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ment similar to that applied to investments in stocks by property-liability insurance companies.

Footnotes to the tables indicate that 10% estimated capital gains tax has been deducted from "other investment profit." We believe it unrealistic to apply this tax rate to companies individually. We have insufficient data to comment on its application to the property-liability insurance industry as a whole.

It appears that parent insurance company and subsidiary insurance company figures have merely been added together and that proper consolidating eliminations have not been made. If this be true, then there would be considerable duplication in the totals for an insurance company group or for the propertyliability insurance industry and the computed rates of return would be affected accordingly.

Footnotes to table 25 indicate that "trade underwriting profit" is used as an item of return and "equity in unearned premium reserves" is used as an item of net worth. In our opinion the formula shown for determining underwriting profit is not representative of all the facts of property-liability insurance company operations. Among other things, it assumes that all the expenses (excluding loss adjustment expenses) of a new or renewal policy are incurred and recorded when the written premium for that policy is recorded. In the case of most directly written business, there are expenses incurred throughout the term of the policy. For example, with automobile insurance policies there are frequent endorsements throughout the term of the policy for change of address, change of car, change of coverage, etc. Expenses applicable to such endorsements are recorded as they occur and are not provided for when the new or renewal policy itself is recorded. There are other substantial faults in the formula and particularly when it is applied to all companies alike.

The footnotes do not explain how the "equity in unearned premium reserves" which is used as an item of net worth was determined. It appears that very small amounts were added to the divisor for "equity in unearned premium reserves." If this be true, then the item of "equity in unearned premium reserves” used in the divisor would be inconsistent with the item of "trade underwriting profit" used in the dividend.

In view of the above we cannot confirm nor do we believe that the tables accurately reflect a true rate of return for property-liability insurance companies on a net worth basis.

4. On the average, yes. See Allstate's response to the first Hart Committee questionnaire for copies of Allstate's auto filings in New York, Illinois and Ohio. Rates in California and Missouri are on the same general basis, but are of course keyed to local loss experience.

5. In relation to a constant set of damages and injuries arising from some given set of accident, the loss adjustment services utilized can be at an optimum level or can tend toward minimum or maximum levels. At the minimum level, these services would consist merely of paying claims asserted without resistance or even investigation. In that event, loss adjustment expenses would be very low and loss costs would be very high. At the maximum level, on the other hand, claims would be resisted to the legal ultimate and no claim would be paid except on final court order. This would tend to minimize loss payments and would maximize loss adjustment expense but might also drive loss payments below equitable levels. We believe there is some optimum intermediate point or range of points between the maximum and minimum levels of loss adjustment at which the sum of loss and loss adjustment costs is lowest and loss settlements are equitable in that they are neither inadequate nor excessive.

If companies are permitted to freely compete in price and to finance that competition not only from savings in loss and loss adjustment costs but also the other expense components, there will be increased incentive for companies to seek out the optimum level of loss and loss adjustment costs and the minimum level of the other expense items. These efforts would tend to increase the percent of total premiums being returned for the benefit of the insured in the form of loss costs and loss adjustment services and the premium levels would therefore be lowered. As evidence of this premise, we need only review the trends which developed with the advent of the strong independent insurers. Not only do the independent insurers, such as Allstate, return a significantly greater portion of the premium dollar than 65% but they have, through competition, forced this return figure to rise from approximately 60% up to the current 65% for much of the business. Intensification of free rate competition would tend to create pressures for greater efficiencies and therefore further increases in the portion of the premium returned for the benefit of policyholders.

In response to the second part of this question, we do not believe that federal antitrust regulation is a necessary concomitant to competition. Presently, Publice Law 15 exempts insurance from federal regulation with a few exceptions (boycott, coercion, etc.) provided adequate state regulation exists. In both prior approval as well as so-called open competition states the insurance industry is circumscribed by restrictive legislation and regulation which not only relate to prices but also to product. Federal regulation certainly cannot guarantee the local scrutiny which is now carried out on a state-by-state basis, and which scrutiny is a watchdog to guarantee vigorous and healthy competition. If the courts hold that such state laws do not meet the requirements for exemptions under public law 13, then existing federal antitrust laws automatically come into play This we believe is a good guarantee to the consumer as can be offered.

