more restrictive terms. The insurance executive wants security against catastrophic loss just like any other businessman. As one insurance executive described the situation at our hearings:

"Still another threat to the solvency of our companies is the probability *** that reinsurers in our country and other countries-particularly in England and the Continentwill restrict or withdraw their riot coverage. If this happens, it will mean that primary underwriters will not be able to spread their catastrophic losses for the riot peril. Such an event is in contradiction to our basic operating procedures and would further expose the solvency of the primary insurers. ✶ ✶✶

"It is an inescapable fact, gentlemen, that a direct relationship exists between insurance market inadequacies and the financial capacities of our insurance companies. Our industry just does not have, nor can it be expected to have, the financial structure to cope with widespread civil disorder. It cannot continue to expose its very solvency no matter how remote the recurrence of widespread rioting may be."

Executives of our Nation's most respected insurance companies have stated that without some financial assistance from government to protect them against catastrophic riot losses, they will be unable to continue offering property insurance in the center city. They stress that this is a matter of urgency. As one said at our hearings:

"[W]e believe that the best and only way to induce insurance companies to provide coverage on all otherwise insurable risks is to relieve them of the exposure to catastrophic riot loss ***. In other words, in the absence of such governmental backup, the Urban Areas Plan could result in risks which are found on inspection to be "insurable" still not finding a market because of the magnitude of the riot exposure alone."

The insurance problems created by riots cannot be allowed to jeopardize the availability of property insurance in center city areas. But the problem of providing adequate and reasonable insurance in the urban core cannot be solved merely by supplying financial assistance to protect insurance companies against catastrophic riot losses. It is clear that adequate insurance was unavailable in the urban core even before the riots. Our survey indicates that property insurance problems are severe in St. Louis--where there were no riots-as well as in Detroit; in Oakland -where riots were minor-as well as in Newark. We are dealing with an inner city insurance problem that is broad in scope and complicated in origin, and riots are only one aspect of it.

Factors Underlying the Crisis.-For a variety of reasons explained in detail in Chapter II, the insurance industry believes that providing insurance to homeowners and businessmen in the urban core is generally unprofitable. As a result, the insurance enterprise does not function well to meet insurance needs in these areas.

The number of insurance agents and brokers selling insurance to residents and businessmen in urban core areas is relatively small. The effort to place the busi

ness may be more time consuming and the results less lucrative than with business from other city areas and the suburbs. Agents and brokers who seek business in urban core areas find that their applications for insurance are screened carefully by the insurance companies with which they deal. An agent who submits. too many applications that a company considers too risky may have his agency contract terminated.

Many agents simply avoid urban core business. An agent in Kansas City, Mo., told the Panel:

"Probably less than 1 percent of our premium volume comes from the areas which are generally thought to be trouble spots or potential trouble spots. One reason for this truthfully is probably that I know it is hard to place this business and not only do not solicit it but actually discourage it."

An agent in Washington, D.C., said:

"We don't have any trouble with business in bilighted areas because we stay away from it. It's bad business."

The basic factor underlying the shortage of insurance in urban core areas is that insurance companies generally regard any business in those areas as relatively unprofitable. Instead of basing their decisions to insure solely on the merits of individual properties, many companies consider the application of an innercity homeowner or businessman on the basis of the neighborhood where his property is located.

Underwriting materials sent to the Panel in response to requests for information reveal clearly that business in certain geographic territories is restricted. For example, one underwriting guide states:

"An underwriter should be aware of the following situations in his territory:

1. The blighted areas.

2. The redevelopment operations.

3. Peculiar weather conditions which might make for a concentration of windstorm or hail losses.

4. The economic makeup of the area.

5. The nature of the industries in the area, etc. "This knowledge can be gathered by drives through the area, by talking to and visiting agents, and by following local newspapers as to incidents of crimes and fires. A good way to keep this information available and up to date is by the use of a red line around the questionable areas on territorial maps centrally located in the Underwriting Division for ease of reference by all Underwriting personnel." (Italics added.) A New York City insurance agent at our hearings put it more pointedly:

to

"[M]ost companies mark off certain areas denote a lack of interest in business arising in these areas In New York these are called K.O. areas-meaning knock-out areas; in Boston they are called redline districts. Same thing-don't write the business."

