Protests admonishing the murders of George Floyd, Breonna Taylor, and Black Americans at the hands of police defined 2020, second only to the 100-year global pandemic. The moral imperative for police reform is clear, but investors are considering the financial imperative, as well. Thousands of police misconduct lawsuits are filed annually – which cost taxpayers over $300 million in 2019. But what about the private insurance companies that back these municipal police departments? How are they responding to the Black Lives Matter movement and calls for reform?

This proxy season, Arjuna Capital is probing that question in a new shareholder proposal with the largest property and casualty insurer in the world – Chubb. Specifically, we want Chubb to “report on current company policies, and options for changes to such policies, to help ensure its insurance offerings reduce and do not increase the potential for racist police brutality, nor associate our brand with police violations of civil rights and liberties.”

There are two ways to view the insurers’ role – as reducing risk or as increasing it. The more troubling of the two is how insurers may increase the risk of police brutality through moral hazard. John Rappaport, at the University of Chicago Law School, has written extensively on this issue and points to the risk of insuring police departments at all:

If insurance companies are not doing a good job at trying to manage the risk, they could actually be making things worse. This is the idea of moral hazard, right? When you get insurance coverage, you drive a little bit less carefully.

On the flip side of the coin, insurance companies can and often do work with police departments to improve policies and training. The U.S. Commission on Human Rights’ report, “Police Use of Force: An Examination of Modern Policing Policies,” highlights studies showing liability insurance may increase police accountability:

Insurance companies exert pressure on police departments to reduce uses of force that may result in large settlements or court-ordered damages that the insurance company must then pay out. Through lower premiums and deductibles, private insurance encourages departments to engage in “better training, better use of force policies, better screening in the hiring process, and even the firing of bad cops.”

Encouraging better policing is a critical leverage point for insurers and their investors. Not only does it reduce the risk of big payouts, but it also reduces the moral and reputational risk of complacency in the face of systemic racism and social inequity.