Finally, we reject the assumption that auto insurance buyers are any more "unknowledgeable” than consumers in any other area. Our own experience tells us that a substantial amount of "switching" exists in to the auto insurance business and that a rate change is the most frequent reason for that switching.

In addition to the pressure to keep prices low as a result of the fear of losing business to competitors, insurance rates even under “open competition" are subject to examination and regulation by the state to see that they comply with the definitions of excessiveness found in virtually all competitive rating laws.

6. No. Bureaus, to the best of our knowledge, act on the basis of the combined experience of all members and subscribers.

7. We must take exceptions to Mr. Webb's report, not only as to theory, but also as to technical procedure Mr Webb theorizes that the following sources of premium reductions are available to insurance companies.

(1) Reduce the dollar value of claim,
(2) Reduce expenses, or

(3) Reduce insurer profits. We would agree with respect to item 3 and, provided the term "expenses" is defined to mean operating expenses exclusive of claim expenses, we would agree with item 2.

With respect to item 1 however, we cannot agree with Mr. Webb's concept that the only way to bring about a reduction in the dollar value of claims is through careful selection of policyholders. We believe that reduction in loss costs can also be realized through more efficient claim processing—paying justified claims promptly and fairly but not overcompensating claimants with valid claims or compensating claimants with invalid claims. This practice actually reduces the cost of insurance and does not merely shift the cost to other segments of society.

Mr. Webb states that it is not possible, on the basis of information available to him, to determine the exact portion of an insurer's rate discount which is attributable to the cost reducing factors listed above. He then proceeds to attempt a measurement of the effect of the expense factor. Table I displays expenses as ratios of premium and contains two minor technical errors. First, the bureau ratios are direct ratios (excluding the effect of reinsurance) while the Allstate ratios were determined on a net basis (including the effect of reinsurance). This is inconsistent; direct ratios should have been used for Allstate. Second, since he is attempting to measure the effect of reduced expenses only, there is no reason to omit the profit factor. Also, tax ratios for all companies should be the same since the major variation in this ratio would be due to different distributions of business by state and such variation should not be reflected in a calculation designed to measure savings potential due to reduced expenses. Therefore, Table I should be revised for Allstate as follows:

Allstate 1 Expense:

Expense Continued Commissions --------

9.3 Other acquisition --

8.5 Bureau ------General administration.---- 4. 3 Taxes and fees.

? 3.0

Total Expense-- -------- 25.1 When adjusted to the Bureau average premium level, Table II should be revised as follows:

1 1968 Direct Expenses. 2 Bureau Tax Factor.

Allstate-Continued Expense :

Expense Continued Commissions -----

9.3 Other acquisition_

6. 7 Bureau
General administration ---- 3.4
Taxes and fees.

3.0
Total

22. 4 The formula used by Mr. Webb to measure the savings potential of reduced expenses causes the greatest concern. He has assumed a constant pure claims cost (i.e., excluding all claims expense) and loaded this amount by the individual company loss adjustment ratio. It is common practice in those states to allow deviations based solely on lower expenses to use a permissible pure loss and loss adjustment expense provision. Mr. Webb's procedure assumes there is no pure loss reducing effect as a result of greater attention to loss adjustment. While most bureau companies utilize independent adjusters who may have no interest in the company, Allstate uses salaried employees and a network or drive-in claims offices. We believe our procedure effects fast and equitable claim handling which, while possibly more expensive, is more advantageous to our insureds in speeding settlement, in more satisfactorily arriving at fair settlements, in resisting unwarranted claims and in thereby reducing the cost of insurance.

In addition, we feel that Mr. Webb's method of including fixed expenses (i.e., other acquisition and general administration) in his formula is in error. Since he has expressed these expenses as percents of the average bureau premium, they should be added to the loss element so as not to vary with the needed gross premium. Mr. Webb's formula should be adjusted as follows:

Gross rate=loss and loss adjustment expense & fixed expense

1-(variable expense) Where

(1) The loss and loss adjustment provision is equal to the bureau percent provision.

