Supplier Diversity

Historically, models used by insurance companies in the U.S. have adversely affected the ability of poor and non-white individuals to obtain adequate coverage. Using zip codes, home ownership status, credit scores, and other demographic information as a proxy for assessing risk, traditional underwriting models have created unequal access to insurance as a financial safeguard, and consequently reduced some families’ ability to build generational wealth.

Longstanding bias in traditional insurance pricing models

There are laws against discrimination in underwriting, including some, like the Fair Housing Act, that even attempt to address disparate impact on protected classes as separate from the intent of certain practices. However, the issue remains, leading The National Association of Insurance Commissioners (NAIC) to form a special committee in 2020 to determine ‘what barriers exist in the industry that potentially disadvantage people of color and historically underrepresented groups.’

The auto insurance industry has been particularly guilty of archaic underwriting standards. From marital status to educational attainment, rating systems for auto carriers penalized prospective customers for aspects of their lives they cannot control as well as life choices that should have no bearing on their ability to qualify for affordable coverage.

Creating fair insurance for all

Loop insurance, a startup founded by John Henry and Carey Nadeau, aims to address these discriminatory pricing practices in the auto insurance space. Founded on the belief that everyone deserves affordable auto insurance, they use proprietary AI to focus on factors that have a direct correlation to how consumers drive.

According to Loop, their technology does not punish customers for their occupation, credit, education, or homeownership status. In fact, they provide consumers with a breakdown for how much an insurance rate will vary based on each deciding factor. Loop uses just two key metrics to give its customers a price: road conditions and driver behavior. By collecting data about how and where someone drives, Loop can set insurance premiums that are less dependent on demographic details out of their control.

Equitable Insurance does not have to be a fantasy

The trend of underwriting without using traditional factors is expected to increase. In fact, other industries outside of insurance have adopted this practice. Meritize, a lender which looks beyond FICO scores, is an attractive alternative for student loan borrowers. This lender considers an applicant’s academic or military achievements to enhance credit worthiness and improve loan options. ResidentScore, Transunion’s unique scoring model – used by landlords to screen renters – identifies the characteristics of renters least likely to default on rent payments by using actual rental outcome data to predict the likelihood of evictions.

Though Loop is currently tackling affordable and equitable access in the auto insurance market, their mission could be applied to other insurance markets. While it can be argued that bias will continue to exist in AI – since code is programmed by people, who bring their biases into a digital framework – committing resources and taking actionable steps to address inequity for all will provide insurers with increased trust from traditionally excluded consumers, resulting in affordable options by which consumers can protect themselves against the daily risks of living and increased revenue for insurers. This is truly a win-win situation for all stakeholders.

In the aftermath of the tragic death of George Floyd, businesses across the country have scrutinized their Diversity and Inclusion (D&I) initiatives more closely than ever. JP Morgan has recently committed $30 billion to help close the racial wealth gap facing Black and Latino Americans.

While the investment addresses important issues, like the origination of personal home loans and providing loans to thousands of small Black and Latino businesses, other banks have pursued similar outreach efforts. Earlier this year, Citigroup and Bank of America announced over $1 billion each to help close the racial wealth gap.

While these banks have made external efforts to improve D&I, these banks, and other organizations, have also taken measures to address D&I internally.

Starbucks made the unprecedented move to tie executive pay to 2025 diversity targets, with the goal of having 30% of U.S. corporate employees and 40% of U.S. retail and manufacturing employees be people of color.

Setting a date of 2025 is important for two reasons — it sets a definitive timeframe for the company to manage towards, and a five-year window enables Starbucks to be thoughtful about a strategy that can be adjusted as needed to meet its goals.

Tying executive pay to diversity targets is one way to make a D&I program impactful, and Starbucks should also consider tracking the retention rates of these new hires. Do these targeted employees have a higher attrition rate than new hires from other racial backgrounds? What percentage of these new hires remain at Starbucks after one year?

Retention is another important metric every D&I program should measure.

Starbucks has always been on the cutting edge of promoting conversations around race, from the edgy Race Together Campaign in 2015 to its response to the profiling incident at one of their Philadelphia stores in 2018.

However, despite their good intentions, trouble may be brewing for Starbucks and other businesses contracted to work with the federal government given the new executive order issued by the White House addressing race and sex stereotyping.

Government Contractors Beware

On September 22, the White House’s Executive Order on Combating Race and Sex Stereotyping instructed all federal agencies and government contractors to suspend diversity training programs.

While the goal of the order is to discourage D&I training programs from casting the United States as a fundamentally racist country, it misses the point of what D&I programs are designed to accomplish.

In the wake of George Floyd, firms want to create a safe environment where employees can understand the difficulties faced by their fellow employees of color, and an important part of D&I training involves having open and honest dialogue.

D&I programs attract employees of color to companies, and studies show that diversity boosts innovation and financial results.

While many companies, such as Starbucks, intend to ignore this executive order, smaller firms that do not have Starbucks’ fortress balance sheet may be unable to withstand the shock of losing a government contract due to lack of compliance.

If a government contractor suspends its D&I program to remain in compliance with its federal contract, does this create liability should an employee file suit claiming racial discrimination due to the changing office environment? By suspending D&I programs, do government contractors also run the risk of declining employee morale and high attrition?

While government contractors continue to debate the suspension of their existing D&I training programs, there is a solution they can implement to protect themselves from liability in the form of Employment Practices Liability Insurance (EPLI) insurance.

Try EPLI

EPLI covers, up to the policy limits, damages for which an employer is legally liable such as violating an employee’s civil or other legal rights. This can include claims such as racism, sexism and ageism.

In addition to paying a judgment for which the insured is liable, EPLI also provides legal defense costs, which can be substantial even when there has been no wrongdoing.
As employees and employers struggle to make sense of the post-George Floyd environment, having a forum to openly discuss race is more important than ever.

Government contractors are encouraged to revisit the limits on their EPLI policies with their risk managers, and now is the perfect time to procure this imperative coverage if none exists.

Just like COVID-19 has led to an increase of D&O claims, the suspension of D&I programs may result in an increase of EPLI claims among employees who face real or perceived racial discrimination in an environment without D&I training.

While the future of D&I training remains nebulous for government contractors, having a robust EPLI insurance policy provides the financial backstop needed to place a fixed price on an uncertain future.

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