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ATL does not believe in the compulsory insurance systems, which take a significant element of competition out of the market. We do question the committee's assumption that the buyer of a third party policy "will never receive any direct benefit from the policy.” He is protected every day he drives. He pays for that security, and is benefitted by it. The holder of a life insurance policy was benefitted by its protection last year, which made the premium cost worthwhile, even though he did not die.

The committee statement that the innocent driver “will not even have a legal claim against the wrongdoer's insurer unless or until he obtains a judgment" is technically true, but ignores the practical fact that probably 98% of claims are settled by the insurer before judgment.

In any event, those innocent victims who do have to wait until judgment would surely be willing to wait for their full compensation after judgment instead of taking the half-payment of the limited schedule first party plans.

24. Please comment upon the adequacy of the present system for the allocation of fault and liability in the small $100-$200 property damage liability claims area where the liability insurer resists payment of the claim and stands upon the want of contractual privity with the claimant until he has obtained a judgment.

The small property damage claim does present difficulty for the present tort system. Our courts are not really designed for the very small claim, any more than a powerful forging press is designed to press a pair of pants. We doubt that any other type of insurance system will handle small property damage claims efficiently and economically. It is worth noting that the AIA plan makes no effort to solve the problem-except by the gross expedient of abolishing all claims for property damage and denying property coverage in the first party provisions of that plan.

Even with present collision insurance the insured cannot afford to litigate with his insurer the value of his claim, and as a practical matter must accept the insurance company's appraisal of his loss. "Contractual privity" does not mean that the contract will be performed in a way entirely satisfactory to the insured.

ATL suggests that expansion of arbitration proceedings and small claims courts can alleviate the problem, but we have seen no plan which solves it completely. The magnitude of property damage claims is reflected in figures released last December (1969) by Donald Segraves, Vice President of the American Mutual Insurance Alliance. He compared the cost of $10,000/$20,000 bodily injury coverage with the cost of a combined $50 deductible collision, $50 deductible fire, theft and comprehensive and $5,000 property damage liability policy. In Washington, D.C., the bodily injury coverage would cost $80 and the vehicle damage coverages would cost $205 dollars; in central St. Louis $92 for bodily injury and $232 for vehicle damage; in Cincinnati $57 against $138. In New York City the average driver would pay 69% of his total $358 premium for his vehicle damage coverage; in San Francisco, 68% of $346; and in the safe driving, low premium city of Denver, 66% of $157.

It must be obvious that any plan, such as that of the American Insurance Association, which arbitrarily abolishes all liability and all payment for vehicle damage, first party or third party, can advertise a great reduction in premium cost. That doesn't solve the problem. It may be that the problem cannot be solved at all if automobile design and repair costs remain what they are. We hope the Committee can find a way to persuade Detroit to build a car that is able to sustain a front end or rear end impact at 5 m.p.h. without the great amount of sheet metal damage which now occurs. Dr. William Haddon, Jr. has assured the Committee in his testimony that less flimsy designing is practicable. ATL believes it is not only possible, but imperative.

25. On page 12 of your statement you say ATLA urges that drivers and passengers be legally compelled to use safety lap belts and shoulder belts.

Do you believe that failure to use any such device should be permitted to be set up in defense to bar recovery by an otherwise innocent auto accident victim? · Under present law negligence is defined as the failure to use ordinary care. It is also defined as a failure to obey safety laws. So long as the use of seat belts is not compulsory and the great majority of drivers do not use them, there is no want of "ordinary care" in failing to buckle up.

If the use of such safety devices becomes mandatory, by statute, then failure to obey the statute would probably constitute negligence. Further, we believe most drivers would obey the statute and it would become customary for ordinarily careful drivers to wear them. Under such circumstances, failure to use

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the mandated safety equipment would fall within the defense of avoidable consequences. The defense would not completely bar recovery, inasmuch as a failure to use seat belts would not be the cause of the accident. The defense would mitigate the amount of recovery, however. The injury directly produced by the failure to wear a restraint would be subject to reduced damages, on a comparative negligence basis.

Under present law in many states motorcyclists are compelled to wear crash helmets. If the cyclist refuses to obey the safety law, then his damages for head injuries which would have been prevented by the helmet might be reducedbut not the damages for a torn up leg or ruptured spleen.

