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property-casualty insurers which may conclude that the States will continue to vacillate on competitive rating laws, ignoring the views of the Department of Justice and regulatory scholars that price competition is the best way to maintain reasonable premium levels.
Other insurers, perhaps few in number at the present time, may become concerned with the increasing diversity of regulation by the 50 States and the District of Columbia. Each jurisdiction tends to go off on its own oblivious to the regulatory demands of other States. This is a far cry from the post-SEUA decision and McCarran-Ferguson Act (effective March 5, 1945) period. Then the States, fighting to preserve State regulation, acted in unison with an awareness that a business which had just been held to be a part of interstate commerce could not be regulated effectively and in the public interest if each State went its separate way. But that good beginning has not been maintained. The hard fact is the only important model uniform bill to be enacted extensively by the States in the past 30 years has been the model State Post-Insolvency Assessment Guaranty Association Act, sponsored by the National Association of Insurance Commissioners. In other important areas, the pattern of regulation, in terms of reasonable uniformity, is disappointing.
On the other hand, one of the principal advantages of State regulation is the opportunity for States to adjust their regulatory philosophy to local needs. This is important and should not be ignored. However, in our judgment, State regulation would be greatly improved if more attention were paid to the essentially interstate nature of the business and the need to achieve comity and cooperation among the States.
Without discussing the details of title II, we would like to offer some general comments. Section 204(a)(4) of title II exempts federally chartered insurers from State rate regulatory laws with two exceptions, one of which is particularly important. Section 109(c) of title I provides that the Federal antitrust laws shall be applicable to federally chartered insurers "with respect to those activities that are exempt from certain State regulation as specified in section 704 of this act."
This is aimed at property-casualty insurers which in the past, and still in varying degree, have pooled experience either for cooperatively developed rates or to assist companies in making their own individual rates. No such collective activity relating to rates is utilized in the life insurance business, because of the nature of the business. Thus, no adjustment for life insurers which elect to seek a Federal charter has to be made. Aside from the area of advertising, there are no important areas where life insurers are regulated by State law pursuant to the McCarran-Ferguson Act in order that the Federal antitrust laws not apply. On the other hand, most property-casualty insurers opting for Federal charters would have to make many adjustments if they were to become fully exposed to the Federal antitrust laws. Some of the problems for property-casualty insurers are discussed in detail in a report of the Department of Justice to the Task Group on Antitrust Immunities entitled, “The Pricing and Marketing of Insurance” (January 1977).
Not too many years ago the very idea of operating under the Federal antitrust laws would have been considered wholly unrealistic by most
segments of the property-casualty insurance business. Too much of the business was written at bureau rates and an instant leap into free price competition would not have been feasible. Today's marketplace is quite different from the period following the SEUA decision and enactment of the McCarran-Ferguson Act. Healthy price competition prevails in most major lines and throughout the country where permitted by State law. Unfortunately, a number of States have been laggard in revising their rating laws to adapt to a totally different marketplace.
Our member companies support the enactment of competitive rating laws. We agree with the Antitrust Division of the Department of Justice that such State rating laws serve the public much more effectively than laws requiring approval of rates. There is no justification for requiring competitive prices to be approved before they are put into effect. States which are still trying to require prior approval of competitive rates are encountering all kinds of difficulties; the availability of insurance is becoming a major problem.
It should be made abundantly clear that the State competitive rating laws advocated by American Insurance Association do not merely eliminate prior approval of rates. They specifically prohibit agreements to adhere to rates and contain other antitrust proscriptions similar to the Federal laws.
The point we wish to make is that today there is much less reliance on bureau-developed rates. Thus, the transition to a completely free and unregulated market, subject only to Federal antitrust constraints, does not present the same kind of transitional obstacles which existed in the past, for the simple reason that the posture of the marketplace has changed radically. Of course, there will be difficult areas requiring special attention. One of the major unresolved problems is the treatment of residual markets, which include the various facilities for providing insurance to risks which are unable to obtain coverage in the voluntary market. Examples are the automobile assigned risk plans, the FAIR plans for property insurance, windstorm pools, and joint underwriting associations for medical malpractice insurance.
