These are extremely expensive. Again, when they are available, they are extremely expensive. There is a myth, I guess, that exists among the insurance companies that for some reason, especially in the inner city or minority areas, that the cooking there may not be as good as it is in other areas. I guess that is part of the view that product liability cases are extremely high. Mr. HORTON. You are talking about the food products? Mr. FLETCHER. Yes. That has no relation to crime incidents, street crime, and I don't know why it would be tremendously high except for one other factor, and that is that many people will consider the action on the part of some lawyers may be in direct relation to crime. incidents. And that is, we know, in many cases where product liability settlements go to court, that lawyers now seek rather exorbitant and high settlements, and we think this has a direct effect on the rate that insurance companies are offering to policyholders. Mr. HORTON. Mr. Fletcher, when you say products and liquor liability insurance, are you talking about one or two policies? Mr. FLETCHER. It would be one or two policies. A liquor store that sells nothing else would have liquor liability. Mr. HORTON. Are you talking about liquor liability that protects you under the Dram Shop Act, which is in effect in Illinois. All States don't have that. Mr. FLETCHER. Well, I am sorry. We are faced with that here in Illinois. Mr. HORTON. What you are saying is that you would have trouble getting that products coverage? Mr. FLETCHER. Right. Mr. HORTON. In the inner city. Mr. FLETCHER. Right. Mr. HORTON. And you might not have any trouble getting it somewhere else? Mr. FLETCHER. Well, if you did have trouble, the rate would be— the rate would vary from place to place. Mr. HORTON. I wonder if there might be, if you think there might be some relationship between possibly the verdicts returned in products liability cases in the inner city and those perhaps in suburbs or more rustic areas. Do they tend to obtain higher verdicts here? Mr. FLETCHER. I think so, sir. Mr. HORTON. But there is still no ultimate reason not to write the insurance, really. Mr. FLETCHER. NO. Mr. HORTON. Proceed. Thank you. Mr. FLETCHER. Well, I guess what I would like to say to sort of wrap this up, sir, is that we have found in the areas of the inner city that are labeled as high crime areas, that insurance has a direct effector crime has a direct effect on insurance, and that in effect has a direct effect on the small businesses and the operators. We think that the insurance facility here in Illinois with the fair insurance now dealing with that problem in terms of the fire insurance, but in terms of robbery and burglary insurance, we still have a deep poblem, and the net effect being that businesses are forced to operate without coverage and live in constant fear of losing everything or to pay high rates and perhaps make many of their ventures unprofitable in the long run. Mr. HORTON. Well, thank you very much, Mr. Fletcher. This is quite helpful and brings us another vantage point in seeing how it affects the banking industry also. Mr. Button. Mr. BUTTON. Thank you, Mr. Chairman. Mr. Fletcher, I would like to thank you for the information. I find it very useful, and I am sure it is going to be an essential part of this hearing. I would like to be able to call on you at another time to just try to increase my own personal understanding of this, because I think it is something I want to be much better informed on. Again, thank you again for coming before us here today. Mr. FLETCHER. Thank you, Mr. Button. Mr. ROE. Mr. Fletcher, you say that the commissions on the FAIR plan you believe to be low. Do you know what they are? Mr. FLETCHER. No; I don't. I don't have those figures available, but I have talked to brokers about the rights and there is a difference. Mr. ROE. Have they told you that they don't refer people to the Fair plan? Mr. FLETCHER. No; but we have called brokers. We have tried to get insurance information and this is for a particular entrepreneur, and he has come in and he asks who have you been doing business with, and we find out that this particular businessman has been dealing with the broker for several months and he hasn't been able to get insurance. And he is operating in an inner city area. And we raise the question of have you referred him to the FAIR plan, and if we are talking to the businessman, "Were you referred to the FAIR plan?" Mr. ROE. And he says no? Mr. FLETCHER. He says no. Mr. ROE. And what reason does he give? Mr. FLETCHER. None: "I didn't know, the broker didn't say anything." So we have, on occasion, called brokers and said, "Why don't you recommend that he go to the FAIR plan?" "OK, fine." But I have had some conversations with them about commissions and the problem is they will try to place him someplace else, and it leaves a long period of time while they are getting high quotes and then, ultimately, he winds up in the FAIR plan anyway. Mr. ROE. Do you know what areas in Chicago are so-called redlined for burglary insurance? Mr. FLETCHER. I couldn't give you exact boundaries. I can give you general areas. The west side, Lawndale. East and West Garfield. Mr. ROE. How did you obtain this information? Mr. FLETCHER. Well, nobody gives you a map and says, "These are areas that are redlined." I think over experience, time, you know, from dealing with brokers and insurance companies where you get one kind of quote and where a guy gets insurance relatively easy and where another businessman has difficulty in getting that kind of insurance. And you can readily guess that there is some distinction between companies as to one area and another. Mr. HORTON. Thank you. Mr. KLUCZYNSKI. Mr. Finn, any questions? Mr. FINN. Mr. Fletcher, your bank is probably one of the few that are truly committed to making the effort to make the loans and to find. insurance. Aside from a sense of public spirit, wanting to help the community, is there