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DECEMBER 30, 1969. ANDRE MAISONPIERRE, Manager, American Mutual Insurance Alliance, Washington, D.C.

DEAR MR. MAISONPIERRE: Thank you for submitting your prepared statement and attachments for the hearing record. In view of the fact that the subcommittee was unable to ask you questions, we would be grateful if you would furnish the following information for the hearing record.

1. What portion (in dollars) of the total countrywide premiums for (a) auto bodily injury liability, (b) auto property damage liability and (c) auto physical damage coverages were written by the member companies of the Alliance in 1968?

2. At the present time do any of your larger member companies' auto insurance applications contain language to the effect:

"Has any driver in the household been cancelled, not renewed or rejected by any other company within the last three years?"

If so, please indicate which companies.

3. We would appreciate your reviewing the enclosed tables 13–24. Does the information contained in these tables, showing share of the auto insurance market by state, indicate to you a high degree of concentration in the auto insurance business?

4. Would you please review tables 25, 25a, 26a and 29. Does the information contained in these tables accurately reflect a true rate of return on a net worth (policyholders' surplus) basis? We would welcome any comments you care to make.

(You will note in tables 25a, 26a and 29 that no adjustments were made to statutory underwriting nor to policyholders' surplus to reflect any equity in the unearned premium reserves; in tables 25 such adjustments were made.)

5. Numerous insurance industry witnesses have testified that "over the last 10 years the auto insurance industry in the aggregate has suffered underwriting losses of more than $1.7 billion on automobile liability coverages".

Do you substantially agree with this statement? If you do, for each of the last 10 years (1959–1968), please furnish us with the underwriting results adjusted to reflect the industry's equity in the unearned premium reserves. Please show your computations.

6. It is our understanding from recent testimony that private passenger auto insurance rates are made basically by relating loss costs per exposure (car year). Some 65% to 75% of the private passenger auto insurance premium dollar is earmarked for claim and adjustment costs (permissible loss ratio). These claim and adjustment costs differ as to rural and urban areas, from city to city and sometimes within a city. Furthermore, we understand that medical, repair costs, wages and other items underlying claim payments are not under the control of individual insurance companies.

Would you please explain how "open competition" among individual insurance companies in any given state would reduce (a) claim and (b) adjustment costs, or would bring benefits more in line with premiums? (Please see tables 1, 3 and 4 enclosed.)

7. For those states with "open competition" no-filing rating laws, how is the consumer protected from anticompetitive conduct in the insurance marketplace?

Doesn't an "open competition" no-filing rating law on the state level place the burden of proving whether or not auto insurance rates are excessive on an unknowledgeable public?

8. Please furnish the dates and results of any antitrust-type investigation of automobile insurance market concentration, industry pricing practices, competitive conduct, entry and and exit, and profitability conducted since 1948 by any state which has an "open competition" no-filing casualty rating law.

9. Do you believe that Federal antitrust is a necessary concomitant to competition?

10. Does auto insurance ratamaking in concert, and the pattern of deviating from those rates by independent companies, and larger bureau companies, result in the smaller companies (see tables 13, 14 and 15) actually being the price leaders in terms of the published or indicated bureau rates?

11. On page 11 you say that "one measure of a “reasonable' cost for insurance is an amount adequate to provide for the continuation of the insurance institution (i.e., to pay its losses and expenses), with enough left over to provide for adequate growth of the institution to meet the public's future insurance protection needs".

Isn't the "enough left over” equivalent to profit, and unless returned to policy. holders as dividends or lower rates, constitutes retained earnings?

12. As of December 31, 1968, the largest members of the Alliance, Lumbermens Mutual Casualty and Liberty Mutual alone had, according to Best's Reports, "conditional reserve funds" (i.e., reserves not included in the net worth section of the annual statement) of $79 million and $132 million, respectively.

(a) As of December 31, 1968, what were the total "conditional (or contingency) reserve funds" of the ten largest members of The Alliance?

(b) What is the purpose of conditional reserve funds?

