Public Affairs; U.S. Senate Insurance Hearings

From Washington D.C. National Public Radio now presents taped coverage of hearings by the Senate Judiciary Subcommittee on citizen and shareholder rights. This program was recorded at 9:00 a.m. Eastern time for this delayed broadcast. I'm David Malpass in Washington. These two days of exploratory hearings were called by Senator Howard Metzenbaum chairman of the subcommittee to investigate consumer complaints of discrimination by auto and home insurance companies. Some of the consumers testifying today will present evidence that they were not able to buy insurance for their cars or home or that the rates being charged were exorbitant. They will further say that the reason for their troubles is that insurance companies consider them to be high risks not on the basis of their past record but because of their age sex marital status occupation or place of residence. We can expect insurance industry representatives to admit that much of this has taken place but they will argue it's perfectly defensible

sound business practice in predicting accidents or other laws. Today many of the witnesses will be consumers also testifying though our state insurance commissioners that will be James stone of Massachusetts Richard Mathias of Illinois John Ingram of North Carolina and representatives of the National Association of Insurance Commissioners will also be here. Also today Los Angeles County Supervisor Kenneth Hahn will be testifying he'll point out that residents of watts for example pay substantially more for car insurance than those who live in Los Angeles suburbs even if their driving records are spotless. Hahn refers to this issue as the consumer crisis of the century. Los Angeles by the way has filed a lawsuit against automobile insurance companies in California. Now the subcommittee chairman is ready to begin today's hearing. Here's Ohio Senator Howard Metzenbaum. We convene the opening of the citizens and shareholders rights and remedies

subcommittee of the Judiciary Committee this morning. Today and tomorrow our committee will examine into the question of whether or not individuals in our society are being deprived of their equal rights to insurance at FAIR RATES to property and casualty insurance companies make just as justifiable unnecessary distinctions among American citizens. Or do they unfairly and needlessly discriminate against them. And answering this question we will inquire into the coverage and rate policies of the industry. Specifically we will attempt to ascertain whether the use of such categories as age sex race neighborhood occupation and marital status based on personal characteristics that consumers cannot control is fair. Insurance has become a necessity of our daily living unless automobile homeowners insurance in particular are available at FAIR RATES. Many

consumers will not be able to drive cars or own homes. Thus the issues we will be discussing today and tomorrow now have and will continue to have a deep and long term impact on the American average American who regulates the insurance industry. The States. But today with the exception of a few outs broken even courageous state insurance commissioners some of whom are testifying today the states appear unable to deal with the problems of discrimination in the cost and availability of essential injury insurance. The subcommittee's current investigation which began last August is the extension of a series of exhaustive and meaningful hearings held over the last 10 years by my late distinguished colleague Philip hard one of the finest gentleman and most effective legislators ever to serve in the United States Senate. The hard hearings held under the aegis of the

Subcommittee on antitrust and Monopoly our sister subcommittee found that many though by no means all insurance companies seek to maximize profits to the exclusion of providing essential insurance coverage and services. We are here today to determine whether the pattern revealed by the Hart hearings has continued in pursuit of the ideal policy holder many property and casualty insurance companies appear to be employing practices that exclude large segments of cities and whole classes of consumers regardless of the loss records of individuals. Several studies suggest the central city areas all over the United States are being redlined for homeowner insurance purposes. This means that consumers in these areas are unable to obtain comprehensive insurance on their homes and are forced into the high priced market of nonstandard companies and state fair plans in that market. Homeowners must pay higher premiums per dollar of coverage than the

suburban homeowner pays while receiving less comprehensive coverage. A persuasive case has been made that insurance redlining is contributing to the exodus of property owners from the central city. Even more troubling is the fact in establishing territorial classifications property and casualty insurance companies frequently employ geographic areas such as postal zip zip codes and governmental boundaries with no logical relationship to losses. The evidence suggests that large numbers of so-called clean risks that is homeowners with little or no losses are landing in the state for plans according to the Federal Insurance Administration. Of the three million policies written in the state for plans between 1968 and 1974 only four point eight percent less than one out of 20 sustained in loss annually and approximately 95 percent of all the fair policies fair plan policies were found to be loss free.

