Good Morning, Mr. Chairman, and members of the Subcommittee. I am Reverend Charles Cummings, Jr. treasurer of the Washington, D.C. chapter of the Association of Community Organizations for Reform Now (ACORN). ACORN sincerely appreciates the opportunity to present testimony before you today on the important subject of insurance redlining. ACORN has just recently completed a study of residential insurance availability in fourteen cities, which underscores the urgency of the problem, particularly for low and moderate income and minority families.

We appreciate your prompt response to the recent release of this study, and commend you for holding these hearings.

ACORN

ACORN, the Association of Community Organizations for Reform Now, is the country's largest grassroots organization of low- and moderate-income families. Founded in Little Rock, Arkansas in 1970, ACORN has grown to include chapters in 26 states in the nation. ACORN members work on a broad range of issues that affect their everyday quality of life, including affordable housing, neighborhood safety, unemployment and environmental degradation.

In 1978, Missouri ACORN released a study similar to the one which prompted this hearing, and helped pass one of the first anti-redlining statutes in the country. Fifteen years later, ACORN has come back to this problem in an indirect fashion. ACORN has a long history of working to promote bank reinvestment in historically redlined neighborhoods, and has secured over two dozen agreements with lenders that have resulted in commitments for billions of dollars in loans to underserved communities. ACORN has also initiated a very successful community loan counseling program in a dozen cities, and has helped thousands of low- and moderate- income families become homeowners.

But these successes brought us face to face with new obstacles. After successfully developing loan programs tailored to the needs of low-income people, we heard from our members that the monthly premiums for homeowners insurance were often the final impediment to an affordable mortgage. We heard from our members that when they began to shop around for homeowners insurance they were told it was "unavailable in that area.' Or we heard that our members were unable to get full homeowners insurance, or were unable to get coverage for the full replacement cost of any damage their property might incur -- hardly an encouraging sign to someone about to sign a thirty year mortgage.

The problems associated with insurance redlining, as history has shown, are a problem no one area of town or of the country can avoid. Insurance is vital to all sectors of the economy. Without insurance, banks will not originate loans, businesses cannot risk expansion, homes are abandoned, and services and jobs disappear. The costs of this will eventually have to be shared by everyone.

Summary of Testimony & Recommendations

My testimony today has five principal points:

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

Problems of insurance availability in low-income and minority communities have been repeatedly documented by successive studies by the government, academics and community groups, and persist despite the creation of FAIR plans in the 1970's. Studies have consistently identified several problems in low-income and minority neighborhoods: large numbers of properties and individuals altogether without coverage; lower quality and higher priced policies than in high-income and white areas; and large numbers of policies written by unregulated, fly-by-night "surplus line" carriers. The racial composition of a

neighborhood appears to play a significant and independent role in determining insurance availability, quality, and price.

2. Insurance redlining has a devastating cost for individuals, neighborhoods, and society, and any urban initiative requires intervention by the federal government to end insurance redlining.

Insurance redlining undermines economic development in urban, low-income, and minority communities. Without affordable insurance, access to mortgages is made more difficult, urban businesses cannot remain competitive with their suburban counterparts, housing stock deteriorates or is abandoned, and residents who can afford to do so leave their neighborhood. The success of any urban initiative --including enterprise zones-- depends in large part on solving problems of insurance redlining.

3. A variety of obstacles --some legal, others illegal-- are employed by insurance companies to redline low-income and minority neighborhoods.

Companies may use a variety of techniques to avoid business in low-income and minority communities. Agents are frequently located exclusively in the suburbs, or in high-income areas. Agents frequently discourage or effectively pre-screen potential customers in low-income and minority areas. These customers also tend to be offered policies only at substantially higher prices than their counterparts in highincome and white neighborhoods, are more likely to have their claims contested and to have their policies canceled or non-renewed by a carrier.

4. The problem of insurance redlining is compounded by an ineffective state regulatory apparatus that is unwilling or unable adequately to protect consumers.

State insurance departments are generally understaffed and underfunded, and frequently are "captured" by industry interests.

5. The federal government can and must take a proactive role to end insurance redlining.

The Congress and the new Administration can take several affirmative steps to end insurance redlining, including: requiring enhanced disclosures of insurance companies; strengthening the enforcement of antidiscrimination laws; and subjecting insurance companies to community support reviews to monitor industry activities.

The first Federal investigation of the urban insurance crisis was conducted by the Hughes panel in 1968. Concerned that the outbreak of the now historic urban riots would lead to a mass flight of insurers from the inner city, the panel was appointed to study the cause and effect of the availability crisis, and make recommendations for its remedy.

