S. Hrg. 103-660
S. 1989, INSURANCE POUCY TRANSFER ACT AND
INSURANCE REDUNING
'y 4. C 73/7: S, HRG. 103-660
S. 1989/ Insurance Policy Transfer...
HEARING
BEFORE THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
MAY 26, 1994
Printed for the use of the Committee on Commerce, Science, and Transportation
SEP 21 '
tv^ ;
U.S. GOVERNMENT PRINTING OFFICE
79-871 CC WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-044749-6
S. Hrg. 103-660
S. 1989, INSURANCE POUCY TRANSFER ACT AND
INSURANCE REDUNING
Y 4, C 73/7: S. HRG, 103-660
S. 1989* Insurance Policy Transfer...
HEARING
BEFORE THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
MAY 26, 1994
Printed for the use of the Committee on Commerce, Science, and Transportation
SEP 21 r ,
U.S. GOVERNMENT PRINTING OFFICE
7»-871 CC WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-044749-6
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE. Hawaii
WENDELL H. FORD, Kentucky
J. JAMES EXON, Nebraska
JOHN D. ROCKEFELLER IV, West Virginia
JOHN F. KERRY. Massachusetts
JOHN B. BREAUX, Louisiana
RICHARD H. BRYAN, Nevada
CHARLES S. ROBB, Virginia
BYRON L. DORGAN, North Dakota
JOHN C. DANFORTH, Missouri
BOB PACKWOOD, Oregon
LARRY PRESSLER, South Dakota
TED STEVENS, Alaska
JOHN MCCAIN, Arizona
CONRAD BURNS, Montana
SLADE GORTON, Washington
TRENT LOTT, Mississippi
KAY BAILEY HUTCHISON, Texas
HARLAN MATHEWS, Tennessee
Kevin G. CUKTIN, Chief Counsel and Staff Director
Jonathan Chambers, Republican Staff Director
(II)
CONTENTS
Page
Opening statement of Senator Bryan 1
Opening statement of Senator Hollings 2
List of Witnesses
Bell, Gerald, Commercial Lines Specialist, National Association of Independ-
ent Insurers 81
Prepared statement 83
Bhargava, Deepak, Legislative Director, Association of Community Organiza-
tions for Reform Now 84
Prepared statement 86
Collins, Representative Cardiss, prepared statement of 56
Eliades, George 6
Feingold, Hon. Russell, U.S. Senator from Wisconsin 48
Prepared statement 50
Foster, Steven T., Insurance Commissioner, State of Virginia, and Past Presi-
dent, National Association of Insurance Commissioners 13
Prepared statement 15
Griflin, Mary, Insurance Counsel, Consumers Union 9,64
Prepared statement 11,66
Hunter, Robert, Commissioner, Texas Department of Insurance 25,57
Prepared statement 26,60
Kennedy, Hon. Joseph P., II, U.S. Representative from Massachusetts 52
Prepared statement 53
Metzenbaum, Hon. Howard, U.S. Senator from Ohio 2
Mica, Dan, Executive Vice President, American Council of Life Insurance 29
Prepared statement 33
Schubert, Lynn M., Assistant General Counsel, American Insurance Associa-
tion 69
Prepared statement 71
Appendix
Questions asked by Senator Bums and answers thereto by:
Mr. Bell, NAH 102
Mr. Bhargava 104
Mr. Hunter 105
Ms. Griffin 101
(in)
S. 1989, INSURANCE POLICY TRANSFER ACT
AND INSURANCE REDLINING
THURSDAY, MAY 26, 1994
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The committee met, pursuant to notice, at 2:35 p.m. in room SR-
253, Russell Senate Office Building, Hon. Richard H. Bryan, pre-
siding.
Staff members assigned to this hearing: Moses Boyd, senior coun-
sel, and Claudia A. Simons, staff counsel; and Sherman Joyce, mi-
nority staff counsel.
OPENING STATEMENT OF SENATOR BRYAN
Senator Bryan. Let me take this opportunity to welcome every-
one to our hearing this afternoon. And I would especially like to ex-
tend a warm welcome to my colleague from the Judiciary Commit-
tee, Senator Howard Metzenbaum, who joins us here today and
who has been instrumental in highlighting a problem that affects
potentially thousands of consumers, namely the transferring of an
insurance policy without the knowledge or the consent of the pol-
icyholder.
As consumers, when we purchase an insurance policy from one
company, dutifully paying the premiums over the years, we do not
expect to discover later that another company has taken over that
policy. Yet as we will hear this afternoon, this is precisely what has
happened to a number of policyholders throughout the country.
Insurance companies frequently transfer policies for a variety of
legitimate business reasons. It is not my purpose here today in con-
vening this hearing to suggest that we should prohibit all such
transfers. However, I do have concern that these transfers, particu-
larly when the assuming company is not as financially sound as
the transferring insurer, are often effected without the knowledge
or the consent of the policyholder.
One can only imagine a policyholder's surprise to learn that the
strong, financially sound insurance company with which he had
originally contracted has transferred his policy to a much weaker,
financially distressed company. In many cases the policyholder
learns of this transfer only when a claim is made and it is discov-
ered that the new insurer cannot pay the claim.
It is particularly ironic that our efforts to prevent consumer
fraud, which focuses on the informed consumer, advising that con-
sumers must always check the credentials of any company before
writing out a check, can be so easily frustrated in this context. S.
(1)
1989 is a step in the right direction to address this problem, and
I look forward to hearing the testimony of our witnesses today as
we seek a constructive solution to this problem. Mr. Chairman,
your comments, please.
OPENING STATEMENT OF SENATOR ROLLINGS
The Chairman. This afternoon, the committee is holding a hear-
ing to examine S. 1989, the Insurance Policy Transfer Act, legisla-
tion introduced by Senator Metzenbaum and cospon sored by
Consumer Subcommittee Chairman Bryan.
The bill is intended to address a consumer problem that may be
quite widespread. This problem arises when a consumer purchases
an insurance policy from one insurance company and, without the
consumer's knowledge or consent, that company subsequently
transfers the policy to another company, which may be less finan-
cially sound than the original insurer.
There are certainly many legitimate reasons for one insurer to
transfer individual or blocks of policies to another insurer. There
have been instances, however, in which a policyholder did not be-
come aware of the transfer until a claim was filed, only to find that
the new insurer was financially distressed and unable to pay the
claim. Some argue that the original insurer should at least be re-
quired to notify the policyholder, as a party to the insurance con-
tract, of the transfer. Others contend that a policy transfer should
not be allowed without the policyholder's actual consent.
The legislation before the committee attempts to address these
types of problems by requiring insurers to notify and obtain con-
sent from policyholders prior to a transfer. I look forward to the
testimony of this panel of witnesses this afternoon.
Thank you, Mr. Chairman.
Senator Bryan. Thank you, Mr. Chairman. Now, as I indicated
at the outset, it is my privilege to welcome the Senior Senator from
Ohio, Senator Howard Metzenbaum.
STATEMENT OF HON. HOWARD METZENBAUM, U.S. SENATOR
FROM OHIO
Senator Metzenbaum. Senator Bryan, it is a pleasure to be here
with you and work with you in connection with this subject. It is
very seldom that I see fit to correct
Senator Bryan. The junior Senator, excuse me.
Senator Metzenbaum. Junior Senator, only senior by reason of
my age.
I want to thank you for this hearing, which I hope will lead to
greater protection for insurance consumers. Today's hearing con-
cerns one of the most deplorable violations of business ethics that
I have encountered in many years of business and public life. It is
about the transfer of insurance policies from one insurance com-
pany to another without informing or obtaining the consent of the
policyholders. It is an incredible situation.
There was a time when policyholders were assured that the in-
surer from whom they bought tneir policies was, in fact, bound to
pay their claim, so long as they paid premiums. That meant that
policyholders who carefully chose an insurer based on reputation
and ratings did not have to read the fine print of every piece of
mail from their insurance company out of fear that their pohcy was
transferred to a financially shaky insurer.
Senator Bryan, your attention to this subject is very, very impor-
tant and necessary, and I cannot tell you how much I appreciate
your leadership in this area. Because policyholders in the past
could rest assured that their insurance company stood behind its
contract for the next 10, 20, or 30 years, the insurance contract was
based on trust between the insurer and the insured. Unfortunately,
that was long ago and far away.
Today we witness the brave new world of insurance policy trans-
fers, a world where insurance companies treat policyholders like
baseball trading cards, swapping them with other companies when
it suits their interests, and policyholders become mere commod-
ities. Today an insurer who has bet wrong by selling a policy that
turns out to be more costly or merely less profitable than expected
just can dump the poHcies, walk away from its responsibilities. It
can transfer the policies downhill to a more poorly rated insurer.
This practice has been given the incorrect name of assumption
reinsurance. It should really be called policyholder dumping. It is
outrageous because it often deceives and rips off policyholders. My
subcommittee, the Antitrust Committee, investigated such trans-
fers and held hearings. We found transfers from top-rated to
unrated insurers were not that unusual, transfers in which policy-
holders were not asked if they wanted to be transferred. They were
not told about the financial condition of the assuming insurer
which failed.
Make no mistake about it, transfers to less financially healthy
companies cause hardship and trauma and they should be an em-
barrassment to the entire insurance industry. Every president of
every insurance company in this country ought to be sitting here
in this audience or participating, urging that we do som.ething
about this embarrassing situation for the insurance industry.
When we conducted nearings we found one retired couple that
could not get their $50,000 retirement annuity to complete a
planned retirement home. They had to live in an unfinished work-
shop in the rear. In another case an elderly widow had to wait 4
years — 4 years — afler her husband died to get his life insurance
policy proceeds. We will hear from a witness today who became un-
employed and could not get access to his money.
What kind of an industry is this? And I must say to you that the
failure of the NAIC and the entire insurance industry to deal with
this problem is an embarrassment to the entire economic situation
in this country, and the fact is the American people do not know
about it or they would be up in arms.
The special feature of policy transfers is that the original insurer
washes its hands of all obligations to the policyholders. Such trans-
fers have two chief characteristics: The original company extin-
guishes all contractual liability to the insured and a new company
assumes the original company's liability.
The following analogy describes how outrageous these policy
transfers really are. Imagine you deposit $100,000 in a 5-year CD
at Bank of the Rock. Bank of the Rock then transfers the money
to Flim-Flam National without asking for your consent. You want
your money back to buy a home; Bank of the Rock says, "Sorry, we
owe you nothing, we transferred the money to Flim-Flam, and
Flim-Flam is insolvent and cannot pay." That is what having your
insurance policy transferred is all about.
Another analogy. You pay Responsible Engineering to build a
house for you. Responsible has been building solid homes for dec-
ades. Without your knowledge, Responsible transfers the contract
to Fly By-Night Constructors, another company which has a rep-
utation for shoddy work. Fly By-Night does not return calls, you
want Responsible with whom you originally did business to build
your home, but it says "Sorry, we transferred your contract to Fly
By-Night and we owe you nothing."
You and I know this cannot happen in the banking and construc-
tion industries, but it does in insurance and the insurance industry
permits it to go on and the NAIC permits it to go on, and it is an
embarrassment to the entire economy. It is an embarrassment to
an industry that claims it is the great industry of America, it is the
backbone of the country.
It is not our responsibility only in the Senate to do something
about it, it is the responsibility of the insurance industry. No other
business, no human being could violate every law and principle like
this, only the powerful insurance industry does and gets away with
it.
If I sound a bit angry, I get angry about this because I think it
is an incredible reality of our economy that the most powerful in-
dustry in all of America sits on their butts and does nothing when
they ought to be meeting their share of responsibility, and the
NAIC twiddles its thumbs and moves around and does not meet its
responsibility either.
Very often, too often in fact, the second company in an insurance
transfer is inferior to the first; that is pretty much the rule. Very
often policyholders are not told about the transfer until it is a done
deal. Very often policyholders are not told about the shaky finan-
cial condition of the assuming company. Informed consent is not a
requirement of transfers.
Make no mistake, these are not just isolated cases. Transfers are
common. In fact, according to testimony before my subcommittee,
transfers have become increasingly more common. The A.M. Best
Co. provided me with transfers listed in the 1994 Best Insurance
Reports. No fewer — no fewer than 140 insurance companies listed
in the report have engaged in transfers. Probably not all of them
were bad, but a hell of a lot of them were bad, and they are an
embarrassment to the entire economy and to the capitalist system
of our country.
The Best list is silent testimony to the trauma and suffering en-
dured by hundreds of thousands of consumers whose policies have
been transferred to less financially secure companies without their
consent. Many of those policyholders had major medical, disability,
life, and retirement annuity policies.
How would you like it if you had paid premiums for 10, 15, or
20 years to the original insurance company only to have it trans-
ferred without your permission? That happened to an elderly cou-
ple in Minneapolis who paid premiums for 12 years. How many of
us would really like it if we were totally disabled, confined to a bed.
a wheelchair, or a nursing home, and our policy was transferred to
an insolvent or nearly insolvent insurer.
Because of this outrageous dumping of policyholders, I, along
with Senator Bryan, introduced the Insurance Policy Transfer Act.
The act will prevent the transfer of policyholders to less financially
healthy companies. At the same time, it will promote transfers that
are in the industry's and policyholders' best interests.
The Insurance Policy Transfer Act puts a requirement of good
faith and fair dealing back in the insurance contract. It provides
policyholders with a bill of rights. At the core is a requirement that
transfers not take place unless policyholders give their informed
consent. This means not merely the requirement to sign on the dot-
ted line, but the right to the information necessary to make an in-
formed decision.
Since there is no right without a remedy, the act provides policy-
holders the opportunity to go to Federal court to enforce their right
not to be transferred without informed consent. The act does not
leave it solely to some State insurance commissioner to enforce the
policyholders' rights. Historically, State insurance commissioners
are indistinguishable from the insurance industry, going through a
revolving door either coming from the insurance industry and be-
coming the commissioner or going fi-om the position of commis-
sioner or superintendent and going into the industry. They are the
classic example of regulatory capture, where the regulated industry
captures the regulator.
Let me make a parenthetical comment, and that is you cannot
make that statement that I just made and make it across the
board. There are some who have been great as insurance regulators
and who have maintained their sense of independence and integ-
rity. But the reality is that they are so few and far between — and
I think one of them is testifying today. They are so few and far be-
tween that they stand out like a beacon light out of a whole host
of others that ao not stand out very well.
Let me tell you where the State regulators are on this. They
came up with a model law that never responded to some of the
most harmftil aspects of policy transfers. After I informed them of
the inadequacy of their draft, the NAIC continued to propose a
model law that does not protect policyholders. Let me say further
that even if the NAIC could come up with the best model possible,
which is not very likely based on its track record with other model
laws, it would take 20 to 30 years before it would be adopted by
a majority of States.
Policyholders do not have that law. Texas Commissioner Hunter,
in his testimony today, agrees. The present situation of State-by-
State insurance protection is an absurd catch-22. We have received
written testimony from a witness who could not make it to the
hearing. That testimony involves the transfer of policies from a top-
rated Illinois insurance company to an insolvent Texas insurer. The
Texas insurance company was not licensed in Illinois.
Illinois policyholders complained to the Texas and Illinois De-
partments of Insurance; they were put into a revolving door. The
Texas department told my staff that it threw out most of the com-
plaints because the Illinois Insurance Department was responsible,
but the Illinois department said the Texas Department was respon-
sible and consequently threw out most of the complaints. Texas
says Illinois is responsible, Illinois says Texas is responsible, and
the poor guy who bought the insurance policy, and guys and gals
are left holding the bag. It is absurd.
State commissioners either pass the buck or have their heads in
the sand. Policyholders deserve better. Most insurance companies
operate on a national basis. They should be governed by national
law which provides policyholders with a floor of protection no mat-
ter where they live. If the States want to adopt their own laws in
addition, fine.
One would think that practices as reprehensible as policy trans-
fers, which are so contrary to basic contract law, would be impos-
sible. Unfortunately, the insurance lobby is so powerful that it can
defy and deflect progressive State laws. Federal legislation is need-
ed to fill the gap. Its time has come. I hope the committee will
adopt the Insurance Policy Transfer Act and protect policyholders
against the ovei^vhelming financial and legal power of the insur-
ance industry.
Mr. Chairman, I ask that the documents and hearing records re-
ferred to in my statement be placed in the record.
Senator Bryan. Without objection, that will be the order.
[The information referred to may be found in the committee
files.]
Senator Metzenbaum. And, Mr. Chairman, again I want to say
how much I appreciate your taking an interest in this subject, your
being a cosponsor of this legislation, and I look forward to working
with you. I have it on my agenda before I leave the U.S. Senate,
to pass this bill.
Senator Bryan. Senator, thank you very much. I appreciate your
leadership as well, and the depth of your passion and conviction on
this issue is evidence from your opening statement.
I think it might be appropriate now to have our first panel come
to the table. We will begin having George Eliades, and I hope I am
pronouncing his name correctly. Mr. Eliades was referred to ob-
liquely in Senator Metzenbaum's opening statement. We will have
Ms. Mary Griffin, who is the insurance counsel to the Consumers
Union; Steven T. Foster, representing the National Association of
Insurance Commissioners, and who serves presently as the Vir-
ginia Insurance Commissioner; Robert Hunter, the Commissioner
of Insurance, the Department of Insurance, the State of Texas; and
Dan Mica, the Executive Vice President of the American Council of
Life Insurance, and joining him will be Richard Minck.
And as soon as you all get seated, we will begin by hearing Mr.
Eliades' testimony.
STATEMENT OF GEORGE ELIADES
Mr. Eliades. Mr. Chairman and members of the subcommittee,
good afternoon. My name is George K. Eliades, and I reside in the
greater Washington area in Fairfax County, VA. I wish to com-
mend to you legislation to protect insurance policyholders from the
abusive practice of transfers of policies between insurance compa-
nies sponsored by Senators Howard Metzenbaum and Richard
Bryan. I would like to reinforce my support for this legislation, S.
1989, the Insurance Policy Transfer Act, by sharing with you my
experience resulting from the transfer of personal policies from a
strong insurance company to a weak one in poor financial shape
without my knowledge or informed consent.
I am very happy that you are interested in my policy transfer
hardship experience, a victimization that could happen to any citi-
zen. Thank you for inviting me to appear this afternoon. It is my
hope that these important deliberations and your subsequent ac-
tion may somehow also prove helpful in bringing the alleged crimi-
nals who created my hardship to justice. At any rate, this legisla-
tion can help prevent similar unnecessary and outrageous hardship
from happening to you or any American citizen.
I support the need for safeguards that apparently do not now
exist. S. 1989 is, I believe, a positive step to corrective action in
preventing policy transfers not in the best interests of the policy-
holder.
On or about July 8, 1981, my financial planner, Carlton Coffey,
contacted me about investing in annuity policies for retirement
purposes. He informed me that the company with whom I would
be investing, the American Health and Life Insurance Co. of Balti-
more, MD, was a stable, growing company and that its annuities
were a safe investment. He also told me that American Health and
Life was rated A-plus by the A.M. Best insurance rating service.
I decided in favor of such an investment, and between July 1981
and April 1983, I opened three separate accounts with American
Health and Life. Two of them were IRA accounts and one was a
nonqualified deferred compensation plan. The aggregate value of
the three accounts was over $30,000.
Sometime in July 1987 I received a letter from Guarantee Secu-
rity Life Insurance Co. of Jacksonville, FL, notifying me that it had
purchased the annuity business previously belonging to American
Health and Life. I was not given the option as to whether I wanted
my annuity to be invested with Guarantee Security Life, but was
simply notified that this was a done deal. I did not inquire further,
simply because I assumed that the annuity business must have
been similar to home mortgages in that they could be sold without
prior consent.
I have since learned that under current Florida law insurers
need the consent of policyholders before transferring policies. I do
not know when the current law became effective, nor if the law was
simply ignored in 1987 when I was notified of the transfer of my
policies to Guarantee Security Co. I do know that I was never
asked for my consent nor provided with any information about the
financial strength of Guarantee Security Life, if the law was, in
fact, in effect at the time of the transfer in 1987.
In February 1991, I faced the plight of many Americans when I
found myself unemployed. I had served 16 years as president of a
small national trade association in the Washington, DC area, when
I accepted the position of president of a larger trade association
headquartered in the metropolitan Atlanta, GA, area. Shortly after
the change in the annual elected volunteer leadership I was let go
for arbitrary political reasons — which happens — and given 3
months severance pay.
After several months, I contacted Guarantee Security Life and
requested a withdrawal of my money to tide me over during the pe-
8
riod of my unemployment and job search. The response I received
was that the State of Florida had seized the company and placed
it in rehabilitation. As a result, the assets of Guarantee Security
Life had been frozen, and my only recourse for withdrawing my
money was to file for a hardship exemption. This was the first I
had heard of any trouble with Guarantee Security Life.
I proceeded to file for hardship exemption, but it was denied. The
receivership had ruled against me on the grounds that I held per-
sonal assets; namely, my house. I was astounded that the State of
Florida would require that I sell my house before they would agree
to release my own money to me. Had I sold my house, there is no
doubt in my mind but tnat the State of Florida would have then
denied me my money for a second time on the grounds that I now
had some cash from equity received from the sale of my house. The
State of Florida in effect required that I must be botn broke and
homeless before serious consideration to returning my money to
me.
For a period of 14 months my sole source of income was the $198
per week before taxes received from the Virginia Unemployment
Commission. I was able to obtain temporary part-time jobs on an
hourly basis from time to time, and my wife who had stayed home
to raise our children was forced to find employment, as well. Iron-
ically, the investment I thought would protect me in my time of
need, instead created an extraordinary hardship for me and my
family.
I am happy to say that my wretched period of unemployment did
come to an end, and I am again providing for my family. But I have
not forgotten how desperate I was to withdraw my own hard-
earned money from Guarantee Security Life, only to be treated by
the State of Florida as though I was applying for a loan.
Mr. Chairman, I also find it equally appalling that I could invest
my money in an A-plus rated company only to have that invest-
ment shunted off a few years later to a relatively new unrated com-
pany without my consent, without any information about the trans-
fer or the purchasing company and no notification until I learned
that the State of Florida had put the new firm into rehabilitation
at the time I tried to withdraw my money.
I sincerely hope that my experience with Guarantee Security Life
will help this subcommittee in its attempt to correct problems in
the insurance industry, not the least of which is integrity. While
I generally believe that minimum Federal regulation works best in
a private enterprise system, in my personal opinion, if there is an
industry in the United States that needs strict, consistent Federal
controls, which would benefit the consuming public at large, it is
the insurance industry. The American public should not nave to
put up with hardship because of transfers without consent and no
financial strength or rating information on the acquiring company,
the slow payment of legitimate claims and court awards, and other
insurance practices not necessarily related to this specific legisla-
tion.
I believe S. 1989 will go a long way toward providing needed
safeguards to all Americans against policy transfers that treat pol-
icyholders like commodities, traded like baseball cards. Claims by
insurance executives that transfers could benefit consumers be-
cause the acquiring company may give better service is probably
wishful thinking or an aberration, in my considered opinion, for the
very reasons that some transfers may be pursued.
A^ain, I want to thank the subcommittee for its efforts and for
giving me the opportunity to speak to you this afternoon. The les-
son from my experience is very simple: There, but for the grace of
God, goes I. What happened to me happens every day and it can
happen to you — very easily.
If I had been able to stay with American Health and Life, the
A-plus rated company I voluntarily and originally invested in, I
would have been able to get my money without hardship in my
time of need. But, because someone else decided and in fact moved
my money to a poor risk company without my knowledge or in-
formed consent, I did indeed experience unnecessary pain and eco-
nomic hardship.
Thank you for your courtesy and consideration of my statement.
Senator Bryan. Mr. Eliades, thank you very much. You plead, as
the lawyers say, a compelling case.
Ms. Griffin, we would be pleased to hear from you next. Wel-
come.
STATEMENT OF MARY GRIFFIN, INSURANCE COUNSEL,
CONSUMERS UNION
Ms. Griffin. Thank you. Thank you very much for inviting us
to testify today. We are delighted and applaud you, Mr. Chairman
and Senator Metzenbaum, for introducing S. 1989, which provides
needed and essential protection for consumers against transfers of
insurance contracts without their knowledge or informed consent.
We believe that a consumer has a right to consent before substi-
tution of parties to a contract takes place. It is a basic principle of
contract law. Unfortunately, in the area of insurance this basic
principle has not always been upheld in practice. Policyholders are
not only transferred without their consent, as we just heard from
Mr. Eliades, but in some cases with no knowledge of such a trans-
fer until after the fact such as when a notice of a rate increase ar-
rives in the mail.
Are consumers harmed by not being provided the opportunity for
informed consent? Yes, in several ways. When policies are trans-
ferred to a poorly rated company, which many have done, a
consumer does not have as strong a company backing the policy,
and the company may go insolvent, again, as we just heard from
Mr. Eliades.
While States have guaranty funds to protect policyholders in the
event of insolvency, the funds are limited, take time to kick in, and
may not be available if the company is not licensed in the State.
Another problem consumers face is huge rate increases after the
transfer. These premium increases may leave consumers with no
choice but to lapse the policy in the hopes of finding better rates,
which is improbable if you have preexisting conditions or are of ad-
vanced age.
What can consumers do? Consumers can complain about their
policies being transferred, but often find that it is too late or the
law of their State fails to protect them. Insurance departments are
often unable to assist consumers because the laws do not provide
10
the needed tools. Most States do not inform consumers of their
right to reject a transfer, and very few States provide any real pro-
tections to policyholders in the form of affirmative consent and spe-
cific notice requirements.
Consumers could call upon the courts to uphold their common
law rights of contract. But not only is this an expensive and rarely
viable option for most consumers, but consumers cannot predict
what constitutes consent because of varying interpretations of the
law and what fact patterns constitute consent. In the wake of Exec-
utive Life and other large national insurance solvencies, consumers
have been asked to be more diligent when choosing an insurer. It
seems unfair, however, for consumers to exercise due diligence in
choosing an insurer only to find that transfers can take place with-
out their consent.
That is why this legislation is so necessary. By requiring express
written consent, relevant disclosures, and a private cause of action
with attorneys fees, the bill provides a level of protection not cur-
rently found in most State laws and not necessarily afforded by the
common law. The bill sets out a standard that is clear, simple, and
predictable: written consent, or no transfer.
While consent is critical, such consent must be informed and
meaningful. The disclosures provided in the bill contain informa-
tion that is essential for a consumer making a decision about
whether to agree to a transfer. We support these disclosures; in
particular, financial data and information on the effect of a transfer
on the financial condition are critical for consumers to be able to
assess whether the new company will face financial ruin and
whether there is solid financial oacking of these policies.
An opinion by a disinterested third party expert, a requirement
currently in Canadian law, provides the sort of guidance that con-
sumers need when trying to sort through insurance information
which can often be complicated and a statement from the chief in-
surance regulator. State regulators should be looking out for con-
sumers. And while this is useful to the policyholder, certain stand-
ards should be established for how regulators determine whether
the transfer notices are fair and a method for compliance with such
standards. And by providing a private cause of action and attor-
ney's fees, S. 1989 enhances the ability of consumers to obtain rem-
edies for violations of the law.
In conclusion, I would like to quote from a policyholder whose
health policy which she originally purchased with a high deductible
to lower the premium was transferred and her premium increased
by more than 35 percent. "We do not feel it is fair because of our
ages. You just cannot drop a policy and start over, and you sure
cannot afford the high premium with the high deductible together.
I would like to know why the Government will not do anything
about insurance companies."
Well, Senators, we appreciate that now the Government is doing
something about this, and again, thank you for introducing this bill
and thank you for allowing us to testify.
[The prepared statement of Ms. Griffin follows:]
11
Prepared Statement of Mary Griffin
Consumers Union i appreciates the opportunity to testify today on a bill that is
designed to ensure consumers' insurance contract rights are protected. Consumers
Union, publisher of Consumer Reports, has written extensively on insurance and for
years has advocated for changes in the law that will bring fundamental rules of fair
glay and consumer protection to the insurance industry. We applaud you, Mr.
hairman, and Senator Metzenbaum, for introducing this piece of legislation which
provides needed and essential consumer protection — prohibiting transfers of insur-
ance contracts without the prior, informed written consent of the policyholder.
We believe that S. 1989 will protect consumers' insurance contract rights by re-
quiring informed written consent of pwlicyholders prior to the transfer and novation
of insurance contracts. Our testimony today discusses the need for the legislation
and the protections it will provide. We will submit a more detailed response to spe-
cific requirements under the bill, including some sp>ecific recommendations for im-
provement, at a later time.
THE NEED FOR LEGISLATION
We believe that a consumer is entitled to consent to a substitution of parties in
a contract of insurance. Under general contract law, the original obligor can only
be released from liability if a novation occurs. A novation results when a third party
promises to assume a duty to the obligee, which in this case is the policyholder, and
the obligee agrees to the substitution.2 For a novation to take place, the obligee
must assent to the discharge of the original party's, or insurer's, duty .3 Release of
the original obligor from all liability is essential, and mere acceptance of the obliga-
tion without agreement or intention to release is not sufficient to form a novation.*
Unfortunately, in the area of insurance, these principles of contract law have not
always been upheld in practice. Policyholders are not only transferred without their
consent, but in some cases with no knowledge of such a transfer until after the fact,
such as when a notice of a rate increase arrives in the mail. Though consumers have
the right to reiect transfers, it is difficult for policyholders to consent to or reject
a transfer in the absence of notice about the transfer or their right to reject the
transfer. For example, policyholders receive notices after the fact informing them
that "an agreement has been reached between [new company] and [former company]
whereby your policy with [former company] has been reinsured and assumed by
[new company]. '5
Are consumers harmed by not being provided the opportunity for informed con-
sent? Yes, for several reasons. While a transfer to a better rated or more fmancially
sound company may provide more security for the policy, many transfers are from
financially strong companies to weaker, lower-rated companies. Worse vet, some of
the transfers that have taken place involved companies that were poorly rated and
became insolvent soon after the transfer.
While states have guaranty ftinds to protect policyholders in the event of an insol-
vency, the policyholoer may be out of luck if the company was not licensed in his
or her state. Even if the policyholder is covered, states limit the amount of protec-
tion provided under the guaranty fund. And, it may be months or years before a
policyholder can get money from the guaranty fund as some insolvencies take years
to resolve.
When policies are transferred, the new companies oft.en obtain steep rate in-
creases on this transferred business. These increases may or may not be justified
depending on the experience or the risks associated with tnat business and now the
company can incorporate these policies into its existing business. These premium in-
1 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws
of the State of New York to provide consumers with information, education and counsel about
goods, services, health, and p>erBonal finance; and to initiate and cooperate with individual and
group efTorts to maintain and enhance the quality of life for consumers. Consumers Union's in-
come is solely derived from the sale of Consumer Reports, its other publications and from non-
commercial contributions, grants and fees. In addition to reports on Consumers Union's own
product testing. Consumer Reports with approximately 5 million paid circulation, regularly, car-
ries articles on health, product safety, marketplace economics and legislative, judicial and regu-
latory actions which affect consumer welfare. Consumers Union's publications carry no advertis-
ing and receive no commercial support.
2 Restatement (Second) of Contracts at 302.
3 Id. at 280 cmt. d.
* Security Benefit Life Ins. Co. v. Federal Deposit Insurance Corp., Civ. Act. No. 91-4023-5, Oc-
tober 6,1992, U.S. Dist. LEXIS 15784, p. 9 (citing Restatement (Second) of ContracU at 280).
8 This language was contained in notices to policyholders ft^m National Financial Insurance
Company after it was transferred business from Reserve Life Insurance Company.
12
creases may leave consumers with no choice but to lapse the policy in the hope of
finding better rates. But for many this is not an option, particularly with healtn in-
surance policies, because of age or preexisting conaitions. As this distressed
consumer wrote in a complaint arter her and her husband's health policy, which she
originally purchased with a high deductible to lower the premium, was transferred
and her premium increased by more than 35 percent:
We don't feel it's fair because of our ages, you just can't drop a policy and
start over and you sure can't afford the high premium with the high deductible
(sic) together. * * * I like to know why the government will not do anything
about ins. co's.
In addition, policyholders may not get the same kind of service they came to rely
on with their former company. The new insurer may not have convenient offices or
other problems of accessibility may arise. In some situations, consumers have com-
f)lained about the new company falling to pay their claims after months of calls and
etters to the new company.
Consumers complain atlout their policies being transferred but oflen find it is too
late or the law of their state fails to protect them. Insurance departments are often
unable to assist consumers because the laws do not provide the needed tools. Or,
if the insurance company is not licensed in the state, the policyholder's state may
refer the complaint to another state, which may or may not take action depending
on its priorities and resources.
State laws vary widely in the protection they afford consumers. Most states do
not inform consumers oi their right to reject a transfer. Only a few states require
insurers to notify policyholders ol the transfer as a condition of or prior to its com-
fdetion. Still fewer states provide real protections to policyholders in the form of af-
irmative consent and specific notice reqpjirements.
If the state regulatory agency cannot help, consumers can call upon the courts to
apply common law principles of contract law to their policy. While courts have
upheld the rights of insurance contract holders, this may not be a practical recourse
for many consumers. Not only is this an expensive and rarely viable option for most
consumers, but varying interpretations of tne law and what fact patterns constitute
consent may leave consumers unprotected.
In the wake of Executive Life and other large, national insurer insolvencies, con-
sumers have been asked to be more diligent when choosing an insurer. More and
more consumers are asking about the company's financial status, its servicing his-
tory, and its ability to pay claims — all relevant information that consumers should
be seeking before entering into a contract with an insurer. It seems unfair, however,
for consumers to exercise due diligence in choosing an insurer only to find that
transfers can take place without their consent.
As the distressea consumer suggested, we believe that it is time for the govern-
ment to do something about insurance company transfers. Only when policyholders
are provided with iniormation and the opportunity to reject or accept a transfer can
they be assured that their contract rignts are protected. The "Insurance Policy
Transfer Act" goes a long way to providing the level of protection and security con-
sumers deserve before entering into a contract.
PROTECTIONS PROVIDED BY THE "INSURANCE POUCY TRANSFER ACT"
The Requirement of Express Written Consent Protects Insurance Consumers' Con-
tract Rights: The need for consent prior to a substitution in a contract situation is
clear. S. 1989 provides a level of protection not currently found in most state laws
and not necessarily afforded by tne common law because the law, facts and cir-
cumstances are subject to varjring interpretations. By requiring that written consent
of the policyholder be obtained prior to the transfer, the bill sets out a standard that
is clear, simple and predictable — written consent or no transfer.
Under common law, depending on the facts and circumstances presented in a par-
ticular case, the finder of^ fact may or may not find the evidence established the in-
tent to consent. Therefore, any acts short of written consent should not be presumed
to be per se evidence of consent because such a presumption takes away from the
right to a case-by-case determination under common law.
As the court stated in Security Benefit Life: "If the intention of the parties to a
transaction claimed to effect a novation is expressed in writing, the intention of the
parties is a question of law for the court to decide. * * ♦ Otherwise, the existence
of such an agreement and the intention of the parties generally depends on oral tes-
timony, and the existence of a novation is normally a question for the jury."^ By
proviaing that only prior written consent is sufficient for a transfer, without delin-
^ Security Benefit Life, supra note 4 at p. 13.
13
eating those instances in which consent will be implied, the bill enhances rather
than takes away from protections provided by the common law.
In section 5(b), the bill provides for transfers absent the express written consent
of the policyholder if certain conditions are met. While this section provides policy-
holders with protection from downslope transfers (a transfer from a higher to a
lower-rated company), we believe the term "implied consent" as used in this section
is a misnomer. We suggest that this section be termed "exception" because to iden-
tify it as implied consent establishes an intent on the part of the policyholder that
may not exist.
tne standard of prior written consent clarifies what is needed to effect a novation,
will help alleviate confusion for policyholders and companies alike, and provides
guidance and protection for consumers nationwide. Under common law, the
consumer cannot always predict what specific actions will lead to the requisite con-
sent. Express written consent maintains the rights of policyholders by ensuring that
only when written consent is given will their policies be transferred. Insurers can
obtain clear consent of policyholders and rest assured that they can continue to
enter into transfer agreements and avoid lengthy litigation over tne issue of wheth-
er consent was implied.
The Notice Provisions allow for Informed and Meaningful Consent: While consent
prior to a novation is a fundamental precept, such consent must be informed and
meaningful. A consumer without the appropriate information and direction may not
be any Letter ofT than a consumer witn no choice. S. 1989 contains useful and im-
portant information for a consumer making a decision about whether to agree to a
transfer. We suggest that minimum time periods for the notices be included in the
statute or the appropriate agency be directed to develop such time periods.
In addition to providing information such as the name, address and telephone
numbers of the assuming and transferring companies and the policyholder's right
to consent, the notice provisions contain the following important oisclosures:
• Financial data: While ratings may not always he completely accurate indicators
of a company's financial condition, they are important tools for the consumer to as-
sess the status of the conipanies.
• Reason for transfer: It is always helpful in determining whether to remain with
a company to know why it wants to sell your policy to another company.
• Effect of transfer on financial condition: This information, coupled with the rat-
ings, is essential for a consumer to determine whether the new company will have
more capital backing up the policies and therefore a safer choice. It also may help
assess whether to expect a large rate increase.
• Opinion by a disinterested third party expert: Since the financial data on insur-
ance companies can be complicated and hard to sort through, an analysis from a
third party expert is critical to the policyholder's ability to assess the transfer.
• Statement from chief insurance regulator: While this is useful to the policy-
holder, certain standards should be established for how regulators determine wheth-
er the transfer and notice are fair and a method for compliance with such stand-
ards.
A Private Cause of Action Assures Consumers' Ability to Seek Redress: By provid-
ing a private cause of action, S. 1989 enhances the ability of consumers to obtain
remedies for violations of the law. Regulators who lack the time or the resources
will be aided by allowing policyholders to bring actions against alleged wrongdoers.
We thank you for the opportunity to testify today.
Senator Bryan. Thank you very much, Ms. Griffin. We appre-
ciate your testimony. I am sure there will be some questions of you
and Mr. Eliades and others.
Mr. Foster, welcome to our subcommittee hearing this afternoon.
STATEMENT OF STEVEN T. FOSTER, INSURANCE COMMIS-
SIONER, STATE OF VIRGINIA; AND PAST PRESIDENT, NA-
TIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Foster. Mr. Chairman, Senator Metzenbaum, my name is
Steven Foster. I am the Insurance Commissioner from the State of
Virginia. I am the immediate past president of the National Asso-
ciation of Insurance Commissioners, and for 2 years, 1992 and
1993, I chaired the NAIC's Reinsurance Task Force which had
amongst its projects the development of the model act which was
adopted by the NAIC in December of this past year.
14
I might also add that prior to my career as an insurance commis-
sioner my sole employment has been as a public servant for 10
years at the local level. Prior to that, I was in college.
I thank you for this opportunity this morning to be here to ad-
dress this very important issue which is reflected in your bill, and
I would like to add some comments at this time.
Assumption reinsurance has been our agenda at the NAIC for
the last couple of years, and we have tried to find ways to afford
better protections to consumers as to assumption reinsurance. We
believe assumption reinsurance can serve a legitimate purpose for
both insurers and for consumers. For example, if an insurer is in
financial difficulty its solvency may in fact be improved by the
transfer of a block of business to a healthier insurer. Assumption
reinsurance transfer is also useful when insurers decide to dis-
continue a particular line of insurance.
In both cases, insurers and consumers could in fact be better off
by a transfer. Yet at the same time, we are painfully aware that
consumers have had problems with assumption reinsurance, and
they have a right not only to know what has happened to their in-
surance contract, but to know enough to protect their vital inter-
ests. Also, consumers ought to be protected from ending up worse
off as a result of a transfer, as in the case where the assuming in-
surer is or becomes impaired financially or where guaranty fund
protection is eliminated Tby virtue of the transfer.
