Mr. STARK. Mr. Daub.

Mr. DAUB. Thank you, Mr. Chairman.

I, too, regret not having gotten here in time because of the celebration this morning of our problems with those families missing in Vietnam, which is an important function in my district.

I have read your testimony and listened, and most of the questions I would have asked have been asked. If you take the Treasury's logic on this issue, where they could indicate that they have proposed the QRA solution, because they worry about current law distorting the decision between self-insurance and third-party insurance, and I suppose they are looking at things that we all ought to be concerned about.

They are looking at the status of the reserves now in the industry. They are looking at incidents like Bhopal and asbestos, they are looking at the uncontrolled expansion of professional liability, and I think indeed, before this committee and the Congress now, the next step is what we are going to do with Superfund, and that is certainly going to embroil us even more in the legal liability problem with America's small and large business.

What is the solution if you think-I think, Dr. Gandhi, you said that this was a back-door or an indirect premium tax. What if we just simplified it and went to a gross premium tax of, say, 1 percent?

That will raise $1 billion.

Mr. GANDHI. If we are not very careful in terms of the label attached, whether it is income tax or something else, and if the aim is indeed to raise money, then I would say premium tax would be the only way to do it, and the shortest way.

Mr. DAUB. It is simpler, isn't it?

Mr. GANDHI. Yes, sir.

Mr. DAUB. It doesn't discriminate and force some companies that are having a tougher time in certain competitive fields into a tougher situation than others?

Mr. GANDHI. Yes, sir.

Mr. DAUB. Which lines of business, have you studied this, would be most adversely affected by QRA?

Mr. GANDHI. Long lines.

Mr. DAUB. Long lines?

Mr. GANDHI. Particularly in those where it takes several years to settle the claims and pay the claims.

Mr. DAUB. And would you specify for the committee what-Mr. GANDHI. Medical malpractice, reinsurance.

Mr. DAUB. Medical malpractice, reinsurance.

Mr. GANDHI. Other liability, et cetera.

Mr. DAUB. Thank you, Mr. Chairman.

Mr. GUARINI. Mr. Chairman.

Mr. STARK. Mr. Guarini.

Mr. GUARINI. Just for the record, may I ask if you have the figures for 1984, the underwriting gains and the investment gains? You included it in a 10-year summary. Could you break it down individually so that we could have the record complete?

Mr. ANDERSON. Yes, sir. For 1984, there was an underwriting loss of $20.520 billion. There was an investment gain of $20.790 billion, a net gain of $270 million down from 1983's $9.1 billion.

Mr. GUARINI. So, therefore, the current state of the industry is very, very marginal.

Mr. ANDERSON. Yes, sir.

Mr. GUARINI. Thank you.

Mrs. KENNELLY. Mr. Chairman.

Mr. DAUB. Mr. Chairman, I have a further question.

Mr. STARK. Mrs. Kennelly.

Mrs. KENNELLY. Mr. Anderson, Mr. Gandhi, just a little add-on to Mr. Guarini's question. Since you have had the experience over the last 2 years with discontinuing, could you compare or at least address QRA in your report for the other members who weren't here today?

Mr. GANDHI. Did you want to look at the effectiveness of the QRA?

Mrs. KENNELLY. Or if it could be carried out. Comment on it generally, so that we could have it on the record for its other members who aren't here today.

Mr. GANDHI. The QRA can be implemented, because it is independent of industry's own profitability, because the tax would become a part of the premium, and as I indicated, it is a kind of a premium tax in disguise, and there could be some situations where there would be a tax even though there would be no net income. Mrs. KENNELLY. So we would be increasing taxes.

Mr. GANDHI. We would be increasing taxes.

Mrs. KENNELLY. We are not going to do that this year, so thank you, sir.

Mr. STARK. Mr. Daub, did you have a further question?

Mr. DAUB. I have a question I was searching for. Gentlemen, could you answer briefly or if not, put it in the report that other members have asked you to send up to us on their questions. Are State regulators likely to adopt QRA?

Mr. GANDHI. My understanding is that the old method as well as the QRA method are primarily meant for tax purposes, and the States have their own regulations in view of the sovereignty and liquidity of the insurance companies, and they indeed would go on their own way.

