2005
Insurance Reference Manual
Personal Insurance Federation of California Insurance Reference Book
Community Reinvestment Legislation:
A Look at the Facts
For the past ten years, legislative proposals have surfaced periodically to require insurers to make "economically targeted investments" in low-income communities. In 2005, legislation is expected that would establish a requirement that insurance companies invest an unspecified amount of policyholder money in these specially targeted communities. The fact remains that mandatory community investment injures policyholders, homeowners, retirees and the business climate in a number of ways.
Mandatory Community Investment Legislation Undermines an Insurer's Primary Responsibility to its Policyholders
Financial solvency is -- and must remain -- the first priority for insurance companies. Property and casualty insurers need immediate access to large amounts of capital in the event of a catastrophic event or multiple events; life insurers must make sound long-term investments so that funds are available to pay their obligations. To ensure that funds are available to pay claims, insurance companies have an obligation to their policyholders to make only prudent investments. Yet this type of legislation would require increased investment in "socially responsible" investments that have higher risk and lower rates of return than are available on the market. Insurers would be forced to make investments that meet neither their own solvency guidelines nor the guidelines established by the California Department of Insurance (CDI).
Insurers Are Not Banks
Insurance companies and banks are fundamentally different. Banks are federal institutions chartered to provide credit to the communities in which they serve. Community reinvestment was enacted to address a perceived lack of credit in low-income communities. Insurance companies are not federal institutions and are not chartered to provide credit. It makes no sense to take a community reinvestment act, originally crafted to apply specifically to banks, and apply it to insurance companies.
Banks enjoy government-sponsored benefits, such as underpriced federal deposit insurance, and the ability to borrow from the Federal Reserve. Insurers, on the other hand, have no such federal safety net. There is no government subsidy for their guaranty association. Insurers stand solely on the quality of their investments; there is no federal deposit insurance to make a policyholder whole if an insurer invests unwisely.
State Government Should Not Direct Policyholder Dollars Into Unsound Investments
Under mandatory community investment legislation, state government decides where a portion of insurer capital must be invested. Politics supercedes prudent investing. But the government cannot ensure that these are sound investments nor can the state guarantee the viability of the investments. Instead, the government says you must make these investments whether or not a prudent investor would make them.
Insurance Companies Already Make Major Investments Benefiting California Communities
Life, health and property and casualty insurance companies have more than $570 billion invested in California's economy. Over $420 billion is invested in stocks and bonds, which create jobs and support economic growth. Insurers have also invested $23 billion in state and local government bonds, which finance the construction of roads, schools, public works, and, in countless other ways, support the needs of communities throughout California.
Voluntary Community Investment Works Best
California insurers directly participate in the COIN program in the Department of Insurance, which strives to find sound investments in underserved and low-income areas. Under this approach, investments are attracted to low-income communities based on the soundness of the investment, not a government mandate. As of January, 2005, 138 insurance companies have invested more than $1.6 billion in projects approved or sponsored by COIN, including more than $269.6 million in a Fannie Mae mortgage-backed securities package to assist low income home buyers. The new Impact Community Capital program is establishing a mechanism for insurers to voluntarily invest in targeted low-income community projects with sound rates of return. Investments now totaling more than $750 million as of January, 2005.
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