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Will you please correct the copies in your hands so that the record will accurately reflect this correction. Very truly yours,
MELVIN L. STARK, Manager.
STATEMENT OF T. LAWRENCE JONES, PRESIDENT, AMERICAN INSURANCE
My name is T. Lawrence Jones and I am President of American Insurance Association, an organization of insurance companies writing all kinds of property and casualty insurance throughout this country. Our member companies have a premium volume of over $7 billion. We are pleased to have this oppor. tunity to appear before the Senate Commerce Committee to present our views on the general problem of insurance company insolvency, and more particularly on S. 2236. This bill, introduced by Senator Magnuson and co-sponsored by Senators Dodd, Hart, Hollings, Inouye, Moss and Pastore, would create a Federal Insurance Guaranty Corporation for the purpose of protecting the American public against insurance company insolvencies.
Public officials, legislators and the insurance industry itself have been concerned with the problem of insurance company solvency for many years. As could be expected, the intensity of concern has varied substantially as the number of company insolvencies rose and fell and as reports of insurance company liquidations increased and decreased.
Regardless of the understandable ups and downs of public concern, American Insurance Association is convinced that there is a real problem to which a solution must be found.
HISTORICAL POSITION OF INSURANCE INDUSTRY
Some years ago the insurance industry held to the position that all measures by which insurance companies collectively helped, in one way or another, to defray the losses of insolvent insurance companies were unsound. It was argued that these measures put weak companies on a parity with strong ones and tolerated, if not encouraged, bad management. It was further argued that these plans removed incentives on the part of agents and brokers to be sure they were placing their business with responsible and reputable insurance companies. We cannot disagree with the logic of these arguments, but times have changed. Today, such arguments are outweighed by social considerations and we believe the prime consideration is that the public must be protected in the event of an insurance company insolvency. In addition, the nagging insolvency problem damages the industry as a whole and each company suffers in public esteem.
THE DIMENSIONS OF THE PROBLEM
There has been considerable debate as to the size of the problem. Some have endeavored to treat it as de minimis. It is our view that the figures should speak for themselves, but in any event we have concluded that one insurance company insolvency is one too many, especially if there is no way to reimburse the victims of that insolvency.
The only question open for discussion, in our judgment, is what solution will best serve the public interest.
Expansion of uninsured motorist endorsement
American Insurance Association has been seeking the best solution over a period of years and with renewed intensity since the introduction in January 1967 of S. 688, providing for a Federal Motor Vehicle Insurance Guaranty Corporation."
Until recently the discussion has centered an automobile insurance. In fact, the earlier bills, such as S. 688, would have provided protection only against the insolvency of automobile insurers. The focus on automobile insurance suggested to some the desirability of expanding the uninsured motorist coverage specifically to include insurance company insolvencies.
1 See New York Insurance Department Report to Governor Rockefeller, The Public Interest Now in Property and Liability Insurance Regulation, January 7, 1969 and Report of NAIC Special Committee on Automobile Insurance Problems, June 16, 1969.
2 A similar bill, S. 3919, was introduced in 1965 by Senators Dodd, Clark, Magnuson and Hart.
All states, except Maryland and North Dakota, now have mandatory uninsured motorist laws. Most of these laws are specifically applicable in cases where the insurer is insolvent but, even in those states where the law is silent as to coverage in case of insurer insolvency, there is a strong likelihood that the laws would be construed to apply. In fact, practically all auto insurers today have voluntarily included provisions in their uninsured motorist coverage making the coverage specifically applicable to insolvencies.
American Insurance Association has never regarded the uninsured motorist · endorsement with coverage for insolvency as either an adequate or effective answer to insurance company insolvencies.
These uninsured motorist laws are confined to automobile insurance and therefore do not provide protection to other claimants and policyholders who may be the victims of an insurer insolvency. Even in the area of automobile accidents they do not protect the non-car-owning pedestrian who has the misfortune of being injured by a motorist whose insurance company has become insolvent.