(2) Fixed expenses (other acquisition and general) are expressed as a percent of the average bureau premium, and

(3) Variable expenses (commissions and taxes) are a percent of gross premium. Then, we would have the following: Bureau gross rate =100% Bureau loss and loss adjustment provision =100.0%-(29.5% & 5.0%)=65.5% Allstate fixed expenses (Table III) =6.7%+3.4%=10.1% Allstate variable expenses (Table II) plus profit @ 5%=9.3% +3.0%+5.0% =17.3%

65.5+10.1 Gross rate

-=91.4

100.0+17.3 Percent reduction for expenses=8.6%

For 1968 our estimated reduction from bureau rates was 21.3% on a countrywide basis. This figure is a result of 3 factors. First, the inability to achieve rate increases in many states or delays in obtaining such increases have inflated the amount of reduction beyond what otherwise was intended. Second, in many jurisdictions the Allstate rate contemplates a savings in loss and loss adjustment expenses from bureau levels. These savings may result from efficiences as referred to earlier herein a well as from risk selection. Many states now require independent insurers to fully reflect their own loss experience as well as expense experience. Thirdly, further reduction could be justified on the basis of a reduced profit factor, as Mr. Webb observed in his theory on the sources of reduction and then chose to ignore in expressing his conclusion.

Turning to the last paragraph of question 7, our present rates for automobile bodily injury liability insurance are lower in most cases, and lower on the national average and on the average in most of the states, than 2.1% below the bureau level. The downward differential is not a uniform percentage nor do we consider it as a reduction. It varies by classification, by limit of liability by territory, by state, and by time period. We do not determine our rates on the basis of this differential nor do we support our rate levels by means of a differential type calculation except where such a basis is required or strongly preferred by the regulator.

We routinely measure the average difference between our rates and those of the bureau in connection with rate revisions. We find this factor helpful internally, primarily for competitive reasons. It is also of interest to insurance commissioners and has a direct use in support of our revised rates. We do not, however, "justify" these percentage differentials as they are neither (paramount) in our filings nor do they form the basis of our rate making action. Our filings support the rate level we propose to begin using, rather than the average differential from bureau rates. We will not repeat the supporting basis here, however, as it is lengthy and is best explained by use of examples such as those contained in the material previously furnished to your committee as noted in our response to question 4.

8. The Voluntary Private Passenger Non-Fleet auto countrywide B.I. pure premium for Calendar Year 1968 was $28.93. This is the average loss per insured car. It excludes all claim expense and provision for unreported losses.

9. Since we have already discussed the Keeton allegations at length, both in answers to the prior qeustionnaire and in oral testimony, we will not belabor the subject. Suffice it to say that the actual dollars paid in claims are only a portion of the total amount involved in handling automobile insurance claims, all of which redound to the benefit of policyholders and claimants.

We do not believe that all so-called "overlapping” benefits should be eliminated. If an individual chooses to purchase other types of insurance that should be his privilege. We do believe, however, that the fault system should be retained with evolutionary changes in the structure of the automobile insurance product to eliminate current concerns about it. First-party benefits should be a required portion of the policy, should be at a relatively high dollar level, should be immediately payable by the accident victim's own company, and should be deducted from any award recovered by the victim against the at-fault driver.

A victim should retain his rights (and liabilities) under present tort law but to keep costs in line the amount collectible in general damages should be restricted by formula except in cases of severe and permanent injury. Very truly yours,

DAVID C. MILLER.

UNIVERSITY OF CALIFORNLA, BERKELEY,

Berkeley, Calif., November 17, 1969. Senator PHILIP A. HART, U.S. Senate, Committee on the Judiciary, Washington, D.C.

DEAR SENATOR HABT: You had the kindness to ask me to furnish for your committee a brief report of the New Zealand Royal Commission, commonly known as the Woodhouse Committee. I do so herewith in the hope that it may help you to complete the record for purposes of your current inquiries into problems of automobile compensation.

