Community Investment Reporting and theIndustry – “CRA” California Style

With the recent spotlight being placed on the 25th anniversary of the federal Community Reinvestment Act (CRA), legislation enacted in 1977 which requires banks to increase their investments and loans to low income communities, several California legislators are now casting an eye toward similar legislation for the insurance industry in California.

In other states like Massachusetts, New York, Texas, and Illinois, legislators have also examined whether the insurance industry should play a greater role in investing in low and moderate-income communities. The recent passage of the federal Gramm-Leach-Bliley Financial Modernization Act (GLBA), which allows insurers to own banks and visa versa, has served to further blur the lines between banks and insurance companies in the minds of many state legislators.

More insurer investing through COIN
In 1996 a program was created to provide an alternative to state legislation that would have mandated insurance company investments in low-income communities. The California Organized Investment Network (COIN) was designed to review, examine and promote sound community development investments to insurance companies doing business in California. COIN is a collaborative effort between the Legislature, the California Department of Insurance (CDI), the insurance industry, and community development advocates. The intent of the COIN program is to facilitate voluntary insurance industry investments that provide solid returns to investors and both economic and social benefits to California’s low-income urban and rural communities. As of May 2002, the program has facilitated over $705 million in insurer investments in California affordable housing and economic development projects.

Insurers should not be compared to banks
In the 1990’s several banks made long-term, multi-billion dollar commitments to invest in low-income communities in California in order to enhance the closure of their mergers and acquisitions. These commitments have become the defacto measure for “financial institutions” to demonstrate their commitment to low income areas.

Some members of the legislature and community organizations are stating that the COIN program has not produced the same kind of results when compared to the bank commitments of the 1990’s. But insurers point proudly to their multi-billion dollar state bond investment commitments (the industry currently invests more than $463 billion, almost one-third of the state’s annual $1.3 trillion dollar economy), in addition to COIN investments as solid evidence of an on-going commitment to the economy of the state.

State Senator Richard Alarcon of Los Angeles has introduced SB 1861. Sponsored by the Greenlining Institute, this bill, as currently written, would authorize the California Insurance Commissioner to require insurers to annually report information regarding all community development investments and certain philanthropic grants made in California. In its current version, the bill uses the federal CRA guidelines as the standard for reporting of insurer investments.

The CRA specifically addresses concerns about banks locating in a community, collecting deposits, and then making loans to projects elsewhere. Insurers do not “take deposits” from the areas in which they do business. Premiums are directly returned back into the communities in the form of claims payments.

Because a favorable CRA rating can lead to approval of mergers and use of the FDIC coverage for deposits, this is in affect a “carrot” that helps to promote investments. There is no comparable “carrot” for insurance companies. There is no “premium insurance” that is the equivalent of deposit insurance for banks. In fact, there are specific guidelines and ratings for insurer investments in Section 1170 of the California Insurance Code.

This is an important distinction that needs to be recognized by the legislatures around the country. Insurance companies are state-regulated entities that have individual state guidelines and specific investment requirements per the National Association of Insurance Commissioners model law.

Senator Alarcon and the Greenlining Institute draw little distinction between banks and insurance companies in SB 1861. The proposed legislation fails to acknowledge the subtleties between the two industries. SB 1861 needs reporting criteria that is consistent with how insurance companies are legally required to invest. It is ill advised to simply lop federal banking guidelines onto state regulated insurance companies and expect similar results.

Michael A. Gunning is a senior legislative advocate for the Personal Insurance Federation of California and is a former director of the COIN Program.