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There is an assortment of many such problems, in automobile insurance, fire insurance, windstorm insurance, malpractice liability insurance, et cetera, but these can be and are being met. If the Government had decided to write insurance for each of these, I don't believe we would have much of a private insurance industry today. To those who believe that State government should play a greater role in meeting the crime problem. I suggest that the June 30 Report of the Federal Insurance Administrator, and State-controlled programs, such as the NAII proposes, are the most compatible with State initiative on the crime problem and continuation of State regulation

of insurance.

An alternative for the Senate version of the housing bill is now being discussed which would give the States a year to act and then it would provide Federal insurance if State action was not taken.

Gentlemen, I can think of no surer way to sabotage State initiative than to let them know that the Federal Treasury will take over the burden if only they wait a year. This certainly is the worst possible. medicine for the inner city businessman because it virtually guarantees that neither a State level or Federal level plan will be in operation for at least a year.

And with these comments on rapidly moving current events, we are trying to make a contribution to the solution of this important social problem. We have a plan, and I hope our remarks and explanations may be of some service to the subcommittee.

Mr. KLUCZYNSKI. I want to thank you, Mr. DeWolf. I heard you mention Representative Annunzio introduced a bill, H.R. 11512, which you are very much acquainted with, proposing that the Small Business Administration enter the insurance business to write crime insurance for the small businessman.

Then you say that later Mr. Annunzio switched to a bill, H.R. 13666, which called, among other things, for writing crime insurance in the FAIR plan, with the Federal Government entering the insurance business only if the States did not open up their FAIR plan. What is the difference between your plan and the placement of crime insurance under the FAIR plan?

Mr. DEWOLF. Our plan, Mr. Chairman, would be very similar to the FAIR plan. However, there is a difference in that, I think, everyone recognizes that writing crime insurance in the inner city areas is a sure losing proposition, especially if you try to do so at a premium the people can afford. They had the surcharge, they were tried in a few States under the FAIR plans and they created as many problems as they solved. So in recognition of the fact that this business does have to be written at no more than normal premiums, we believe that the States are going to have to take a little different approach than they did under the FAIR plans and they are going to have to write insurance comparable to the FAIR plan to keep them from going broke.

Mr. KLUCZYNSKI. Are you going to be here tomorrow morning?
Mr. DEWOLF. I would be happy to be here.

Mr. KLUCZYNSKI. Mr. Annunzio is going to testify tomorrow. He wasn't able to be here today. I think he was enabling to get his rule out yesterday.

If you could be here, we will hear his testimony.

Mr. Hungate, do you have any questions?

Mr. HUNGATE. I express our appreciation to you. We have a number of people bringing us problems, but it is also unique when they bring us a solution, and we appreciate that.

You mentioned the difficulty in writing a policy at a premium the customer could afford. In the case of car insurance or burglary insurance or product liability or liquor liability insurance, what would be a reasonable base in setting that premium? How large an area would you look at? Would you look at the State or the region or the city? Mr. DEWOLF. There are some problems. I know you referred to this several times during the day, something pretty much along the line suggested in the Senate Small Business Administration report or Professor Denenberg's proposal for a broad area. There are some problems in every one of these solutions.

Now, the problem, sir, with respect to setting a broad area is that if you mandate a rate that is unnaturally high for certain sections, say maybe in crime, it would be too high for the suburbs, too low for the inner city, and it would balance out.

Maybe for fire insurance, if you set a universal rate for a county or several county area, it would be too high, rather, it would be too low for the farmers where there are no hydrants, and it might be too high for the city where there is good fire protection.

Now, the problem that this causes is that it eliminates competition. If the rates aren't regulated in this way, the companies can get in and compete with each other. But when you dictate the rate they write at, it interferes with the normal competitive process. We are not sure that is the right answer either.

Mr. HUNGATE. Pardon me, I suppose basically, not entirely, the insurance regulation is a State proposition?

Mr. DEWOLF. Yes, it is.

Mr. HUNGATE. So when we discuss a region that ran beyond one State or took a city that runs into another State, as many of our cities do, I could see that you would have a tactical problem there. Mr. DEWOLF. Yes.

Mr. HUNGATE. Within the confines of a State setting the region in which the rates could be based, which could be a city or a county or several counties, wouldn't you preserve that competition if they were both required to write their rates over the same region?

Mr. DEWOLF. In other words, a given company might deviate, but it would still be level for the State of Illinois throughout the region. Mr. HUNGATE. Each company would have its rate established according to Cook County and downstate, whatever you call it. Could there not be some competition there?

Mr. DEWOLF. There could be, this could be done, Mr. Hungate, and I think it is not the worst of the solutions I have heard proposed. Mr. HUNGATE. I will keep trying.

Mr. DEWOLF. I certainly didn't mean it that way. But it reminded me a little bit of Massachusetts where there have been proposals for a flat rate for automobile insurance over the whole State. This just produces the worst kind of conflict between the farmers and the community dwellers.

We think you can accomplish about the same thing subsidizing the business with the statewide tax without some of the other problems that you get into the other way.

Mr. HUNGATE. Then he is subsidized, but he can't tell you

Mr. DEWOLFE. It doesn't hurt quite as badly.

Mr. HUNGATE. You are acquainted with Senator Hart's report? Mr. DEWOLF. To tell you the truth. I have been working on this statement and some other things, and I haven't read that in detail. But I am generally acquainted.

