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compensation are less per $100 of paid benefits than under auto liability insurance.

These same differences apply with even greater force to group accident and health insurance as well. Administrative costs to the insurer under group A&H are relatively low because the employer already has nearly all of the factual information required in his employment records, and he performs most of the paperwork involved in signing up new insureds and handling claims.

Although some employers and insurers are now experimenting with various forms of "group" auto insurance, it appears doubtful that auto insurance can be handled on as simplified a basis as group health or workmen's compensation. Illnesses and accidents occur on a largely random basis in a group of persons performing similar work tasks, so that the rating system can be kept fairly simple. But the probable loss exposure under an auto insurance policy varies markedly and in predictable ways, depending on the type and value of the vehicle, the number, type, and ages of the drivers in the household, mileage driven and a number of other factors, many of them within the control the vehicle owner.

All of these differences make the comparisons shown in Tables 3 and 4 rather meaningless.

We would also point out that the comparisons shown in Tables 1, 3 and 4 are inconsistent with each other. Table 1 seems to show that insurers spend 41 cents in expenses out of each auto insurance premium dollar received. Table 3 indicates it takes $125 to deliver $100 in benefits-a much higher expense figure. But the actual record of selected stock and mutual companies as shown in Table 4 shows that the administrative cost of delivering $100 in auto bodily injury benefits in 1968 was more in line with the data in Table 1. All but one of the mutual companies spent less than 40 cents in administrative costs out of each premium dollar, and one spent only 34 cents.

Table 3 is off base in the following respects. For one thing, it is incorrectly labeled. The left-hand bar should be labeled "tort liability" and not “automobile liability insurance," since the data is a hodge-podge of several different liability coverages. Bodily injury is the only auto coverage included. Furthermore, Professor Conard's definition of "administrative expenses" includes the "public cost of courts" as well as insurance industry expenses.

In short, Table 3 is completely invalid, and the other two contain serious errors of perspective and actuarial technique which grossly understate the benefits and overstate the cost of delivering those benefits.

As a further example of the kind of discrepancies which undermine confidence in these figures, the left-hand bar chart in Table 1 shows a 1% underwriting profit for auto bodily injury, property damage and physical damage coverages for the 10-year period ending in 1968. But Bests Aggregates and Averages indicates that stocks and mutuals combined had a statutory underwriting lo88 after dividends of about $1.4 billion. This would produce about a 2% deficit rather than a 1% profit.

7. We are unable adequately to answer this question since we do not know what is meant by the term "anti-competitive conduct" in the insurance market place.

There is an implication in the second part of this question that the entire burden of determining the "excessiveness of auto insurance rates" rests solely on an "unknowledgeable" public. Certainly in a state with an open competition rating law, the individual consumer is ultimately responsible for selecting the coverage and price which best suits his insurance needs and pocketbook. But this is true for consumers in those states where rates are regulated under prior approval laws as well. The choices of consumers in open competition states may be more varied. A competitive insurance market works to the advantage of the insurance buyer by making him better informed. The very process of competing for the consumer's insurance dollar requires that companies fully inform the customer of the purchasing options available to him and the comparative advantages of each. This is the very essence of any competitive system.

The responsibility of the insurance regulator is much greater than that of the consumer. In all open competition rating laws, statutory prohibitions are included against insurers charging excessive, inadequate or unfairly discriminatory rates. These standards are included in prior approval laws as well. If a Commissioner under either type of law finds a rate to be excessive or unreasonably high, he may, in a number of ways, preclude its use. Under open competition law, however, the existence of competition itself acts as a primary deterrent to excessiveness.

If on the other hand, no competition exists in a given line or market, the Insurance Commissioner of the state has the power to prohibit the use of a rate which is found to be excessive. Under any circumstances the consumer is protected under open competition, both by his own intelligent purchasing power and by the statutory powers of the state insurance regulatory authority.

8. The Alliance does not maintain a record of the dates and results of any antitrust type investigation of the automobile insurance industry. It is suggested that the subcommittee contact either the attorney general or the insurance commissioner of individual states for this information.

9. The Alliance does not believe that federal anti-trust laws are a necessary concomitant to the competition provided for under the various state laws.

