[The prepared statement of Bill Tisdale and Carla Wertheim can
be found in the appendix.!
Chairman Barrett. Thank you for your testimony. I appreciate
Our final witness is James Brown. Mr. Brown is the director of
the Center for Consumer Affairs at the University of Wisconsin,
Milwaukee. He has held that position since 1977. He is also an as-
sociate professor with the university.
Prior to joining the university, he was a staflF attorney with Mil-
waukee Legal Services. Mr. Brown has testified in a variety of
consumer-related matters before the Wisconsin, California, and
Florida Legislatures, as well as both Houses of Congress.
Thank you for being with us today, Mr. Brown.
STATEMENT OF JAMES BROWN, CENTER FOR CONSUMER
AFFAIRS AT THE UNIVERSITY OF WISCONSIN, MILWAUKEE
Mr. Brown. Thank you. Congressman.
It would be my intention to comment briefly on several issues
raised in your letter of invitation, first on the relative affordability
and availability of automobile insurance, focusing especially on the
disparities in charges imposed by the market functioning in Mil-
waukee versus the remainder of Wisconsin; second, I would like to
comment on the uses and the resultant impacts of territorial rating
criteria, which has often been blamed for many of the disparities
which I would hope to describe in response to question number 1;
and third identify what I feel are a few necessary elements in any
comprehensive solution of the problems resulting from those dis-
parities and, as indicated, blamed often on the use of territorial
I would point out by way of preface that the automobile insur-
ance market is substantially different than the homeowners' insur-
ance market structurally insofar as in Wisconsin the automobile
insurance market is founded essentially on negligence tortious
principles, whereas homeowners' insurance typically is not founded.
This has some major impacts on how the disparities and charges
for these different kinds of insurance products play out.
I don't portend to have any particular expertise, particularly
compared with the distinguished previous speakers on this panel,
with regard to homeowners' insurance, but it is important, it seems
to me, in trying to distinguish how to resolve the disparate rating
and pricing problems that we are all concerned about.
To provide a context, Wisconsin is, for all the problems that
occur, a relatively low-cost automobile insurance State. Among the
48 contiguous States, Wisconsin rates are in the aggn!*egate ninth
lowest out of the 48 contiguous United States.
Nonetheless, huge premium disparities exist. Without attempting
to provide an empirically sound representative of the size of these
disparities, it seems to me perhaps more illustrative to use one rep-
resentative national writer and simply compare what the rates
would be for an applicant under certain circumstances in different
parts of the State.
Assuming an adult driver, a male adult with no citations or acci-
dents in the prior 3 years, driving a 1988 Buick Regal who drives
10,000 miles a year and doesn't use it to commute to work, a so-
called full package, which would include liability, property damage,
comprehensive collision, and UM and underinsured coverage,
would cost $953 from one major national writer located in what
they call the Metropolitan Milwaukee territory, which is essentially
Capitol Drive to Oklahoma and extending about as far west as
Holly Road, roughly the ball park; $953 for the consumer living in
that area, $694 for the same package in the Milwaukee suburbs,
and $470 for a consumer living in the southwest, largely rural
counties of the State. Thus the disparity is over 100 percent.
Obviously, given the geographical characteristic I just gave, the
impacts of this disparity fall disproportionately on the concentra-
tions of less affluent and the concentrations of minority consumers
in the part of Milwaukee previously described. Thus, the question
becomes the nature of that discrimination. What is the nature of
that discrimination as it leads to the affordability/availability co-
nundrum previously addressed by all of these speakers?
It is an important notion that people have danced around, but I
think it needs explicit statement here. The idea of risk assessment
and resulting discrimination is not only not a negative feature of
the system; it is in fact a positive feature of the system. It is posi-
tive to consumers regardless of where they are in the sense that
if we are going to assess risk on the basis of social or political no-
tions of fairness, obviously we have to charge according to what a
fair assessment of that risk is likely to be.
