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 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.

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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 in-
spected more frequently than their white counterparts. As I have
stated, all of these allegations have been supported and substan-
tiated 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

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.