One final point in connection with consumer problems and property insurance and examination of underwriting guidelines of property insurance companies reveal some extremely subjective underwriting criteria. For example the manual of one group of companies characterizes as a bad risk a consumer who quote can be seen sitting on his front porch without a shirt and a quill or a homeowner who is quote just plain Ari. On that basis I might say maybe a number of us in Congress would fall into the bad discount category ourselves as being just plain ornery. Are these fair or even measurable bases for making essentially a sure insurance decisions with regard to auto insurance. Various company underwriting guides either provide prohibit the sale of auto insurance to categories of persons such as divorcees unmarried persons cooks longshoreman military personnel musicians

unskilled manual laborers and professional athletes or require that persons in such categories be specifically scrutinized before they are accepted as a ship as a insureds and then quite often being rated when they are so accepted. The property and casualty insurance industry suggest that there is a distinct justification for the classifications that they are using. We will hear from them tomorrow. We do know now know now that industry's approach to classifying risks forces whole segments of the population to pay higher premiums as a result of the conduct of a relatively few persons in each class. As an example young drivers do have more accidents than adult drivers but the vast majority of young drivers never have an accident and the data analyzed by a taskforce of the National Association of Insurance Commissioners reveals that in 1974 based on averages 89 percent of all male

drivers under 25 years of age were claim free. It is my belief that personal characteristics such as age sex occupation race territory and marital status which an individual cannot control should not be the basis for denying consumers insurance or making it available only at very high rates. Especially where insurance is essential for carrying on everyday activities such as driving a car and owning a home for treatment of our citizens is essential. I'll hear from our first witness. We identify yourself purser renames those of Tampa am from Boston Massachusetts. I'm glad to be here. I've received a bill. I'm 21 years old and I'm a driver from Boston. I've been driving since I was 16. I mean Mary and I live in East Boston which is a neighborhood in Boston.

I own a 1975 movie I needed to drive back and forth to work. I'm a machinist. My insurance bills and 1976 was fourteen hundred dollars. Option one that includes comprehensive fire and even personal injuries were very low. $100 is a lot for car insurance but it ain't so high. But is Boston but I paid insurance for the first year. Fourteen hundred dollars even though I had to work 50 to 60 hours a week. I heard that there was meetings going on in the neighborhood about problems and car insurance. So I went downtown and people were really mad at me dickless about their bills but I didn't know that much about it until I got involved with mass fish air fish air is an organization all over the country.

I found out more about car insurance. I found out that in Boston there is 24 raiding territories including nine in Boston and Boston is the highest of all. I found out the good Dr is vast and can pay for five times as much as bad drivers in other parts of the state. For instance I live in territory 24 and commute to Everett which is territorial I think I might go with twenty eight hundred dollars. If I live in Everett and worked in East Boston drove the same amount of distance every day. My bill would only be seven thousand nine hundred dollars. The difference of eleven hundred dollars. It was found out that in 1077 Massachusetts had a competitive rating for the first time which prices vary from company to company. So I started calling around to see to get better prices and some advice that I did get I got moved. That's what the agents and

companies told me. I live in Boston all my life and I want to stay there. Anyway I did get even more coverage so I went to option told my bill is twenty eight hundred dollars. I can't afford it so I had to drop the option so that meant for $900. I have no fire in that collision and I have only limited collision. I'm an X and I have to be able to absolutely prove that I'm in the right but I wasn't going to give up. As I said I work very long hours and never have involved in anything before. So I started working around and researching and I've got. And I found out that a lot of people were absolutely mad about their bills. So I've got my bill. Twenty eight hundred dollars and if I own a new car in

1977 it will cost me thirty six hundred dollars for car insurance which is more than you could get for an apartment and a host and a home via your own 977 Oldsmobile Cutlass which is three years old and 70 75 and it cost me twenty eight hundred dollars for insurance. How much is a car worth the car is only worth thirty five hundred dollars. And they wanted twenty eight hundred dollars for insurance. How long you been driving a car for two years. I've been driving since I was 16. How old are you now. I'm 21 he said. For two years all my new cap and all that and how long have you been driving a car. Five years five Have you ever been involved involved in an accident in the last month I have but I was proven right. Me and B. And were these rates charged. You charged actually before you even had the accident.