Similarly, it is a positive feature to insurers. Insurers, like any
other business, are anxious to control their costs. One of the major
ways that they try and control their costs is to take on known risks
and to try and eliminate or price appropriately, hopefully, those
So it is a positive function when we talk about pricing discrimi-
nation. The problem then becomes the tension between what is ul-
timately a social and political concept of fairness on the one hand
balanced against economic imperatives of competition and com-
merce on the other hand.
This, of course, assumes the absence of other more pernicious
forms of discrimination, which, frankly, I would be surprised if any-
body would appear here and defend.
Accordingly, because of this tension, the decision for you. Con-
gressman, and for your colleagues is either strike a political bal-
ance, a role that sometimes some of us, I think, don't envy you
being stuck having to do, or else to try and make some systemic
changes that may eliminate or at least ameliorate some of the dis-
parate impacts that I will discuss.
The question is, is price discrimination as occurring within auto
insurance occurring within acceptable social and political bound-
aries, and if not, how ought it to be remedied?
Now, in setting premiums — maybe I should give a disclosure. I
have been a professor for 17 years, and so if I lapse into a small
lecture here, forgive me. It is an occupational hazard. In setting
premiums, the industry looks for various predictors, and the ideal
predictor features two essential elements. One, it is both easy and
inexpensive to obtain and verify with regard to a proposed risk;
and two, it is relatively reliable as a predictor of future claims.
Anj^hing other than an optimal balance between these two leads
to a system that is more expensive, either in the form of gathering
of information costs, which, of course, always get passed on to
insureds in the form of premiums, or to higher costs in the form
of greater uncertainty.
For all businesses' love of uncertainty in the abstract, they don't
like uncertainty any more than you or I do, and if we liked uncer-
tainty, presumably we wouldn't buy insurance. So the industry will
try and avoid those costs at all — certainly they will make strong ef-
forts to avoid those costs.
Experience has shown clearly that territorial rating is one of the
best indicators in striking this balance between being easy and in-
expensive to obtain and verify on the one hand and yet be reliable
as a predictor on the other hand.
A brief discussion of a major study of claiming behavior in Wis-
consin in the mid and late 1980's.
There are disparities, great disparities with geographically defin-
able boundaries as to how consumers file claims for auto accidents
in Wisconsin. Measured, basically, on the number of property dam-
age claims, which adjusts for how frequently or how infrequently
accidents occur, Milwaukee consumers are 68 — city of Milwaukee
consumers are 68 percent more likely to file bodily injury claims
per 1,000 property damage claims than are consumers generally in
Now, I have not seen any study indicating that Milwaukee con-
sumers are somehow more fragile or otherwise susceptible to in-
jury, and yet they do file, after adjusting for the accident rate, 68
percent more bodily injury claims than consumers generally in the
This is somewhat counterintuitive given the notion that one
would presume that since Milwaukee is more congested and there-
fore speeds on average are less, you would assume that there
would be fewer bodily injury claims, other things being equal, be-
cause there is a strong correlation, as you would expect, between
speed and the likelihood of personal injury. Nonetheless, it is 68
percent higher in Milwaukee than in the State as a whole.
Now, while Milwaukee consumers file more property damage
claims — property damage claims are a good useful surrogate for
overall accident rates — that disparity is only 18 percent. In other
words, Milwaukee consumers are 18 percent more likely to file a
property damage claim than a consumer generally in Wisconsin,
but they are 68 percent more likely to file a bodily injuiy claim.
This is important because bodily injury claims, while lewer in
number, are, as you might suspect, much larger in amount, and
this goes back, as I referred to before, the tie between the auto in-
surance system and the negligence tort-based liability system that
prevails in Wisconsin.
This disparity between Milwaukee and the rest of the State not
only is large, but it is, in fact, increasing. A good way of measuring
this disparity is by the ratio between bodily injury and property
In 1980, that ratio was 22 percent statewide. By 1992, it had
risen almost a third to almost 29 percent statewide. Compare that
29 percent with the experience of at least two major carriers that
provided data with which I am familiar, again for the area roughly
from Capitol Drive south to Oklahoma and west to Holly Road.