Mr. HUNGATE. Could you give me an approximate estimate of what percentage of the companies of which you are acquainted, what percentage of their gross premiums are paid out to policyholders for losses suffered?

Mr. DEWOLF. Well, Congressman Hungate, I have not been working on the automobile problem of late and I would hesitate to give any inaccurate information.

Mr. HUNGATE. Well, any other field? I would take that on fire or burglary, if you are acquainted with it.

In other words, what percentage of the gross premiums that would be collected with fire insurance, is paid out to people for losses, to people that have sustained losses, that is my question.

Mr. DEWOLF. I confess that I haven't seen any statistics recently other than the auto field, and there are so many different sets that you can pay your money and take your choice.

I really don't feel qualified to answer that.

Mr. HUNGATE. Thank you.

Thank you, Mr. Chairman.

Mr. ROE. Obviously with crime insurance you are going to attach some kind of subsidy. The cost of the insurance is not going to be borne by the customer himself because of the high cost.

Mr. DEWOLF. Yes, sir.

Mr. ROE. Do you feel that it is better that this cost should be spread only within the State limits rather than nationwide?

In other words, putting it under the HUD plan that they have now for flood insurance, where the cost is disbursed throughout the country, rather than just in the States where they have the floods?

Mr. DEWOLF. This is sort of a philosophical feeling and we think that the State is big enough to support their own problems.

Mr. ROE. Do you feel that they will? Do you feel that the rural area of the State will want to have their property insurance taxed in order to pay for crime in the big city?

Mr. DEWOLF. I think in a great majority of the States where they have this problem, it would pass. The response we had in Maryland indicates to us that this has a very good chance of going in the urban States.

I might add, counsel, that the other side of this is that we think it would be entirely unnecessary to set up a mechanism to write burglary insurance in Casper and Cheyenne, Wyo., which are their biggest cities; in Billings and Great Falls, Mont.-in other words, it really isn't a national problem; it is probably 15 or 20 major cities in the country where the problem is acute.

Mr. Roe. It is not a rural problem in any particular part of the State either, but we do have to spread the risk, that is agreed, if we are to do anything for the small businessman. The cost of it has to be spread.

And the question becomes what areas you want. I assume that your position is you want it within the State area, that you are not particularly desirous with the Federal Government becoming involved. In other words, yours is similar to the FAIR plan without the Federal Government to enact it.

Mr. DEWOLF. We think both the crime problem, the enforcement problem, is basically a State problem and insurance regulation likewise has traditionally been a State problem.

Now, I might say that the aid to small business in providing money to them to protect their premises and to bring it up to the standards of the local ordinances, and the recently announced Federal programs of aid to State and local police departments, these certainly are highly appropriate Federal activities.

We believe that it is well worth a try on the other route, and we believe it will succeed; to try to handle the insurance end of the problem.

Mr. ROE. Thank you, Mr. DeWolf.

Mr. KLUCZYNSKI. Thank you.

Mr. DEWOLF. Thank you, Mr. Chairman.

Mr. KLUCZYNSKI. If there are no further questions, we want to thank you, and we will adjourn until 9:30 tomorrow morning.

(Whereupon, at 4:05 p.m., September 17, 1970, a recess was taken, to reconvene tomorrow, at 9:30a.m.)

THE IMPACT OF CRIME, CRIME INSURANCE, AND SURETY BONDS ON SMALL BUSINESS IN URBAN AREAS

FRIDAY, SEPTEMBER 18, 1970

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON SMALL BUSINESS PROBLEMS

IN SMALLER TOWNS AND URBAN AREAS OF THE
SELECT COMMITTEE ON SMALL BUSINESS,

Chicago, Ill.

The subcommittee met, pursuant to recess, at 10 a.m., in room 1743, U.S. Courthouse, 219 South Dearborn Street, Hon. John C. Kluczynski (chairman of the subcommittee) presiding.

Present: Representatives Kluczynski, Horton, and Button.

Also present: Representative Hungate of the full committee; Donald Roe, subcommittee counsel; and John Finn, minority counsel. Mr. KLUCZYNSKI. The hearing will come to order.

I greatly appreciated yesterday's hearings. We had some very, very fine witnesses. We received some information that is going to be very beneficial to us when we go into executive session in Washington. I hope from these hearings, yesterday and today, we will be able to come up with some solutions to help that small businessman.

Now, we are going to try to complete our hearings today. The first witness this morning will be Paul Zimmerer, director of the Mayor's Committee for Economic and Cultural Development of Chicago, accompanied by Donald I. Kane.

Will you kindly take the witness chair. Do you have a prepared statement, Mr. Zimmerer?

Mr. ZIMMERER. Yes; I have.

TESTIMONY OF PAUL ZIMMERER, DIRECTOR, MAYOR'S COMMITTEE FOR ECONOMIC AND CULTURAL DEVELOPMENT OF CHICAGO; ACCOMPANIED BY DONALD I. KANE

Mr. KLUCZYNSKI. Do you have copies for the members? Now, do you want to read your prepared statement or do you want us to file it in its entirety and you can hit the high points or summarize it?

You may proceed any way you wish.

Mr. ZIMMERER. Mr. Congressman, the statement is short.

Mr. KLUCZYNSKI. Now, do I understand that you have a statement from Mayor Daley?

Mr. ZIMMERER. Yes, Congressman, I do have a statement. I would like to present it to the committee.

Mr. KLUCZYNSKI. Without objection, that will be made a part of the record.

(The prepared statement follows:)

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