something about your experience that you can relate to encourage other banks that have not been making this effort, even under these difficult conditions, that would encourage them to do it? Mr. FLETCHER. Our effort is we consider ourselves a community bank in Chicago. And as Chicago goes and as the neighborhood around us goes, so goes that bank. Mr. FINN. That ought to be enough incentive for anyone. Mr. FLETCHER. And we have to be actively involved in what happens in the community. One of the things we set out to do with our program, of course, was to help develop the community surrounding us, but to also prove that you can make the kind of loans that we have been making and not lose your shirt, and, in fact, show a profit in your bank. Our bank is growing. We were up, profitwise, last year and, hopefully, we will remain so. We are constantly putting these loans on the books and we consider them good loans. We are not trying to give the bank away. Mr. FINN. Thank you. Mr. KLUCZYNSKI. Mr. Hungate has another question. Mr. HUNGATE. Mr. Fletcher, has the bank had any experience in any of the clients who had no losses for some time and then had a loss which resulted in their insurance being canceled? Mr. FLETCHER. (No response.) Mr. HUNGATE. Well, if you don't know, that is all right. Mr. FLETCHER. I can't recall; no, sir. Mr. HUNGATE. Good, thank you. Mr. KLUCZYNSKI. Thank you, Mr. Fletcher. You have been very helpful to this committee. Mr. FLETCHER. Thank you. Mr. KLUCZYNSKI. The next witness has been here all morning. I'm very happy to call him at this time. So for our next witness we have Mr. George E. DeWolf, assistant general counsel of the NAIL, that is the National Association of Independent Insurers. So you may take the witness chair and proceed as you wish, Mr. De Wolf. Do you have a prepared statement? TESTIMONY OF GEORGE E. DeWOLF, JR., ASSISTANT GENERAL COUNSEL, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS Mr. DEWOLF. Thank you, Mr. Chairman, gentleman of the committee. I do have a prepared statement and most of this is an attachment. I assure you it is short; it has been a long day for you as well. Mr. KLUCZYNSKI. Whatever you wish. If you want to put it in the record in its entirety and you may just summarize it, that is OK. Mr. DEWOLF. Yes, sir: I hope you put the entire thing including the attachment into the record. The statement itself is fairly short. Mr. KLUCZYNSKI. It shall be so done. Proceed. (The statement follows:) STATEMENT OF GEORGE E. DEWOLF, JR., ASSISTANT GENERAL COUNSEL, I am George E. De Wolf, Jr., Assistant General Counsel of the National Association of Independent Insurers. Our association represents over 350 stock and mutual property and casualty insurance companies, which write over half of the automobile insurance written in the United States. Up to the present time, our companies have not been large writers of crime insurance as most of them got their start in the auto insurance field and have been spending their energies competing and growing in the automobile insurance line. Now, however, many NAII companies are expanding into the property insurance field and, in the writing of personal lines, as distinguished from commercial lines, our companies are bringing new competition to property insurance and becoming significant in the market. Commercial property insurance has, over the years, been dominated by the "old-line" stock companies and, to a lesser extent, by those mutual companies which got their start writing workman's compensation insurance. You might say, therefore, that prior to the Hughes Panel Report we were only dimly aware that there was a growing demand for crime insurance from the urban merchants. Over the years only a modest percentage of merchants bought crime coverage so the insurance industry was, understandably, a bit bewildered that mercantile crime insurance was suddenly not only in demand but pronounced to be essential to the stability of our cities. I am not finding fault with this, as I am always pleased to see growing awareness of the value of one of our products. Unfortunately, this new appreciation of mercantile crime insurance has come about when losses have turned so heavy that the insurance companies cannot get enough premium to cover them. The Urban Property Protection and Reinsurance Act of 1968 provided for a report by the Secretary of HUD by June 30, 1970, on the crime insurance availability problem. A few months before this deadline, it became apparent to us that the big writers of commercial crime coverage were not going to propose any new solution but, instead, would stand on the principle that inner city crime coverage would produce a sure loss at any feasible premium and, therefore, it was not truly insurance. It was, accordingly, their position that they could offer nothing, and the problem would have to be solved by the federal government. We recognized, too, that much inner city mercantile crime coverage could not, practically, be charged a sufficient premium to cover its own losses. Therefore, it could not be written without some form of subsidization. But we felt that our industry was not fulfilling its responsibility to government, state or federal, and more pointedly, to our citizens, if we did not attempt to apply our expertise to come up with practical suggestions. Accordingly, our committees set about to develop a program. This program was ultimately approved by our Board of Directors and publicly announced by the NAII at the first of the meetings held by HUD to receive industry views in preparation for its June 30th report. In fact, an earlier version of the NAII bill was actually introduced in the Maryland legislature last year as a counter measure to an earlier proposition that crime insurance be included under the Maryland FAIR Plan. The NAII bill was so well received that even without adequate time remaining in the session for thorough hearings on the proposal; and even with the other insurance trade associations