Their ratio was 49 percent over the last 3 years. So it is nearly
twice as high and it is increasing in Milwaukee.
Yet, pricing based on claiming experience, as alluded to earlier,
will have particularly burdensome impact on Milwaukee consumers
within this portion of the city. Where territorial rating reflects this
experience, obviously, it contributes to this process and it feeds re-
sentment, particularly in cases that I know Congressman Barrett
heard about when he was in the legislature in Wisconsin literally
involving consumers on opposite sides of the street looking at 20,
30, 40, 50 percent variation in premium levels, thus the problem
of accommodating the economically based claiming data on the one
hand to the social and political necessity of affordable auto insur-
ance on the other. Again, all this occurs before considering whether
or not other more pernicious forms of discrimination are occurring.
Should territorial rating therefore be routinely accepted? I don t
think you can conclude that. I would urge you, though, to recogpize
that restrictions or prohibitions on territorial rating are essentially
a case of shooting the messenger.
It will not alter disparity in costs incurred by the system; it will
not reduce overall costs. It may redistribute those costs, but it
doesn't necessarily solve the problem, which most people, I think,
both in central city of Milwaukee and throughout the State, feel
that perhaps auto insurance just costs too much.
I think the data that H.R. 1257 addresses and would accumulate
would certainly underscore these cost disparities.
I cannot conclusively demonstrate whether auto insurance in the
central city is unaffordable or unavailable. It seems clear, however,
that it is not adequately widely obtained. It also seems clear that
it makes little difference to a consumer in Milwaukee whether he
or she can't get auto insurance because either: (A) it's too expensive
to be afforded, or (B) it's simply unavailable at any price. The perti-
nent fact is that it can't be had by many consumers who need it.
Thus, what to do? What seems necessary to me is at least a two-
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 skyrocket-
ing costs might well be addressed and successfully controlled,
thereby providing the possibility — the basis for aggregated pre-
First-party liability structures, I would point out, would particu-
larly benefit less affluent central city consumers.
Second, given the essential nature of auto insurance as a com-
modity, ana I think that was one of the important points suggested
by Mr. Tisdale, exploration of various economic or legal incentives
to encourage or otherwise promote broader obtainability within
central cities should be explored.
Several notions worthy of such an approach might include pilot
programs involving flexible underwriting and appraisal standards
responsive to special factors in low-income or minority commu-
nities; affirmative and sustained marketing programs targeted at
such communities; experimentation with preferable commissions or
other remuneration techniques to encourage agents, and the best
way to encourage an agent, as was suggested in the earlier
commentary, is to hold the carrot of financial reward out there;
special experiments with preferable commissions or other remu-
neration techniques to encourage agents to place business in those
To the extent that the pending legislation will substantially sup-
port these efforts, it is clearly beneficial.
To the extent that the data accumulated under this legislation
enables a more quantifiable assessment of the impacts of the use
of such criteria as territorial rating, it may then answer how much
of the disparity is claims and cost related and how much may be
due to other unacceptable and pernicious forms of discrimination.
[The prepared statement of James Brown can be found in the
Chairman Barrett. Thank you for your testimony. I appreciate
all of your testimony here today. I have some questions for all of
you, frankly. Mr. Latus, I would like to start with you.
You make a very serious allegation that you were dismissed by
American Family because you continued to write policies to
You mentioned in your testimony a January 1989 meeting you
attended which included the American Family Mutual Insurance
State director, a regional vice president, and 11 district managers.
At this meeting, you maintained agents were instructed to pull
ads from the Milwaukee Yellow Pages, ads which you paid for
yourself. You say most of the business which results from those ads
came from African-Americans.
Can you cite other examples in which applications from African-
Americans were discouraged?
