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Beyond that, I think that there is clearly a need for the Federal Government to assist us in the area of regulating unlicensed insurance companies who are not even located in America. They are located offshore. And I mentioned that in my testimony.

With regard to rate regulation and market conduct, which is the sale of insurance, it probably is not wise or necessary for the Federal Government to get into that. The States vary with their enforcement activity. California has very stringent laws, and now I hope very active enforcement of those laws.

So I don't think there is a need in that area. There are concerns about the guarantee funds. These are the insurance programs that insure insurers when they go belly up. The guarantee funds step in, and those guarantee funds are not uniform across the Nation, and because of the lack of uniformity, that creates certain problems.

We think it wise to have uniformity. There may be a role for the Federal Government in that regard also.

Chairman KENNEDY. I appreciate your comments very much, Mr. Garamendi.

Mr. GARAMENDI. Did somebody leave?

Chairman KENNEDY. There is a reason for that, which is that the bells have gone off. Mr. Hinchey and I will scoot across. We will hustle back and continue with questions.

Thank you very much. The subcommittee stands in recess. [Recess.]

Chairman KENNEDY. The subcommittee will come to order.

I want to apologize for the way the subcommittee's work this afternoon has been disrupted, but the fact is that the work continues on the House floor.

I want to introduce Michael Carbajal. He was an insurance broker in New York for 29 years. As a broker, he primarily sold auto insurance. He is currently a columnist for the Insurance Advocate, a weekly insurance magazine.

Thank you for being with us today. Please proceed with your testimony.

STATEMENT OF MICHAEL CARBAJAL, JR., C.P.C.U., MICHAEL CARBAJAL FINANCIAL SERVICES, INC.

Mr. CARBAJAL. First of all, I want to say how grateful I am and how grateful all brokers from the inner city are that this hearing is being held. We have been clamoring for something like this for over 20 years. Because there is no question, no doubt of any kind, that there is redlining.

They call it different names. Some insurance companies call it the racial factor in insurance. So there is no doubt about this.

The superintendent of insurance of California brought in a map. Well, I have seen a map like this, and I will even say the company, Nationwide, where they redlined, it was in red crayon, areas that they didn't want their agents to write. This happened many years ago, but the situation hasn't changed.

There are companies, many companies, that will not write certain areas. Now, our superintendent of insurance, Salvador Curiella, who is a scholar and an excellent superintendent of insurance, has tried to get statistics from the companies to show where

they do right, and he wanted from them a listing by ZIP Code of where their insureds are.

That was 3 years ago. It is still not forthcoming. And the latest excuse I heard was, they couldn't get their computers adjusted in such a manner that they would print out this type of information. So perhaps in a few years we might be able to get it.

There are many ways in which the insurance companies discriminate. They claim they don't discriminate because of race or anything else, because it is not a matter of bigotry, it is a matter of profitability. They have found that in certain areas, they are not as profitable writing automobile insurance as they are in others.

The truth of the matter is, they don't even try. There are a few small companies that have made very successful plunges into this, into writing in certain areas such as in Brooklyn, Red Hook, Bedford-Stuyvesant, and so on, and made a lot of money doing it because they knew exactly what they were doing. Some of the larger companies have not made any effort and they don't appoint any agents in these areas.

You see, if you don't appoint an agent where the market is, then nobody is going to buy, because someone who lives in Brooklyn is not going to go up to Hyde Park to buy insurance. If the guy closest to them cannot sell them insurance, there is no way there is going to be insurance sold.

And the old excuse that all the companies give you now is, we are not discriminating, we are writing, but they are writing throughout residual markets, what they call the assigned risk markets. In New York, it is called the New York Automobile Insurance Plan.

For those of you that may not be entirely familiar with what happens in New York, this is an organization that is subscribed to by all the insurance companies that do business in the State of New York, that sell automobile insurance. According to how much voluntary business they do, that is the number of assignments they get from this residual market.

