« PreviousContinue »
losses totaling $7 billion for the 2 years. And there was considerable concern at that time that one or more major insurance companies would be declared insolvent A year ago newspaper headlines were speculating on the possibility of the failure of the Government Employees Insurance Co.-GEICO—and the effect of such a failure on the policy holders of that company. The New York Times on June 11 of last year reported that
The consensus is that the already strained (guaranty fund) pools could not handle the intense claim activity of a GEICO portfolio.
The weakened financial condition of 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 to improve the quality of r«gulation for solvency.
Since last year the outlook for the property casualty industry has improved. Preliminary figures for 1976 indicate that underwriting losses have declined to a level of $2.2 billion, and the GEICO situation appears to have been turned around. But the mere fact that $2.2 billion in underwriting losses can be regarded as an improvement shows how deeply troubled the property casualty industry has been, and still is. Of course, I hope that the worst is over and that the industry will make a strong recovery. But the trauma of the last few years has brought home to me the need to improve the protections available to insurance policyholders before the next brush with disaster.
The May 25, 1977, issue of the Washington Post carries a story entitled, “How an Insolvent Firm Keeps Selling Insurance." I am submitting this article for inclusion in the Record following the text of the bill which I introduce today. The facts which this article narrates, I believe, provide further evidence of the need to upgrade the quality of solvency regulation in the insurance industry.
Presently, the policyholder obligations of insurance companies are protected by a system of State insurance guaranty funds which were set up in the late 1960's and early 1970's, after a spate of insurance company bankruptcies left insurance companies without insurance protection. These guaranty funds are designed to provide for the payment of claims against covered individuals when their insurer fails, and since 1969 these funds have disbursed about $104 million in 106 insurance company insolvencies. However, the funds have yet to face the collapse of a major insurer, and most knowledgeable observers question their ability to do so. Furthermore, while 46 States have guaranty funds to protect against the failure of property casualty companies, only 18 States presently offer guaranty fund protection against a life insurance company insolvency.
Since each State runs its own guaranty fund, the effort to prevent or control insolvencies is fragmented and ineffective. Uniform standards for guaranty status have not been developed by the States, and the prospect of a number of States scrambling to secure control of the assets of a failed insurer to meet policyholder obligations within their juirsdictions does not present a pretty picture.
Assessments to pay for insolvencies are made after the fact, and they are levied at a time when many companies have troubles of their own, which may be aggravated by the necessity of paying an assessment, thus posing the threat of a domino effect. This threat is somewhat mitigated by the fact that assessments are limited by statute to about 1 percent of a company's premium volume in about half the States and 2 percent in the rest, but this very limitation means that most funds would not be able to deal with a major failure or multiple failures in a timely fashion.
Where State guaranty funds have been operated on a "preassessment” basis, they have proven to be subject to the whims of the State legislature. New York State's fund amassed $240 million through assessments and interest income. However, to help alleviate New York State's fiscal crisis, the New York State Property and Liability Insurance Security Fund switched more than $200 million from bank certificates of deposit and Federal Government securities into New York State obligations. Thus, the New York State fund was illiquid just at the time when it was most likely to be called upon to deal with an insurance company insolvency.
These and other weaknesses in our present system for dealing with insurance company insolvencies have convinced me that it would be desirable to create an alternative system of regulation for solvency purposes.
The bill which I introduce today would seek to improve the quality of insurance company regulation by providing for an alternative system of Federal regulation
similar to the Federal regulatory alternative presently available to banks and savings and loan associations under what has come to be known as the "dual banking system.” I believe that the existence of such a system of alternative regulation would provide a check against both inadequate regulation and overregulation at either the State level or the Federal level.
The bill consists of two titles. Title I would create a Federal insurance guaranty program similar in concept to the Federal Deposit Insurance program available in the banking field. Title II provides a Federal chartering alternative for insurance companies similar to the Federal chartering alternative presently available to banks and savings and loan associations under the dual banking system.
