ple, and instead of spreading their risk or their loss along with the rest of the market, it is spread among a much smaller group of people, including perhaps some bad risks, and the end result is that it loses money. But for every 100 people in the FAIR plan, if 5 or 10 of them have losses, the 90 or 95 percent of the people who were good risks and never belonged in there in the first place are punished because they have been grouped and labeled and dumped in there by the voluntary market.

The FAIR plan is not in any way, shape, or form a response to the problem of insurance availability. There are all kinds of coverage that are essential, that is not provided from State to State. Some States are better than others

Chairman KENNEDY. These are not necessarily riot-prone neighborhoods that I am talking about. One of the neighborhoods is the Back Bay section of Boston. It is essentially an upper income section of the city that has a fairly high crime rate.

Now, if the truth is that there is simply no other insurance available there, what is the answer to the problem?

Mr. SQUIRES. It seems to me what you are describing there is improper underwriting where people who should be picked up by the voluntary market are improperly labeled, either because they live in an older home, in a minority neighborhood, or whatever. Those people should be covered if the competitive market is working properly.

Chairman KENNEDY. But the fact that they should be covered, and they are not covered, doesn't really solve the problem. So how do you get insurance companies to offer insurance in those circumstances?

Mr. SQUIRES. You don't start by improving the FAIR plan. I think part of what you do is the disclosure we talked about, the greater scrutiny. By providing more effective enforcement you will get companies that will take a second look at their own policies.

Chairman KENNEDY. But is there, in fact, any mandate today that allows a State government to force insurance companies to insure, or is it the kind of situation where there is simply no regulation, so if I am an insurance company I can say, for instance, I don't want to sell to green-eyed midgets?

Mr. SQUIRES. There is no effective mandate. State insurance regulation is very weak. The State insurance commissioner of California is one of the exceptional figures in this issue. But, no, there is no mandate.

Chairman KENNEDY. It is very different from what we see in regard to banks where they are given a geographical jurisdiction through which they are supposed to then provide certain services. Mr. SQUIRES. It is entirely different. And that is only one of the reasons why it is so different.

Chairman KENNEDY. If that be the case, then under the guidelines, would you suggest that we can in fact have any authority to say to the insurance industry that they should insure people of color or that they should insure others? These people are being discriminated against because they are black. It is not because they are bad insurance risks.

Mr. SQUIRES. It is difficult under the current structure of the law to devise an authority that the Federal Government can do that.

Chairman KENNEDY. Any government. It doesn't have to be Federal.

Mr. SQUIRES. You are raising the possibility of reconsidering the McCarran-Ferguson provision. Or you are talking about something that would provide a positive mandate on insurers so if they wanted to get new policies approved or new rates approved or they wanted to open up a new agency somewhere in the city, they would have to be meeting a set of responsibilities similar to what lenders are doing under the Community Redevelopment Act.

It seems to me under State regulatory schemes it is technically feasible to do that. Whether it is politically feasible given the unequal relationships and power between consumer groups and the insurance industry, I don't know if that is a realistic solution.

Chairman KENNEDY. That is a different question.

Mr. Carbajal, do you have a thought on this issue?

Mr. CARBAJAL. I have a lot of thoughts on the FAIR plan. In New York, we have, I guess, a unique situation as far as the rest of the country is concerned. The FAIR plan is beautifully run. It is the cream of the crop. All the insurance executives have a place on the board of directors. Because there is a lot of money at stake there. In automobile insurance you have got 10 and 20 as the basic rates, 10,000 to 20,000. With the FAIR plan they go up to the hundreds of thousands of dollars. So the insurance companies are very-look at all the risks very, very carefully. They know exactly what they are doing. And a lot of very good risks are placed in the FAIR plan in New York because it is cheaper and better than the regular market, especially when they are in tight markets that the insurance companies don't want to write for some reason, they go to the FAIR plan.

There is a lot of business in the FAIR plan that doesn't belong there, but I as a broker have put a lot of business in there that I shouldn't have. The rates are not much, and sometimes it is even less.

