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his present position he served as an audit manager with the accounting firm of Coopers & Lybrand, specializing in insurance.

At the insurance division he has responsibility for the licensing of companies and agents. And, of particular importance for our record, he oversees examinations and investigations of all licensees and handles all matters dealing with insolvencies.

As I said, we are very, very pleased also to have Commissioner Kinder and Director Mathias.

Gentlemen, I want to thank you for submitting your statements. I want you to know that we appreciate the time and effort that you put into those statements, and you may proceed with them. If you wish to abbreviate them, that would be appreciated by the committee. The full text of your statements, of course, will be printed in the record, and we do have many questions that we want to ask of you. So you may proceed and, Commissioner Kinder, would you lead off ?



Mr. Kinder. Thank you, Senator.

My name is Wesley J. Kinder. I'm commissioner of insurance in the State of California and member of the executive committee of the National Association of Insurance Commissioners, commonly referred to as the NAIC. Having its inception in 1871, the NAIC is the oldest voluntary association of State oflicials. The NAIC membership consists of the principal insurance regulatory officials in the 50 States, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands.

Senator, you have a written statement on our behalf and rather than repeat it in its entirety I will excerpt from it here.

Senator BROOKE. We're very grateful.
[Complete statement of Mr. Kinder follows:]



I. Introduction.
II. S. 1710 meets no demonstrated need.
A. Insurance solvency concerns.

1. Magnitude of the alleged problem.
2. Profitability.
3. Regulation for solvency.

4. Guaranty fund protection.
B. No need is demonstrated by the improper analogy to the bank regu-

latory system.

1. Perspective on banking analogy.

2. FDIC parallel. C. Absence of need to apply Federal antitrust laws to promote competi

tion in insurance. III. Adverse impact of S. 1710 on the insurance consuming public.

A. Application of the antitrust laws would adversely affect the public


1. The States are better able to foster competition.
2. The potential limitation of substantial amounts of joint ac-

tivity through the application of antitrust is inconsistent
with many needs of insurance buyers.

3. Potential regulatory vacuum under the Federal antitrust laws. 4. S. 1710 would likely result in Federal rate regulatory control.

5. Antitrust summary.
B. Adverse impact on the continuing State solvency guaranty fund

C. Illusory promise of limited regulatory involvement.
D. Illustrative technical flaws in S. 1710.
E. S. 1710 would deprive the public of the advantages of State insurance


1. Development of State insurance regulation.
2. The fundamental concept of federalism.

3. Advantages of State insurance regulation. IV. Summary.

Mr. Chairman and members of the Banking Committee, my name is Wesley J. Kinder, Commissioner of Insurance in the State of California and member of the Executive Committee of the National Association of Insurance Commissioners (commonly referred to as the NAIC). Having its inception in 1871, the NAIC is the oldest voluntary association of state officials. The NAIC membership consists of the principal insurance regulatory officials in the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands.

I. INTRODUCTION The NAIC appreciates the opportunity to testify before this committee during your initial consideration of the “Federal Insurance Act of 1977.” Generally, the basic issue posed by S. 1710 is couched in the terms of state versus federal regulation. However, the ultimate issue, implicit in the longstanding controversy surrounding state vs. federal regulation is now and has always been what kind of insurance regulation will best serve the interests of the public. We trust that the public interest will remain clearly in your view throughout these proceedings. We also trust that your ultimate conclusion will once again reaffirm the current desirability and historical effectiveness of state insurance regulation. We believe that the predominant system of state insurance regulation should be maintained in the public interest. Hence, the NAIC strongly opposes the enactment of S. 1710.

The NAIC is deeply troubled by the general concept of alternative state and federal regulation of the insurance business contained in this bill. Although some problems do exist in the insurance business, like virtually all other industries, proposing a major shift to a federal regulatory system that either competes with or sits on top of the existing, well developed state system makes little economic sense in theory or as a practical matter. S. 1710 is posed as an alternative federal regulatory system, but it is unlikely that the existing, viable state insurance regulatory system would long continue in parity with the federal commission if this bill were enacted. Expansive development of such a federal agency will undoubtedly follow the enactment of S. 1710 either through conferral of additional powers by Congress, administrative assumption of authority, or both.

In an era characterized by promises of regulatory reform and reduction of overregulation, spawning yet another massive federal regulatory agency 1 is,

at best, at odds with the times. In light of the fact that there has not been documented by any compelling need for federal regulatory involvement in the insurance business, such a shift would seem to be entirely superflous and should, therefore, be suspect.

Nevertheless, we are acutely aware of the fact that we are engaged in an area of state regulation that exists at the sufferance of Congress. Even if not always comfortable, we welcome your probing efforts aimed at determining and maintaining the quality of state insurance regulation. S. 1710 is superficially an alternative scheme of federal regulation, but in its proper perspective, we hope that it emerges as a focus for partially carrying out your duty to oversee the performance of state insurance regulation rather than as the leading edge of its extinction.