During the NAIC's deliberations on our model act we took exten-
sive testimony from consumers, industry groups, and others, much
as you are doing here today. We also nave listened closely to the
concerns expressed by Members of Congress. The act we adopted
last December requires the prior approval of the insurance commis-
sioner before any assumption reinsurance transaction can take
place. This approval can be granted only if the assuming insurer
is licensed in the commissioner's State, and is subject to all of the
requirements of this model act with respect to residents of the
State such as, for example, guaranty fund coverage.
In addition, the NAIC model also mandates important consumer
disclosure protections. The transferring insurer must provide the
policyholder with a notice of transfer. That notice must provide the
consumer with, among other things, very detailed information as to
the financial condition of the transferring and the assuming car-
rier, and notice that the policyholder has the right to either consent
to or reject the transfer. Of utmost importance, the model leaves
in the hands of the policyholder the ultimate power and say as to
whether their policy is in fact transferred to another insurer.
As is the case with your bill, our model allows implied consent
based on the consumer's inaction only after clear notification and
a long period of time; in our case, in excess of 2 years. Express con-
sent — that is, direct consumer action — was one of our goals in
crafting this NAJC model. Most States already have a requirement
that the commissioner's approval is needed prior to a transfer.
Since December, five States have adopted laws or regulations based
on the model act, which is less than 5 months old. Bills are pend-
ing in two other States which are based upon the model act.
Four States, including Virginia, have adopted laws to ensure that
consumers have the right to reject a transfer. Virginia took such
15
action in 1993 at the same time that I was chairing the NAIC
Model Act Committee on Assumption Reinsurance. We did not
wait. We did not twiddle our thumbs. I went to our legislature and
said put in the Virginia law that no Virginia resident shall have
their contract transferred without their consent. That has been our
law for over a year. Clearly, the States are already doing their job.
Let me now turn to the Insurance Policy Transfer Act, which is
your bill. In this bill we obviously see much that we recognize from
our own model act. Like the NAIC model, your bill includes a re-
quirement for approval by the commissioner, extensive disclosure of
financial information to the policyholder, the assurance that the
policyholder may reject the transfer, and provisions for the ex-
pressed and implied consent of the policyholder.
Yet the differences highlight why the very idea of a Federal bill
on this subject presents concerns to us. First and foremost, the
Federal bill would grant to the Department of Commerce the au-
thority to promulgate regulations to implement the law, whereas
the NAIC model would leave such authority to State legislators and
their regulators. Mr. Chairman, we are concerned that if you com-
bine the Federal Government's previous poor record of financial
service regulation with its lack of expertise and experience in in-
surance regulation you could be writing a recipe for disaster for the
American consumer.
The policymaking reins in this area, we believe, should be left in
the hands of State legislatures and their respective State insurance
regulators. We have seen what the States have done already in
several areas to put into their laws some of the protections wnich
are in our model act, and certainly we would encourage, and I plan
in Virginia to introduce a bill this next session which would offer
these protections. Protection of consumers, we believe, is a very im-
portant business to us as State insurance regulators, as it has been
for more than a century.
I thank you for this opportunity to testify and look forward to an-
swering questions you may have.
[The prepared statement of Mr. Foster follows:]
Prepared Statement of Steven T. Focter
Mr. Chairman, members of the Committee, my name is Steven Foster. I am the
Past President of the National Association of Insurance Commissioners (NAIC) and
the Commissioner of Insurance for the Commonwealth of Virginia, a position I have
held for 7 years. I also served last year as the Chairman of the NAIC's Reinsurance
Task Force, which has jurisdiction over all reinsurance issues, including the subject
of today's hearing, assumption reinsurance. Our task force developed the NAIC's As-
sumption Reinsurance Model Act, which I will discuss today.
The NAIC is the oldest association of state public officials, whose members are
the chief insurance regulatory officials of the 50 states, the District of Columbia,
and four U.S. possessions. On behalf of the NAIC, I thank you for the opportunity
to appear before this Committee to discuss the important issue of improving
consumer protections for policyholders whose insurance policies are transferred from
one company to another in what is known as an assumption reinsurance trans-
action. We are also grateful for the thoughtful oversight by this committee over the
last several years regarding a wide range of important issues for insurance consum-
ers.
Today, I will discuss the role played by assumption reinsurance transactions in
the insurance marketplace, the potential benefits of such transfers as well as the
hazards such transactions may pose to consumers, actions by the NAIC and the
states to improve protections afforded to consumers against these hazards, and S.
1989, the Insurance Policy Transfer Act.
16
CONSUMER PROTECTION AND ASSUMPTION REINSURANCE
An assumption reinsurance agreement is a transaction in which an insurance
company transfers the obligations and/or risks on insurance contracts to another in-
surer. TTiis makes the assuming insurer directly liable to the policyholders and re-
lieves the transferring insurer of that responsibility.
Assumption reinsurance agreements can be beneficial. If an insurer is in financial
difficulty, that insurer's solvency may be improved in part by the transfer of a block
of business to a healthier insurer. This is in the clear interest of policyholders of
the troubled company. Not only does such a transfer increase the likelihood that the
promises made by the insurer to the policyholder will be kept, but it also increases
the likelihood that the service needs of the consumer will be met.
Assumption reinsurance transfers are also useful where an insurer, for any of a
variety of reasons, has decided that it is not advisable to continue in a particular
line of insurance. In this situation, it may better serve the policyholder for the in-
surer to transfer the existing business to an insurer that has a more vital, ongoing
interest in conducting business in that particular line of insurance.
While we believe that assumption reinsurance transfers can be beneficial, we real-
ize that consumers have important rights in such transfers. For example, consumers
have a basic right not only to know what is happening to their insurance contract,
but to know enough about what is happening to protect their interests. Second, we
believe that consumers ought to be protected from ending up worse off as a result
of a transfer, as in the case where the assuming insurer is or becomes impaired fi-
nancially, or where guaranty and protection is lessened or eliminated by virtue of
the transfer.
THE ACTIONS OF THE NAIC AND THE STATES ON ASSUMPTION REINSURANCE
The NAIC is sensitive to these consumer issues. State insurance regulators have
debated the development of an effective means of guaranteeing consumer rights and
of providing consumers with protections. We have taken extensive testimony from
consumer representatives, inaustry groups, and other interested parties, and we
have listenea closely to the concerns expressed by members of Congress and others.
Last December, the NAIC adopted the Assumption Reinsurance Model Act, which
I have included as an attachment to this statement (Attachment A). Briefly, the
Model Act takes a two-pronged approach to protecting the interests of a policynolder
whose contract is the subject oi a proposed assumption reinsurance agreement.
First, the Model requires the prior approval of the state insurance commissioner for
any assumption reinsurance transaction. This approval could be granted only if the
assuming insurer is licensed in the commissioner's state and is subject to all other
requirements of the act with respect to residents of the state, such as guaranty fund
coverage. In deciding whether to approve the transfer, the Commissioner would con-
sider the financial condition of botn companies, the competence, experience, and in-
tegrity of the management of the assuming insurer, the assuming insurer's plan for
administration of the block of business, tne fairness of the transfer, and the ade-
quacy of the notice to policyholders.
The second prong ot the Model Act's consumer protection hinges on disclosure to
the consumer of the proposed assumption reinsurance agreement. Under the Model,
the transferring insurer is required to provide to each policyholder and each policy-
holder's agent or broker a notice oi transfer. That notice would proviae the
consumer with, among other things, very detailed information as to the financial
condition of the assuming insurer and the fact that the policyholder has the right
to either consent to or reject the transfer.
The financial information about both the transferring insurer and the assuming
insurer that the transferring insurer would be required to provide policyholders is
extensive. It would include:
• ratings for the last five years from two nationally recognized insurance rating
services;
• end-of-the-year balance sheets for the previous three years and for the most re-
cent quarter;
• a copy of the Management's Discussion and Analysis that was filed as a supple-
ment to the previous year's annual statement, and
• an explanation of the reason for the transfer.
Under the NAIC's Model Act, policyholders have the right to reject the transfer
of their insurance policies. They can do so simply by returning to the insurer a
preaddressed, postage-paid response card, or by sending any other written notice in-
dicating that the transfer is rejected.
The Model provides that the consent of a policyholder can be implied only in a
couple of circumstances. First, if the policyholder pays a premium to the assuming
17
company during the 24-month period after receipt of the notice of transfer, and if
the policyholder does not take advantage of the opportunity to make the premium
payment under protest while withholding consent to the transfer, consent may be
implied. It is important to note, however, that the premium notice from the com-
pany must clearly state that payment to the assuming insurer shall constitute ac-
ceptance of the transfer. The premium notice from the company must also provide
a method for the policyholder to pay the premium while reserving the right to reject
the transfer.
Implied consent may also be inferred from the consumer's inaction, but only after
an extensive notification requirement and a long period of time. After no fewer than
twenty-four months after the first notice, the transferring insurer must send a sec-
ond notice to the policyholder. If, after an additional month, the policyholder still
has not expressly consented or rejected the transfer, consent will be deemed to have
been given.
It is clear from this statutory structure involving review of the proposed transfer
and approval by the commissioner, extensive disclosure of financial and other infor-
mation to the consumer, and ample opportunity for the consumer to reject the trans-
fer, that express consent, as opposed to implied consent, is the NAIC's preferred
mechanism lor exercising a consumer's approval of a policy transfer. We believe that
this approach goes the extra mile — with two notices over a 25-month period — to en-
courage a decision by the policyholder.
We are most encouraged by the response of the states to this brand new Model
Law. All but a very few states already require the commissioner's approval for an
assumption reinsurance transfer. Furthermore, as the chart I have provided with
this statement illustrates (Attachment B); five states already have adopted laws or
regulations based on the Model Law and these states have provided consumers with
the opportunity to reject the transfer. Proposals based on the Model also are pend-
ing in two other states. Four states, including my own, already have provisions pro-
viding consumers with the right to reject assumption reinsurance transfers. Inas-
much as many state legislatures are still in session in this, the first legislative ses-
sion after the NAIC adopted the Model Act, we consider this to be an encouraging
affirmative response by the states.
S. 1989
As we examine S. 1989, the Insurance Policy Transfer Act sponsored bv Senators
Bryan and Metzenbaum, we see much that we recognize from our own Model Act.
Like the NAIC Model Act, the bill includes the requirement of approval by the com-
missioner, extensive disclosure of financial information to the policyholder, the as-
surance that the policyholder may reject the transfer, and provisions for the ex-
pressed and implied consent of the policyholder.
These similarities serve to emphasize the fact that the NAIC Model Act contains
what we agree are the essential components of consumer protection — oversight, dis-
closure, and the right to reject the transfer. Similarly, the primary differences high-
light why the very idea of a federal bill on this subject gives us concern. First and
foremost of these differences is the fact that the Insurance Policy Transfer Act
would grant to the Department of Commerce the authority to promulgate regula-
tions to implement the Act, whereas the NAIC Model Act would leave such author-
ity with the state regulators. In the past, we have said the federal government has,
at best, a poor record of financial services regulation. We have grave concern about
the prospect that a federal bureaucracy with scant experience in insurance regula-
tion would be charged with the implementation and enforcement of insurance regu-
lations that have an impact on so many other aspects of insurance regulation. Our
concern is compounded by the specter of a conflict between little or no enforcement
by a federal agency and a state law that may be superseded, tying the hands of
state regulators trying to protect consumers.
The other key point of disagreement between S. 1989 and the NAIC Model Act,
the requirement of an independent "expert" opinion, also highlights our concern
about federal intrusion into insurance regulation. The Senate bill does not take into
account the difficulty inherent in finding actuaries without conflicts of interest, and
the fact that actuaries are not regulated by any government entity. The overlooking
of these facts, of which state insurance regulators are all too aware, underscores the
fact that this sort of issue is best debated and decided by those who have the most
experience with the issue — state insurance commissioners.
As you know, the business of insurance is regulated by the states, as it has been
since New Hampshire established the first insurance department in 1851. Since the
passage of the McCarran-Ferguson Act in 1945, that regulation by the states has
Deen performed with the approval of and oversight by the U.S. Congress. State regu-
18
lators both acknowledge and welcome the oversight of this body. Indeed, on many
occasions that oversight has helped state regulators to provide more effective protec-
tion to American insurance consumers.
While we welcome congressional oversight, we have long maintained that respon-
sibility for regulation should remain with the states. This is not an issue of turf pro-
tection. Rather, it is an issue of preserving a system of good regulatory policy-
making. Issues such as assumption reinsurance do not operate in a vacuum. Rather,
they have implications that touch upon other aspects of insurance regulation. For
example, assumption reinsurance is an issue that has broad implications for
rehabilitations and liquidations of failed insurers, oversight of agents and brokers,
the analysis of the financial condition of insurers, market conduct regulation, and
the operation of guaranty lunds. When one goes about improving consumer protec-
tion with regard to assumption reinsurance, one must also take into account the re-
lationship of that issue to these other regulatory components. The soundest way to
do that is to keep the reins of policymaking in the hands of the people who have
responsibility over all these related regulatory issues and who deal with their inter-
relationship dav in and day out. Those policymaking reins should be left with state
insurance regulators, who have shown over the last century and a half that we are
really quite good at protecting insurance consumers. In fact, we believe that the
past decade has shown that the states do a better job at regulating insurance than
the federal government does at regulating other financial institutions
CONCLUSION
issue and the
cyholders. Yet,
We certainly appreciate your level of concern over this important
effort put forth in drafting a proposal to enhance protections for pol
as we have seen with the Employee Retirement Income Security Act (ERISA), the
Liability Risk Retention Act (LRRA), and other instances where the federal govern-
ment intrudes upon and preempts state insurance regulation, single-issue federal
regulation can unleash a host of unintended consequences that can be disastrous for
insurance consumers.
Again, let me stress that we welcome congressional oversight. We ask simply that
you exercise that oversight with caution and an understanding that state regulators
are both committed to improving consumer protection and quite expert at crafting
integrated solutions to consumer protection problems.
ATTACHMENT A— ASSUMPTION REINSURANCE MODEL ACT
Section 1. Purpose
This Act provides for the regulation of the transfer and novation of contracts of
insurance by way of assumption reinsurance. It defines assumption reinsurance and
establishes notice and disclosure requirements which protect and define the rights
and obligations of policyholders, regulators and the parties to assumption reinsur-
ance agreements.
Section 2. Scope
A. This Act applies to any insurer authorized in this state which either assumes
or transfers the obligations and/or risks on contracts of insurance pursuant to an
assumption reinsurance agreement.
B. This Act does not apply to:
(1) Any reinsurance agreement or transaction in which the ceding insurer
continues to remain directly liable for its insurance obligations ano/or risks
under the contracts of insurance subject to the reinsurance agreement;
(2) The substitution of one insurer for another upon the expiration of insur-
ance coverage pursuant to statutory or contractual requirements and the issu-
ance of a new contract of insurance by another insurer;
(3) The transfer of contracts of insurance pursuant to mergers or consolida-
tions of two (2) or more insurers to the extent that those transactions are regu-
lated by statute;
(4) Any insurer subject to a judicial order of liqruidation or rehabilitation;
Drafting Note: This section is intended to apply to any similar proceedings
under court order.
(5) Any reinsurance agreement or transaction to which a state insurance
guaranty association is a party, provided that policyholders do not lose any
rights or claims afforded under their original policies pursuant to [cite applica-
ble state guaranty fund laws]; or
(6) The transfer of liabilities from one insurer to another under a single
group policy upon the request of the group policyholder.
19
Section 3. Definitions
A. "Assuming insurer" means the insurer which acquires an insurance obligation
and/or risk from the transferring insurer pursuant to an assumption reinsurance
agreement.
B. "Assumption reinsurance agreement" means any contract which both:
(1) Transfers insurance obligations and/or risks of existing or in-force con-
tracts of insurance from a transferring insurer to an assuming insurer; and
(2) Is intended to effect a novation of the transferred contract of insurance
with the result that the assuming insurer becomes directly liable to the policy-
holders of the transferring insurer and the transferring insurer's insurance obli-
gations and/or risks under the contracts are extinguished.
C. "Contract of insurance" means any written agreement between an insurer and
policyholder pursuant to which the insurer, in exchange for premium or other con-
sideration, agrees to assume an obligation and/or risk of the policyholder or to make
payments on behalf of, or to, the policyholder or its beneficiaries; it shall include
all property, casualty, life, health, accident, surety, title and annuity business au-
thorized to be written pursuant to the insurance laws of this state.
Drafting Note: Individual states may cite specific sections of their insurance
laws regarding lines, classes or types of insurance to which this Act is applicable.
If a state has a statutory definition of contract of insurance which is inconsistent
with this definition, the state may want to consider using the statutory definition.
D. "Home service business" means insurance business on which premiums are
collected on a weekly or monthly basis by an agent of the insurer.
E. "Notice of transfer" means the written notice to policyholders required by Sec-
tion 4A.
F. 'Policyholder" means any individual or entity which has the right to terminate
or otherwise alter the terms of a contract of insurance. It includes any
certificateholder whose certificate is in force on the proposed effective date of the
assumption, if the certificateholder has the right to keep the certificate in force
without change in benefit following termination of the group policy.
The right to keep the certificate in force referred to in this section shall not in-
clude the right to elect individual coverage under the Consolidated omnibus Budget
Reconciliation Act, ("COBRA") section 601, et seq., of the Employee Retirement In-
come security Act of 1974, as amended, 29 U.S.C. 1161 et seq.
G. "Transferring insurer" means the insurer which transfers an insurance obliga-
tion and/or risk to an assuming insurer pursuant to an assumption reinsurance
agreement.
Section 4. Notice Requirements
A. Notice to Policyholders, Agents and Brokers:
(1) The transferring insurer shall provide or cause to be provided to each pol-
icyholder a notice of transfer by first-class mail, addressed to the policyholder's
last known address or to the address to which premium notices or other policy
documents are sent or, with respect to home service business, by p>ersonal deliv-
ery with acknowledged receipt. A notice of transfer shall also be sent to the
transferring insurer's agents or brokers of record on the affected policies.
(2) The notice of transfer shall state or provide:
(a) The date the transfer and novation of the policyholder's contract of
insurance is proposed to take place;
(b) The name, address and telephone number of the assuming and trans-
ferring insurer;
(c) That the policyholder has the right to either consent to or reject the
transfer and novation;
(d) The procedures and time limit for consenting to or rejecting the trans-
fer and novation;
(e) A summary of any effect that consenting to or rejecting the transfer
and novation will have on the policyholder's rights;
(D A statement that the assuming insurer is licensed to write the type
of business being assumed in the state where the policyholder resides, or
is otherwise authorized, as provided herein, to assume such business;
(g) The name and address of the person at the transferring insurer to
whom the policyholder should send its written statement of acceptance or
rejection of the transfer and novation; and
(h) The address and phone number of the insurance department where
the policyholder resides so that the policyholder may write or call the insur-
ance department for further information regarding the financial condition
of the assuming insurer.
(i) The following financial data for both companies:
20
(i) Ratings for the last five (5) year, if available or for such lesser pe-
riod as is available from two (2) nationally recognized insurance rating
services acceptable to the commissioner including the rating service's
explanation of the meaning of the ratings. If ratings are unavailable for
any year of the five-year period, this shall also be disclosed;
Drafting Note: Insert the title of tne chief insurance regulatory official wherever
the term -commissioner" appears.
(ii) A balance sheet as of December 31 for the previous three (3)
years if available or for such lesser period as is available and as of the
date of the most recent quarterly statement;
(iii) A copy of the Management's Discussion and Analysis that was
filed as a supplement to the previous year's annual statement; and
(iv) An explanation of the reason for the transfer.
(3) Notice in a form identical or substantially similar to Appendix A attached
shall be deemed to comply with the requirements of Section 4A(2).
(4) The notice of transfer shall include a pre-addressed, postage-paid response
card which a policyholder may return as its written statement of acceptance or
rejection of the transfer and novation.
(5) The notice of transfer shall be filed as part of the prior approval require-
ment set forth in Section 4B(1).
B. Notification and Prior Approval Requirements
(1) Prior approval by the commissioner is required for any transaction where
an insurer domiciled in this state assumes or transfers obligations and/or risks
on contracts of insurance under an assumption reinsurance agreement. No in-
surer licensed in this state shall transfer obligations and/or risks on contracts
of insurance issued to or owned by residents of this state to any insurer that
is not licensed in this state. An insurer domiciled in this state shall not assume
obligations and/or risks on contracts of insurance issued to or owned by policy-
holders residing in any other state unless it is licensed in the other state, or
the insurance regulatory official of that state has approved the assumption.
(2) Any licensed foreign insurer that enters into an assumption reinsurance
agreement which transfers the obligations and/or risks on contracts of insurance
issued to or owned by residents of this state, shall file or cause to be filed with
the commissioner of insurance of this state the assumption certificate, a copy
of the notice of transfer and an affidavit that the transaction is subject to sub-
stantially similar requirements in the state of domicile of both the transferring
and assuming insurer. If no such requirements exist in the domicile of either
the transferring or assuming insurers, then the requirements of section 4B(3)
shall apply.
Drafting Note: It is anticipated that the insurance department will review the
filing in a manner consistent with the policy form review process applicable for the
state which could include either prior approval or file and use.
(3) Any licensed foreign insurer tnat enters into an assumption reinsurance
agreement which transfers the obligations and/or risks on contracts of insurance
issued to or owned by residents of this state, shall obtain prior approval of the
commissioner of insurance of this state and be subject to all other requirements
of this Act with respect to residents of this state, unless the transferring and
assuming insurers are subject to assumption reinsurance requirements adopted
by statute or regulation in the jurisdiction of their domicile which are substan-
tially similar to those contained herein.
(4) The following factors, along with such other factors as the commissioner
deems appropriate under the circumstances, shall be considered by the commis-
sioner in reviewing a request for approval:
(a) The financial condition of the transferring and assuming insurers and
the effect the transaction will have on the financial condition of each com-
pany;
(b) The competence, experience and integrity of those persons who con-
trol the operation of the assuming insurer;
(c) The plans or proposals the assuming party has with respect to the ad-
ministration of the policies subject to the proposed transfer;
(d) Whether the transfer is fair and reasonable to the policyholders of
both companies; and
(e) Whether the notice of transfer to be provided by the insurer is fair,
adequate and not misleading.
Section 5. Policyholder Rights
A. Policyholders shall have the right to reject the transfer and novation of their
contracts of insurance. Policyholders electing to reject the assumption transaction
21
shall return to the transferring insurer the pre-addressed, postage-paid response
card or other written notice and indicate thereon that the assumption is rejected
(collectively referred to as the "Response Card").
B. Payment of any premium to the assuming company during the twenty-four-
month period after notice is received shall be deemed to indicate the policyholder's
acceptance of the transfer to the assuming insurer and a novation shall be deemed
to have been efTected, provided that the premium notice clearly states that payment
of the premium to the assuming insurer shall constitute acceptance of the transfer.
However, the premium notice shall also provide a method for the policyholder to pay
the premium while reserving the right to reject the transfer. With respect to any
home service business or any other business not using premium notices, the disclo-
sures and procedural reauirements of this subsection are to be set forth in the No-
tice of Transfer required oy Section 4 and in the assumption certificate.
C. After no fewer than twenty-four (24) months from the mailing of the initial no-
tice of transfer required under section 4A, if positive consent to, or rejection of, the
transfer and assumption has not been received or consent has not been deemed to
have occurred under Subsection B of this section, the transferring company shall
send to the policyholder a second and final notice of transfer as specified in Section
4A. If the policyholder does not accept or reiect the transfer during the one month
period immediately following the date on which the transferring insurer mails the
second and final notice of transfer, the policyholder's consent will be deemed to have
occurred and novation of the contract will be effected. With respect to the home
service business, or any other business not using premium notices, the twenty-four
and one month periods shall be measured from the date of delivery of the Notice
of Transfer pursuant to Section 4A(1).
D. The transferring insurer will be deemed to have received the Response Card
on the date it is postmarked. A policyholder may also send its Response Card by
facsimile or other electronic transmission or by registered mail, express delivery or
courier service, in which case the Response Card shall be deemed to have been re-
ceived by the assuming insurer on the date of actual receipt by the transferring in-
surer.
Section 6. Effect of Consent
If a policyholder consents to the transfer pursuant to Section 5 or if the transfer
is effected under Section 7, there shall be a novation of the contract of insurance
subject to the assumption reinsurance agreement with the result that the transfer-
ring insurer shall thereby be relieved of all insurance obligations and/or risks trans-
ferred under the assumption reinsurance agreement and the assuming insurer shall
become directly and solely liable to the policyholder for those insurance obligations
and/or risks.
Section 7. Commissioner's Discretion
If an insurer domiciled in this state or in a jurisdiction having a substantially
similar law is deemed by the domiciliary commissioner to be in hazardous financial
condition or an administrative proceeding has been instituted against it for the pur-
pose of reorganizing or conserving the insurer, and the transfer of the contracts of
insurance is in the best interest of the policyholders, as determined by the domi-
ciliary commissioner, a transfer and novation may be effected notwithstanding the
provisions of this Act. This may include a form of implied consent and adequate no-
tification to the policyholder of the circumstances requiring the transfer as approved
by the commissioner.
Drafting Note: States must amend their guaranty association law to specify that
residents whose policies are transferred to an unlicensed insurer pursuant to this
section are entitled to continued guaranty association protection.
Section 8. Effective Date
This Act shall take effect six (6) months after the date it is enacted and shall
apply to all assumption reinsurance agreements entered into on or after that effec-
tive date.
NOTICE OF TRANSFER
IMPORTANT: THIS NOTICE AFFECTS YOUR CONTRACT RIGHTS. PLEASE
READ IT CAREFULLY.
Transfer of Policy
The [ABC Insurance Company] has agreed to replace us as your insurer under
[insert policy/certificate name and number] effective [insert date]. The [ABC Insur-
22
ance Company's] principal place of business is [insert address] and certain financial
information concerning both companies is attached, including (1) ratings for the last
five years, if available, or for such lesser period as is available from two nationally
recognized insurance rating services; (2) balance sheets for the previous three years,
if available, or for such lesser period as is available and as of the date of the most
recent quarterly statement; (3) a copy of the Management's Discussion and Analysis
that was filed as a supplement to the previous year's annual statement; and (4) an
explanation of the reason for the transfer. You may obtain additional information
concerning [ABC Insurance Company] from reference materials in your local library
or by contacting your Insurance Commissioner at [insert address and phone num-
ber].
The [ABC Insurance Company] is licensed to write this coverage in your state.
The Commissioner of Insurance in your state has reviewed the potential effect of
the proposed transaction, and has approved the transaction.
Your Rights
You may choose to consent to or reject the transfer of your policy to [ABC Insur-
ance Company]. If you want your policy transferred, you may notify us in writing
by signing and returning the enclosed pre-addressed, postage-paid card or by writ-
ing to us at:
[Insert name, address and facsimile number of contact person.]
Payment of your premium to the assuming company will also constitute accept-
ance of the transaction. However, a method will be provided to allow you to pay the
premium while reserving the ri^t to reject the transfer.
If you reject the transfer, you may keep your fx)licy with us or exercise any option
under your policy. If we do not receive a written rejection you will, as a matter of
law, have consented to the transfer. However, before this consent is final you will
be provided a second notice of the transfer twenty-four months from now. After the
second notice is provided, you will have one month to reply. If you have paid your
premium to the (ABC Insurance Company], without reserving your right to reject
the transfer, you will not receive a second notice.
Drafting Note: The second and final notice to the policyholders should include
a date by which the policyholder should respond. The date should be one month
after the date on which the notice was mailed to the policyholder.
Effect of Transfer
If you accept this transfer, [ABC Insurance Company] will be your insurer. It will
have direct responsibility to you for the payment of all claims, benefits and for all
other policy obligations. We will no longer have any obligations to you.
If you accept this transfer, you should make all premium payments and claims
submissions to [ABC Insurance Company] and direct all questions to [ABC Insur-
ance Company].
If you have any further questions about this agreement, you may contact [XYZ
Insurance] or [ABC Insurance].
Sincerely,
[XYZ Insurance Company
111 No Street. Smithville, USA, 555/
555-5555]
[ABC Insurance Company
222 No Street, Jonesville, USA, 333/
333-3333]
For your convenience, we have enclosed a pre-addressed postage-paid response
card. Please take time now to read the enclosed notice and complete and return the
response card to us.
[Notice Date]
RESPONSE CARD
Yes, I accept the transfer of my jwlicy from [name of transferring company]
to [name of assuming company].
No, I reject the proposed transfer of my policy from [name of transferring
company] to [name of assuming company] and wish to retain my policy with [name
of transferring company].
Date; Signature; Name; Street Address; City, State, Zip.
23
Attachment B— NAIC State Provisions for Approval of Assumption Reinsurance
Citation
§27-27-47 (stock); §27-27-48 (mutual)
§21.69.610 (stock); §21,69.620 (mutual)
§20-730 (stock); §20-734 (mutual)
§23-62-205 (1991); Reg. 55 (1992)
I.e. §810
Reg. 3-3-1
PA. 91-41
"nt. 18 §4944
§35-365
§628.481 (stock); §628.491 (mutual)
B 33-52-1 to 33-52-6
§431:4-501
§41-2856 (stock); §41-2858 (mutual) ..
215 ILCS 5/74
§27-6-1.1-5
§521.3
§40-221(3)
§§40-1219 to 40-1219a
Bulletin 1993-21 (1993)
§304.24-420
R.S. 22:942
Tit. 24-A§§761 to 766
48A §273 (stock); 48A §274 (mutual) ....
C. 175 §20
§500.7604
§60A.09
No provision
§375.241, Reg. 20&-2.400
§436.125
Provision
Bulk reinsurance agreements must \x approved t)y commis-
sioner t)efore effective.
Bulk reinsurance agreements must be approved by commis-
sioner before effective.
Bulk reinsurance agreements must be approved by commis-
sioner before effective.
Assumption reinsurance certificate approved by commis-
sioner, delivered to policytiolders; standards for commis-
sioner approval.
Assumption reinsurance agreement of group insurance or 10
or more individual contracts must have written consent of
commissioner.
Assumption reinsurance agreements require approval by
commissioner; notice to policyholders; amendments pend-
ing to adopt NAIC model.
Agreements to bulk reinsurance must be filed with commis-
sioner; disapproval standards.
Agreements of bulk reinsurance must be filed with commis-
sioner before effective.
May reinsure all or risks with consent of superintendent.
Bulk reinsurance agreements subject to prior approval by
commissioner.
Provides for approval of assumption reinsurance agreements
by commissioner, notice to policyholders, right of policy-
holders to reject transfer and novation; based on NAIC
model.
Bulk reinsurance shall be considered a consolidation of the
two companies.
Reinsurance of all or substantially all of insurance in force
treated as merger (stock); prior approval required (mu-
tual).
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Commissioner must approve proposed agreement of assump-
tion reinsurance; if approved, must notify contract holders
within 45 days.
Approval of any reinsurance contract by commissioner re-
quired.
Prior approval by commissioner of any bulk reinsurance
agreement required.
Requires notification of policyholders and written consent
before transfer due to a merger or consolidation, except
when insurer is impaired.
Notifies insurers of procedure required by court decision.
Approval of bulk reinsurance agreements by commissioner
required.
Written approval of bulk reinsurance agreements by commis-
sioner required.
Provides for approval of assumption reinsurance agreements
by commissioner; notice to policyholders, right of policy-
holders to reject transfer and novation; based on NAIC
model.
Prior approval of bulk reinsurance agreement by commis-
sioner required.
Company ceding more than 75 percent of risk shall obtain
prior approval of commissioner.
Commissioner must give prior approval of reinsurance of all
risks for purposes of effecting consolidation or merger.
File assumption reinsurance agreements with commissioner.
Requires approval of director; assumption reinsurance con-
sidered to be doing business in State.
Before transfer of obligation to pay annuity, must get written
consent of obligee.
24
Attachment B — NAIC State Provisions for Approval of Assumption Reinsurance — Continued
state
Citation
Provisioii
§§375.1280 to 375.1295
MT
NE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
OR
PA
Rl
SC
SO
"m
TX
UT
VT
§33-2-1211 (stock); §33-2-1212 (mutual) ...
§44-224.03 (stock); §44-224.05 (other than
stock).
§§44-6201 to 44-6211
Bulletin CB-85 (1993)
§693A.370
No provision
§178:18-64
§59A-34-40
§1308
Bull. 88-L-2
§§26.1-07-01 to 26.1-07-21
§3907.12 (legal reserve life); §3925.33 (other
than life).
Tit. 36 §2132 (stock); tit. 36 §2134 (mutual)
No provision
Tit. 40 §442
Reg. 90i.l to 90i.3 (1993)
§§27-53-1 to 27-53-7
§38-27-310
§58-5-120 (domestic stock); §58-5-123 (do-
mestic mutual).
Dept. policy
28 TAC 7.604
§31A-22-1204
T. 8 §3435
SB 341 pending (1994)
Notice to policyholders, opportunity to reject novation. If
don't reject, after third notice deemed to have consented.
Financial information on tx)th insurers must t>e provided;
t}ased on NAIC model.
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Prior approval of bulk reinsurance agreements by director re-
quired.
Provides for approval of assumption reinsurance agreements
by commissioner; notice to policyholders, right of policy-
holders to reject transfer and novation; based on NAIC
model.
Format for notice of transfer.
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Prior approval of bulk reinsurance agreements by super-
intendent required.
Prior approval of bulk reinsurance agreements by super-
intendent required.
Proposed assumption reinsurance contracts must be filed
with department 30 days prior to use.
Approval of bulk reinsurance agreements by commissioner
required.
Bulk reinsurance agreements need written consent of a
three-person commission (legal reserve life); prior ap-
proval of bulk reinsurance agreements by commissioner
(other than life).
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Approval of bulk reinsurance agreements by commissioner
required.
Department statement of policy required certificates of as-
sumption be provided to policyholders. The purpose of the
certificate is notification. Form must be approved by in-
surance department priiK to issuance.
Provides for prior approval by commissioner of all assump-
tion reinsurance agreements, notice to policyholder, right
of policyholder to reject transfer and novation; based on
NAIC model.
Transfer of substantially all liabilities without prior approval
IS grounds for rehabilitation.
Pnor approval of bulk reinsurance agreements by director re-
quired.
Letter of notification of assumption sent to commissioner. No
requirement for approval. Department approves assump-
tion certificates only. Form letter sent to assuming com-
pany and policyholders informing them of 50-day notice
and right to refuse the assumption.
Any domestic insurer reinsuring its entire outstanding busi-
ness must file documents with the commissioner to allow
determination that all policyholder interests are being
protected.
Approval of commissioner required for bulk reinsurance
agreements.
Prior approval of bulk reinsurance agreements required;
commissioner may require notification of policyholders,
policyholder may reject the reinsurance.
Based on NAIC model with 12-month/2-month period for re-
jection.
25
Attachment B— NAIC State Provisions for Approvai of Assumption Reinsurance— Continued
state
VA
WA
WV
Wl
WY
Citation
§38.2-136
Reg. 284-95-010 to 284-95-080
§33-4-15
§611.78 (domestic); §618.32 (foreign)
§26-24-150
Provision
Policyholders may consent to any assumption unless the
commissioner enters an order of approval when the
ceding insurer is in impaired financial condition and the
transfer is in the t)est interests of the policyholders.
Provide 30 days' notice to policyholders and commissioner;
policyholders may consent or reject; assumption of poli-
cies IS considered doing business in State.
Insurer must seek advance approval of commissioner which
may include consideration of whether it would substan-
tially reduce the protection of policyholders.
Report reinsurance transaction to commissioner 31 days in
advance of proposed effective date.
Prior approval of bulk reinsurance agreements by commis-
sioner required.
Eveiy attempt has been made to provide correct and complete information. For further information, consult the statutes and regulations
cited.
Senator Bryan. Mr. Hunter.
STATEMENT OF ROBERT HUNTER, COMMISSIONER, TEXAS
DEPARTMENT OF INSURANCE
Mr. Hunter. Mr. Chairman, my name is Bob Hunter. I am In-
surance Commissioner for the State of Texas. I really congratulate
you for leading on this issue. I want to go out of my way to com-
mend you on this. I would like to see some changes in the bill to
strengthen it, but I think it is a terrific start.
The bill contains the essence of what is needed to protect con-
sumers. The transfer shall not be effective as to an individual
consumer unless that consumer has made an informed consent to
the transfer. That is the essence of protection. I commend both of
you for your leadership.
I fully support each of the 14 disclosures you require, particu-
larly disclosures of adverse consequences of the transfer, ratings
from all the ratings organizations for both the transferring and as-
suming insurer, and a fairness opinion of a disinterested third
party which, as was pointed out, does occur in other countries, and
the commissioner's certification from both States that the trans-
action is in the best interest of the policyholders.
I suggest strengthening the disclosures by requiring not only dis-
closure of consent to the transfer, but how to object to it, also re-
quiring notice to the consumers of any third parties who refuse to
provide a fairness opinion, and prior approval of any commissioner
of insurance that has a substantial block, say over 20 percent of
the policies to be transferred in his or her State, because you might
have two States involved in the transfer, but a third State might
have most of the business and not be involved in the approval, and
I think it should be.
I would also suggest these consumer protections be added to the
bill: one, the consumer should be provided with the right to cov-
erage from either insurer if the transfer is found to be in violation
of the act; two, that standards for the third party and Commis-
sioner approvals of the transfer should be considered and put into
the act; three, transferring insurers should be required to carry all
liabilities on their books for policies that have not yet consented to
transfer; four, very importantly, Congress should provide greater
26
flexibility to the Commissioner in the transferring company's domi-
ciliary State to transfer policies of a financially weak insurer — I
think maybe it is too stringent the way it is drafted; and five, the
insurance commissioner must be empowered to enforce this act, not
the Department of Commerce. I think we are in a better position
to monitor compliance.
Although I am in some disagreement with Stephen Foster of the
NAIC on this issue, I am a firm advocate of State regulation, Mr.
Chairman. Senator Metzenbaum, it is true that historically there
has been a revolving door — 50 percent of the commissioners have
come from the industry and returned to it, and that has been a se-
rious problem, but you know me well for all these years that we
have worked together on these issues, and I am going to tell you
something is changing.
Senator Metzenbaum. If they were all like you, Mr. Hunter, we
would not have problems.
Mr. Hunter. But the States and NAIC are changing fast. You
probably remember Jay Angloff, who was my general counsel and
worked for Congress Watch. He is now the commissioner in Mis-
souri. We have exconsumer leaders, bona fide consumer leaders in
Oregon, Washington, and Georgia. Several other States have com-
missioners that are clearly consumer-oriented.
To show the change, at the last NAIC meeting, 18 States sup-
ported the call for an end to the passing of lobbying costs and polit-
ical advertising costs through the consumers. I imagine a few years
ago, Senator, if that had been proposed you would have gotten no
support at all — 18 States went public with that support.
So, Senator Metzenbaum, all I can say, you deserve much of the
credit for the change, but vour consistent call for improvement over
these years is why I think these things are happening, and I just
wanted to say how much I appreciate — on behalf of consumers all
over America, I appreciate what you have done all of these years,
so I would like to thank you very much.
[The prepared statement of Mr. Hunter follows:]
Prepared Statement of J. Robert Hunter
My name is J. Robert Hunter. I am the Insurance Commissioner from the State
of Texas. I previously served as Federal Insurance Administrator under Presidents
Ford and Carter and as President of the National Insurance Consumer Organiza-
tion.
I am testifying today in support of S. 1989 as an overdue solution to the dangers
of assumption reinsurance for consumers across the country. My comments are di-
vided into three areas: (1) identification of the key protections contained in the bill,
protections which must remain for the law to successfully protect consumers, (2) the
problems with the NMC draft model act and the necessity for national legislation,
and (3) some suggested amendments to the bill to further protect consumers.
KEY CONSUMER PROTECTIONS CONTAINED IN THE BILL
S. 1989 adopts the correct fundamental concept for the protection of consumers
in the assumption reinsurance transaction: the transfer shall not be effective as to
an individual consumer unless that consumer has made an informed consent to the
transfer. Any legislation which permits the transfer of the insurer's responsibilities
without the informed consent of the insured must be rejected. I commend Senators
Metzenbaum and Bryan for drafting a bill that not only requires disclosure of the
fact of the transfer, but guarantees that the consumer will be provided key informa-
tion to make an informed decision on whether to agree or object to the transfer. I
support the disclosure of each item set out in Section 4(c) of the bill and will discuss
the Key items and the need for the information.