Yes in the beginning of January my bill was twenty eight hundred dollars. And they said because I was 21 years of age I was under 25 because I live in East Boston and I'm a male driver. Have you ever had any traffic violations. No I haven't. Have you ever had any claims in the last four years or five years for theft or accident of any kind. No I haven't. Is there something special about your car. Do you have a CB radio tape deck. Is there something is it is souped up cars something that particularly you know when I listen. No it is just the regular list. Perhaps use it for some especially hazardous work. Do you use it sometimes as a as a taxi cab or for detective work or anything of that you know I wish I did. What do you do for me. I'm a machinist and where do you work in Everett and have you held a job as a

machinist for some time. Yes I long for three years now. Your present bill is twenty eight hundred and eighty dollars. Twenty twenty eight hundred nine dollars and what kind of coverage do you have. Obviously one with low getting about the $900 figure out when eight hundred nine dollars to get what would you have had. How much coverage as far as liabilities comes OP someone over 10 five thousands and thousands of thousand five thousand five thousand or ten maximum for personal injury 5000 for property damage correct. And was there any deductible was any part of it was earning deductible. We had a collision with reference to your own car. I had 200 on the dock to go with the we. And when you inquired into this matter what specifically did

they tell you were the reasons as to why you were being charged such a high premium. The reasons that I got was because I'm only 21 years of age. I fall into the under 25 category because I live in Boston and because I'm a male driver which I have no control over because you're What can we all drive on M E L E right. If I made a male driver would it have been less if you were female. Yes it would have. Sergeant Necker Mr. Chairman members of the committee thank you for this opportunity to appear before you today. My name is Sergeant Joseph S. going and I'm 20 years old and I've been in the room a member of the Marine United States Marine Corps for slightly over three years. I would like to relay to you an experience that I had while attempting to obtain automobile insurance as a member of the service.

In September 976 I was informed by the British insurance company that my insurance policy would be cancelled as I no longer live with my parents and could no longer be carried on their policy a separate driver. At this time I was 19 years old and driving in 1076 Mustang. I had received one speeding ticket within 60 days of taking my driver's license at age 16 for driving 30 mph in a 25 mile per hour zone through my driving record to remain clear during the remainder of September and October. I called various insurance companies trying to get car insurance. One of the companies I contacted was a branch office of also a company located in a 500 Arlington Boulevard Fairfax Virginia. I spoke with an agent of this company over the telephone and after giving the agent my age driving record type vehicle I was quoted a price of possibly three hundred eighty five dollars per year with the agent. I told him I was a corporal for United States Marines. He then informed me that my rate would be a possibly

four hundred eighty five dollars per year. He explained that due to the fact that I was under the age of 21 and beneath the rank of B I was considered to be a high risk person do the poor driving records of military people in a category. I told the agent that was more than I could afford and hung up. I'm available if you have any questions. Sergeant thank you for your testimony and. How long have you been driving totally for your son. Have you had any accidents when the agent told you that your insurance was one hundred and eighty five dollars a year. Instead of the price of three hundred eighty five dollars a year. Did the agent talk about any factors other than your military service. Well he told me so those under 21 in the military wondering if

it was considered a high risk category. Do you discuss for them the fact that it had no accidents and that that seemed to be it. Either pay it or not take it is that it just based on who it was from. Do you understand that the at this procedure with respect to higher rates for members of military personnel is generally prevalent. Have you been informed of that by other men in your outfit. Are the men that you know in the military. I know some of the other members of my company are from getting car insurance and other members of my company do have a few problems getting car insurance. I do have problems getting insurance. Do you use your car. How far do you drive to work. I live partially moaning into two miles were from my own office.

And do you use your car for any outside part time work such as cab driving or use it for anything outside other than just going back and forth to work in pleasure driving going back with work and pleasure. Ok I am an agent of one leading auto insurance company told member of my staff. That the company uses to insure service man because according to him quote They drive from Washington to Los Angeles every weekend make frequent frequent long trips in your car. Do you know the men in the service. If you think that's a generally prevalent kind of situation. Well sir if I get the opportunity like a 4 day weekend or something like that I will go home. Where is home. Same goes for cars and your station here in Washington State Question.

Thank you Sergeant. Barbara. If they're correct my name is Barbara Peretz and I'm the chairperson of the Buckeye woodland community Congress insurance redlining committee in a vice president of this neighborhood organization. I'd like to tell you first a little bit about my neighborhood. It's in Cleveland Ohio. It's on the southeast side. Our neighborhood was once predominantly Hungary and Slovak and Italian. But now has a sizable portion of black population. But it is a rich cultural diversity and an interface of senior citizens and young families as well as a range of income levels from affluent to Parvati. Shaker square an example of an affluent area was one of the first planned shopping centers in the United States and seen a list of us in a poverty area is the first Catholic church in the United States and a national landmark. The age of the housing stock ranges from 50 to 100 years of solid brick and wood construction.

