neighborhoods were more likely to be offered FAIR plans or offered limited market value coverage.

On average, in our study, callers from low-income areas were quoted premiums 2.5 times higher per $1,000 of coverage than were testers from upper income areas.

Twenty-five years after the Hughes Presidential Commission identified insurance availability as a central obstacle to urban economic development, insurance redlining remains a pervasive problem in low-income and minority communities.

Various studies by academics and government have found patterns similar to those revealed in ACORN's study. They have demonstrated that there is a major problem of insurance availability and affordability in minority and low-income areas.

Unfortunately, FAIR plans, shared risk pools for high-risk policyholders created in the 1970's, have not solved the problem. Numerous studies have argued that FAIR plans have in fact become dumping grounds for whole neighborhoods.

Our preliminary analysis of the claim data suggests that people on FAIR plans may not be more likely to have claims than other policyholders, offering less coverage at higher rates. FAIR plans have become a form of institutionalized redlining.

The heart of the problem, however, lies in the conventional market, and with the practice of insurance companies. These problems appear to have resisted change for a quarter of a century.

Insurance redlining is both blatant and subtle. Blatant forms are fairly straightforward, despite State antiredlining statutes.

An insurer can still usually refuse to insure someone based on area in which they live. An insurer can also redline by offering prohibitory rates; that is, offer an unreasonable quote that is well beyond the ability of a policy seeker to afford.

Finally, an insurer can use underwriting criteria that clearly redline whole areas of classes of people.

For example, if a company refused to insure based on the age or value of the dwelling, that may have the effect of excluding all minority neighborhoods in a city. Redlining may also take the form of higher prices or a lower level of coverage; differences that may not be based on any concrete risk analysis.

While individuals who are not redlined out of the conventional or residual market may remain without insurance, others turn to scavenger companies, surplus line carriers. These unregulated offshore companies also offer high rates and are not covered by State guarantee funds. When the time comes for a big claim, these companies may turn out to be nothing more than a P.O. Box, and leave the policyholder high and dry.

This, I am sure, is familiar to you, Mr. Chairman. After your recent investigation into the problem of second mortgage scams, insurance redlining has a devastating cost for individuals, neighborhoods, and society. The development of thriving neighborhoods with the expanding opportunities for home ownership and entrepreneurship hinge on the availability of credit and insurance.

Mortgage lenders will often not make loans without insurance. No insurance means no loans. And inner city small business cannot hope to compete with its suburban counterparts if its insurance costs twice as much.

Without adequate and competitive insurance, enterprise zones will not alone lead to increased job opportunities in our communities. The problem of insurance redlining is compounded by an ineffective State regulatory apparatus. that is unwilling or unable adequately to protect consumers.

The Federal Government can and must take a protective role to end insurance redlining. For decades bankers denied charges of redlining until Congress passed the Home Mortgage Disclosure Act, HMDA, and improved it with amendments which you sponsored, Mr. Chairman.

Congress should pass similar disclosure legislation for insurance companies. That disclosure should include disclosure of homeowners' policies written by companies on a census tract basis, and by the race of the applicant.

The Justice Department and HUD should also apply the Fair Housing Acts to insurance companies and investigate for discrimination.

Community groups have an obligation to contribute to the solutions. ACORN is trying to work directly with the insurance companies to underwrite the risk fairly, and to educate consumers. ACORN hopes to develop a neighborhood home safety program to reduce risk in our neighborhoods and thereby to improve the affordability of insurance in our communities.

The crisis of insurance availability is too important for the Federal Government to continue to ignore. Insurance is a necessity for urban economic development. In the words of the Hughes Commission, a quarter century ago, "Communities without insurance are communities without hope.'

Thank you, Mr. Chairman. That concludes my testimony.

[The prepared statement of Reverend Cummings can be found in the appendix.]