27
Section 4(cX5) requires a summary of the adverse efTects of consenting to the
transfer. Of course, this information is per se required for a consumer to make an
informed choice. I have little doubt that insurers will point out the alleged benefits
of the transfer; they should be required to point out both sides of the equation.
Section 4(cX7) requires a statement that the assuming insurer is licensed in the
state or otherwise authorized to assume the insurance Dusiness. This provision is
crucial because state guaranty fiind protections are typically provided only to li-
censed companies. Thus, if the policy is transferred to a financially weak company
that is not licensed in the consumer's state, the consumer would otherwise be left
unprotected in the event of an insolvency.
Section 4(cX10) requires the disclosure of financial data for the transferring in-
surer and the assuming insurer, including ratings from all nationally recognized
rating firms, financial statements and a disclosure of the purpose of the transfer.
It is important to include disclosure of all ratings because the insurer should not
be permitted to disclose only the highest ratings. Financial data about the compa-
nies is crucial because of the nature of assumption reinsurance. In some cases, the
transferring insurer seeks the transfer because the book of business is no longer
profitable or is too expensive to manage. Not surprisingly, in these cases the willing
buyers often tend to Se financially weak companies. Consumers need to know this.
Section 4(cX12) requires a disinterested third party "fairness opinion" finding that
the transaction is in the best interest of consumers affected by the transaction.
While insurance departments would do their best to review proposed assumption re-
insurance transactions, their workload may prevent them from reviewing all nec-
essary information. It is important to have a disinterested third party review the
transaction to ensure that consumers' interests are protected.
Section 4(c)(13) requires a certification by the commissioners of the states of domi-
cile of the transferring and assuming insurers that the transaction is in the best
interests of policyholders affected by the transaction. This provision is crucial be-
cause Insurance Departments keep information about an insurer's financial status
confidential in many cases. The certification will allow the Commissioners to dis-
approve such a transaction without revealing the confidential information.
I believe that all fourteen of the required disclosures contained in Section 4(c) are
critical, and I recommend that none of those disclosures be eliminated from the bill.
Below I offer some amendments to those disclosure requirements to further
strengthen the protections for consumers.
THE NEED FOR NATIONAL LEGISLATION
There are three major reasons for Congress to act on assumption reinsurance
rather than waiting for an NMC model law to be adopted by the states. These rea-
sons are: substance, uniformity and timing. I will address each of these issues. My
comments should not be read as a criticism of the NMC but, rather, as an acknowl-
edgment of the realities regarding NMC model laws. Unlike Congress, NMC Com-
missioners only meet on a quarterly basis. So the NMC process is, by its nature,
slow. This is usually okay, but in this instance people are being hurt by transfers
today and action should come soon. Further, once the NMC acts, each individual
state legislature must then adopt the model act, adding more time to the process.
In most circumstances, a longer and more deliberative process benefits consumers
and the industry. For issues such as assumption reinsurance, however, where con-
sumers are currently being harmed, we need to move faster to protect citizens. As
a firm believer in state regulation, I believe federal standards where uniformity is
needed will assure that state regulation continues to serve America well.
The current NMC draft model law on assumption reinsurance falls short of pro-
viding the necessary consumer protections that are contained in S. 1989. Here are
a few examples:
• The very purpose of the NMC model is flawed. Its purpose is to provide "for
the regulation of the transfer and novation of contracts of insurance by way of as-
sumption reinsurance." This purpose has the mistaken assumption that the end of
legislation is to provide for regulation. Regulation should never be an end, it should
be a means to reaching an end, like the protection of consumers. S. 1989, on the
other hand, hits the mark exactly: "It is the purpose of this Act to prohibit the
transfer and novation of a contract of insurance without the prior informed written
consent of the policyholder." That is the goal any legislation should have regarding
assumption reinsurance. The fundamental failure of the NMC model is its failure
to recognize that the purpose of the legislation is to ensure that consumers make
an informed consent to any assumption reinsurance transaction. That fundamental
failure to have a purpose other than the creation of regulation permeates the failure
of the act to effectively protect the interests of policyholders.
28
• The model act only reauires disclosure of two financial ratings. Of course, this
allows the insurers to simply pick the highest two ratings by all rating services for
the assuming insurer. Since each insurer has its own ratings by all rating services,
the benefits of full disclosure outweigh the minimal cost in making two additional
ratinjg service disclosures.
• The model act provides that payment of premium to the assuming insurer con-
stitutes consent to tne transfer. This provision violates the fundamental concept on
which any assumption reinsurance legislation should be based: no transfer of a pol-
icy shall be effective without the (1) informed (2) consent of the insured. Payment
of the premium to the assuming insurer satisfies neither of these two requirements.
Payment does not evidence consent to the transfer or that the insured has read any
of the materials included in the disclosure.
Second, national legislation will provide needed uniformity to assumption reinsur-
ance transactions. Most reinsurance transactions affect consumers in many, if not
all, states. National legislation will ensure that all consumers will be adequately
protected and that insurers will not be required to comply with difierent and pos-
sibly contradictory state requirements, and will eliminate the duplication of efforts
by each state in regulating assumption reinsurance transactions.
Third, national legislation will ensure more timely protection of insurance con-
sumers. The NMC's procedure for drafting model legislation takes a long time, usu-
ally several years. Further, many NMC model bills are enacted by only a few states
so protection may never be complete. While waiting for implementation of an NMC
model law will likely take several years before the public would be protected, Con-
gress can act this year and provide those protections to consumers immediately.
SUGGESTIONS FOR STRENGTHENING THE BILL
While I strongly support the bill overall, I do have some minor suggestions for
strengthening the protections for consumers. Those suggestions are as follows:
Disclosures
Section 4(c) contains the disclosures required before an insurer may transfer a
policy. As stated above, these disclosures are crucial to ensuring that the consumer
makes an informed decision. I have several suggestions for furthering the goals of
consumer education and consumer protection, as follows:
• Section 4(cX4) requires disclosure of the method for consenting to the transfer.
The disclosure should also provide the method of objecting to the transfer.
• Section 4(cX12) requires disclosure of the third party "fairness opinion" stating
that the transfer is in the best interest of the policyholders. The insurer, in attempt-
ing to obtain such an opinion, may receive a third party opinion that the transfer
is not in the policyholders' best interest. Presumably the insurer will simply obtain
another opinion. Consumers should be informed of both opinions. Thus, I rec-
ommend tnat the section include an additional disclosure of any third parties that
refused to provide a fairness opinion, along with the third party's name, address,
phone number and reasons for refusing to provide the fairness opinion.
• Section 4(cX7) reauires a statement that the assuming insurer is licensed in the
state or otherwise autnorized to assume the insurance business. The purpose of this
provision is to ensure that the consumer remains protected by the state's guaranty
association. However, it is possible that a company is authorized to assume the busi-
ness but is not covered by the guaranty association. No transfer should be permitted
unless the assuming insurer is covered hy the state's guaranty association. Thus,
I recommend that the disclosure also require that the policy will continue to be cov-
ered by the state's guaranty association after the transfer.
• Section 4(cX13) requires certain statements by the commissioner of the states
in which the assuming and transferring insurers are domiciled. While I supfX)rt the
need for this disclosure, the approval of other commissioners should be required
when consumers in another state make up a substantial portion of the block of busi-
ness to be transferred. For instance, a threshold of 20 percent would require the
same disclosure from the commissioner of any state in which consumers who hold
at least 20 percent of the policies to be transferred reside.
Additional Consumer Protections
I have several recommendations for further consumer protections that could be
added to the bill. Again, these suggestions are intended to further the bill's goal of
protecting policyholders in the assumption reinsurance transaction. My rec-
ommendations are as follows:
• Although a transfer is deemed void unless it complies with the bill's require-
ments, the consumer should be provided with the right to coverage from either the
assuming or the transferring company m the event a transfer is made in violation
29
of the Act. The right to coverage from the assuming insurer better protects the con-
sumer's potential for being paid on a claim, especially when the transferring com-
pany has not carried the liability on its books and may no longer be in a position
to pay all claims. Since the consumer has a contractual right against the transfer-
ring insurer, the consumer assumes the right of the transferring company to force
the assuming company to pay the claim. This provision will also ensure that assum-
ing companies will have an incentive to see that the transaction complies with the
law.
• No standards are set out for third party and commissioners to determine when
to approve a transaction as being in the best interest of the policyholders. Congress
should consider adding standards for these determinations. For instance, the review
should take into consideration any change in rates or benefits, the financial health
of the assuming and transferring insurers, and the service level of the two insurers.
The NMC drail model act sets out some standards, but that list needs to be ex-
panded.
• Transferring insurers should be required to carry all liabilities on their books
for policies on which thev have not received a consent to the transfer. This will en-
sure that the company's books and records accurately reflect the company's financial
status.
• A protection needs to be added for those consumers who allow their coverage
to lapse in protest against the transfer of coverage. This reaction is known as "shock
lapse," and the rate of lapse is particularly hi^ when the assuming insurer has low
financial ratings. The protections in the bill should significantly reduce the amount
of lapses because consumers will be given a clear choice to remain with the transfer-
ring insurer. However, some lapses may still occur when companies fail to comply
with the act. I recommend that a provision be added to provide that a transfer in
violation of the act is considered a breach of the insurance contract and entitles any
consumer who has had their policy lapse after the transfer to reinstate the policy
by pajdng all back premiums. You may want to put a two year limit on a consumer's
ability to exercise tnis right.
• Congress should consider providing greater freedom to the commissioner in the
transferring company's domicile to transfer policies of a financially weak company.
• An additional issue which needs to be addressed is whether the bill should pro-
vide immunity for third parties who offer or refuse to offer a fairness opinion from
liability to policy holders. On one hand, the purpose of the opinion is to nave policy-
holders rely on it, so the third party should pay any damages caused by the breach
of its duty. On the other hand, few firms will be willing to engage in this work if
they face potential lawsuits in multiple states. While I do not nave an opinion on
this issue, I recommend that Congress address the issue prior to passage of the bill.
• Section 8 provides relief for policyholders for violations of the Act. It is crucial
that this section empower the states, specifically the insurance commissioners, to
enforce this Act. State insurance departments are in a better position to monitor
compliance with the Act and issue such orders as necessary in a timely manner to
protect consumers.
CONCLUSION
I support the adoption of S. 1989 and I encourage adoption of the minor changes
I have recommended. The current practice of insurers, who sell policies based on
their price, service and financial strength, in transferring their obligations to an-
other insurer without the informed consent of the policyholder is unfair and decep-
tive. Senators Metzenbaum and Bryan should be commended for their fine work on
this important consumer protection issue.
I would be happy to respond to any questions you may have.
Senator Bryan. Thank you very much, Mr. Hunter. Mr. Mica, we
will hear from you next.
STATEMENT OF DAN MICA, EXECUTIVE VICE PRESIDENT,
AMERICAN COUNCIL OF LIFE INSURANCE; ACCOMPANIED
BY RICHARD MINCK, EXECUTIVE VICE PRESIDENT
Mr. Mica. Thank you, Mr. Chairman. My name is Dan Mica. I
am the executive vice president of the American Council of Life In-
surance, and as you know, we are a national trade association rep-
resenting over 600 legal reserve life insurance companies, and to-
79-871 0-94-2
30
gether they write about 90 percent, over 90 percent of the life in-
surance in force.
Accompanying me is Dick Minck, another executive vice presi-
dent of ACLI, and an actuary with many years of experience in the
life insurance and annuity business. We are very pleased to be with
you this morning, and on behalf of our member companies, do ap-
preciate the opportunity to be here, and your invitation.
We both think policyholders in our member companies have ben-
efited from the attention you and Senator Metzenbaum have given
to the important subject of assumption reinsurance. The National
Association of Insurance Commissioners, as you know, looked at as-
sumption reinsurance. We heard that here today closely, and they
have developed a model bill, model legislation which will be consid-
ered by States.
The attention has been useful, because it has encouraged us to
consider the appropriate balance between the several interests in-
volved. In general, the NAIC assumption reinsurance model act has
reflected what we think is a balanced and meaningful and appro-
priate way.
It allows companies to use assumption reinsurance to leave a line
of business in which they may not be able to compete effectively.
It safeguards policyholders' current rights, and it preserves the reg-
ulators' abilities to move business from financially troubled insur-
ers to a sound one.
We do think that balance is important, and we certainly have
some areas where we may want to strengthen this model or have
some differences with the model.
At this point, I would like to call on Dick Minck to provide some
background on assumption reinsurance.
Senator Bryan. Mr. Minck, I am sorry the table is not set up
more conveniently. If you would pull that microphone as closely as
possible, we do want to get the benefit of your testimony.
Mr. Minck. Mr. Chairman, thank you. There are two general
types of insurance. One is described in the vernacular of the trade
as indemnity reinsurance, which has been in existence for — well,
both have been in existence for many years.
The question might — and under indemnity reinsurance, an insur-
ance company will cede coverage to a second insurer and will be
paid by that second insurer based on the claims that eventually
emerge. However, under indemnity reinsurance, the first carrier,
the one from whom the policy was first purchased, will be respon-
sible for paying the claims. The second carrier will reimburse the
first carrier. In effect, the first carrier will have been acquiring in-
surance for itself fi"om another source.
Now, why would you need something different than that, as-
sumption reinsurance, and there are two areas that you generally
find it. One is when a company is in trouble, where the company
will not continue in existence, will not be there to pay claims, and
either the insurance company itself or a regulator has found an-
other company that will assume that business as a block.
In that circumstance, it is sensible for the policyholders involved
to come to the new company for payment of claims, because that
is the only company that will be there.
31
There is a second circumstance that has come about more fre-
quently in recent years, because of the great competition that has
been generated under the economy we have Hved with since the oil
crisis and high interest rates first appeared in the late seventies,
and that is people changing their types of policies, the operations
they are in, offering new kinds of contracts, and finding when they
got down there they were not competitive, that there were other
companies that did a lot better, and in those cases the companies
decide that they had better get out of that business and let some-
one who can do it more effectively do it.
Now, you sometimes run into that in other lines of business such
as property and casualty. I, for example, had an umbrella coverage
with a company for 20-odd years and got a letter from them a
month ago saying they were not going to renew it. Thev were no
longer competitive in that line. They were going out of*^ business,
and they suggested I find another company, and so I found another
company, and that is perfectly reasonable.
But with life insurance and annuity contracts that option is not
open. They are long-term contracts. They are renewable. You can-
not bring them to an end on an anniversary, so that the companies
involved find someone who will do the business better and sell that
block of business to them.
Now, those are the two principal reasons that you find most of
these assumption reinsurance contracts going, two important rea-
sons, and that is why they have it, and we are concerned that
whatever we do to straighten out the problems that have been
identified will not make it impossible to write assumption reinsur-
ance in those cases where it is needed.
Let me turn it back to Mr. Mica.
Mr. Mica. As I close, Mr. Chairman, let me make a few com-
ments, and as I said earlier, the intention on assumption reinsur-
ance given by you and Senator Metzenbaum and NAIC has been
very fruitful. It has revealed, as was indicated here today, some
problems with some particular transactions, as well as some areas
of serious mutual concern, some of what information the policy-
holder needs and can reasonably use when a block of policies is
being sold.
Our companies care not only about the ability to pay future
claims, but we have to and must care about the concerns and feel-
ings of our customers. Our companies sell promises of future per-
formance, and that means that they must have and we must act
to have the public's confidence ana respect, and I surely under-
stand the comments that Senator Metzenbaum has made here
today. Reasonable men do have differences of opinions on ap-
proaches, however.
The increased attention on the assumption reinsurance trans-
actions has received has given us an opportunity to discuss those
problems and concerns that have arisen and take some steps that
enhance the public's confidence in our industry and in State regula-
tion. We think that NAIC's model act attempts to strike an appro-
priate and reasonable balance of the interest of all parties con-
cerned.
I might note here that I was informed this morning that some
44 States, 44 States now require the insurance commissioner's of-
32
fice to be notified before any transaction on assumption reinsur-
ance can take place, so that, too, the States have also come to ac-
knowledge the concern on these problems.
The bill, as I am discussing here, the model, it allows continued
use of assumption reinsurance subject to many limitations and re-
strictions. It clarifies policyholders' rights without diminishing
those current common law rights. One of those common law rights
that I was informed of is that the most recent court decisions allow
individual policyholders to hold both companies liable in the case
of assumption reinsurance, the ceding company and the other com-
pany. It also gives additional regulatory oversight and control by
requiring, as I just indicated, regulatory approval of the trans-
actions.
As States enact the approaches contained in the model act, pol-
icyholders, regulators, and companies will benefit.
I see that my time is up. I will try to summarize a page or two
here and essentially say that we do have some concerns about the
utilization of the Department of Commerce, and certainly a Federal
regulation. The need to create a new Federal bureaucracy and
move it to a Federal level causes a great deal of concern, when, in-
deed, many feel that this can best be addressed as a part of an
overall system at the State level.
Let me make a comment on the rating agencies, and even the
disinterested third party. We do have some questions about the dis-
interested third party. Obviously, that party would either have to
be unpaid, or paid by one or the other individuals involved in the
situation, and we are not sure how that would work.
The other is the highest possible rating. There is a requirement
that it move to the highest possible rating. These commercial rat-
ing services are available, but certainly a close review would indi-
cate that the insurance industry, although one of the stronger in-
dustries in ratings and the financial services area, does not have
a large number of companies rated AAA. Ultimately, it could re-
sult, we feel, in a very concentrated area where these policies
would be shifted, and ultimately could be very difficult and cause
greater problems for the consumers.
I have noted here in my testimony that only a few companies buy
Standard & Poor's, Moody's, Duff & Phelps, and very few have
rated A-plus or better. Most companies are currently rated only by
A.M. Best or by qualified ratings of Standard & Poor's that go no
higher than what we call the BBBQ rating.
In essence, as currently written, the legislation would bar all ac-
tivities of assumption reinsurance for the vast majority of compa-
nies, and as was indicated in testimony earlier, there are a number
of good reasons to move these policies quickly, particularly when
you have a company that is facing problems.
I would just say in conclusion there are other points raised in my
testimony. I would be happy to answer questions on them, but we
do oppose the legislation on several grounds as it is currently writ-
ten, or even if it were modified. One of the most basic, obviously,
is the question that has been here for many, many years, is should
it be State, should it be Federal, and if it is Federal, is that dual
regulation, and would dual regulation work.
Thank you.
33
[The prepared statement of Mr. Mica follows:]
Prepared Statement of Dan Mica
My name is Dan Mica. I am an Executive Vice President of the American Council
of Life Insurance, or ACLI. The ACLI is a national trade association of 616 legal
reserve life insurance companies who together write about 90 percent of the life in-
surance in force in the United States. Accompanying me is Dick Minck, who is also
an Executive Vice President of ACLI, and an actuary with mane years of experience
in the life insurance and annuity business. We are personally pleased to be asked
to be with you this morning to share some of our perceptions, and the members of
ACLI appreciate your invitation.
We think both policyholders and our member companies have benefited from the
attention that has been given to the important subject of assumption reinsurance.
The National Association of Insurance Commissioners has, as you know, looked at
assumption reinsurance closely and has recently developed model legislation which
will be considered by the states.
The attention has been useful because it has encouraged us to consider the appro-
priate balance among the several interests involved. In general, the NAIC's Assump-
tion Reinsurance Model Act has reflected that balance in a meaningful and appro-
priate way. It allows companies to use assumption reinsurance to leave a line of
Dusiness in which they may not be able to compete effectively; it safeguards policy-
holders' current rights; and it preserves the regulators' ability to move business
from a financially troubled insurer to a sound one. We think that balance is impor-
tant.
Now, let me ask Mr. Minck to provide a little background on assumption reinsur-
ance.
THE NEED FOR ASSUMPTION REINSURANCE
Assumption reinsurance is the sale or transfer of a block of existing insurance
policies from one company to another. It has little in common with most reinsurance
contracts, sometimes described as "indemnity reinsurance." In indemnity reinsur-
ance, the insurer that sold policies is still directly obligated to pay claims on those
policies, but will recover some of the costs from another insurer — a sort of insurance
for insurers.
Under indemnity reinsurance, the first insurer is directly liable to the policy-
holder or to the beneficiary, and the second insurer is directly liable only to the first
insurer, not to the policyholder. The policyholder is not directly involved with the
agreement. The first insurer is known usually as the ceding insurer, and the second
insurer is usually known as the assuming insurer because it has assumed an obliga-
tion to reimburse the ceding insurer for its losses.
By contrast, in assumption reinsurance, the assuming insurer agrees to be di-
rectly liable to the policynolder. The ceding insurer ("seller") and the assuming in-
surer CTDuyer") want the policyholder to accept the buyer in substitution of the sell-
er. One basic question is: which company is liable to the policyholder? Under cur-
rent law, in many situations both mad be, depending on the facts and cir-
cumstances. Moreover, Policyholders have substantial remedies to enforce those
rights.
Many observers mad have been confused by the Practical and legal diflerences be-
tween indemnity reinsurance and assumption reinsurance. They mad also have un-
derestimated a policyholder's current legal rights and remedies. Clarifying policy-
holder rights is an important and laudable goal, but its pursuit should not deprive
companies and regulators of a useful tool like assumption reinsurance.
In the last two decades, certainly since interest rates skyrocketed in the late
1970's, the life insurance and annuity business has become considerably more tur-
bulent than it was when 1 started out in the industry. Competition has always been
fierce, but-margins have never been thinner. The industry is constantly designing
new products, and existing products are supplanted. A related result has been that
consolidations have increased, in some part to achieve needed economies of scale.
That is one of the major reasons why assumption reinsurance is a necessary busi-
ness tool for our industry.
Life insurance and annuities are, in particular, very long-term contracts that can
continue in force for mane decades. Before death benefits or annuity benefits become
payable, mane unforeseen events mad occur. As businesses, life insurers must adapt
to economic circumstances unforeseen when policies were issued. That is why insur-
ers need to be able to sell or transfer a block of existing policies. Assumption rein-
surance can allow the industry and individual insurers to accommodate and to ad-
34
just to economic changes. Its use can promote economies of scale, reduce barriers
to market entry and exit, and promote efTicient allocation of resources.
An example of changing economic circumstances might be a small life insurer
with a block of universal life insurance. Assume that the insurer designed and sold
a product that was competitive. Suppose that its costs for maintaining investment
management and systems staffs rose beyond what it had projected and were con-
tinuing to rise while demand for the product was slackening. What would an insur-
er's options be in such a situation?
The insurer could retain those policies and pay those expenses, of course, but the
result would be a decreasing number of policyholders who would bear increasing
costs. That would be bad for the policyholders. Another option might be for the in-
surer to try to maintain the level of charges to the policyholders by using up exist-
ing surplus. That might work, at least as lone as the suiplus lasted, but it is obvi-
ous that such an option would eventually be bad for pwlicyholders.
A third option for the insurer might be to sell or to transfer the block to another
insurer that has already achieved economies of scale in administering its own uni-
versal life insurance line of business. If the transfer is done responsibly and well,
it can benefit the affected policyholders. Their policies would bear lower expense
charges, and possibly receive higher interest crediting rates,' as a result, more poli-
cies would continue in force.
Now, Mr. Mica would like to readdress recent developments.
S. 1989 AND STATES — OUR COMPANIES' CONCERNS
As I said earlier, the attention given to assumption reinsurance by Senator
Metzenbaum and the NAIC has been fruitful. It has revealed problems in a few par-
ticular transactions, as well as some areas of serious mutual concern, such as what
information the policyholder needs and can reasonably use when a block of policies
is being sold.
Our companies care not only about their ability to pay future claims, but also for
the feelings of their customers. Our companies sell promises of future performance,
and that means they must have the public's confidence and respect. The increased
attention assumption reinsurance transactions have received has given us the op-
portunity to address those problems and concerns that have arisen, and to take
some steps that should enhance the public's confidence in our industry and in state
regulation.
The NAIC's Model Act attempts to strike an appropriate and reasonable balance
of the interests of all concerned parties. Although we have had concerns over some
details of the Model, it allows the continued use of assumption reinsurance, subject
to mane limitations and restrictions. It clarifies policyholder rights, without dimin-
ishing those current, common law rights. It also gives additional regulatory over-
sight and control by requiring regulatory approval of the transactions. As states
enact the approaches contained in this Model, policyholders, regulators, and compa-
nies will benefit.
The overall regulation of the business of insurance lies with the states, and we
believe that the current state regulatory system is best situated and equippjed to
handle assumption reinsurance transactions. S. 1989 incorporates many of the pro-
visions of the NAIC Model, but it would single out the regulatory jurisdiction over
assumption reinsurance transactions and transfer it to the U.S. Department of Com-
merce, with the Secretary of Commerce charged with promulgating regulations. De-
spite the preemption contained in the bill, the result would be dual regulation of
the companies Involved. To be effective, the regulation of assumption reinsurance
bust be carried out within a total regulatory system. Such regulation cannot be suc-
cessfully carried out in a vacuum. For example, the NAIC Model Act provides for
an important exemption where a state insurance guaranty association is a party.
S. 1989 does not provide for such an exemption. This could hamper and complicate
the current state system of providing continuing coverage to policyholders where an
insurance company has become insolvent. S. 1989 also fails to exempt the transfer
of liabilities under a group policy upon the request of the group policyholder. These
diflerences could cause additional state versus federal conflicts.
In addition to creating the problems inherent in dual regulation, the passage of
S. 1989 could actually hurt policyholders in the lone run. The bill prescribes nec-
essarily untested statutory concepts which would preempt the current common law
that has evolved to protect policyholders. Most of the decisions in cases where a
transferring insurer did not obtain informed positive consent from policyholders,
and where the assuming insurer became insolvent, have held the transferring in-
surer liable.
35
In addition, S. 1989 contains a number of provisions that would make it more dif-
ficult to use assumption reinsurance. One example is the requirement that implied
consent cannot take place for three years, even if a policyholder has paid premiums
to the new company each month for twelve months (or twenty-four months). A sec-
ond example is the requirement of finding a "disinterested" third-party exoert to de-
termine that the transfer is fair and in tne best interests of the policyholders; this
would be difficult if the expert must be unpaid in order to qualify as "disinterested."
Another provision of S. 1989 that would make it difficult to use assumption rein-
surance is the prohibition of any implied consent unless the transfer is to an insurer
with the "highest possible rating^ or with a rating higher than the selling insurer.
The "highest possiole rating" requirement would l)e too restrictive since there are
verb few companies rated '^AA by S&P, Moody's and Duff and Phelps, and verb
few rated "A++" by A.M. Best. Most companies are currently rated only by A.M.
Best or by the "qualified" ratings of S&P that eo no higher than BBBq. Thus, S.
1989 would effectively bar the vast majority of U.S. life insurance companies from
ever a effectively completing the transfer of blocks of business due to the near im-
possible requirement of receiving a written positive response from each policyholder.
In conclusion, we urge you not to mark-up this bill or and modified version of it
that would preempt state law and lead to a dual system of insurance regulation,
but rather to allow the states to address this matter on the basis of concepts con-
tained in the NAIC Model.
Senator Bryan. Thank you very much, Mr. Mica. As Senator
Metzenbaum observed in his opening statement, he is the essential
part of a quorum that needs to be convened at another important
committee hearing, and I am going to yield to him first to ask some
questions, and then I will follow up.
Senator Metzenbaum.
Senator Metzenbaum. Thank you very much, Mr. Chairman.
Mr. Mica, I have known you for some years, and you served in
Congress with us, and when you speak, you speak very smoothly,
but when you act, you do not act quite so smoothly, and I am going
to be frank in my opinion.
The insurance industry, and that applies to the ACLI, has done
a terrible job, an indifferent and an irresponsible job in its concern
for its policyholders, particularly those policyholders who are trans-
ferred.
The ACLI opposed the NAIC's model law on policy transfers in
the letter to the NAIC last June. That letter called policy transfers
"a business tool." They are not tools. They represent the financial
well-being of people like this gentleman over here, who woke up
one day and found that what he thought was a solid position with
an insurance company — and he asked for his $30,000 and he did
not get it, and when that happens, it would seem to me that the
ACLI would want to move in and try to be helpful, but you have
not been.
Your position ignores the concerns of the policyholders, and
frankly, I have some real questions as to how you arrive at that
position for some of your companies. You are mutual companies,
many of you, and really you are supposed to be speaking for your
policyholders.
Instead, you forget you have got policyholders, and somehow
some of the company executives are so arrogant they think they
are responsible to absolutely no one. As Mr. Shin of Metropolitan
Life said before my committee some years ago, he said, "We are not
responsible to anyone. We are just responsible to ourselves."
In addition, your letter to the NAIC criticized the NAIC position
because it gave too much, not too little disclosure to the policy-
holders.
36
You also did not like the NAIC proposal to have companies wait
3 years before transferring policyholders without their consent. You
even thought policyholders should be transferred to States in which
the new company was not licensed. How could you advocate posi-
tions such as these and still say you want to protect policyholders?
What in the industry provides policyholders that are being trans-
ferred with essential information to make informed decisions such
as the financial statements of the company, the financial state-
ments reflecting the transfer, the ratings of the companies, and the
statements of what those ratings mean? Would not that be the
right thing to do, Mr. Mica?
Mr. Mica. Well, Senator, first let me start out by the testimony
you mentioned of an executive with a company some years ago. I
personally disagree with that statement, and I will tell vou that I
think that I hope the leadership of our industry would all disagree
with that. We do have a responsibility to the policyholders, and we
should make that clear.
Second, each of the items mentioned in that letter were part of
negotiations that were ongoing about the NAIC model act — for in-
stance, the question about 3 years.
Senator Metzenbaum. But you did write such a letter, though,
you or somebody else.
Mr. Mica. Actually, I was not aware of that letter, but I know
there were negotiations going on. But I know, for instance, the ex-
ample you mentioned, that 3-year waiting period, and I think there
is a legitimate question there. I had just heard a little bit about
this in the last few days.
The question was raised when a policyholder's policy is trans-
ferred, if that policyholder pays his premium or her premium for
1 year, is that enough for implied consent? 2 years, is that enough?
3 years, 5 years, 10 years?
How many years does the person have to pav for you to at least
feel that they have accepted the transfer, and the debate was at
the time, should it be 2 or 3 years? That was the locus of that par-
ticular question.
I do not recall each of the ones there, but again, those were posi-
tions that were being taken during negotiations on the legislation.
To date, there are still other areas that I think we have disagree-
ment and other areas we have full agreement with the NAIC, but
I think that it does show, if you will, that we do not always have
an agreement, or they do not roll over for the industry.
Senator Metzenbaum. Let me just tell you what you wrote in the
letter — well, Carolyn Cobb wrote the letter — but she said, "Our
members feel that the common law currently more than adequately
protects policyholder interest."
I know damn well that is not the fact. Common law does not pro-
tect the policyholder interest. Ask this man over here.
She goes on to say, "We think this model will effectively elimi-
nate assumption reinsurance as a business tool." Now, she is the
managing counsel of the American Council of Life Insurance; and
she goes on to say, "The proposed 36-month window is an unwork-
able timeframe for implied consent."
And she was not just writing on her own; she wrote copies of it
to a number of other people.
37
Mr. Mica. Well, I can comment on the common law aspect, and
that is something I did ask about, also.
It appears — and it is my understanding under more current court
decisions the last few years — the courts as they are ruling on as-
sumption reinsurance, as I understand it, are now saying that you
cannot do much of what happened in this situation with the first
witness; that either company or both companies will be liable.
If you go to the company that has become insolvent, then you can
go back to the original company.
Senator Metzenbaum. I am not aware of that being the fact.
When Security Benefit Life— Security Benefit Life of Kansas — was
transferred to Life Insurance of Pennsylvania, an unrated company
now failed, they did not pay off until some of us in Congress
jumped up and down; and finally they decided to pay off.
W^ien American Life and Casualty, which had an A-plus rating,
was transferred to Guarantee Security Life of Florida, unrated and
failed, the policyholders were left high and dry.
I do not know if they ever subsequently collected when Capital
Life of Colorado, A-plus rating. Mutual Security Life of Indiana, C-
plus; when Reserve Life of Texas, A-plus, the National Financial
Insurance, C-plus; a whole slew of other transfers.
Are you still going to sit there and tell me the industry is pro-
tecting the policyholders?
Mr. Mica. Let me just restate again, Senator, it is absolutely,
without a doubt, in our interests to do everything we can to see the
situations that occur like they did to the gentleman at this table,
do not occur.
Senator Metzenbaum. Tell me one instance in which ACLI ever
intervened in a matter of that kind. Maybe in Security Benefit
Life?
Mr. Mica. Well, I can tell you one I just realized this morning.
It did not dawn on me until I was looking over this that I, myself,
held a policy from a major top-rated company, six policies. Inciden-
tally, one of those policies was transferred just before that company
went bankrupt. And I now have a policy with another company
that is viable.
And so the ceding took place, in my case, just the opposite.
Senator Metzenbaum. The company that you bought the policy
with went bankrupt, is that what you are saying?
Mr. Mica. The company I bought the policy with went insolvent.
You know the name of it. And it turned out that they had ceded
the policy to a company that I do not think — I have not checked —
had a rating as high as the company that I purchased it with. But
I have ultimately benefited from that business tool, if you will.
Mr. MiNCK. Just as a footnote on that: The company that Mr.
Mica refers to sold a large block of its business through one of
these assumption reinsurance businesses — in fact, its group busi-
ness. And as a result of that, there were much more in the way
of funds available for the other policyholders. They would have had
much less, if they had not been able to do it in a very timely fash-
ion.
Mr. Mica. Senator, it is a problem, and needs to be addressed.
We all agree on that. I think there are two basic questions that
38
come into play here; and I think this is going to go on, as long as
the debate goes: Should it be State? Or should it be Federal?
And then, some questions on detail: Should it be 24 months? 36
months? Informed consent: Does that mean, if they signed the doc-
ument, does that mean they read the document? In other cases
where they are required under various insurance regulators to sign
something, indicating that they have read something, we found
that after they have signed it they still have not read it.
So, there is room.
Senator Metzenbaum. Mr. Mica, have you ever tried to read an
insurance policy? I want to tell you, I was a coif graduate of law.
I was a very good lawyer, headed up my own law firm. I look at
those insurance policies, with all that fine print, and it moves over
and it usually says, "So and so, and so and so accept, as provided
in paragraph C-l(a)," and I go over to C-l(a) and then it provides
some exception, "except as provided in paragraph F-2." By the time
I get about one-third of the way through, I throw the policy aside.
Mr. Mica. You know. Senator, I asked that question when I first
came with the industry some 4 or 5 years ago, and said the same
thing, that, "I really do not read my policies; I cannot. And let us
talk to some of our insurance lawyers, and see how we can do a
better job."
And what I came to conclusion was, and what they indicated to
me in many, many instances, they say to me and others who work
with the legislature, "If you can change the laws in a way that they
clearly delineate who has which right and which does not, we can
change our policies."
But, because of so many legal decisions, court decisions, and so
many laws that we have to deal with, we have to write policies
Senator Metzenbaum. If you tell Senator Bryan what you need
changed, then he will take care of that.
Mr. Hunter, give me your view as to whether or not the NAIC
proposal moves far enough, or whether it provides enough protec-
tion; and in your opinion, what date all 50 States will have con-
cluded passage of the legislation.
Mr. Hunter. Well, first of all, it is impossible for me to predict
when 50 States might pass legislation. My best guess would be,
maybe never.
Senator Metzenbaum. Maybe never?
Mr. Hunter. Yes, because there are a lot of model bills that
some States do not enact; so it is hard to predict when 50 would
enact. I think pieces of it could get enacted, but in terms of actually
the model bill, I would say, probably never. And I listed in my tes-
timony some problems I had with it.
I thought more than two financial ratings should be involved. I
thought that there should be written consent fi-om the consumer;
and that the payment of premium to an assuming insurer con-
stituting consent was, I thought, inappropriate.
Senator Metzenbaum. Mr. Eliades, you were out in the cold for
a while; and apparently came back in. But did you ever get covered
on the $30,000 you expected? Or did that just go by the boards?
Mr. Eliades. I have not received a penny in receivership. Yes,
I hope at some point in the future to receive some of my money
39
back. I expect to get something back, but, I do not know how much
it will be nor when. At this point, I have not received anything.
And sir, may I comment on the idea of whether the insurance in-
dustry should be State-regulated or federally regulated.
Part of the problem is, there are 50 States and 50 sets of regula-
tions. If they want to simplify the process, then let the Federal
Government regulate the industry — with one, consistently applied
set of rules, across the Nation. As I said in my testimony, I do not
generally favor Federal regulation of the private enterprise system;
but I do think that the arrogance of the insurance industry is out-
rageous and out of control — they do not know how to behave nor
treat people. Federal regulation would simplify the process for
them and clear up a lot of confusion and arrogant behavior. Fed-
eral regulation would make the rules consistent throughout the 50
States.
As to whether or not informed consent should be 3, 4, 5, or 6
years, it was 6 years before my policy was sold, without my in-
formed consent. And 4 more years passed, before I found out the
acquiring company was in bankruptcy and I was not going to get
anything.
I do not think that there should be any 3, 4, or 5 years before
the company can transfer funds without informed consent. I think,
at any point in time, a policyholder should have the right to decide
what happens to his money; whether it is transferred to another
firm, or what.
I do not believe that the insurance company should have that
right, to make a transfer decision without giving us information on
the financial strength of the potential acquiring company. For as
long as they have our money, we should be able to say "No, I don't
want my money transferred to another company."
Senator Metzenbaum. Mr. Foster, you have heard Mr. Eliades.
He is stuck, $30,000 plus interest that he has not been receiving.
NAIC. Any thoughts about that? What can be done? What should
have been done?
Mr. Foster. No, but I would be happy to speak as his insurance
commissioner, if he now lives in Fairfax, VA. I want to get his card,
and give him my card before I leave. Because there may be some-
thing we can do. It depends on the nature of these contracts, and
the extent to which there is or is not guarantee fund coverage.
I took very careful notes, but I cannot conclude from my notes
if there is or is not. But he is a resident of Virginia, and I would
be happy to lend the assistance of my office to help him. Because
there is no excuse for what happened to him. I cannot excuse for
a moment any insurance company transferring a policy without
any notice to the policyholder.
Senator Metzenbaum. This is obviously an intelligent man. He
headed up a trade association; he speaks well in making his pres-
entation. And he and, I would guess, many hundreds of thousands,
perhaps — I do not know how many — were all left out in the cold.
And the insurance commissioners are not doing anything for him.
He writes the insurance commissioner; and the insurance commis-
sioner tells him to sell his home and go broke, before he can
40
Mr. Foster. I cannot respond; but I will check into why that took
place in Texas and Illinois. I do not know what the circumstances
were there.
I know, when you are a receiver for an insurance company, you
oftentimes have hardship provisions that allow for the release of
funds to specified policyholders. We had it with Fidelity Bankers
Life Insurance Co. We did not require that a person show us they
had sold their primary residence, as an indication.
So, I would be happy to check into that, and see if I can give any
assistance to him, dealing with those two States.
Senator Metzenbaum. I would hope, in your doing so, you would
also find out why — was it Florida you were in?
Mr. Eliades. Yes, sir.
Senator Metzenbaum. Why Florida — which really at this time
has a strong insurance commissioner who just took on Met Life in
a real out-and-out battle that I am sure you all know more about
than I do; but, as I see it, did one hell of a iob. And so, my guess
is, he Nvas not the commissioner at the time tnis occurred.
Mr. Foster. Well, he said 1987. My guess is, back in those days
Florida, like Virginia, did not have the law we have on the books
today. Our law now prohibits transfers without policyholder con-
sent.
Senator Metzenbaum. Just let me ask: Can there be implied
consent? Or is it written consent?
Mr. Foster. Our statute right now just says "consent." We put
this on the books, frankly, because as you know, we took some time
to get input from all parties on our NAIC model act. You provided
input, as did others; and I thought, as the chair of the committee,
it was important to take, if need be, 3 more months or 6 more
months.