The companies' motives for restricting the supply of insurance in urban core areas are not hard to find. Every company has a limited capacity to accept risks, and every company legitimately seeks to maximize profits on the insurance it writes. In doing so, company

underwriters are given incentives for choosing the least hazardous risks in relation to the amount of premium charged. Thus, in attempting to select only better risks, they find it easier to block out areas considered to be blighted than to evaluate properties individually.

In considering center city properties to be relatively poor risks, insurance companies may have in mind that buildings in these areas may be older and less fire resistant than new buildings in other areas or the suburbs. They may have defective heating and electrical systems. Narrow and congested streets may hamper firemen. The density of construction and the closeness of properties may invite the spread of individual fires into conflagrations. Damage from heat, smoke, and water may be widespread.

Companies may also feel that environmental hazards generally exist. Property in excellent condition may be exposed to nearby fire risks. It may be vulnerable to unusual crime hazards. Newly arrived residents from rural areas may be unaccustomed to the requirements of urban living. Overcrowding increases tension and antisocial behavior.

The added risk of riots, even though regarded as a remote possibility, has now prompted some companies to state that continued deterioration of the present situation would make them positively unwilling to provide any insurance in urban core areas.

Yet none of these factors may be of significance with respect to any individual property. What could be regarded as generally reasonable procedures may be arbitrary and discriminatory when applied in any particular case. Applications for insurance must be considered on their individual merits if everyone is to have fair access to insurance. Stop-Gap Measures

In response to the urgency of the center city insurance problem, this Panel, on September 15, 1967, called for state regulators and the insurance industry to prevent mass cancellations and nonrenewals and to halt a further constriction of the market. As a first step toward increasing the availability of insurance in center cities, we also urged the adoption and expansion of "Urban Area Plans." Under these plans, individual properties are insured unless a physical inspection discloses demonstrable reasons why the property itself cannot be insured.

Encouraging developments are taking place. State insurance commissioners, in consultation with the industry, have taken actions to maintain existing insurance coverage. Thus, in Michigan and New Jersey, for example, commissioners have extended a moratorium against cancellations and nonrenewals and have begun to work with the industry on steps to enlarge the supply of insurance in urban core areas. Some states— for example, Illinois and Kansas-have adopted

Urban Area Plans; others, such as New Jersey and Connecticut, are working to develop these and similar methods to overcome the insurance crisis. The National Association of Insurance Commissioners has made its concern a matter of record and has encouraged action to meet the problems.

Insurance companies have generally acted responsibly while awaiting the development of a more basic solution to the problem. They have not engaged in mass cancellations or nonrenewals. They have endeavored to maintain existing markets.

Despite these constructive efforts, there is great uncertainty over the future of the inner city insurance market. In some cases, the moratoria on cancellations and nonrenewals imposed by state insurance departments in the wake of the summer's riots are by their terms limited in time. Clearly, critical problems remain to be solved.

The Urgent Need for a Comprehensive Program

We believe that further steps must be taken immediately. We recommend that a comprehensive and affirmative program be placed into operation at once. The resources and talents of the insurance industry and of local, state and Federal governments must be marshalled to assure property owners everywhere fair access to insurance.

Unless bold and cooperative action is taken without delay, the problems of insurance availability will only become more serious, and solutions will be even more difficult to achieve.

Some representatives of insurance companies have said that if the underlying problems of urban blight were corrected, insurance would be readily available. But if insurance were more readily available for property that is adequately maintained, the underlying problems of urban blight would be more readily corrected.

Owners of well-maintained homes and businesses in urban core areas should not be asked to wait for better days to come. Indeed, they will not wait those who can will move out at the first opportunity. Those who do not move will have less incentive to keep up their properties. Insurance must be made available

now.

