disparate pricing regimens within the state.
Within states, significant variations in price of course
exist. Perhaps the easiest, admittedly anecdotal manner in which to
demonstrate such variations is to select a large, representative,
carrier writing throughout the state, and compare data from that
carrier regarding premiums in different regions of the state. While
not all-encompassing, these data clearly demonstrate the breadth of
existing pricing variations. Based on such information, it is
indisputable that broad variations exist, both as between various
parts of the state, and within the metropolitan area.
For example, for an adult with no accidents or violations in
the previous three years, driving a 1988 Buick Regal 10,000 miles
per year, not using the vehicle to commute to work, a 'total' [*]
package would cost: $953 per year in the carrier's 'Milwaukee'
territory; $694 per year in the Milwaukee suburbs; and, $470 per
year in the largely rural southwestern counties of the state.
Substantial differences in premium amount as among these areas
occur in liability, comprehensive and collision coverages. Clearly,
where a proposed insured lives has an enormous impact on the price
of insurance from this typical major carrier.
Since insurance inherently involves risk-spreading, the
initial question is whether or not insurers should be permitted to
charge different amounts for identical coverages to various
consumers. It would be relatively easy, for example, simply to
require that all insureds within, say, an entire state (reflecting
a uniform liability structure) pay identical amounts for identical
[*] $50/100/25K liability; $5K medical; full comprehensive;
collision w/ $250 ded; and, $25/50K UM
coverages. Insurers could achieve substantial efficiencies in
avoiding the significant costs entailed in identifying, acquiring,
verifying (and, ultimately, justifying) criteria by which to
distinguish among consumers, and thereby set premiums. Thus, any
driver in, for example, Antigo could pay the same amount as a
driver in Milwaukee or Racine: the larger the base, presumably the
more accurately an insurer could anticipate aggregate costs.
However, such total risk-spreading is generally not acceptably
viewed. Different drivers pose substantially different risks based
on various factors, many of them quite clear-cut, such as annual
miles driven. Understandably, a consumer driving 10,000 miles per
year would object to paying the same amount as another who drives
30,000 miles per year. Thus, many (indeed, probably most) consumers
would object to a system without any discrimination among insureds.
Some drivers will predictably have more accidents, and thus,
presumably, file more claims. It doesn't offend most people's
notion of good public policy and fairness to charge such consumers
more for coverage.
Similarly, insurance carriers also would object to such a
totally discrimination-free system. As profit-making institutions,
carriers naturally will want to seek out and underwrite drivers
from whom they anticipate receiving fewer claims, just as any
business seeks to control its costs. Thus, there are natural forces
occurring in markets â€” eminating both from consumers and from the
industry â€” which encourage, even demand that insurers attempt to
assess the likelihood of future risks in setting insurance rates.
Note that from the standpoint of most consumers, it is
essentially a social or political concept â€” perceived fairness â€”
that underlies the demand for attempting to assess the likelihood
of future accidents and to price accordingly, i.e., to
discriminate. From the industry's point of view, it is more an
economic imperative â€” cost control, competitive attractiveness,
and ultimately, profitability.
Regardless of the forces leading to discrimination in
insurance pricing, it is both widely present, and, within
acceptable social and political boundaries, desirable. Accordingly,
the industry has developed a sophisticated set of data, based on
various criteria intended to assist them in identifying and pricing
for various proposed insureds. The question today is whether or not
the price discrimination which is clearly occurring in major urban
areas today, including Milwaukee, is within such boundaries, and if
not, how best to address it.
Whatever criteria are employed in attempting to predict the
likelihood of claims, there are both costs and uncertainties in
doing so. The ideal predictor is one that first, is easy and
inexpensive to obtain and to verify, and second, is relatively
reliable and accurate in predicting future claims.
Among the most commonly used of such criteria is that of
location, i.e., territorial rating. It has been found to satisfy
the combination of the aforementioned criteria to a greater extent
than most other criteria. By contrast, other consumer-specific
information is relatively more difficult to obtain or to verify, or
is less reliable as a predictor, or some combination of both.
For example, in determining the number of miles which any
given consumer drives in a typical year, an insurer could rely upon
a consumer's representation to such a question. This might involve
no verification beyond taking the consumer's word. Actual
inspection of the odometer is obviously more time-consuming, and
thus more costly. And, even that step is largely inadequate when
dealing with prospective insureds, as yet unknown to the insurer.
Obtaining comprehensive, reliable information about a given
individual's driving record is still more involved. Information
about accidents, claims, liability, traffic citations, etc. is
still quite widely dispersed. And, given privacy implications,
some (perhaps many?) sources may be reluctant to divulge such
information, either in part or in whole.
Presumably, more complete, thorough information about a
prospective risk enables a more rational (and by implication,
hopefully, a fairer) estimate of future potential claiming
activity. Gathering and confirming such information, however, of
course entails additional expense.