We did not wait, in Virginia. I said, "Let us put a law on our
books right now," which was a year ago, prior to the NAIC model
act being adopted. But I do think now, in fact I know, with the
model act on the books we will go by it. But it will be express con-
sent. That is what we believe the statute currently means, and that
is how we will interpret it.
Senator Metzenbaum. Mr. Chairman, I think I have imposed
upon your time enough. I think that — I appreciate greatly your
support and your concern on this subject; and look forward, about
the third day, we get back to passing our legislation.
Senator Bryan. Thank you very much. Senator Metzenbaum. I
think the questions were illuminating, and I am going to follow up
on some of them. I know your staff is going to be able to remain
after you leave, for another hearing.
But once again, I appreciate your interest and your support.
Senator METZENBAUM. Thank you very much.
Senator Bryan. Thank you very mucn. Ms. Griffin, let me begin
with a question for you. I have a baseline question that I am a bit
confused on.
Under the common law, setting aside for a moment the insurance
contract, an obligor cannot extinguish his, her, or its liability by
transferring that obligation to another party. Another party may
assume that obligation, and you may indeed have a third-party
beneficiary arrangement as a consequence of that; but both the
41
original obligor and the assuming party are legally responsible gen-
erally, as an abstract proposition in the common law.
Is there something that is unique to insurance contract law? Or
are there statutory provisions that create an exception to the rule?
Can you give me a very encapsulated view of what the state of the
law is, with respect to the transfer of insurance contracts under the
circumstance that Mr. Eliades had?
Ms. Griffin. Under the circumstance Mr. Eliades had, I believe
he could get recourse through the common law. The common law —
and this has been a little bit confused in the process — the common
law requires consent. The question is: What rises to the level, for
the court, what rises to the level to be considered consent?
If there is a written instrument, such as is in S. 1989, it would
be a question of law. It would be fairly simple. It would be a matter
of summary judgment.
Anything other than that, it is the question of the intent of the
parties; and each case would turn upon the facts of the case. Did
the party know? Did the party assent, by action? Was there some-
thing implicated?
We have had concerns about the NAIC model, because what it
does is, it delineates specific instances where implied consent will
be deemed, so that is taken away. For instance, payment of pre-
mium or something like that. If you go into court, however, you
may be able to say, "I did not intend to do that." But it is automati-
cally assumed under the model.
That is why anything short of written, express written consent,
becomes unclear; and that is why that needs to be the standard.
Senator Bryan. Ms. Griffin, I do not want to get highly technical
here — and I never took a course in my life on insurance law — and
so I am not educated in this.
But ordinarily, unless the terms of the consent would say, in ef-
fect, "And by so consenting, I hereby agree to relieve the former ob-
ligor of his or its liability, ' mere consent alone does not extinguish
the liability, under the common law. Both remain equally liable.
You may, obviously, by the terms of the transfer, effect a nova-
tion in which there is a substitution of liability, generally, under
contract law.
Again, help me a little bit. I understand what you are saying
about the ambiguity that may adhere in consent; but if there is a
consent alone, without the express agreement on the party of the
insured, does the consent alone — let us assume we have a consent.
Let us assume Mr. Eliades consented to the transfer — he clearly
did not — but that the consent did not say, "I hereby agree to relieve
the original insurer of its obligation to me." What would the law
be, then?
Ms. Griffin. I think that would definitely depend on the particu-
lar court; but I understand what you mean. Because mere consent
alone, without the intention to release the obligation, is not suffi-
cient.
But my understanding would be, if there is an instrument that
is specifically said, "I consent to this transfer from Company A to
B," that that would probably be enough to show the intent to re-
lease the obligation.
42
But, an>'thing short of that is totally a question for the
factfinder. It is a case-by-case determination; and consumers really
cannot predict what may happen in the court. That is why, again,
I go back to this — express consent will provide a real level of pre-
dictability.
Senator Bryan. I do understand that you can have the litigators'
full employment act by, you know, what act or inaction constitutes
consent; and that is something that is clear, from the testimony.
Mr. Foster, under the model act that you all have, does it require
the insurance commissioner to make an affirmative finding that
the transfer is in the best interest of the insured?
Mr. Foster. Yes, sir. The model act has standards that will give
guidance to the insurance commissioner.
Senator Bryan. I know you may have some standards; but does,
in effect, the standard require a conclusion on the part of the insur-
ance commissioner that "the transfer is in the best interest," or at
least, "the insurance commissioner believes?"
Mr. Foster. That is correct. We would have to come to that con-
clusion, that it is in the best interest of the policyholder.
Senator Bryan. And under the model act, notice is required, as
I understand from the testimony here. What is the form of that no-
tice?
Mr. Foster. It is not that dissimilar from the notice that would
be required in the Federal law. Now, there are certain things
that — for example, we have a 2-year, 24-month to notice; and yours
goes beyond that, obviously.
Senator Bryan. So, this is a written notice?
Mr. Foster. That is correct. And it would include, as I recall, 5
years of financials; 5 years of at least two rating service ratings;
3 to 5 years, I forget which it is, specifically, of the company's bal-
ance sneet that the company is going to, and the one that, the
ceding carrier.
It is all meant to be — frankly, we tried to strike a balance at the
NAIC committee, of providing enough essential information to the
policyholder, without overkill or sending so much information that
a typical policyholder — and we all, unfortunately, have to attempt
to put ourselves in that person's shoes. How much is too much?
And how much is essential?
And so, we tried to strike balance; and there were no negotia-
tions between the NAIC and ACLI. I must have missed that, be-
cause I was involved for 2 years.
We had public meetings; we took public comment. Ms. Cobb and
others sent letters to our task force. We considered those letters.
We got a letter from Senator Metzenbaum and others.
In the end, we tried to weigh in the balance how much the pol-
icyholder needed to get, and ought to get, to make an informed de-
cision; and I think we struck a reasonable balance. That is not to
say it is perfect, or not to say that we should not add something
here or there.
Senator Bryan. Mr. Foster, what type of consent does the model
act contemplate?
Mr. Foster. Like your Federal bill, express consent.
Senator Bryan. Express consent. So, the consent must be in
writing, I take it?
43
Mr. Foster. Well, it has got to be express. It is clear in the two
notices that you got the right to reject the transfer, much in the
same way and in similar language; the Federal bill is along the
same lines.
Senator Bryan. Let me press you forward here. Staff has just
provided me with a copy of the notice requirement under the model
act.
At least, under our numerical structuring, it is on page 3 of the
notice requirements. I do not know whether ours if paginated with
your own listing.
But again, it does not appear to me just in a cursory reading of
this that, in fact, express written consent is required. Direct my at-
tention, if you will, Mr. Foster.
Mr. Foster. In the same way, nor does your Federal bill require
this consent.
Senator Bryan. And I am not suggesting what we have crafted
is a model to be held out to the world. There may, indeed, be some
adjustments that have to be made with respect to some clarifica-
tion and some concerns, frankly, that are practical impediments
that we may want to take a look at.
So, yours then, does not require an express written consent?
Mr. Foster. Let me respond to that, because I know the person
sitting on either side of me took the position then — and probably
they may still today, I do not know — but Ms. Griffin and Mr. Hun-
ter at that time, and others, suggested anything short of outright
positive consent was not enough for consumers.
That weighed very heavily on me and, I know, other commis-
sioners on that task force. What should we do, to be acting in the
best interest of policyholders? And certainly, there was unanimous
agreement from Day One, that no Virginia resident, Texas resi-
dent, any resident, should ever find their contract transferred to an
unlicensed carrier in their State, and risk guaranty fund coverage
being jeopardized.
In the same way, no contract should ever be transferred, without
notice given and some kind of opportunity for the policyholder to
consent expressly to it.
We did end up coming down on the point of stopping short of
positive consent; because I believed then, and I believe today, posi-
tive consent would prohibit and eliminate assumption reinsurance
agreements. I could not bring myself to conclude that, as State in-
surance regulators, I should be recommending to my Legislature
that it should be contrary to public policy for insurance companies
to transfer blocs of business.
I believe that it was appropriate, so long as it was proper and
looked after consumers; and as long as the insurance commis-
sioners office, now Commissioner Hunter's office, and others looked
at it, applied it against standards, and say, "You have to have some
provision for consent. You have to publish information to the pol-
icyholder. And, in the end, the insurance commissioner is going to
review it."
And I think that is important to a resident of Texas, if he gets,
in his package, an indication that Commissioner Hunter's office has
looked at it. I would rather go with that route than I would an out-
right prohibition.
44
Senator Bryan. Well, let me just tell you what troubles me about
the approach. Our legislation — and I am not suggesting that it is
a model — but our legislation breaks it down into two categories.
And it says, first, there shall be a category of prohibited trans-
fers, and says that it requires express consent. That is the premise.
And then we go into an area that will be, perhaps, more trouble-
some for Ms. Griffin, and Mr. Hunter has raised some concern, in
which we describe circumstances in which that consent can be im-
plied. And among those would be a length of a period of time.
But the premise is that it requires express written consent. I do
not find that in the model act, and if I am misreading that, please
share it with me.
Mr. Foster. No, it is not in the model act; nor do I find it in your
statute.
Senator Bryan. Let me read it: "Except as provided in subsection
B, no insurer shall enter into a transfer agreement, or transfer a
contract of insurance pursuant to a transfer agreement, without
the written consent of the policyholder or beneficiary of the policy-
holder."
Now, that is the primary predicate. I recognize
Mr. Foster. But then, read section B, Senator. It then sets out
the same kind of
Senator Bryan. Yes, I understand that. But the philosophical ap-
proach is quite different. I mean, what we are saying in the first
instance, there should be written consent. Then, "We recognize that
there are circumstances under which the law can imply consent."
Mr. Foster. Well, I am not sure the average policyholder gets
the benefit of these five lines in Federal law when, in the end, the
result is the same. The result is, their contract may be transferred,
if they fail to object.
Maybe I just have not focused on the importance that a policy-
holder in Virginia may place on those five lines in the Federal law;
when, in the end, there are clear exceptions in the next section.
Senator Bryan. I would simply say I find some ambiguity in the
approach. I find some concern about that, and the exceptions I
think are clearly in a different context as I find them in the model
act. But let me not belabor the point, because we have got another
hearing.
Mr. Hunter, you have indicated some things that you find about
the proposed legislation that you feel that we ought to take a look
at and to correct, and we can pursue that perhaps in follow-up
writing.
Specifically, in addition to the fact that there is no assurance
that the model act will ever be passed by all the States — I think
all of us understand that that is a matter up to each State legisla-
ture, and they can take what parts they want and discard what
parts they want or simply reject it and say we have got something
we like better — encapsulate for me your primary concern with the
substance of the model act. Aside fi-om the fact that it is not uni-
form in the sense that it can compel all States, what would be the
two or three items that give you the greatest amount of heartburn?
Mr. Hunter. I think I tried to list them in the testimony. First
of all, the purpose of the NAIC Act it savs is to provide for the reg-
ulation of the transfer and novation of contracts of insurance by
45
way of assumption reinsurance, compared to the purpose of your
act, which is to prohibit the transfer and novation of a contract of
insurance without the prior informed written consent of the poHcy-
holder. That is the basic difference.
Senator Bryan. Yes.
Mr. Hunter. And I am hearing the debate about whether you ac-
tually accomplish that, but if your intent is going to be carried out,
then that is what I think should be the intent that should be car-
ried out. And then there were some technical things about numbers
of ratings and so on that I have listed in my testimony, but that
is the essence.
Mr. Foster. Mr. Chairman, could I comment on Mr. Hunter's an-
swer there, because I have got concern that Virginia and other
States have enacted State legislation, and now if you adopt this
Federal legislation it has been suggested by some of the aides to
the authors that this is going to be self-enforcing, that we should
not expect the Department of Commerce to issue regulations, that
the only benefit to be derived by Virginia policyholders is the right
to go to Federal court and sue.
Well, I can tell you, I offer that comment frequently, more fre-
quently than I like, to policyholders. And I say I am sorry, I cannot
help you with your dispute, it is a contractual dispute, go to your
local court. I normally remove the telephone this far from my ear
where I hear from them as to what they think about my suggestion
that the law allows them to hire a lawyer and sue.
So, my concern — although I cannot suggest for a moment that 50
States in lockstep will adopt this model act, I know States are
adopting laws based on the model act. And I have grave concerns
about any Federal bill — and this is where Commissioner Hunter
and I just disagree — that would possibly supersede my State law
or would create a chaotic situation where there is a Federal laws
on the books with no enforcement.
The suggestion that the industry would police themselves and
enforce it against themselves, or even that I would be asked to en-
force a Federal law; I am removed to Federal court enough as it
is, by ERISA, by the Risk Retention Act, and other places where
Congress, in some effort to address a problem, has preempted State
regulation. So, my only point is to please do not put us in that kind
of position here.
Senator Bryan. Mr. Foster, I take it that your concern might be
ameliorated to some extent if you were given the power to enforce
the provisions? We do that, for example, in a number of statutes.
That is not uncommon. I am working on a telemarketing fraud
piece of legislation that has passed out of this committee, it has
passed out of the Senate, in which we give the attorney generals
of the respective State the power to enforce the provisions as they
deal with telemarketing fraud. We even provide some venue op-
tions.
Mr. Foster. That is certainly preferable to a Federal agency
being named and then not enforcing it. I cannot dispute that.
Senator Bryan. I understand the concern. I think you make a
valid point there.
46
Mr. Mica and Mr. Minck, before we conclude, Senator Metzen-
baum questioned you quite extensively; I would not want you to
think that I am neglecting you here in not raising a few questions.
Let me understand, what is really the objection if you agree that
policyholders ought not to be left in the position of Mr. Eliades? I
mean that is an absolutely compelling story beyond any question
of a doubt. That, I mean, nobody in America ought to be left in
such a situation that this gentleman was. We can find no culpabil-
ity in the way in which he handled his business relationship with
the original carrier that he acquired. He had no knowledge of the
transfer, he fell into a situation in which he was in necessitous cir-
cumstances, and now he seeks the benefit of his bargain and he
has gone through all of this and 6 years later, or whatever it is,
you still have not gotten a dime.
Now, that is something that, frankly, I am sympathetic to.
Mr. Minck. Senator.
Senator Bryan. Yes.
Mr. Minck. I think there is nobody I know that would not agree
with what you just said. And, in fact, the parts that we have been
addressing — and there has been unanimity between us and the
NAIC — it has been the need for there to be proper information
given to anyone in his position before contracts are transferred, an
opportunity to say no if they do not want them; certainly an oppor-
tunity to say yes if they want to go to the other company.
And then there comes the question of what do you do with the
large number of people who do not respond to written solicitations,
whether they come from insurance companies or anyplace else in
the world. AJnd it is that, and that is a very real thing, that we are
concerned about. And we want to have a situation where if, for ex-
ample, an individual does not respond to say yes or no but pays
premiums for 2 years, say 24 monthly premiums, we can go ahead
on the assumption that, in fact, he is satisfied and that he is cov-
ered now by the company.
We want to bring these things to closure. We also want to be in
a situation where if a group case transfers and there are, say, 500
employees and the employer says yes, we do not want to be in a
situation where we have to get 500 yeses from each of the employ-
ees, and if they just do not respond then it is not effective.
Senator Bryan. Mr. Minck, there may be some basis to accommo-
date some of those concerns, but I must say I think Mr. Hunter
makes an argument that is pretty strong. There is no assurance,
notwithstanding — let us assume your best of attention and your ad-
vocacy in each of the respective States, that this is going to be en-
acted in every State.
Now, why should policyholders in those States who do not have
such provisions as Mr. Foster and his colleagues have put together
in this model act, why should they be left in a disadvantaged situa-
tion when we can solve that by enacting a statute which provides
for notice, requires an express consent?
Try to work out with you those technical concerns that I think
there may be some common ground to come down on, the group
policy coverage. I understand what you are saying there. I would
want to take a look at that. I think you may make a point there.
47
But I do not understand why there is this aversion to doing some-
thing that has a uniformity across the country.
Mr. MiNCK. Well, again, we are not averse to uniformity across
the country. And, in fact, I think you will find that in order to get
something accomplished in a business like ours, you do not need
50 States to have the same rules. Companies will comply with the
rules as soon as they are in effect in a large number of States. You
have to, to operate something of this sort.
But our problem is seriously along the lines that Commissioner
Foster pointed out. We think that many of these situations are
emergency situations where there is a regulator who is attempting
to save a company or do other things, and we think that you can-
not have diverse centers or different people administering it.
One of the, again, examples that I referred to earlier of a com-
pany that was being rehabilitated, and the sale through one of
these contracts of a very large block of business to everybody's ben-
efit; if the commissioner who was doing that had had to get ap-
proval from the Department of Commerce, I think much of the
value of the stuff that was being sold would have vanished. We just
very much feel that it ought to be the States who are regulating
it as part of their overall regulation.
Mr. Mica. Also, Senator, I might add that — at least expressed to
me as I was preparing to come up here from some of our member
companies, is that the idea of selecting one paragraph or one sen-
tence of company operations, pulling it out and enforcing it at a
Federal level in a vacuum with everything else does create some
concerns, just operational concerns.
Legitimate concerns that here is an agency that would be given
the authority to do only this in this area, the Department of Com-
merce, when there are others in the Congress who say that this
part of the business should be regulated and overseen by the SEC,
this part by FTC, the other part by the Justice Department. You
get into a situation where there is almost no end to it. So, there
are legitimate concerns about how you can operate.
Senator Bryan. Well, I guess, Mr. Mica — I do understand what
you are saying. You are talking about a balkanization of the regu-
lation process, I understand those concerns. But, I mean, we deal
with those in other contexts by saying, in effect, look, here is the
Federal standard. You know, if the State enacts measures that are
equal to or greater than that and are certified, then in effect the
enforcement mechanism is lefl to the State level.
Now, this may not be a model enforcement, but that is OSHA,
that is the way OSHA is handled for example. And I am not here
to defend every promulgated regulation or the enforcement, but
conceptually it is a Federal standard and we say that, look, if the
State certifies that it will adhere to that standard, give even flexi-
bility to go further, then, in effect, that authority is delegated to
the State level.
You do not deal with the Federal enforcement concept, you deal
with the State OSHA regulator, you deal — within the context of
this legislation, you deal with Mr. Foster, Mr. Hunter, their col-
leagues in the respective States. I mean that, then, it seems to me,
addresses the concern that you have about many different jurisdic-
tions involved in regulating your industry.
48
Mr. Mica. Senator, I do not mean to make light of it, but if I go
back and tell my folks it is going to work like OSHA, I am in trou-
ble.
Senator Bryan. And I understand that.
Mr. Mica. They are going to give me a hard time.
Senator Bryan. That in terms of the substance of the content.
Mr. Mica. I understand.
Senator Bryan. But, I mean, in terms of the concept, I mean we
do that frequently at the Federal level, to provide that.
Well, gentlemen and ladies, we thank you very much for being
here. This has been a most informative hearing and we look for-
ward to working with you and your colleagues in the industry, the
private sector, the consumers, and obviously the victims of Amer-
ica. Thank you very much. We stand adjourned. [Hearing recessed
at 4:10 p.m. and reconvened at 4:15 p.m.]
Senator Bryan. The subcommittee will now convene. This part of
this afternoon's hearing is devoted to an examination of the issue
of insurance company redlining.
"Redlining" is defined as the refusal by insurance companies to
service individuals in communities either because of race or resi-
dential location. Consumer and civil rights organizations allege
that redlining is widespread among minority communities. They
further allege that companies are engaged in a number of discrimi-
natory practices, including employing higher underwriting stand-
ards or the outright refusal to service in minority communities. In-
surance industry representatives, on the other hand however, deny
these allegations and suggest that companies' underwriting activi-
ties are based on risks and other business decisions.
While there is no specific legislation that is presently before the
committee, I have scheduled this oversight hearing this afternoon
to ensure that the issue is thoroughly examined. Although the
Commerce Committee staff has been involved in discussions with
various interest groups over the last several months, this is the
committee's first official proceeding on this issue and we have testi-
fying before us today a number of witnesses who will offer some in-
structive insights into this issue.
Joining us first is our colleague from the State of Wisconsin who
has established himself as a real leader in this issue, offering legis-
lation; testifying, I believe, before the Banking Committee. And I
am delighted to welcome him today and to receive his comments
to be made a part of this official record.
Senator Feingold, welcome, and I apologize to you that we fell be-
hind schedule, largely because Senator Metzenbaum's and my
questioning took longer than we needed to. But we appreciate your
patience and forbearance, and are delighted to hear your testi-
mony.
STATEMENT OF HON. RUSSELL FEINGOLD, U.S. SENATOR
FROM WISCONSIN
Senator Feingold. Thank you very much, Mr. Chairman, for
your courtesy and for holding this hearing on the problem of dis-
crimination in the determination of who has access to affordable,
high quality insurance in America, a practice that we all better
know as insurance redlining. Your interest in this subject and your
49
continued leadership and concern about the issues that affect our
Nation's consumers as chairman of the committee's Consumer Sub-
committee is much appreciated, and I look forward to working with
you on this issue, Mr. Chairman.
During this hearing the Senate Commerce Committee will gather
testimony from a diverse group of individuals and organizations
that will describe the extent of the lack of access to affordable,
quality insurance. Of course, this testimony will only reaffirm what
many of us in this room have known for some time. That is because
we already have three decades of research, studies, and reports
compiled on this subject which have again and again reaffirmed the
extent of the problem of insurance redlining.
It is not only disturbing that discrimination continues to exist
today, but it troubles me even more, Mr. Chairman, that our great
city of Milwaukee, WI has received national attention regarding
this problem. In fact, a CNN television report stated that Milwau-
kee is becoming not only famous for beer, but for insurance dis-
crimination as well. This is something we want to change.
Senator Bryan. The former you accept, the latter you reject I am
sure.
Senator Feingold. That is correct, Senator, Yes. [Laughter.]
To address this problem, I introduced S. 1917, the Anti-Redlining
and Insurance Disclosure Act of 1994, which would require insur-
ance companies to disclose information regarding where they write
property insurance. The bill is patterned after the reporting re-
quirements that are already required of banks and thrifts under
the Home Mortgage Disclosure Act.
There are three components which S. 1917 includes which I
think are critical if we are going to have any meaningful measure
designed to address the problem of insurance redlining. I will just
make a very quick statement about each of those three points.
Senator Bryan. Go right ahead.
Senator Feengold. First, it is important that any data collection
and reporting requirements on insurance costs and policies be done
at the most detailed level which is reasonably feasible. For exam-
ple, I happen to think it is preferable to require reporting by cen-
sus tract rather than ZIP code, since it allows for more detailed de-
tection and analysis.
Second, and perhaps most importantly, the collection of data on
insurance losses and claims should also be included in any insur-
ance disclosure initiative. The importance of such data was high-
lighted by the recent compilation of data comparing low-income mi-
nority areas with low-income white areas collected from insurers in
St. Louis and Kansas City by the Missouri Department of Insur-
ance, which showed that low-income minorities, on average, paid
higher premiums for homeowners' insurance than white home-
owners of similar means for comparable coverage even though, Mr.
Chairman, the losses were lower in the minority areas. Without
this data, we may not be able to adequately resolve whether or not
claims that disparate treatment of certain neighborhoods are justi-
fied by greater claims and losses.
Finally, Mr. Chairman, and third, since the collection and disclo-
sure of such data will provide affected individuals and Federal and
State regulators valuable information necessary to enforce our Na-
50
tion's antidiscrimination laws, it should be made available to the
greatest number of communities and individuals as possible.
Although the bill only applies the data disclosure requirements
to a limited number of property insurance lines such as home-
owner's insurance, I also recognize the problem and the need to im-
pose similar disclosure requirements on automobile insurance prac-
tices. The principles that I briefly mentioned before apply equally
to any legislation designed to address the availability of affordable
quality automobile insurance, especially in light of the recent stud-
ies and the lack of access to such insurance for many Americans.
I am encouraged once again to see two Members of the House of
Representatives appearing before a Senate committee on this issue.
Of course, I am referring to Representative Collins and my good
friend Representative Joe Kennedy, who really is the reason I got
involved in this issue. He helped us put together a hearing in Mil-
waukee to highlight it, and mv bill is really a reflection of the work
he started in the House, in the hope that the Senate can hold up
its part of the bargain on trying to deal with this problem.
It is my hope that we can all work together and build upon the
important advances that both of these people have made and con-
tributed to bring to national attention and focus to these practices.
It is important that we not waste all of their efforts and the mo-
mentum they have provided to this issue, and it is critical that we
all make a concerted effort to enact the most stringent legislation
possible during the 103d Congress.
So to conclude, I want to thank the chairman of the entire com-
mittee. Chairman Hollings, and the chairman of the subcommittee.
Chairman Bryan, for holding this hearing, and I look forward to
working with them and the other members of the committee and
the whole Senate, to try to finally address this problem.
[The prepared statement of Senator Feingold follows:]
Prepared State.me.nt of Senator Feingold
Thank you Mr. Chairman, for holding this hearing on the problem of discrimina-
tion in the determination of who has access to affordable high quality insurance in
America — better known as the practice of insurance redlining. Your interest in this
subject and your continued leadership and concern about the issues that affect our
nation's consumers as Chairman of the Committee's Consumer Subcommittee is
much appreciated. I look forward to working with you on this and other important
issues.
During this hearing the Senate Commerce Committee will gather testimony from
a diverse group of individuals and organizations on a subject that strikes at the core
of the ability of many Americans to participate fully in our society by being able
to enjoy that which has come to be known as a significant portion of the "American
dream" — home ownership.
Three decades of research, studies, and reports have reaffirmed the extent of the
problem of insurance redlining that prompted the 1968 National Advisory Panel on
Insurance's description that "Communities without insurance are communities with-
out hope" as well as the inadequacy of state and federal responses to address it.
These studies, as well as testimony and evidence gathered before both the House
Banking and Energy and Commerce Committees, thanks to the efforts of both Rep-
resentatives Joseph Kennedy and Cardiss Collins, have indicated that hundreds of
thousands, if not millions, of individuals and entire neighborhoods continue to be
denied or provided inferior insurance coverage and that insurance redlining prac-
tices are currently widespread throughout the United States.
It is not only disturbing that discrimination continues to exist today, but it trou-
bles me even more so that the fine city of Milwaukee, Wisconsin, has received na-
tional attention regarding this problem. In fact, a CNN television report even stated
51
that Milwaukee is becoming not only famous for beer, but for insurance discrimina-
tion as well.
The disturbing results concerning the occurrence of insurance discrimination re-
leased just two weeks ago by the' National Fair Housing Alliance, which revealed
widespread insurance discrimination in minority neighborhoods in the four cities ex-
amined, including Milwaukee, only adds to this reputation. For me, the implications
of these results are simple it is time for us to act and do all that we can to prevent
the shameful practice oi insurance redlining.
Some will argue that the disparities in the access to and availability of insurance
are solely based on principles of economics and statistically based risk assess-
ments — and not on principles of preiudice. Sadly enough, it appears that this is not
always the case. Take the words of an insurance company district sales manager
from Milwaukee, who was recorded as telling his agents:
"* * * I think you write too many blacks * * ♦ You gotta sell good, solid pre-
mium paying white people * * * They own their homes, the white worics. ♦ * *
very honestfy, black people will buy anything that looks good right now. * * *
But when it comes to pay for it next time. * * * You're not going to get your
money out of them."
This "quit writing all those blacks * * *" prejudicial policy was not only commu-
nicated to agents verbally, but was placed in writing as well. And it has been re-
ported that the manager even showea one agent how to accomplish this goal by stat-
ing that:
"If a black wants insurance, you don't have to say, just tell them, because
based on this kind of policy, the company will only allow me to accept an annual
premium. Do it that way."
Activity of this type that has prompted such allegations of discrimination in the
insurance industry cannot and must not be tolerated anywhere in our society.
To address this problem, I introduced S. 1917, "The Anti-Redlining in Insurance
Disclosure Act of 1994", which would require insurance companies to disclose infor-
mation regarding where they write property insurance, patterned after the reporting
requirements already required of banks and thrifts unaer the Home Mortgage Dis-
closure Act. This information would allow members of the public, regulators, the in-
surance industry, and Confess the means to identify the extent of tne problem and
would assist affected individuals and federal and state agencies efforts at enforcing
our nation's anti-discrimination laws.
There are several components which S. 1917 includes which are critical for any
meaningful measure designed to address the problem of insurance redlining.
First, it is important that any data collection and reporting req^uirements on in-
surance costs and policies be done at the most detailed level which is reasonably
feasible. For example, it is preferable to reguire reporting by census tract rather
than zip code since it allows for more detailed detection and analysis, as census
tract populations are much smaller and homogeneous than many urban zip codes
which often contain nei^borhoods that have a diverse range of economic, racial and
housing stock characteristics, thereby resulting in a "masking" effect for purposes
of statistical analysis. The census tract reporting standard that is required of the
banking industry under the Home Mortgage Disclosure Act should be applied to the
insurance industry as well. S. 1917 takes this approach.
Second, and perhaps most importantly, the collection of data on insurance losses
and claims should also be incluaed in any insurance disclosure initiative. Such data
would be essential for any proper analysis necessary to resolve disputes that arise
involving claims that disparities in the price of insurance between different nei^-
borfioods or groups of people are solely based on loss experience and the associated
risk involved rather than prejudice.
The importance of such data was highlighted by the recent compilation of data
comparing low-income minority areas with low-income white areas collected from in-
surers in St. Louis and Kansas City by the Missouri Department of Insurance,
which showed that low-income minorities on average paid higher premiums for
homeowner's insurance than white homeowners of similar means for comparable
coverage, even though losses were lower in the minority areas. Without this data,
we may not be able to adequately resolve whether or not claims that disparate
treatment of certain neighborhoods are justified by greater claims and losses.
Third, since the collection and disclosure of such data will provide affected indi-
viduals and federal and state regulators valuable information necessary to enforce
our nation's anti-discrimination laws, it should be made-available to the greatest
number of communities and individuals as possible. S. 1917 would require that data
be collected in 150 Metropolitan Statistical Areas.
I am also interested in exploring whether or not the insurance industry should
be required to meet the same requirements that are imposed upon the banking in-
52
dustry under the Community Reinvestment Act. To that end, S. 1917 calls for a
study which would review the feasibilitv of creating reinvestment requirements for
insurers similar to those already applied to depository institutions.
Although S. 1917 only applies the data disclosure' requirements to a limited num-
ber of property insurance lines such as homeowners insurance, I recognize the prob-
lem and the need to impose similar disclosure requirements on automobile insur-
ance practices. The principles that I briefly mentioned before apply equally to any
legislation designed to address the availability of affordable quality automobile in-
surance, especially in light of the recent studies on the lack of access to such insur-
ance for many Americans.
It is important that we place people of all races and ethnic backgrounds on a level
plaving field when it comes to the opportunity to purchase all types of insurance —
including both homeowners and automobile insurance. It is difficult enough these
days to be able to afford to buy a home, and almost impossible to purchase one with-
out homeowners insurance.
It is also a reality today that in order to obtain a job which pays enough for an
individual to save an adequate amount of money to buv their own home, one must
often travel a great distance away from their own neighborhood — often to a distant
suburb where all too often most good paying jobs are now being exclusively located.
Without affordable automobile insurance, access to even these opportunities are es-
sentially denied.
I am encouraged once again to see both Representative Collins and Representa-
tive Kennedy prepared to testify before a Senate Committee on the nature of the
insurance redhning problem and the need for Congressional action to address it. It
is my hope that we can all work together and build upon the important advances
that both of them have contributed to bringing national attention and focus upon
these practices. It is important that we not waste all of their eflbrts and the momen-
tum they have provided to this issue, and it is critical that we all make a concerted
effort to enact tne most stringent legislation possible during the 103rd Congress.
In conclusion, I would like to again thank both Chairman Hollings and Senator
Bryan for holding this hearing and look forward to working with them both and
other members oi this Committee and the Senate towards addressing the problem
of insurance redlining.
Senator Bryan. Thank you very much, Senator Feingold. Let me
assure you that this subcommittee is pleased to work with you.
And I know you have a busy schedule, but I would invite you to
join us here if you are able to stay, and give you an opportunity
to visit by way of any questions you have oi our distinguished
panel.
Senator Feingold. Thank you, Mr. Chairman.
Senator Bryan. I note that we have been joined by the distin-
guished Representative from the Eighth District in Massachusetts,
who chairs the Consumer Credit and Insurance Subcommittee in
the House, previously referenced here by Senator Feingold's testi-
mony, a friend and one that we have an opportunity to work with
on a number of issues and are continuing to work on a number of
issues that we are both very interested in, and hopefully we will
be able to reach a successful and satisfactory conclusion in this
Congress, the Honorable Joe Kennedy. Joe, it is nice to have you
here with us.
STATEMENT OF HON. JOSEPH P. KENNEDY II, U.S.
REPRESENTATIVE FROM MASSACHUSETTS
Mr. Kennedy. Thank you so much. Senator Bryan. I want to par-
ticularly thank you for the tremendous leadership you have shown
on a range of issues involving consumer interests in this country.
Your leadership on interests of consumers, particularly with regard
to matters over the fair credit reporting, have been unparalleled,
and your ability to find ways to get legislation fashioned I think
is a tremendous tribute to your service to our country.
53
And I thank you so much for your interest not only in those
consumer issues, but in one that is much more insidious perhaps.
It is never seen, but it is felt by millions of Americans across our
country, and that is the issue of insurance redlining. This is an im-
portant hearing, and I thank you so much for your willingness to
investigate this. We are in the process of getting legislation passed
on the floor of the House, and we would love to see legislation
passed over here in the Senate this vear as well.
I want to say that we applaud the committee's decision to look
at this very serious problem of insurance redlining. In today's fi-
nancially complex world, insurance is a cornerstone of opportunity.
Without insurance, a consumer cannot get a loan. Without a loan,
that consumer cannot buy a home or start a business. And without
the ability to buy a home or start a business or to acquire other
assets, the consumer is trapped in a world not only of the lack of
opportunity, but in complete despair.
Mr. Chairman, I would ask if I could just submit my statement
to the record and just talk with you about my observations on this
issue.
Senator Bryan. That will be the order. It will be made a part of
the record, and I note that the Congressman has a vote coming up
shortly so I know it has to be abbreviated, but you take it in any
order that you want and when you have to leave we understand.
Mr. Kennedy. Thank you veiy much, Mr. Chairman,.
[The prepared statement of Mr. Kennedy follows:]
Prepared Statement of Mr. Kennedy
Thank you, Chairman Hollings, for inviting me to participate in today's hearing.
It is an honor to appear before you and the other members of the committee this
afternoon.
I applaud the committee's decision to look at the very serious problem of insur-
ance redlining. In today's financially complex world, insurance is a cornerstone of
opportunity. Without insurance, a consumer cannot get a loan. Without a loan, that
consumer cannot buy a home or start a business. And without the ability to buy
a home, start a business, or acquire other assets, the consumer is trapped in a world
not of opportunity, but of despair.
Most of us are lucky enough to find the insurance we need to lead secure lives.
But throu^out the country, millions of people are being denied reasonable insur-
ance for reasons having nothing to do with the risks they pose, but having every-
thing to do with their race, their wealth, and their nei^borhood. The civu rights
revolution that transformed our schools and workplaces has yet to penetrate the for-
tress that is the insurance industry. There Jim Crow is still laying down the law —
separate and unequal. It's wrong, it's Un-American, and it must stop.
Mr. Chairman, if you're African American, or Latino, or Asian, or gay, then Na-
tionwide is not on your side, you're in no hands with Allstate, and unlike a good
neighbor, State Farm is not there. Let's just look at some of the facts that the sub-
committee which I chair found over the course of 4 hearings and ongoing investiga-
tions:
• The California Insurance Group gave maps to agents that crossed out in yellow
ink the African-American, Hispanic, and gay neighborhoods of San Francisco. The
company deemed those areas off-limits for purposes of writing policies. California's
Insurance Commissioner, John Garamendi, sued the company for unlawful discrimi-
nation. Ultimately, he reached a half million dollar settlement, and won a commit-
ment from the company to increase its business in minority communities by $3 to
$4 million over the next 4 years.
• Two weeks ago, the National Fair Housing Alliance announced that it would
press charges against Allstate and Nationwide for discrimination in 4 major cities.
The Alliance found dramatic evidence of discrimination. In Chicago, for instance,
testers found evidence of discrimination in 95 percent of cases examined. And in At-
lanta, where the eyes of the world will be focussed two years from now during the
Olympics, only 2 of Nationwide's 155 offices are located in or near a minority area.
54
In Wisconsin, where the subcommittee held a hearine earlier this year, the
NAACP has recently filed suit against American Family Insurance Company, the
state's largest underwriter of homeowner's insurance, for redlining minority areas
of Milwaukee. One of the company's sales managers was caught on tape making the
following statement — and I quote: "Veiy honestly, I think you write too many
blacks. * * * you gotta sell good, premium-paying white people. ♦ * * very hon-
estly, black people will buy anything that looks good right now * * ♦ but when it
comes to pay for it next time * * * you're not going to get your money out of them.
* * * the only way you're going to correct your [performance] is get away from the
blacks." The agent who was the focus of those comments was later fired.
Mr. Chairman, I'm sure you've heard insurers tell you, as I have, that urban
homeowners are adequately served by state-sanctioned FA.I.R. Plans. In limited in-
stances that may be so. But F.A.I.R. Plans are too oflen poor substitutes for private
insurance. Instead of pooling truly high-risk homeowners, they have become dump-
ing grounds for everyone living in the city, including the people who are good
risks — the people who live in sofid neighborhoods and who take care of their homes.
And F.A.I.R. Plans require people to pay more in premiums for less coverage. A re-
cent study by the community group ACORN shows that urban and minority con-
sumers are paying as much as 270 percent more for F.A.I.R. Plan coverage than
they'd pay for equivalent private insurance. F.A.I.R. Plans aren't fair; they're a rip-
off.
You have probably also heard insurers say that they can't insure urban residents
because losses there are too high. Again, the evidence suggests that this may be a
fUmsy excuse. Missouri's insurance commissioner analyzea 12 years worth of data
collected in white and black areas of St. Louis and Kansas City. The numbers show
that residents of low-income black areas pay more for homeowners insurance and
get less coverage than whites of the same income, even though their losses are less
tnan those of wnites.
All in all, Mr. Chairman, the record suggests a nationwide pattern of discrimina-
tion by insurers against urban and minority consumers. I am pleased that H.U.D.
and the Justice Department have begun to seriously examine the practices of the
insurance industry. But more needs to be done. As the G.A.O. recently reported, we
need more information about who is getting insurance, who's not, and why. and we
need that information in as detailed a form as possible, including census tracts, race
and ethnicity, and loss information. Banks and thrills already produce this kind of
data to comply with the Home Mortgage Disclosure Act. If lenders can do it, then
so can insurers.
Such information will help us shine a light on industry practices, and expose the
truth about redlining once and for all. Those who have nothing to hide have nothing
to fear. Others will receive a much-needed prodding to correct indefensible practices.
Some of us may differ about how best to address the issue of insurance redlining.
But I believe that most of us agree that there is a problem. We must work together
to solve it. The Home Mortgage Disclosure Act and other laws have helped to elimi-
nate discrimination in the banking industry. Now it is time to expand the fight for
fairness to the insurance industry. The days of special treatment for the industry —
whether it be exemption from antitrust laws or from accepted norms of equal oppor-
tunity — must end.
In closing, let me again thank you, Chairman Hollings, for having me here this
afternoon. I would be nappy to answer any questions, or provide any assistance to
you as you continue to consider this critical issue. Thank you.
Mr. Kennedy. This issue I think is a critical one because if we
are serious about ever deaHng with the ultimate problem of racism
in America, we have to deal with the characteristics of racism that
all too oflen surround, I think, the black and brown and yellow peo-
ple of our country. In my own district, about 60 percent of my dis-
trict is reasonably well off and is white, but 40 percent of my dis-
trict is poor, black, brown, and yellow. In those minority portions
of my district the fact is that people cannot own their own home,
they cannot own their own small businesses, and the reason for
that is quite simply the lack of insurance that is made available
and the lack of banks that make loans in the poorest ghettos of
every major city in America.