Extensive vacant and owner occupied housing rehabilitation is occurring in the neighborhood. The B W C C which I represent success in attracting a Neighborhood Housing Services Program a private not for profit rehab operation the Lutheran Housing Corp. and a national V.A. rehab pilot project. The business trips are viable and economically healthy local development Corp's are trying to stem deterioration in sections of these commercial zones. Neighborhood issues that have been worked on by our organization in clean include vacant houses homeowner problems with FHA v. insured homes safety lending and insurance institutions lending institutions securing commercial development dollars and now insurance redlining our neighborhood. In our neighborhood insurance companies are refusing to write new policies. They are canceling and nonrenewable policies of

longtime clients they are raising premium rates at an alarming rate. When questioning an agent as to why the reply is it's the neighborhood you live in. Before I get to the documentation that exists and exemplifies our points one point needs to be stripped. I am proud of the neighborhood I live in. I like to walk to the local stores where the owners know who I am. I like to walk on a tree lined streets and have my neighbors wave hello to me. To me the neighborhood is the city along with the family the neighborhood provides the roots that will make the city thrive. I have a 975 Ford Pinto which is a sub car and in July my 6 month premium came due. I have been paying a hundred thirty one dollars in it have been raised to $200 more than a 50 percent jump in a six month period. I need only called my insurance agent because I had had no accidents nor no tickets. At first the

agent told me Well it cost more to repair autos today but upon further questioning he told me matter of fact Lee. It's where you live. The insurance industry is forcing homeowners and renters in our community into two options to move out of the neighborhood because of the high rates are to be put on the Ohio fair plan which means higher rates for less coverage than conventional policies. A senior citizen and a retired veteran Franco's and head home ownership owners insurance with one agent for 30 years. He was for transfer to another agent because his agent retired. He was asked to prepay his insured homeowners insurance for three years which he did and he was canceled after two years and referred to the refunded a portion of his payment. He was referred to the Ohio fair plan after being told no other surance could be found for him. He refused the fair plan because it offers much less coverage for more money than

he had been paying previously. Frank Norman he lived in our neighborhood for over 20 years. Frank is a president of one of the local community organizations. Frank at home he had a homeowner's policy with the Utica fire insurance company the policy was to have covered a three year period from December 3rd 975 to December 3rd 978. He's received a cancellation notice on November 3rd 977 No reason was stated for the cancellation. They were referred to the Ohio fair plan which they rejected since it did not offer adequate coverage. They found conventional insurance for forty six dollars more than they had been previously paying. MR as well Walker an ass or naturalized citizen from Jamaica owns a few properties and soca Avenue. He had only homeowner's insurance with a union insurance for a number of years. He is a homeowner policy covered all three of his properties. He was cancelled on April 21st.

He was refunded a portion of his payment. He called his agent this is Macky to inquire why he had been cancelled. Mr Walker demanded a written reason for the cancellation and says Mackey agreed it to this day. Mr worker has not received a notice. Charles and Brenda cast Leitchfield have renter's insurance with Allstate in 1975. Their payment was $64 in one thousand seventy six. It was re raised to eighty six dollars in one thousand seventy seven. They raised a bill for nine received a bill for ninety seven dollars. A raise of three three dollars over a two year period. They dropped their insurance at this point for they had never made a claim. Their agent could not justify the increase except to say it's the neighborhood you live in. Because of the powerful influence of insurance companies the

insurance industry is able to set its own rates through the insurance services office the rates are put out by the aria so are used by the insurance companies nationwide and automatically approved by the regulators. The problem of insurance redlining is further compounded by an epic regulator's partisan to the insurance industry who view the public as a nuisance. In Ohio here the insurance regulator is a good example of one who caters to the insurance industry. The Buckeye woodland community Congress recently asked Mr Joe to attend a meeting a public meeting in our neighborhood. He refused due to health reasons. Yet a few weeks ago he attended a five day convention of Commissioners of insurance in Miami Beach. Mr. Johns just approved a 25 percent rate increase in auto insurance within the city of Cleveland.