10. It is not apparent what the term "price leaders" means in this question. The term has been used to mean both those carriers charging the highest prices for a particular class of business as well as those using the lowest prices. In either case, the departure from rates made in concert has little, if anything, to do with the size of the carrier. Unless there has been a wide variation in underwriting technique, claims cost will not vary appreciably from company to company. The ability of insurance companies to deviate from bureau rates will be based primarily upon the expenses incurred by the company in doing business, and will reflect the competitive advantages accruing to companies with lower expenses.

11. The "enough left over" after dividends to policyholders and after taxes would be added to surplus as regards policyholders. This amount, if one wished to do so, could be considered as "retained earnings." As we pointed out in our statement to your subcommittee, these retained earnings as a contribution to surplus are the foundation of the ability of the mutual insurance industry to meet the public's future insurance needs. A mutual insurance company must look to its own profitable operations to generate money for expanded capacity and to maintain stable operations. It cannot appeal to investors for capital.

It is the responsibility of the Board of Directors of a mutual insurer, elected by the policyholder-owners, to determine the proper distribution of the operating profits to policyholders as dividends, and to surplus as an investment in the growth and continued stability of the insurer. The current difficulty of stock insurers in attracting new capital emphasizes the resopnsibility of mutual insurance company management in recognizing mutual insurers obligations to a future insurance market, and mandates that mutual managers realistically discharge this responsibility.

It may be of interest to note that Best's Aggregate and Averages (1969 Ed., page 153) reports for 1968 that 326 mutual property and casualty companies paid dividends to policyholders of $275 million. These dividends were paid by returning to mutual policyholders all of the $5.6 million underwriting profit plus $269.4 from investment income, realized capital gains, and unrealized capital gains. These dividend payments represent 52% of the companies' net income and are considerably higher than comparable returns for all manufacturing (44%) and all insured banks (46%) to their owners. During the same year, these mutual companies were able to reinvest in their future growth only $252 million. This figure represents only an 8% increase in surplus while premium surplus growth adversely affects the ability of mutual insurers to provide needed writings were increasing about 11%. We must stress that continued lagging market capacity during a time of unprecedented demand for more insurance.

12. (a) Conditional (or contingency) reserve funds of the 10 largest Alliance Companies on December 31, 1968.

Conditional reserves Liberty Group------------------------

- $132, 793, 546 Employers Group---------------

20,000,000 Kemper Group -

84, 962, 712 American Mutual Liability Group-

13, 625, 712 Sentry Group-----New Jersey Manufacturers.-Utica Mutual--------

500,000 Michigan Mutual Liability

1,000,000 Northwestern Mutual.--. Federated -----------------

300,000 Total

253, 181,258

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We believe that inquiries (b) and (c) should be directed to the individual insurers.

13. Yes, "surplus" has a function in automobile insurance ratemaking. Rates should be made to cover anticipated losses and anticipated expenses and to provide for a reasonable underwriting profit. Determining what is a reasonable underwriting profit involves questions of dividends, the availability and cost of of reinsurance, market growth and surplus necessary for security and to take care of the public's increasing needs for insurance.

14. Our concern about the fact that in four out of the last five years mutual company surpluses have failed to grow as fast as premiums is based largely on the historical thrust of mutual insurance. As the name denotes, mutual carriers were formed for the benefit of their policyholder-owners, and their premium rates reflected a desire to adhere as closely as possible to the cost of operations. For the most part, increases in surplus were therefore moderate, consistent with a maximum return to their owners. The growing American economy is now placing new burdens on mutual insurers, requiring increasingly larger commitments to the need for market capacity. The present problems of stock carriers in obtaining and retaining capital may well place upon mutual companies additional responsibilities for providing market capacity. The historically conservative rate of growth of mutual companies' surplus places mutual carriers in a position where this additional need for market capacity cannot be met. More rapid surplus growth must be realized.

Although requirements relating to unearned premium reserves, combined with a small surplus, does impose capacity restrictions, other immediate factors are of more significance. A general rate inadequacy in the automobile liability field has had its effect in producing underwriting losses, which had to be made up from a modest surplus. In addition, the fact that for security reasons, mutual companies have invested a large percentage of their assets in bonds has also had an effect on surplus.

Since, within statutory limitations each company must determine what its surplus requirement should be, and recognizing the major influence on the surplus account, rates, dividends, investment policy and policyholders surplus are all interrelated.