Now, if an individual cannot own their own home, or if they can-
not own their own small business, it is very difficult for them to
55
build up assets or wealth. Without the ability to build up assets or
wealth, the best schools in America are eliminated from the reach
of their kids. The problem becomes a cycle of poverty that goes
from generation to generation.
My sense is that the way that we can ultimately break the back
of racial prejudice in America is to make sure that all of our insti-
tutions are doing their fair share, making certain that they are in-
vesting in the inner city of America, that they are not looking at
redlining entire neighborhoods simply because of the geography or
because of the race of the individuals that happen to live in a par-
ticular area.
And we have—just so much testimony has come before my sub-
committee, Mr. Chairman, on the House side, of individuals in-
volved with some of the biggest companies in America. The fact is
that you are not in good hands with Allstate, and Nationwide is not
on your side, if we look at how these industries actually operate.
These companies eliminate whole groups of individuals from the
ability to get insurance because of where they live or the color of
their skin.
Agents have come before our committee and told us of specific ra-
cial slurs and slanders that have taken place. They have been told
point blank that they are not allowed to write policies in minority
parts of a service area. And in my own district, I had a small busi-
ness that was in a white part of Dorchester, MA, a section of Bos-
ton. The fellow — ^he is white — moved his company into black Dor-
chester. He was told that his insurance was going to be canceled.
He asked his broker why his insurance was canceled, and the
broker said because I am not allowed to write policies in that part
of the city of Boston.
These are the realities that take place. It is a reality that takes
place in Los Angeles. We had an insurance commissioner, John
Garamendi, come before our committee and show us maps that he
had gotten from agents that demonstrated whole sections of the
city of Los Angeles that are redlined.
Much of the insurance in this and other inner city areas is
underwrittent by offshore insurers. In Los Angeles, for instance,
most of the companies that were paying their insurance premiums
in the inner city before the 1992 civil disturbances paid them on
time, and yet when they went to collect on those insurance claims
80 percent of them were unable to collect because the insurance
companies simply packed up their bags and left because there were
so many concentrated losses, and because these were unregulated
insurance companies operating in a State that cannot possibly stay
on top of all the different companies that are there.
So, what we are trying to do is not come in with a whole series
of regulations as to how the insurance industry ought to operate.
All we are asking is for the light of day, for simple disclosure. Let
us get these companies to just tell us the truth, tell us where they
are writing policies.
And let us do it in the most detailed way we can. There is a
great deal of controversy over whether we should do it by census
tracts or whether we should do it by ZIP codes. The fact is that the
insurance industry wants ZIP codes because they know that census
tracts are the kind of specific data that will allow us to determine
56
which individuals are actually getting the policies written and who
are not getting the policies written for them. If you take ZIP codes,
you could mix data from wealthy white suburbs with that from
poor black ghettos, and therefore you will get a very confused pic-
ture as to what is actually happening in the insurance industry.
We are just trying to get simple disclosure. With that disclosure,
I think we can begin to know what our industries are doing. With
that light, Mr. Chairman, I believe we can end any kind of poten-
tial discrimination that exists in that industry.
We need your help in the U.S. Senate. You have been a great
friend of the consumers of this country, of people without a voice,
and I look forward to working with you, Mr. Chairman, on this
issue, and joining with you to make certain that we end the ter-
rible scourge of racism that exists and make certain that there are
no tendencies with regard to redlining in the insurance industry.
And I thank you very much for the opportunity to testify.
Senator Bryan. Let me just say that we appreciate very much
not only your time here this afternoon, but the commitment that
you have shown on this. This is not something, I know, that you
take lightly, and I appreciate the passion with which you speak
and the conviction with which you articulate your concerns, and we
will look forward to working with you on this and many other is-
sues. Thank you very much for joining us.
Mr. KE^fNEDY. Thank you very much, Mr. Chairman.
Senator Bryan. Let us now for the record — I have been informed
that Congresswoman Collins was unable to make it over to the
hearing this afternoon because of a commitment in the other body,
and without objection her statement will be made a part of the
record as well.
[The prepared statement of Ms. Collins follows:]
Prepared Statement of Representative Coluns
Mr. Chairman and members of the committee, I appreciate the opportunity to tes-
tify today on the important issue of insurance redlining, particularly before this
committee, which has been such a leader in consumer protection. The timing is ap-
propriate. I testified last July 1 on toy safety legislation, and that bill, with the
strong leadership of you, Mr. Chairman, and Senators Gorton and Danforth, is now
almost on the President's desk. Hopefully, in the next few months, we can also get
an insurance redlining bill to the President's desk.
Over the last year, the House Commerce Subcommittee has examined redlining
practices of insurance companies. At the subcommittee's two hearings, we heard
very disturbing reports about a variety of practices insurance companies use to deny
access to insurance to the residents of'^our urban areas.
Some may say that insurance redlining is a thing of the past, but the witnesses
at our hearings testified that the practice continues. Some may say redlining doesn't
exist, or thry're not sure it's a problem. I know it's a problem. My constituents know
it's a problem.
For example, those at the hearing can't forget Selwyn Whitehead of the Economic
Empowerment Foundation, who testified about her experience in trying to get liabil-
ity insurance for her telecommunications consulting firm in the late 1980's. When
she identified her firm as a woman-owned firm, of color, in Oakland, she was turned
away or quoted premiums from $8,000 to $10,000 per year. But when she called on
behalf of ner fictitious white male boss, a Mr. Selwyn Whitehead, the first quote
was for $1,200.
The statistics speak for themselves. Illinois Public Action testified that there are
52 State Farm ofnces and 32 Allstate offices in a predominantly white congressional
district in Chicago. But in the Chicago portion of my district, according to Public
Action, there are only six State Farm offices and two Allstate offices outside the
downtown area. I would like to submit for the record the detailed study prepared
57
by Illinois Public Action, "An Analysis of Zip Code Distribution of State Farm and
Allstate Agents and Policies in Chicago."
And ACORN testified that in Chicago, only 51.1 percent of occupied, single family
units in low income neighborhoods, and only 57.6 percent in minority neighbor-
hoods, were covered by any type of insurance, compared to 90.0 percent coverage
in high income and 87.7 coverage in white areas.
And there is plenty of other evidence of redlining behavior by insurance compa-
nies. For example, the NAACP has a lawsuit pending against American Family Mu-
tual Insurance Co. That's the case where the sales manager was recorded as telling
an agent, "I think you write too many blacks. You gotta sell good, solid premium
paying white people." The California Insurance Department recently entered into a
$500,000 settlement with the California Insurance Group after the company was ac-
cused of redlining large areas of San Francisco. Other witnesses today will provide
still more evidence of redlining.
As a practical matter, access to property insurance is a necessity for mortgage
loans and is often essential for access to small business loans. Without access to af-
fordable insurance, small businesses in our urban areas cannot prosper nor generate
badly needed jobs. Similarly, access to affordable automobile insurance is often es-
sential for residents of the inner cities to keep and hold jobs.
My constituents must suffer daily the indignities of insurance redlining. They
want to start seeing some relief. We here in Washington can argue about the perfect
bill. But my constituents want results. We can wait forever for State legislatures
to pass the perfect bill — or even any bill. But the people in Chicago want results.
We can argue about the perfect bill and let the clock keep ticking away. Maybe we
can even wait until next Congress, or the Congress after that, in the hope of the
perfect bill. But I fear the environment for good legislation will not be any better
next year, and will likely be worse. But while we argue over the perfect biU, the
people back home want results.
I urge this committee to begin the process of fighting redlining by supporting ap-
propriate legislation.
["An Analysis of Zip Code Distribution of State Farm and Allstate Agents and
Policies in Chicago," by IDinois Public Action, April, 1993 may be found in the com-
mittee files.]
Senator Bryan. Our panelists on this issue are Robert Hunter,
who is the Insurance Commissioner of the Department of Insur-
ance, the State of Texas, Ms. Mary Griffin, who is the insurance
counsel of the Consumer's Union, Ms. Lynn Schubert, who is the
assistant general counsel of the American Insurance Association,
Gerald Bell, the commercial lines specialist. National Association of
Independent Insurers, and Deepak Bhargava, who is the legislative
director of the Association of Community Organizations. Let me
welcome each of you to the panel.
Mr. Hunter, I am told there may be a plane schedule, that we
may be able to help out a little bit if we allow you to go first. If
that is in fact the case, you can testify and excuse yourself We all
understand that. Welcome again, for the third time today. I think
the State of Texas is getting its money's worth out of you, and we
are as well.
This is efficiency which is seldom evidenced at the Federal level.
I want to let you know that you have been a great part of contrib-
uting to that efficiency. Thank you, Mr. Hunter.
STATEMENT OF ROBERT HUNTER, COMMISSIONER, TEXAS
DEPARTMENT OF INSURANCE
Mr. Hunter. Thank you, Mr. Chairman. I certainly appreciate
that, and appreciate your consideration of my flight problems.
Thank you for the opportunity to discuss the need for a Federal re-
porting bill on the issue of insurance redlining. During the 1970's,
when I was Federal Insurance Administrator under Presidents
58
Ford and Carter, we studied and documented the issue of insur-
ance redlining in several studies.
Although the Federal Grovemment acted to keep insurance in
cities through the Riot Reinsurance Program, the problem of dis-
crimination against certain parts of the Nation's cities has never
been fiilly addressed. When, in the early 1980's the Riot Reinsur-
ance Program was eliminated, the Federal role in protecting insur-
ance consumers against redlining was also ended. There was study
after study during the seventies that showed that redlining was an
issue.
Lately, the issue has stirred back to life in the wake of the riots
in Los Angeles, where so many people were found not to have in-
surance, and some of those, particularly businesses, had insurance
with unlicensed companies that did not pay.
The stirring back to life is real in Washington, because HUD and
the Justice Department are now actively looking at enforcing Fair
Housing Act provisions against redlining, and the President has is-
sued an Executive order to encourage such activity.
But we need action from Congress as well. We need a national
data base from which we can draw conclusions about how redlining
impacts America and, for the first time in history, have a baseline
from which we can measure progress in serving the underserved.
The National Association of Insurance Commissioners has start-
ed a study, but only 23 States have agreed to participate. I think
we need a national data base.
When I conducted a public hearing just a couple of weeks ago in
Houston on the issue of redlining, I received a clearcut example of
this problem. Habitat for Humanity, an organization which I am
sure you know about, has 50 homes in Houston built for and with
low-income citizens, using their sweat equity.
The new owners have worked on the construction and have
learned a great deal about home maintenance and home owner-
ship. These homes are quality risks, and the group of homeowners
in Houston have made only one claim in the last 3 years, that
being for a tree that fell in a storm.
Nonetheless, only one major insurance company, Texas Farmers,
was willing to insure these homes. As a result, they have had to
go to very high-priced, nonstandard insurers. I have supplied to the
staff a transcript of the Habitat for Humanity's testimony, which
I think is very telling.
This is not real underwriting. It has nothing to do with risk. It
is the application of preconceptions about areas of the city, rather
than the quality of the risk. These are quality risks.
So, when I urge action, including voluntary action by insurance
companies to end redlining, I am not talking about social engineer-
ing, but I am talking about the use of sound business practices.
How do we begin to attack redlining? I think, as Representative
Kennedy said, the essential first step is exposing the facts to the
light of day. Insurance companies say there is no redlining. I think
there is. I think there is a lot of documentation of it, but let us get
the data on the table.
To solve the problem of redlining, all areas where consumers are
being unfairly discriminated must be identified. This requires reli-
able data broken down into small enough pieces to see what is hap-
59
pening to specific neighborhoods, and other specific groups of con-
sumers. I would point to the HMDA type of data that the banks
must supply. That is the kind of data that is needed, and that data
base has I think made real changes in the banking industry's atti-
tudes and perception.
I have to say also, in the wake of the Houston hearing, the insur-
ers have come to me and talked to me about their plans. Their eyes
were, I believe, opened that there is a real problem. I just had
some private meetings with them, and there was much "mea culpa"
involved in that, and I think even the insurance industry is begin-
ning to realize this is a serious national problem that needs resolu-
tion.
The kind of statistics we need are data about where people are
writing, where they place their agents, what kind of claims do they
have so that we can see whether or not the losses justify their not
writing in certain places, and so on.
In Texas, we have begun our review of our ZIP code data that
we do collect as part of the NAIC call. We ran some regression
analyses. We found that in ZIP codes where auto insurance avail-
ability is two times worse than the State average — in other words,
where it is harder to get auto insurance — the minority population
also is twice the State average, and where insurance is written in
nonstandard companies half as much as the State average — where
it is easy to get coverage — the minority population percentage is
also half, so there is a correlation there.
By the way, I should say rural risks sometimes have trouble get-
ting insurance, and it relates to underwriting guides.
In Texas, 88 percent of the companies have age of home restric-
tions. In other words, if your home is older than a certain age, we
will not write you no matter what the quality.
More than 90 percent have minimum coverage amounts. Often
companies will not write homes valued under, say, $60,000, regard-
less of the quality.
Senator Bryan. Would that exclude Monticello, Mount Vernon,
and some other establishments?
Mr. Hunter. Their age. Probability not the value, but certainly
their age.
For example, there are several companies with $60,000 or higher
restrictions — we will not write below $60,000 — and Texas' median
housing value is $42,500.
Now, this presents a problem, and as I say, it is also in the rural
areas, so these underwriting guidelines have an adverse impact on
the availability of homeowner s insurance for consumers in older or
lower income, inner city, and rural neighborhoods.
As you doubtless know, there are two bills in the House pending
before the Rules Committee on the subject of redlining, the Collins
bill and the Kennedy bill, and I support the Kennedy approach.
In the Senate, Senator Feingold has a bill that is between the
Collins and Kennedy approaches. I encourage you to look strongly
at that bill. It actually is sort of the bill close to the bill that both
Ms. Collins and Mr. Kennedy had before they went off in opposite
directions.
I think that the draft of Senator Feingold is very good. I encour-
age you to add auto insurance to it. Currently, it covers only home-
60
owners. I encourage you tx) use census tract rather than ZIP code
data to collect race and gender data and claims information and
make that data publicly available so that we can start to shed the
light of day on tnese tnings and move the country toward an end
to this kind of discrimination.
Thank you very much.
[The prepared statement of Mr. Hunter follows:]
Prepared Statement of J. Robert Hunter
Mr. Chairman and Members of the Committee, I am pleased to appear before the
Committee on the important issue of insurance redlining.
More than 25 years have passed since President Lyndon B. Johnson's Commission
on Insurance Availability in Urban America, formed in the aftermath of Los Angeles
rioting, told us that "communities without insurance are communities without
hop)e. As Federal Insurance Commissioner, I ran the riot reinsurance and FMR
Plan programs which sprang from that commission's studies. During the 1970s, we
at the Federal Insurance Administration performed several studies documenting the
fact that some insurers were avoiding certain neighborhoods. One of our reports
showed that in New York City, residents were more likely to be denied homeowners
insurance if thev were black than if they had building codie violations.
Today, we still find insurance companies making underwriting decisions based on
all kinds of factors that have nothing to do with a statistically measured or measur-
able probability of risk. One of these factors, unfortunately, is your location on a
city map that probably does not have any red boundary lines drawn on it but it
might as well because the results are the same. I commend the members of this
body who have decided to address redlining for their recognition — and rejection —
of this antiquated form of underwriting and their determination to do something
about it.
Definitions
In your study of this issue, you will hear and see the word "redlining" over and
again. I think it behooves each of us to be clear about the meaning of this emotion-
ally laden word when we use it.
My definition of redlining is simple. By redlining I mean unfair discrimination in
the availability, price, benefits or quality of insurance for a class of consumers based
on factors outsiae the control of the consumer. Redlining is not only geographic; it
includes unfair discrimination based on race, gender, age, income level, value of
home, age of home or other characteristics that the consumer cannot change.
By this definition, redlining occurs when a class of individuals is denied insur-
ance, charged a higher price, provided fewer benefits or given inferior service for a
reason unrelated to their risk or for a reason that is contrary to public policy.
Data indicate that unfair discrimination against several classes of individuals,
particularly minorities and low income citizens, is practiced all too commonly in the
insurance industry, denying many consumers the ability to purchase cars or homes
or maintain small businesses. The Federal Fair Housing Act, as interpreted by the
Supreme Court, is an example of the federal interest in ensuring that redlining does
not prevent classes of consumers from purchasing a home. Denying insurance to
citizens and small businesses in economically underdeveloped areas contributes to
the web of inadequate economic opportunity and social decay. There was a television
investigative report a number of years ago called The Poor Pay More." We see the
same result in insurance. The channeling of low-income people into high-risk, high-
rate insurance companies is redlining.
I want to make it clear that I am coming at this problem not only as a state offi-
cial with a consumer protection mandate and a personal history as an insurance
consumer advocate. I also approach redlining as an actuary with experience in risk
analysis and insurance loss projection. Underwriting standards that take a mono-
lithic approach to neighborhoods, home value and age of home just don't make
sense. They treat well maintained, structurally sound and burglar-resistant homes
the same as fire traps.
When I conducted a public hearing on redlining in Houston on March 31, 1994,
I received a clear-cut example of this approach to underwriting. Habitat for Human-
ity, an organization made internationally famous by former President Jimmy
Carter, has built 50 homes for — and, of particular importance, with — low income
families in Houston. This is sweat equity, and the new owners have not only worked
on the construction, but learned a great deal about home maintenance. These homes
and their owners are quality risks. This group of homeowners in Houston have
61
made only one claim — for a tree that fell during a storm. Nonetheless, only one
major insurance company, Texas Farmers, was willing to insure these homes. A
transcript of the Habitat for Humanity representative's testimony is shown as At-
tachment A.
The approach taken by other companies to the question of insuring these Habitat
for Humanity homes was not genuine underwriting. Rather, it was the application
of certain preconceptions about how people across the tracks live their lives and
tend their nomes. So when I urge action, including voluntary action by insurance
companies, to end redlining, I'm not talking social engineering but I am talking the
use of sound business practices that separate profitable from unprofitable insurance
business one risk at a time.
Data Collection
How do we begin to attack redlining? The essential first step is to identify all
areas that are being unfairly discriminated against in the availability, price, bene-
fits or quality of insurance. To solve the problem of redlining, all areas where con-
sumers are being unfairly discriminated against must be identified.
This requires reliable data broken into small enough pieces to see what is happen-
ing to specific neighborhoods and other specific groups of consumers. I would like
to see data that tells what is happening in rural areas as well as in cities, and I
would like to have urban data all the way down to the census tract level.
Certain lines of insurance — homeowners, automobile and small business commer-
cial policies — are most susceptible to redlining, and those are the lines where the
need for good, reliable statistical data are most crucial.
The kinds of statistics we need include data about service (including locations of
insurance agents), coverages sold in an area, premium volume, prices charged and
losses (including loss ratios).
Texas has been trying for more than a year to assess the degree to which redlin-
ing occurs in our state. We have used data calls, a consulting actuary's study and
the more anecdotal route of public hearings. This is an ongoing effort to come up
with the sometimes elusive truth about whether the industry does things its spokes-
f)er3ons deny it does. It is a pity that Texas has taken so long to identify the prob-
em. It is doubly tragic that I must report that Texas is at the cutting edge of data
analysis on this issue.
Evidence of Redlining — the Texas Experience
One place we looked for evidence of redlining was the placement of drivers in the
Texas Automobile Insurance Plan (TMP), which operates as our state's assigned risk
plan for drivers who have been rejected for coverage by insurance companies in the
voluntary market. It is noteworthy that the TAIP offers only liability coverages, not
comprehensive coverage that pays when cars are stolen or vandalized. Even if one
assumes — as I do not — that low-income or high-minority nei^borhoods are by defi-
nition high-crime neighborhoods, this should not be a reason for sending drivers to
the TAIP.
Studies of TMP assignments in 1993 show that consumers who live in Zip Codes
with predominantlylow-income and minority populations are disproportionately in-
sured through the TMP compared with those from Zip Codes with higher-than-aver-
age income and higher-than-average Anglo populations. Rural consumers also are
disproportionately represented in the TMP.
TAIP assignments are one indicator of auto insurance availability in particular
neighborhoods. Statistics gathered through this year's NAIC call to insurers writing
auto insurance in Texas also showed a direct correlation between lack of availability
and the ethnic and racial minority percentages of the population in the Zip Code.
The data presented in Attachment B graphically portray the existence of auto insur-
ance redlining. The data show that the higher the minority population in a Zip
Code, the worse the auto insurance availability. In addition, lower availability of
auto insurance correlates with lower median household income in a Zip Code.
• In Zip Codes where auto insurance availability is two times worse than the
state average, the minority population percentage in the Zip Code also is twice the
state average; and
• In Zip Codes where auto insurance is written in non-standard companies half
as much as the statewide average, the minority population percentage is also half
the statewide average.
The data also show a strong correlation between low median household income
and low availability of insurance. I can supply a copy of these data in full Zip Code
detail to this Committee if you desire it.
The Texas Department of Insurance is doing a similar analysis of homeowners in-
surance by Zip (Jode, but we do not have any preliminary results at this time.
79-871 0-94-3
62
I cannot overemphasize the importance of gathering thorough and reliable statis-
tics on the insurance marketplace. Like the NMC, Texas is iust beginning efforts
in this direction. Texas is a pioneer in gathering insurance data independently of
industry-controlled statistical organizations, and we intend to have a continuing
flow of Zip Coded data on automobile, homeowners and commercial insurance. We
have just scratched the surface in our ability to detect redlining and other unfairly
discriminatory insurance practices, and this data flow will put us in a much better
position to protect the insurance-buying public in the future. To have any hope of
a national picture in the foreseeable future, we must have Congressional action. In-
surance is, I fear, just too powerful a sp>ecial interest in most states.
Underwriting Guidelines
We are looking not only at evidence of redlining. We are reviewing companies' un-
derwriting guidelines to determine the causes. Several common underwriting guide-
lines adversely affect the availability of homeowners insurance in minority and low-
income neighborhoods as well as in some rural and inter-urban communities. Texas'
Office of Public Insurance Counsel (OPIC) reviewed the homeowners underwriting
guidelines filed with our Department by insurance companies this year and issued
a report (Attachment C) showing that:
• 88 percent of the companies have age-of-home restrictions.
• More than 90 percent of the companies have minimum coverage amounts, often
above Texas' median housing value of $42,500. Many won't write homes valued
under $60,000 or higher!
• 60 percent of tne companies have location restrictions. While not as overt as
a red line map, these restrictions prohibit coverage for certain consumers in very
vague terms without objective standards (e. g. "unprotected" areas).
All of these underwriting guidelines have an adverse impact on the availability
of homeowners insurance Tor consumers in older or lower income inner-city and
rural neighborhoods.
Regulatory action against unfair underwriting practices is a new phenomenon but
I predict you will see much more of it as the trend toward election or appointment
of consumer-oriented insurance commissioners continues throughout the nation. In
Texas, the Commissioner received clearcut legislative authority only last year to re-
quest and receive companies' underwriting guidelines and to use them in enforce-
ment actions (but we are not free to disclose them to the public, which inhibits our
ability to make competition in price fully effective — we need an informed consumer
for that). Our Department just initiated disciplinary actions against 59 companies,
including some of the largest auto writers, for alleged unfairly discriminatory under-
writing guidelines, which either exclude people or force them into high-rate compa-
nies merely because they are single, have only one car, have a driver s license from
the "wron^ country, won't buy another kind of insurance policy from the same com-
pany or had been rejected or canceled by a different company.
On May 2, 1994, I imposed a Texas record fine of $850,000 on Allstate for apply-
ing similar guidelines. In this case, we actually received videotapes showing agent
after agent turning down an applicant because he was single, had only one car and
was not in the market for any insurance but an auto policy.
Although the practices involved in these disciplinary cases do not involve exclud-
ing specific neighborhoods, they do have disproportionate impact on racial and eth-
nic minority populations and low-income consumers. That is why the focus on red-
lining should not be limited to discrimination based on geographic location alone.
Besides the disciplinary actions mentioned above, I am considering further rule-
making, enforcement actions and proposed legislation to further combat unfair un-
derwriting practices and redlining. One of the ideas I'm considering is requiring that
an underwriting guide be demonstrated as risk related by statistics in order to use
it in Texas.
Reporting Issues
There are a number of specific issues related to data collection that the Commit-
tee needs to consider if it is to fully address this issue. I would like to discuss sev-
eral of these issues.
• Census Tract Versus Zip Code: Although current reporting of neighborhood-re-
lated insurance data is by Zip Code in the vast majority of states, it is not sufficient
to answer questions about redlining. Congress would come closer to getting the in-
formation it needs on redlining if obtains reports by census tract. One reason is that
related demographic information from the Bureau of the Census is far more com-
plete and accurate for census tracts than it is for Zip Codes. In addition, census
tracts tend to be smaller and more demographically homogeneous than Zip Codes,
thereby giving a clearer, better focused picture of the treatment of minority and low-
63
income neighborhoods than we get from looking at Zip Code data. Furthermore, Zip
Codes exist to expedite mail handling and are subject to change whenever necessary
to further that objective. Census tract boundaries are less likely to shift.
I believe the larger insurance companies that would object to reporting could eas-
ily adapt to census-tract reporting because the necessary software is readily avail-
able. Some have suggested requiring the government to provide insurance cornpa-
nies with this software. If insurers claim that census tract is too difficult, you might
consider requiring reporting by 9-digit Zip Code, which can, as I understand it, be
used to construct census tracts. All insurers must have this information in order to
obtain mail cost savings.
• Race and Gender Data: I support the collection of race and gender data because
it will further the objective of discouraging unfair discrimination, including those
forms of discrimination that have the intent and/or effect of redlining. This kind of
data collection is essential if Congress is to determine whether insurance companies
are, in fact, discriminating based on race or gender. It will also provide stronger fac-
tual support for legislative, judicial and regulatory actions to protect the rights of
racial and ethnic minority populations to buy insurance at fair and affordable rates.
Finally, and possibly of greatest importance, such data might increase the availabil-
ity of insurance to minorities by opening the eyes of many insurance companies to
the effect of their underwriting guidelines on these populations. Such conipanies
could be expected to act to increase their minority business to avoid discrimination
suits, regulatory action and further legislation.
At my March 31 redlining hearing in Houston, an ITT Hartford representative
testified the company had gone through a painful process in which it came to realize
its underwriting practices were causing unintended problems for some minorities.
The company is taking initial steps to turn this around, including a program to de-
velop more minority agents to work in underserved areas. Thus, simply by forcing
companies to examine the effects of their underwriting guidelines on minorities and
low-income consumers, we can begin the process of their own self-examination and
reform.
• Claims Information: Claims information is vital if Congress, regulators and oth-
ers are to accurately assess the extent of redlining and other forms of unfair dis-
crimination in the sale and pricing of insurance and take appropriate corrective ac-
tion. What if you collect data from an insurer and see what appears to be unfair
discrimination based on where it wrote its policies? What if it then says it is making
a sound business judgment based on the claims? Where are we then?
Claims data are highly relevant information, and we seek claims data in our own
data calls because assuring fair rates is only half the regulatory battle. If a home-
owner in a predominantly minority area pays the same rate as one in an upscale
comer of the same city but receives scaled-down benefits if he or she has a fee or
other loss, that is redlining as surely as rejection for coverage or assignment to a
high-risk company. This, in fact, might very well be happening in some of our cities.
PudHc adjusters have told our Department that some insurance companies have dif-
ferent payment standards in minority areas than in other areas. Trial lawyers and
some adjusters also have alleged that insurers pay smaller damages for minority
claimants. But, as an insurance regulator, I need solid statistical support for rule-
making and enforcement actions against such behavior, and I believe Congress also
needs more than hunches and anecdotal evidence. You need these data!
Finally, enlightened insurance regulators and companies are coming to under-
stand that they have an obligation to attack the root cause of rising insurance rates
by encouraging better construction, stronger defenses against crime and other loss-
grevention measures. The Texas Department of Insurance recently created its first
afety Unit to lead the way in this effort. Claims data, by neighborhood, can help
regulators and the industry target areas where loss prevention efforts can do the
most good.
• Additional Data Needs: Data on personal auto insurance should be collected.
Auto insurance is as important, if not more important, than homeowners insurance
in minority and low-income neighborhoods where homeownership is more of a
dream than a reality. Texas' data show significant redlining in auto insurance.
Renters insurance should be included in the definition of residential property in-
surance as a designated lines of insurance for data collection. Because many low in-
come and minority consumers are unable to purchase homes but need insurance for
their personal property, data is needed on renters insurance.
Also, data on the age of the insured should be collected for homeowners and auto
in addition to region, race, gender, age of home and location of home.
• Availability of Data to Public: Data should be made available to the public as
soon as possible. I suggest that the federal agency receiving the data be allowed
time for review, but a preliminary report should be issued 30 days after the data
64
is due from insurers and a final report issued 60 days after the data is due from
insurers. Losses by individual insurers by Zip or census tract a should not be held
in closed records. To combat unfair discrimination in claims payments, it is crucial
that this information be open to the public.
• Automatic Sunset Provision: Data collection should not automatically sunset.
Its purpose will continue to exist in the future. Congress would be remiss to pretend
that redlining is a disease that can be cured in a short period of time with no dan-
ger of remission.
Conclusion
Based on available data, it is obvious that redlining is a problem in many urban
communities and rural areas. Other forms of discrimination, such as underwriting
guidelines that deny coverage or assign consumers to high-risk, high-rate companies
because they are single or own only one car or don't buy other kinds of insurance
from a company often have the same effect on minority and low-income people as
geographic redlining. More data is necessary if policymakers and insurance regu-
lators are to fully understand the scope of this problem and take the actions nec-
essary to protect the insurance-buying public. Congress is to be commended for tak-
ing on this difficult but extremely important issue.
[Attachments A, B, and C may be found in the committee files.]
Senator Bryan. Thank you very much, Mr. Hunter, for your yeo-
man testimony in each of these three hearings. We appreciate it.
Ms. Griffin, it is nice to have you back again so soon.
STATEMENT OF MARY GRIFFIN, INSURANCE COUNSEL,
CONSUMERS UNION
Ms. Griffin. Thank you, Mr. Chairman, and thank you for hold-
ing this hearing to address an issue that is so critical to inner citv
and rural communities, the lack of availability of affordable, qual-
ity insurance.
My organization. Consumers Union, which has closely followed
the insurance industry for years, is delighted to see Congress tack-
ling the issue of redlining, a problem that has plagued communities
for decades.
Insurance, as we all know, is an indispensable part of modem
American society. You cannot buy a home, drive a car, or open a
business unless you have insurance. Given the critical and indis-
pensable role of insurance, insurance should be both available and
affordable to all, regardless of race, ethnicity, gender, or location.
But we are a long way from achieving that goal.
Studies, tests conducted by fair housing groups, and ongoing liti-
gation, reveal more than isolated instances of illegal insurance dis-
crimination and disparities in the cost and availability of insurance
throughout the country.
Most recently, the National Fair Housing Alliance released the
results of their testing, which revealed widespread discrimination.
Using testers with homes of similar value, size, and age, but lo-
cated in different neighborhoods, middle class African American,
Latino, and white, the group found that insurance companies ap-
plied their standards differently in black and Latino neighborhoods
than they did in white neighborhoods. For example, a tester calling
from a minority neighborhood was told the company could not in-
sure for less than $55,000, but in a white neighbornood, a similar
house valued at less than $55,000 was provided a quote.
And in our own city, the District of Columbia, where I am a resi-
dent, in a survey of yellow pages we conducted we found that State
65
Farm, which enjoys approximately 20 to 25 percent of the auto in-
surance market in the District and 17 percent of the homeowners'
market, has 18 agency locations in the city, 10 of which are in the
northwest area of the city, most on Connecticut and Wisconsin Ave-
nues. Apparently State Farm is a better neighbor in suburban
Maryland, where one can find over 120 agent locations. And All-
state has only 1 office in the District, but extends its hands gener-
ously out into the suburbs, to where it has 180 offices in this area.
The effects of redlining exact a heavy toll on our economy, de-
stroying jobs and economic development and devouring much-need-
ed tax revenues. Such practices must be stopped. The question is.
How?
We believe our lawmakers have a fundamental responsibility to
ensure communities access to affordable and quality insurance. For
decades, the insurance industry has kept Government at bay
through intense lobbying activities at both the Federal and State
levels. Another impediment to achieving a fair and functional in-
surance market is the patchwork of 50 State laws and regulatory
schemes.
Relying on only this system inhibits the free flow of ideas and
information that is necessary to develop and implement a public-
spirited regulatory approach toward the private sector. It is time
for Congress to act.
While there are many possible solutions to the redlining problem,
from developing and enforcing existing antidiscrimination laws, to
changing rate structures, to market incentives, to voluntary efforts
by the industry, the first step toward resolving this problem is
through exposing the industry to a little sunshine. We view the col-
lection and dissemination of data as part of the solution, an inte-
gral part.
What kinds of data would be useful to determining the extent
and scope of the problem? Well, as Mr. Hunter said, we need to
know about the number of policies sold and the cost and type of
coverage, as well as the race, ethnicity, and gender of the policy-
holders, to determine the price and quality of insurance sold and
help identify those areas or residents most underserved.
The data must be released in census tract format to facilitate de-
mographically based comparisons and a better understanding of
underwriting patterns.
Of course, extremely critical to the analysis of the market and
figuring out the reasons for the disparities is loss data. Insurers
often argue that they cannot write policies in certain minority and
low-income neighborhoods because they suffer from high losses. If
companies do not report their losses, we will never know if the high
premiums charged in these neighborhoods are based on higher
risks, or whether these high premiums are used to subsidize other
neighborhoods, as some studies suggest.
We also need to assess companies' underwriting criteria, because
many have criteria unrelated to risk, are based on subjective as-
sumptions, and have a disparate effect on certain neighborhoods or
residents. Not only will this information tell us whether the criteria
insurers use are themselves discriminatorv, but also whether, in
light of the statistics, they are being applied fairly.
66
While discriminatory behavior must be addressed at its core, by
changing the culture and environment that allows such behavior to
fester, experience with civil rights legislation has taught us that
Government action in the form of legislation is sometimes a nec-
essary catalyst to that change.
We hope Congress takes action to provide the information nec-
essary to assess how well the industry is serving the economic and
social needs of our society, and whether regulatory or legal changes
are necessary for our economic growth and well-being, and again,
we thank you for holding this hearing.
[The prepared statement of Ms. Griffin follows:]
Prepared Statement of Mary Griffin
Consumers Union appreciates this opportunity to testify on an issue that is criti-
cal to inner city and rural communities — the lack of availability of affordable, qual-
ity insurance. My organization, which has closely followed the insurance industry
for years, is delighted to see Congress tackling the issue of redlining — a problem
that has plagued communities for decades. We thank you, Mr. Chairman, (or hold-
ing this hearing to shed light on this problem.
Insurance, as we all know, is an indispensable part of modem American society.
Examples of the relevance of insurance to our everyday lives include:
• After food and shelter, insurance is the single largest annual consumer invest-
ment.
• The American dream of homeownership remains unrealized if people cannot
purchase insurance to protect the property against fires, theft and other losses.
• In most parts of the U.S., a car is a necessity for transportation to and from
work. It makes automobile insurance a necessity, too, since most states require driv-
ers to carry liability and uninsured motorist coverage.
• To bring businesses into a community, insurance must be available, not only
to protect the business' property but also to cover liability for risks associated with
the business. And if it is a contracting or development business, insurance for bond-
ing purposes is critical to its operation.
Given the critical and indispensable role of insurance, insurance should be both
available and affordable to all, regardless of race, ethnicity, gender, or location. But
we are a long way toward achieving that goal.
THE PROBLEM OF REDLINING
Redlining — when insurance is not sold or marketed in certain neighborhoods or
only policies which provide inferior coverage or at high premiums are sold in those
neighborhoods — is well-documented and decades old. Studies, tests conducted by fair
housing groups, and ongoing litigation reveal more than isolated instances of illegal
insurance discrimination and disparities in the cost and availability of insurance
among neighborhoods of different racial and income characteristics.
The following represents only a partial list of some of the evidence that reveals
communities are discriminated against in the sale or pricing of insurance.
Studies
• The Missouri Department of Insurance, in a study of homeowners insurance re-
leased in 1993, found that 1) residents in predominantly minority low-income urban
areas pay more for their insurance than other residents of Missouri, including low-
income whites and 2) companies pay out less for claims in low-income minority
areas than in low-income white neighborhoods, suggesting that companies discrimi-
nate on the basis of race, not on the basis of loss experience.
• In a report issued in April on underwriting guidelines used by companies in
Texas, the Texas OfTice of Public Insurance Counsel found that companies rep-
resenting approximately 90 percent of the homeowners market have minimum value
or maximum age restrictions that prevent homeowners with lower-value homes or
older homes from purchasing insurance. Among some of the other restrictions com-
panies apply are those based on "lifestyle" which restrict coverage based on living
conditions, living arrangements and perceived morals of the applicant.
• A study released oy ACORN fast February showed 1) that minority home-
owners in many markets are significantly less likely than whites to carry home-
owners insurance, 2) that, when consumers shop by telephone, agents are more like-
ly to quote a price on a homeowners policy in a white neighborhood than in a minor-
67
ity one and 3) that the price is likely to be more favorable in connection with the
home in the white neighborhood.
• Studies of the automobile insurance market in both Texas and New York re-
vealed that the likelihood of consumers being placed in the assigned risk plan (pro-
gram for high-risk drivers) had more to do with where one lived or with one's eco-
nomic status than with one's driving record— the poorer the area or the greater the
minority population, the higher the number of people in the plan.
• In a survey of insurance coverage of those who suffered damage in the disturb-
ances in Los Angeles in 1992, the California Department of Insurance found that
52 percent of those who called in to report damages and were later contacted by
the department had no insurance and 42 percent of those who had insurance re-
ported they were underinsured.
Testing
Earlier this month, the National Fair Housing Alliance released the results of its
testing in four cities— Atlanta, Chicago, Louisville and Toledo. The testing revealed
widespread discrimination and disparate treatment of testers calling from middle
class African-American and Latino neighborhoods as compared to other testers call-
ing from white neighborhoods with homes of similar value, size and age. Some of
the discriminatory practices used by companies/agents include:
• Reftising to provide insurance because of the age of the home, but only appljdng
this standard to homes located in minority neighbomoods.
• Refusing to insure properties in minority neighborhoods because of the market
value of the homes.
• Offering only market value policies rather than replacement cost coverage (in-
suring the cost of replacing the home or contents rather than insuring only for mar-
ket value) policies in homes in minority neighborhoods.
• Requiring inspection of a home prior to providing information on the cost or
type of insurance available in minority neighborhoods.
• Requiring a credit check for applicants in minority neighborhoods.
Litigation
• In Milwaukee, Wisconsin, the National Association for the Advancement of Col-
ored People (NAACP) brought an action against American Families Insurance Com-
pany, alleging that agents were instructed not to sell in minority neighborhoods.
• In Pittsburgh, Pennsylvania, a suit was brought against an insurance company
by a group of agents who were told not to sell insurance policies in African-Amer-
ican neighborhoods.
• In Toledo, Ohio, the Toledo Fair Housing Center filed a complaint against Na-
tionwide alleging discrimination under the state fair housing laws.
And, in our own city of the District of Columbia, we conducted a survey last year
based on a review of the yellow pages which provides a picture of the marketing
practices in the area. State Farm, which enjoys approximately 20 to 25 percent of
the auto insurance market in the District and 17 percent of the homeowners mar-
ket, has 18 agency locations in the city, 10 of which are in the northwest area of
the city, most on Connecticut and Wisconsin Avenues. Apparently, State Farm is
a better neighbor in suburban Maryland where one can find over 120 agent loca-
tions. And Allstate has only 1 office in the District but extends its hands generously
out into the suburbs where it has 180 offices.