You stated that the increase would be rescinded bull within 30 days if proved unjust so unjustly. Mr jump however commented that there that this was rare. It is extremely difficult to question increases cancellations and nonrenewable when the person who has the power to investigate and find the answers will not sit down and talk with the people. Senators the people in my neighborhood are the little people. They don't understand why it is that they maintain their homes and then they are cancelled. They do not have computers to fight allegations. All they know is that they are known that they are getting tired of receiving computerized letters that say in effect We can't make as much money as we'd like from your neighborhood. What we need are the tools to begin to resolve this issue. First we need disclosure of net earnings of these corporations. The disclosure data should also

reveal how our money is being invested with disclosure. A community such as ours. You could investigate a proposed rate increase and see whether it is due to a bad investment overseas or to poor management or to a need for a higher profit margin. Secondly we need laws that forbid cancellation of policies. The insurance business is supposedly a business of risk to be cancelled before their policy expires is hardly a risk if one has been insured with the company for a number of years loyalty and fee should be maintained. Once a neighborhood is now considered profitable cancellations notices spread like a cancer. Finally notices of nonrenewable should include a written reason for the non-renewal. This would force insurance companies to maintain their policies for fear of being exposed as red liners. An agent could hardly write a nonrenewable notice nonrenewable do it due to undesirable

neighborhood you live in. We are not asking for more bureaucracy but the necessary tools to help ourselves. Let us do it. We will challenge the insurance industry to prove to us that they are not redlining our neighborhood. The destruction of our neighborhoods must stop. Allow the people who are most affected the community people their dignity to fight for them and to maintain our community. And I thank you. Thank you Mr. Kurtz. And knowing something of your organization and the job that you are doing and an effort to preserve the community. I'd like to commend you not alone for your statement above for the effort that that organization is making to instead of walking away from the problems of the area you're fighting the problems and obviously this is one of them. How do you feel that in an effort to preserve the neighborhood

that the policies of insurance companies that have discriminatory policies whether for auto insurance or with respect to homeowners insurance makes it that much more difficult and causes some people to throw up their hands and give up the battle and leave the inner city to me. Exactly senator. The holes in my neighborhood runs from approximately I would say twenty to thirty five thousand dollars. This is the kind of a home that a young family can afford. They can't afford to go out into the suburbs where the homes are in an average of 80 to 100 thousand dollars. Actually your neighborhood is in many respects very well preserved and doesn't border in some parts Shaker Heights. Exactly which is a very wealthy community in this country. And the thing that good I guess I'm trying to say is that because of this kind of red line that people are questioning should I

live here and we need to have young people because these are these are good homes they're solid homes and they're affordable homes as your group or any group asked for state legislative hearing you know. My good friend from Wyoming that Representative Tommy Bell the state representative actually was prepared to come down and testify in support of the concerns evidence by this committee. I think that his ability to deal with the problem at the legislative level is indicated by the fact that he was urged to come here to sort of assist us and the federal so that I think that the legislature is aware of the problem. But I don't think that they've been able to cope with it very effectively. All right Surely you're not saying that the Ohio legislature is incapable of dealing with human problems.

Oh I'd say having been a former member of that legislature I'd say that they have great difficulty in passing effective legislation relative to the insurance industry yes. I try I fail. Well. Take your word for it. I was not capable of it being with its own problems when it comes to this guy. And you can't imagine saying the same thing about Wyoming. I think the lobbyists are just too effective down the aisle and I just made sure to hope that they will be able to meet this fall. I think one of the underlying problems that are involved in this set of hearings has to do with the fact that the McCarran Ferguson Act did pass an act by Congress and 45 was passed on the assumption that the state legislative bodies would provide effective regulation. And I think one of the reasons that we're having these hearings is that but for the exception of a few courageous

commissioners in the main the states have not provided very effective regulation of the insurance industry. This time we're going to change the order. Thank you very much. We're going to change the order just a bit. That supervisor Kenneth Hahn of Los Angeles County is here. He's as an appointment at the White House this morning so that we're going to take his testimony out of order before we hear from our panel of property insurance consumers supervisor on. You do know of our 10 minute rule I think you were present. Yes I heard I came one day early because yesterday I went to St. Paul Minnesota to pay my respects and to attend the funeral of. Very good

friend Senator Hubert Humphrey. So I came a day early yesterday went to the funeral and came here and. Chatted with the vice president there. Since you do not know me you maybe understand some of California politics. Let me tell you I represent one million five hundred thousand people in Los Angeles County. I'm elected every four years. There are five supervisors that govern a county of seven million people. I represent Watts. I represent where the airport is I represent downtown Los Angeles. I have the inner city. I was born in Los Angeles and I've been in public life 31 years. Elected by the people. And it is a rare opportunity for me to express the voice of nearly seven million people.

