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order insurance and mergers, and regulation by the Securities and Exchange Commission over publicly held insurance companies, there has never been direct federal financial regulation of insurance. The Federal Insurance Act of 1977, however, provides for dual and concurrent financial regulation of federally chartered companies and state chartered companies who are members of the federal

guarantee fund.

Senator Brooke has indicated that his bill would seek to improve the quality of insurance company regulation by providing for an alternative system 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. Since this legislation is intended to structure a Federal insurance regulatory system patterned in part after existing Federal bank regulatory mechanisms it would be instructive to briefly review how well the bank regulatory system has performed. Consider:

At present there are three organizations which exercise regulatory authority at the federal level, the Federal Reserve Board which supervises member banks, the Federal Deposit Insurance Corporation, which insures bank deposits and the Comptroller of the Currency who examines national and D.C. banks. There has been increasing concern voiced that these organizations compete to some extent in their regulatory responsibilities for banks under their respective juris

dictions. There exists today bank examiners in the various

In

states who also exercise regulatory responsibilites.
summary, the bank regulatory system exhibits overlapping

and duplicative regulatory authorities and is itself the
subject of hearings for reorganization at the federal level.

Despite the existence of extensive Federal regulatory
programs banks continue to fail and the increasing number
of bank failures in the past few years plus the number of
problem banks is a source of genuine concern. In fact, the
existence of National Early Warning Systems has not pre-
vented several large bank failures in recent years.

It is not any more realistic to expect federal state co-
operation in regulating insurance companies than it is for bank
regulators to work closely together at the federal and state level.
It is abundantly clear that enactment of this bill would

produce major changes in the operation of the property and casualty
insurance system. For instance, it 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 will, as
already mentioned, likely bring to an end the existing state in-
solvency mechanism; and, finally, it will require the creation of a
massive new federal bureaucracy and lead to a period of instability,
uncertainty, litigation and increased economic regulation.

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 anti-trust laws. The smaller insurance company, and the more limited its market penetration, the more dependent that company is on aggregating its experience with that of other carriers. Smaller property casualty insurance companies just do not have an adequate loss experience of their own to develop credible information upon which to base their insurance rates by product line.

Out of 2882 property and liability insurance companies licensed in the United States in 1976, 900 operated in most states and wrote the vast majority of business. Many life insurance companies, particularly, the new ones, are also relatively small when compared to older well established life insurers. In other words

most insurance

companies are relatively small, have limited product lines and offer their services in finite market areas.

In commenting on the Anti-Trust Division Report on Insurance Pricing and Marketing, the FIA stated that "smaller companies could not possibly make their own rates based only on their own loss experience simply because such experience (by itself) would be entirely lacking in credibility."

Today, individual insurance company loss experiences is pooled with other carriers through rating and statistical bureaus. This combined experience is then trended so that past loss experience can be utilized to estimate future loss experience. Bureaus will publish advisory rates which the member companies may use in the development of their own rates. It is absolutely essential that the raw experience data acquired by these rating bureaus are representative of the total exposure being insured and that the data provided by member companies can be properly assimilated. Hence, companies must report their losses to bureaus using relatively similar rating and territorial classification systems to allow for the necessary aggregation of information. However, the utilization of rating bureaus is open to question under the Federal Insurance Act. Note that companies that elect to become federally chartered will no longer be immune from federal anti-trust laws. It is questionable whether federally chartered companies would be legally capable of exchanging any price information, including information limited to losses incurred. It is clear, however, that federally chartered companies would be prohibited from membership in a rating bureau which trends past losses to enable its members to price their insurance products. 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

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of such widely varying systems will produce an amalgam of information which many individual companies will find of little use in the development of their own individual rates.

Again, citing the comment from the Federal Insurance Administration to the Justice Department, the FIA said "one of the obvious problems in respect to permitting the existence of a wide variety of elaborate and incompatible class plans under an open rating concept is that the millions of potential rating slots thereby engendered may negate credibility for the loss experience of many or most of the individual classes and may preclude the making of proper relativity tests."

What is likely to happen is that the larger companies will
First, they will be deterred

no longer support bureau operations.

from any bureau operation activities until these have been legally established. Second, the larger companies will question their continued support of bureau operations particularly if they perceive that their limited operations will be of little help to them but will primarily benefit competitors.

Accordingly, 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 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.