15. Yes, as stated in our answers to questions 13 and 14.

16. To our knowledge there is no indication that Alliance member companies are not providing to private passenger automobile policyholders liability limits which they desire or have need for. Each insurance company management must decide, as a part of its marketing and underwriting philosophy, the options of limits of automobile liability coverages it wishes to offer its customers. In general, the Alliance, however, has advocated and supported liability limits consistent with the growing economy.

In those states where legislation has been proposed to increase the financial responsibility limits, the Alliance has supported these moves, consistent with attempting to avoid substantial increased cost to all automobile policyholders in the state.

The Alliance position with respect to the availability of higher policy limits in Automobile Insurance Plans was explained in our statement to your subcommittee. The Alliance has supported changes advocated by the national Industry Committee on Auto Insurance Plans. We support the offering of higher bodily injury and property damage liability limits of protection and additional coverages in the Automobile Insurance Plan. Where higher limits are provided in automobile insurance plans, we believe that small insurers without adequate reinsurance arrangements should be protected by the mandatory pooling of limits over the financial responsibility limits. This position reflects recognition by the American Mutual Insurance Alliance and its member companies of the fact that adequate liability limits for automobile insurance must be responsive to increasing claims costs, and exposure of policyholders to larger verdicts by juries.

We do not understand what is meant by the question relating to the spread between premiums and losses on higher limits.

17. We do not know of any credible studies that can validate Professor Keeton's conjectures with regard to the distribution of the auto bodily injury premium dollar. He has put them together using a patchwork of studies made at different times and utilizing different research approaches. He apparently places major reliance on the Conard study and on the AIA study, both of which have been shown to contain serious flaws.

Some of the shortcomings of the Conard study are cited in our answer to question 6. For a critique of the AIA study and its shortcomings, please see Actuarial Report on the Adequacy of the Costing of the American Insurance Association's "Complete Personal Protection Automobile Insurance Plan," which was included as an attachment to the Alliance report filed with your subcommittee in December.

We also wish to point out that Professor Keeton's analysis, like the data presented in Tables 1, 3, and 4, is based on the invalid premise that the auto liability system is intended to deliver “benefits" to claimants only. As indicated in our discussion of this point under question 6, the liability system in reality is designed to deliver important benefits and services to policyholders, claimants and the general public. Thus, the actual benefits delivered by the system include major portions of the premium dollar which Professor Keeton has chosen to call expenses.

As to the second part of your question, the Alliance has not made any studies of policyholders' knowledge of a “Keeton-type analysis," nor are we aware of any such studies having been made among member companies.

You also ask, “What would the Alliance recommend to correct these deficiencies in the present system ?" We do not agree in many respects with Professor Keeton's analysis of the defects in the present auto reparations system. However, we agree that there are some, and have already placed in the record of the Senate Antitrust and Monopoly Subcommittee a comprehensive statement in support of reforms along the lines of the “Cotter Plan." It includes measures to achieve a more equitable distribution of benefits, to diminish reliance on fault determinations, to eliminate undesirable duplications of benefits, to discourage litigation and to reduce costs for both policyholders and claimants.

18. The Alliance does not believe that the inability of a claimant, under the laws of most jurisdictions, to pursue his claim directly against the insurer of the person causing him injury, has produced a major source of public dissatisfaction with the present liability insurance system. The Alliance would be opposed to permitting direct action against an insurance company in those jurisdictions which presently prohibit such practice.

Under the present tort liability system, the tort claim of a plaintiff involves simply the question of whether the defendant is liable to the plaintiff, and if so, the amount of damages which the plaintiff has suffered. These issues are to be determined solely upon the basis of evidence which is relative and material. The wealth or poverty of the defendant is not a fact to be considered. The fact that insurance exists is but a part of this rule. If the jury is to be informed, directly or indirectly, that the judgment will be paid by a party other than the defendant, and without any personal loss to the defendant, it would also seem reasonable and proper to bring to the attention of the jury the wealth of the defendant, his ability to respond to damages, or to pay, or cause to be paid, such verdict as the jury might render.

If such information is to be furnished to the jury, then the next logical step is to furnish information concerning the plaintiff's financial condition with the obvious result that the jury's determination would be based, not on liability, but on the ability to pay.

It would seem that the main thrust of the direct action proposals is to make the jury aware of the fact that the insurance exists. Emphasis on the fact of insurance in the minds of the jury could influence them, consciously or otherwise, to consider that fact in their ultimate decision.

