Insurance regulators may use stick instead of carrot against redlining.

The California Department of Insurance will be forced to use the fear of public "embarrassment" rather than financial incentives to persuade insurers to write coverage in underserved areas, under new proposed anti-redlining regulations, Bill Ahern, deputy insurance commissioner, told the Business Journal last week.

In the department's original anti-redlining regulations, insurers with good records of providing home, auto and small business coverage in underserved and low income areas would be allowed a higher rate of return, Ahern said.

But that financial incentive has been stripped from the newly, rewritten regulations which will be submitted to the state Office of Administrative Law for its approval in the next few weeks, Ahern said.

But those regulations were written before an L.A. Superior Court judge threw out Insurance Commissioner John Garamendi's regulations regarding how much insurers should give back to auto policy holders under Proposition 103.

Judge Dzintras Janavs ruled in February that the regulations by which Garamendi determined that Woodland Hills-based 20th Century Insurance Co. had to return to policy holders $100 million in what the Insurance Department deemed were excess profits, were unconstitutional, because the regulations centered on a plan which would allow all insurers a certain rate of return.

The redlining regulations, meant to discourage insurers from the illegal practice of refusing to write coverage in minority and low income communities, were also based on the same basic principles Prop. 103 regulations, Ahern explained.

"The court decision stopped us from using the rate of return regulations," in the redlining arena, Ahern said. "It's a carrot we don't have (to offer insurers) because of the court."

Mark Savage, an attorney with Public Advocates, a San Francisco-based law firm which has gotten major California banks to agree to lend billions in low income neighborhoods, also worked on the insurance regulations.

He said department officials threw out the rate of return motive because they were concerned about "what the OAL (which is charged with approving regulations written by state officials) might do. They might point at the 20th Century case and say, 'You can't do that.'"

Ahern said instead of giving insurers with good records higher profits, the Insurance Department will "embarrass" insurers with poor records at press conferences.

Under the new regulations, an insurance company's statewide market share will be compared to its market share in a specific previously underserved area, said Kenneth Cooley, an attorney with State Farm Insurance Co. Insurers will then be given index numbers based on that comparison.

Then a median will be established and insurers with index numbers below the median will be asked to sign five-year agreements with the Insurance Department. Insurers "will be asked to develop a market plan for coverage in that community," Cooley said.

Ahern said companies below the median will be embarrassed at press conferences. Those which fail to meet the requirements of the agreement "will be embarrassed even more," at press conferences held by the Insurance Commissioner, Ahern said.

Cooley questioned the methodology behind the plan, noting "in the real world" there is never uniformity of market share across the state. He added that an insurer writing more coverage in one area than another does not prove it is discriminating against a certain community.

"As a matter of logic, that is quite accurate, it's not proof positive," Savage said. "But the big picture is, people in communities of color can't get insurance in instance after instance."

Savage added that Public Advocates, a non-profit advocacy group for low income and minority California residents, which has successfully negotiated major "settlements" in which large banks have agreed to lend in low-income areas, has not been able to successfully negotiate with insurance companies.