The Board of Supervisors of our county voted four to one to demand our legislature eliminate redlining and discrimination and injustice. And I think the biggest ripoff in the United States as far as the consumer is concerned is the optimal legal insurance companies and their practices in America and what they do to the inner city. The testimony of this lady from Ohio could duplicated in my district I thought she was speaking for me in my district. And to think that no one is even pull back the veil of the insurance lobby in the United States. At a Senate level or the congressional level just last week I appeared before the Senate Committee of California's insurance committee and the assembly committee. Both of them on the Packers to eliminate redlining the practices saying that the insurance of California should be

regulated on the safety of a driver is a good driver because he has wrecks. Does he gets tickets. Is he a drunk driver. And you know how many votes I got that Senate committee up there. It was so influenced by the insurance companies of California that only two. Members Assembly voted for a bill. We had five bills a great insurance commission up far to make an actuary study of insurance to make the insurance company file before they raise the price to eliminate discrimination eliminate redlining eliminate sex and occupation. The only thing they voted out of one committee is occupation. You know why the Screen Actors Guild set up a whole lot of people in Hollywood said listen our actors are being discriminated. And so they said at least we got in there and I got just a little bone. So that's why I'm coming here because I think there's a violation of the 14th member of the Constitution the United States. I think Attorney General Bell

should immediately look into the fact that the civil rights of American people are being discriminated against their personal lives and watch in my district and you know I started this. Senator let me tell you how it started. A lady in what's called a year ago actually was December 1. May I introduce Mr. Moss guy who is my administrative assistant who did all the research. Says this John. I live in Watts and I bought a car and I pay $970 insurance I think it was State Farm State Farm Insurance. I was visiting a friend in Whittier another section. Perhaps she was a maid in the home and she knew them for 25 years and they were very friendly. She told what she paid what her car was and it happened that they bought a car for their

daughter with the same make and model and same insurance company and it was $300 less and still she said to me why is it I said it must be some lair. One should try to find another insurance company. The free enterprise system nobody will sell to me. In fact we only have two agencies in an area that serves 700000 people only two is the big Automobile Club of Southern California their home office and figural and Adams and they have one branch office 97 and S. Sears and Roebucks that sells all states have three had three big stores in my district they shut one down as FOSS and Vermont in the inner city where the blacks of nobody. They rigged the prices they cut out competition they bring fear to the people. I have had so many. We have had over 40 thousand letters or

communications or petitions since I started this drive in 1986. No other public official in California ever looked into it and really a county supervisor is really not my job although our budget is 3 million dollars. We have 58 county departments with ministering to all the local government for a county with 80 incorporated cities. Plus the unincorporated area where the governing body. I really didn't think it was my job to tackle the insurance company but nobody else is doing it. I know this will be this hearing can be one of the most your if you're Committee of the Congress so the Senate can be one of the most important committees FARs consumer interests are in and in the United States. And I I applaud you to get the facts and the truth and I applaud you as the chairman for having this hearing to invite us from all over the United States to testify.

Thank you very much for your comments. That was Kenneth Hahn supervisor of the county of Los Angeles. How many will come back to order. We will. Commence by hearing Mr. James. Chairman I'm grateful for the opportunity to testify before this committee of the United States Senate. I think you're now addressing the most significant of contemporary issues in the regulation of property insurance. One cannot evaluate whether current patterns of product availability and pricing represent an acceptable discrimination against certain segments or individuals in the American public. Without examining the very fundamentals of the role of insurance in our society statistical distinctions among individuals in the marketing of homeowners and automobile insurance form the essence of today's competition in those businesses. Unfair discrimination on the other hand is prohibited by the insurance laws of every state in this nation. Nowhere has the

line been firmly and finally drawn between useful distinctions of risk and unfair discrimination as a consequence of these vague regulatory standards. There are people in this country who through absolutely no fault of their own are unable to purchase essential insurance protection. There are millions of people who are able to obtain necessary coverage is only at the exorbitant rates in the 10 largest cities in the United States. A complete package of homeowners and automobile coverage is because those who are able to purchase it more than 10 percent of the average family income in those cities situation is intolerable. Defenders of the insurance industry's marketing techniques will tell you the policies are underwritten and rated soley to match objective risk characteristics. Some specific examples from Massachusetts automobile insurance may cast some doubt on that assertion. In 1077 a resident of the wealthy suburban town of Concord Massachusetts could have purchased a full package of automobile