In other words, if I wanted insurance and can't find the place to buy it because they won't sell to me, even though my record is perfect, I apply to the New York Automobile Insurance Plan. They will marry me with one of the companies, and I will be doing business through them. However, the rates will be sometimes two and three times more than they would be if that company had written me voluntarily.

There are a few companies in New York that write voluntarily. They are local companies, Empire being one of them, and the other one is the Executive Insurance Co., which is part of what is called the Robert plan. They have had great success, and they have proven that selling insurance to minorities can be profitable, and there is no reason why the major companies can't do it.

Actually, these two companies are very pleased that the major companies can't do it, because they are writing as much as they

can.

Now, Mr. Kennedy, Congressman Kennedy mentioned about an underwriting guide. Well, some years ago, I happened to be president of the Storefront Brokers Association, and I got a lot of feedback from a lot of my brokers. Some years ago, one of the field reps

from one of the insurance companies went to visit one of his agents. He left his briefcase there and he went away. After the fellow left, they saw the briefcase there and he didn't know who it was and he opened it, and inside there was an underwriting guide. And it said there, "not to be distributed."

I published it, by the way, in my column in the Insurance Advocate. That went over well. And listen to some of these ridiculous things they had there.

They told the agent, "Try to see the man's home, where he lives. If he has a neat house, the chances are that he is a good driver. If he has got a messy house, don't write him because he will probably be a bad risk. Don't write any musicians, even classical musicians. They turn out to be bad."

They went with a whole list of occupations, including policemen. They didn't like those either because they might rush to the scene of an emergency and have an accident, or something to that effect. Anyhow, when it appeared in the Advocate, the insurance company denied it until I made a photocopy of it and published it again on their stationery, so there was no denial of that.

There is one part of that that I am most anxious to bring out, which is, how the New York Automobile Insurance Plan works. And I want to get into the business of the carrot and the stick and show you that it will not work. It has not worked. They have tried it. It hasn't worked. It will not work. And I will show you the reasons why.

The New York Automobile Insurance Plan is run just like a private men's club. There are 15 members. Eight of them are insurance company members, in other words, representatives from the insurance company. This is proper, because they should have a majority. They are putting up the money, and the rest are supposed to be what is called public members who are there to advise and cast a vote representing the public.

Out of those seven members, five of them are elected. Two are appointed by the superintendent of insurance. Of the elected five, in order to be elected you have to be nominated.

The only ones that can nominate you are the eight members that are on there, that are from the insurance companies. And in order to get voted in, you have to be voted in by them.

So this is a great thing for politics. I mean, can you imagine running for office and saying, "You nominate me and then you vote for me, too"? And no one else can nominate you and no one else can vote for you. So they are absolutely guaranteed. So when they have a vote on some crucial issue, it is always 15 to zero, because it is totally rigged.

Now, I have spoken to some people that are in the insurance companies and I tell them, "Don't you feel ashamed? This is disgraceful." They say, "We feel ashamed but we are very happy with this arrangement."

Chairman KENNEDY. Some politicians up here might like that system.

Mr. MCCANDLESS. It is an east coast activity.

Mr. CARBAJAL. For some reason the insurance companies completely abandon these so-called ghetto areas. They don't want to have any part of it. So they don't care what they do.

The insurance department, in order to make it an incentive for them to write business in some of these areas, tells them, Look, you write one voluntarily; we will subtract two from your assignments at the New York Automobile Insurance Plan. The superintendent thought this was going to be the panacea, this was going to be great, we are going to depopulate the plan.

By the way, the plan in New York has over 1 million, 1 million automobiles. And it is growing.

There were no takers in this plan, no takers. So they figured something has to be done. So they came up with this idea, because the service that some of these carriers give the insurers is absolutely awful. You can't get through on the phone.

Can you imagine companies where you can't get through on the phone? What they did was they said, "We are going to form a thing called the lead plan." The lead plan means that a company that has given many assignments can sell those assignments to somebody else. The going rate was 125 percent of the premium. In other words, they were willing to accept a 25-percent loss on every one just to get rid of it.