That explains why the FAIR plan in New York, very often, many, many years, makes money, and they are embarrassed over it, because it was not made to make money. It was assumed from the beginning they were going to take a loss. And that is not the case at all.

The only difference within New York, the only disadvantage is that in the homeowners, they don't supply theft coverage or liability. But they provide just about everything else. They provide riot. Chairman KENNEDY. Thank you.

Reverend Cummings, or Mr. Bhargava.

Mr. BHARGAVA. Just a couple of quick comments. Whatever data there is out there publicly available, FAIR plans may in fact work differently than we think they do.

We took a look at the claims data for Missouri, for example. Six percent of the folks who are on FAIR plans in St. Louis and Kansas City made claims in 1991. That compares to 12 percent in the conventional market. That was 1 year.

I suspect if you looked at other places you would find different things. But all I am saying is that clearly there are large numbers of people out there no more likely to be a risk than anybody else who are put there, and they are bearing the cost of folks who are

on FAIR plans because they are arsonists or whatever, who are in fact higher risks.

The question is, for those individuals who are higher risks, who is going to bear the cost of that? Currently, it is those who are least able to pay who are bearing those costs.

The second thing in terms of what the government can do, I think there are two options. The State of Michigan has a law which hasn't actually worked very well, but I think conceptually is very good, where companies are required to insure anyone who has a building that is up to code and who doesn't have a claims history. So a company must give the homeowner the presumption that they are insurable and write that policy.

The other option I think is to restrict the kinds of criteria companies can use to design you a policy. So under the Fair Housing Act, for example, I would argue that we should make it illegal to use underwriting criteria that discriminate against certain neighborhoods, things like age of dwelling, things like neighborhood, things like race. That is one way to go. But there are a couple of things I think the Federal Government can do.

Mr. MCCANDLESS. Thank you, Mr. Chairman.

I listened with a great deal of interest. I want to apologize from my side of the aisle for the inconveniences you have been put through today. Not being in charge of the House, we have to go along with the system.

Chairman KENNEDY. Our fault?

Mr. MCCANDLESS. When I opened my remarks I said that we are here to consider the increased availability and affordability of insurance. For some 20-odd years I held all the insurance licenses available in California. So a little knowledge is dangerous. But let me go through something very quickly here to start the foundation.

I look at a building or a home, for example, a single-family dwelling. The first thing is, how far is that from a response station for fire purposes? What is the water flow pressure in that area? What is the location of the nearest hydrant? What is the age of the residents? Is there street lighting? What are the building codes? Does it meet the building codes?

How about the electrical wiring? If it is a commercial building, does it have sprinklers? What type of roof does it have? What kind of condition is the building in? Has it been maintained? And then in the neighborhood, of one or another types, is there a long list of theft and vandalism responses on the part of law enforcement? All of this becomes one thing, exposure, which translates into underwriting a policy for that particular building.

Now, this is basic to the insurance industry. But I use this to illustrate the point. The same thing would apply to automobiles. If you have got 6 kids under 25 in the family, obviously, there is more risk than if there is none. So we have all of these various underwriting elements.

We are talking here about lower income inner-city areas, which was brought out in the testimony that, by and large, are older buildings, which then fall into some of these categories, and if we are talking about the Mission District of San Francisco, very few

of those buildings have structures that would withstand any kind of earthquake. What do we do about that? Is that going to be something that we would consider?

So my question to the panel-I would like to start with you, Mr. Squires-is, with all of this as basic underwriting, irrespective of where the house may or may not be, how do we address the issue for which we have brought this panel together and you so kindly are testifying?

Mr. SQUIRES. First, it sounds to me like what you are describing is a rather thorough, conscientious underwriting process that unfortunately probably doesn't occur as often as we would like. But in terms of the issue of racial discrimination, which to some extent may be different from disinvestment of older areas, what frustrates me is, when we take those things as an assumption and we look at the impact of income or age of structure, and you systematically research this, you find that those factors don't explain away the racial disparity, or when you do test and you have blacks and whites or people from black or white neighborhoods that are otherwise the

same

Mr. MCCANDLESS. Let me intervene, because that is not a function. It is already there as a part of law.