Among our objections to S. 1710 are the following, briefly summarized concerns :


1 At the recent American Bar Association National Institute in Minneapolis, a primary staff draftsman of S. 1710 estimated that the proposed federal agency would have a "few thousand employees."

(1) Congressional policy since 1945 with respect to insurance regulation has been expressed in the McCarran-Ferguson Act. The McCarran Act explicitly states that the policy of continuing state regulation is “in the public interest." S. 1710 carries with it the seed for substantially diminishing or eliminating state regulation. Enactment of this measure would, in effect, bypass the McCarran Act.

(2) The fair question against which state regulation should be evaluated is whether it is good and effective enough to prevail. No proper nor definitive demonstration has been developed to justify an alternative federal system of the scope envisioned by S. 1710. In short, there is no demonstrated need.

(3) The creation of a new, costly Federal commission charged with regulating the insurance business and operating a guaranty system far exceeds the purported need. The Federal Insurance Commission would certainly be contradictory to the prevailing notion of Federal deregulation and is virtually impossible to justify in terms of additional taxpayer expense or benefits.

(4) Enactment of S. 1710 may well have the effect of diminishing the incentives of States to continue developing measures to control insolvencies, jeopardize a constructive record of regulatory accomplishment, and generally disrupt ongoing State regulatory activities.

(5) The existing version of S. 1710 is seriously flawed both as to technical details and the conceptual viability of establishing alternative State-Federal systems.

(6) The analogy drawn with dual regulation in the banking industry is not appropriate nor does it justify Federal initiatives in insurance regulation.

(7) The ultimate consequences of Federal insurance regulation are unlikely to be in the best interests of the insurance consuming public.

The remainder of my remarks will elaborate on these and other concerns.



The major impetus in proposing S. 1710 apparently is the belief that either the states are incapable of effectively regulating the insurance business for solvency or, for whatever reason, they have not done so and are not about to. Senator Brooke acknowledged this in so many words upon introduction of S. 1710 :

“The bill grew out of my concern about the financial condition of the propertycasualty insurance business. In 1974 and 1975, property-casualty companies experienced the two worst years in their history, with combined underwriting losses totaling $7 billion for the two years. ... The weakened financial condition in the property-casualty industry and the possibility of a major company failure prompted me to consider what steps might be taken to insure protection for policyholders and improve the quality of regulation for solvency. ... [T]he trauma of the last few years has brought home to me the need to improve the protections available to insurance policymakers before the next brush with disaster.”

The premise upon which S. 1710 is based is every bit as faulty as the proposed solution. The premise is faulty for at least two basic reasons. (1) The propertycasualty insurance industry has experienced a difficult period in recent yearsprimarily because of severe inflation in the goods and services purchased with insurance benefits, diminshing investment returns and the general economic decline. However, the magnitude of the problem is relatively small, and the continuing profitability throughout this period (including 1974–75) as well as the return to profitability results consistent with the median results of the other U.S. industries collectively demonstrate that the idle speculation about potential disaster is grossly overstated. (2) The states have established and maintained both a sound mechanism for regulating the solvency of the insurance business and a sound record of protecting the insurance consuming public through (a) broad and detailed solvency controls and (b) guaranty fund protection in the event an insolvency occurs. Moreover, as will be discussed later and contrary to the intent of S. 1710, enactment of this bill would seriously jeopardize the financial solidity of the insurance industry and operate contrary to the interests of the insurance consuming public.

123 Congressional Record, S. 10038 (Daily Ed. June 16, 1977).

1. Magnitude of the alleged problem

The proponents of S. 1710 have blown the magnitude of the insolvency problem out of proportion and understated the ability of the industry to sustain insolvency assessments. In 1976, the NAIC Statistical Reporting System reported premiums of $57.7 billion for all property and liability lines combined on a countrywide basis. At the same time, the National Committee on Insurance Guaranty Funds reports that in 1976, four property-casualty insurers were de clared insolvent. We estimate these insolvencies to result in assessments of less than $21 million, or .036 of 1% of premiums. Overall operating income for 1976 totaled $2.7 billion dollars. In other words, we estimate insolvencies in 1976 to cost less than .04 of 1% of premiums and less than 1% of net income. The alleged inability of an industry of this magnitude to sustain insolvency assessments through the existing guaranty funds established under state laws is obviously overstated.