Chairman KENNEDY. Thank you, Reverend Cummings. We appreciate your testimony and the hard work that ACORN has done, which has brought to light a lot of the problems that exist for poor communities with regard to insurance. I thank you and all the hard-working folks associated with your organization.

I would now like to introduce Prof. Gregory Squires, who is a professor of sociology and a member of the Urban Studies Program and faculty at the University of Wisconsin-Milwaukee. Prior to joining the faculty, he served as a research analyst for the U.S. Commission on Civil Rights.

His main research interests are the racial effects of urban development, focusing on economic development policy. He has written a number of articles on insurance redlining.

Please proceed with your testimony.

STATEMENT OF GREGORY SQUIRES, PROFESSOR, UNIVERSITY OF WISCONSIN-MILWAUKEE

Mr. SQUIRES. Thank you. I appreciate the invitation to be able to participate in this discussion today.

I want to pick up on the comment that Reverend Cummings has made that 25 years ago a Federal panel concluded that communities without insurance are communities without hope. That statement could be just as easily written today as 25 years ago.

Neighborhoods containing large numbers of minority residents are discriminated against in the provision of insurance. This is a systematic reality. It is not just anecdotal experience. Intentional racial discrimination has continued. The fact is that industry practices have an adverse effect on minorities and perpetuate discrimination.

In research that I conducted with the U.S. Commission on Civil Rights in Chicago and I have done in the city of Milwaukee as a faculty member at the University of Wisconsin-Milwaukee, we have found that racial composition of neighborhoods is more highly associated with the number of insurance policies written in neighborhoods than the number of owner-occupied housing units, the income of residents, the poverty rate, the age or condition of housing, the population turnover, the crime rate, the incidence of fire, and other factors presumably associated with risk.

More importantly, the association between race and insurance provision remains even after you control for all these other riskrelated factors.

There is a racial gap in the provision of insurance in the United States that cannot be explained away by income, economics, or risk. The question is why.

Part of the answer may be profitability. Insurance agents will say that they can make more money writing highly valued properties or homes which happen to be located in predominantly white suburban communities. To me this simply begs the question of whether profit maximization for some should be used as a justification for the devastation of the neighborhoods of many.

I don't accept the concept that insurance cannot be profitably written in these neighborhoods, but we have to consider alternative mechanisms for delivering this essential service, whether it be municipal insurance programs, publicly regulated utilities, or some other approach. It seems to me if it cannot be profitably written, we have to think of ways of making the service available.

But unfortunately, the issue is even more complex. The perpetuation of racial stereotypes continues to affect the provision of services.

Let me read you one statement from 1988, by the sales manager of an insurance company. They very conveniently put it in writing in a memo. This is from the manager to several agents. I quote: "Your persistency went down the shitter. Very honestly, I think you write too many Blacks. You have got to sell good, solid, premium-paying white people. They own their homes. The white works. Very honestly, black people will buy anything that looks good right now but when it comes to pay for it next time, you are not going to get your money out of them. The only way you are going to correct your persistency is to get away from Blacks."

This has led some of us in the State of Wisconsin to think that maybe race has something to do with the provision of insurance in this country.

There are some practices that may have some legitimate business purposes that are not intentionally discriminatory but have that effect nevertheless. Many companies will not provide coverage on homes valued at less than $25,000 or $30,000. Given the realities of residential discrimination in the United States, we know

that minorities are far more likely to be screened out by these kinds of underwriting criteria.

There are also many underwriting rules still in place, some of which you have already heard today, that clearly have no rational basis. Let me read you a couple of observations from underwriting managers.

"The following occupations are not to be approved for preferred policies: janitors, stewardesses, traveling salesmen, auto salesmen (particularly those associated with used cars), musicians, and athletes."

Another manual has a section headed "Red flags for Agents and Claims Personnel." One of the sections here is called Declining Property Values, and under that one of the indicator is "Population or racial changes."

