Mr. Farmer, the subcommittee appreciates your willingness to testify today, particularly in light of the fact that another industry group, the American Insurance Association, refused the subcommittee's request to appear today. The AIA's refusal to testify suggests a troubling lack of concern about the very serious charges leveled against this industry by some of our witnesses.

So, Mr. Farmer, I want you to know how much we appreciate your willingness to testify and give us your perspective. Please proceed.

STATEMENT OF DAVE FARMER, VICE PRESIDENT, ALLIANCE OF AMERICAN INSURERS

Mr. FARMER. Thank you, Mr. Chairman.

My name is David Farmer. I am the vice president of Federal affairs for the Alliance of American Insurers. We are committed to servicing the insurance needs of all Americans.

We believe better understanding of the insurance system is important for this subcommittee and for people who believe the system is discriminatory. Redlining is against the law. Racial discrimination is against the law. Report them, fine them, investigate them, and take the appropriate action that is necessary.

Mr. Garamendi, in proffering the evidence, is going to conduct an investigation, and that is the process, and that is as it should be. The industry does not condone racial discrimination at all. I want to make that point perfectly clear.

Let me briefly describe to you how the property insurance mechanism has responded to the specific needs of the urban marketplace. In the wake of the civil disturbances of the 1960's, President Johnson created a Federal advisory panel on insurance in riot-affected areas. In that report and recommendation, the panel conducted interviews, surveys, and obtained written information from State and local officials, several days of formal hearings featuring scores of witnesses were held. The panel conducted 3,000 interviews during a scientific study. Questionnaires were sent to insurance regulators, companies, agents, real estate brokers, fire and police officials.

In response to the panel's recommendations, Congress enacted the Urban Property Protection Reinsurance Act of 1968 which provided for the creation of FAIR plans. And FAIR plans, which stand for Fair Access to Insurance Requirements, subsequently were created in 29 States.

Any occupied property that is not in poor physical condition, is built in accordance with local codes, is used in a lawful manner, is eligible for basic property coverage through FAIR plans.

As with all insurance products, FAIR plans are tailored to meet different needs of local markets. Pricing of these coverages generally are the same as the standard market. Some plans have surcharges related to specific risk factors.

It should be emphasized that even with the surcharges, FAIR plans over the 25-some years of their existence in the aggregate have lost money. And I would direct the subcommittee to exhibits 3, 4, and 6 at the back of my prepared testimony.

These exhibits are taken from a just published Alliance study of residual markets. I have a copy of that for all the members of the subcommittee.

The 1967 Federal insurance panel's methodology, defining key issues, vigorous investigation, and recommendations based on hard data, contrast, unfortunately sharply, with ACORN's study on homeowners insurance. The ACORN document is a series of unsubstantiated conclusions based on flawed research. Certainly, this document cannot support the serious charges ACORN has leveled at the insurance industry.

The ACORN study is fatally flawed for the following basic reasons. The sample size is too small to act as the base for such a grand conclusion, and the study fails to consider several valid explanations for apparent coverage disparities among properties.

ACORN also has ignored the fact that unfortunately arson, theft, and vandalism occur with much greater frequency in economically disadvantaged urban areas. This fact explains why insurance coverage varies from place to place.

The report also fails to consider the role income plays in the decision to buy insurance. ACORN attributes the lack of insurance in poor neighborhoods to redlining, without investigating whether residents of those neighborhoods would buy insurance at any price.

In addition, the number of renters usually is higher than the number of owners in these areas. ACORN does not account for this. As a result, their findings with respect to the breadth of coverage in various neighborhoods are skewed.

In conclusion, let me reaffirm that no individuals are denied property coverage based on race or simply because of the geographic location of their property. Basic property insurance is available to virtually anyone who wants to buy it, either on the voluntary market or through the FAIR plan.

