STATEMENT

Banking Subcommittee on Consumer Credit Hearing

on Insurance Redlining

February 24, 1993

Lusible Rayhal Mand

I would like to thank Chairman Kennedy for his leadership and vision in identifying issues in this subcommittee that are of major importance to communities like the one I represent. Insurance Redlining is an issue that I and some of my colleagues from California such as Ms. Waters have dealt with for a number of years. It is a very serious problem in many parts of the state, particularly in the South Central and South East portions of Los Angeles County. Unattainable insurance was of such critical importance that in California, voters approved a statewide Insurance Commissioner position to regulate the escalating costs of insurance. This is as you know a position now held by Commissioner Garamendi. The problems we are experiencing in California range from lack of insurance, to the high price of insurance, to poor quality of insurance sold in impoverished neighborhoods. I would like to thank today's witness, particularly Mr. Garamendi from my home state for assisting us and providing information on insurance redlining. I look forward to

working with the chairman and interested parties to find

solutions to this difficult issue.

Testimony of California Insurance Commissioner

John Garamendi

Before the Committee on Banking, Finance & Urban Affairs,

Subcommittee on Consumer Credit & Insurance

Honorable Joseph P. Kennedy II

February 24, 1993

Good morning, Mr. Chairman and Members of the Committee.
California Insurance Commissioner John Garamendi.

I am

You have asked me to testify about discrimination in insurance: insurers that refuse to solicit, sell, or service insurance business in inner city, minority, and low income communities, while profitably providing full service to other parts of a community or state. This is called redlining, because insurers carve out an area (put a red line around it on the map) and refuse to service it. They don't put agents there; they don't sell insurance there. And as a result, people can't insure their cars or homes and can't start businesses.

I'm

It may surprise you that there are people who deny redlining exists. They apparently chalk up the whole idea to hyper-active imagination on the part of overzealous consumer advocates. here to assure you that redlining is real, and it is practiced day in and day out in California's urban areas. We have taken significant steps to find it and end it.

Let me make three brief points, then offer some background and take any questions.

1.

From time to time we receive information about redlining and other issues. As a matter of fact, we received in the past few weeks allegations against a company. If these allegations prove to be true, the map I have here was used in a calculated and determined fashion to exclude from insurance coverage substantial portions of the City of San Francisco. I would like to share this map with the subcommittee. If these allegations are true, people living in the areas highlighted in yellow -- the majority of the city - would be excluded from insurance coverage by this company. This would be redlining -- the real thing.

I am showing the subcommittee the map as it was received by my Department. Since it may become evidence in a possible subsequent proceeding, I will need to take the map with me at the conclusion of my testimony, but I will provide the subcommittee with copies.

2.

3.

My Department has begun to look at the redlining problem
from a statistical vantage point. What do the numbers tell
us about agents operating in a given city? Or policies
sold? We have begun to identify disturbing trends that show
that residents of Oakland and Los Angeles, for example, both
cities with strong minority communities, have significantly
fewer agents to serve them and, not surprisingly, are much
less able to buy insurance than people who live in other,
more "desirable" cities and towns, such as Fresno. I can
provide you with the evidence we have uncovered.

The

in

My Department has moved to provide strict regulation where
none has existed in order to encourage good insurance
practices and toss out the bad and the discriminatory.
regulations which we are about to move into final stages
will penalize the discriminating insurer where it hurts:
the wallet. An insurer who redlines is penalized on the
profit side. An insurer who plays by the rules gets a
bonus. After all, it's already against the law to
discriminate. If the possibility of being pointed out as a
lawbreaker would discourage these bad companies, they would
have stopped redlining. They have not stopped. We have
simply decided it's time to make it too costly to discrim-
inate; it's time to take away the profit from comfortable,
illegal underwriting.

SOME BACKGROUND

Although California voters enacted the Insurance Reform Initiative ("Proposition 103") in 1988, which obliges insurers to insure all good drivers, many insurance companies still refuse to do so. These insurers claim the risks are too high in low income and minority communities and inner city neighborhoods. In fact, some insurers place unfair restrictions on agents' ability to bring insurance into the very areas that most need the service.

Proposition 103 prohibits any rate that is unfairly discriminatory or violates California law, and I have renewed my pledge to stop this continuing injustice. Because Proposition 103 subjects insurers doing business in the state to the state civil rights and antitrust law, as well as the unfair practices

act, a coalition of consumer advocates has proposed that all insurers should be required to serve all persons, on reasonable terms, without discrimination.'

The coalition alleged that insurers have abandoned inner-cities, and that when they do write policies in low-income and minority communities, they provide services inferior to those provided to other communities. Their petition asked for the establishment of a system of bonuses and penalties, to reward good service and penalize service that is substandard or lacking altogether. They proposed that rules be written to regulate insurer rates of return: The allowable rate of return for insurers that write policies in certain communities should be increased as an incentive to provide responsive and non-discriminatory service. On the other side of the coin, mandate a lower rate of return for insurers that fail to serve those communities.

Riots ravaged Los Angeles last year. The city burned for days, though one could say it smoldered for years before. Local, statewide, and federal leaders alike were handed an unmistakable message: The inner city has immediate, enormous needs, and its communities have borne discrimination for years. We moved to hold hearings there to set regulations to eliminate insurance discrimination in the inner city and other low-income and minority communities throughout California.

We reached out to the African American entrepreneur who despite having capital, cannot open a business because no insurance company will provide business insurance because of race. And as the riots showed, insurance discrimination in certain communities makes it impossible for the citizens to be served by the types and varieties of businesses available in other areas of town. We must ensure that an entrepreneur of any race who wishes to open a business within a low-income, inner-city, or minority community is able to get adequate business insurance.

We addressed the needs of the inner-city Asian immigrant, forced to break the law and drive without auto insurance, putting at risk all she has, because she cannot find an agent who speaks her language or a local agent who has an appointment to sell insurance. We sought to help the Latino insurance broker who wants desperately to serve the community where he grew up, but finds there is no product available to sell to his community.

A coalition of 15 minority and low income consumer groups, represented by the San Francisco-based law firm Public Advocates, Inc., petitioned the California Department of Insurance to write regulations to prohibit redlining. We believe Public Advocates' proposal can be a starting point to develop incentives for insurers to better serve areas that are currently underserved or ignored.

Discrimination in insurance is wrong, and we will not allow it to continue.

I can and will continue to enforce laws against discrimination. But prosecution of a few wrongdoers will not solve the problem. We should restructure the system to offer incentives to insurers that aggressively seek business in all markets. I appreciate this opportunity to work with you to make discrimination in the insurance industry a thing of the past, because it's illegal and no longer profitable. Good insurers will remain welcome and will reap a real benefit, if they offer services and products that meet the needs of all communities, all people, regardless of race, income, or geographic location. If we do it right, we can

make a real difference.