insurance coverage for as little as 200 dollars despite a driving record marred by frequent accidents. The 24 year old working man in the urban and predominantly black north Dorchester section of Boston having driven for seven years without an accident or conviction would have paid more than twenty five hundred dollars for the same coverage on the same car with the same company. It does not take an insurance expert to know that these prices are wrong. The example is admittedly extreme to the most extreme example within Massachusetts. Get data from a study of automobile insurance premiums around the country shows that the Massachusetts ratio of course city premiums to outlying area premiums is about average for major metropolitan areas. Massachusetts has now barked upon a corrective course. It begins with the realisation that unregulated corporate decision making and property insurance is intrinsically self destructive. Left to itself the insurance business will tend toward an insufficient spread of

risk and unjust structure of relative prices and an upward spiral of unchecked costs. Unfortunately the marketing strategy most attractive to any individual insurer is likely to be in conflict with the needs of the insurance system as a whole. Profits are maximized for an insurance company when it manages to beat the averages. Premiums for large volume coverage lines are set in accordance with the claim experience of policyholder groups often sorted by such characteristics as age sex and place of residence. It is forever to a company's advantage to identify a smaller subgroup which is better or worse than the average risk in its parent group preferred subgroups are actively solicited as customers lost prone subgroups are shunned or rejected. It is this continuing process of refinement that eventually undermines and destroys the foundations of the industry in which it is nurtured. An intricately refined classification plan unquestionably negates the principle of spread. Imagine if you can a

future health insurance system which accurately identified in an early age all citizens genetically inclined to develop diseases they would be unable to afford insurance while those would be while those who didn't need it would find it reasonably priced. The private health insurance market would soon collapse. Are we better served in some way by a property insurance mechanism mechanism which pinpoints the social costs of urban crime to those most likely to be victimized by it. Are we better served by auto insurance pricing which focusses the costs of commuting patterns on those into whose neighborhoods the commuters bring dangerous traffic densities. I think we are not the usefulness of insurance depends upon its spread of risk. Conventional insurance marketing techniques Moreover fail even the most elementary test of distributive justice. Those characteristics which insurers find useful for prediction of claims are not necessarily those causally related to individual

loss experience a characteristic which successfully distinguishes one group from another may be very nearly useless in distinguishing between individuals. A manual of essential insurance prices must be viewed from many people as a schedule of monetary penalties. Can we really charge a penalty in this day and age for being male. The automobile insurance system does this every day in most states despite the uncontrovertible fact that many men are better drivers than their women counterparts whatever the averages may show. Can one justifiably charge an extra premium for being young. When statistics show that many youthful drivers are among the best operators on the road and the older people who learn to drive have records no better than youthful learners. I think it is time we stop the practice of assuming that a young male or urban policy holder is guilty until proven innocent. Chromosome count and the year of your birth should not determine what you pay for essential property insurance. People should be charged for what they do not for what they are. Even

those who hold the incredible position that justice takes has no place in the evaluation of an insurance mechanism should be prepared to re-examine the traditional marketing of property insurance. In practical terms the current system simply will not work. It stands passively by its claim frequencies rise out of control by computing its prices to reflect the policyholder characteristics beyond any individual's ability to alter the insurance mechanism in use today. Provides no constructive incentives it observes and it measures claims but it never reduces them. A fairer system of insurance pricing one based on individually individually controllable characteristics would also be a more effective one. Property insurers have a means to give policyholders motivation to upgrade their buildings and to improve their driving habits. Instead they rely on a pricing structure grounded in group averages and immutable characteristics whose only incentives are for fraud and resentment.

