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INSURANCE REDLINING: FACT OR FICTION?

WEDNESDAY, FEBRUARY 24, 1993

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE, COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS, Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room 2237, Rayburn House Office Building, Hon. Joseph P. Kennedy [chairman of the subcommittee] presiding.

Present: Chairman Kennedy, Representatives Gutierrez, Rush, Roybal-Allard, Barrett, Velazquez, Hinchey, Flake, McCandless, King, Pryce, Knollenberg, Baker, and Sanders.

Chairman KENNEDY. The subcommittee will please come to order.

Today the subcommittee holds the fourth in a series of hearings on the credit crisis for American consumers and small businesses. This afternoon's hearing poses a simple question: Is insurance redlining taking place in our country? Today's witnesses, save one, state unequivocally that it is. In fact, despite studies and surveys reaching back 22 decades, redlining by insurance companies continues to be an unrelenting fact of American life.

Insurance is the invisible key to economic advancement in our society. Without it, consumers cannot obtain the credit that they need from banks and thrifts to achieve a decent level of financial security and prosperity. Homes cannot be bought. Businesses are unable to start and grow. Inevitably, redlined communities decay and citizens trapped within them are condemned to lives of poverty and despair.

Yet, despite knowing the importance of this key, the industry has used it to lock tight the door of economic opportunity for millions of consumers. The evidence presented to this subcommittee clearly suggests that a pattern of massive nationwide discrimination against low-income and minority Americans exists.

Our first witness, California Insurance Commissioner Garamendi, who I might add has done more to document and remedy insurance redlining than any public official in the history of our country, will show us a map of San Francisco. This map, purportedly used by an insurer, marks off huge sections of the city where agents are forbidden to sell policies.

Another witness, with over 40 years experience as a broker and industry analyst, tells of seeing maps of New York City literally redlined by insurance companies to show agents where not to write policies. And in case he had any doubt about the meaning of those

red lines, he was told by a company underwriter that the company does not "write Blacks or Hispanics.'

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The industry has found other ways to discriminate that may be less blatant but are just as effective in weeding out the poor and minorities from the pool of insurable risks. Underwriting guidelines, the bible of the industry, are models of double speak and innuendo. Fair on their face, they can be discriminatory in effect.

The subcommittee has obtained portions of several of these usually confidential guidelines, or manuals, as they are called in the trade, used to underwrite auto insurance in Texas. One company, Metropolitan Life, requires people seeking car insurance to own a home. We called Met Life and asked them to explain how on earth owning a home makes someone a better driver. Their answer: Homeowners make better drivers.

The bottom line is that a requirement like this wipes out the possibility of insurance for lots of hard-working Americans who may have excellent driving records.

Another Dallas-based insurance company, Trinity Universal, is apparently not universal about its willingness to insure inner-city minority applicants. Trinity flatly refused to provide auto insurance to consumers who lived in six Texas counties. It so happens that those six Texas counties are overwhelmingly urban and Hispanic, including Dallas/Fort Worth, Corpus Christi, El Paso, and the Rio Grande Valley, which is the single poorest area in the United States.

Their guidelines do not explain why someone is a bad driver just because of where they live. They also do not insure anyone who has been in the country less than 5 years or drives cars with "excessive stereo systems." Standards such as these are ridiculous on their face, bearing no relation to driving ability but having much to do with race, income, and residence of consumers.

Some low-risk inner-city residents are able to find insurance; however, they are paying more in premiums for less in coverage. A study just completed by the consumer group ACORN shows that urban and minority consumers are paying as much as 270 percent more for State-sanctioned insurance than for private insurance. Yet, they cannot get insurance to cover the cost of rebuilding their homes if they are destroyed by fire or other disasters. They can only receive coverage up to the value of their homes, which in the inner city may not be much.

The message that insurers are sending to low-income and minority consumers is crystal clear: You are irresponsible; you are dangerous; you don't deserve insurance. Solely because of the color of their skin, the size of their paycheck, and the address of their home, millions of Americans must pay more in premiums for less coverage, take their chance on some shadowy, unregulated, or unfunded insurance company, or go without insurance at all.

So when it comes to getting decent insurance, Nationwide may not be on your side, you could be in no hands at all with Allstate, and unlike the good neighbor, State Farm might not be there.

The presence of discrimination in the insurance industry is no more surprising than its existence in the banking industry or other sectors of our society. What is surprising, however, is that so little has been done to effect a remedy.

This hearing is just the beginning of the subcommittee's examination of the problem. I hope that our outstanding panel of witnesses will help us focus on what we can do to rid this Nation of this scourge.

I, for one, believe that we need to see more data from insurance companies on where they do and do not write policies, much like the Home Mortgage Disclosure Act. It requires banks to have data on mortgage loans. It will put to the test the contention that discrimination does not exist.

We should also consider giving consumers the right to know why they have been turned down for insurance, much like the right they have to know why they have been turned down for credit. Such a requirement would strongly discourage insurers from using underwriting standards unrelated to risk.

I hope today's hearing will be another step toward ending the system of economic apartheid that continues to hold so many Americans back from achieving their full human potential.

That said, let me now turn to the ranking Member of our subcommittee, Mr. McCandless, for an opening statement.

Mr. MCCANDLESS. Thank you, Mr. Chairman.

Let me begin by making the point that discrimination on the basis of race, gender, or ethnic origin is not only completely irrational, but illegal. Such discrimination should not and cannot be tolerated.

There are remedies we all support to eliminate discrimination. If discrimination is taking place within the insurance industry, then those responsible should be held fully accountable for their actions under existing civil rights laws.