Also in our nation's capital, a group of former and current employees accused one
of the area's largest insurers, GEICO, of deliberately refusing to cover qualified mi-
nority appHcants. Among the allegations was the company practice of not requiring
inspections of homes in the affluent, primarily white zip codes of the northwest part
of the city but requiring them in other primarily minority zip codes. The Super-
intendent of Insurance recently instituted a market-conduct investigation to exam-
ine GEICCS business practices.
Insurance departments, civil rights, consumer, and community groups, agents and
employees of the companies all have come forward with allegations or studies indi-
cating that companies illegally discriminate against minorities and insurance for
residents of minority and low-income nei^borhoods is often not available or is more
expensive than in white neighborhoods..
There is clearly a problem in the availability and affordability of insurance prod-
ucts in low-income and minority communities and company underwriting practices.
The effects of such redlining exact a heavy toll on our economy, destroying jobs and
economic development and devouring much needed tax revenues. Society at large
only loses from these destructive and discriminatory practices. They must be ended.
The question is — how?
68
THE NEED FOR CONGRESS TO ADDRESS THE PROBLEM
We believe our lawmakers have a fundamental responsibility to ensure commu-
nities access to affordable and worthwhile insurance. For decades the insurance in-
dustry has kept the reformist impulses of government at bay through intense lobby-
ing activities at both the federal and state levels. Since 1945, insurers have been
shielded from antitrust laws and the FTC Improvem.ents Act of 1980 basically pro-
hibits the Federal Trade Commission from even studying the business of insurance.
These restrictions and others keep us far from the goal of making insurance avail-
able and affordable to all. Another impediment to achieving a fair and functional
insurance market is the patchwork of 50 state laws and regulatory schemes under
which the business of insurance is primarily regulated. This system inhibits the free
flow of ideas and information that is necessary to develop and implement a public
spirited regulatory approach toward the private sector.
It is time for Congress to act. While there are many possible solutions to the red-
lining problem, from development of and active enforcement of discrimination laws
to changing rate structures to instituting or strengthening current public insurance
programs to market incentives, the first step toward resolving the redlining problem
is through exposing the insurance industry to a little sunshine. We have been kept
in the dark for too long, enabling insurance companies to control the debate over
issues of access and anordability to quality insurance and the way in which the
market is structured.
We view the collection and dissemination of data as part of the solution, an inte-
gral part. The federal government needs to enact legislation to provide for a nation-
wide data base of information on insurance. Only with this information can we
begin to assess the extent and scope of the problem and engage in discussion about
what may need to be done. The following data are examples of the kinds of informa-
tion needed to assess the problem:
• Annual disclosure of the policies sold in each census tract (zip+4 reporting) by
type of policy on a company-by-company basis: Information about the number of poli-
cies sold and the cost and type of coverage as well as the race, ethnicity and gender
of the policyholders will provide essential data to determine the price and quality
of insurance sold and help identify the areas or residents most underserved. Data
should be collected on automobile, homeowners and insurance sold to small business
owners. The data must be on a census tract basis (companies to report on a zip44
basis) to facilitate demographically-based comparisons and reveal underwriting pat-
terns.
• Disclosure of loss data to determine whether higher prices charged in some
neighborhoods are justified by higher losses (claims): Insurers oflen argue that they
cannot write policies in certain minority and low-income neighborhoods because they
suffer high losses. If companies don't report their losses, we'll never know if the high
premiums charged in these neighborhoods are based on higher risks or whether
these high premiums are used to subsidize other neighborhoods, as some studies
suggest.
• Disclosure of underwriting criteria. Studies indicate that underwriting criteria
unrelated to risk and based on subjective, biased assumptions are used to determine
who should be sold insurance. Not oniy will this information tell us whether the cri-
teria insurers use to determine whether to accept an applicant for coverage are
themselves discriminatory but also whether, in light of the statistics, they are being
applied fairly.
• Information about where agents are located to determine which neighborhoods
are underserved. Without access to insurance agents, many find it difficult to pur-
chase insurance and of the quality they desire at the price they can afford.
While discriminatory behavior must be addressed at its core, by changing the cul-
ture and environment that allows such behavior to fester, experience with civil
rights legislation has taught us that government action in the form of legislation
is sometimes a necessary catalyst to that change. We cannot wait for the industry
to act on its own initiative, an industry that has for too long been mired in resist-
ance to change.
We hope Congress takes action to provide the information necessary to assess how
well the industry is serving the economic and social needs of our society and wheth-
er regulatory or legal changes are necessary for our economic growth and well-being.
Senator Bryan. Thank you very much, Ms. Griflfin. We are
pleased to have you again.
Ms. Schubert, let me welcome you to our subcommittee hearing
and invite your testimony now.
69
STATEMENT OF LYNN M. SCHXJBERT, ASSISTANT GENERAL
COUNSEL, AMERICAN INSURANCE ASSOCIATION
Ms. Schubert. Thank you, Chairman Bryan, and thank you for
inviting us here today to talk on this important topic of access to
insurance for urban residents and businesses.
AIA represents more than 270 companies writing property and
casualty insurance in every State and jurisdiction of the United
States. These members are concerned about this critical issue.
Additionally, I have been authorized today to present this testi-
mony on behalf of the Independent Insurance Agents of America
and the Council of Insurance Agents and Brokers. I would request
that our written statement be entered into the record, and I will
try and summarize that today.
Senator Bryan. It will be made a part of the record.
Ms. Schubert. Thank you.
We have one overriding goal on this issue, and that is that urban
residents and businesses, as all other Americans, must be able to
purchase attractive insurance products at a price reasonably based
on the risk. AIA, IIAA, and the council members are committed to
working with legislators, regulators, consumers, and brokers to en-
sure that this occurs.
To determine whether or not insurance is available in all areas,
we would support Federal data collection of insurance information
if that data collection is designed to produce a fair, efficient, and
effective study of insurance availability and cost. H.R. 1188, pend-
ing in the House, we believe is such a measure, and we do support
that bill.
Any data collection will show that there are some areas, espe-
cially in our cities, which have higher numbers of residents and
small businesses without insurance than other areas. These dis-
crepancies are related to a whole host of socioeconomic cir-
cumstances faced by people who work and live in urban areas, and
which also increase the cost of insurance.
Outright racial or ethnic discrimination also may occur. We hope
that it is infrequent. We know that it is a violation of both Federal
and State law. We advocate stringent prosecution wherever it is
found. These discrepancies, whether they are caused by economics
or by discrimination, must be addressed.
It is cold comfort to the citizens for whom insurance is unavail-
able to explain to them the reasons why the problem exists. We be-
lieve it is time to start attacking these problems head-on, and the
meetings that we have been having with State regulators, includ-
ing the one we have had recently with Commissioner Hunter that
he referenced, is an effort by the industry to do just that.
It is impossible to say that there is not one underwriter or one
agent or one insurer out there who is illegally discriminating in the
selling of insurance. However, we do not believe that it is a sys-
temic problem, but rather, if it occurs, it occurs in isolated in-
stances.
The most important thing to note in this discussion is that dis-
crimination is illegal. All States have laws against unfair discrimi-
nation in the insurance industry. The National Association of In-
surance Commissioners Model Unfair Trade Practices Act prohibits
arbitrary underwriting decisions based on geographic location alone
70
as unfair discrimination. AIA strongly endorses this provision, and
we have supported its adoption by the NAIC and by the State legis-
latures.
If insurers are illegally discriminating, they should be pros-
ecuted. States currently have the authority to do so, and are doing
so in appropriate situations. There is, however, a bottom-line ques-
tion that should be addressed — whether those urban consumers
wishing to purchase insurance currently are able to do so. Based
on the studies which have been done, it is our belief that the an-
swer is yes.
Those studies are discussed in detail in our written statement.
However, there are other studies which reach different conclusions.
While we have a detailed analysis of the cause of these differences,
we are not here to argue the numbers today. Rather, those dif-
ferences are the very reason we are willing to support Federal data
collection of information on the availability and cost of insurance.
We welcome thoughtful investigation and analysis of this issue.
The parameters of such a data collection effort, however, are criti-
cal. Inordinate cost of collecting data with limited value would not
assist the insurance consumer, but rather harm that consumer
with either higher prices or possibly less financially sound insurers.
Any Federal data collection should be drafted in a fashion to pro-
vide quick, efficient, and cost-effective data. Collection of data
which reveals what insurance is being sold, where it is being sold,
who is selling it, and how much it costs the consumer would an-
swer the question of whether or not insurance is available. That is
the question that Representative Kennedy posed. Is the insurance
available?
This collection should be undertaken in a format to provide the
most information in the most useful form in the most cost-efficient
fashion. We believe that is 5-digit ZIP code. This information would
allow regulators to focus efforts on ZIP codes with significant dis-
parities between numbers of homeowners and numbers of home-
owners' policies, rather than be required to review detailed infor-
mation for huge numbers of census tracts where no problems exist
whatsoever. That is simple disclosure.
Insurers are not trying to hide information, as has been alleged
here. We currently report reams of data in 50 States. There is plen-
ty of sunshine on the insurance industry, and we are willing to do
the same thing at the Federal level.
Senator Feingold mentioned the Missouri data, which is collected
by ZIP code, and Commissioner Hunter mentioned the Texas data
which is collected by ZIP code. That information has allowed them
to make conclusions about availability of insurance based on the
five-digit ZIP code, and we believe that information would be effec-
tive at the Federal level.
If I could just summarize, we are working on a number of
proactive programs with the Urban League, the Big I, the insur-
ance departments of many States, and State legislatures to address
the issue of insurance availability by increasing the number of mi-
nority agents, increasing the number of agents in urban areas, and,
conducting tours for insurance underwriters of neighborhoods
where perhaps insurance might not be as readily available as in
other neighborhoods.
71
We believe these partnerships are the wav to move forward in
trying to really deal with the problems of urban America, and not
aaditional data collection at a census tract level that would cost
both the insurance industry and insurance consumers more money.
Thank you very much.
[The prepared statement of Ms. Schubert follows:]
Prepared Statement of Lynn M. Schubert
The American Insurance Association is a national trade organization representing
more than 270 companies writing property and casualty insurance in every state
and jurisdiction of the United States. ALA members write 36 percent of all commer-
cial property and casualty insurance in the United States. They also write a signifi-
cant amount of personal, homeowners and automobile insurance. ALA member com-
panies employ more than 145,000 people and pay $2.2 billion in state taxes and fees
(including payroll taxes) to state governments each year.
We appreciate the opportunity to be here today to discuss the important topic of
access to insurance for urban residents and businesses. I have been authorized to
present this testimony not only on behalf of the AIA, but also on behalf of the Inde-
pendent Insurance Agents of America (IIAA) and the Council of Insurance Agents
and Brokers (The Council). IIAA is a trade association representing nearly 300,000
independent insurance agents. The Council (formerly the National Association of
Casualty and Surety Agents, NACSA,) represents the nation's 300 largest commer-
cial insurance agencies and brokerages who write over $70 billion in premiums an-
nually.
These organizations have one over-riding goal on the issue of insurance access
and availability C!hairman Bryan: urban residents and businesses, as all other
Americans, must be able to purchase attractive insurance products at a price rea-
sonably based on the risk. ALA, IIAA and The Council members are committed to
working with legislators, regulators, consumers and brokers to ensure that this oc-
curs.
It is a fact that certain areas — especially in our cities — have higher numbers of
residents and small businesses without insurance than other areas. These discrep-
ancies are related to a whole host of socio-economic circumstances faced by people
who work and live in the urban areas, and which also increase the cost of insurance.
Outright racial or ethnic discrimination may also occur. We hope that it is infre-
quent. We know that it is a violation of federal and state law. We advocate stringent
prosecution wherever it is found.
To determine whether or not insurance is available in all areas, we could support
federal data collection of insurance information - if it is designed to produce a fair,
efficient and effective study of insurance availability and cost. H.R. 1188, pending
in the House, is such a measure, and AIA, IIAA and The Council support this bill.
The details of the bill and the reasons for our support are addressed later in this
testimony.
If there are availability problems, however, whether they are caused by economics
or by discrimination, they must be addressed. It is cold comfort to the citizens for
whom insurance is unavailable to explain to them the reasons why the problem ex-
ists. We believe it is time to start attacking these problems head-on.
We encourage and will participate in thorough and thoughtful dialogue on the
subject of urban insurance coverage with the goal of developing workable solutions
to tne problems. Specifically, we would like to work with legislators and regulators
to develop products and marketing ideas which adequately serve urban residents
and businesses. We want to discuss the establishment of market assistance plans
and other programs to facilitate greater access to insurers. For example, we already
are working with regulators in a number of states on programs to bring urban-based
independent agents together with companies.
One state wnich is moving forward on this issue is (Georgia. In Atlanta, AIA, in
conjunction with the Urban League, the Independent Insurance Agents of America,
the Insurance Department and state regulators, has established a task force to ad-
dress the issue oi insurance in urban markets. One of the first projects of the task
force is the Agent/Insurer Partnership. The task force has put together a directory
of profile forms completed by minority agents and has distributed it to standard in-
surance companies. These companies have reviewed the profiles, and are in the
process of making agency appointments from the directory. While the process is not
complete, a number of appointments already have been made. Now that this pro-
gram has proven successful, we are woricing to expand these efforts nationwide.
72
In addition, we also support the inclusion of homeowners insurance in existing
Fair Access to Insurance Requirement Plans (FAIR) to address the needs of home-
owners who are unable to find insurance in the voluntary market.
In California we publicly have supported a proposal which would provide for
statewide rating of basic first party insurance in the context of a cost effective no-
fault system. We believe this system should be considered in other states where
auto insurance costs are too high, especially for low-income urban citizens. We will
continue to explore other options along these lines for other lines of insurance.
Allegations nave been made that insurance is unavailable in urban areas due to
insurance redlining. Further, this Committee has asked us to address the question
of whether insurers illegally discriminate in providing property insurance. Before
any further discussion oY the positive efforts of the industry in the areas of insur-
ance availability and cost let me address the specific question posed by the Commit-
tee. To answer this question we need to start with a discussion of the concept of
redlining.
DEFI^fmON OF REDLININO
Redlining is an illegal offensive practice that cannot be tolerated. AIA opposes
redlining. The term has long referred to an attempt to discriminate on the basis of
race or ethnic origin by not doing business within certain "redlined" neighborhoods.
The practice is illegal, reprehensible, inexcusable and must not be tolerated. Viola-
tors should be punished.
Defining the term, however, in order to identify the specific activities that con-
stitute the practice of redlining, has proven a difficult task. Redlining is an emotion-
ally charged term that connotes different things to different people and, as such, has
defied definition in a universally accepted manner. In recent years insurance regu-
lators and industry representatives have spent many hours debating the issue and
hammeringout language describing and prohibiting certain practices that constitute
redlining. This language, embodied in the National Association of Insurance Com-
missioners (NAIC) Model Unfair Trade Practices Act, defines and prohibits the fol-
lowing as unfair discrimination:
Making or permitting any unfair discrimination between individuals or risks
of the same class and of essentially the same hazard by refusing to insure, re-
fusing to renew, canceling or limiting the amount of insurance coverage on a
property or casualty risk solely because of the geographic location of the risk,
unless such action is the result of the application of sound underwriting and
actuarial principles related to actual or reasonably anticipated loss experience.
We strongly endorse this provision. We have supported its adoption by tne NAIC
and its passage in state legislatures across the country. The language clearly pro-
scribes arbitrary underwriting decisions based upon geographic location alone. It
recognizes, however, that sound underwriting and actuarial principles cannot be ig-
nored by the industry — insurers must make rational underwriting decisions that
will preserve their solvency and protect consumers.
AIA has a clear record of opposition to the arbitrary reliance by insurers upon
physical location alone when rendering underwriting decisions. Throughout our his-
tory we have consistently stated our belief that insurance should be readily avail-
able, subject to fair and sound underwriting principles. The first step to making in-
surance available is the development of products that are attractive and affordable
for urban residents and businesses.
THE FIRST STEP TOWARD A SOLUTION
We must focus our attention immediately on a fundamental issue, i.e., the rapid
development and approval of attractive and affordable insurance products tailored
to meet the needs of urban consumers.
In California, we have joined forces with a broad coalition of consumer and civil
rights groups led by Consumers Union and the I^atino Issues Forum to create an
innovative, no-frills no-fault automobile insurance policy. This policy is a perfect ex-
ample of a creative, practical and sound solution to a real problem of people in need.
The policy is designed to be offered statewide at one low price. It guarantees all
injured accident victims at least $15,000 in medical and wage loss benefits for a uni-
form statewide price, and removes nuisance and minor injury litigation for non-eco-
nomic losses. Independent actuaries have concluded that the basic coverage could
be sold, on an actuarially sound statewide basis, for $220, saving California consum-
ers $1.8 billion in the first year alone.
Unfortunately, this product is not yet available to California consumers. During
recent sessions of the California legislature, the bill that would pave the way for
provision of this product in the marketplace has been bottled up.
73
The National Conference of Insurance Legislators recently has approved a model
automobile insurance law providing $15,000 of basic personal compensation cov-
erage and property damage liability coverage, along with limits on lawsuits and
health care costs. AIA estimates the standard price for the minimum mandated cov-
erage would be $117 in Vermont, $146 in Missouri and $199 in Texas.
We are working to inform legislators and regulators about the potential benefits
of this and similar new products. AIA encourages all state legislators and insurance
regulators to maintain a receptive attitude toward innovative and experimental in-
surance products. These kinds of products will serve as the key that will guarantee
an open door to insurance for all consumers.
IS INSURANCE AVAILABLE
The bottom line question that must be addressed is whether those urban consum-
ers wishing to purchase insurance currently are able to do so.
A number of studies from 1979 through 1993 show that a large percentage of
homeowners have homeowners insurance. In 1979, the AIA sponsored a nationwide
study on availability of homeowners insurance. That study showed that 98 percent
of homeowners had homeowners insurance. Eighty-eight percent of those surveyed
had comprehensive coverage covering fire, theft, vandalism and liability. Fifteen
percent had more limited coverage.
In 1980, R.L. Associates, a private research firm in Princeton, N.J., conducted a
similar survey for the All-Industry-Research Advisory Council (now Insurance Re-
search Council). This survey focused on the urban core of America, surveying urban
core neighborhoods in six of the largest American cities: Atlanta, Chicago, Cleve-
land, Los Angeles, Philadelphia, and New York (borough of Brooklyn). The results
of the 1980 survey were consistent with those of 1979. In fact, the total percentage
of homeowners with homeowners insurance increased from 98 percent to 99 percent.
The percentage with comprehensive versus more limited coverages also increased,
from 88 percent to 90 percent.
In 1993, a similar study was commissioned by AIA and performed by R.L. Associ-
ates. The survey covered the experiences of homeowners with regard to obtaining
various forms of property insurance and their attitude toward that coverage. The
results of this study conclusively demonstrate that property insurance Is widely
available in each of the cities surveyed, and that such coverage is "very easy" or
"somewhat easy" to obtain for the vast majority of policyholders. During the past
five years few respondents have been turned down for any type of homeowners cov-
erage, and an even smaller percentage have had their coverage canceled or non-re-
newed for any reason.
When combined with previous empirical research, this survey indicates that the
percentage of urban homeowners with property insurance is comparable to that in
suburban and rural jurisdictions. Moreover, to the extent that some homeowners are
without coverage, this decision is likely to be based on personal choice or economic
constraints, rather than difficulty in obtaining insurance.
Following are key highlights from the survey of 1,502 urban homeowners in Chi-
cago, Los Angeles, Atlanta, Brooklyn, Cleveland and Philadelphia:
• Less than 2 percent of the homeowners surveyed in the six cities did not carry
any homeowners insurance. Ninety-three percent had comprehensive coverage cov-
ering fire, theft, storm damage, vandalism, and liability. About 5 percent carried
more basis home insurance policies covering fire damage only or fire and windstorm
damage.
• The percentage of homeowners without any coverage ranged from less than 1
percent in Chicago and Atlanta to 3 percent in Los Angeles.
• There were no significant differences among African-Americans and whites in
terms of insurance coverage. Ninety-nine percent of African-American homeowners
carried either comprehensive (92 percent) homeowners coverage or more basic poli-
cies (7 percent). Ninety-eight percent of those identifjing themselves as white had
some homeowners coverage, including 94 percent with comprehensive policies and
4 percent with basic coverage.
• Nearly nine in ten (87 percent) urban homeowners said it was very or some-
what easy to find homeowners insurance. An even higher share (93 percent) said
it was convenient to contact an insurance agent or insurance company.
• Urban homeowners use a variety of methods to shop for and purchase home-
owners insurance including telephoning an agent, having an agent come to their
homes, traveling to an agent's office, purchasing through a mortgage or real estate
office, and purchasing home insurance by mail. A significant number of homeowners
in each of tne six cities have used one of these methods to purchase home insurance.
74
• Only 3 percent of urban homeowners had experienced cancellation or non-re-
newal of home insurance coverage during the past five years. Reasons for cancella-
tion or non-renewal cited by this small group of homeowners included non-payment
or late payment of premiums, loss experience (multiple theft or fire claims), insur-
ance companies that ceased writing home insurance, and physical problems with the
property.
• Very few respondents (3 percent) said that they were aware of anyone in their
neighborhood who had experienced difficulty in obtaining homeowners insurance.
Other surveys and studies show similar results. The Roper Organization Inc., a
nationally known public opinion survey firm, included a question on homeowners in-
surance as part oi a representative sample of 1,976 Americans for the 1992 Public
Attitude Monitor published by the Insurance Research Council. Conducted during
June 1992, the survey found that 94 percent of those surveyed owning homes had
homeowners insurance. Not surprisingly, the Roper survey showed some variations
in the share of homeowners witn insurance by region, income and community type.
For example, the survey indicated that homeowners living in central cities of metro-
politan areas with populations of greater than 250,000 actually were more likely to
nave homeowners insurance (96 percent) than the population as a whole. Central
city residents owning homes, including those living in very large cities with more
than a million people, were more likely to have homeowners insurance than persons
living in suburos (95 percent) and those living in rural areas and small towns (91
percent).
The 1992 Roper findings are nearly identical to those from another independent
national survey conducted by Cambridge Reports Inc. in 1989 on home ownership
and home insurance rates. The Cambridge survey found that 95 percent of home-
owners nationally carried homeowners insurance.
Other surveys also document that small business insurance consumers are largely
able to obtain desired insurance coverages and that voluntary market availability
improved steadily during the 1980s. The purchase of various insurance coverages
by small businesses increased during the 1980s. Urban small businesses were in
some cases more likely to have some coverages than their suburban, small town or
rural counterparts. Nationally representative surveys of small businesses (Small
Business Attitude Monitor 1991, Business Attitude Monitor, 1988) conducted by the
Insurance Research Council showed that the share of small businesses purchasing
key coverages such as property and liability rose from 1988 to very high levels by
1991. This evidence of general availability and affordability tracks well with the
independent data on the use of FAIR plans in commercial lines.
This evidence of general availability and affordability tracks well with the inde-
pendent data on the use of FAIR plans in commercial lines.
Participation of the FAIR plan m the marketplace is decreasing. Commercial lines
premium volume written through the FAIR Plans declined steadily in most states
from 1986 through 1991 as a percentage of total commercialpremium volume. For
example, commercial written premiums in the Illinois FAm Plan declined from
about one quarter of one percent (0.24 percent) to less than one-tenth of one percent
(.088 percent) of total commercial premium in the voluntary market. In addition to
Illinois, AIA analyzed the District of Columbia and eight large urban states: Califor-
nia, (Georgia, Massachusetts, Michigan, New Jersey, New York, Ohio, and Penn-
sylvania, and found that each experienced significant drops in FAIR Plan commer-
cial lines premium volume in relation to the state commercial voluntary market.
The decline in FAIR Plan premium volume in relation to the commercial voluntary
market generally indicates that businesses were having an easier time finding in-
surance through the voluntary market.
Personal lines FAIR Plan premium volume also decreased in Illinois and other
states relative to the voluntary market from 1986 through 1991. For example, FAIR
Plan premium volume in Illinois dropped from just over one-half of one percent
(0.52 percent) to about one-third of one percent (.036 percent) of total personal lines
(homeowners) premiums from 1986 to 1991. In New York, FAIR Plan premium
dropped from nine tenths of one percent of the voluntary market to under six tenths
of one percent. Overall, in eight out of the nine states that we analyzed, premium
volume in the FAIR plan declined in relationship to the voluntary market between
1986 and 1991, and in the remaining state where FAIR plan market penetration
did not decline, the increase was less than two tenths of one percent.
The number of applications received by the FAIR Plans for commercial and per-
sonal lines combinea also generally decreased from 1986 to 1991. Our analysis of
applications and policies issued in the ten jurisdictions examined indicates that over
that period, the number of applications received annually declined by an average
of 25.5 percent and the number of policies and binders issued by each of the plans
annually decreased by an average of 23.3 percent. These are all signs of improving
75
prof)erty insurance availability in the voluntary markets of these states and the Dis-
trict of Columbia. The bottom line conclusion is that the percentage of risks written
by the FAIR Plan versus the voluntary market is decreasing steadily.
Small businesses located in major cities were just as likely as their counterparts
in suburbs, non-metropolitan cities and towns, and rural areas to have liability in-
surance, more likely to have business interruption insurance, and somewhat less
likely to have property insurance. In this context, urban applies to small businesses
located within the city limits of a large city. As for specifically inner city businesses,
the only representative study of which we are aware on these businesses was pub-
lished in 1982 by All Industry Research Advisory Council (now the Insurance Re-
search Council). This study. Availability and Use of Business Insurance by Small
Urban Businesses, covers inner city small businesses in Chicago, Atlanta, Boston,
Brooklyn, Cleveland, Detroit, Los Angeles, and Philadelphia. Tne survey indicated
that at that time 92 percent of the inner city firms had some type of property-liabil-
ity coverage and 86 percent had the property coverages of fire, wind and vandalism.
Small businesses in inner-city Los Angeles were as likely as businesses in the
overall sample to have at least one or more of the property-liability coverages.
Although it appears from the data that insurance is available and affordable to
the vast majority of residents and businesses in inner-city areas, we recognize that
this still might leave some insurable risks without coverage for one reason or an-
other. We must continue our efforts to make insurance available for all insurable
risks.
POTENTIAL FEDERAL ACTION
The next question is what steps the Federal Government should take to identify
and combat illegal property insurance discrimination, if such discrimination exits.
As mentioned earlier, a fair, economical, efficient data collection scheme on the fed-
eral level to determine if insurance is equally available, based on the risk, for all
Americans, is something AIA, IIAA and The Council could support. The parameters
of such a data collection effort, however, are critical. Inordinate costs of collecting
data with limited value would not assist the insurance consumer, but rather, harm
that consumer with either higher prices or possibly less financially sound insurers.
Collection of data which reveals what insurance is being sold, where it is being
sold, who is selling it and how much.it costs the consumer, would answer the ques-
tion of whether or not insurance is available. This collection should be undertaken
in a format to provide the most information, in the most useful form, in the most
cost-efficient fashion.
The most that is needed today is a data collection and study effort, designed to
collect a limited amount of data from insurers on limited lines, in a limited number
of cities, for a limited period of time. The data should answer the four issues ad-
dressed above, who, what, where and how much. It should require reporting in a
format that readily is obtainable and is cost effective — five-digit zip code. Various
studies could be undertaken for more complex issues such as commercial insurance,
agent appointments and terminations, insurance applicants and the effectiveness of
the data collection.
Data collection should be limited in time and scope to answer the question is in-
surance available equally in all neighborhoods at a cost commensurate with the
risk. The question oi whether or not insurers are illegally discriminating is a ques-
tion of regulation for insurance regulators. Federal data collection can assist regu-
lators in making this determination, but data collection alone cannot answer that
question or enforce discrimination laws.
The lines of insurance raising concern are homeowners, dwelling fire and allied
lines and private passenger automobile. Data collection should be limited to those
lines. To determine the current situation, the duration of the study should be lim-
ited. Anywhere from one to five years of data collection would show the status of
insurance availability. The unit of measurement also needs to be reasonable. Data
on the existence and details of policies is kept by most insurers on a computer sys-
tem which includes at most only the five-digit zip code of the property insured. In-
surers have gone to great expense in recent years to install these systems so that
they can report five-digit zip code information to state regulators.
The full address of the property insured often only is in a manually kept record,
and sometimes, if the property is part of an umbrella policy, not even there. Vir-
tually no insurer has a statistical reporting computer system which collects or could
store nine-digit zip code information. The capital which would be required to convert
existing computer systems to report on any basis other than five-digit zip code is
extraordinary, and the value of data on any other basis is limited.
76
Last year Senate Banking Committee Chairman Donald Riegle requested the U.S.
General Accounting Office (GAO) to investigate the necessity of federal reporting to
determine availability, affordability and accessibility of property insurance. The
GAO undertook an extensive investigation of this issue, starting with a review of
existing literature, proposed bills, and state requirements. GAO staff discussed the
issue with trade associations — including a number of meetings with AIA stafT—
consumer groups, statistical agents, research organizations and the NAIC, and ulti-
mately developed their own analyses and conclusions.
The result of this study, the GAO Report to Chairman Riegle, "Property Insur-
ance, Data Needed to Examine Availability, Affordability, and Accessibility Issues"
was released on February 9, 1994. In analyzing what data should be reported, the
report begins with the statement that collection of zip code data is important. While
the report does state that census tract reporting could be more useful, it goes on
to say that this would require restrictions due to the volume of data which would
be generated. "The value of this reporting must be weighed carefully against the ad-
ditional burden it places on companies to comply."
According to the report, the data that can be reported readily by companies (zip
code data for policy information) would be useful to examine availability and afford-
ability issues, "but will not be sufficient to determine conclusively whether unfair
discrimination exists or why." However, the data would be a marked improvement
over what is available today and "could serve to point regulators more effectively
in directions for further probing."
At this time insurance is regulated by the states. It is up to state insurance regu-
lators, among other things, to investigate insurer practices and punish those insur-
ers who illegally discriminate. Analysis of data reported by zip code clearly would
allow regulators and others to determine if there is a disparity between the number
of owner-occupied homes within a zip code and the number of homeowners policies.
Any large disparity then would indicate that the appropriate regulator needs to ask
insurers for more detailed information within that particular zip code. This would
limit the volume of information collected by the federal government to a manageable
load, but would provide the information needed to investigate areas of concern.
Additionally, the number of areas to be studied under any federal data collection
should be related to the question raised. The allegations giving rise to this issue at
the federal level address insurance availability in urban areas. To determine the so-
lution, data needs to be collected for those areas where there is alleged to be a prob-
lem. Twenty-five of the largest urban areas include approximately forty-three per-
cent of the United States population. This number clearly is sufficient to address
the question.
Any federal data collection should be drafted in a fashion to provide quick, effi-
cient and cost effective data collection. H.R. 1188, introduced by Congresswoman
Cardiss Collins of Illinois, is a bill which would gather the information necessary
to determine if insurance is available in all neighborhoods equally, where the insur-
ance is being provided, who is providing the insurance, what kind of insurance is
provided, and what it costs, on a five-digit zip code basis. This information could
be reported within a year, rather than the up to three years it could take for insur-
ers to begin providing census tract data, ana at a reasonable cost to the consumer,
rather than the exorbitant cost to consumers of insurers implementing an entirely
new reporting system for the federal government, while keeping in place their re-
porting systems for state regulators.
The information which would be provided by H.R. 1188 would allow regulators to
focus efforts on zip codes with significant disparities between number of home-
owners and number of homeowners policies, rather than being required to review
detailed information for huge numbers of census tracts with no problems whatso-
ever.
Time and effort could be spent on addressing real problems of our urban cores
rather than over-reporting and reviewing of unnecessary data.
AIA, IIAA and The Council urge the Commerce Committee to. consider a federal
data collection effort which will address the issue of insurance availability and cost
in a rational, effective fashion.
AFFIRMATIVE EFFORTS BY THE INDUSTRY
AIA recognizes that there are a number of issues that may have an impact on
urban consumers and their ability to obtain insurance. The term redlining often is
used loosely as a catch-all, short-hand term to identify a wide variety of issues af-
fecting the urban areas of our nation. AIA members and others are taking steps to
address these issues. It is our belief that partnerships between the insurance indus-
77
try and consumer organizations, civil rights organizations and housing organizations
are the most productive way to move ahead.
Location of Agents with Company Appointments
One of the most controversial issues is whether agents with standard company
appointments can be found in urban areas. Some urban consumers contend that in-
surance companies selectively place agents in locations that discourage applications
for policies from certain geographic areas. The majority of AIA menioer companies
mancet their products through the independent agency system. These agents are
truly independent entrepreneurs, usually representing more than one insurer. These
agents are not company employees placed in a particular office by the insurance
company. The companies they represent cannot and do not control the location of
the agent's place of business.
However, AIA, IIAA and The Council are committed to the idea of increasing the
number of minority and urban based agents with standard company appointments.
The Atlanta Agent/Insurer Partnership discussed earlier is one example of what the
industry is domg to move forward on this issue. Another example is insurers' par-
ticipation in agent association programs such as INVEST, a program which assists
students with financial difficulties to start a career in the insurance industry.
AIA and the IIAA also are working closely together on other efforts to increase
the number of minority agents with standard company appointment in programs
such as grouping of agents and special brokers programs.
A number of these types of programs are in the development stages around the
country.
Other Marketing Systems
It is important to note, however, that about 60 percent of personal lines insurance
is not sola through the independent agency system. It is sold by captive agents, em-
ployees, or by direct marketing such as mail and telephone. Increasing the number
of independent agents serving urban areas alone will not be enough to resolve ac-
cess problems. Other new marketing techniques will be required to better serve
urban areas. AIA members currently are participating in discussions at the NAIC
meetings on this subject, and would be delirfited to assist regulators in developing
such techniques within the limits of state and federal antitrust laws.
The Product
Residents in urban areas must have ready access to insurance products that are
attractive to them as well as affordable. As discussed above, the first requirement
is the product. Products can be offered which provide coverages and limits which
are desirable, at a price that is affordable. AIA consistently has supported the au-
thorization bv law and the approval by regulators of such products. However, each
policy must be underwritten carefully, looking at underlying risk factors. To make
such products available to greater numbers oi consumers, risk factors must be de-
creased. Specifically, I am referring to the high risk of fire, high crime rates and
excessive increases in automobile repair costs and health costs.
Some view refusals to issue replacement cost coverage in homeowners' policies for
risks that evidence a substantial disparity between replacement cost and market
value as redlining. Again, we disagree. AIA acknowledges that many insurers will
not provide this coverage when there is a wide disparity, between the replacement
cost and the market value of a structure. In most instances, in order to qualify for
replacement cost coverage, an insured must buy enough coverage to represent at
least 80 percent of the cost of replacing the structure. This requirement may present
a dilemma for insureds who own homes built before the 1950s. For many of these
older homes the cost to replace the building with the exact type of materials used
in the original construction far exceeds what the owner might spend to replace the
dwelling using modem materials and simpler construction techniques. Replacement
cost coverage is not well-suited for these kinds of properties, because insureds may
be unwilling or unable to buy — and insurers may be unwilling to sell — insurance in
an amount well beyond the price for which the dwelling could be sold. Insurers,
however, have responded to tne needs of property owners faced with this disparity.
For example, a lower cost variable percentage replacement loss settlement endorse-
ment has Been developed.
This endorsement permits an insured to choose to insure at a lower percentage
of insurance to replacement value (i.e., usually 50 percent, 60 percent, or 70 per-
cent), rather than the 80 percent usually required for replacement cost coverage.
Thus, if the policyholder decides to insure for 50 percent of the replacement cost of
the property, the premium would be lower than coverage for 70 percent of the re-
placement cost. However, if the property is totally destroyed, the proceeds to the
policyholder would be 50 percent of the replacement cost of the property.
79-871 0-94-4
78
Additionally, the industry has developed repair cost policies that delete the re-
placement cost provision and provide that a damaged dwelling will be repaired or
replaced with commonly used building materials instead of materials of like kind
and quality. It is important to recognize that when faced with a dilemma such as
this, the insurance industry has responded with products suited for a particular
purpose. Without the regulatory approval of these products, the industry cannot ad-
dress the problems of the consumer. These are further examples of the industry re-
sponding to consumer needs with specialized products.
It has been asserted that these types of products are inferior and do not provide
the same coverage as is available to properties without this large difference between
market value and replacement costs. However, the cost of insurance is based in part
on the expected cost to pay a claim under the policy. The price of providing replace-
ment cost policies for these types of properties is so high that prior to the develop-
ment of alternative products, consumers asserted that property insurance was un-
available because it was unaffordable. To address this concern, insurers develof>ed
new products that would provide a measure of coverage and protection, but would
not cost so much as to be unavailable. The price of insurance must reflect the risk.
Companies will continue to attempt to address the needs of consumers by creating
legitimate products that can be purchased for a reasonable price.
Marketing and Service
Marketing and servicing products in communities where English often is a second
language presents special aifficulties. AIA companies have added Spanish speaking
customer service representatives to personal lines service centers and toll free hot
lines, print posters and brochures in both English and Spanish, and have programs
to target small and disadvantaged contractors. These efforts make marketing and
servicing products in the urban areas more effective.
Education
Education is critical to the availability and accessibility of insurance. Education
must be conducted both for consumers and for insurers. Currently AIA members are
working with individual state regulators as well as the NAIC Insurance Availability
and Aflordability Task Force Subcommittee on Education to develop programs to in-
crease the knowledge of average and low-income consumers about insurance, and
to increase the knowledge of underwriters and agents about urban neighborhoods
and opportunities. We believe this concerted effort will assist in increasing the avail-
ability and accessibility of insurance products which are truly priced based on the
risk.
Product Pricing
Some consumers allege that insurers intentionally overprice a product to prevent
sales in urban areas. In many states, pricing of insurance is determined tnrough
a regulatory approval process. Rates are not intentionally set higher for urban risks
to prevent people from purchasing the insurance. Individual company rates should
be and are oased on loss experience and are subject to the review of the state insur-
ance regulator. In many cases, urban insurance rates are the same as or lower than
those applicable to risks in suburban areas. In other instances policies for risks in
urban areas will be more expensive than similar risks in suburban areas. This rate
disparity is due to the increased costs of certain policies, such as increased incidents
ana severity of claims in certain areas, or increased distance from a fire station.
Automobile insurance is a good example of this cause and efTect. The cost of auto-
mobile insurance reflects the costs of goods and services that are paid by automobile
insuremce premiums, including litigation, health care, and auto repair. The fre-
quency of bodily injury liability claims countrywide has increased 19.0 percent from
1987 through the third quarter of 1992, according to NAII/ISO Fast Track data. The
increase in the loss cost for bodily injury habilitv during that same period was 67.1
percent. Meanwhile, the frequency of property damage liability claims and collision
claims in countrywide has decreased 11.0 percent and 16.0 percent, respectively,
with the loss costs increasing 13.0 percent and 1.4 percent. This helps demonstrate
that liability claims and the resulting medical costs are a major source of high and
rising auto insurance costs.
Of course, these costs are not uniform between states, or within areas of certain
states. For example, in Illinois, the average loss cost for bodily injurj' liability is
$109, compared to the countrywide average loss cost of $119. In the District of Co-
lumbia, the average loss cost for bodilv injury liability is $191, compared to the
countrywide average loss cost of $119. Virginia has an average loss cost for bodily
injury liability of $101, and Maryland $144. Some other average loss costs as of the
third quarter of 1992 for these areas are: property damage liability: Illinois $65,
D.C. $79, Virginia $47, Maryland $62, countrywide $56; collision: Illinois $117, D.C.
79
$150, Virginia $76, Maryland $104, countrywide $103. These costs are reflected in
rates chareed in these states.
There also are significant difFerences in how costs are distributed within states.
For example, according to a 1990 report, the bodily injury liability claim frequency
per 100 insured cars in Chicago was 3.07 versus the Illinois statewide average of
1.81. This means that bodily injury liability claims were filed 69.6 percent more
often in Chicago than for the state, as a whole. Also, there were 52 bodily injury
liability claims for every 100 property damage liability claims in Chicago compared
to 34 for the state, as a whole. Thus, in Chicago, an injury claim was 55 percent
more likely to be filed for each property damage claim, than the average for the
state of Illinois.