Mr. Latus. Well, we as agents were more or less programmed.
When we wrote a piece of business that the company necessarily
didn't want, they would at times send out one or two different un-
derwriters to underwrite the business.
There have been cases where we have written business on the
north side of town and it has been rejected and we had to go
through the Wisconsin Insurance Plan, the WIP Program. And you
became somewhat conditioned, in defense of the agents out there,
that when you did write this type of business, you ended up doing
additional work and you knew that the company was going to find
some fault in the house, in the property, that would require prob-
ably a rejection and then having to place the business in the Wis-
consin Insurance Plan.
I might add that I represent some seven or eight different com-
panies. American Family has two programs. They have the Gold
Star, as Alderman Pratt was referring to earlier; plus they have
what they call a Dwelling Owners Program. The Dwelling Owners
Program is designed for those properties that have high replace-
ment and low property values. They automatically get placed in the
I am familiar with the one that Alderman Pratt was referring to.
There are limited coverages. Obviously, the Gold Star was the bet-
Chairman Barrett. Who would make the determination as to
which program an individual would fall into?
Mr. Latus. Well, once again, an agent that continually submitted
applications under the Gold Star that the property consisted of low
property value and high replacement, there would be a number of
rejections. It didn't take that long for an agent to become accli-
mated and conditioned to the fact that he was going to get a rejec-
tion and then have to rewrite the policy.
So at the time of presentation, a lot of times the agent will make
that cognitive decision to write a piece of business in the Dwelling
Owners Program versus the Gold Star Program.
I might add that with my other five companies, none of them
have the two-fold program. American Family is the only company
that I have represented in the last 20 years that has the twofold
program. Maybe we should ask ourselves why they have that dif-
ferent type of policies. Maybe it is designed for different reasons.
Chairman Barrett. OK You also mentioned your work through
dealerships. Can you talk about that?
Mr. Latus. Certainly.
Chairman Barrett. I assume you were talking about auto insur-
ance when you talked about dealerships.
Mr. Latus. Correct. My experience with the company had to do
with referrals from dealerships and writing of business out of my
Milwaukee Yellow Page ad. As a seasoned and veteran agent, I
have built many good relationships with dealerships in town, in
Milwaukee, and it is not something a new agent can walk into a
dealership and say start giving me your business; it is a condi-
tioning process, and I worked long and hard to obtain these
A dealership had my pager, my telephone, my car phone, my res-
idence telephone number. When the business manager needed in-
surance on a vehicle, to deliver a vehicle, I made myself available
to them and I would go and write the business at the dealership.
In July 1989 is when I was called in Jerry Cutsforth's office and
I was told, quote, "We do not like that kind of business." Once
again, as in my report, that business consisted of almost 100 per-
cent African -American.
Chairman Barrett. And why didn't they like that type of
Mr. Latus. I think that is why we are here today. I think that
is why we are here today, addressing those issues.
Chairman Barrett. Mr. Englund, did you want to respond? You
were moving toward the microphone there. Go ahead.
Mr. Englund. Congressman Barrett, as I think you indicated,
American Family chose not to appear today, and I certainly can't
be their spokesperson and I don't claim to have any insight into the
merits of the specific case with Mr. Latus.
But it is extremely difficult for me to sit here quietW to hear
many of these allegations unrefuted given the nature of the com-
pany that I know, and I would indulge you and subcommittee staff
to at least call to your attention that American Family is a com-
pany that has aggressively recruited and attempted to maintain
minority agents in the city of Milwaukee, to speak to some of the
issues we have talked about.