I read a book about underwriting 5 or 6 years ago that said clergymen were not good risks for automobile insurance and the rationale

Chairman KENNEDY. Mr. Flake, Reverend, what do you say about that?

Mr. FLAKE. We will pray for ourselves.

Mr. SQUIRES. The rationale was that clergymen feel they are protected by the Lord and feel they don't need to be protected.

Mr. MCCANDLESS. Being a reformed used car salesman turned politician, how do you respond to that?

Mr. SQUIRES. No comment. But the problem is less what is in the underwriting manuals and the way these rules are interpreted, but the subjective and arbitrary way decisions are being made. There have been test audits, like the ACORN test, where people calling from predominantly white neighborhoods are offered a quote over the phone; they are told the policy can be bound over the phone and they are eagerly pursued as customers, whereas customers from minority areas with the same financial capacity are told by the agent that they will call you back, and the call is never returned; they are referred to the FAIR plan, and there are many other techniques used to evade doing business in these neighborhoods.

Again, this is found in systematic studies of what is going on in cities, but it is also something I have been told personally by several agents, black and white, as something they know is going on because they have been told to practice these kinds of things.

Another factor is the location of agencies. It has been mentioned that people don't provide insurance in certain areas because they don't open up insurance agencies there.

We found in Milwaukee that in 1970, 1980, and 1990, the distribution of agents was clearly associated with the racial composition of the neighborhood and that did not disappear when we controlled for income, occupation, condition of homes, and other factors. In other words, it wasn't just that the agents were following the people and the money, they were following the racial composition of the neighborhood.

The neighborhood of Sherman Park, a very stable middle-income community-a member of this subcommittee lives in Sherman Park-that neighborhood changed between 1970 and 1980 from 1 percent nonwhite to 24 percent nonwhite. The number of people

that live there, the number of owner-occupied dwellings, the income has stayed about the same, but the number of insurance agents declined from 22 to 9.

So what do we do about this? It seems to me the first step is comprehensive disclosure. Each property insurer should be required to disclose the following information for each application: The race, gender, and income of the applicant, the census tract, age, structure, and value of the property, the disposition of the application (whether it was approved or not, and if not, why, and what the person can do to make the application approvable), the type of policy, the value, the premium, the deductible, exclusions, and other terms of the policy. This information should be publicly available in a user-friendly format for community groups, researchers, and others.

This, of course, does not reflect the question of what happens to people before they even file an application, the prescreening that goes on. Here you simply need to test. You need more test audits like ACORN's and others to find out what is going on at this level.

The Federal Government can be far more aggressive in enforcing statutes that prohibit unfair treatment here. A community reinvestment act for insurers might be a creative way of assuring that this essential service is provided to low- and moderate-income neighborhoods. And here you can structure in the kind of carrots and sticks that have been talked about earlier.

There are other issues that have to be brought into the debate. We need to disclose the underwriting rules as well as where property insurance is being written. We need to bring investment practices into this discussion. The insurance industry generally controls $2 trillion and makes much, if not most, of its profits from investment rather than insurance-selling activities. That investment needs to be brought in as part of the debate.

Employment practices need to be brought in. According to the EEOC, in 1990, 23 percent of the total private sector work force was nonwhite compared to less than 17 percent among property casualty insurance companies. I am not aware of any systematic research that shows a linkage between racial composition of the work force and underwriting activity, but from what I am told by insurance agents I have to believe that more minority agents would mean more service to currently distressed areas.

There is no question that redlining undermines redevelopment efforts. It locks people out of critical markets simply because of skin color, and contributes to the concentration of poverty and the rise of underclass behavior in the United States.

One small but important part of any viable urban policy must be a vigorous response to the continuing fact of insurance redlining. I thank you.

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

Chairman KENNEDY. Thank you very much, Mr. Squires.

David Farmer is the vice president of Federal affairs for the Alliance for American Insurers. The alliance is a national trade association representing 180 property and casualty insurance companies.