State insurance commissioners-and I think Commissioner Garamendi in his earlier testimony validated that when he said there was a problem in the California FAIR plan, and trying to make those changes and the industry has agreed to make those changes. I think that testimony of the commissioner is very important. But State insurance commissioners currently are examining urban property issues. We support their efforts and look forward to the findings of the NAIC's new urban issues subgroup.

Urban property insurance presents unique coverage situations. In April 1992, the Los Angeles riots caused an estimated $775 million in insured property losses. These losses marked the beginning of a record year of catastrophic losses. Hurricane Andrew will cost the insurance industry nearly $20 billion, the Niki almost $2 billion.

Even in the face of such extraordinary losses, insurers still continue to meet their commitment to urban America in the area of insurance. Nevertheless, there is a belief that insurers don't treat everyone fairly.

I can tell you the Alliance is committed and your member companies are committed to do everything we can to correct this misperception. And as I said before, in terms of redlining and in terms of racial discrimination, members of the Alliance and the members of the industry condemn that practice.

Thank you, Mr. Chairman.

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

Chairman KENNEDY. Thank you for your testimony, Mr. Farmer. Now, our final witness today will be Lisa Rice, who is the executive director of the Toledo Fair Housing Center in Toledo, Ohio. The center provides services in all areas of fair housing, including fair housing and mortgage lending issues.

Please try to remember the 5-limit limit.

STATEMENT OF LISA RICE, EXECUTIVE DIRECTOR, FAIR HOUSING CENTER

Ms. RICE. The Toledo Fair Housing Center is not a research organization. We are a private nonprofit organization. We are an enforcement organization. We investigate bona fide complaints of discrimination.

So as I am talking today, I am not just dealing with statistics or with numbers. I am dealing with real people and real incidents. Based on the complaints that we receive-and we receive roughly 20 complaints of insurance discrimination per year-based on the complaints that we have received from victims of homeowners insurance, we have been able to identify discriminatory practices levied by the insurance industry. We have conducted testing in response to these bona fide complaints of discrimination. We found several things.

Most of the complaints in which we find that discrimination is occurring, they are based on the racial composition of the neighborhoods. Persons are being denied coverage because of the racial composition of their neighborhood. Persons are not being courted by insurance agencies. They are being dropped by insurance agencies because of the racial composition of the neighborhood in which they want to purchase a home.

Persons are being canceled by companies. We have even had persons who have been with companies for years and years and have never filed a claim, and they are being canceled by companies because of the racial composition of the neighborhood.

They are being referred to the Ohio FAIR plan as the only avenue for coverage, and again, as one of the subcommittee members pointed out earlier, the Ohio FAIR plan, the FAIR plan insurance is not insurance that the average buyer wants to procure. It is insurance of the last resort.

Persons are being charged higher rates for less or the same coverage as their white counterparts. They are being offered inferior policies. They are being offered policies not in the elite company, but in the secondary company, or again, as I said earlier, being referred to the Ohio FAIR plan.

They don't have local agencies to which they can go for business. There are no insurance offices in central city neighborhoods in Toledo, Ohio.

Also, persons who live in minority neighborhoods are being inspected more frequently than their white counterparts. As I have stated, all of these allegations have been supported and substantiated by testing evidence.

Now, let me explain testing; what we do when we receive a complaint and how we test.

We match two properties, one in a caucasian neighborhood and one in an African-American neighborhood. They are matched in terms of structure, the age of the housing, the value of the housing, and other things, such as their closeness to a fire hydrant and things of this nature.

We set up the testing in some situations so that the condition of the property in the African-American neighborhood is better than the condition of the property in the caucasian neighborhood. And let me just cite for you some of the things that occurred in our testing.

We had one instance where we had a rental dwelling, a duplex dwelling in a white neighborhood, a duplex dwelling in an AfricanAmerican neighborhood. Clearly, the one in the white neighborhood was in not as good condition as the duplex dwelling in the AfricanAmerican neighborhood. In more than one test, we have used these two properties in more than-in testing against more than one insurance company.