Yet any workable program must take other realities into account. Insurance companies are legitimately interested in profits and in maintaining their financial safety and stability. They therefore seek to avoid high risks. The states are already burdened with urgent demands on their resources. The Federal Government's responsibilities already more than match its tax

revenues.

We believe that a successful program can be designed to operate within the context of the exist ing structure of the insurance industry and the exist

ing pattern of state regulation and taxation of the insurance industry.

We believe also that Federal measures should support rather than supplant local efforts. Action by the Federal Government should encourage and assist those with front-line responsibilities.

We are convinced that the solution of the insurance problem of the center cities lies in the cooperative efforts of all who are involved. No single interested segment-the insurance industry, local, state, and Federal Governments, or the residents and businessmen of the urban core-can, acting alone, ameliorate the complex and interdependent conditions that cause this problem. All must accept a measure of responsibility. By doing so, the insurance crisis can be met.

The principal alternative to this approach is for government itself to provide insurance directly. We believe that so marked a departure from the free enterprise insurance system is unjustified at this time. We have confidence in the strength of the insurance industry and the abilities of the state insurance departments. We feel that they can, with limited Federal assistance, meet the challenge posed by the critical insurance needs of our center cities.

SUMMARY OF RECOMMENDATIONS We propose a five-part program of mutually supporting actions to be undertaken immediately by all who have a responsibility for solving the problem:

We call upon the insurance industry to take the lead in establishing voluntary plans in all states to assure all property owners fair access to property insurance.

We look to the states to cooperate with the industry in establishing these plans, and to supplement the plans, to whatever extent may be necessary, by organizing insurance pools and taking other steps to facilitate the insuring of urban core properties.

We urge that the Federal Government enact legislation creating a National Insurance Development Corporation (NIDC) to assist the insurance industry and the states in achieving the important goal of providing adequate insurance for inner cities. Through the NIDC, the state and Federal Governments can provide backup for the remote contingency of very large riot losses.

■ We recommend that the Federal Government enact tax deferral measures to increase the capacity of the insurance industry to absorb the financial costs of the program.

We suggest a series of other necessary steps to meet the special needs of the inner city insurance market-for example, programs to train agents and brokers from the core areas; to assure the absence of discrimination in insurance company employment on racial or other grounds; and to seek out better methods of preventing losses and of marketing insurance in low-income areas.

The fundamental thrust of our program is cooperative action. Thus, only those companies that participate in plans and pools at the local level, and only those

states that take action to implement the program, will be eligible to receive the benefits provided by the National Insurance Development Corp. and by the Federal tax-deferral measures. We firmly believe that all concerned must work together to meet the urban insurance crisis. Everyone must contribute; no one should escape responsibility.

Our specific recommendations for a five-part program are:

FAIR Plans

We recommend that the insurance industry, in cooperation with the states, institute in all States plans establishing fair access to insurance requirements (FAIR plans).

A FAIR plan assures every property owner in a State:

■ Inspection of his property;

■ Written notice of any improvements or loss prevention measures that may be required to make his property insurable; and

■Insurance if the property is adequately maintained according to reasonable insurance standards.

FAIR plans make these assurances applicable to:

■ All dwellings and commercial risks, including buildings and contents;

and for these basic lines of insurance:

■Fire and extended coverage (damages from wind, hail, explosion, riot, civil commotion, aircraft, vehicle, and smoke);

■ Vandalism and malicious mischief; and Burglary and theft.

FAIR plans envision a substantial expansion of Urban Area Plans that have been in operation on a limited scale since 1960. Urban Area Plans generally cover only residential properties in limited geographical areas, offer only fire and extended coverage insurance, and have procedural inadequacies. Experience with Urban Area Plans demonstrates their promise, but also exposes their limitations. FAIR plans will fulfill that promise.

One of the most notable extensions FAIR plans will make over Urban Area Plans is to provide burglary and theft insurance as well as fire and extended coverage. What is commonly termed "burglary and theft insurance" encompasses a multitude of different coverages, each presenting difficult underwriting problems. This line of insurance has been a very minor part of total industry writings. It has been much more expensive to market, and increasing crime rates are making it even more expensive. The problems of burglary and theft insurance have received relatively little study, and the potential for improvement is great.

