Encouraging Property Insurers to Invest in Communities
How two states are encouraging insurers to invest in social and environmentally-friendly projects
By Tai Michaels
Aligning the finance sector with social goals
Over fifty years ago, concern began growing nationally that finance had abandoned socially vulnerable communities. Decades of “redlining”—the widespread practice of refusing to offer loans in low-income communities of color—had contributed to stark inequalities. In response, Congress passed the 1977 Community Reinvestment Act (CRA) which was designed to incentivize banks to offer financial services and invest in all communities where they operate, regardless of income. Federal banking regulators evaluate whether banks are lending, investing, and providing financial services in low- and moderate income areas and use that as a factor in determining whether to approve mergers, acquisitions, and branch openings. Decades later, research suggests that the act has increased community development investments in low-income neighborhoods without damaging banking profits.
At the time the CRA was adopted, there was debate as to whether insurance should be included in the law. Insurers successfully argued against their inclusion. Taking a quid pro quo view of the CRA, they argued that federal banks enjoy benefits like insured bank deposits that insurers do not receive and so should not be subjected to CRA-like requirements. They also argued that insurance firms did not unfairly discriminate and stressed that insurers did not have a geographic “community” that would create a natural application of the CRA.
That said, insurance companies manage incredible amounts of investments – nearly $9 trillion in the US alone. Yet despite receiving premiums from a wide range of neighborhoods, reports from Massachusetts and Wisconsin found that insurers, too, had mostly invested in wealthy, White communities. Under mounting pressure in the mid-1990s, both California and Massachusetts have created their own state-level programs that, while differing from the CRA, share the same broad intent of driving some of the activities of large financial institutions into historically disinvested areas. Over the years, these two programs have arguably catalyzed tens of billions of dollars for community development, as well as for climate action. While climate has not been part of the CRA, it has been a focus of stakeholder pressure on insurers.
California: COIN
In 1996, discussions in California of applying the CRA to insurance culminated in the creation of the California Organized Investment Network (COIN). The COIN program was ultimately a compromise between community development financial institutions (CDFIs), insurers, and the state’s Department of Insurance. Instead of controlling how insurers invest, COIN operates under a voluntary approach, vetting investments and labeling those with a sufficient focus on low and moderate-income (LMI) or rural communities as “COIN qualified.” COIN also highlights a select set of innovative projects through their investment bulletin program, promoting them to insurers to spur interest. The program’s strength is soft power: connecting innovative project managers to funders, working with insurers to find COIN qualified investments that fit their needs, and adapting the program for changing markets. Even without incentives or regulations, the program claims to have redirected substantial sums to these projects. In their first 25 years, as of year-end 2020, insurers held COIN-qualified investments totaling more than $38 billion.
COIN was not always without incentives. Until 2017, COIN had an additional tax credit subprogram, offering a 20% tax credit for insurers to make equity investments or extend zero-interest loans to qualified CDFIs for a period of five years. Whereas COIN-qualified investments have to offer market-rate returns to entice investment, the tax credit unlocked interest-free capital, enabling a much wider range of projects since insurers generated a guaranteed annual return rate of about 4.5% through the state’s tax credit. Particularly as interest rates dropped throughout the 2010s, the tax credit became increasingly attractive compared to other comparable investments, leading it to be repeatedly fully subscribed up to its $10 million tax credit limit. By the time the tax credit program lapsed in 2017 due to funding concerns, it had catalyzed more than $285 million in high impact investments.
Massachusetts: TLI + PCI
Massachusetts took a similar approach to California, aiming to drive more insurer investment into underserved communities. In 1997, just a year after COIN was founded, the state passed legislation creating The Life Initiative(TLI) and the Property & Casualty Insurance Fund (PCI). As opposed to COIN, TLI and PCI (together referred to as the Funds) took a much more hands on approach to determining where funding was most needed. Life insurance and property & casualty insurance companies made a one-time equity contribution, locked in for 25 years, to TLI and PCI of $100 million and $85 million respectively. The Funds then select which community development projects to fund, subject to approval from the insurers who invest in them. In return, the insurers receive a tax reduction. While insurers can withdraw their investments now that the initial 25 year investment period has lapsed, only one insurer has done so.
