Page images
PDF
EPUB

Comparison of Estimated Federal Guarantee Fund Accumulation versus Actual State Guarantee Fund Experience

1969-1976 (in millions)

[blocks in formation]

?

?

1969
1970
1971
1972
1973
1974
1975
1976

$ 29, 224.9

32,867.0
35,714.9
39,317.5
42,479.8
45,152.4
50,000.0
59,500.0
$ 334, 256.5

$ 73.1

82.2
89.3
98.3
106.2
112.9
125.0
148.8

$ 9.4

13.5
18.5
13.5
14.6
20.0
56.8

15.0
$161.3

$ 63.7

68.7
70.8
84.8
91.6
92.9
68.2
133.8

$835.84

$674.59

1/ Includes accident and health written by property liability companies. 2) Assumes that all companies opted for federal guarantee at .25% 3 As reported in the AAI study of residual markets, AAI Bulletin No. 77-6 (2/3/77). 4

Does not reflect impact of compound interest on fund accumulation. 5/

Source: Best's Aggregates and Averages 1975 and 1976 figures are preliminary.

The CHAIRMAN. Thank you very much, Mr. Maisonpierre.

Our final witness is Mr. Arthur C. Mertz. You have a 35-page statement, and if you could abbreviate it, we would appreciate it.

Mr. MERTZ. I would be very happy to abbreviate my remarks, Mr. Chairman.

STATEMENT OF ARTHUR C. MERTZ, PRESIDENT, NATIONAL

ASSOCIATION OF INDEPENDENT INSURERS

[ocr errors]

Mr. MERTZ. My name is Arthur C. Mertz, and I am president of the National Association of Independent Insurers, NAII for short.

We are a voluntary national trade association of more than 600 property and casualty insurers of all sizes. Most of our companies are small and medium sized.

I want to emphasize both our filed statement and my testimony today are addressed solely to the casualty property lines of business.

Since our association was founded in 1945, the year the Carran Act was adopted, NAII members have played a leading role in opening and preserving the channels of competition under the State regulatory system created in response to that act.

We were the first, incidentally, to support competitive rating laws and today we, like other segments of the business, are seeking the adoption of more such laws.

We believe the actual effect of S. 1710 would be to substantially repeal the McCarran-Ferguson Act, under which the Congress in 1945, after much study and debate, reaffirmed that “the continued regulation and taxation by the several States of the business of insurance is in the public interest."

It may be argued that S. 1710 does not really impact McCarran, because the decision to seek Federal charting or guaranty status is optional. We disagree. A system which empowers members of our industry to choose who shall or who shall not regulate them, in such vital areas as rates, reserves, investments, and so on, is certainly drastically different than is embodied in the McCarran Act, which reserves to Government the power to make that choice of who regulates whom, the State government in the first instance, and Congress in the last.

In adopting S. 1710, Congress would be abdicating the ultimate legislative responsibility for determining who shall regulate insurance and would vest that responsibility in the hands of the regulated. In actual effect this power would gravitate to a handful of the very large insurance companies.

I have nothing against large insurance companies. We have some large members ourselves. Not only would those larger companies be able to choose which regulator they consider advantageous for themselves, but they could largely chart the destinies of their smaller competitors.

This leads to our second major reason for opposition; namely, that S. 1710 could invite the destruction of competition by the elimination of many small insurers from the market, a result I am sure the sponsors of this bill never intended or contemplated.

For one thing, a move from State insolvency funds to Federal guaranty status by any significant number of large insurers would thrust intense cost burdens and competitive pressures on the insurers remaining under the State funds and exclusive State supervision.

Second, S. 1710, as written, would give federally chartered insurers substantial competitive advantages over their State-chartered competitors in the pricing of insurance. Those who opt to be completely exempted from every State regulatory control over rates, could raise or lower or manipulate their prices virtually at will, and they could thereby outmaneuver their State-chartered competitors at every turn.

Today the multistate large companies already enjoy many natural advantages over their smaller more localized competitors. But at least all companies have to play under the same set of rules, standards, procedures, and codes.

Equally important is the fact that small companies today are assured of continued availability of the composite statistical data and the filed rates and supporting data of all companies, including the very large companies, whose experience is needed to provide a proper basis for meaningful trend indicators for the future.

This bill would permit the larger insurers to escape all of those requirements, including the filing and review of rates and the furnishing of data. This would make the present competitive struggle far more difficult, perhaps impossible for scores of smaller companies. They would be unable to price their insurance competitively and profitably and this would be true whether or not they themselves opted for Federal chartering.

