The thick red line

AS a company in the process of making the largest private investment in Toxteth, Liverpool in 30 years, supermarket giant Tesco might well have felt slightly aggrieved when it found itself the target of the local council’s wrath recently.

Last month, Tesco was accused of “hypocrisy of the highest order” after it emerged that its insurance arm had been refusing motor cover to Toxteth residents despite plans to open a £30m store in the area. It was the second time Tesco was accused of so-called ‘redlining’, having recently reversed a policy not to provide car cover for motorists living in the N15 area of London (including Tottenham) after the practice was highlighted in a recent BBC television programme.

Of course, being “redlined” is painful for consumers and clearly limits choice. But how big a problem is redlining within the UK insurance market and what impact is it having on brokers’ businesses? Is it costing brokers money in terms of lost business or leading to difficulty placing business?

The short answer appears to be ‘no’.

In simple terms, redlining is based on the past behaviour of a large group of people in a specific postcode rather than an individual’s behaviour and as such punishes everyone in a specific area for the behaviour of a group.

US courts have tackled redlining

The term redlining owes itself to the US Congress, which during an investigation into insurance companies in the 1960s found insurers kept maps with thick red lines drawn around areas they refused to underwrite.

It is a significant political issue in America where redlining tends to occur in poor, minority communities, leading to charges of racism. Most US cities have established high-risk pools called Fair Access to Insurance Requirements (FAIR), to ensure that residents in such areas get cover. Some US states even prohibit insurance redlining, but in the absence of federal legislation a series of high-profile court cases over the past 20 years have effectively forced insurers and banks to make multimillion-dollar payouts and abandon the policy.

Such legal actions are unheard of in the UK, largely because of the industry maxim that where one insurer fears to tread, another will happily rush in, albeit usually charging a stiff premium, and also because the practice is not associated with a particular racial group.

But while instances of redlining are becoming more common according to the Biba, its impact on the broking fraternity is minimal.

“We haven’t had a huge number of queries about redlining, but we have had some,” says Biba’s head of corporate affairs, Graeme Trudgill. “There is still a lot of capacity in the market for insurance but we are seeing specific insurers where their rates have shot up in certain postcodes for home insurance or motor insurance. When we enquire why that has happened, it’s usually down to claims experience or the flood map. Insurers are now getting much more information about things like the higher risk of floods.”

That view is echoed by most brokers. “I can’t say the action of any insurer in terms of redlining is causing us any angst, or affecting us as a business, certainly not geographically,” says Andy Westby, Towergate’s chief executive for personal lines underwriting.

“There will always be risks that are more difficult to insure than others but as a business we can place 98% of the risks we see. It’s a dynamic market and if an insurer lacks appetite to trade in a particular segment, there will often be another insurer who sees this as an opportunity. There are high-risk postcodes that some insurers will actively go for, while others don’t.”

Westby’s point about opportunity is borne out by recent trends in Northern Ireland, a part of the UK that has experienced more than its fair share of redlining over the years. Last year, troubled insurer Quinn declined to renew motor cover for a number of customers in Newry and parts of Belfast.

Chief executive of Northern Ireland broker Hughes Insurance, Gareth Brady, saw the opportunity to expand his business in both areas. “We believe there is the potential to write profitable business in those areas, but it can be challenging to bring an insurer along with you. There is still what I would call a legacy attitude to those areas.”

The legacy Brady alludes to is the 30 years of violence that plagued Northern Ireland until the late 1990s. Some insurers remain wary of certain areas in Northern Ireland that were affected by the troubles, particularly in Belfast or the border areas. “I think if insurers looked at the data they would think differently, but paradoxically part of the problem is insurers don’t have a lot of data to make decisions because over the years they haven’t written much business in those areas,” Brady says.

Although Brady doesn’t believe redlining is a common problem, he insists many insurers still view the attractiveness of various geographic areas within a broad terms rating structure. “Generally, insurers tend to group their loss experiences of certain postcode areas and load their rates accordingly, but within any rating area there can be huge differences between customers and their circumstances,” he says.

Postcode rating a blunt instrument?

Bearing in mind that these days the industry has access to more detailed information and data that enables insurers to pinpoint risk more accurately, it is worth asking why insurers still ‘load their rates’ based on geographical postcodes, which are quite a blunt instrument for rating when set against other methods, such as credit rating checks. Studies have proven that credit scores are a key predictor of future responsible behaviour, and as such, a more accurate indicator of potential risk.

“It’s true that insurers can cut down to individual risk level these days,” Towergate’s Westby says. “But insurers aren’t driving around the country looking at areas and earmarking them as places they don’t fancy. If there are high claims frequencies in an area, then the numbers won’t look good and insurers will act accordingly.”

That kind of geographical claims experience was highlighted late last year when insurer Esure reported a whooping 300% increase in personal injury claims in the B31 postcode area of Birmingham, despite the fact that there was no increase in accidental damage claims.

Flood risk is the latest concern

Leaving motor aside, one area where the postcode is the sole determining factor is flood insurance. In the wake of the recent devastating storms that wreaked havoc across the UK, building and contents insurance payouts have soared, resulting in many carriers refusing to provide cover in areas deemed to be at risk of flooding. “There are instances of insurers being unable to provide cover against flood risks in areas that lack adequate flood defences, but the perception of redlining far outweighs the reality,” says a spokesman for the ABI.

But there are growing concerns about the increase in the number of insurers that are effectively refusing home cover within certain postcodes by spiking premiums and excesses. Last month, Biba announced plans to establish a working party to develop bespoke cover for high flood risk areas after 2013, when the current agreement between the industry and government expires.

Westby adds: “Some carriers will automatically decline cover if a risk falls within a known flood postcode area. However, there are still insurers out there who are prepared to look at risks on an individual level, based on their own merits.”

How brokers can benefit

In this respect, redlining can actually offer brokers a way into some markets when customers fail to get cover by going direct. “Brokers can start talking to insurers to get a better idea of their criteria,” says Biba’s Trudgill. “Ultimately the broker can try to prove to the insurer that the customer should be insured, it’s where a broker can really add value.”

Bearing in mind claims are increasing as the recession bites deeper, and that compulsory insurance for cars will soon include vehicles that are kept off the road, redlining may well impact further on the market in the coming years, and brokers may find themselves increasingly called upon to offset its impact on customers. IT