Part of it is they are on the record either two or three minutes. Yes I can. I can certainly summarize Thank you. In Massachusetts we have some experience with these problems and we've tried very hard to do something about them. Cancellation and refusals have been virtually forbidden now underwriting into a high rated pool is permitted only when a driver's had more than two at fault accidents or convictions in the most three. In the most recent three year period and two years ago we instituted a uniform state supervised merit rating program. Just last month then I promulgated a new pricing structure to continue the emphasis on individual merit rating all differentials based upon gender marital status and youth have now been dropped from Massachusetts automobile insurance. Geographical differentials remain in the rate structure but they will be substantially reduced in one thousand seventy eight and maybe

further attenuated in the future. That young driver I talked about earlier who paid twenty five hundred dollars last year for a full package of coverages in north Georgia Chester will be able to purchase the same protection this year for approximately one third of that amount. Our mechanism for providing essential fire insurance and other fixed property coverages in Massachusetts is based on the federally created fair plan model. It guarantees the availability of fire insurance but in a manner less satisfactory than mandatory oper approach used in automobile insurance customers not able to choose the insurer of his choice and instead must in many cases must accept a fair plan policy at a fair planned price. We have extended the fair plan as many states have not to include a complete package of homeowners coverages and in 1076 we denied a request by the plan's insurers to apply a 50 percent surcharge over standard market rates to all fair plan policyholders not every state unfortunately denied similar requests. That kind of a surcharge can be based on an underwriters intuitive judgment.

No reason is given and no appeal is possible. Last year the US House of Representatives passed a prohibition on these inexcusable surcharges sponsored by Congresswoman Elizabeth Holtzman of New York and the United States Senate unfortunately failed to concur legislation to this effect should be passed by the Senate next time it's considered. And you might look into the automobile reinsurance approach as one superior to the current fair plan approach. Arbitrary underwriting judgement has no more place in the Equitable equitable provision of fire coverages and it doesn't automobile insurance. I think it is courageous and farsighted of this committee to be holding this hearing today. I'd ask you not to take the problem of unfair discrimination lightly. You cannot solve it by looking for red lining. If you take away their red pencils and their maps the insurance industry will find other judge mental underwriting characteristics which will allow denials of applications from inner city residents the young and the poor. You must seek to

halt entirely subjective refusals to write essential property coverages and even then you will not have solved the problem as long as the traditional insurance pricing assumptions remain in place. Until insurers abandon the notion that rating must be based on immutable group statistics beyond any individual's control the insurance mechanism cannot perform its proper role in modern society. Insurance must be used to spread the risks of natural environmental hazards not to narrow them. Insurance must be used to encourage responsible behavior not to generate profits from the cost plus servicing of an ever increasing claims load. It is by no means coincidental that a just insurance system would be the one best able to perform these vital tasks. Thank you. James Stanley insurance commissioner of Massachusetts. Mr. Stone I'm told by industry representatives that actuarial statistics show that young male drivers have more accidents than other classes of consumers. How do you justify eliminating the youthful male driver

class for auto insurance in Massachusetts. And are you sacrificing accuracy or accuracy for other goals. The essence of what I'm trying to do is to move away from those use of group statistics if I can give a simple example perhaps I can illustrate my point. If we imagine one group of policyholders 10 percent of whom have a claim in a year and another group of policyholders 5 percent of whom have a claim in a year the traditional industry approach would be to say Well 10 percent is twice five percent. So everyone in the first group should pay twice what everyone in the second group pays. But in fact 90 percent of the first group 95 percent of the second group are clean. And it seems to me that what's done is to expand the average statistics for those who have claims to make them appear as though they covered the entire group. I guess my attitude is if you can prove to me that

someone is the average person in the group then it's all right from the average rate of the group. I would like to suggest a lot of you as we cood this portion of the morning's testimony that you give some consideration to inquiring into the subject of mutual insurance companies who never give the mutual policyholders an opportunity to be that which they are and that is the owners of their own company. And I believe that you could do that in the strongest way of enforcing of supporting the free enterprise system. I cannot conceive of a situation where I mutual insurance company cancels their their own ownership without even a hearing. And I would like to urge it upon you as well as DNI and I see that the mutual be given a special kind of attention in this respect and in many respects and in all respects not alone not alone with respect to this but with respect to the question of dividends distribution and accumulation of

unnecessary services. You've been listening to hearings before a subcommittee of the Senate Judiciary Committee chaired by Senator Howard Metzenbaum of Ohio. They are investigating complaints that auto and home insurance companies unfairly discriminate against consumers because of their age place of residence or marital status or occupation. Consumers from across the country have told of their personal experiences and several state insurance commissioners have discussed the problem and told of their state's efforts at reform. Only one insurance industry representative testified today. Several more though will argue their side of the issue tomorrow. This program was recorded this morning for this delayed broadcast technical supervision was provided by Gary Henderson. I'm David Malpass in Washington funds for this program were provided by the Corporation for Public Broadcasting. This is NPR National Public Radio.