The uninsured motorist insolvency coverage is an obvious example of placing the financial burden of insurance company insolvency where it does not belong. It is not a valid solution and we doubt whether anyone today will seriously contend otherwise. State Security Funds
A number of states have endeavored to meet the problem by the enactment of laws providing for state security or insolvency funds. These laws were originally enacted to protect employees under state workmen's compensation laws. (See attached list of states having workmen's compensation security funds.) Most of these laws were enacted during the 1930 depression years. Legislators were concerned that workers injured in industrial accidents might find their workmen's compensation benefits endangered by insurance company insolvencies
Most of these workmen's compensation security funds were of the pre-insolvency assessment typei.e. they required the collection of funds by assessing insurers prior to a company insolvency. Two of them (Maryland and Minnesota) are post-assessment insolvency funds, which means insurers are assessed only after the insolvency has occurred.
The security-fund solution for automobile liability insurance companies was first enacted by the State of New York in 1947. This law (Section 333 of the New York Insurance Law) was amended in 1969 to make the New York security fund applicable to all property and casualty lines other than workmen's compensation which continues to have its own security fund law.
In the 1950's Maryland and New Jersey enacted automobile liability insurance security fund laws of the pre-insolvency assessment type. In subsequent years some state legislatures, from time to time, considered insolvency fund legislation but no additional states enacted these laws until the renewed interest this year when California, Michigan, New Hampshire and Wisconsin enacted post-insolvency assessment laws and, as noted above, New York expanded its law to cover other property and casualty lines. In addition, New York has also placed a much needed ceiling of $200 million on the fund. This year Maryland amended its law to make the fund applicable to automobile physical damage insurance."
This renewed interest in state insolvency fund legislation has been caused by a recent flurry of insolvencies, some of which have been widely publicized. In addition, the introduction of legislation in the Congress, patterned after the Federal Deposit Insurance Corporation Act with strong support in both the Senate and House of Representatives, has rekindled interest in legislation at the state level.
The position of American Insurance Association on state pre-insolvency assessment funds (Maryland, New Jersey and New York) and state post-insolvency
3 See attached American Insurance Association Chart Analysis, October 1969.
nen's compensation laws, as originally enacted, made the employer liable for workmen's compensation benefits in the event the insurer became insolvent. This provision was eliminated in a few states which subsequently enacted security fund statutes.
5 In 1939 New York had established an insolvency fund to protect persons who had claims against a company providing the compulsory coverage for public motor vehicles.
969 amendment, the method of assessing insurers provided no realistic limitation on the size of the fund. It had grown to an amount in excess of $125 million. For a number of years AIA and others have urged a limitation be placed on the size of this fund.
7 See the attached AIA Special Management Legislative Bulletin summarizing insolvency fund legislation in 1969. See also attached summary of Property and Liability Security Fund laws.
assessment laws (California, Michigan, New Hampshire and Wisconsin) is clearcut. Neither, in our judgment, provides a sound solution to the problems and we do not think the public interest is well served by such legislation. State preinsolvency fund laus
The preinsolvency assessment type of law creates a fund in anticipation of some possible future insolvency. The proliferation of such funds in each of the fifty states to protect policyholders and claimants from insolvencies in a business which is transacted across state lines would be difficult to justify from the standpoint of efficient and sound public administration. In the years following the Southeastern Underwriters Association decision by the United States Supreme Court in 1944, it was recognized that a sure way to encourage federal action would be for a number of states to enact preinsolvency security fund laws. It did not make sense then, and it makes no sense today, to have fifty states amass such funds, administer them and make payments to claimants and policy holders. If one accepts the hypothesis that preinsolvency funding is more effective and equitable than postinsolvency laws, then clearly one fund is preferable to the establishment of fifty funds.
There is valid concern that these state preinsolvency funds which tend to reach amounts far in excess of foreseeable needs will be diverted to other purposes. This fear has been ridiculed by some public officials but the plain fact is that such diversion has happened in the past few years. Twice the New Jersey automobile security fund monies have been diverted into the New Jersey Claim and Unsatisfied Judgment Fund (Chapter 241, Laws of 1967 and Chapter 322, Laws of 1968). So this is not a fanciful fear; it is a real possibility.