Under S. 1710 a federally chartered insurer is exempt from any State law regulating and fixing rates except laws regulating residual market rates (section 204(a) (4)). This means that voluntary market rates will not be regulated by the State but will be subject to the Federal antitrust laws. On the other hand, residual market rates will still remain subject to applicable State law. Many believe it is difficult to have competitive pricing in the voluntary market when rates in the involuntary market remain under tight State control. This dilemma exists today in competitive rating law States and it would continue to plague free price competition for federally chartered insurers under S. 1710.
AIA POSITION It is difficult to oppose any legislative proposal which is intended to be optional. On its face S. 1710 does not require an insurer to seek a Federal charter nor does it require any company to apply for a Federal guaranty certification. But as we have indicated, we believe that once some major companies have obtained Federal guaranty certification, virtually all companies will be forced to follow the same route. They
may even have to go the whole way and seek Federal charters because some of their principal competitors, having obtained Federal charters, are no longer subject to the pricing burdens or the delays inherent in cumbersome State prior approval rating laws.
If in fact there is no real world choice, S. 1710 presents us with what in substance is not unlike a complete Federal preemption of insurance regulation. Since American Insurance Association continues to support State regulation, we cannot endorse S. 1710.
We realize that others may differ with our interpretation and believe that S. 1710 will not result in Federal preemption. Others may favor S. 1710 or the concept of a Federal chartering alternative regardless of any long-term implications for State supervision of the insurance business.
S. 1710 needs a great deal more study, and not just its own specific provisions. Some areas of inquiry might cover:
First. Are there other national systems for handling insolvencies beyond that envisaged by S. 1710?
Second. Should the matter of insolvency, Federal chartering, and competitive pricing be approached separately or in one bill as suggested by S. 1710?
Third. Is it possible to have a dual system, as contemplated by S. 1710, or will the Federal alternative inevitably replace State regulation? Assuming the former, how will the dual system work?
These are just some areas of inquiry that come to mind.
Mr. Maisonpierre, you have a 40-page statement. I presume you are not going to read it in full. It is a fine statement, we will be happy to print it in the record. Could you give it to us in about 8 or 9 minutes ?
Mr. MAISONPIERRE. Yes, sir.
STATEMENT OF ANDRE MAISONPIERRE, ON BEHALF OF THE
ALLIANCE OF AMERICAN INSURERS
Mr. MAISON PIERRE. We appreciate the opportunity to testify on S. 1710, the Federal Insurance Act of 1977.
Our statement describes the advantages which would accrue to companies electing to become federally chartered or opting for participation in the proposed Federal guarantee fund. It also describes the disadvantages which would befall those companies electing to come within the Federal orbit. More importantly, our statement examines, in detail, the profound changes which the enactment of this bill would produce in the operation of the property and casualty insurance system. We believe that the total fabric of insurance regulation would be radically realigned if this legislation were to be enacted and that a substantial impact would be felt by companies electing not to participate in this Federal program.
Enactment of this bill would directly impair the ability of small companies to price their insurance product; it would limit the ability of the insurance industry to establish commercial pooling agreements through which essential underwriting capacity can be created to insure certain exposures; it would likely bring to an end the existing
State insolvency mechanism; and, finally, it will require the creation of a massive new Federal bureaucracy.
These issues will now be discussed in turn:
A. The legislation will substantially hamper the ability of small companies to price their product.-The McCarran-Ferguson Act, recognizing the need to pool certain information to develop rates and premiums granted broad immunities to the insurance industry from Federal antitrust laws. The smaller an insurance company, and the more limited its market penetration, the more dependent that company is on aggregating its experience with that of other carriers. Today, the aggregation and trending of experience is done through rating and statistical bureaus.