If they did opt for Federal chartering, not because they wanted to, but because they were pressured into doing it, they would thereby subject themselves fully to the Federal antitrust laws, and would have added to the already severe problems I have just indicated, where they would lack credible data, they would have added to those problems the constant fear that any parallelism or tracking of the rates and rate changes of their competitors and any cooperative action in the use of advisory services for trending rates to the future, however necessary they were to them, could invite Justice Department action or private treble damage suits, or both.

I must say we are not reassured by what the Department of Justice has had to say on this point. They indicated they have not studied in depth the impact of this bill on small insurers.

I want to assure you we have, and we are gravely concerned about that impact.

In sum, in our view this bill would operate as an anti-small-business, pro-big-business measure, even though again I am sure it was not so intended.

Our next objection is that S. 1710 would deprive consumers of many vital regulatory safeguards and rights and remedies which they now enjoy under State law. It would give the federally chartered insurers complete freedom to raise or lower rates at will.

Now the prospect of totally unregulated pricing freedom-I am not talking about "open competition” rating as in California, because there are standards there, and there are procedures there—the prospect of totally unregulated pricing freedom, subject only to the broad constraints of antitrust, is obviously an attractive one to any business entrepreneur. But sound judgment tells us that this theoretical utopia

[ocr errors]

is simply not realistically attainable in our business. It does not fit our business. And it never fit our business.

Congress, in 1945, concluded it did not fit our business. The most we believe we can reasonably ask for in the way of regulatory systems are those which eliminate burdensome prior approval procedures, but still require all rates and rate changes to satisfy rating standards of adequacy, nonexcessiveness and nondiscrimination. That is in a nutshell what the "open competition” rating law does. It is not unrestricted competition, it is competition subject to the regulatory standards.

At the present time technically trained officials in every State are monitoring the entire property casualty pricing picture on the consumers behalf, under specific standards. We seriously question whether consumers, or legislators in their behalf, would be satisfied for very long to lose those sa feguards and that monitoring.

We believe the advent of sizable rate increases by any large insurers choosing the Federal chartering route under S. 1710 would soon give rise to heated demands for imposition of stringent rate control by the Federal Government.

This is one of the forms of bureaucracy we and I think others have indicated we are concerned about.

The States also now are monitoring many many other areas besides rates. Commissioner Stone just indicated that in his department they process 10,000 consumer complaints, presumably in all lines of insurance, annually. Who, we might ask, under S. 1710, is going to monitor the consumer complaints for federally chartered insurers, unless you set up one heck of a big staff and bureaucracy to do it. And Commissioner Stone's figures are just for Massachusetts.

There are many other ways in which this bill will in our opinion lessen overall regulatory effectiveness and operate to the disadvantage rather than the benefit of the consumer.

We enumerate them on pages 13 to 22 of our statement. That is, the regulatory responsibility would be divided and diffused, there would be duplication, overlapping, there are many areas where there are uncertainties, and certainly the grant of power to the Federal Insurance Commission is in many instances so broad as to permit regulation by fiat.

The remainder of our statement is devoted to the reasons why we do not believe a case has been made for Federal involvement by S. 1710, and why we believe the case for continued State supervision of our business is stronger than it ever was.

We also point out that we believe that the banking regulatory system which has been cited as a precedent for S. 1710 is neither an appro priate example for comparative purposes by the nature and makeup and function of the business, nor is it a convincing example, because there are apparently problems in that field which indicate the solutions have not all been worked out.

Second, we do not believe that the insolvency problem for property and casualty insurance currently or over the last several years is of sufficient proportions to warrant the imposition of a huge Federal guarantee fund and the accompanying regulatory system that must go with it on top of the State system.

I believe this point has been pretty well discussed by the distinguished Commissioners who were here. I would just add one footnote. That is, since the GEICO saga has been mentioned several times, we certainly don't see how it can be used, properly used, as any evidence for support of the bill. We think it is a rather overwhelming success story as to how well the present State system does work and can work.

We finally show in our statement how over the past three decades the States have overwhelmingly responded to the congressional intent of the McCarran Act, and have developed a regulatory system which premotes competition and solvency, fosters innovation, and assures an constantly expanding market capacity, all in the public interest.

While that system is not perfect, it is constantly being improved, and the improvements in recent years have been dramatic, especially in areas of examinations and solvency surveillance.

Certainly our business, like others, faces a lot of problems. Most of them stem from spiraling inflation and the cost of the ingredients which go into liability and property insurance losses.

We appreciate the concern expressed by the sponsors of S. 1710 and by various members of this committee over those problems. But we submit that S. 1710 will do nothing toward solving those problems. Conversely, in the ways we have indicated in our statement, it will substantially add to the operational costs of the insurance system, and the regulatory process, and would, by creating confusion over lines of responsibility, undermine the effectiveness of that process.

We therefore respectfully urge this distinguished committee not to act favorably upon this measure.

Thank you.
[The complete statement of Mr. Mertz follows:

« PreviousContinue »