While the ultimate answer to the problem lies in the reduction of crime and in loss prevention, FAIR plans can provide the incentive to insurance companies to develop innovations in the burglary and theft line that will make the basic coverages more available to the public.

The major differences between Urban Area Plans and FAIR plans have led us to formulate the new name, which has the added merit of conveying to the public the overriding purpose of the plans.

We believe that FAIR plans will:

End the practice of "red-lining" neighborhoods and eliminate other restrictive activities;

Secure for all property owners equitable access to all basic lines of property insurance; and

Encourage property improvement and loss prevention by responsible owners.

FAIR plans will also furnish accurate information to local and state governments on neighborhoods and on the condition of individual properties in poverty areas. We strongly urge forceful action at local levels to remedy the known environmental hazards of these areas. Action should include the development and enforcement of effective building and fire codes, the provision of more adequate police and fire protection, and the improvement of health, safety and related local

services.

If the information produced by FAIR plans leads to constructive governmental action, environmental hazards, which generate many of the insurance problems that make the FAIR plans necessary, will be removed. Thus, FAIR plans contain, in themselves, a broader implication. They serve as a stimulus to cure the basic conditions which have created the need for FAIR plans at this time.

We recognize that the successful operation of FAIR plans depends to a large extent on a sincere effort on the part of each insurance company to accept center city insurance risks.

We are confident that the insurance industry will take the steps required to help solve what is not only a complex and troublesome insurance problem, but a profound social problem.

FAIR plans establish minimum standards that are essential to overcome center city insurance problems. Every state will develop and implement a plan in conformance with its own local institutions, and every state may, indeed, establish criteria beyond those suggested by the Panel.

The rates for insuring properties are an important aspect of FAIR plans. Since the regulation of insurance rates is a state function, the States will bear the responsibility for the rates payable for properties insured under FAIR plans.

We urge that, insofar as possible, the level of rates generally applicable in a state also apply to properties insured under FAIR plans. Surcharges, if needed,

should be permitted only for demonstrable hazards of the property itself. Wherever possible, there should be no additional rate for environmental hazards.

We recognize the need for flexible and adequate rates. A risk must bear an appropriate rate; if a property is significantly more hazardous than average, it must yield a commensurately higher premium. Nevertheless, we hope that the states will consider placing a maximum limit on surcharges. Excessive or discriminatory rates must not be permitted to undermine the goals of the FAIR plan.

State Pools or Other Facilities

We recommend that states, in cooperation with the insurance industry, form pools of insurance companies (or other facilities) to make insurance available for insurable properties that do not receive coverage under the FAIR plans.

State pools will supplement FAIR plans. Some owners of well-maintained property will be unable to obtain insurance even after an inspection under the FAIR plan. Although the property itself is in good condition, it may be adjacent to an extremely high fire risk, exposed to unusual crime hazards, or subject to other environmental hazards which presently make property uninsurable.

Owners of these properties, usually declined by individual insurance companies, must have fair access to insurance. The responsible owner who cares for his property must not be penalized because of his neighborhood. He must not be denied insurance for reasons beyond his control. To do so not only treats him unfairly, but encourages the spread of urban blight.

It is important to recognize the distinction between this property and uninsurable property that itself is in hazardous condition and cannot or will not be repaired by the owner. Uninsurable property of this latter sort should not be insured, but should, instead, be the object of renewal programs designed to revitalize blighted

areas.

We recommend that state insurance pools be formed where necessary to insure well-maintained property, regardless of its location. A pool is an association of insurance companies that agree to share income, expenses, and losses according to a predetermined arrangement. A pool may be voluntary if all but an insignificant part of the industry participates. In some states it may have to be mandatory to obtain the broad industry participation that is necessary.

State pools will:

■ Guarantee to the property owner insurance if his property meets insurable standards, even when his property is subjected to environmental hazards;

Provide a method of spreading equitably throughout the insurance industry the risks from environmental hazards unacceptable to a single company;

■ Create a convenient facility for Government financial assistance if it is needed to provide insurance for these risks.