If they are not being held accountable, then we should direct our attention toward the State insurance commissioners and attorneys general, and ask them why they are not doing their jobs.

Our focus today, however, should be on what steps we might consider to increase the availability and affordability of insurance in inner city, low-income, and other underserved areas.

As a general rule, when the government is trying to encourage an activity, it has two options. It can mandate the activity and punish those who fail to comply, or it can provide incentives to those who engage in that activity. The better the incentive, the more the activity. This is the proverbial carrot or stick debate.

In reviewing the testimony for this afternoon's hearing, it became obvious that the suggestions of most of our witnesses are long on sticks and short on carrots.

I have a very fundamental disagreement with those that advocate that the insurance industry should be treated like a public utility or that regulation of insurance should be taken away from the States and given to the Federal Government.

I believe in the free enterprise system. If a person can expect a reasonable return, then there is virtually no limit to the ingenuity used to provide goods and services. If the perceived risks are greater than the expected return, then there will be a shortage of goods and services. To address the shortages, we can either decrease the risk or increase the return. That is true of all goods and services, including insurance.

I make these comments for the purpose of encouraging a broad debate from a variety of perspectives. I look forward to the witnesses' comments and thank them for being with us this afternoon. I want to congratulate you and the staff, Mr. Chairman. All of the statements were submitted in the timeline we talked about last time. It made it much easier for us.

Chairman KENNEDY. We are always happy to take your suggestions.

Mr. Hinchey.

Mr. HINCHEY. Thank you very much, Mr. Chairman, for holding this hearing and the series of hearings that have been held on this subject.

It is clear that numerous communities across the country, your State and mine and other places across the country, have been denied as a result of redlining that has been taking place. Those people have been depriving Americans of their rights.

Those people who have held the hearings have taken a leadership role in defining those problems, casting appropriate light on them, and also offering suggestions on how best to deal with them. So I am grateful to you, Mr. Chairman, for shedding light on this problem and for my ability to take part in it.

Chairman KENNEDY. We want to thank you, Mr. Hinchey. Your questioning has really been perceptive in terms of the concerns that you have, not only for the people in your district, but I think people around the country who are dependent on our largest companies to obtain credit. So we are really delighted with your participation on this subcommittee.

Chairman Flake. Always good to hear that "Chairman," isn't it? Mr. FLAKE. I like that, yes. Thank you. Thank you, Mr. Chairman. It is certainly good to be here, primarily because of the nature of this particular hearing, as you have done and continue to do to lift issues of concern to help all America be involved in the process of not only economic recovery, but some degree of fairness. I think it is almost impossible in many of our urban communities to find insurance companies still doing business there, in spite of the fact that it represents a potentially good market for the availability of them to have customers. It is a sad situation when you are trying to do community development, both for housing and more particularly for commercial development, to suddenly find insurance companies are either unwilling or charge rates that are so onerous that persons who would choose to have insurance cannot afford to do so. And then to find another instance, when there has been a tragedy, the insurance is not of sufficient nature to cover, in spite of the fact that the person who considers themselves having been insured has in fact paid more than they would have paid if they were in other communities.

I think we all must agree you cannot possibly hope to bring urban America back to stability, to a place where you can do business and have a functional community, without having the full cooperation of the banking community, the corporate community, and the insurance industry.

So I think the hearing is important if we are going to continue to discuss ways of getting capital into those communities. Yet, it does no good if the cost is driven up for persons trying to do busi

ness, or those persons find it impossible to have the same benefits as other businesses that function outside of those communities.

So I commend you for the hearing. I look forward to hearing the witnesses. I just hope as we continue to work together to try to rebuild America, that we are talking about all of America, not just a portion of it, and understand that a part of the rebuilding process has to do with elimination of this what I consider a sin called redlining.

Thank you very much, Mr. Chairman.

Chairman KENNEDY. Thank you, Chairman Flake.

Mr. Knollenberg was here next. I am sorry I missed you there in the corner.

Mr. KNOLLENBERG. I snuck in, Mr. Chairman, but I am here in the body and flesh.

Mr. Chairman, I want to thank you for your confession of overlooking me, number one, but number two, for holding this hearing to examine the allegations of insurance redlining. I want to welcome our witnesses.

This whole idea concerns me a great deal. Prior to coming to Congress, I was in the insurance business, and so this hearing is of particular interest to me.

Í know that in Michigan, as in a number of States, we have a FAIR plan. It stands for Fair Access to Insurance Requirements. It is something that I think is part of the handout, but we have information here if anyone would like to relate to it or has a question about it.

Under this program, policies of last resort are offered through the Michigan Basic Property Insurance Association. This program offers homeowner's, which includes liability, fire and theft and commercial insurance. They also provide fire coverage for people who want to rent property who are in a landlord category. My sense is in talking with the Michigan Insurance Department, the insurance commissioner, that this program has been successful.

As a champion of economic empowerment, I have always been concerned about charges that urban areas are redlined for purposes of insurance-small business loans included, mortgages, other types of credit.

But I do have to say that I am concerned that some of the studies and the data that we are reviewing may not offer full and balanced perspective on this issue. Nonetheless, we look forward to hearing our witnesses, and to hear the address on the free market situation, and also the fact that I want to ensure that this issue is not something that becomes just more of a government dictate. So I do welcome, of course, our folks who are here today, and look forward to their testimony.

Thank you, Mr. Chairman.

Chairman KENNEDY. Thank you very much. I am delighted to hear your previous experience. I think it would be helpful to us in these hearings.

I think we are going to hear some of our witnesses discuss the FAIR plans. We have a FAIR plan in Massachusetts. There are some benefits from them, but some problems as well. But we will hear from our witnesses.

Peter King was here next.

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