Mr. SQUIRES. What is there?

Mr. MCCANDLESS. The racial discrimination.

Mr. SQUIRES. But for whatever reason, clearly the nondiscrimination is not being enforced.

Mr. MCCANDLESS. We can't write a policy that says there should be no racial discrimination, because it is already in law in both the State and Federal Government.

Mr. SQUIRES. Twenty-five years ago we could have said the same thing in reference to mortgage lending. There is a lot that can be done to bring to light new information that will develop new policies that will enable us to get at the issue of discrimination.

I agree you can only say you can't discriminate once. There is no need to pass another law that says you can't discriminate.

Mr. MCCANDLESS. I would like to set aside the racial discrimination aspect of it because we are talking about lower income, innercity type activities. Obviously, there are different kinds of racial mixes in these areas than there would be in the suburbs. But we are talking here now about the ability to insure these dwellings as an underwriting aspect of the insurance business at what would be available and affordable insurance rates.

Now, how do we do this?

Mr. SQUIRES. There are several ways. First of all, instead of simply turning down an application because they are not qualified, the agent could work with the person and let them know what they need to do to become qualified and offer to reinspect. I know sometimes that happens. It doesn't always happen.

We could restructure the compensation system within some companies. Some have done this, where agents could be paid a salary plus commission rather than a straight commission so there is less of an incentive to ignore the city and go to high-priced homes in the suburbs.

There are a number of things that can be done within the structure of the industry to make these properties more attractive.

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But first there has to be a recognition there is profitable business to be written in these neighborhoods. We don't need FAIR plans. We don't need an insurance market of last resort for most of these people.

With a little bit of creativity, we can come up with products and marketing efforts that will make these people insurable, where we can take the risk out of presumably high-risk properties and bring them into the market. But right now that is not the mentality. The notion is, let's figure out how we can avoid certain areas and not get caught and go back to the areas we are writing vanilla policies for.

Mr. MCCANDLESS. My time is beginning to wane here. Mr. Cummings, if I interpret your testimony-and this is why I am asking you-you are saying that the insurance business should become a public utility. Did I understand your 10-point comment correctly?

Reverend CUMMINGS. Exactly. What I am saying is that it should be fair. We speak about the FAIR plan. It should be fair, and use the "fair" in FAIR plan.

The problem is a thin line between proper underwriting and discrimination. So, therefore, there is a thin line between the proper order of doing things and discrimination. So, therefore, if you do things, underwrite insurance policies, you are very close to discrimination. Therefore, we need stronger regulations to improve this problem.

Mr. MCCANDLESS. In California-I will wind up very quickly-we have what we refer to as assigned risk. This means that there is a law in the books on the State of California that you must have auto insurance. If there is a law you must have auto insurance, then insurance must be available to those who can legally drive.

If you have a very poor driving record, whatever that might be, normally a regular insurance company will not accept you at regular rates. You may have premium policies to pay, but if you are still not able to do that, you are given an assigned risk policy that qualifies you to continue to drive as long as you have the legal requirements to do so.

Is that what we are talking about here when we talk about also these inner cities, that we should have a legal requirement that because you are in a neighborhood that may have a high rate of theft and vandalism, and so forth, that there should be something available to you-you call it the FAIR plan-that would be underwritten by the policies and premiums of other areas, and therefore we would simply charge a little bit more over here to this risk and that would overshadow the lesser rate in the lower income in the city type of policy?

Mr. BHARGAVA. In response to that, you are really talking about two different kinds of underwriting criteria. I just heard you speak of two different kinds. You are speaking of driving records on the one hand, which is something that is directly under someone'sMr. MCCANDLESS. I changed to dwellings.

Mr. BHARGAVA. But I meant, there are things under people's direct control. Your driving records, whether you have a fire alarm in your house, whether you have a burglar alarm, whether you maintain your property correctly, whether you have good locks or