26. In order to determine the cost of the tort liability insurance system, do you consider that it is necessary to add to the direct costs reflected in insurance premiums, the cost of administering the compulsory insurance and financial responsibility laws and the cost of maintaining the courts and procedures related to the determination of fault!

If a statistician wished to know the total cost to society of every aspect of the fault system, he would total up all the indirect and fixed costs. This would include that part of the cost of maintaining the court system which could be eliminated if automobile litigation over fault were abolished and not replaced with other litigation over extent of injury and contract coverage under the proposed first party systems.

We have seen no figures which would allow computation of the total national cost of the automobile litigation portion of the civil portion of the court system. It must be a small cost, a tiny percentage of the total damage picture, in light of the fact that so few claims are litigated.

There is no reliable method by which we can anticipate the extent to which the cost of supervising and administering no-fault insurance and adjudicating disputes over no-fault losses and benefits would be less than the indirect social cost of the present system. If it is assumed that total indirect costs would be less, we must ask whether society places enough value on justice and fairness to offset the costs. Certainly the skyrocketing costs for the administration of criminal justice in the rising volume of complex criminal litigation is an indirect expense to society-yet no one has suggested a $5,000 deductible felony as a solution, nor suggested we eliminate arson by making it legal to burn buildings, nor advocated that the star chamber and the rack be substituted for constitutional trial procedures as an economy measure.

27. Does your Association favor arbitration in connection with uninsured motorist claims, and if so, does it favor restriction of arbitration proceedings to the questions of liability and damage?

ATL has taken no position on arbitration in connection with uninsured motorist claims. Our general position, favorable to the arbitration of modest sized claims, has been set forth in our earlier policy statement. We are not persuaded that uninsured motorist claims should be treated differently from all other claims. If the uninsured motorist claim is subjected to arbitration, for whatever reason, then it does not seem justifiable to limit the arbitration to liability and damage while relegating policy defenses and coverage questions to separate judicial proceedings.

28. Does your Association have information as to the extent, if any, which coverage disputes and problems currently occupy the time and attention of the courts (inasmuch as in most jurisdictions uninsured motorist claim arbitration will be enjoined until coverage questions are judicially resolved)

We have no specfic information on the extent to which coverage disputes occupy court time. In the general experience of our membership such cases are very few on a numerical or percentage basis. Coverage cases on uninsured motorist riders do make up the majority of the cases in this small class.

29. Do you believe that it is appropriate or practical to approach the dual recovery problem through the Federal income tax laws by providing that the excess of recovery over actual loss and expenses should constitute taxable ordinary income!

This question contains a basic assumption that the loss of an eye is not an "actual loss," and assumes that it is no loss to a free man to be tortured by the pain of splintered bones or torn flesh. ATL must reject that assumption, which is contrary to the strong belief of the overwhelming majority of our citizens who know that the value of living consists of far more than merely working for wages. A jury verdict is limited to "fair compensation, no more and no less, for the actual damage and loss suffered.” Restoration of loss does not create taxable income. In the same way, damages recovered for libel or defamation are not taxable, for the good reason that they constitute restoraiton for the loss of good reputation.

30. On page 22 of your statement you state that "ATLA believes that Medical Pay coverage should be mandatory with every casualty policy, to be rejected only in writing, and with whatever limits the car owner is willing to purchase.

In connection with the right of rejection under uninsured motorist coverage laros and mandatory Medical Pay, do you have any opinion on whether or not there is a danger that those to whom the purchase of liability insurance for purposes of compliance with financial responsibility laws is most burdensome are most Ukely to reject the coverage and least able to afford the economic loss incident to auto accidents ?

It is our belief, based on the experience of our membership, that coverage which is manditorily included unless rejected in writing is ordinarily not rejected. Many policy holders are, regrettably, unaware that such coverage can be purchased by them on a voluntary basis, so that mandatory inclusion unless rejected in writing brings the availability of this coverage to the direct attention of the policy holder. One might assume, on theoretical grounds, that those who have difficulty in making the liability insurance payment would reject medical pay coverage, but we have no gtudies to prove this really happens. The danger that some drivers may have uncompensated medical loss is not great enough to warrant compulsory medical payment coverage for all automobile drivers as a limited class, in our opinion.

31. If it were assumed that the regulated maximum rates, mentioned on pages 24 and 26, based upon all loss experience averaged, were ample to cover the losses of the better or average risks but were inadequate to cover the expected 1088e8 of the balance of the market with the consequence the other drivers could not obtain insurance in the voluntary market, what solution would your Association propose to provide coverage for these drivers ?