Thus, insurers seek some optimal balance in selecting and
utilizing various criteria to enable them to be both 'fair' and
cost-efficient. There is some point beyond which the 'fairness'
benefits achieved by obtaining ever more-specific information about
individual prospective insureds to enable ever more precise premium
setting is overwhelmed by the incremental costs of obtaining such
Fairly or not, insurers have found that territorial rating is
a relatively inexpensively obtained, easily verified and generally
reliable, predictive surrogate for more involved individual
information. Extensive claims experience information demonstrates
that consumers whose vehicles are located in major cities generally
file more claims, and thus incur more costs, to insurance systems,
than do other, more rural consumers.
For example, in a major study of claiming activity during
several years in the mid-1980s, consumers housing their vehicles in
the City of Milwaukee filed 68% more bodily injury (BI) claims than
did consumers generally statewide in Wisconsin. At the same time,
however, Milwaukee consumers filed only 18% more property damage
(PD) claims than did all Wisconsin insureds. PD claims, because of
their much greater frequency, have generally been viewed as a
superior surrogate for overall accident rates. Thus, though
Milwaukee consumers seemingly had only slightly more (18%)
accidents, they filed substantially more (68%) BI claims.
[Curiously, while one might intuitively expect more accidents
in urban areas, given a higher degree of congestion, one would
likely also intuitively expect fewer BI claims, given presumed
lower overall rates of speed, again stemming from the greater
congestion. Yet, this is not, by the statistics just cited, the
This disparity is being further exacerbated by trends in
claiming behavior over time. In 1980, the ratio of BI claims to PD
claims statewide in Wisconsin was 22.0%. By 1992, this ratio had
risen by over a quarter to 28.2%. Using PD claims as a surrogate
for overall accident rates, this indicates that consumers are
becoming increasingly likely to file BI claims resulting from
comparable numbers of accidents.
Though fewer in number, BI claims are typically significantly
larger in amount. Thus, an increase in the frequency of such claims
will have a disproportionately large impact on overall claims
expense. Since Milwaukee consumers are historically substantially
more likely to file BI claims (and apparently becoming even more
so) than Wisconsin consumers generally, at least some of the
significant disparity between city and outstate premium levels is
There is thus little doubt that auto insurance pricing based
upon claiming experience will have a particularly burdensome impact
on Milwaukee consumers, especially those in the less far-flung
regions of the City. To the extent that territorial rating reflects
that claiming experience, it too contributes to the process.
However, territorial rating is merely the messenger bringing the
bad news that consumers in central cities will, other things being
equal, engage in more claiming activity.
The seeming unfairness of dramatically different premiums for
otherwise identical consumers living as close as on opposite sides
of a street is apparent. The problem thus becomes one of
accommodating the economic claiming data on the one hand to the
political and social necessity of affordable auto insurance on the
other. And, all this occurs before even considering whether or nor
other, more pernicious forms of discrimination are occurring, a
topic which other witnesses today are presumably better equipped to
address than am I .
The implications of restricting or eliminating the use of
territorial rating can be complicated. Care must be taken to
distinguish between the socio/political overtones of this issue and
the economic impacts of proposals restricting use of such criteria.
Does this suggest that territorial rating should therefore be
unquestioningly tolerated and accepted? Not necessarily. Consider
the following analogy. Certain medical conditions are known to be
more prevalent (often to enormous degrees) in, for example, white
vs. African-American populations. Would such a statistically
indisputable finding justify a distinction (i.e., a discrimination)
for health insurance coverage based upon the criterion of race?
Most observers would indicate clearly not.
Outlawing or restricting the use of territorial rating won't
alter the disparity in costs incurred, and as a result, the
premiums charged. Limiting use of various criteria which only
measure location will not serve to reduce overall insurer costs,
and accordingly, will similarly not serve to lower premiums in the
aggregate. Restrictions on the use of such criteria might serve to
make insurance more affordable for selected consumers; however,
only at an off -setting cost to other consumers, and, a cost which
will in all likelihood exceed any rate relief afforded those
consumers benefitting from such a restriction.
I suspect that the accumulation of data of the type envisioned
by the pending proposals will serve primarily to underscore the
disparities in prices I have previously described. That these
disparities exist seems indisputable, both empirically and
intuitively. There is little doubt that many consumers in central
urban areas of cities like Milwaukee, often those least able to
afford insurance, are faced at best with the difficulties of
enormously expensive insurance, and at worst, with simple
unavailability, as some insurers withdraw from those areas â€” for
I cannot conclusively demonstrate whether insurance in the
central city is unaffordable or unavailable. It seems clear though
that it is not adequately widely obtained. However, it seems that
it makes little difference to a consumer in central Milwaukee
whether he or she can't get auto insurance because either (a) it is
too expensive to be afforded, or (b) it is simply unavailable at
any price. The fact is that it can't be had by many consumers who
What seems necessary thus is at least a two-pronged approach.