What the panel concluded, however, was that "[r]iots [were] only one aspect" of the availability crisis. In the words of David Badain, “[t]he panel in fact found that the industry was one which 'exaggerated its urban loss experience' and manifested its view in underwriting manuals warning of excessive inner city risks. As these views were accepted by underwriters and agents, insurance in these areas became less readily available, and the cycle of deterioration continued."

The results of this exodus by the insurers, as the panel predicted, has been to encourage those inner city residents who can afford to relocate in the suburbs to do so. This prediction I even saw reflected on my way to this hearing room -- an ad on a congressional bulletin board for a sublet in Virginia which cited lower insurance rates as a principal advantage of leaving the city.

The result for those people who can not afford this emigration has been to further erode the incentive to maintain their property. The panel predicted this as well, and warned the country that "[i]nsurance must be available now.'

Unfortunately, what was made available were the FAIR plans. For those states in which the industry voluntarily set up shared risk pools for "high risk" insureds, the option of Federal Riot Reinsurance was made available. This reinsurance, which is literally the insurance of insurance, was offered at a lower rate than was available on the open market, to companies which participated in the FAIR plans.

But problems with the FAIR plans rapidly made themselves apparent. In New York, for example, they were required to be made self sufficient, thereby essentially nullifying their goal and begging the question of what purpose the discounted Federal reinsurance fulfilled. In most states, FAIR plans were also substantially more expensive than the conventional market-- 300% more in New York, according to 1979 Aetna study. Also, FAIR plans often only offer limited coverage as opposed to full homeowners coverage.

It also became apparent that the FAIR plans had become a dumping ground for whole areas, as opposed to identifiably high-risk individuals areas that the underwriters just don't want to spend the time evaluating independently. Thus rather than being used for riot stricken areas, or high risk individuals, FAIR plans were used by companies to avoid any policy-seeker perceived to be high-risk, simply by virtue of his or her zip code. A 1977 study by Robert Abrams revealed that 45% of Bronx residents and businesses were covered by FAIR plans or "surplus line carriers". ACORN found this in its analysis as well, with low income minority areas accounting for almost 70% of the FAIR plans written in St. Louis Missouri. In Detroit, all our test callers who sought insurance anywhere in the city were solely offered FAIR plan policies.

The claim that many low risk families were being burdened with the FAIR plan has been supported by statistical analysis. In New York, only 4.8% of FAIR plan policy holders reported any claims, according to testimony before the Judiciary committee in 1978. ACORN's preliminary analysis of 1991 zip code data in St. Louis and Kansas City, Missouri, found that only 6% of FAIR plan policy holders reported claims, compared to 12% of conventional policy-holders. Similarly, NY PIRG found in 1978 that only 1/3 of the FAIR plans in New York had any surcharges -- implying that upon inspections they turned out to be well maintained properties.

FAIR plan policy holders were thus being offered inferior coverage at a greater price -- and those policy holders who were unfairly grouped in these programs were alone in bearing the cost of higher risk properties, while the conventional market made even more money. It is in this sense that FAIR plans are only one of the many subtle mechanisms for redlining. People are redlined out of the conventional market, only to find themselves rated out of the residual market.

Clearly, FAIR plans did not solve the insurance availability crisis predicted by the Hughes panel, but it would be a mistake to blame this failure on the FAIR plans themselves. Rather, these problems suggest a problem with the functioning of the conventional market that has changed very little since the investigation by the Hughes panel. Indeed, it might be argued that the creation of FAIR plans served to deflect attention from gross abuses within the industry, and to defer much needed reforms.

Studies from the mid- 1970's onwards have consistently found patterns of bias in the industry. In Insurance Redlining, Fact not Fiction, a report of the Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin Advisory Committees to the US Commission on Civil Rights, in 1979, the same problems with availability, quality and affordability were documented. The study's zip code analysis in Chicago revealed very similar results: a strong correlation between the racial and income composition of neighborhoods and their relative level of coverage.

In 1974, the Federal Insurance Administration issued a report entitled "Full Insurance Availability" which was highly critical of the FAIR plans. Indeed, it found that only 4.8 percent of the 3 million FAIR policies then in effect had actually reported losses, indicating that the “the vast majority of the insureds in the plans should have been written voluntarily."

In 1976, a report by the Detroit city council President, Carl Levin, found that in many instances "Detroiters cannot obtain insurance in the private market at all and must purchase insurance in the property pool. Insurance purchased from the pool is more expensive and provides less coverage that in the private market."

Professor Gregory Squires, of the University of Milwaukee, Wisconsin, has also recently performed similar studies on the availability and cost of insurance, both through statistical analysis of zip code data in Milwaukee, through phone testing and through analyses of agent locations. Squires has found that "homeowners insurance is clearly more readily available in predominantly white areas than in non-white areas after controlling for median income, poverty, age of the housing stock and population turnover... A lot of the discrepancy cannot be explained away."