Some states may well choose a different method to

achieve the same results expected from pools. They may elect some other arrangement more suitable to their own local institutions—for example, a state insurance company to underwrite the properties directly or a state, insurance fund to provide reinsurance for these risks. The point is, state pools or some other facility may be needed to achieve the goals of the FAIR plans.

In some states, properties adversely affected by environmental hazards may be insignificant in number. They may be insured without the necessity of organizing a state pool. Diligent effort exercised by property owners and social responsibility exercised by state officials and the insurance industry-for example, by modfying underwriting standards-may succeed in providing adequate insurance through the FAIR plans alone.

States that are uncertain whether a pool is necessary may wish to wait a year or two until they evaluate the data developed under their FAIR plan. In this case, they would have the benefit of the experience of those states that have moved forward more rapidly with pool arrangements.

We recognize that very little is known about insuring core area risks under a pool arrangement. The experience of the Watts Pool is helpful but since that pool is restricted to fire insurance at highly surcharged rates for commercial properties in a limited geographic area, it is not necessarily a model that can be used generally. Pooling, however, is a standard insurance arrangement, and there is every reason to expect that it can function effectively to handle center city insurance problems.

The underwriting standards of the pool should be set by the state insurance department after consulting with the insurance industry. All properties meeting reasonable standards of insurability should be accepted regardless of environmental hazards.

It is recognized that deductibles and other limits on liability may be needed in making insurance available through a pool.

Rates for property insured in the pool will be regulated by the states. Each state will determine its own appropriate pattern of rates. We recognize that flexible rates may be necessary. But we urge that the pool charge no additional rate for environmental hazards, and that, if surcharges are needed, they be subjected to a maximum limit in order to keep the premium costs within the means of the urban core resident.

It may well be that intensive loss prevention and educational campaigns, deductibles and other similar insurance devices, as well as prudent pool management, can make the pool profitable over a reasonable period of time.

We recognize, however, that the rates charged for pool risks and the type of risks undertaken by the pool may make recurring losses inevitable. Handling these

losses might be resolved in a number of ways. If rates are adequate throughout a state to permit substantial profits by companies generally, companies might be assessed some portion of their underwriting income on nonpool property. Or, a state might itself provide funds from premium taxes or general revenues and subsidize to a certain extent the risks in the pool. Just as a State provides funds for other programs designed to revitalize core areas, it could consider its insurance pool as a related undertaking.

Another alternative for covering pool losses is for the State pool to apply to the National Insurance Development Corporation for financial backing against losses. In this event, Federal as well as State funds would be available to spread the cost of subsidization. National Insurance Development Corporation

We recommend that the Federal Government charter a National Insurance Development Corporation (NIDC) to undertake responsibility for a variety of vital but unfulfilled functions in support of the actions of private industry and States in the operations of FAIR plans and State pools.

The National Insurance Development Corporation would have no shareholders, but rather directors appointed by the President and representing all the parties vitally interested in the inner city insurance problem-residents of urban cores, insurance industry. representatives, State officials (including State regulators), Federal officials, and members of the public. It would not seek to make a profit but to discharge important functions in making insurance more widely available to the public.

The Corporation would discharge these functions:

Provide reinsurance against the risk of extraordinary loss from civil disorders, and thereby remove the burden from a single group of persons or segment of the insurance industry; ■ Provide a source of reinsurance for State pools;

Assess the performance of FAIR plans, State pools, and other insurance programs designed to deal with the problems of the inner cities, by gathering information, analyzing data, and preparing studies for the benefit of the public, the industry, and government.

At the present time, standard insurance policies in many lines of insurance include coverage against loss from riots. We strongly believe that the insurance industry should continue to include this riot coverage in all lines of insurance in which it presently exists.

We believe that the riot risk should, however, be neutralized as a factor hampering the underwriting of insurance in center cities and the placement of private reinsurance. Accordingly, the NIDC would issue riot reinsurance to member companies which are participating fully in FAIR plans and, where they exist, in State pools.

Any company desiring this riot reinsurance would