asking, not without some justification, for additional time to study the proposal; and even with the confusion created by a mixup in the legislative drafting office which caused every section in the bill to be misnumbered; even with all this, it very nearly passed. Very briefly, the general outline of the NAII program, which would be enacted on a state-by-state basis in those states where needed, is as follows: Coverage to be provided would be mercantile safe burglary, mercantile robbery, mercantile open stock burglary, and storekeepers burglary and robbery, with appropriate limits for small merchants. Also, deductibles could be used to cut down on the expense of handling the very small occurrence. Contracts would be issued by regularly licensed insurance companies as servicing carriers, and 100% reinsured in a pool. Business would originate through regular agents and brokers. Membership in the Pool would be voluntary, with certain inducements in the state tax. The Commissioner would have the power, however, to order all licensed companies to join if an insufficient number volunteer. Standard bureau rates for the same coverage in the voluntary market would be used. Commission should be adequate to compensate the agent for his ex pense, but it should be less than for voluntary market business. Also, because of the limited coverage available from the pool, it is believed that better risks will be attracted to package policies in the voluntary market. Eligibility and underwriting standards will be as follows: The plans will be statewide. Any person or corporation may apply. Initial underwriting standards are to be based on the successful city of Oakland crime reduction ordinance. Burglar alarms should be required for more hazardous occupancies. Experience may dictate additional requirements to avoid fraudulent or excessive losses. An industry administrative committee, representative of all elements of the insurance industry, would hire employees to operate the Pool, and supervise its operation. A Board of Governors, consisting of state officials, would have ultimate authority over the plan of operation, rules and regulations of the Pool. Funds would be generated by: 1. A small initial assessment on members to meet organizational expenses, to be repaid out of subsequent income, 2. Premium income from coverage written, and 3. A State reinsurance fund, supported by a policy tax on all crime insurance and package policies containing an element of crime coverage. The State Reinsurance Fund would be administered by the State Treasurer, It would reinsure the Pool against a combined loss and expense ratio exceeding 100%. It would be paid a reinsurance premium by the Pool equal to any profits of the Pool after allowing for retention by the Pool of working cash balances. It would also receive crime indemnity tax remitted by insurance companies. Any surplus accumulated in excess of needs and reserves for future losses would be remitted to the general funds of the state. To support the State Reinsurance Fund, a policy or premium tax would be levied on all crime policies and multi-peril policies containing crime coverage. including the homeowners policy. Insurance companies would collect the tax and remit to the State Reinsurance Fund. As an incentive to join the Pool, members of the Pool would be permitted to keep a small percentage of the tax in reimbursement of their expenses in collecting it and their costs of participating in the Pool. Mr. Chairman, I have attached a copy of our draft bill to the written testimony submitted to you. We are proud to have taken the initiative in developing and advocating this solution to the crime insurance market problem. We were also pleased to find that when the June 30th HUD report, prepared by George K. Bernstein, Federal Insurance Administrator, was published, our program was quite consistent with the fundamentals, if not all the details, of the HUD report. We think that this report of Mr. Bernstein's is as balanced and scholarly a statement of the problems and the practicalities for meeting these problems as anyone could hope to find. We are, of course, aware that the Senate counterpart of this committee has studied the crime problem, too, in all its aspects and thrown much light on the subject in its landmark report entitled "Crime Against Small Business." An approach suggested in this report was that an entire metropolitan area should have a uniform crime insurance rate, so that the loss cost of crime in the core area would be spread over the whole. Representative Annunzio introduced a bill, H.R. 11512, proposing that the Small Business Administration enter the insurance business to write crime insurance for small businessmen. Later, Mr. Annunzio switched his thinking to his bill H.R. 13666 which called, among other things, for writing crime insurance in the FAIR plans, with the federal government entering the inusrance business only if the states did not open up their FAIR plans. This provision has now been attached to the Housing Subcommittee's recommended omnibus housing bill. Just this morning I have heard that the Senate housing subcommittee is expected to vote out Tuesday its version of the Housing bill which will provide that the federal government may issue direct insurance policies against crime loss where crime insurance is not obtainable by businesses or persons at rates they can afford. Personally, I don't know anyone who feels he can afford his insurance, and we have to believe the size of this giveaway will far, far exceed its authors expectations. We believe this sleeper could ultimately prove to be one of the most expensive parts of the whole housing program. On a basic level, I am really surprised that after the admonitions the insurance business has received from legislators not to desert its social obligations, the Senate is now considering an insurance program which would obviously become a dumping ground for all the unprofitable crime business, without even requiring |