First, if price pressures are to be relieved, underlying costs must
be addressed. First-party liability structures and fraud costs are
perhaps the most important areas long-identified where skyrocketing
costs might well be addressed and successfully controlled, thereby
providing the possibility of premium relief.
Insofar as liability is concerned, lower-income, central city
consumers primarily insure other drivers and only secondarily
themselves. Since they typically have smaller loss exposures,
reversing that model will serve to ease cost pressures for those
most in need of insurance price relief. Similarly, revamping a
liability system burdened with enormous administrative and
transactional costs that fails virtually completely to serve either
of its intended purposes, namely, behavior modification or
retribution, would be a major step in bringing cost relief to low-
Second, given the essential nature of auto insurance as a
commodity, exploration of various economic or legal incentives to
encourage or otherwise promote its broader obtainability within
central cities should be explored. Several admittedly generic
notions worthy of study might include: credible, independent,
analytical research regarding the unique or special insurance needs
of particular communities; pilot programs involving flexible
underwriting and appraisal standards responsive to special factors
in low-income or minority communities; affirmative and sustained
marketing programs targeted at such communities; and,
experimentation with preferable commissions or other remuneration
techniques to encourage agents to place business in such
communities. To the extent that pending legislation will
substantially support these efforts, it seems beneficial.
STATEMENT OF SENATOR RUSSELL D. FEINGOLD
BEFORE THE HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE
THE AVAILABILITY OF HOMEOWNER AND AUTOMOBILE
INSURANCE IN MILWAUKEE, WISCONSIN
January 4, 1994
Thank you Mr. Chairman, for holding this hearing on the problem
of discrimination in the insurance industry and for allowing me
to submit my testimony on this 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
the "American dream" - home ownership.
I would also like to thank Representative Barrett for addressing
this problem and for all of his efforts in bringing this hearing
to Wisconsin. It is critical that Congress seeks to take every
opportunity to bring the legislative process to the people whose
lives are actually affected by the laws written in Washington.
It is one thing to hear the testimony of the experts and
lobbyists at hearings in Washington, but to truly reflect the
thoughts and experiences of those who we are elected to represent
â€” our constituents â€” we must try and make every effort to open
up the process to the people beyond Washington D.C. Thank you
Chairman Kennedy and Representative Barrett for doing so.
Our nation has struggled with the problem of discrimination in
many facets of American life. In the 1960 's we tried to address
many of the areas in which prejudice permeated our society. The
Voting Rights Act was signed into law to ensure that all
Americans, regardless of race, could participate in our
democratic process. Discrimination involving an individual's
right to choose where they wanted to live was addressed by the
Fair Housing Act, and Congress responded to discrimination in the
work place by enacting title VII of the Civil Rights Act.
Each of these laws was designed to protect fundamental aspects of
an individual's ability to participate in American society.
As an elected official, I have made a commitment to help fight
discrimination in all of its ugly forms. As a state senator, I
fought hard to make sure that all communities and their members
had access to the lending institutions that are necessary to
purchase a home or operate a small business. As Chair of the
Wisconsin State Senate Banking Committee, I introduced the
Wisconsin Community Reinvestment Act which would have made it
easier for state regulators to identify and grade the performance
of financial institution's lending records in low income
Now another form of racial bias and prejudice has reached the
public's attention â€” discrimination in the insurance industry.
I'm sure that this is old news to many of the people in
attendance today and the problem is no stranger to Wisconsin
either. In fact, both Representative Barrett and I worked on
preventing insurance discrimination practices while we were
members of the Wisconsin State Legislature. In 1989 I was a
State Senate cosponsor of a bill similar in some respects to the
one introduced by the distinguished Chair of this Subcommittee,
which would have prohibited and helped eliminate discriminatory
practices in the insurance industry.
Sadly enough, the decisions on who gets insurance and what type
of coverage they will receive based solely on the color of one's
skin or the neighborhood in which they live by excluding a
certain geographic area from insurance coverage, better known as
insurance redlining, has taken place for some time and has been
discussed and examined by public officials as far back as twenty-
five years ago.
And recently it has been reported that these practices are
currently widespread throughout the United States. It is not
only disturbing that discrimination continues to exist today, but
it troubles me even more so that the fine City of Milwaukee has
received national attention for its occurrence. In fact, a CNN
television report even stated that Milwaukee is becoming famous
not only for beer, but for insurance discrimination. The type of
activity that has prompted such allegations cannot and must not
be tolerated in our society â€” let alone in Milwaukee or the
State of Wisconsin. We must remedy the situation so that the
actions of a few do not discredit the rest of the citizens of
Milwaukee and Wisconsin. -'t
It is important that people of all races and ethnic backgrounds
be placed on a level playing field when it comes to the
opportunity to purchase insurance. It is difficult enough these
days for anyone to be able to afford to buy a home, and is even ^
more difficult, if not impossible, to purchase one without
homeowner insurance. . . ._.