A major weakness in the state preinsolvency fund legislation is that it is solely a "bail-out" remedy. It does absolutely nothing to bolster and strengthen regulatory procedures in order to prevent insolvencies. Some have even suggested that these preinsolvency funds may accelerate the number of insolvencies because state regulatory authorities may become complacent and less diligent in exercis. ing their supervisory functions, knowing that the funds will take care of policyholders and claimants. We disagree with that view. There are far too many other discomforting consequences which will beset an insurance commissioner in the event of an insolvency—including market restrictions, loss of jobs, loss of tax revenue and all the other heartaches associated with a liquidation proceeding. While regulatory bodies will not relax their vigilance in regulating to preserve solvency, these security fund laws in no way help to prevent insolvencies. The industry has long held the view, and I believe it does today, that any solution to the insolvency problem which provides financial assistance to policyholders and claimants must be accompanied by additional affirmative regulatory procedures to prevent insolvencies. American Insurance Association still holds to that proposition. State postinsolvency assessment laros
The postinsolvency assessment law avoids, or at least lessens, some of the defects inherent in pre-insolvency assessment fund laws. Large sums are not accumulated and thus do not remain idle and unproductive long before they are needed. Also, since no funds are accumulated, there is no enticing opportunity for diversion to other purposes. However, like the pre-insolvency laws, post-insolvency assessment laws do not make any sound and workable contribution to the prevention of insolvency.
The post-insolvency assessment plan has other serious defects. It exposes insurers to unknown liabilities which could occur at a time when they might be least able to sustain such additional liabilities, even though there are annual limitations on assessments.
There is no way the post-insolvency assessment plan can soften the patent inequity of placing the total economic burden on solvent and well-managed insurers. The post-insolvency law, as we have noted, does nothing to prevent insolvencies and then compounds this inadequacy by making the strong and reputable companies pay for the sins of the mis-managed and weak, including a
number whose managements might have engaged in highly questionable, if not at times clearly fraudulent, practices.
The post-insolvency assessment concept is embodied in model state legislation being proposed by the American Mutual Insurance Alliance. The AMIA model bill, as we understand it, places some regulatory power in an insolvency board composed of the insurance commissioner and representatives of insurance companies, thereby recognizing that something more than a financial rescue is needed. Whether it is a proper responsibility for the private sector to become involved in this kind of industry policing, is debatable. It is noteworthy that up to the present time, no post-insolvency assessment law has bestowed any such authority on insurance companies.
Summarizing our views on state security fund laws, American Insurance Association is completely opposed to a solution which would establish security funds in each state by means of an annual assessment on insurers. We are also opposed to the post-insolvency assessment plan although we recognize that it is probably the least objectionable remedy available at the state level. An additional reason that these state post-insolvency assessment laws are less objectionable than some of the other state proposals is that they can be effectively meshed into a national solution should a national plan prove to be the ultimate answer. Alternative measures
Since the American Insurance Association companies have realized the shortcomings of the conventional state-oriented solutions, we have explored alternatives to the Federal Deposit Insurance Corporation approach in order to see if we could develop a national plan which could be administered largely, if not solely, by the industry.
In this phase of our study, we were guided by the following basic criteria :
1. Any such plan must provide additional safeguards to prevent insolvencies ; bail-out alone would be unacceptable.
2. It should include a private guaranty facility, national in scope.
3. In order to avoid further echelons of regulation, the role of state and federal regulation should be as little as legally possible.
4. All insurers should be compelled or strongly induced to participate in the facility.
Within the context of these criteria, we studied the concept of a private facility along the lines of the National Association of Securities Dealers (NASD) which is authorized by the 1938 amendments to the Securities Exchange Commission Act of 1934 to regulate over-the-counter brokers. Such a plan would have contemplated one or more private facilities guaranteeing the policies of its members. All insurers would be required to belong to a facility which would have certain examination powers over its members.