The property in the white neighborhood always receives the better policy. They are either offered a replacement coverage or market value policy. The cost for the insurance is lower. But what happens frequently to the property in the African-American neighborhood is that although it is in better condition, the insurance agent often drops the caller or refers that caller to the FAIR plan. One of the other things that we have found, and this is very easy to ascertain, is that insurance companies have minimum insurance amounts. Now, in Toledo, and I can cite you the information for Toledo, a lot of insurance companies have minimum insurance policies of $30,000. Some have $40,000, some have $50,000. That is if your property is valued under $30,000, they will not write you, period.

That type of a policy has a devastating effect on the minority neighborhoods in Toledo. A policy with a minimum value of $30,000 has a disparate effect on 78 percent of the African-American community, 74 percent of the Hispanic community; and 30 percent of the caucasian community in Toledo.

In the MSA, this policy has a disparate effect on 71 percent of the African-American community, 40 percent of the Hispanic community, and only 12 percent of the caucasian community. What we have found is that these numbers will deviate a little bit more because we found in testing where we have had callers call on properties that are valued under $30,000 in all white neighborhoods, and the insurance agent will artificially inflate the value of the property in the caucasian neighborhood so that he can write the insurance.

Let me just very quickly speak to the issue of profitability. Also, let me say that in no-we have conducted about 150 tests-in no test where we had a caller calling and the caucasian neighborhood was the tester referred to the Ohio FAIR plan.

Chairman KENNEDY. I am going to have to ask you to please wrap it up.

Ms. RICE. Let me briefly speak to the issue of profitability. The argument the industry has made was to secure these higher profits

with less risk. However, the industry's own records in Ohio show that the owners of higher priced suburban properties file more claims at higher cost per claim than owners of moderately priced property.

In a document prepared by the Ohio Department of Insurance, for the period of 1983 to 1987, the incurred ratio of properties valued at $126,000 and greater was 58 percent. Properties valued

at

Chairman KENNEDY. Ma'am, I am afraid—I don't know if people are taking in all those numbers in any event, but your entire statement can be submitted for the record. And I would urge all of you to submit your entire statements for the record. But in the interests of trying to provide opportunity for members to ask questions, which is after all how we get the most out of a lot of the information that you have, I would like to move on.

[The prepared statement of Ms. Lisa Rice can be found in the appendix.]

Chairman KENNEDY. My first question really has to do with the FAIR plan. In my home at the moment in Boston I am insured under our FAIR plan, and in times past, in other sections of the city of Boston, I have been insured by the FAIR plan. It seems to me that your criticism of the FAIR plan is that it is attracting too many bad risk people. As a result of that, it penalizes people that are better risks.

The difficulty, of course, is that if you take out of the FAIR plan people that are better risks, don't you then increase the premiums for people that are bad risks?

So I don't know. It seems in some sense it is sort of a zero-sum game where in the end you end up actually making it more difficult for the most vulnerable people to get insurance.

Now, I am sure I am missing something, because it is too obvious. But Mr. Squires, why don't you take a crack at answering that, please.

Mr. SQUIRES. Part of the problem is the FAIR plan was designed to provide coverage for good risks who happened to live in riotprone areas. It was not meant to cover bad risks. But it has been treated as a dumping ground for all kinds of risks.

Chairman KENNEDY. If that is true, then who is supposed to get the bad risks?

Mr. SQUIRES. Well, presumably people if they were bad risks could be advised as to what they had to do to their properties to make them insurable.

Chairman KENNEDY. In some cases

Mr. SQUIRES. Nobody is suggesting

Chairman KENNEDY. Excuse me, but in some cases it isn't just the fact of where you live. Everyone in certain sections of the city of Boston is in the FAIR plan. You can't get any other insurance other than the FAIR plan. There are whole neighborhoods in the city of Boston with access to the FAIR plan only. In two neighborhoods I have lived in the only insurance available was the FAIR plan.

Mr. SQUIRES. That is an abuse of the FAIR plan. That is not how it is supposed to be used. When you report all these figures that show the FAIR plan is losing money, you separate out certain peo