I would specifically call to your attention and the subcommittee
staffs attention that American Family is not unique in offering two
forms of coverage and that the issue of repair cost versus replace-
ment cost on homeowners' insurance is an issue. It is an issue that
needs to be discussed. It is an issue that confronts any insurer who
is insuring severely depreciated property. The resolution of it by
American Family in offering a multitude of coverages is not unique
I would call to your attention, the subcommittee staffs attention,
that the Wisconsin Insurance Plan or FAIR plan, with one of the
lowest numbers of houses in a FAIR plan in a major metropolitan
city in this country, has achieved that status because of the active
efforts of American Family Mutual Insurance in trying to write
coverage in the very neighborhoods Mr. Latus is talking about.
I just think it is important, given the tragic decision on their
part not to be here, that you get some sense that there is some
more to this story.
Chairman Barrett. Again, as you pointed out, we had invited
them to be here today. I would have obviously preferred that they
had made the decision to be here as well.
Mr. Englund, since you have the microphone there, one of the
things that I hear as a Member of Congress when I talk to rep-
resentatives from the banking community or the savings bank com-
munity, the different lending communities, is they talked about the
Community Reinvestment Act, and they make the case that they
are being asked to lift up the central cities of this country, that
they are being asked to make investments in neighborhoods, they
are being asked to show what types of loans are being made in
neighborhoods, and no one else is being asked to do the same thing.
You present the picture today of the insurance company being
picked on, with the illusionary racism label and things like that,
but when I talk to members of the banking community or the sav-
ings bank community, frankly, I think they would like to have you
in the same boat as they are in, and their argument is that they
alone cannot help revitalize our central cities, that it is going to
Why shouldn't the insurance industry be part of that solution?
Mr. Englund. Well, first of all, I would acknowledge to you, Con-
gressman Barrett, that the public policy initiatives dealing with the
banking industry push them into a much higher profile of activity
than the insurance industry and I acknowledge it is a legitimate
public policy issue.
My underlying point is that the data that looks at involvement
and participation, especially as it relates to homeowners' insurance,
especially as it relates to Wisconsin is there and it is available for
scrutiny and is there for you and subcommittee staff to look at, and
I believe it shows a level of participation in terms of what we do
for a living, which is sell and service homeowners' insurance, as
being at a level for which we have nothing to be embarrassed
If the subcommittee staff will take the time to examine the costs
of the product, you will find that it compares quite nicely to costs
that people expect to pay and what is happening throughout the
State of Wisconsin. If you look at market penetration, you see the
same type of thing.
So we feel that we are doing our job, Congressman Barrett, in
terms of what we are all about in terms of selling and servicing
As you know, there are some additional components in the Com-
munity Reinvestment Act reinvestment, investing money into the
central city, and I am just not familiar enough with the require-
ments there relative to the banking and savings industry, the in-
I mean, especially on this housing thing, Congressman Barrett —
auto insurance, you know better than most Members of Congress,
auto insurance is an issue, but the housing issue just befuddles me
in terms of understanding it vis-a-vis Milwaukee because I believe
that the data and the experience is there to demonstrate that the
systems are working and working well here.
Chairman Barrett. Let's continue down that road.
I read an article that you had written in the Business Journal
that talked about the different ZIP Codes and the percentage of
coverage by, I think it was the top 25 companies. You would recall
it better than I. Frankly, what jumped out at me from the article
in the Business Journal was that you talked about ZIP Codes — for
example, 53225, 53216, 53210 — where the percentage of African-
Americans ranged from 11 percent to 54 percent, and the percent-
age coverage was actually pretty consistent, in the 60 to 70 percent
It reminded me sort of that old television show, "You Don't Say,"
because it's not what you say that counts, it's what you don't say,
and what vou didn't say in that article was that for the ZIP Codes
with the highest percentage of African-American, 53212, 53205,
53206, that respectively for those ZIP Codes the coverage was 45,
34, and 37 percent. First of all, I was surprised that the entire data
wasn't included in the article; and second, it does strike me that
there is a difference in coverage the higher the percentage of
African- Americans living in a ZIP Code.
Mr. Englund. Sure. First of all, you will be pleased and I am
pleased that attached to my testimony today is that very data you
are reading from. It is not something that we are ashamed of. The