➤ New York's top insurance regulator does not believe all the factors currently used in underwriting insurance policies are necessary.

➤ Insurance companies are responsible for ensuring that their products and practices are not having a disparate impact on minority communities, the regulator said.

➤ Diversity and inclusion are a "top priority" for the regulator, and the department plans to engage "much more directly" on the topic with companies, she said.

New York Department of Financial Services Superintendent Linda Lacewell is the leader of a department that has a long history of implementing progressive regulation for the financial industries under her purview.

S&P Global Market Intelligence sat down with Lacewell virtually to discuss how NYDFS is prioritizing diversity and inclusion in the industries it regulates, and how the insurance industry can ensure that its products and practices do not discriminate against communities of color. The following is an edited version of that conversation.

S&P Global Market Intelligence: Why do you feel it’s important to have greater representation of people of color and women in the insurance industry?

Linda Lacewell: Diversity for both race, ethnicity and gender is critically important in the financial services industry, and here's why: It used to be people said you should be more inclusive with respect to underserved communities because it's the right thing to do, and we're all part of the same community, and that is true. But in recent years, there are all kinds of studies that have been developed that show that diversity for its own sake is important in decision-making.

To the extent that we as a regulator oversee the safety and soundness of financial institutions under our purview, it's well within our prerogative to say — and we do — how are you doing on diversity? Because that makes you a stronger institution, and it's of interest to us as we look at how you are dealing with all the evolving risks and challenges.

Over summer 2020 the National Association of Insurance Commissioners formed a Special Committee on Race and Insurance. What does the NAIC need to accomplish in order for its mission to be successful?

What the NAIC needs, at the end of the day, is action, and the NAIC has committed to action. Many of us have said to the NAIC, "Look, this can't be a series of sessions with dialogue that result in either nothing, or something weak." We've got to actually have a real impact, and that means initiatives to facilitate diversity within the industry, diversity within the NAIC, and [to understand] what the impacts of the insurance products and services are: Is there disparate impact on communities of color?

As you know, we've got three crises right now: The public health pandemic, the resulting economic crisis and loss of jobs, and the cry for racial justice across the country. These are all connected and related. They have to all be addressed. We've got to have the hard conversations, but we've got to take action, because otherwise, on this cry for racial justice, which includes people being treated equally with respect to opportunities including in insurance, we've got to make sure that people are not protesting in vain. We've got to use that energy and harness it.

Where is the insurance industry in terms of making sure its products and practices don't discriminate against communities of color?

Even before the pandemic, we looked at the use of big data and artificial intelligence and said to insurers: If you're going to look to big data, it’s your responsibility to make sure you're not having a disparate impact on minority communities. You can't just say, "Well, somebody else designed this product for me, and I don't know what the impact is."

I think the NAIC needs to move in that direction as well. Insurance is about protecting people. We've got to make it equally available to all on the same terms and conditions and make sure that some factors are not being used as a proxy, even inadvertently, for a prohibited factor, such as race.

Do you believe that factors such as ZIP code, education and occupation have a place in the underwriting of insurance policies?

No, and with respect to education and occupation, we've already told our industry that those are not suitable factors. Underwriting is about exactly that: What is the risk? Where you live, and what your job is, has no bearing on your driving record. And I would go further to say that your credit history has no bearing in the risk that you're going to have a claim, and that is unfortunately still allowed in New York under state statute. I think we need to take another look at that. Given that we are all now putting a laser focus on these factors that may well not be necessary, I think that there's going to be a lot of movement in the right direction.

We have to send a clear message to financial institutions that this is an important priority. And, by the way, that works. When you're a regulator, you have the advantage of an ongoing relationship with an institution that wants to know what your priorities are and where they should be investing their resources. And we tell them a top priority is diversity and inclusion. We plan to engage much more directly on both the insurance and banking side of our portfolio.

How influential can a single state insurance commissioner be in driving change when you have peers who may have different priorities? Does that suggest the need for some sort of federal regulation?

New York is one of the biggest insurance markets in the world, and New York generally leads — we always have. Last year when the NAIC had a conference in New York, and I was the host, I used my opening remarks to talk about the lack of gender and other diversity within the industry and then said we need more diversity in the industry so that we have more diverse regulators across the country, and so we have more diversity within the top levels of the NAIC. A lot of women came up to me afterwards and said, "Thank you for what you said."

It was considered to be controversial that I even raised the issue. Why? We need to talk about these issues. You've got to open up the dialogue. If you don't recognize the problem, you're not going to solve the problem.

Look, I'm one of three girls. My mother was born in Calcutta, immigrated to the U.K., then to the U.S. I went to schools outside of the United States. I'm very comfortable with diversity. I seek it out. I recognize the richness that it brings to the discussion around the table. New York is comfortable with diversity, unlike many others, and we need to help those who may not be as used to diversity outside the state of New York to understand that it is something to be desired and not something to be concerned about in any kind of negative way.

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