(a) If it were assumed further that the assigned risk rates were increased, do you believe that the driver placed in the assigned risk plan, simply because he was unable to obtain coverage in the voluntary market, would be in the same position he is today?

It would be our expectation that with regulated maximum rates there would still be classifications for better than average risks, for average risks, and for worse than average risks. Drivers with poor safety experience can sensibly be charged higher premiums, and indeed ought to be both in fairness to good drivers and as a deterrent to bad driving. It is not necessary to have all assigned risk drivers pay the same premium. If a driver has an average driving record but cannot obtain voluntary coverage, it would be fair to assign him to a pool where he could obtain coverage at a rate appropriate for the risk he presents.

On the other hand a driver who has a poor record should be assigned as a risk at a rate commensurate with the risk he presents. A regulatory agency could review complaints from drivers unable to obtain voluntary coverage and decide which one of the assigned risk rates would be appropriate. ATL does not assume that there must be one single rate for all assigned risk drivers.

32. Many safe drivers or merit rated insurance plans provide for surcharges for accidents either irrespective of, or prior to, the ultimate determination of fault.

Does your Association regard such a program as being compatible with the fault principle?

We do not believe that ratings for insurance purposes should be made arbitrarily, and it follows that we do not find a surcharge made irrespective of fault to be appropriate in a fault-oriented system. Although we would condemn a rate change based solely on the fact of an accident irrespective of fault, if the investigation of the circumstances made in the course of a liability defense causes the insurer to believe there was probable fault of its insured, we would not criticize that fact being considered in a provisional rating prior to the ultimate determination of fault. If the insured is ultimately found to be free of fault an appropriate adjustment in rate with rebate of past surcharge should be made.

33. Testimony received by the subcommittee reveals that in the making of auto insurance rates, generally, overall statewide rate levels are first established and that while state experience is used to establish the pure los component of the rates, essentially all of the elements of the expense component are based upon a countrywide experience. Classification relationships are applied only after the overall statewide rate level is established and that the differences within the classifications are determined only upon a countrywide basis. Territorial relationships are applied after the overall statewide rate levels are ascertained.

(a) In view of the described ratemaking procedures which use countrywide data, would you remain of the opinion that "rating is largely a local or state problem?"

(6) If a certain general metropolitan area lay in more than one state, for example, New York City-Hoboken and Jersey City area, Philadelphia-Camden area, St. Louis, Missouri-East St. Louis, Illinois area, Kansas City, MissouriKansas City, Kansas area, and Chicago, IllinoisGary, Indiana, area, would it not be more reasonable to assume that rates made for these metropolitan areas, and based upon the experience of each, would be more fair and just than rates based primarily upon the overall rate levels of the various states in which parts of such metropolitan areas layi

Perhaps we should have said "rate-making ought to be a state or local problem." If state experience is used to determine loss components, state experience should be used to determine expense components. We do not see the logic in making classifications on a countrywide basis, unless than classification in a limited territorial area should reasonably be governed by the identical factors used in the countrywide classification. It would be reasonable to assume that a fair rating system would result in the same rates in the metropolitan areas of our sprawling cities, even though those areas might lie in two states.

34. If, as you say on page 28 of your statement, insurance companies should have an opportunity for a fair profit in return for risk investment of capital," what do you consider to be a fair profit" for (a) a multiple line property and liability insurer, and (b) an insurer writing more than two-thirds auto insurance?

(a) What standards would you use to determine and measure "a fair profit in return for risk investment of capital" for (a) and (b) in question 347

(6) What percentage for the capital at risk of (a) a multiple line insurer, and (b) an insurer writing more than two-thirds auto insurance, comes from investment sources other than the premium dollars of its policy holder customers!

ATL had in mind that a fair profit in return for risk investment of capital meant a fair profit on the invested capital of the insurance company itself as distinguished from profit on the total assets which include the policy holders' unearned premium dollars. We had in mind also that the insurance company operation is more analagous to public utility companies and banking companies than it is to the manufacture of goods or other industrial enterprises. A return after taxes on mean net worth in the range of 10% ought to provide enough incentive to keep the insurance business active and healthy.

(b) ATL has no financial data on insurance company financing which would permit it to determine what differences there are between multiple-line casualty companies and automobile casualty companies ; nor what percentage of the capital at risk comes from premium dollars in both types of companies. We assume the committee can obtain such data directly from the different types of insurance writers.