A report from the Illinois Public Action Council (IPAC) found that both State Farm and Allstate, in their auto insurance practices, had "redlined by not placing agents in all city neighborhoods and not providing phone quotes to callers from certain areas." In fact, neither of these companies had any agents in the west and mid south areas of Chicago. The total area redlined by these companies covers over 85 square miles of the city.

The Pennsylvania Public Interest Coalition found similar results for auto insurance. Agent locations and the likelihood of being offered coverage or a quote over the phone differed significantly based on the race and income of neighborhood.

Recently, the NAACP scored a major victory in a class action suit charging a Wisconsin insurer with discrimination. The NAACP case is the first time a federal appeals court has ruled that the Fair Housing Act also bans bias in the underwriting of homeowners insurance. The suit charged that American Family, the largest underwriter in Wisconsin, was redlining parts of Milwaukee. It also alleged that the company was charging higher premiums to non-whites for properties of comparable value and risk, instructing agents to avoid selling policies to blacks and failing to locate offices in black neighborhoods.

The suit has now been sent back to a lower court to determine whether the discriminatory practices did occur as defined by the federal Fair Housing Act and state law. It must also be noted that the appeal court's ruling only applied to rates shown to be based on race, rather than actuarial classifications. The ruling did not make a judgment as to whether risk classifications having a disparate impact on members of a racial or ethnic group are illegal under the Fair Housing Act.

Finally, reporting by Peter Kerr of the New York Times in the wake of the Los Angeles riots found that a large portion of policies written in south-central L.A. were written by "surplus line" carriers, or "scavenger companies". These insurers, who offer policies at a much higher cost than mainstream carriers, are often located offshore and avoid state regulations almost entirely. Often, when huge payments become due, their address may turn out to be little more than a post office box, and the policy holder is left holding a worthless piece of paper. The parallels with the second mortgage scams recently investigated by this Subcommittee are clear.

Despite the lack of readily available data on the subject, scores of investigations by academics, interest groups and governmental agencies have unerringly come to the same conclusion: Insurance redlining is indeed "fact - not fiction." The insurance companies methodological arguments with these findings only underscore the need for systematic disclosure of data by the insurance industry.

2. A Policy of Discrimination: Findings of ACORN Research

On February 5, ACORN released a study on the availability, quality and cost of residential insurance in fourteen major cities. The study, the first of its kind, combined a statistical analysis of insurance company filings by zip code in 5 cities with the results of extensive testing in 13 cities. I would like to submit a copy for the record, as well as assorted press clippings.

The statistical analysis was performed in four states currently requiring such disclosure of property and casualty insurance companies - disclosure similar in kind to the HMDA (Home Mortgage Disclosure Act) filings required of banks. It compared the number of homeowners or other personal dwelling policies written by the industry in various urban and suburban zip codes to demographic data on race and income of neighborhoods. The study also looked at the quality of coverage in neighborhoods of different racial and income compositions.

The second part of the study consisted of the results of extensive testing of various insurance agents and underwriters in thirteen cities. Testers attempted to obtain quotes for insurance from both captive and independent agents for properties in different neighborhoods -- including low income urban areas, upper income predominantly white urban areas, and suburban areas. Information on disparities in the ability of callers to get quotes and to get the premium policy, and differences in prices of policies and the frequency of required inspections was then compiled.

Among the key findings of the study are that:

Minority and low-income neighborhoods where data was available were underinsured much as 48% in low-income neighborhoods in Chicago.

by as

This figure of "relative coverage" was arrived at by comparing the number of single family units in a zip code with the total number of residential policies written by all insurers in that zip code. Similar results were found in St. Louis and Kansas City Missouri, with these areas underinsured by 50% and 30% respectively. For Wisconsin and Minnesota data was only collected for the largest companies, but the discrepancies between low income areas and upper income areas was significant.

Discrepancies remained significant when comparing the coverage of neighborhoods of similar income, bud different racial composition.

Test callers from low-income neighborhoods were refused a quote on a policy 38% of the time, compared to 7% of the time for callers from high-income areas.

Callers from low-income areas were often plainly told by agents that "we don't write policies in that area", or "we don't write policies for properties of that value." In some cases, testers were told they would have their call returned at a later time with a quote promises that were rarely kept.

Insurance policies written in low-income and minority neighborhoods tend to be of substandard

Callers from low-income neighborhoods were offered "market value" policies -- policies which do not cover the property for the full replacement costs in case of damage. They were also offered FAIR plan policies more frequently than callers from high-income areas. FAIR plan policies are often of substandard quality and usually cost substantially more than conventional policies --270% more in Missouri, for example.

Test callers from low-income neighborhoods were quoted rates averaging 2.5 higher, relative to their level of coverage, as test callers from upper-income neighborhoods.