However, there have been some suggestions that if for tax purposes we were to adopt the discounting of reserves, either QRA or GAO method, then indeed, some believe that it would also be for the State purpose.

Mr. DAUB. I think, then, I would follow up with Mrs. Kennelly's point that she made in the first part of her questioning. That if you go to this method and you look at different lines and different companies, that that becomes a disincentive and there is going to be a massive shift in the current portfolio of investment and a lot of disruption.

Mr. ANDERSON. We don't anticipate that happening, sir, to be honest with you. There is a period here where the industry is going to have to come to grips with its new loss experience, some of these catastrophic things have given it a new picture of what it can reasonably expect to be paying out 5 years from now on a medical malpractice claim, and we see what we are proposing here as being really neutral in the last analysis concerning that aspect of it.

Mr. GANDHI. I think indeed there have been substantial underwriting losses, nobody would deny that. But at the same time, we ought to remember that it is indeed the result of the industry's pricing strategy to charge low premiums to generate cash up front, and that is why even in 1984, which was the worst underwriting year, the industry has generated about $12 billion of additional cash, net cash flow, so there are people out there who say that industry is not in bad shape to the extent that they have been able to manage this cash so well, which they always have, they would carry on like that.

Mr. DAUB. I think you make a good point. Thank you very much. Mr. STARK. If I could follow up on that point, I would ask Mr. Anderson and Mr. Gandhi if you would, as the first item of your report for the Chair, calculate if you are able in this period of time the amount of losses of property and casualty companies which were available to parent companies to offset other taxable income as compared with the total taxes that the industry paid.

The Chair rather suspects that not only if we just made the property and casualty industry tax-free, but did not allow the transfer of losses to offset other taxable income, we would probably pick up one very large amount of revenue just in that transaction alone. Do you agree with that, Mr. Gandhi?

Mr. GANDHI. Yes, sir.

Mr. STARK. I would like to see your estimate of how large a revenue increase we could have if we just decided to help the struggling property and casualty industry along, and made them tax-free. I think that would be interesting.

Mr. ANDERSON. At a minimum, sir, we perhaps could select some of the larger companies who are subsidiaries

Mr. STARK. Because, as these companies crash into oblivion because of their tremendous underwriting losses, I notice that unsophisticated investors like AT&T and Xerox continue to buy up modern companies like the Hartford and Home and Foster, and I suppose that their interests are purely eleemosynary, and that they just do this for their employees, so they will continue to have homeowners policies and auto coverage and the rest.

In a more serious vein, you referred in table 2 to increases in surplus and dividends to stockholders. Why did you feel that this would have significant in your presentation.

Mr. ANDERSON. We thought it was relevant to show that in fact, there has been a very healthy profitability of these organizations over this period, that in fact, as a result of the profits that we described, the gains that we described in table one.

We wanted to explain the disposition of those gains and just show that throughout this period, even though there were losses from time to time, that they were able to increase surplus while at the same time paying dividends to the stockholders.

Mr. STARK. Do you have any comment on the suggestion that the introduction of discounting in the calculation of reserve deductions would weaken or change the State regulatory system, which is designed to ensure the integrity of assets or the solvency of these companies?

Mr. ANDERSON. We give the States more credit. We give the States enough credit to believe that they will look around the ac

counting conventions and be able to decide, and the tax conventions, and decide what the real health of the organizations is.

Mr. STARK. We understand that you have recently made an estimate of the amount of taxes that will be paid by-I will defer that question for a minute, and save the best for last.

Would your proposal or the administration's proposal produce much in the way of new revenue? Do you have an estimate of what that would raise, and could you also comment on what kinds of empirical numbers you might have to-we would have to impose, in the way of a premium tax to equal what you think either your proposal or the administration's proposal would raise?

Mr. ANDERSON. In rough numbers, we are talking about, let's say, 800 or so million dollars would be the part that we raise on the loss reserve deduction and on the new treatment of the acquisition expenditures.

Mr. STARK. One year?

Mr. ANDERSON. That is correct, sir, one annualized year. There would be a transition year that the Congress would have to contend with in deciding how to get over it. $800 million, and premiums are now running at the rate of $110 or $115 billion annually, so you are talking less than 1 percent, sir.