TITLE I-FEDERAL INSURANCE GUARANTY PROGRAM Section 101 of the bill would establish a Federal Insurance Commission which would be an independent agency in the executive branch of the Federal Government and would be charged with the administration of both the Federal insurance guaranty program described in title I and the Federal chartering alternative described in title II. The Commission would consist of three members appointed by the President and confirmed by the Senate, and each member would serve for a term of 6 years. The Chairman would be designated by the President, and executive authority within the Commission would be vested in the Chairman.
All of the functions presently administered by the Federal Insurance Administrator at the Department of Housing and Urban Development would be transferred to the Commission, and the Commission would be vested with rulemaking and other powers necessary to carry out its responsibilities.
Section 101 would also create an advisory committee to the Federal Insurance Commission which would consist of consumer and industry representatives, as well as representatives of State regulatory agencies and representatives of the Treasury Department and the Department of Housing and Urban Development.
Section 102 would create a Federal Insurance Guaranty Fund which would consist of fees paid by insurance companies whose obligations are guaranteed by the Federal Insurance Commission. This fund would be authorized to borrow from the Secretary of the Treasury such amounts as are necessary to cover losses which might arise during the early years of operation of the fund or in a crisis situation. However, the fund is expected to operate on a self-sustaining basis, and moneys borrowed from the Treasury would have to be repaid. An annual fee of not to exceed one-fourth of 1 percent per year would be assessed against federally guaranteed insurers.
Under section 103, the Federal Insurance Commission would be authorized to issue a Federal guaranty certificate to any insurer, whether State-chartered or federally-chartered, which meets such financial and other requirements as the Commission may prescribe. The Commission may for cause deny a Federal guaranty certificate to an applicant or may revoke or suspend such certificate, but in taking such action, the Commission would be required to issue a written order specifying the factual conclusions and legal authority on which its action is based.
Section 103 also provides that investments of a federally-guaranteed insurer, other than a federally-chartered insurer, would be regulated in general by the laws and regulations of the insurer's State of domicile, unless the Commission finds that such laws or regulations fail to require the minimal protections necessary for the Federal Insurance Fund, in which case the Commission may issue an order requiring that the insurer bring its investments in compliance with the standards established by the Commission.
A federally-guaranteed insurer would, under the provisions of section 103, be exempt from State insurance guaranty fund assessments.
Section 104 provides that whenever a federally-guaranteed insurer is adjudicated to be insolvent, the Federal Insurance Commission shall satisfy all guaranteed obligations. A "guaranteed obligation" is defined as: First, an insurance obligation to a policyholder, a claimant of an insured, or an assignee of any of them, within the coverage of a policy guaranteed in accordance with the bill; or second, the right of a policyholder, an insured, or the assignee of either of them, for returns of premium due as the result of termination of a policy guaranteed in accordance with the provisions of the bill by reason of an insolvency arising while the insurer is a federally-guaranteed insurer.
Section 105 prescribes procedures available to the Commission to avoid default or to facilitate the merger or consolidation of a federally-guaranteed insurer.
Section 106 describes the procedures available to the Commission for the rehabilitation, reorganization, or dissolution of a federally-guaranteed insurer. The Commission may, after notice to the federally-guaranteed insurer, apply to the appropriate U.S. district court for the appointment of a receiver to administer the affairs of an insurer which is either unable, or reasonably likely to become unable, to fulfill its obligations when due.
Any receiver appointed would be subject to the same duties as a trustee under section 47 of the Bankruptcy Act and would conduct the insurance company's affairs consistent with the provisions applicable to a proceeding of chapter X of the Bankruptcy Act.
Section 107 describes the regulatory authority of the Commission, including authority to establish an "early warning system" to help prevent insolvencies. Such an "early warning system” could be developed either by the Commission itself or by the Commission in cooperation with State regulatory authorities and trade associations.