It is an insult to the millions of Americans of color who take
pride in home ownership and make their payments each month for
certain decision makers to simply write them off by ignorantly
assuming that minorities are a greater risk or too risky to
insure. Not only does this type of thinking prevent many hard
working individuals of all means the chance to own a home or
start up a business, but it flies in the face of the evidence and
adds to urban decay as well. What are the chances for a section
of a city to ever rebound or be revitalized if no individuals who
are committed to turning things around are ever allowed to become
insured and thus enabled to purchase a home or create jobs by
opening a small business?
Unfortunately, we can pass all of the laws that we want in order
to make discriminatory activities illegal â€” but none will ensure
that such practices will go away. Unequal treatment of
individuals solely on the basis of the color of their skin will
not disappear because a law is enacted making it illegal. But
the law does enable people whose rights are violated to seek
redress and punish those who violate these rights through the
legal system. And the law also symbolizes our consensus to
condemn and eliminate this invidious discrimination.
That is why I would like to commend the efforts of Chairman
Kennedy on introducing H.R. 1257, the "Insurance Consumer
Protection Act of 1993". H.R. 1257 would, among other things,
give federal agencies and affected individuals the ability to
effectively detect and address the problem of insurance redlining
and enforce the Fair Housing Act. It would accomplish this by
requiring insurance companies to disclose and report the number
and types of policies made along census tract lines along with
the race and income of the applicants and whether the applicants
were accepted or rejected. Such information would be invaluable
to federal prosecutors and individuals seeking redress from
discriminatory redlining practices. And of course, insurance
companies that are in compliance with the law would have nothing
to fear from any such disclosures.
Currently, there is no companion measure to H.R. 1257 in the
United States Senate. In light of the serious nature of
insurance discrimination and the need for federal legislation, it
is my intention to either introduce a companion measure in the
Senate, or work with the leadership of the Senate Banking
Committee to introduce a measure which would address the problem
and work to ensure the strongest possible measure becomes law.
The testimony which your subcommittee has gathered has documented
the problems of insurance redlining and its consequences for
millions of Americans, who are denied insurance or forced to pay
higher premiums for lower coverage. I am pleased that the
Clinton Administration has expressed its support for legislation
to address this problem and has urged Congress to act quickly on
this important matter. At a minimum, the kind of information and
reporting requirements provided for under H.R. 1257 should be
I would also like to note that although much of the focus
heretofore has been on homeowner insurance, both H.R. 1257 and
the Clinton Administration have made it clear that discrimination
in automobile insurance would be covered as well. This is
another important area of concern for many residents of these
communities and I am pleased that these proposals will address it
There have also been suggestions made that the insurance industry
ought to be subjected to the same requirements that are imposed
upon the banking industry under the Community Reinvestment Act.
Just as the banking community is required to address the credit
needs of all communities, we should consider whether the
insurance industry ought to be asked to make a similar effort to
make affordable insurance accessible to the residents of those
communities as well.
In conclusion, I would like to again thank Representatives
Kennedy and Barrett for their work in this area and for bringing
the people of Milwaukee into the process. I look forward to
working with both of you and all of those in attendance today in
making sure that we do all that we can to end the practice of
8383 Crttnway Blwi.
517 E Wlsconjirn Ave.
â€¢viilwjukM, Wl 53202
(4 Ui 276-/ 2112
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Wishiniiion. DC. 205 10-4904
DO NOT RELEASE UNTIL:
Tuesday, January 4, 1994
SEH. PEIMGOLD BLASTS SHAMEFUL PRACTICS OF INSORANCE REDLINING
IN CONGRESSIONAL TESTIMONY SUBMITTED TO HBARINa IN MILWAUKEE
Fain^old Vows to TaJce Up Figbt In the Senate,
Raises Possibility of Imposing â– Community Rsinvastmant"
Requirement on Insxirance Industry
MILWAUKEE, Wl - - In written testimony submitted to a
Congressional Subcommittee Hearing in Milwaukee, U.S. Senator
Russ Feingold attacked the practice of insurance redlining - the
practice in which property insurance is denied to individuals on
the basis of race or geographic areas with predominantly minority
"This shameful practice strikes at the very core of the
ability of many Americans to participate fully in the American
Dream - home ownership," Feingold said. "The systematic denial
of insurance to the minority community simply cannot be tolerated
in a just society."
Feingold vowed to take up the fight for legislation in the
Senate. Since there is no Senate companion legislation to H.R.
1257, the House bill to outlaw insurance redlining, Feingold
announced his intention to introduce similar legislation in the