Mr. STARK. And the 800 is yours. Does the Treasury proposal raise more in your opinion?

Mr. GANDHI. Sir, in the administration's proposals in 1986, there is no increase in revenue. In 1987, there is about $100 million. In 1988, about $900 million, and then goes on.

Mr. STARK. So it really has a slow kick.

Mr. GANDHI. Yes, sir.

Mr. STARK. Then, I guess my final question is that I do understand, and I say this by way of thanking you and showing what you have done. The life insurance industry would concur in the restrictions that took place in the life insurance taxation since your study of several years ago that you have some preliminary estimates on the amount of taxes that will be paid by the life insurance companies for the 1984 tax year.

Could you summarize and share those just briefly with the committee?

Mr. ANDERSON. Let me explain to you how we got to them, sir. You can see our bottom line there, it is a loose estimate, but anywhere from $2.4 to $2.6 billion, somewhere in that ball park.

I am not loose on it because of the problems in calculating it, and let me explain it. No. 1, the 1984 tax data is not available, so what we did was we took 50 large companies, but mutual and stock, and we went back 3 years and calculated what part of the total taxes of the industry did these 50 pay, and the percentage of the total industry taxes paid over those three years for the largest 50 was 77.5 percent, 77 percent, 83.8 percent.

Well, what we had to decide was, working from that, what would it be? We knew what the taxes were for those same 50 who had filed with the District of Columbia. We knew what their taxes were, and we tried to extrapolate to find, what was the relationship, what will the relationship be to total industry taxes.

I got my choice. I got 77 percent, I got 83 percent. We chose 80 percent for the number we have on the chart there.

Mr. STARK. A good political decision.

Mr. ANDERSON. So, in any event, we think it is ball park, sir. We think it is ball park. We think that undoubtedly, one of the explanations perhaps why it isn't more would be the ability of the companies to take some of this new income, but again offset it against carry loss forwards, so maybe the 3 billion, I say don't take that as being evidence that the 3 billion was a bad number.

Mr. STARK. What you are suggesting is that we came pretty close.

Mr. ANDERSON. That is correct.

Mr. STARK. To the amount of revenue, but we were off some on the segment balance which we thought would be 45-55, and that appears to be more like 50-50.

Mr. ANDERSON. That is what we understand, sir, yes.

Mr. GANDHI. Can I just make one additional comment, sir. That the variance between 2.6 billion that we project here, and about $3 billion that was supposed to have been promised could, to some extent, be because of the loss carryovers that the companies may have generated?

Mr. STARK. We certainly do so.

Mr. GANDHI. Right and I just want to draw your attention, sir, that here we have going back to 1978 and all the way through 1984 in comparing the total life insurance industry tax bill, and through the 1984 bill there is substantial increase in taxes from 1982 and 1983, but nevertheless it may fall short from $3 billion that was expected.

Mr. STARK. Let me ask one final question. In the opinion of both of you, with your experience of studying this complex problem of taxing for the tax revenue that might or might not be generated for property and casualty companies, and remembering the experiences we had in writing the life insurance tax law, would you agree that if this committee and its staff must act in the absence of detailed and comprehensive financial information, which is generally only available to us on a voluntary basis, that the dangers of taxing too much are as great as they are in taxing too little, and that it would be in the best interests of the industry, for their own selfish interests, to provide as much current and factual information to the committee and its staff in an effort to make our job easier?

Don't you think that chances are that we would all come out with a fairer equation?

Mr. ANDERSON. Absolutely correct, sir. Knowledge helps.
Mr. STARK. Thank you very much.

The next panel, the Honorable Richard S. Schweiker, president of the American Council of Life Insurance, Edward E. Phillips, chairman of the New England Mutual Life Insurance Co., Ian M. Rolland, chief executive officer of the Lincoln National Life Insurance Co., the Life Insurers Conference represented by F. Charles McMains, Jr., and the Prudential Life Insurance Co. represented by Robert Beck, chairman and chief executive officer.

Welcome to the committee, gentlemen. We appreciate seeing you back here. I will ask if you wouldn't mind testifying in the order that you appear on the witness list. As I said earlier, at this point