Section 107 further provides that it would be unlawful for any federallychartered insurer to refuse to insure any individual or group of individuals solely because of age, sex, race, religion, or national origin, and to classify or charge a rate or premium to such individual or group of individuals with the purpose or effect or unfairly discriminating against them.
Section 108 sets forth the supervisory authority of the Federal Insurance Commission over federally-guaranteed companies. The powers given to the Federal Insurance Commission under this section are parallel to the authorities granted to the Federal Deposit Insurance Corporation in its supervision of federally-insured banks.
Section 109 provides that the Commission shall not adopt any rule or regulation or exercise its authority in such a manner as to impose a burden on competition not necessary or appropriate in the furtherance of the purposes of the bill, and that the Commission shall in all cases adopt the least anticompetitive alternative to protecting policyholders and the public interest. With respect to federally-chartered insurers, this section makes clear that the Federal antitrust laws would be applicable to them. Of course, the bill does not amend the McCarran-Ferguson Act, and State-chartered, federally-guaranteed companies would maintain their current posture vis-a-vis of the Federal antitrust laws.
TITLE II-FEDERAL CHARTERING OF INSURANCE COMPANIES Section 201 authorizes the Federal Insurance Commission to issue a charter to any stocks, mutual, or reciprocal insurer, reinsurer, or surety, the U.S. Branch of Alien Insurer or Surety, or any other alien insurer or surety maintaining in the United States at all times trust funds of not less than $50 million, or such lesser amount as may be approved by the Commission.
Upon the issuance of a Federal charter, the State charter or similar authority of an insurer which is converting to a Federal charter will be preempted and terminated, except that any such insurer shall be deemed to continue its corporate or other existence for all purposes of Federal and State law.
A federally-chartered insurer shall be deemed to be authorized to do business in any State, except that the appropriate regulatory authority of any State may, for cause and upon a showing to the satisfaction of the Federal Insurance Commission that such action is necessary or justified, revoke the authority of the federally-chartered insurer to do business in that State.
The insurance obligations of all fed- * * * federally-chartered insurer may elect to * * * anteed in accordance with the provisions of title I.
Section 201 further provides that a federally-chartered insurer may elect to surrender its Federal charter and return to a State-chartered status.
Except as otherwise specifically provided, a federally-chartered insurer shall have the powers of a business corporation chartered in the District of Columbia under the District of Columbia Business Corporation Act.
Section 202 sets forth the procedure for organization of a federally-chartered insurer. It states that in the case of a group or fleet of insurers under common management or subject to the effective control of one person, no one or more of the insurers which are part of such group or fleet shall be federally chartered unless all are federally chartered.
Section 203 sets forth the conditions under which a federally-chartered insurer may commence doing business.
Section 204 provides that a federally-chartered insurer shall be exempt from the provisions of any State law.
First, which requires the establishment and maintenance of reserves;
Fourth, which provides for the regulation or fixing of rates or premiums, or of classes of risks, except in the case of an assigned risk plan or other residual market mechanism or in the case of any line of insurance in which the Federal Insurance Commission determines that the insurer competes principally for the producer's business rather than the business of the ultimate consumer.
Section 204 makes clear that States may continue to levy taxes on federallychartered insurers transacting business within their jurisdictions but provides that federally-chartered insurers would exceed the amount of tax which would be imposed on the least taxed insurer doing the same type of business and organized under the laws of any State other than the taxing State.
Section 204 also provides, for the purpose of any tax law enacted under the authority of a State, that a federally-chartered insurer shall not be treated as an insurer organized or incorporated under the law of the enacting State. Thus, a federally-chartered insurer would be exempt from State retaliatory taxes. However, for the purposes of any other law enacted under the authority of a State or the United States, a federally-chartered insurer would be treated as an insurer organized or incorporated under the laws of the State in which its principal place of business is located.