And there was a company that bought them. Two companies that bought them, in fact. One of them is the Robert plan, who is eminently successful doing this, and the other one was Empire. They bought them, they handled them, they are making money and everybody is very happy, and these other major carriers are not involved in any way. They are turning it over.

The Robert plan has now 70 companies that they have taken all their assignments. So these companies have completely washed their hands of all the assigned risk business.

Now, the carriers, the insurance companies, will tell you that they don't discriminate, it is a matter of profitability. They want to make a profit. They are in business to make a profit. It just so happens that in black and Hispanic areas, they are losing money. That is accidental. But it just happens that way.

Now, I believe that the top of these companies, they actually believe this. I really think they believe it. But as it goes down to the underwriters, I don't think it goes that way. I think there is really true discrimination.

I have been told, not once but many, many times in my 30 years in this business that we prefer not to write blacks and Hispanics. Now, in some companies this carries over not only to the ghetto areas, but to some of the so-called better areas. They just don't want them. They want no part of it.

Let me touch quickly on the FAIR plan. We have a FAIR plan in New York that is absolutely great. They make money constantly. Chairman KENNEDY. I really want to hear from you. You are a wonderful witness. I feel badly because I think we have already cut our other witnesses off. I have asked people to try to limit their comments to 5 minutes. Why don't you just try to wrap it up.

Mr. CARBAJAL. I just want to tell you we have a great FAIR plan, it works, because they have the proper people running it, and that all the major carriers do not sell off as the others have. For example, the major carriers, some of the real big ones, the Aetnas and the All States, State Farm, and so on, they handle their own. However, they give this to their worst people. In other words, the worst

employees that they have, those are the ones they give. Any time they find a good employee that is working for the New York Automobile Insurance Plan, they promote him out.

So we are on the losing end. This hearing can do a great deal to change all this, because just the mere publicity is likely to embarrass these people into doing something about it.

[The prepared statement of Mr. Carbajal can be found in the appendix.]

Chairman KENNEDY. Let's hope you are right. We really appreciate your testimony today.

I would like to now introduce Rev. Charles Cummings, the treasurer of the District of Columbia chapter of ACORN, and an active member of ACORN for over 5 years.

ACORN, the Association for Community Organizations for Reform Now, has chapters in 35 cities and has a long history of promoting bank reinvestment in neighborhoods. He will testify on the results of a new study today.

Reverend Cummings is accompanied by Deepak Bhargava, the legislative director for ACORN.

Please proceed, Reverend Cummings, and try to keep in mind the 5-minute limitation. Thank you very much.

BY

DEEPAK

STATEMENT OF REV. CHARLES CUMMINGS, JR., TREASURER,
DC CHAPTER, ACORN, ACCOMPANIED
BHARGAVA, LEGISLATIVE DIRECTOR, ACORN

Reverend CUMMINGS. Thank you.

Good afternoon, Mr. Chairman, and members of the subcommittee. I am Rev. Charles Cummings, Jr., treasurer of the Washington, DC chapter of ACORN. I appreciate the opportunity to present testimony before you today on the important subject of insurance redlining.

ACORN has just recently completed a study of insurance redlining in 14 cities. The study reveals severe problems in the extent, quality, and price of coverage in low-income and minority communities.

I appreciate your prompt response to the recent release of this study, and commend you for holding these hearings. I would also like to commend Chairman Kennedy for your consistent record of leadership on behalf of working families.

The results of our study are alarming. The four principal findings of our study were that low-income minority areas were significantly underinsured by conventional and residual markets by as much as 48 to 50 percent in Chicago, and St. Louis, Missouri, for example, and minority areas were underinsured compared to the white areas of comparable income.

A wide range of obstacles were used by agents to avoid doing business in low-income and minority areas. Testers from these neighborhoods were not even offered quotes on policies in 38 percent of the tests conducted.

Testers were often simply told that "we don't write policies in that neighborhood" or that "we don't cover houses worth less than a certain value."

The policies that were offered and written in low-income and minority areas were often of a substandard quality. Residents of these

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