Experience in the more difficult and recent years, 1974 and 1975, does not alter the underlying, obvious ability of the property-casualty insurance business to sustain assessments made under the state guaranty funds. During these two years, approximately 25 P/C insurers were declared insolvent. Meanwhile, the amount of assessments made under the state property-casualty guaranty fund laws have increased from $49 million assessed prior to March 1975 to $104 million since inception of the funds by January 1976, and $121 million by January 1977. Even with annual assessments at an extraordinarily high rate of $60 million, such a figure would represent only .14 of 1% of premiums in 1974, .12 of 1% in 1975 and .1 of 1% in 1976. Although this information does not suggest the optimal form of a guaranty system, it does evidence the ability of the business to operate under the existing state system while at the same time providing the financial backstop needed to protecet policyholders and claimants from insurance company insolvencies. 2. Profitability

Senator Brooke's views on underwriting losses as the basis of his solvency concerns also results in biased conclusions that are out of touch with real world profitability results of the insurance business. Underwriting results are not the bottom line for the insurance business in that they exclude investment gain, among other items. For the years 1971-1976, the NAIC Statistical Reporting System reports that property casualty insurers experienced the following industrywide profitability results: INDUSTRY PROFITABILITY ALL LINES COUNTRYWIDE PROPERTY AND LIABILITY INSURANCE

lin millions of dollars)

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"Overall Operating Income" is total income excluding all capital gains and losses adjusted to generally accepted accounting principles, after federal taxes. *Total Return” equals “Overall Operating Income” plus all capital gains and losses (realized and unrealized) after federal taxes. In each of the years 19711976, insurers realized industrywide positive operating income. Expressed in terms of return on net worth, the results are as follows:

: NAIC Report on Profitability By Line By State for the year 1977, Aug. 10, 1977. Guaranty Funds reports that in 1976, four property-casualty insurers were declared insolvent. We estimate these insolvencies to result in assessments of

* National Committee on Insurance Guaranty Funds-Newsletter (hereinafter referred to as NCIGF Newsletter) vol. 6, No. 1. Jan. 26, 1977.

ONCIGF Newsletter vol. 6 No. 2, Jan, 26, 1977 at 2.

NCIGF Newsletter vol. 4 No. 2, Mar. 27, 1975 at 4 ; vol. 5 No. 1, Jan. 20, 1976 at 1; and vol. 6 No. 2 Jan. 26, 1977 at 1. These figures do not include insolvency assessments made under the New York preassessment guaranty fund law nor the New Jersey fund prior to 1974.

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The profitability results for the insurance industry for 1971-1976 compare quite closely with the median results for the 500 largest industrial corporations as compiled annually by Fortune Magazine.

The comparable 1971–1976 mean results reported by Fortune Magazine for return on net worth was 12.2 percent for the 50 largest commercial banking companies, 10.6 percent for the 50 largest utilities, and 5.5 percent for the 50 largest transportation companies. The banks and financial companies are similar to insurance in that they are financial industries, and utilities and transportation bear some resemblance in that their prices are regulated. The transportation industry, which is regulated primarily by federal agencies, is clearly in much worse financial condition than the insurance industry. A number of large transportation companies have failed under federal supervision in recent years. The inadequate financial strength of the transportation industry has been caused at least in part by the maze of federal regulatory controls and in turn has been the cause, at least in part, of the inadequate and declining service to the public by some forms of public transportation. We do not suggest that the insurance business has not had difficulties. From an availability standpoint, a 9 to 10 percent return on net worth is not sufficient to permit needed growth in net worth which is necessary to sustain growth in premium volume and the insurance needs of American consumers. Profitability results are notably improving and, as regulators, we intend to see that surpluses and reserves are brought up to levels that will strengthen financial condition and improve availability. However, the conclusion that the property-casualty business remains “deeply troubled" is at least overstated. Furthermore, and more importantly for your consideration of S. 1710, the alleged lack of adequate regulation for solvency and the suggested possibility of an insolvency disaster are patently false. 3. Regulation for solvency

In a free market, competitive environment, it must be expected that inefficient businesses will either do poorly or perhaps even fail. In the United States each year thousands of businesses fail, creating a loss of jobs and othed adverse economic effects on those communities in which they are located. However, the average consumer is typically affected little by such failures and, overall, this purging effect may be beneficial to the economy.

In some industries, the impact of an insolvency may be more troublesome than the usual business failure. Dealing in the business of providing economic security, the insurance business has long been held to be affected with a special public interest.Insurers are therefore shielded to some extent from the full force of competition by way of capital and surplus, and other financial requirements aimed at assuring the performance of insurance obligations.

The public rightly regards the insurance business as a means to provide economic security upon the occurrence of the insured event, obviously requiring financially sound insurance companies. Nevertheless, insurance companies are poolers of risk. They use the law of large numbers to spread losses, and while they can reduce the chance of failure by pooling risks in sufficiently large numbers, they can never completely eliminate it.

Maintenance of the financial integrity of insurers and a method of assuring performance of insurers' obligations in the event of their insolvency are critical elements of the public's interest in effective regulation and operation of the insur

German Alliance Co. v. Lewis 233 U.S. 389 (1914).

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