The Unintended Effects of Fair Access to Insurance Requirements Plans 

In the 1960s, property insurance policies were expensive, scarce, and vulnerable to cancellation in central city neighborhoods. In response, Congress authorized Fair Access to Insurance Requirements (FAIR) plans in 1968, which would provide insurance to property owners who were denied coverage in the private market. By 1977, more than 5.7 million insurance policies had been issued across a range of states.  

Insurance is essential for well-functioning real estate markets, enabling loans, repairs, sales and construction. FAIR plans were a well-meaning policy intervention, and while they helped many property owners secure insurance, concerns soon emerged that certain features of the plans incentivized housing disinvestment and even “arson for profit.” FAIR plans included prohibitions on considering environmental hazards in underwriting, mandatory insurer participation in pools that diluted property-specific underwriting incentives, and payouts on claims often far exceeded actual market values in declining areas. 

A new paper by New York University’s Ingrid Gould Ellen, Federal Reserve Bank of Chicago’s Daniel Hartley and Federal Reserve Bank of Philadelphia’s Jeffery Lin, and Peking University’s Wei You, “The Bronx is Burning: Urban Disinvestment Effects of Fair Access to Insurance Requirements Plans” examines the unintended effects of the FAIR plans developed across 26 states in the 1970s. The article’s findings are especially instructive as policymakers are grappling with how to design interventions in the insurance market as costs have increased significantly in the last few years. 

Their article, published in the Review of Economics and Statistics, shows residential property insurance plans adopted in the 1960s led to significant disinvestment and accelerated declines in neighborhood population, while increasing the Black share of the population in affected neighborhoods.

“Our results provide new evidence that FAIR plans over-insured properties, creating moral hazard and accelerating housing disinvestment in midcentury US central cities,” the authors write. “Further, our results provide evidence for the role of housing disinvestment—whether through arson or more subtle neglect—in neighborhood change.”

Key Findings 

To analyze the effects of FAIR, the authors compared outcomes before and after FAIR plan authorization in 1968. Next, they distinguished between neighborhoods likely issued FAIR policies and those not issued policies by measuring the withdrawal of private property insurance establishments from central neighborhoods across 26 major U.S. cities. And finally, they compared this within-city neighborhood contrast in states that launched FAIR plans by 1970 to states that did not.  

• Their research shows that FAIR plan availability led to significant housing disinvestment, with affected neighborhoods experiencing declines in pre-war housing stocks between 1960 and 1990. The analysis also estimated an average loss of 225 pre-war housing units per treated census tract (14.7% of the 1960 stock).

• In early adoption FAIR states, urban neighborhoods with declining private insurance access between 1940 and 1967 showed a larger decrease in pre-war housing stock compared to neighborhoods with stable access. This effect became apparent during the 1960s and more pronounced in the 1970s, aligning with FAIR plan implementation. They find little within city-neighborhood differences in states that did not adopt FAIR plans in the 1960s. Effects are muted by the 1980s, when FAIR plans began tightening rules to reduce arson risk, including by limiting requested insurance amounts and by requiring justification for claims where values exceeded market prices. 

• FAIR plans also substantially impacted neighborhood composition, accelerating white flight and potentially decreasing neighborhood economic status in treated areas. The results also highlight the interplay between insurance policy, housing markets, and neighborhood dynamics, revealing unintended consequences of FAIR plans. 

• To bolster their findings, the authors also use three data sources to measure the occurrence of building fires in 43 cities from the 1940s through 1988. They found cities in early-FAIR states experienced 39% more building fires in an isolated period between 1968 and 1980 compared with cities in non-FAIR states. The authors estimates imply 13,000 excess fires concentrated in certain census tracts in New York City alone relative to if New York had not been an early adopter of FAIR plans. 

Lessons for The Contemporary Insurance Crisis

Today, property owners are again facing rising property insurance rates and cancellations from private insurance, reflecting climate risks and other distinct challenges. In many states, FAIR plans have expanded to fill the gap. 

Unlike the earlier crisis, some differences in the design of FAIR plans make the current situation more manageable. For example, FAIR plans have tightened underwriting standards, policies are not concentrated in declining property markets, and payouts are unlikely to exceed market value. However, the present crisis is more enduring and far reaching as climate risks are unlikely to abate, the authors write. 

Instead of promoting urban abandonment, the current risk lies in encouraging redevelopment in hazard prone areas and discouraging mitigation efforts by cushioning losses. Findings by the authors suggest the importance of minimizing perverse incentives as property values fall, including by right-sizing payouts. In general, the paper’s results underscore the importance of careful design in developing policy responses to address unraveling property insurance markets.