Conversely, the fact that an action has not been brought against an insurance company but against the defendant directly, could indicate to a jury that the defendant is uninsured and must personally bear the financial loss for his negli. gent act, which could again temper the decision which the jury might otherwise reach.

We fail to see how the ends of justice will be served by introducing, into a proceeding to determine liability, the irrelevant element of who shall pay damages once liability has been determined.

19. We can endlessly circle in the arguments of proponents and opponents of the "fault” system, regarding the issue of deterrence. The Defense Research Institute has published a paper on the subject, Fault, A Deterrent to Highway Accidents, which they submitted to your subcommittee as part of their December 16, 1969 statement. While not necessarily endorsing the complete DRI study, we believe the following arguments are particularly telling :

"Under fault, institutionalized methods of expressing the censure of the group serve to punish the faulty driver if he continues in his acts. Of key importance, these constant reminders of fault and imposing sanctions are triggered by even a minor accident. There is no such triggering mechanism in the proposed no-fault system. Here, there should be no hint of disapproval on the part of drivers ; after all, under the new system, accidents would not be attributed to faulty, aggressive driving. Accident occurrence would be like the gentle rain which falleth from the heavens”.

"In contradiction of some theorists who claim that since insurance carries the financial burden, fault no longer matters, we have demonstrated that the fault system is of paramount importance because it generates psychological deterrents which keep down the number of accidents".

"Studies also support common sense in another way-aggression will seek out the lowest level of retaliation and will continue to stalk those victims against whom a display of aggression will meet with a minimum of reproof. Aggressive drivers meet opposition under the fault system ; there is no opposition under no-fault".

Similarly, the American Bar Association comments :

"We are not trying to say that the tort law should be relied on to be the chief deterrent to dangerous conduct. But this is one of its traditional objectives. Unless the tradition is clearly false, there is no reason to eliminate it from the armamentarium of the cause of safety. Of course, we should continue to look to the criminal law. But it cannot do the job unaided. Liability insurance does have a unique opportunity. It can educate, punish, and reward. These efforts should not be discouraged."

The NAII has spoken to the issue in its recent statement filed with your subcommittee, citing Professor Conrad's comment that there is no evidence to support the theory that the existence of insurance insulates the motorist from the consequences of his own negligence, and therefore seriously dilutes the current effect of fault. Conrad submits there is a definite deterrence emanating from the present fault system

Our answer is "no" to the second part of the question. 20. No.

21. (a) 1967 membership—120 companies ; 1968 membership—121 companies ; 1969 membership—116 companies. (b) Executives and member companies serving on Board of Directors:

1967 H. J. Lowry, Chairman, Michigan Mutual Liability Company. James S. Kemper, Jr., Chairman-Elect, Lumbermens Mutual Casualty Company. Richard E. Felts, Vice Chairman, Hamilton Mutual Insurance Company. Oran F. Needham, Vice Chairman, Millers Mutual Fire Insurance Company of

Texas. John N. Tulley, Vice Chairman, Dorchester Mutual Fire Insurance Company. R. S. Hanson, American Hardware Mutual Insurance Company. R. E. Roberson, American Mutual Liability Insurance Company. F. W. Purmort, Jr., Central Mutual Insurance Company. Norman Lustig, Consolidated Mutual Insurance Company. J. M. Sweitzer, Employers Mutual Liability Insurance Company. C. I. Buxton, II, Federated Mutual Implement and Hardware Insurance Company. John W. Joanis, Hardware Mutual Casualty Company. T.R. Lubking, Indiana Lumbermens Mutual Insurance Company. G. W. Hopkins, Iowa National Mutual Insurance Company. Frank L. Farwell, Liberty Mutual Insurance Company. C. E. Nail, Lumbermens Mutual Insurance Company. A. M. Innes, Middlesex Mutual Insurance Company. Howard D. Heath, Northwestern Mutual Insurance Company. Paul H. Dubuc, Shelby Mutual Insurance Company. J.P. Craugh, Utica Mutual Insurance Company.

1968 James S. Kemper, Jr., Chairman, Lumbermens Mutual Casualty Company. A. M. Innes, Chairman-Elect, Middlesex Mutual Insurance Company. Howard M. Betts, Vice Chairman, Grain Dealers Mutual Insurance Company. Olin A. Wetzel, Vice Chairman, Millers Mutual Insurance Association of Illinois.

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