It is questionable whether federally chartered companies, no longer immune from Federal antitrust laws, would be legally capable of participation in bureau activities. Furthermore, since it is assumed that federally chartered companies will operate in a “free market economy,” they would be inclined to develop their own individual and unique rating classes, territories and rating plans peculiar to their own operations. The aggregation by bureaus even if allowed-of such widely varying systems will produce an amalgam of information
individual companies will find of little use in the development of their own individual rates.
Absent regulation and absent restriction on diversity of classification plan, it is questionable whether large insurers under the Federal Insurance Act would continue to support bureau operations. Where, then, will this leave the smaller insurance companies? One should certainly expect that this will have major impact on the competitive nature of the insurance business and that substantially increased territorial market concentration will follow.
B. The legislation will undermine the stability of workers' compensation insurance.-A particularly troublesome situation will arise in the area of workers' compensation insurance. We believe that because federally chartered companies would be legally prohibited from participating in bureau operations the present workers' compensation rating system would be substantially dismantled. Yet, workers' compensation insurance represents unusual actuarial difficulties in achieving accurate rates in part because of the limitless benefits, both as to time and amount provided, under this coverage. Further, long delayed reactions to occupational exposures to harmful substances create major difficulties in assessing an insurance carrier's liability at any one time.
Because of the overriding social purpose of the workers' compensation system, the States are even more concerned about market stability for this line of insurance than for most others.
There is no doubt that to the extent that insurers do become federally chartered the stability of the workers' compensation system will be very similar to the troubles that have been recently highlighted in product liability and malpractice insurance.
C. The legislation will reduce the ability of companies to meet consumer insurance needs through pooling agreements.-In order to provide the capacity necessary to respond to the insurance buying public's needs, insurance companies have established numerous pooling devices. At times, it is only through such pools that sufficient insurance capacity can be created to insure certain exposures. At other times, such pools provide the opportunity for greater market competition among insurers by allowing smaller insurers to pool their capacity with others to enable them to bid on an exposure which only larger companies can otherwise afford to do.
If such pooling devices were not permitted, or common rates and forms not permitted, many large risks would find it difficult if not impossible to secure adequate insurance coverage. This of course would be to the detriment of the insurance buying public.
Federally chartered companies, no longer protected by McCarranFerguson antitrust immunities, would likely abandon their participation in such pooling mechanisms. At least, until the legality has been established.
Yet, these are important industry practices. The fact that conflicts with antitrust laws exist do not, obviously, make these practices undesirable from a consumer's standpoint. Many of these practices were created to make insurance available to broader publics in a more competitive environment. But, the courts have not always held that a clear public interest is of itself sufficient to overcome a legal barrier.
D. The Federal Insurance Act will substantially weaken consumer protection against losses resulting from company insolvency.-S. 1710 would establish a Federal insolvency system to compete with the presently existing state insolvency programs. However, S. 1710 makes no attempt to compete fairly with the State system. It allows participation in the Federal program only for those companies which meet that degree of financial stability promulgated by regulation by the Federal Insurance Commission. One must assume that the degree of stability which will be required by those regulations will be substantial. Hence, only the stronger insurance institutions will be allowed to participate in the Federal guarantee plan. If the State plans were to apply the same selectivity the public would receive little or no protection against company insolvencies since those companies more likely to become insolvent would be excluded from both the Federal and the State system.
To the extent that the strongest financial companies elect to participate in the Federal program, it will then fall upon the weaker companies to attempt to respond to the losses generated from insolvencies through State guarantee fund postassessments. It stands to reason that the State insolvency system would collapse in time.
An additional grossly unfair competitive advantage is provided the federal system because the legislation puts roadblocks in the way of companies desiring to leave the federal system, but makes it very easy for a company to enter the federal system. Is it not reasonable to expect that once a company finds that a competitor may be in serious financial difficulty, and that upon the insolvency of that competitor it would be called upon for a substantial assessment in case that insolvency materializes, that it would seek immediate participation in the Federal guarantee program in order to escape the postassessment levy? Thus, companies would be invited to avoid their obligations under State insolvency plans.
E. The bill calls for the establishment of a vast new Federal bureaucracy.—The proposed responsibilities and powers of the Fed