(c) What is the purpose for not including these reserves in the net worth section of your member companies' annual statements to state insurance regulators?

13. Would you please explain whether or not "surplus” has any function in auto insurance ratemaking?

14. You state on page 11 that “In four out of the past five years, mutual company surpluses have failed to grow as fast as premiums—i.e., our capacity to absorb new risk is not keeping pace with the creation of new risks."

It is our understanding from recent testimony that when an insurance company increases its premium writings during an inflationary period, surplus tends to decrease because of state insurance regulatory requirements for unearned premium reserving.

We would appreciate your comments. Do you believe that this could explain why mutual insurance company surpluses “have failed to grow as fast as premiums"?

15. Is there any direct interaction and interrelation among auto insurance rate levels, company surplus, reinsurance availability and rates?

If this interaction and interrelation exists, do you believe that it has any affect on "capacity"?

16. What effort, if any, is the Alliance making to have its member companies provide higher policy limits to their private passenger nonfleet auto policyholders?

Do higher limits allow more spread between premiums and losses?

17. According to Professor Robert Keeton of Harvard Law School, the following portions of each premium dollar collected for private passenger auto bodily injury liability insurance is paid net to accident victims:

(a) 14.5¢ for out-of-pocket losses not already compensated from other sources, (b) Se for losses also compensated from other sources, and (C) 21.5€ paid in excess of actual loss. We would welcome any comments you would care to make. (The enclosed hearing record at pp. 38-42 contains his complete analysis.)

Has the Institute made any studies, or does it have any information, which would indicate whether or not policyholders are aware of a Keeton-type analysis showing (a) disparity between auto bodily injury insurance benefits and costs, (b) overlapping of these benefits and (c) payments in excess of actual loss?

How would your “Responsible Reform" program specifically correct these deficiencies in the present system?

18. Witnesses have suggested during our hearing that at least some of the insuring public's dissatisfaction with liability insurance and its more favorable attitude toward physical damage coverages results from the fact that although the car owner is virtually compelled to buy insurance to protect the potential claimant in case of an accident for which the car owner is legally responsible, yet in the event of an accident involving fault upon the part of the other person, the car owner has no contractual rights against the other person's insurer unless, or until, such car owner obtains a judgment against the other person.

Do you believe that this is a source of dissatisfaction and, if so, would it be eliminated if the damaged car owner was given a direct right of action against the liability insurer, either by statute, or by voluntary elimination by insurance companies of the "no action" clause in the policy?

Does the Institute favor affording the injured person a direct right of action against the insurance company?

19. There are those who say that one of the reasons the present fault system should be retained as the method for distributing the costs of auto accidents is that it deters accidents. Others say that since the risk of driving is transferred to an insurance fund, the fault system as a means for holding motorist individually responsible for their negligent driving is not too meaningful.

If the accident prevention issue was considered apart from the compensation issue, do you believe that society could concentrate its efforts and resources more efficiently and effectively on each of these issues ?

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20. Does the Alliance consider the auto liability insurance premium to be in the nature of a tax on motoring?

21. We would appreciate the following information concerning the Alliance and its member companies for each year 1967, 1968 and 1969:

(a) Number of member companies of the Alliance.

(b) Names of companies and executives who were, or are, on the executive or governing committee.

(c) Total dues and fees paid by member companies to the Alliance, and the method or formula used to determine those dues and fees.

(d) Number of professional and non-clerical persons employed by the Alliance and total salaries paid to these persons.

(e) Amount paid or contributed in any form by the Alliance to the Insurance Information Institute.

(f) Amount paid or contributed in any form by the member companies of the Alliance to the Insurance Information Institute. We are grateful for your cooperation and would appreciate receiving the requested information by January 21, 1970. Sincerely,

PHILIP A. HART, Chairman Antitrust and Monopoly Subcommittee. Enclosures.

AMERICAN MUTUAL INSURANCE ALLIANCE,

Washington, D.C., January 23, 1970. Hon. PHILIP A. HART, Chairman, Senate Antitrust and Monopoly Subcommittee, Washington, D.C.