Section 205 sets forth the investment criteria for federally-chartered insurers. The objective of this section is to require that a federally-chartered insurer invest funds in an amount equal to the sum of its policyholder obligations and minimum capital and surplus, or guaranty fund required by law, in assets of integrity and stability. With respect to amounts above its policyholder obligations and minimum capital and surplus, or guaranty fund required by law, the insurer is free to invest such funds at its own discretion without regard to the investment criteria set forth in the bill.
Senator BROOKE. Mr. Chairman, I want to take this opportunity to thank you for calling these hearings. I think they are important hearings not only to our Banking Committee but I think its very, very important to policyholders and to the insurance industry as well, and I look forward to what I know will be excellent testimony from those witnesses that have been invited.
The CHAIRMAN. Thank you very much, Senator Brooke.
Chairman Williams, go right ahead, sir. If you would like to abbreviate your statement in any way we will be happy to have it printed in full in the record and proceed to questioning at any time you wish.
STATEMENT OF HAROLD M. WILLIAMS, CHAIRMAN,
SECURITIES AND EXCHANGE COMMISSION
Mr. WILLIAMS. Mr. Chairman and members of the committee, I appreciate the opportunity to appear here today before this committee to participate in your consideration of S. 1710 and, more generally, in vour consideration of the nature and structure of the insurance industry. The bill obviously raises important questions concerning the regulation of insurance companies which are among the principal financial institutions of our economy. As you undoubtedly know, the SEC's jurisdiction with respect to insurance companies is rather limited and, as a result, it is impossible for us to draw any broad conclusions based on experience. I would, however, like to share and convey to you some of our general observations and some of my personal views on this subject.
SEC LIMITED REGULATION OF INSURANCE COMPANIES
The SEC does not possess general regulatory authority over the business operations of insurance companies, nor does it regulate the relationship between policyholder and insurance company. We do, however, exercise jurisdiction with respect to some aspects of the relationship between an insurance company and its public stockholders, and with respect to transactions in securities issued or owned by insurance companies.
Pursuant to the Securities Act of 1933, an insurance company or insurance holding company which makes a public offering of securities must file a registration statement with the Commission. In addition, while section 3 (a) (8) of the Securities Act exempts most insurance policies or annuity contracts, variable annuities and variable life insurance contracts are subject to all the requirements of the Securities Act. Unlike traditional insurance products, the benefits under variable annuity and variable life contracts are dependent upon the result of a specific portfolio of securities and are not guaranteed by the insurance company.
In conjunction with our consideration in the early 1970's of the status of variable life insurance under the Federal securities laws, the Commission had occasion to consider the adequacy of State insurance regulation with respect to the disclosure provided to purchasers of insurance contracts. The Commission determined that, where the contract is in variable terms, the disclosures provided by the Securities Act were necessary, since State insurance regulation is directed primarily at maintaining the solvency of insurance companies rather than at providing the purchaser with full disclosure. Having made that decision, the Commission and its staff now review disclosure documents filed with respect to both variable annuity and variable life contracts and have developed a certain experience therewith.
Other disclosures required by the Federal securities laws are quite circumscribed in the case of insurance companies. Many insurance companies are exempt from the registration and annual and periodic reporting requirements of the Securities Exchange Act of 1934 by section 12(g) (2) (G). A company qualifies for this exemption if its domiciliary State regulates proxies and insider trading in a manner comparable to the regulation contained in sections 14 and 16 of the Exchange Act, and if it files annual “convention" (financial) statements on a form prescribed by the National Association of Insurance Commissioners ("NAIC"). The NAIC convention statement requires neither an audit by independent accountants nor periodic reporting as is mandatory for other corporate issuers. Holding companies with insurance subsidiaries are not eligible for this exemption, however, and are subject to the registration and reporting requirements of the Exchange Act to the same extent as other corporations.
There are other requirements of the Exchange Act which do apply with full force to insurance companies. For example, section 13(d) provides that a person who acquires more than 5 percent ownership of an equity security of an insurance company must file a report with the Commission, as must an insurance company acquiring more than
99-073 0 - 78 - 3