In the course of our study of this proposal we were advised by counsel that a purely private facility without federal legislation could present problems. It was recommended to us that it might be necessary to have some federal supervisory power over the private facility and that members of the facility should have the right to appeal the action of the facility to the supervising federal body. It was further suggested that it might be necessary to have some exemption from the federal antitrust laws. Part of the reasoning for this suggestion was that the activities of the facility would include the policing of insurers and this could be construed to constitute, "boycott, coercion and intimidation" which are expressly excluded from the scope of the exemption contained in the McCarranFerguson Act.
If it were necessary to obtain federal legislation to permit the operation of a private insurance guaranty facility, three practical questions had to be answered:
1. Could we reasonably anticipate that the Congress would favorably consider legislation authorizing a private facility to exercise a policing function, albeit a limited one?
2. Would the Congress be likely to expand the present antitrust exemption even for such a worthy purpose as providing policyholder and claimant security against insolvencies?
3. Against the background of the highly successful Federal Deposit Insurance Corporation Act, is there any reasonable likelihood that the Congress would consider a different approach in the insurance area?
We have endeavored to analyze realistically and objectively these three questions and have concluded that they must be answered in the negative.
One other consideration has affected our view of the private facility approach. Some of our member companies do not believe that private insurers should become involved in the policing of their competitors. Even if there were no federal legislative problems, they would be opposed to a private facility with policing powers. Additionally, we should reiterate that American Insurance Associtiation is opposed to any solution which does not make a workable contribution to the prevention of insolvencies.
Although we have concluded that the private facility approach is not feasible, if we could be convinced that it did not necessitate far-reaching federal legislation, we would be willing to re-evaluate our position. The one caveat would be the practicality and propriety of any device requiring competitors to police one another.
We have examined other variations of the private facility approach, including the private insurance guaranty corporation proposal outlined in the June 16, 1969 Automobile Insurance Study Background Memorandum, prepared by the staff of the National Association of Insurance Commissioners' Central Office for consideration by the NAIC Special Committee on Automobile Insurance Problems.
We believe that our comments with respect to a private facility suggested by present regulation of over-the-counter brokers by NASD is applicable to the proposal suggested by staff of the NAIC Central Office.
PROPOSAL OF ECONOMIC REGULATION ADVISORY COMMITTEE TO THE DOT AUTO
INSURANCE AND COMPENSATION STUDY
The Economic Regulation Advisory Committee to the Department of Transportation Auto Insurance and Compensation Study under date of July 8, 1969 submitted a report to the DOT on . 2236. This advisory committee suggested its own proposal in lieu of S. 2236. Their plan would provide for the enactment by the Congress of a law providing for the imposition of a "substantial federal general revenue tax on insurance premiums derived within each state." It would further provide that the tax be forgiven in full as to all states which have in effect an insolvency guaranty law meeting certain criteria specified in the federal law. The purpose of this proposal is to apply maximum pressure on "state legislatures and regulators to have adequate legal requirements and adequate administrative supervision of insurers." The proposal contemplates the possibility of state enactment of insolvency fund laws similar to the New York law or a postinsolvency assessment law such as those enacted in four states this year.
This plan has all the weaknesses of the state insolvency measures and it is hard to see what it does to improve state regulatory machinery to prevent insolvencies.
We have great respect for the members of this advisory committee but we cannot convince ourselves that a tax threat proposal of this sort is a workable solution.
We come now to S. 2236, the consideration of which is the reason for the hearings of your committee.
S. 2236 is patterned on the highly successful federal legislation establishing the Federal Deposit Insurance Corporation which insures the deposits of all its member banks. The bill establishes a corporation to be known as the Federal Insurance Guaranty Corporation, to which practically all insurers are required to belong. Only a small number of insurers would not be required to join since
8 Some have attempted to compare this private industry role to insurance industry organizations which assist law enforcement authorities. We believe this is a far-fetched analogy and not at all relevant in the area of competitors.