DEAR SENATOR HART: We are happy to supply for your Subcommittee's hearing record on automobile insurance the following answers to your December 30th letter.

You will note that we have omitted answering Question 4. We are having real difficulty understanding the tables without having available the calculations which were used. We expect to be in a position to comment on this question by the end of the month.

1. 1968 country wide auto premiums for Alliance member companies are as follows with their share of the total market :

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2. Yes, most companies writing automobile liability insurance bave a question on their application form regarding non-renewals, rejections, and cancellations. The question is used to trigger further investigation. We checked with the following member companies and all stated that they used a similar question on their application forms.

American Mutual Liability Insurance Company
Employers Mutual Casualty Company
Hardware Mutual Casualty Company
Liberty Mutual Liability Insurance Company
Lumbermens Mutual Casualty Company

Utica Mutual Insurance Company 3. We have reviewed tables 13–24 showing share of automobile insurance market for the United States and for the states of California, New York, Texas, Missouri, Ohio, and Illinois. We noted that a total of 62 different companies were listed for the six states and that the composition of the top twenty companies in each state varied greatly from state to state. We also noted that the total number of companies writing automobile insurance in a state varied from 161 in New York to 189 in Illinois.

Your question calls for a value judgment in relative terms. Without further amplification and clarification as to the intent of the question it is not possible to provide you with an opinion that would be meaningful. About all we can say is that the above figures would seem to indicate that the insurance industry does not have a “higher degree of concentration" as compared to other major industries that operate under the provisions of the federal antitrust laws.

4. Omitted.

5. According the Best's Aggregates & Averages (1969 Edition), the underwriting losses for the ten-year period 1959–1968 were: Stock companies : Bodily injury

$1,088, 448, 489 Property damage---

365, 681, 624 Mutual companies : Bodily injury

234, 288, 905 Property Damage--

89, 012, 579

Totai ----------------------------------------------- 1, 777, 431, 597 We would therefore agree that the insurance industry suffered underwriting losses of more than $1.7 billion over the last 10 years. In determining "underwriting gain or loss” for a particular line or subline of insurance, we would make no adjustment to reflect any so-called equity in the unearned premium reserves. We know of no valid way such an adjustment could be made other than on an individual company basis.

6. We are unaware of any allegations that the existence of open competition rating laws, in any state, would operate to reduce claim costs. Claim costs are the composite result of the frequency of accidents, prevailing hospital and medical costs, auto repair costs, and the amount of voluntary settlements and judgments rendered by jury. The rating function applies these elements, it does not affect them. Hopefully, the driving public might ultimately feel that claim costs as reflected in the rate are sufficiently high to stimulate interest in public efforts to improve highways, reduce auto repair and people repair costs, and to support reasonable jury awards. This beneficial result could also come about under prior approval rating laws as well as under open competition laws.

An open competition rating law in a given state would allow more prompt reflection in the rate level of the comparative efficiency between insurers in various segments of internal operations, including loss adjustment expense. Loss adjustment expenses are, to some extent, a controllable cost of doing business. A carrier which due to its method of operation, mix of business or geographical prominence can handle claims at less cost than its competitors, has the opportunity to reflect this comparative advantage in its rating structure more readily and promptly under an open competition rating law.

The latter portion of this question appears to be misstated-in more states than not the problem has been, and will no doubt continue to be, bringing premiums more in line with benefits. In a state where a prior approval rating law is efficiently and fairly administered within a favorable total insurance environment, rates will reasonably reflect benefits just as would be the case under an open competition form of regulation. Thus, the tables referred to in your question do not seem to have any relevance to the subject of "open competition".

However, we want to comment further on the relationship of benefits to premiums. Tables 1, 3, and 4, which purport to show this relationship, are full of inconsistencies, invalid comparisons, and data which cannot be located in the sources cited.

All three tables apparently are based on the false premise that the auto liability insurance system is designed solely to put cash payments in the hands of persons involved in traffic accidents. To define as "benefits" only the net payments delivered to claimants is as invalid as describing the benefits of the judicial system solely in terms of the amount of revenue it produces in the form of fines.