We understand the role that insurance costs play in limiting access to insurance.
We know that rates based on loss experience may be more than some consumers
are able to pay. In fact, if insurance is not affordable, it essentially is not available.
However, we believe there are rational solutions to problems relating to the cost and
the value of auto insurance. One such solution is the development of innovative, low
cost products such as our no-frills, no-fault automobile insurance policy proposed in
California. With cooperation and creativity we can meet the needs of all consumers,
including those who are low-income, by offering them useful and affordable insur-
ance products. If these products are available, and consumers are interested in pur-
chasing them, insurers are sure to increase their marketing efforts to be the com-
pany making those sales.
Risk Reduction
To lower cost and increase insurance availability, the risk in some neighborhoods
must be decreased. AIA and member companies are working with community orga-
nizations such as the Association of Communities for Reform Now (ACORN) on pro-
grams such as the ACORN Nei^borhood Home and Safety Program to assist com-
munities in lowering their risks, and then providing insurance for those participat-
ing residents.
OTHER ISSUES
In recent discussions of redlining, many of the above issues have been raised. Ad-
ditionally, issues of insurance investment in urban areas, aflirmative action within
insurance companies and contributions to minority or urban-oriented organizations
have been added to the discussion. I would like to address what we are doing in
connection with these broader social and economic issues. We are proud of our suc-
cesses, and would like to mention them. However, we recognize that more has to
be done by everyone, including insurers, to help revitalize our urban areas.
Affirmative Action Within Insurance Companies
AIA member companies fund and participate in the recruitment and advancement
of minorities through a variety of programs, both external and internal. The exter-
nal organizations supported by our members include: The Urban League, Black Ex-
ecutive Exchange Program, and SER (Jobs for Progress, Inc.), minority summer in-
ternship and scholarship programs like INROADS, inner-city youth job training ini-
tiatives like INVEST and the STAG Program. Internal initiatives include targeted
college recruitment, company- wide managerial diversity training, the creation of
specific, regular opportunities for minority employees to meet and network with top
management, minority career development programs, coaching and mentoring pro-
grams. Several companies have made an explicit commitment to promote minorities
to the highest professional and managerial positions. Some advance the process by
auditing the employee mix to ensure representation of the labor pool at laree.
In aodition to employee opportunities for minorities, many companies also target
minority companies as vendors. For example, one AIA member's targeted minority
vendors program played a part in 12 jiercent of the company's 1991 purchases being
made through minority or women vendors.
Jobs In Urban Areas
Probably the most important need of urban centers today is jobs for urban resi-
dents. Many AIA member companies maintain significant facilities in urban areas
across America. Thousands of workers are employed by the insurance industry in
cities such as Chicago, Atlanta, Baltimore, Boston, Cleveland, Dallas, Detroit, Los
Angeles, Miami, New York City, Philadelphia and Pittsburgh.
Insurance Company Investment in Urban Areas
Related to the issue of jobs is the issue of investment. Insurance industry invest-
ment in urban areas is significant. Excluding all other types of insurance invest-
80
ments in urban areas and only considering the purchase of municipal bonds, the in-
surance industry has invested billions of dollars a year into urban areas. For exam-
ple, for the most recent year for which we have data, 1989, insurers held or sold
a total of $1.8 billion in various Chicago municipal bonds. For Los Angeles city
alone, insurers held or sold $573.4 million in these bonds. For Los Angeles county,
insurers sold or held $501.2 million in bonds. The total of all bonds sold or held by
insurers as of the end of 1989 for both Los Angeles city and county was approxi-
mately $1.1 billion. In addition to these investment dollars, companies also contrib-
ute financially to many regional and national organizations dedicated to the ad-
vancement of minority interests and the revitalization of American cities. A list of
some of these organizations is attached as Appendix A.
These contributions assist not only residents in urban areas, but all of America,
by giving urban residents a chance for housing, education, cultural activities, career
training, and a host of other opportunities which would not be available without the
efforts of corporate America. The insurance industry is proud of its participation in
these programs, and intends to look for additional ways to assist in the revitaliza-
tion of our urban areas.
CONCLUSION
This sensitivity to the benefits of working with minorities and women as employ-
ees and managers, as a sales force, as vendors, as customers, and as citizens, is well
documented in the insurance industry. We are committed to work with the Con-
gress, state legislators, insurance regulators and consumers to address both broad
social and economic and insurance specific problems.
In summary, we oppose redlining. We support the NAIC Unfair Trade Practices
Model Act. We support H.R. 1188. Further, we look forward to working with the
Senate Commerce Committee as you address these important issues.
APPENDIX A— MINORITY AND URBAN ORGANIZATIONS SUPPORTED IN PART BY
INSURANCE COMPANIES
The NAACP Mexican American Legal Defense &
The National Urban League Educational Fund
The United Negro College Fund National Urban Fellows
Howard University Minority Career Fairs
Livingstone College Neighborhood Housing Services
Morehouse College Center for Community Change
Johnson C. Smith University Community Training and Assistance
Spelman College ^ ^^ -f r n ; n a
Emory College C"^"^'', menr""""^
Hampton University Low^l'ncoSousing Fund
The I^callmtiatives Support National Minority Suppliers
Corporation (affordable urban housing) Development Councif
Martin Luther King Jr. Youth Northwest Bronx Community and Clergy
Foundation Coalition
Opportunities Industrialization Centers WAVE Inc.
of America A Better Chance
The National Political Congress of Black Amistad Foundation
Women Coalition of African American Cultural
The National Puerto Rican Forum Organizations
The National Society of Black Engineers I Have a Dream Foundation
The Latin American Association Habitat for Humanity (Atlanta, Newark,
Las Jovenes NJ)
The San Juan Tutorial Program The Philadelphia Martin Luther King
(education, cultural enrichment and Association for
recreation for inner city Hispanic Nonviolence
children) United Way
National Puerto Rican Coalition v mT^T*' Scholarship Fund
National Council of La Raza Y.M.U.A.
El Hogar Del Future, Inc.
Senator Bryan. Thank you very much, Ms. Schubert. Mr. Bell,
we will hear from you next.
81
STATEMENT OF GERALD BELL, COMMERCIAL LINES SPECIAL-
IST, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS
Mr. Bell. Mr. Chairman, my oral comments will synopsize the
written comments you have.
Senator Bryan. Let me just assure you that your statement, as
well as each of the witness' statements that have previously been
submitted to us, will be made a part of the record. So we appre-
ciate that.
Mr. Bell. Thank you very much, sir. I will not abuse your time,
and read it all.
I represent the National Association of Independent Insurers, a
property and casualty insurance trade association of more than 570
member companies, including many small- and medium-size insur-
ers.
We oppose enactment of any Federal insurance data gathering,
any collective legislation or mechanism, because it would create a
costly, unnecessary Federal response for a problem which, if it ex-
ists to any extent, is being adequately addressed at the State level,
we believe.
Property insurers are already precluded by State insurance law
from discriminating on the basis of race, color, religion, gender,
handicap, national origin, and other criteria. And conduct by any
insurer of this nature would be unfair discrimination. We abhor
such practices, if thev exist; we repudiate them, and support the
rigid enforcement of tne appropriate Federal and State statutes.
The NAIC developed and advocates model laws that require in-
surers to state why insurers are nonrenewing a policy; and which
specially prohibit companies from declining to write insurance sole-
ly on the basis of the geographic location of property.
If there are charges of unlawful discrimination, the States
through their insurance commissioners are empowered to inves-
tigate them; and many of them are doing so. The States also have
the power to prosecute companies found to be in violation of such
unfair trade practices, and we encourage them to do so.
The States are taking steps to address perceived unfair under-
writing and marketing practices, which some call redlining, by in-
surers.
The NAIC task force on insurance availability and aflfordability
is conducting a three-prong examination of insurer marketing and
underwriting practices, which include the following elements:
A data call, by ZIP code, to apply to the 20 States with the 40
largest metropolitan statistical areas. That call includes home-
owners, private passenger auto liability which was called for by
Commissioner Hunter, dwelling fire, commercial fire, allied lines
and business owners' policies of the top 40 personal lines insurers
in each State.
It is designed to elicit ZIP code data on premiums, exposures,
nonrenewals, cancellations and agent appointments; so that the in-
formation sees the light of day to a greater extent than it ever has,
and that all the information is on the table.
A comprehensive urban insurance analysis of the data by the
NAIC staff, to assess the nature and extent of insurance availabil-
ity and affordability problems in urban areas, including such fac-
tors as claim costs, income and race, and to recommend possible
82
regulatory and policy measures to address urban insurance prob-
lems.
And third, a qualitative analysis of urban insurance problems,
including surveys, focus groups, and public meetings, and target
examinations of insurers.
States with major urban areas have taken steps to ensure the
availability of essential insurance for years, for high-risk prop-
erties, by establishing FAIR plans or other mechanisms which are
private insurance sector responses which create facilities to spread
the cost of writing high-risk property insurance among all licensed
property and casualty insurance companies in the State.
FAIR plans currently operate in 30 States and the District of Co-
lumbia. Those plans have lost money during the years 1971
through 1991, 20 years in all, with the exception of the year 1987.
The specific amount is in the statement; it is close to $1 billion.
And insurance companies are assessed for the losses that these
plans incur, which exceed the premiums that the policyholders pay.
The proposals which are currently before the House and the Sen-
ate impose additional Federal data reporting burdens on insurance
companies; and appear to suggest a quota system for agent place-
ment, and type of coverage to be written, without regard to basic
underwriting criteria.
Besides being duplicative and extremely costly, the Federal data
reporting proposals perhaps represent a first step toward an ill-
conceived goal to force insurers to provide the same coverage at the
same price, regardless of risk.
Insurers cannot provide identical coverage for different categories
of risk, such as older and more fire-hazard and theft-prone prop-
erties in certain areas, or rural properties as, again. Commissioner
Hunter alluded to, far removed from firefighting and water avail-
ability.
Additionally, the legislation would, perhaps, force policyholders
who own properties which are in the lower risk categories to sub-
sidize higher risk categories. The insurance industry has histori-
cally developed a range of products to fit different risks and make
coverage available, based on sound actuarial principles that are de-
signed to avoid, or at least minimized, subsidized rates.
The proposed bills are unnecessary; they are duplicative; thev
are costly; particularly for smaller regional companies which can ill
afford the additional administrative burdens that go hand-in-hand
with these proposals.
At this time, when the Nation must be seeking ways to reduce
the Federal deficit by cutting Federal spending, the proposed legis-
lation would spawn a new Federal bureaucracy to gather and ana-
lyze the information which is already being collected at the State
level.
The investigation of alleged insurance redlining is a prime exam-
ple of a project which should be left to the States, which are al-
ready doing the job.
We respectfully urge the members of this committee, Mr. Chair-
man, to oppose enactment of all of these proposals.
A copy of NAH's background paper on Urban Property Insurance
Issues is submitted, which amplifies many of the comments in
great detail. Thank you, sir.
83
[The prepared statement of Mr. Bell follows:]
Prepared Statement of Gerald W. Bell
Good afternoon. My name is Gerald Bell and I am the Senior Commercial Lines
Specialist for NAIL
The National Association of Independent Insurers (NAQ), a property/casualty In-
surance trade association of more than 570 member companies, including many
small and medium-sized insurers, opposes enactment of any federal insurance data
collection legislation because it would create a costly, unnecessary federal response
for a problem which, if it exists to any extent, is being adequately addressed at the
state level.
F*roperty insurers are prohibited by state insurance law from discriminating on
the basis of race, color, religion, gender, handicap or national origin. Conduct of this
nature would be unfair discrimination. The NAII repudiates such practices and sup-
ports enforcement of the law.
The National Association of Insurance Commissioners (NAIC) developed and ad-
vocates model laws that require insurers to state why they are non-renewing a pol-
icy, and specifically prohibit companies from declining to write insurance solely on
the basis of the geographic location of the property.
A number of states have adopted these models and the NAII continues to support
their enactment.
If there are charges of unlawful discrimination, the states, through their insur-
ance commissioners, are empowered to investigate them, and many of them are
doing so. The states also have the power to prosecute companies found to be in vio-
lation of such unfair trade practice laws.
The states are taking steps to address perceived unfair underwriting and market-
ing practices (redlining) by insurers. The NAIC Task Force on Insurance Availabil-
ity and Aflbrdability is conducting a three-prong examination of Insurer marketing
and underwriting practices which include the following elements:
(1) A data callby zip code to apply to the 20 states with the 40 largest metropoli-
tan areas (MSAs). It will cover homeowners, private passenger auto fiability, dwell-
ing fire, commercial fire, allied lines and business ownersl policies of the top 40 per-
sonal lines insurers in each state. It Is designed to elicit zip code data on premiums,
exposures, nonrenewals, cancellations and agent appointments.
(2) A comprehensive urban insurance analysis of the data by the NAIC staff to
assess the nature and extent of insurance availability and affordability problems in
urban areas including such factors as claim costs, income and race, and to rec-
ommend possible regulatory and policy measures to address urban insurance prob-
lems.
(3) A qualitative analysis of urban insurance problems utilizing surveys, focus
groups and public meetings.
States with major urban areas have taken steps to ensure the availability of es-
sential property insurance for high risk properties by establishing FAIR Plans, pri-
vate sector facilities which spread the cost of writing high risk property insurance
among all licensed property and casualty insurance companies in the state.
FALK plans operate in 30 states and the District of Columbia. In Arkansas and
Mississippi the FAIR Plans only provide coverage in rural areas with limited or no
water supply and minimum fire suppression capacity. Other Fair Plans, such as the
ones in Florida, South Carolina and Texas, provide windstorm and hail coverages
onlv.
Between 1971 and 1991, 20 years In all, FAIR Plans lost monev In all years ex-
cept 1987. In that year the plans barely broke even. The total underwriting loss for
all the FAIR plans since Inception Is $992,477,000. Insurance companies participat-
ing in the plans are assessed for the losses.
In setting their rates insurance companies look at the characteristics of the prop-
erties involved, not at the individual homeowners.
Because the business of insurance is highly competitive, companies must carefully
evaluate risks. Some risks, such as the deteriorating condition of a building, or the
high risk of a building being vandalized based on past history of thefts in the build-
ing itself or in adjacent buildings, cannot be underwritten by competing companies
in the voluntary market. These problems are not limited to urban areas. Sometimes,
properties in rural areas are rated as hi^er risks because of the lack of firefi^ting
equipment and nearby water supply to deal with a potential blaze.
The proposals which are currently pending before the House and Senate would
impose additional federal data reporting burdens on insurance companies and ap-
pear to dictate a ouota system for agent placement and type of coverage to be writ-
ten without regard to basic underwriting criteria.
84
Besides being duplicative and extremely costly, the federal data reporting propos-
als perhaps represent a first step towara an Ill-conceived goal to force insurers to
provide the same coverage at the same price regardless of risk. Insurers cannot pro-
vide identical coverage for different categories of risk, such as older, more fire-haz-
ard and theft-prone properties In urban areas, or rural dwellings far removed from
fire fighting equipment, or new suburban properties.
Additionally, the legislation would force policyholders who own properties which
are in categories of lower risks to subsidize higher risk categories. The insurance
industry has developed a range of products to fit different risks and make coverage
available based on sound actuarial principles that are designed to avoid or at least
minimize subsidized rates.
The proposed bills are unnecessary, duplicative and costly, particularly for small-
er, regional companies which can ill-afford the additional administrative burdens
that go hand-in-hand with these proposals.
It is important to understand that insurance companies play an active role in
helping inner city residents upgrade their properties, make their neighborhoods
safer and their homes more insurable. One specific example is the creation of Nei^-
borfiood Housing Services (NHS) a partnership involving insurers, other businesses,
local governments and residents, all dedicated to revitalizing inner cities.
NHS services include providing low-income loans and lending assistance, as well
as financial, housing rehabilitation assistance and insurance counseling to inner city
residents. Since the 1980s, approximately 130 Insurance companies have contrib-
uted more than $50 million to NHS projects.
At a time when the nation should be seeking ways to reduce the federal deficit
by cutting federal spending, the proposed legislation would spawn a new federal bu-
reaucracy to gather and analyze the information which is already being collected at
the state level. The investigation of alleged insurance red lining is a prime example
of a project which should be left to the states which are already doing the Job.
We respectfully urge members of this committee to oppose enactment of these pro-
posals. A copy of NAII's background paper on Urban Property Insurance Issues is
submitted for the record. This document expands on the thoughts outlined above
and offers a few constructive steps public policymakers might consider to promote
property insurance availability.
Senator Bryan. Thank you very much, Mr. Bell. Mr. Bhargava,
we will have you bat cleanup here on this panel.
STATEMENT OF DEEPAK BHARGAVA, LEGISLATIVE DIRECTOR,
ASSOCIATION OF COMMUNITY ORGANIZATIONS FOR RE-
FORM NOW
Mr. Bhargava. Thank you, Mr. Chairman. I am Deepak
Bhargava, legislative director of ACORN; and I am happy to be
here today. Thank you for having me.
The problem of insurance redlining has been on the table for over
25 years. It reemerged, as Commissioner Hunter said, after the
riots in Los Angeles, when the California Department of Insurance
found that consumers in minority neighborhoods in Los Angeles ei-
ther could not get coverage, or were paying exorbitant rates, or
were being covered by surplus lines carriers that, eventually, de-
frauded them.
And this is a great irony, since the 1968 riots in manv commu-
nities around the country led to the formation of the Hughes Presi-
dential Commission on Insurance Availability; which found a sub-
stantial problem, and concluded that: "communities without insur-
ance are communities without hope."
So, more than 25 years later, we have not made much progress.
ACORN's own study of homeowners' insurance discrimination
last year found that residents of predominantly minority neighbor-
hoods often find it difficult or impossible to get quotes from agents;
are more likely to be steered to FAIR plans or to substandard poli-
cies which offer limited coverage at a higher price; and often face
85
requirements, for example, inspections or credit checks, that are
not required of other appHcants.
Testing by the National Fair Housing Alliance, which resulted in
two complaints against major insurance companies, found discrimi-
nation in the provision of homeowners' insurance to be pervasive.
In comparing the treatment of applicants for similar homes of
similar value with similar income neighborhoods, they found that
African-American testers experienced discrimination 47 percent of
the time in Louisville; and 60 percent of the time in Atlanta and
Milwaukee. And Latino testers in Chicago experienced discrimina-
tion upward of 95 percent of the time, in the tests that were con-
ducted.
Many insurers claim that such disparities are due to risk, rather
than to prejudice. I think it is important to note the only study in
this area was done by the Missouri Department of Insurance in
1993, which found that homeowners in low-income minority areas
pay more for policies than homeowners in low-income white areas;
but the losses in minority areas over a 5-year period were signifi-
cantly less than in white areas.
So, this study suggests that the insurance industry's contention
that underwriting is extremely precise, and based solely on risk,
may not be accurate.
And it is also worthwhile pointing out that flagrant discrimina-
tion is not uncommon or unusual. The NAACP lawsuit in Milwau-
kee against the American Family Mutual Insurance Company rest-
ed, in part, on a conversation between a sales manager for the com-
pany and an insurance agent.
Tne conversation went as follows:
Very honestly, I think you write too many blacks. You have got to sell good, solid,
premium-paying white people. They own their homes, the white works. Very hon-
estly, black people will buy anything that looks good right now; but when it comes
time to pay for it, you are not going to get your money out of them. The only way
you are going to correct your persistency is to get away from the blacks.
I would urge this committee to consider and to pass legislation
that would, as a modest first step, require insurance companies to
disclose information comparable to that collected by banks under
the Home Mortgage Disclosure Act.
This would serve three purposes: First, the administration has
stated that data collection would assist an enforcement of Federal
civil rights laws, such as the Federal Fair Housing Act; second, it
would resolve the dispute, the ongoing dispute between the insur-
ance industry and advocacy groups about whether this problem ex-
ists; and lastly, as you know from your work on the Banking Com-
mittee, even disclosure could have a remarkable impact on industry
practices, as has been the case with HMDA over the past few
years.
I would simply- endorse what Mary said about the contents of dis-
closure: That it should be done at a census tract basis, in as many
MSAs as possible, and with the race and gender of policyholders.
Let me, last, comment on the efforts of the NAIC. I think the
record of the NAIC, and consumer protection in general, leaves
something to be desired. In this area, it is an absolute scandal.
The NAIC has not moved on this issue, despite abundant evi-
dence, for over 2 decades. The data call to which the two witnesses
86
spoke was initiated only after the Federal Government moved in
this area.
And I might note that the NAIC is not collecting data on losses;
which is absolutely essential, to get at the bottom of this problem.
So, I will not keep you any longer. Thank you for the opportunity
to testify.
[The prepared statement of Mr. Bhargava follows:!
Prepared Statement of Mr. Bhargava
Good afternoon, Mr. Chairman, and members of the Committee. I am Deepak
Bhargava, Legislative Director of ACORN. We sincerely appreciate the opportunity
to present testimony before you today on the important subject of insurance redlin-
ing. We appreciate the Committee's attention to this problem, and congratulate you
for your willingness to address it.
1. INSURANCE REDLINING: A REVIEW OF THE EVIDENCE
The existence of insurance redlining has been documented by numerous studies,
commissions and panels over the course of two decades. We define insurance redlin-
ing as the industry practice of refusing to write policies, charging differential rates,
onering substandard coverage, discouraging applications, or imposing differential re-
quirements as a condition of coverage based on the geographic location of a property
or individual seeking coverage.
Insurance redlining in practice means that minority and low-income neighbor-
hoods are underinsured; consumers in these neighborhoods receive lower-quality
coverage at a higher price than policyholders in hign-income or predominantly white
areas and are more likely to be covered by FAIR plans; policyholders in minority
and low-income areas are more likely to have their policies canceled or non-renewed
by a carrier, and to have their claims contested.
Numerous studies have found that the racial composition of a neighborhood is an
independent factor influencing underwriting decisions, even after other criteria,
such as income, the number of rental and owner-occupied units, the incidence of fire
and crime, and the age and value of dwellings are accounted for.
Studies in these areas have consistently documented several factors which ac-
count for these disparities.
(1) Applicants from predominantly minority and low-income areas are often "pre-
screened" — or discouraged from seeking coverage.
Results of phone surveys to agents from applicants posing as residents from
neighborhoods of different race compositions and income levels show significant dis-
parities. Applicants from low-income and minority neighborhoods are often simply
not offered quotes over the phone, or face stiffer requirements as a condition of cov-
erage than residents of other neighborhoods.
(2) Insurers use discriminatory underwriting criteria.
Although no insurer is allowed to use race as an underwriting criteria, the use
of criteria such as the value of the dwelling, the age of the dwelling or its construc-
tion type have the effect of redlining areas with high concentrations of low-income
and minority households. Such criteria may be established by carriers at certain
thresholds precisely in order to exclude certain neighborhoods.
In some cases, agents may be instructed bv companies to avoid writing policies
to people in certain professions — those in which minorities are more likely to he rep-
resented. Additionally, many underwriting guidelines use excessively subjective con-
tents such as "lifestyle" or "morals" that invite discrimination.
(3) Insurers use discriminatory rate setting methods.
,- Basic rates for property insurance are primarily established by rating territory.
Larger companies in particular may create territories that effectively carve up a city
according to the racial and income characteristics of neighborhoods — thereby allow-
ing for wide disparities in premiums charged.
(4) Agents are underrepresented in low-income and minority neighborhoods.
The number of agents selling policies in a zip code varies sharply based on the
racial and income composition of a nei^borhooa, even after other factors are taken
into account. And changes in the racial composition of a neighborhood may lead to
dramatic shifts in the number of agents located there.
(5) Policyholders in low-income and minority areas are treated as second class
consumers by many carriers.
PoHcyholders in minority and low-income neighborhoods are more likely to have
their claims disputed, as well as have their policies canceled or non-renewed without
87
reason, or for reasons which would not result in the termination of a policyholder
in a high-income or predominantly white area.
(6) State regulators are unable and often unwilling to stop these practices.
State insurance departments are often underfunded and understaffed, and the
pro-industry bias of many departments leaves many anti-discrimination laws effec-
tively unenforced, and many consumers without recourse.
(7) FAIR plans and assigned risk pools — created to be the insurer of last resort —
may in fact be used as "dumping grounds" for whole neighborhoods.
A disproportionate number of homeowners in minority and low-income areas are
assigned to the residual market The policies available in this market are often lim-
ited to fire and extended coverage, usually do not cover the insured for full replace-
ment cost, and may cost as much as 270 percent more than the conventional mar-
ket.
(8) Abandonment by the large insurers has created a niche for unregulated surplus
lines carriers.
Surplus lines carriers — or "scavenger" companies — are chartered offshore, and
may avoid state regulation as well as insurance by state guarantee funds. These
specialized carriers may aggressively market policies in low-income and minority
communities, sometimes leaving consumers altogether unprotected in case of a
major claim.
These problems have been documented over the past twenty five years in numer-
ous studies and in litigation. Below is a summary of some of the relevant research
and litigation.
HUGHES PA.N'EL — INSURANCE IN RIOT AFFECTED AREAS (1968)
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 "[rjiots [were] only one aspect" of
the availability crisis. In the words of David Badain, "[tjhe 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
create additional incentives for those inner-city residents who can afford to relocate
to the suburbs to do so.
For those people who can not afford to leave the result 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."
FEDERAL INSURANCE ADMINISTRATION: FULL INSURANCE AVAILABILITY (1974)
In 1974, the Federal Insurance Administration issued a report entitled "Full In-
surance 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 re-
ported losses, indicating that the "the vast majority of the insureds in the plans
should have been written voluntarily."
U.S. COMMISSION ON CIVIL RIGHTS (1979)
In Insurance Redlining Fact not Fiction, a report of the Illinois, Indiana, Michi-
gan, Minnesota, Ohio and Wisconsin Advisory Committees to the U.S. Commission
on Civil Rights, in 1979, the same problems with availability, quality and afford-
ability were documented.
The Conmiittee also performed a zip code analysis of policies written in Chicago,
similar to that performed by ACORN, and had similar findings. The study examined
the level of coverage by the conventional market and FAIR plans, and compared
these figures to the racial composition of the zip codes, controlling for the age of
housing, family income levels and the incidence of fires and thefts.
Of all factors considered, coverage levels were most closely correlated with the ra-
cial and income composition of neighborhoods, for both the conventional market and
FAIR plans. This correlation remained significant even after controlling for the dif-
ferential incidence of fire and thefl by neighborhood type.
88
STUDIES BY PROFESSOR GREGORY SQUIRES (1980'S)
Professor Gregory Squires, of the University of Milwaukee, Wisconsin, has been
the leading academic researcher on the problem of insurance redlining for two dec-
ades. He drafted much of the study submitted to the U.S. Commission on Civil
Rights, and has also recently performed similar studies on the availability and cost
of insurance. The methodology of these studies has included both statistical analysis
of zip code data in Milwaukee, phone testing of agents, and analyses of agent loca-
tions by zip code.
The results of the statistical analysis Professor Squires recently performed for
Milwaukee those the results of his study for the U.S. Commission on Civil Ri^ts
a decade earlier. Squires found that:
"Racial composition was associated with the number of policies written per
owner-occupied dwelling more highly than income, poverty rate, age or condi-
tion of housing, population turnover, crime rate, incidents of fire, and other fac-
tors presumably associated with risk. More importantly, racial composition re-
mained statistically significantly associated with the distribution of insurance
policies even after these other variables were controlled."
Prof. Squires has also performed testing similar to that conducted by ACORN,
and found that:
"In testing programs we have carried out in Milwaukee with the Metropolitan
Milwaukee Fair Housing Council and others have done in cities throughout the
United States, residents of minority communities have been discouraged while
residents of predominantly white neighborhoods have been encouraged to do
business with insurance agents. Despite limitations in available data and the
methodologies often employed, the overwhelming conclusion of existing research
is that there is a racial gap in the availability of property insurance. While
some of this gap can be accounted for by financial considerations of insureds,
conditions of properties, and risk related factors generally, the racial gap re-
mains substantial even after these factors are taken into consideration.
Another example given by Prof. Squires is the correlation of agent location to the
racial composition of neighborhoods, which he found to be significant in Milwaukee
in 1970, 1980, and 1990, even after taking into consideration the number of owner
occupied housing units, the age and condition of homes, and the income of the resi-
dents. A striking example was of the Sherman Park neighborhood on Milwaukee's
west side, which changed from 1 percent non-white to 24 percent non-white between
1970 and 1980. Over this same period, the number of insurance agents declined,
from 22 to 9.
Prof. Squires has also uncovered the following statements from company under-
writing manuals and guides:
"Coverage may not be bound on the following classifications without prior ap-
proval ♦ * ♦ professional athletes, musicians or entertainers.
'Tollowing occupations not to be approved for preferred policies: janitors,
stewardesses, traveling salesmen, auto salesmen (particularly those associated
with used cars sales), musicians, athletes, etc.
"RED FLAGS FOR AGENTS AND CLAIMS PERSONNEL * * *
"a. Declining property values * * *
"b. Population or racial changes."
Perhaps the most ludicrous example was of the one agent who was told to avoid
members of the clergy for automobile insurance because they "tend to place their
faith in the Lord when driving."
ILUNOIS PUBLIC ACTION COUNCIL (IPAC) (1991)
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 cer-
tain areas." In fact, neither of these companies had any agents in the west and mid
south areas of Chicago. TTie total area redlined by these companies covers over 85
square miles of the city.
PENNSYLVANIA PUBLIC INTEREST COALITION (1991)
The Pennsylvania Public Interest Coalition found similar results for auto insur-
ance. 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.
89
NAACP LAWSUIT (1992)
Recently, the NAACP won a major victory in a class action suit charging a Wis-
consin insurer with discrimination in the sales of insurance. The NAACP case is the
first time a federal appeals court has ruled that the Fair Housing Act prohibits bias
in the underwriting and sales of homeowners insurance. The suit charged that
American Family, the largest underwriter in Wisconsin, was redlining parts of Mil-
waukee. It also alleged that the company was charging higher premiums to non-
whites for properties of comparable value and risk, instructing agents to avoid sell-
ing 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 dis-
criminatory practices did occur as defined by the federal Farr 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.
The following quote is from a sales manager for the American Family Insurance
company advising several agents in 1988:
"Your persistency went down the shitter * * * very honestly, I think you
write too many blacks * * * you gotta sell good, solid premium paying white
people * * * they own their homes, the white works ♦ * ♦ Very honestly, black
people will buy anything that looks good right now * * * but when it come to
pay for it next time * * * you're not going to get your money out of them * * *
the only way you're going to correct your persistency is get away from the
blacks."
OFFICE OF PUBLIC INSURANCE COUNSEL (OPIC) (1993)
OPIC is an independent state agency representing Texan insurance consumers.
OPIC recently undertook an investigation of the distribution of the Texas Auto In-
surance Plan (TAW) policies, the state assigned risk plan, and also looked at the
agent distribution of some of the largest underwriters in Texas.
The TAIPs population increased from 250,000 to 750,000 from August 1991
through July 1992, partly as a result of stricter enforcement of the mandatory insur-
ance laws, and partly as a result of tighter underwriting guidelines by the conven-
tional maricet. ^p code analysis of the location of these policyholders revealed, once
again, that the likelihood of being in the TAIP had more to do with the race or in-
come levels of one's neighborhood than with one's driving record. Zip codes with mi-
nority composition twice the state average had 1.5 times as many TAIP policies. Zip
codes with minority compositions four times the state level had TAIP concentrations
of twice the state average.
OPIC found no significant risk associated reasons for these disparities. As the
TAIP offers minimum liability, crime levels in different neighborhoods are irrelevant
to an insurer's risk. In fact, it seems that the primary reason for the unwillingness
of conventional insurers to insure low-income people is that the latter are less likely
to buy excess liability limits, homeowners and life insurance as part of a package.
Another example of the subjectivity of insurance underwriting requirements is the
use of the "no prior" rule. When enforcement of state required insurance laws were
enforced, many companies refused coverage to people who had previously held insur-
ance. Preliminary analysis of the "no priors" However, indicate that loss per expo-
sure is in fact 17 percent lower for "no priors" than for "priors", and about 25 per-
cent lower for "no priors" than for "no needs".
OPIC also analyzed the location of the location of State Farm agents by zip code,
and found that zip codes without agents consistently had higher minority concentra-
tions, even for zip-codes with populations over 10,000.
MISSOURI DEPARTMENT OF INSURANCE (1993)
The Missouri Department of Insurance's 1993 study of zip code level policy infor-
mation revealed that residents of low-income minority zip codes in St. Louis and
Kansas City paid more for coverage than residents of low-income white zip codes
in those two cities, and were more likely to receive "limited" as opposed to "stand-
ard" policies. Yet, the loss ratio in low-income minority neighborhoods was signifi-
cantly less than in low-income white areas.
For example, homeowners in low-income minority areas in St. Louis paid $7.30
per thousand dollars of coverage, compared to $4.65 in low-income white areas. Yet
the loss ratio in low-income minority areas was 57 percent, compared to 72 percent
in low-income white areas.
90
This study is especially significant, because it suggests that the usual response
from the industry to charges of redlining — higher risk in low-income areas — may not
adequately explain disparities in underwriting patterns.
CALLAWAY V. ALLSTATE (1993)
Under proposition 103, coverage is guaranteed to all Califomians with good driv-
ing records with the insurer of one's choice. According to a former employee of All-
state, however, the company launched a policy of systematically and deliberately
evading this mandate. Employees were instructed to discourage applicants with
good driving records who were otherwise considered "undesirable", and to lose the
applications, or place them in a storage area to be ignored if the client persisted
in his or her application.
Sales agents were also required by management to comply with a series of condi-
tions which were virtually impossible to achieve in order to discourage applications
for coverage by urban and minority applicants. Management also ordered its em-
ployees to close Allstate ofTices in selected urban and minority communities to avoid
applications from prospective insureds in these "undesirable" areas. Employees were
also instructed to include life insurance with homeowners policies without informing
the client, and also refused to notify policyholders that the "guaranteed replacement
cost" provisions did not cover personal property, knowing the client would be misled.
The plaintiff in this case was a rising executive who objected to these policies, was
subsequently laid off, and given a monthly payment in exchange for his secrecy. He
filed suit after Allstate allegedly stopped making payments.
OFFICE OF PUBLIC INSURANCE COUNSEL (1994)
A 1994 OPIC study A Review of Homeowners Insurance Underwriting Guidelines
Used in Texas found that:
• companies representing 91 percent of the homeowners market employed mini-
mum coverage amounts, and 88 percent had age of house restrictions;
• companies representing 60 percent of the market had restrictions based on the
location of property; and
• 29 percent had restrictions based on "lifestyle" or "bad morals."
TOLEDO FAIR HOUSING CENTER (1992-93)
The Toledo Fair Housing Center, has been investigating claims of insurance red-
lining and has conducted phone testing of Toledo insurers. Their findings are con-
sistent with those from other studies. Confronted by a common refusal to insure
properties valued at less than $30,000, the Center examined the impact such a pol-
icy and found that the policy 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 the city of Toledo. The impact on the MSA would be, re-
spectively, 71 percent, 40 percent and 12 percent.
The Center has also been investigating claims discrimination, and while complete
results are not yet available, has found discrimination in 95 percent of the inves-
tigations conducted. In these studies, the Center has been using similar residences
with property owners of difTerent races, and has even given the Caucasian property
owners properties in a markedly inferior state. The center has found a clear pattern
of discrimination.
NATIONAL FAIR HOUSING ALLIANCE (1994)
In May, 1994, the National Fair Housing Alliance filed complaints with HUD
against Nationwide and Allstate charging illegal discrimination under the Fair
Housing Act. NFHA's testing revealed that:
• In Louisville, African-American testers experienced discrimination 47 percent of
the time;
• In Atlanta, African-American testers experienced discrimination 60 percent of
the time;
• In Milwaukee, African-American testers experienced discrimination 60 percent
of the time; and
• In Chicago, Latino testers experienced discrimination 95 percent of the time.
NFHA found that a wide range of discriminatory practices exist in the industry,
including: use of minimum insurance amounts and maximim age requirements;
credit checks for minority applicants, but not white applicants; and inspection re-
quirements for minority applicants, but not white applicants.
91
MISCELLANEOUS EVIDENCE
An article by Peter Kerr of the New York Times documented the prevalence of
offshore "scavenger" companies, who prey upon the underinsured inner city. In the
wake of the Los Angeles riots, Kerr surveyed business owners and found that a
large portion of policies written to businesses in south-central Los Angeles were
written by "surphis line" carriers, or "scavenger companies". These insurers, who
offer policies at a much higher cost than mainstream carriers, licensed 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.
John Garamendi, the Insurance Commissioner in California, recently fmed a Cali-
fornia insurance company, based on evidence supplied by an agent. The agent sup-
f)lied a map which had the minority and low-income portions of San Francisco out-
Lned in yellow highlighter. The agent claims that the mid-sized carrier who sent
him the map instructed him not to write policies in any of the hi^lighted areas.
The Texas and Missouri insurance departments have also taken enforcement actions
against insurance companies for illegal discrimination.
Despite the lack of readily availaole data on the subject, scores of investigations
by academics, interest groups and governmental agencies have come to the same
conclusion: insurance redlining is indeed "fact — not fiction." The insurance indus-
try's methodological arguments with the results of these studies over the course of
three decades only underscores the need for systematic disclosure of data by the in-
surance industry.
2. "a policy of discrimination?": findings of acorn RESEARCH
On February 5, 1993, 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.
The statistical analysis was performed in four states currently requiring such dis-
closure of property and casualty insurance companies — disclosure similar in kind to
the federal Home Mortgage Disclosure Act (HMDA) 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 nei^borhoods. The study also looked at the quality of coverage in
neighborhoods of different racial and income compositions.
TTie second part of the study consisted of the results of extensive testing of var-
ious insurance agents and underwriters in thirteen cities. Testers attempted to ob-
tain quotes for insurance-from both captive and independent agents for properties
in different neighborhoods — including low-income, generally minority 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 poUcy,
and differences in prices of policies and the frequency of required inspections was
then compiled.
Among the key findings of the study are that:
(1) Test callers from minority neighborhoods were refused a quote on a policy 38
percent of the time, compared to 7 percent of the time for callers from white 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.
(2) Insurance policies written in low-income and minority neighborhoods tend to
be of substandard quality.
Callers from low-income neighborhoods were offered "market value" policies — poli-
cies which do not cover the property for the full replacement costs in case of dam-
age. 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 percent more in Missouri,
for example.
(3) Test callers from low-income neighborhoods were quoted rates averaging 2.5
times higher, relative to their level of coverage, as test callers from upper-income
neighborhoods.
These figures were based on quotes given by agents to testers, relative to the level
of coverage offered.
The results of this study seem to indicate problems as serious in its dimensions
as those identified by the Hughes panel in 1968.
92
3. FAER PLANS — A FAILED SOLUTION
FAIR plans were established on the recommendation of the Hughes panel. 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 re-
insurance was offered at a lower rate than was available on the open market, to
companies which participated in the FAIR plans. FAIR plans were explicitly created
to be the insurer of last resort.
But problems with the FAIR plans rapidly made themselves apparent In New
Yoric, for example, they were required to operate at cost, thereby essentially nul-
lifying their goal and begging the question of what purpose the discounted Federal
reinsurance fulfilled. In most states, FAIR plans were also substantially more ex-
pensive than the conventional market — 300 percent more in New York, according
to a 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 under-
writers 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 policyseeker perceived to be high-risk, simply by
virtue of his or her zip code. A 1977 study by Robert Abrams revealed that 45 per-
cent 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 percent of the FAIR plans written in St. Louis. In Detroit,
all our test callers who sought insurance anywhere in the city were solely offered
FAIR plan policies.
Little has therefore changed since 1976, when a report by the Detroit city council
President, Carl Levin, found that in many instances "Detroiters cannot obtain insur-
ance 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."
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 percent 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 percent of FAIR plan policy holders
reported claims, compared to 12 percent of conventional policy-holders. Similarly,
NY PIRO found in 1978 that only one-third of the FAIR plans in New Yoric had
any surcharges — implying that, upon inspections, the majority turned out to be well
maintained properties.