The report itself was published in December, 1967, by the Government Printer, Wellington, New Zealand, under the title “Compensation for Personal Injury in New Zealand”. It has been commented on by D. L. Mathieson, 31 Modern Law Review 544 (1968), and Joan M. Mathieson, 18 International and Comparative Law Quarterly 191 (1969). With best wishes. Yours sincerely,

John G. FLEMING,

Professor of Law. The Report in 1967 of the New Zealand Royal Commission of Inquiry, set up in 1966 under the chairmanship of Woodhouse, J., breaks new ground, in comparison with other investigations such as those in British Columbia, Ontario, etc., because it ambitiously propounds a novel situation for the whole field of personal injury, not restricted to automobile or industrial accidents. It thus provides at least one answer, striking as it no doubt is, to the argument often voiced in comparison to automobile compensation plans: "Why single out any particular kind of accident for special dispensation?" In this connection the genesis of the Report is particularly interesting in that the Royal Commission was originally set up to inquire specifically into the law relating to compensation and claims for damages for incapacity or death arising out of accidents suffered by persons in employment. The Commission soon reached the conclusion, however (thereby arguably going beyond its terms of reference), that it was "impos

sible to resolve the problems of industrial injuries in isolation". A unified scheme avoids, among others, problems of demarcation between competing compensation plans, in particular between workmen's compensation, social security and any other special plan e.g. for automobile accidents, as well as the problem of justifying different scales of benefits.

The Commission's main conclusion was to replace for all purposes the conventional tort liability in case of personal injuries by a system of national insurance, administered by the government rather than by private insurance (as is now the case in New Zealand for workmen's compensation). The proposed level of compensation under such a unified scheme would be income-related. The injured person would receive 80% of his lost income (tax paid) for the period of his incapacity, without any arbitrary time limit such as the six-year period now in operation in New Zealand for workmen's compensation. A ceiling of between $NZ 80 and 120 per week is suggested, sufficiently high to cover for all practical purposes the whole working population. The residuary 20% would be absorbed by the injured person himself, and serve the function of a deterrent against malingering and encouragement toward rehabilitation. For the first four weeks of incapacity, moreover, compensation would not exceed $25 per week.

In evaluating this proposal, care must be taken to relate the above-mentioned figures to the New Zealand cost of living which is about half of that now prevailing in the United States. At first sight rather startling is the conclusion reached by the Commission, with the aid of the government actuary, that the cost of the scheme would not, or only to a negligible extent (perhaps 5%), increase the present combined level of disbursements by way of private insurance premiums, social security and workmen's compensation contributions. While this sanguine estimate has not passed entirely without challenge, it becomes more plausible when considered in the light of the rather drastic reduction of benefits during the initial four weeks (eliminating thereby the vast bulk of accidents from the scope of compensation), as well as the common law damages for pain and suffering which account for a substantial proportion of the cost of common law tort compensation.

While it is hus hoped not to increase the over-all cost of a unified scheme, there remains the question of how this cost is to be met. The Commission suggests that it be funded by (1) employer contributions at the rate of one percent of all wages and salaries; by the self-employed at the same rate of their earnings; (2) by a levy on all motor vehicle drivers at the rate of $1.50; (3) a small contribution by the government out of general revenue.

Opposition to the recommendations of this report has so far been far less strenuous or vocal than might have been expected, especially by anyone accustomed to the American scene. There are several explanations. For one thing, skepticism regarding the continued effectiveness of the tort system is much more widespread even in countries accustomed to the Anglo-American common law. A good number of prominent members of the bench in Australasia and the United Kingdom have voiced their opposition to the continuation of the existing system of tort liability, reformed as that already is by the large-scale abolition of civil juries, especially in relation to automobile accidents. Secondly, New Zealand is already accustomed to a much larger measure of publicly-sponsored social security (invalidity, medical insurance) than the U.S.A. A third reason, accounting for the muted response of the insurance industry, is that automobile and workmen's compensation insurance no longer represent lucrative activities, with the result that private insurance companies would be freed to move into other areas in which their limited resources could be more profitably employed.

This leaves as the remaining possible nuclei of the opposition only the legal profession and the trade unions. So far as the first is concerned, lawyers in New Zealand as much as in the U.S.A. would forfeit existing areas of practice. A unified scheme of compensation obviously offers far less occasions for legal controversy than the existing complex system; indeed it is precisely this feature which perhaps more than any other argues so strongly for a drastic reform. Experience, on the other hand, gives ground for the belief that lawyers would find other outlets for their released talents.

This leaves the trade unions which feel that their members have most to lose by the suggested reform. This is so because New Zealand, in common with most other Commonwealth countries, has continued hitherto to offer to an injured workman an option between workmen's compensation (nonfault related) and common law recovery against his own employer for negligence, including that of fellow employees. Insofar as the present reform proposal involves giving up

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