Although the Funds are investing at a smaller scale than the sum of COIN’s voluntary investments, they are more directly involved in making individual projects possible. PCI primarily invests in the riskier early stages of pre-construction work and frequently provides bridging capital which helps unlock further investment. PCI has directly invested $544 million but unlocked over $3.5 billion in additional private funding by taking on riskier investments that make the rest of the project more appetizing to private investors. While this keeps PCI’s investment returns lower than market rate, the insurance investors receive tax benefits to compensate. “The returns we offer investors are ultimately impact returns,” says Michelle Volpe, executive director of the PCI Fund.
Opportunities and Challenges in Harnessing Insurer Investments
Assessing the ultimate benefits of these programs is not easy. For voluntary approaches like COIN-qualified investments, it is unclear to what degree insurers might have invested in the same projects even if COIN didn’t exist. Because COIN lacks a financial incentive or regulatory stick, it relies on insurers voluntarily taking an interest in social impact investing. Much of the growth in COIN-qualified investments has mirrored growth in impact investing more broadly. Impact investments grew 14% per year nationally from 2020-2024, in-line with the growth of COIN-qualified investments held by insurers from 2015-2020. “Sustainable investing has grown in popularity … and we’re benefiting from that trend,” says Peter Streit, an investment officer with COIN. Thus, it remains somewhat unclear how much COIN’s approach changes insurers’ interest in making impact investments. Regardless, the fact remains that insurers have gravitated towards the impact strategy promoted by COIN, and underserved communities and environmental projects in California have benefitted from these increased capital flows. Furthermore, the approach is relatively low cost for the state since it focuses on spreading information rather than providing financial incentives.
For tax credit-driven programs, the central question is whether the cost to the state is worth the benefits from the additional investments. The most socially beneficial projects often have lower returns and/or are illiquid. Both are challenging for insurers who must make reasonable returns and be able to quickly liquidate capital to pay back policyholders after disasters. PCI, TLI, and COIN’s elapsed tax credit subprogram all relied on tax credits to make up the difference in returns and reward insurers. That, however, requires public funds and thus comes with a cost. Insurers average 6% of their portfolio in illiquid investments, and investing in LMI communities has repeatedly proven to provide comparable returns and risks, suggesting that insurers setting aside a set portion of their surplus for such positive purposes could be both viable and beneficial.
Looking forward
Beyond COIN and the Funds, there has also been strong interest in applying elements of the CRA to insurance from groups such as the Greenlining Institute, which has been exploring ways to revitalize the COIN program. While the existing programs have relied on voluntary approaches, other proposals have aimed to go further, creating requirements for insurers to make more equitable investments. One such example is the proposal that ultimately led to the creation of COIN which would have required insurers to invest 1% of premiums collected in the state into LMI or rural communities. However, more research is needed to understand how much social impact investment insurers are doing on their own—such as insurer investments in Impact Community Capital—and whether additional policy is warranted and can be designed in conjunction with solvency needs.
Multiple stakeholders have been increasingly interested in extending the approach of COIN and the Funds to a wider range of climate investments. While the existing programs were created without any climate focus, COIN added a broad “green investments” category in 2010, but it did not include decarbonization or climate adaptation. The climate economy has now developed to the extent that some insurers invest without any state-imposed programs. One firm, MassMutual, has gone even further and created their own Climate Tech fund. Those working on climate resilience have also argued that if insurers invested in reducing the impacts of extreme weather in areas where they also offer policies, their investments could not only bring needed capital to resilience but have positive benefits for their underwriting. Although not explored in this post, it is worth noting that some insurers are using their philanthropy to support resilience resilience or other social and environmental investments, such as the Nature Force partnership in Canada to protect wetlands for flood mitigation benefits.
Other policyholder advocates have focused on another aspect of the CRA: whether insurance products are available and accessible in frontline communities. A range of approaches have been suggested to create more inclusive insurance markets, from exploring new products, such as microinsurance, to government-created premium assistance programs for lower-income households, to ensuring more equitable claims adjudication. As the risk of disasters grows, access to the financial protection insurance provides is critical for frontline communities.