FAIR plan policy holders were thus being offered inferior coverage at a greater
price — and those policyholders 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 tne residual market
"Ine Boards governing FAIR plans frequently have little public input. The Board
of the New York Auto Insurance Plan, for example, consists of fifteen members,
eight of which are insurance company representatives, and seven of whom are "pub-
lic members." However, these public members must be appointed and elected by the
rest of the board, making their independence open to question. Not a single member
of the Governing committee is a resident of the neighborhoods where most of the
clients of the plan reside.
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 nas changed very little since the investigation by the
Hughes panel. Indeed, it mi^t be argued that the creation of FAIR plans served
to deflect attention from gross abuses within the industry, and to defer much needed
reforms.
4. STATE REGULATION: INADEQUATE AND INEFFECTIVE
A few states have passed anti-redlining statutes. However, these are usually fair-
ly ineffective, and poorly enforced. The NAIC model laws language for anti-realining
statutes suggests that states prohibit "refusing to insure" someone based solely on
their geographic location. Some states also make cancellations subject to that re-
striction. Discrimination on the basis of race is illegal in all states, sometimes spe-
93
cifically in reference to insurance, sometimes through more broad based civil rights
or unfair trade practices laws.
The wording of these laws leaves companies excessive latitude. Broad based red-
lining and anti-discrimination laws, for example, do not prohibit or restrict the use
of underwriting criteria which have the effect of redlining or discriminating against
minorities. And the enforcement of these laws has been less than aggressive.
The most comprehensive legislation addressing redlining was enacted in Michi-
gan. This statute requires that the owner of any building meeting property code
may obtain premium coverage with the insurer of his or her choice. FAIR plans are
also available, and offer full coverage at a price which reflects the average price of
similar conventional policies. Michigan also nas a cap on the difference in territorial
rates any company may set, and limits the number of territories to three. In some
respects, the Michigan law sets the standard for the nation.
Nevertheless, an ACORN member from Detroit was repeatedly refused coverage
by one insurer, and referred to the FAIR plan — ^yet she was never asked whether
her property was up to code. When she asked to speak to the agent's supervisor,
he informed her that coverage could be made available, but it would cost three times
as much as the FAIR plan. Indeed, every test caller from the city of Detroit in our
study was referred to tne FAIR plan. Clearly, then, such laws make little difference
if they are not enforced.
California has passed some of the most aggressively pro-consumer legislation in
recent years. Proposition 103, enacted by the voters as the insurance reform initia-
tive, obliged insurers to insure all good drivers, and prohibits any rate that is un-
fairly discriminatory. Commissioner Garamendi has also been working on anti-red-
lining regulations which emphasize a "carrot and stick" approach. Under these regu-
lations, an insurer with a bad record of providing coverage in inner city areas is
financially penalized, via a decrease in the amount of profit permitted in rate ap-
provals. Insurers who play by the rules are given a bonus. Despite the industry's
claims that market incentives, and not prohibitions are the way to solve the insur-
ance availability problems, few insurers have expressed support for these regula-
tions.
The current system of state level regulation is insufficient and inadequate. Ac-
cording to a 1988 report by the Consumer Insurance Information Group (CIIG) and
the Association of Professional Independent Agents (PIA National), insurance de-
partments have inadequate resources to regulate carriers. Four states. New York,
California, Florida and Texas, control more than half of all funds and staff dedicated
to insurance regulation in the country.
The report also showed that the average department has less than four actuar-
ies — the mdividuals charged with assessing risk and evaluating company rate fil-
ings. This pales in comparison to the number of actuaries analyzing and filing the
rates for the insurance companies. In Chicago, the rate filing manual for one com-
pany may be as long as 1500 pages! It the insurers' risk analysis is faulty or based
on prejudice, it is unlikely that the insurance department would ever find out.
Years earlier, a similar criticism was made by then Detroit City Council President
Carl Levin, regarding the time constraints facing the department when evaluating
rate hikes. 'These rigid time constraints are a suostantiai problem in the rate mak-
ing process. The insurance bureau receives approximately 7500 filings each year,
about 1500 of which request rate increases, and has five staff people available to
review them. The time pressures and the sheer volume work against an adequate
review of all rate increase requests."
And the departments do seem to be a little too close to the industry. Another PIA
study showed that at least 38 percent of insurance commissioners had worked for
the industry prior to serving the state, while almost half would work for the indus-
try after serving an average of only 3.3 years. Also, less than a fourth of the states
have elected ofTicials who are directly responsible to consumers of insurance.
Last year, an article in the Washington Post made these ties explicit The NAIC,
which was planning a meeting in the Washington, D.C. area sent a letter to several
of the larger local insurers requesting contributions, accommodations and even golf
tee times from the industry.
Another example can be seen in the saga of the New York disclosure law. Origi-
nally, disclosure of homeowners policies was to be provided to the commissioner by
zip code. However, because of complaints by the industry, this requirement was
changed by regulation to reauire only disclosure by county. This change rendered
the data virtually useless in aetermining urban availability problems.
In fact, when ACORN tried to gain access to this data, we were informed that
it had not even been examined, due to staff shortages, and that it was the custom
of the department not to make it publicly available until it had examined the data
itself. When we pressed the issue, we were then informed that not all the data could
94
be provided to us anyway, because some companies requested the data not be made
publicly available This denial was in spite of the fact that the statute explicitly
states that the data shall be made accessible to the public. When ACORN men-
tioned this point, we were told they were aware of this legal obligation, but that
they usually withheld the information anyway, because they like "to stay on the
companies' good side"!
The NAIC only responded to the public outcry over redlining that followed the
1992 Los Angeles riots after Congress stepped in — as a way of preserving turf. The
NAIC's secretive and closed procedures have fed mistrust among the public. The
data call they have initiated will not result in credible data of the necessary specific-
ity. The unwillingness of the NAIC or most individual states to release this data
to the public for independent analysis further undermines the credibility of the state
response. We firmly believe federal action in this area is needed.
5. INSURANCE REDLINING AND ECONOMIC DEVELOPMENT
Overpriced and substandard quaHty insurance contributes to abandonment and
urban decline, and leaves urban businesses and residents poorly situated to compete
with their suburban counterparts. This dilemma is illustrated by the response of one
of the trade groups to our recent study. A spokesperson for the group argued that
"[o]f course insurance is more expensive in inner cities. But so are groceries." Unfor-
tunately she had it reversed — it is groceries that are made more expensive because
insurance is more costly in urban areas. Indeed, there is probably no single prod-
uct — including groceries — which is as regressive in its impact on low-income house-
holds.
The development of thriving neighborhoods with expanding oppwrtunities for
homeownership and entrepreneurship hinges on the availability of credit and insur-
ance. Mortgage lenders will often not make loans without property insurance — no
insurance means no home. And, high-priced insurance acts as a real deterrent to
the creation of affordable housing for low- and mode rate -income families. Residents
of low-income and minority neighborhoods face additional hurdles in achieving a
better standard of living in the form of homeowners and auto insurance rates that
may be several times that of their suburban counterparts.
In addition, any urban aid or enterprise zone legislation will be a foregone failure
without affordable insurance. A small business cannot remain competitive with its
suburban counterparts if its insurance costs twice as much, and without adequate
insurance, a small business cannot risk expansion. And the jobs that do exist are
made inaccessible by over-priced auto insurance.
The first presidential commission on insurance availability put it simply: "commu-
nities without insurance are communities without hope."
6. RECOMMENDATIONS
We believe that the first step in addressing the problem of insurance redlining
is the collection of data comparable to the Home Mortgage Disclosure Act (HMDA).
Such data collection will serve multiple purposes. First, it will allow for an objective
analysis of insurance underwriting disparities, and provide insight into the causes
of those disparities. Second, it will assist state and federal regulators in enforcement
of the anti-discrimination laws. And lastly, in much the same way that the sunshine
introduced by HMDA has transformed mortgage lending practices, insurance disclo-
sure would allow for critical self-analysis by the industry. We strongly support legis-
lation introduced by Senator Russell Feingold (D-WI), S. 1917, and urge the Com-
mittee to move on comparable legislation.
We believe that insurance legislation should require disclosure of the number,
price and type of policies sold for automobile, homeowners and commercial insur-
ance for small business on a census tract basis, and by the race and gender of pol-
icyholders. Information should be collected in all Metropolitan Statistical Areas
(MSAs) to ensure that groups protected by state and federal anti-discrimination
laws will benefit from the legislation. Finally, the legislation must require reporting
of information on loss data to resolve the dispute over the extent to which identified
disparities in underwriting practices reflect risk or prejudice.
In addition, we are greatly encouraged by the public statements of HUD and the
Justice Department that they intend to vigorously enforce the federal Fair Housing
Act as it applies to residential property insurance.
We appreciate the Committee's attention to these important issues, and look for-
ward to working with you to craft appropriate legislation.
95
Senator Bryan. Thank you veiy much, Mr. Bhargava. Let me
begin with you, a question: In your view, is risk, is that a relevant
factor, in terms of an underwriting standard?
Mr. Bhargava. Yes, it is.
Senator Bryan. Tell me a little bit about the Missouri study. Be-
cause you indicate that — that is, at least exhibit A in your argu-
ment — that at least in some instances, risk is not the criteria; be-
cause in those areas in which there were low-income whites, where
the risk of loss was greater, they actually paid lower premiums, if
I understood your testimony, than a comparable neighborhood of
minority where the risk was less but the premium structure was
higher.
Was that the essence of what you said?
Mr. Bhargava. That is exactly right. In their analysis of data
from St. Louis and Kansas City, they found that the average pre-
miums per $1,000 of coverage were substantially higher in minor-
ity neighborhoods of the same income; but that the loss ratio was
substantially lower. And that was data over a 5-year period that
they looked at.
Senator Bryan. Who did that study?
Mr. Bhargava. That was the Missouri Department of Insurance,
based upon ZIP code data they have been collecting since 1978.
Senator Bryan. Mr. Bell, what is your response to that? Do you
think the Missouri study is flawed?
Mr. Bell. Yes, I do. I have read the study. It is our view that
the staff of the Missouri Department has manipulated and mis-
interpreted data, to support their preconceived conclusion.
It is interesting that the same ACORN report that triggered the
Missouri study also triggered a Minnesota study. The Minnesota
Department of Commerce just released their analysis. They looked
at over 4,000 instances of insurers refusing, canceling, or not re-
newing homeowners' coverage, because they wanted to know the
facts.
And, after they completed their study, they reported that over 97
percent of the actions that they reviewed over those 4,000 items
complied with all of the applicable antiredlining statutes. Of the re-
mainder, most of the violations were technical in nature.
They determined that out of the, I think it was 4,100 and some,
there were only 12 that might be considered redlining, according to
the Department; and they are not sure of those, and they are inves-
tigating them.
So, redlining is, I suggest, still a matter of perception. Of course,
one can argue that perception is reality, I suppose. But clearly,
there are urban property insurance issues of great magnitude that
have to be addressed.
I think the insurance industry is going about it, in addressing
the issues, identifying the issues, in diverse ways; States are ad-
dressing it differently; this Congress is addressing it in various
ways; because we have a concern for the problem.
But I feel that, getting back to your specific question, that Com-
missioner Angoff, or Director Angoff, in Missouri has a flawed con-
clusion, based upon analysis of the data that his department sup-
plied him.
96
Senator Bryan. Ms. Schubert, you represent an industry group.
Did I understand that you also are testifying on behalf of the Big
I today? I thought I heard you say that, looking at my notes here.
Ms. Schubert. That is correct.
Senator Bryan. And obviously, you believe that there is a prob-
lem out there; and you support, I believe you said it was, 1188 in
the House, which is Congresswoman Collins' bill. Am I right on
that?
Ms. Schubert. You are right on the fact that we support 1188.
Whether we agree that there is a problem or not, is really a dif-
ferent question.
Senator Bryan. Well, I would ask you directly: Do you think
there is a problem out there?
Ms. Schubert. We do not believe there is a problem in the avail-
ability of insurance in urban areas. We have a study that shows
98 percent of homeowners in core urban areas have homeowners'
insurance.
However, even if that is absolutely accurate, that is 2 percent of
the homeowners that there might be a problem with; and we think
that we should address that.
We want data collection, because we want the evidence to be
clear, whether or not the insurance is available. There are always
foing to be neighborhoods that have increased risk or higher risk,
hat is one of the reasons that we support partnerships with
groups like ACORN.
We are working with ACORN, and a number of our companies
are working with ACORN, on their Neighborhood Home and Safety
Program, to try and reduce the risk in neighborhoods so that we
can increase the availability and reduce the cost of insurance.
So, we recognize that there are things that need to be done. We
do not think that there is a pervasive discrimination problem, or
a lack of availability of insurance.
If I could just, very briefly, very briefly, touch on the Missouri
study — there is no conclusion yet by Director AngofF as to whether
or not redlining exists. I testified in Missouri with the director on
this issue; and his conclusion at that point was, they had not fin-
ished their study. What they released was a lot of data to the
press, and that data has since been quoted over and over again;
but the department has not published any conclusions.
What Director Angoff said at that time was, they had not decided
that there was any illegal activity or any redlining. There are some
actuarial reasons for the numbers that you are hearing; and I know
the people that know me, and are here with me in the back, are
thinking, "Oh Lord, please do not let her try and explain it." I am
not an actuary, and I cannot do that very well for you today. It has
to do with costs per thousand dollars of premium and losses as a
percentage of the coverage.
But we do have some people that could put something in writing
for you; and I would be more than happy to give you some informa-
tion in writing on that issue.
[At the time of printing the information referred to was not avail-
able.]
Senator Bryan. Assuming for the sake of argument that vou are
correct that the Commissioner in Missouri has not reached a con-
97
elusion — and I do not know whether or not he has — ^but what about
the interpretive analysis that Mr. Bhargava has shared with us?
The essence of which is that, look, it is not risk; it appears to be
race.
At least, in the instance which he suggests, low-income whites,
low-income minorities. Less risk in the low-income minority com-
munity, higher risk in the low-income white community; and yet
the premiums, according to his interpretive analysis, are higher in
the minority community.
Do you find such data in the Missouri study?
Ms. Schubert. That is not what the data says. It has to do with
cost per thousand. It is not an absolute premium. It has to do with
the cost per thousand, and the risk comparison on cost per thou-
sand of the policy.
I have not looked at the data recently enough to address that
today. My memory is that we looked at the actual data, and the
conclusion that was stated in the press is not what the data itself
shows.
I would be happy to follow up on that.
Senator Bryan. We will give you an opportunity to respond to
that. In effect, I believe you say you are reading the data dif-
ferently than Mr. Bhargava does. That would be the essence of
your testimony?
Ms. Schubert. I think that is true. And the bottom line is: If,
in fact, it is based on race, if somebody has data that shows it is
based on race, then there is a statute in Missouri, there is a statute
in Texas, there are statutes in a lot of States that take care of that;
and they should be out there, doing something about it.
Senator Bryan. Mr. Bhargava's point, I think, in his testimony,
is that the NAIC has done a very poor job on — and I am not
quoting him exactly, but that is the essence of his testimony, if I
recall — that they have done a terrible job in enforcing antiredlining
provisions that may exist.
I take it you might reach a different conclusion.
Ms. Schubert. Well, the NAIC is not a regulatory body. It is up
to each State's regulators and attorney generals to enforce their
State laws and get out there and do something about it.
And I think Mr. Bhargava is correct that there has been a great
increase in activity in the States in the last couple of years on this
issue.
Senator Bryan. Ms. Griffin, do you agree that risk is a valid un-
derwriting criteria?
Ms. Griffen. I think you have to look at the type of risk you are
talking about. But, yes. I think this discussion, more clearly than
anything else, points out the need for data.
There are very many reasons, underlying facts, underlying things
that come into the equation, that need to be discussed; and many
reasonable minds can disagree on what data presents. But we can-
not even get to this level of discussion without the data.
And I would really like to note, on the Missouri study, it at least
gets us to the level of losses. And then we can just start discussing.
But without information about the losses, how can we even enter
into a good discussion about this? I think this is precisely the point.
98
I have not seen the Minnesota study; but from what Mr. Bell
said, I was struck by the fact that they said that they found that
the companies had complied with all applicable statutes. And I
think that is key.
I think we would have to take a look at the statutes, because
many States have statutes which do not protect; and do not specifi-
cally prohibit discrimination based on race, and other factors that
have absolutely nothing to do with risk. And, in the past, they have
not been very strong in enforcing their antidiscrimination laws.
This is a very new wave. There have only been a couple of in-
stances of enforcement.
And I think the pressure that the Federal Government is bring-
ing to bear on the State regulators has a lot to do with it; consumer
groups, civil rights groups, the litigation. But we are really not
going to get anywhere, until we get a little sunshine in here.
Senator Bryan. And the Missouri study was done, based upon
ZIP code, if I understand. You favor census tract data, or at least
I think Mr. Hunter testified
Ms. Greffin. I would like to clarify that. The companies would
be reporting only on a ZIP-plus-four, a 9-digit ZIP code, which they
have collected, or they issue policies on that basis now.
And then, whoever the data collector for the Federal Government
would be, would translate that data into census tract in terms of
releasing it to the public; so we could have the benefit of the demo-
graphics, like in the banking situation, with HMDA.
Senator Bryan. Let me press you on that. I am certainly not
knowledgeable. I do have a little understanding of census tract
data, but in a different context.
The census tract data is a much smaller breakout than an entire
ZIP code, would you not agree?
Ms. Griffin. Yes.
Senator Bryan. And, if I understand what you are telling me —
and I will give Ms. Schubert and Mr. Bell a chance, or Mr.
Bhargava, to offer comments on that — you are saying that, as you
understand the requirement, that the company would be required
to base its reporting data on the ZIP code. And that, once that is
provided, then it would be broken down into census tract?
Ms. Griffdsi. That is ZIP-plus-four, the 9-digit ZIP code.
Senator Bryan. Tell me what ZIP-plus-four is. Mr. Marvin and
I have not had a conversation about what ZIP-plus-four means.
Tell me what that is. And I do not mean to make light of this, but
it will be helpful for me to understand your position.
Ms. Griffin. A while ago, the Post Office in an effort to become
more efficient and, I guess
Senator Bryan. That is very tempting. No one is going to re-
spond to that.
Ms. Griffin. They went to a 9-digit ZIP code; and 9-digit ZIP
codes, basically, break ZIP codes down into, apparently, one-block
areas, very small areas. There are computer programs that can
convert that ZIP-plus-four data into census tract, with a fairly high
degree of accuracy.
So, we have all along been suggesting that as a way to get
around the obvious problems that companies would have in collect-
ing census tract. Because when you do census tract directly, you
99
have to input the addresses as opposed to just numbers with ZIP-
plus-four.
Senator Bryan. So, ZlP-plus-four is what you want; and that,
thereafter, it would be broken further down by census tract?
Ms. Griffin. Well actually, it goes up. It is actually ZIP-plus-
four, and you are moving up to census tract. But you cannot move
down from 5-digit ZIP code to census tract. That is the problem.
Senator Bryan. Ms. Schubert, what is the problem with that?
Ms. Schubert. Well, unlike what Ms. Griffin just said, compa-
nies do not issue policies based upon ZIP-plus-four. Absolutely, un-
equivocally, they do not issue policies based on ZIP-plus-four; they
do not collect that information.
Perhaps Mr. Bell can get into, maybe, some of his companies.
The only ZIP-plus-four information that AIA members have is in
their mailing computer system, which sends out the bills; and that
is it, as far as we can tell. And we have spent countless — of incred-
ibly boring — hours with data collecting people, telling us why this
is a difficult task.
But they collect ZIP-plus-four just to send out the bills. And the
bill does not necessarily go to where the home happens to be; it
goes to wherever the policyholder is. That information is not kept
in the policy system; it is not kept in the loss system; and it is un-
available.
On the other hand, if you had a 5-digit ZIP code, although you
cannot break it down into census tracts, there is demographic infor-
mation provided by the Census Bureau which is built up from cen-
sus tracts to the ZIP code level. In that fashion you can get demo-
graphic information on the ZIP code.
Our position is: There is no reason to spend the additional money
to change everyone's computer systems, when you can look at a 5-
digit ZIP code and you can compare. Say you have 100 policies and
you have 102 homes in that neighborhood. You know you do not
have a problem.
If you have 100 policies, and you have 300 homes in that ZIP
code, then you know that is a ZIP code that you need to take a clos-
er look at. And that is where you should be spending your money.
Ms. Greffen. Can I just respond to that?
Senator Bryan. Sure, and then we will hear from Mr. Bell and
Mr. Bhargava. Go ahead.
Ms. Griffin. Very quickly, and I do not want to get into the spe-
cifics, but it is very hard — and I think it is intuitively understand-
able that it is very hard — to go from ZIP code down to census tract.
And census tracts represent different types of neighborhoods.
You do not pick up those differences with ZIP codes. We have
run maps on this.
And also, Ms. Schubert talked about a problem with availability
when she talked about 100 versus 300 policies. Availability is only
one part of the problem. There is also affordability and quality; and
it is more difficult to get to those issues.
Senator Bryan. Mr. Bhargava, let me ask you about the Min-
nesota study, which Mr. Bell referenced. Are you familiar with that
study at all?
Mr. Bhargava. I have not read that study.
100
Senator Bryan. Maybe, if you would be so kind as to look at it,
and share with us your response, as to whether you agree?
Mr. Bhargava. I would just make one quick observation on that
study; which is that on a ZIP code basis, there is not a single pre-
dominantly minority ZIP code in the State of Minnesota — in other
words, a ZIP code that has a minority population of more than 50
percent.
So, that the ZIP code data that they worked off in Minnesota was
very difficult, to say the least; and it is not a State with a high pro-
portion of minorities.
But I will get back to you, with a more detailed answer.
Senator Bryan. Let me thank each of you for sharing your
thoughts with us this afternoon.
We will give you an opportunity, Mr. Bell. I did not want to cut
you off, if you nave something else you want to add; to give you
the last word here.
And we will keep this hearing record open for a while, for any
additional questions.
Mr. Bell. This is a privilege I never get at home. I will make
the effort to send a copy of the Minnesota study to each of the pan-
elists and to you, Mr. Chairman, so that you will all have that for
your analysis.
The Minnesota study was not based on ZIP code. They simply
looked at 4,000 cancellations, wherever they were. And we agree
with Ms. Schubert's comments regarding the ZIP-plus-four. Each of
us in this room has a ZIP-plus-four. I do not know mine; most of
us probably do not know ours, but we each have one.
It is very difficult to collect it, because your applicant does not
know what it is.
Senator Bryan. We appreciate your comments. Thank you so
much for joining us.
And this subcommittee will stand adjourned.
[Whereupon, at 5:20 p.m., the hearing was adjourned.]
APPENDIX
Questions Asked by Senator Burns and Answers Thereto by Ms. Griffin
Question. Ms. Griffin, the proposals before Congress would require insurance
companies to collect extensive data. Isn't data on this subject already being collected
by the National Association of Insurance Commissioners to be made available by the
end of this month?
Answer. While some states have been collecting data related to insurance redlin-
ing, state data collection efforts are insufficient. First, the data the National Asso-
ciation of Insurance Commissioners (NAJC) is collecting will be aggregated. It is the
understanding that individual company data will not be available unless an individ-
ual state agrees to release their data. Without individual company data, it will be
difficult to assess the problems in the market and the data will be virtually useless
for civil ri^ts enforcement purposes.
Second, only 23 states are participating in this one-time data call and NAIC has
no authority to require other states to participate. Third, while the information was
collected in May, the NAIC specifically denied requests that it release the "raw
data" to the public. It will provide its report and analysis on the aggregated data
sometime near the end of the year. The NAIC concluded that it was up to the states
to distribute the data or direct the NAIC to distribute the data if requested. Only
a few states, however, agreed to release the data upon request.
And finally, under the proposed federal bills, the data would be collected on an
ongoing basis and would be accessible to the public from the federal government.
And because the data to be disclosed under the bills is already collected by insur-
ance companies, the bills present little, if any, burden on companies.
Question. If this in fact is the case, why do you feel the federal government needs
to get involved in an issue that the state has jurisdiction over?
Answer. While states have had primary responsibility over the regulation of in-
surance, it is important for the federal government to get involved in this issue.
Communities devastated by the effects of insurance discrimination should be the
concern of the entire country. Redlining of neighborhoods and discrimination against
individuals by the insurance industry presents a heavy drain on the nation's econ-
omy, destroying jobs and economic development and sapping badly needed tax reve-
nues. It is in everyone's interest, from the lowest income consumer to the most afflu-
ent, to end these destructive and immoral practices.
The federal government should collect and disseminate data on the insurance
market for a number of reasons:
• Numerous studies in various markets throughout the country indicate that in-
surance may not be available to poor and minority consumers when it would be
available to nonminoritv consumers in similar circumstances.
• The insurance industry operates in a national market in which some of the
largest companies operate in most of the metropolitan areas of the country and
there is currently insufficient information available on a nationwide basis to meas-
ure the extent of'^discriminatory practices within the insurance industry.
• A centralized data bank is the most efficient and effective way to measure the
extent of redlining and discrimination throughout the country and within firms that
participate in interstate commerce.
• Data would be useful to federal agencies responsible for enforcing certain laws.
Both the Assistant Attorney General for Civil Rights and HUD's Assistant Secretary
for Fair Housing testified before the Senate recently about the need for the informa-
tion. For example, the Department of Housing and Urban Development is charged
with enforcing the Federal Fair Housing Act. If there is discrimination in home-
owners insurance or a problem with access and affordability, this agency should
have this information to determine whether and what kind of action is needed.
Question. Do you believe that the states are not doing their job as it relates to
redlining and that the way in which you resolve the problem is to create another
federal agency?
(101)
102
Answer. With few exceptions, states have not taken any actions against compa-
nies in the area of race-based or unfair discrimination, discriminatory marketing
and distribution systems, or they have not vigorously advocated for the tools to ad-
dress this problem. The few actions taken in recent years have been taken by "pro-
consumer" commissioners who serve terms. Their replacements may not be so pro-
active. If data from the federal data base reveals problems, it will be easier for the
federal government and the broad range of interested groups who will have access
to the data to ask regulators to take action to address the problems. None of the
bills currently before Congress would create another federal agency.
• The federal government has historically been active in enforcing civil rights
laws, often because of the failure of states to act in this area.
• Many state insurance departments, particularly in states with lower popu-
lations, lack the resources and expertise to collect and analyze data relating to in-
surance discrimination.
Question. Do you have any cost estimates as to what it will take to oversee the
activities that are described in the legislation? Congress is operating on a tight
budget and I want to make sure that before we commit to something, no matter
how big or small, we can pay for it! Before you answer this question, I think it is
important for you to know that Congress had to pass a supplemental appropriation
of $200 million to hire 100 plus lawyers to implement the Cable Re-Regulation bill
that Congress passed last year. No small potatoes as far as this Senator is con-
cerned.
Answer. According to the cost estimates released by the Congressional Budget Of-
fice and contained in the Committee Reports, the cost for data collection under the
bills ranges from approximately $1 to $16 depending upon which bill and which
year the cost estimate is associated. These estimates include early years and do not
app>ear to be based on continuous reporting after the first few years, which may be
less because of one-time only start up costs.
Question Asked by Senator Burns and Answer Thereto by Mr. Bell, NAII
Question. Would you describe the constructive actions NAII and others in the in-
dustry are taking to address the issue of availability and afTordability of property
and casualty insurance in urban and rural areas?
Answer. The NAII Board of Governors appointed a board level Urban Issues Task
Force in the Spring of 1994 to thoroughly analyze the full scope of urban insurance
issues and to present specific policy recommendations and action steps which may
relieve tensions and achieve positive results regarding both insurance availability
and afTordability. While the work of this Task Force and its four special subcommit-
tees is still in process, we can already identify a few of the areas of study: liaison
and support for community "rebuilder" groups such as Neighborhood Housing Serv-
ices ana other similar organizations; consideration of establishment of insurance
Market Assistance Programs where accessibility to available insurer markets is not
understood by residents; possible modifications to the insurance product offerings of
the FAIR Plans where appropriate; incentives for broader voluntary market partici-
pation such as premium tax credits for insurers, take-out and keep-out credits for
insurers against FAIR Plan assessments; efforts to promote greater loss prevention
efforts by urban/rural dwellers (i.e. anti-crime, anti-fire); and exploration as to via-
bility of the concept of group insurance pricing for urban residents who are members
of identified established community groups.
NAII member insurers and others currently insure millions of homes, families and
businesses in urban areas across the United States. Bach insurer has its own under-
writing guidelines and many urban properties fall within their parameters. Studies
indicate that 96 percent of the homeowners in the United States, including those
in urban areas, currently carry homeowners insurance.
Essential property insurance is available in about thirty states through property
insurance residual market mechanisms of last resort generally known as FAIR
Plans. These insurance industry supported plans make insurance available to
urban, and in some instances rural, residents. All property insurance companies
participate in these plans which make coverage available for structures which would
otherwise be uninsurable.
Many NAII member insurers and others work with the National Housing Service,
Urban Leagues and other groups which are genuinely concerned with improving liv-
ing conditions, instilling neighoorhood pride, mitigating the causes of loss, improv-
ing living conditions, and enhancing the insurability of nomes in urban areas. NAII
and its member insurers also works with these organizations to foster better under-
103
standing of urban risks by insurance underwriters and a better understanding of
the insurance process by consumers. Such joint activities include:
• Bus tours through urban areas to allow underwriters to see individual risks
first hand.
• Monetary contributions to NHS.
• Insurance company employee participation in voluntary programs to build/re-
build inner-city neighborhoods.
• Educational programs to increase consumer awareness about insurance avail-
ability.
NAII member insurers and others cooperate with state regulators and the Na-
tional Association of Insurance Commissioners (NAIC) to provide statistical data,
which when analyzed will assist in supplanting conjecture with fact regarding the
true nature of urban insurance availability. Insurers, regulators and others can
thereafter determine the appropriate market based response to any statistical rev-
elations.
NAII member insurers and others held a prospective insurance agent job fair in
Chicago in 1992 in order to expose urban residents to the insurance agent career
possibility.
NAII member insurers and others sponsor and financially underwrite the Illinois
Insurance Hotline, which has given free insurance information to over 45,000 Illi-
nois residents since 1990. A similar program in operation is known as the Milwau-
kee Community Insurance Information Center.
NAII member insurers and others participate in the Illinois Insurance Depart-
ment's Urban Issues Task Force. One current project is to train counselors to assist
urban residents with prepurchase counseling.
NAII member insurers and others financially underwrite and support the mission
of the Insurance Institute for Property Loss Keduction in its loss mitigation role.
The Institute is currently working with the roofing manufacturing industry to de-
sign standards for less damageable roofing from loss by wind, hail and fire. The In-
stitute is also working with the three national building code organizations to
achieve greater uniformity and to strengthen national standards which will reduce
future insured loss. The Institute is also assisting states and local communities to
adopt retrofit codes which can be applied to existing structures in order to reduce
to severity of insured loss.
NAII member insurers and others financially underwrite and support the mission
of the Insurance Committee for Arson Control (ICAC). ICAC seeks ways to reduce
the incidence of the unconscionable act of deliberately setting a fire. Arson caused
over $2 billion in property loss and 605 lives lost in 1992 alone. ICAC works with
public and private sectors, legislators and regulators, individuals and groups to seek
out solutions and to take steps that will make a difference.
NAII member insurers and others participate in the Hawaii Hurricane Relief
Fund and the Florida Hurricane Catastrophe Fund. These funds were created as
risk spreading mechanisms so that insurers could continue to provide their products
and services to all residents of those states, both urban and rural.
NAII member insurers and others, working through the Natural Disaster Coali-
tion, envisioned and drafted the framework of the Natural Disaster Protection Act.
Lead sponsors are Senator Daniel Inouye, S. 1350, and Representative Norman Mi-
neta, H.R. 2873. The Act will provide a means whereby all Americans will be able
to purchase catastrophe insurance at actuarially sound but reasonable prices.
NAII member insurers and others have invested heavily in municipal bonds which
provide for needed public facilities and services and infrastructure repair. This
make urban communities better places to live and work and better places for insur-
ers to make their products and services readily available.
There are many contributing factors to rising automobile insurance premiums.
The NAII believes the problem of affordability must be attacked on a number of
fronts and on a state -by-state basis. The magnitude of the affordability problem, the
demographics of the state, and the prevailing political conditions are among the con-
siderations in an valuation as to wnich of the following issues is action warranted:
reformation of insurance coverage and state auto insurance laws, medical cost con-
tainment, safety oriented automobile design/repair and insurance rating, strength-
ening of the traffic laws and motor vehicle code, improved anti-thefl counter-
measures, steps to reduce insurance fraud, anti alcohol and drug deterrence and en-
forcement, civil justice reform, and reduced automobile usage. Each of these issues
and the state action steps advocated by NAII are contained in the enclosed mono-
graph titled Containing Auto Insurance Costs.
Insurance fraud is a serious crime that drives up the cost of insurance for every-
one. The insurance industry seeks to join forces with the public, legislators and the
law enforcement community in a renewed effort to attack and deter insurance fraud.
104
The enclosed NAII monograph titled Antifraud Task Force Report & Recommenda-
tions contains specific recommendations to be undertaken in order to deter insur-
ance fraud.
NAII seeks to repeal compulsory auto liability insurance laws. In concept compul-
sory is sound, but in practice its a failure, e.g., liability insurance is unnecessary
coverage for poor motorists and operates like a regressive tax. NAII supports a low
cost, no-frills policy (Maxi-Value Policy) it conceived in states where afibrdability
problems are acute.
[Referenced material above may be found in the committee file.]
Question Asked by Senator Burns and Answer Thereto by Mr. Brargava
Question. Mr. Bhargava, we take risks every single day! In fact, in this town, you
take them the moment you step out the door. Insurance is like every other business,
you take risks! In fact, I would argue huge risks! It is a business in the sense you
have a product to sell to someone who is able to pay for it. In any business, that
product will cost more or less depending on location, the cost of materials, labor,
transportation and so on. What cost $5 in Washington, D.C. might only cost $2.50
in Billings, Montana. The point I am trying to make is that there are a number
of factors that go into any business decision. In the case of insurance, it bases prices
on the assessment of risk. Do you object to basing the price of insurance on risk
assessment? If you believe risk-based premiums are wrong, do you have another so-
lution?
Answer. I believe that in the case of property insurance for homes, autos, and
small businesses, it is appropriate to base the price of insurance on the basis of risk.
There are, however, several corollary questions which this issue raises.
First, is it appropriate to rely for the most part on geographically-based assess-
ments of risk, or individually-based assessments of risk for the purposes of under-
writing and pricing?
Under the present system, it is likely that a good driver living in an urban area,
but commuting to the suburbs for work, will pay significantly more in premiums
than a driver with a poor record residing in a suburban area who commutes into
the city for work. This is clearly a perverse consequence of a geographically-based
system for arriving at insurance prices.
ACORN believes that while it may be appropriate for insurance underwriting
practices to rely in part on geographical assessments of risk, the current system ex-
aggerates this aspect of risk experience to the neglect of factors focusing on an indi-
vidual's risk.
Second, do the industry's pricing policies accurately reflect risk?
A recent study by the Missouri Department of Insurance suggests the opposite.
In its analysis of zip-code based data, the Department found that residents of low-
income, predominantly minority neighborhoods pay more per thousand dollars of
coverage than do residents of low-income, white neighborhoods in St. Louis and
Kansas City. However, the study found that residents in low-income, minority areas
actually incurred fewer losses. This suggests that the pricing policies of insurance
companies may reflect factors other than risk, which may include racial bias or
stereotypes. That is precisely why comprehensive disclosure legislation along the
lines proposed by Senator Feingold (D-WI) is so urgently needed.
Third, if there are disparities in the price of insurance in different neighborfioods
that accurately reflect risk, what is the appropriate public policy response?
Even if the industry is correct in its contention that price differences between
neighborhoods of difierent racial and income compositions are justified by risk expe-
rience (we can't verily this claim without access to data), large price disparities may
still be a matter of concern.
To the extent that small businesses, for example, in minority areas are made un-
competitive by virtue of hi^ premiums, job creation in distressed areas will sufler.
To the extent that homeowners policies or auto policies are priced beyond the reach
of many residents of low-incorae areas, homeownership rates and mobility will suf-
fer.
So, whether the ultimate cause of price disparities is risk or prejudice (or a mix-
ture of the two), the public has a compelling interest in access to comprehensive
data on property insurers' policy writing and loss data.
105
Questions Asked by Senator Burns and Answers Thereto by Mr. Hunter
Question. What efTorts have you made as Commissioner to alleviate the problem
of redlining?
Answer. Our regulatory philosophy is to rely on market forces to provide the nec-
essary insurance to consumers at the lowest prices. In the case of certain lines of
insurance — projjerty insurance, automobile insurance, business liability insurance —
availability is unfairly restricted because of geographic location. The lack of avail-
ability represents a market failure and we have initiated several activities to ad-
dress these market failure and improve the competitive operation of insurance mar-
kets.
First, we have made a significant investment in improved information to both con-
sumers and producers of insurance. Our independent data initiative in Texas rep-
resents the most far-reaching state program to wrest control of insurance data col-
lection from the insurance industry. The result of independent data will be more re-
liable, more detailed and more timely data for insurers to use in making their busi-
ness decisions about pricing of insurance. In addition, we have provided insurance
consumers with information about buying insurance, including tips for insurance
shopping and a consumer's bill of rights for auto and homeowners insurance. We
provide price comparisons for homeowners and auto insurance and are working with
vendors to provide an electronic pricing service for consumers.
Second, we have passed and enforced rules which prohibit unfair discrimination
in the sale of insurance. We believe that underwriting guidelines and rating fac-
tors — the characteristics of the consumer, vehicle or property — which determine
whether an insurer will sell insurance and at what price should be substantially re-
lated to risk of loss or size of administrative expense. We have passed rules which
prohibit the use of underwriting guidelines which are arbitrary and not related to
risk of loss. Allstate paid a fine of $850,000 after we challenged them on unfair un-
derwriting guidelines and we have cases pending against dozens of other insurers
for illegal and unfair underwriting guidelines. For a competitive market to operate
successfully, the Department of Insurance must use its regulatory powers to elimi-
nate unfair trade practices which put consumers or law-abiding insurers at a com-
petitive disadvantage.
Finally, we understand that even in a competitive market, financial incentives
may be necessary to bring more producers into the market. In the case of mandatory
auto liability insurance, we have found a striking availability problems in many
parts of Texas with a high minority pwpulations and/or low household income. While
we are working to ensure that insurance companies are not unfairly discriminating
against people living in these ZIP Codes, we are also working to provide incentives
to insurers for voluntarily writing business in these ZIP Codes. Specifically, insurers
will receive a credit against their quota from automobile assigned risks for each ve-
hicle voluntarily written in those ZIP Codes designed as underserved.
Question. What efforts have been made by the National Association of Insurance
Commissioners?
Answer. The NAIC has established an Insurance Availability and Affordability
Task Force to examine the issues of redlining. The Task Force, with the support of
NAIC staff, has established a program to study the issue. To date, the NAIC Task
Force has performed a literature review, analyzed studies produced by other
sources, collected some ZIP Code data from insurers and looked at some non-quan-
titative tools for analyzing availability and affordability problems. The Task Force
is still in the study stage and will be in the study stage through next year.
Question. Does the federal government need to get involved? Are we moving away
from state-based regulation and to wards federal government takeover?
Answer. The federal involvement anticipated in S. 1989 is limited, relevant, and
appropriate. S. 1989 is limited to the collection of data only. It assures a uniform
national database which would allow a broad and thorough statistical analysis of
insurance availability and affordability. In comparison with the 22 states included
in the premium only zip code survey of the NAIC, this database would better focus
efforts to address the real problems of redlining. S. 1989 would enhance state-based
insurance regulation by making better data available to regulators for their analysis
and use.
O
79-871 O - Q4 (■\^7)
BOSTON PUBLIC LIBRARY
llllililililllllill
3 9999 05982 242 7
ISBN 0-16-044749-6
9 780160"447495
90000