We note that in the last decade, a group of 1,200 stock, mutual and reciprocal property and liability insurance companies have averaged a 10.5% profit return, after taxes, on mean net worth. "Mean net worth" means not only capital stock, surplus, and retained earnings, but includes an adjustment reflecting the insurer's equity in unearned premiums. During this period of time there was a substantial increase in the number of companies whose business was predominantly automobile insurance (an increase from 177 to 277 companies while the total number of all companies remained substantially the same). This would indicate that the return of 1% underwriting profit and 4% investment profit on total premiums written (from Table 1 furnished to us by the committee) has been attractive to the owners of risk capital.

ATL does not wish to imply that every insurance company be limited to a 10% profit (as defined) or guaranteed a 10% profit. In a competitive system, even at uniform rates some more efficient companies may make twice the average profit, while weaker managements might show no profit or even a loss. When rates are fixed at a minimum level, then efficiency produces a high rate of return. We would prefer to see no minimum premium rates, in the hope competition might drive the rates down to a level weher the best companies are earning a fair rate of return on their capital at risk.

35. On page 29 of your statement you state: "Rates in financial responsibility states have been significantly better than rates in compulsory insurance states."

(a) Would you please furnish the data upon which this conclusion is grounded! (6) In which of the compulsory liability insurance states do companies "provide coverage for all drivers at a flat rate," and the general ratemaking procedures outlined in question 33 of this letter are not used !

ATL had in mind Massachusetts, where the rate for a small $5,000/10,000 bodily injury policy (in Boston) is the highest in the nation. This is undoubtedly caused by the fact that the writers of the compulsory liability insurance policies are required to participate in an assigned risk pool where the flat rate charged is the same as the published average rate for average risk drivers. The low rate for assigned risk drivers (who belong in the pool) results in a higher rate for the average drivers. We suspect that political considerations, rather than good insurance practice, has produced this result.

In addition, the compulsory policy in Massachusetts covers only bodily injury. A driver is not required to carry property damage coverage, and many do not do so. As a result the rightful driver whose fender is crumpled is tempted to claim that his person was injured too, in order to get payment from the only available coverage. The ratio of injury claims to total accidents is extraordinarily high in Massachusetts compared to national averages, and we doubt that human beings are really more fragile in Boston than in Bangor.

Compulsory insurance, in and of itself, does not necessarily produce high rates, but the kind of political decisions made to accommodate the poor risk drivers are likely to penalize the good drivers.


NORTH AMERICA My name is Charles Cox. I am President of Insurance Company of North America. INA is one of the largest underwriters of property and casualty insurance, writing substantially all lines of insurance throughout the United States and in many foreign countries. We have historically been committed to innovation, and to competition in product, services, and price. Our efforts to gain the independence necessary to pursue such a course have been considered by this subcommittee on previous occasions.

The scope of your present inquiry encompasses the philosophy of insurance, the structure of the industry, forms of regulation, management techniques and business practices, and extends even to some of the myths and fables within the industry and about the industry.

The broad scope is necessary and proper, since you are examining a functional system ; concentration on isolated features of the system would tend to produce misleading findings.

Of course, it is impractical to analyze all the details within the scope of your investigation, and some priorities must be established. In the final analysis, a complex system is evaluated on the basis of its performance. We as managers, and you as investigators, must identify those details which effect performance and which can be changed, and evaluate the effects of such changes.

Your Chairman, in an October address at White Sulphur Springs, described his individual views of the investigation and identified three "desirable social goals" for the industry:

1. That every licensed driver be able to get and keep insurance at comparaable and reasonable prices;

2. That everyone injured in an automobile accident be compensated, at a minimum for his actual out-of-pocket expenses and loss of earnings; and

3. That when the insurance is needed, the compensation and protection will be forthcoming. I appreciate that there are many other areas of interest to the Chairman and to the other members of the committee; for the purpose of placing before the committee the broad position of my company, I would like to address myself to these three propositions.

I will take the third item first.

As the Chairman has observed, provisions for insolvency protection are embodied in Senate Bill 2236. I have recently testified in support of the substance of that bill, and have offered suggestions for what I believe would be improvements. I would repeat here my position that the effect of such legislation should be to protect the policyholder and the claimant; it should not be to protect owners, managers, or business creditors of badly managed or dishonest

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