In actuality, of course, the auto liability insurance system provides important benefits for policyholders and for the public generally, as well as for accident victims. Thus, some portions of the premium dollar which have been listed as "expenses" or "administrative costs" in these tables are in reality used to deliver benefits in the form of services to policyholders, claimants, and the public.

The 12 or 13 cents allocated to claim adjustment expense, for example, finance several direct and indirect benefits. This portion of the auto premium pays for:

1. The investigation of auto accidents to determine the nature and extent of the damages and injuries actually sustained (a service that would be required under any reparations system);

2. Negotiating a settlement, a process which often includes the providing of practical advice and assistance to the claimant as well as to the policyholder;

3. Providing advice and, if necessary, legal defense services to policyholders to protect them against inflated or unwarranted claims;

4. The determination of legal responsibility for the accident-a process which is designed to vindicate the innocent and to bring to bear both psychological and financial forms of deterrence on the negligent;

5. Screening of claims to minimize fraud. Other important benefits are provided by the 14 cents allocated to agents' commissions. This portion of the premium dollar makes available to the purchaser the services of a trained insurance adviser, and makes it possible to offer a wide range of coverages and options so that each purchaser can tailor his coverage to fit his individual circumstances. The cost of distribution is a necessary element of any system geared to provide consumers with choices and convenience and insurance commissions, incidentally, are smaller than the retail markups on most other consumer products and services.

Benefits provided by company expenses include loss prevention activities, which reduce the number and severity of highway accidents and thus contribute to making the highways safer for everyone.

The auto insurance premium dollar pays for all of these services, and many others. These benefits do not jingle in the claimant's pockets, but they are no less important to society than those which do. By failing to acknowledge that the auto liability insurance system produces benefits other than cash payments to claimants, all three tables produce a distorted and invalid picture of the system's performance.

Tables 3 and 4 also fall into serious error in attempting to draw parallels between the cost of distributing $100 of benefits under the auto liability system and under the workmen's compensation and group accident and health systems.

Table 3 is a reformulation of a chart found on page 61 of the book “Automobile Accident Cost and Payments," by Messrs. Conard, Morgan, Pratt, Voltz and Bombaugh. In discussing it, the authors tell us that "... readers should remind themselves of its limited signification. It is not a representation of the relative importance of the various systems to an injury victim ... neither is it a comparison of relative efficiency, since the various systems perform quite different functions, so that their expense ratios are not really comparable."

Automobile liability insurance is designed to protect the insured's assets from legal liabilities resulting from his operation of an automobile. It is sold primarily to individuals, who have a wide range of individual needs and preferences involving not only the liability coverages but other forms of auto insurance as well.

Even after the auto policy has been sold, there is frequent need for further servicing by the agent and company. Administrative changes in auto insurance policies, particularly those involving the addition or deletion of optional coverages, changes of address and changes of vehicles, are far more frequent than for any other class of insurance. There is no practical way to avoid the administrative expense of keeping auto policies accurate and up-to-date.

Moreover, losses under auto insurance policies do not occur at fixed locations convenient to the agent or insurance company offices. They can and often do occur in remote and inconvenient places, requiring that the company maintain an extensive network of service facilities for prompt and adequate handling of claims.

Workmen's compensation policies, on the other hand, are sold almost exclusively to commercial risks. These policies do not involve the sales expense that auto policies do, primarily because the premium is much larger and the agent therefore can afford to accept a lower commission.

Another major difference is that the employer handles a large part of the recordkeeping, claims investigation, emergency medical care, screening for malingering and fraud, and numerous other functions which otherwise would have to be included in the overhead expense of the insurer. Even if the injury occurs away from the employer's premises, the insurer usually can obtain most of the claims information it needs from a convenient central source—the employer. These services are not performed without cost-but the cost is absorbed by the employer and does not show up in the insurer's administrative expense. Thus the insurer's overhead costs and claims adjustment expenses under workmen's

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