First, 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. If, for example, just the top twenty companies in the property/casualty insurance business should choose federal chartering or federal guaranty protection, it would cause the state guaranty funds to lose over 50 percent of their premium base for assessments for losses and expenses. This and other factors would greatly increase the burdens and pressures on the insurers remaining under the state funds. Additional strong pressures would be created if federally guaranteed insurers began to advertise that fact much the same way banks presently advertise they are insured by FDIC. Members of state guaranty funds are not allowed a similar privilege. This would give federally guaranteed companies a significant competitive advantage. That advantage would be further enhanced if lending institutions required insurers of property under mortgage to be federally insured, or if any form of preferred treatment were given to federally guaranteed insurers by such lending institutions or by anyone involved in the insurance marketing system. Secondly, S-1710 as written would give federally chartered insurers substantial competitive advantages over their state chartered competitors 2 in the pricing of insurance. With narrow exceptions, federally chartered insurers would be exempted from every state rate regulatory control. They could raise or lower or manipulate their prices at will, so long as they observed the very general boundary lines set by the federal antitrust laws (essentially, avoidance of action in concert) and by the anti-discrimination provisions contained in S-1710 itself. A host of opportunities would exist for federally chartered insurers to exploit market and pricing opportunities and outmaneuver their state chartered competitors at every turn. Today, large multi-state companies already enjoy many natural advantages over their smaller, more localized competitors such as sheer size, spread of risk, technical and research resources, etc. But they are at least all subject to the same explicit rating standards, procedures and supervisory controls. Equally important, under the prevailing state laws and regulations, small companies are assured of continued availability of and access to the composite statistical data, (as well as the filed rates, manuals and supporting data) of all companies, including the very large companies whose experience is needed to provide a credible basis for meaningful trend indicators. 2. The two exceptions of Subsections 204(a)(4)(A) and (B) of the Act, dealing with residual market plans and with lines of insurance where competition is for the producer's business rather than the ultimate customer's. S-1710 would permit the large insurers to escape all these require ments of the state rating laws, including the filing and review of rates and the furnishing of data. This would render the present competitive struggle far more difficult - perhaps hopeless for scores or hundreds of small companies. It might be asked: Why couldn't the smaller companies solve this problem by simply opting for federal artering themselves? If they did so opt, it would of course confirm the predictions of many observers that adoption of S-1710 will ultimately visit full-blown federal regulation upon our entire industry. There are a number of reasons, though, why the farsighted small insurer views the federal chartering "option" under S-1710 as a snare and delusion rather than a meaningful and practical option. For one thing, once the vital informational spigot of large company experience data and rate filing information has been shut off by the departure of a significant number of those companies from state rate regulatory jurisdiction, the ability of many small companies to navigate ratewise will be irreparably damaged. This will be true whether or not a small company itself opts for federal chartering. 3. Other than the two narrow exceptions noted under footnote 2. Actually, the federal chartering route will in our Association's view seriously compound the problems and perils of most small companies (and even some large companies) that choose it. Certain large company managements may feel that the prospect of unfettered pricing freedom which S-1710 seems to offer at the go-in is attractive enough to outweigh the cost burdens and uncertainties federal chartering will entail and the broad grants of vaguelydefined powers it gives to federal regulators. (As we will point out later, we believe any freedoms the Act affords any federal charterees to raise prices may turn out to be short-lived.) But for many small and medium-sized companies federal chartering would be no bargain at all, even at the go-in. Deprived of a broad base of experience and rating information including the larger companies' input, and lacking a credible volume of their own individual experience, they will be unable to price their insurance competitively and profitably they opt for federal chartering. - whether or not But if they do choose that route and thereby subject themselves fully to the federal antitrust laws, they will have added to their already severe problems the constant fear that any "parallelism" or "tracking" of the rates, rate changes and classifications of their competitors, and any cooperative action in the use of advisory rating services, however necessary and well-motivated, may invite Justice Department action or private treble damage suits or both. Nor can they afford the luxury of high-priced antitrust counsel to guide their every step, as their large competitors can. Indeed, the large insurer will have proportionately less need for such costly counseling, because it can manage pretty well in making pricing decisions on the basis of its own individual experience base and research and actuarial resources. In sum, S-1710 is an anti-small business, pro-big business measure pure and simple. It would enable a handful of very large insurers to increase drastically their present natural advantages over smaller competitors, and ultimately to squeeze them out of the market. The smaller companies could not survive price manipulation by large competitors. They could not support two regulatory systems and the costs of duplicative examinations. They could not afford the additional staff and expert counseling needed to assure that they are in constant compliance with myriads of state and federal laws and regulations. They could not afford the increased costs of the federal guaranty fund and its concomitant impairment of their capacity. They could not stand restrictive standards which will inhibit their investment flexibility. And they could not price their product soundly without benefit of jointly produced industry data including large company data, and without the historic right given them under the McCarran Act to use that data in their pricing so long as that use is regulated by the state insurance departments. Thus, many small insurers would be forced out of the property/casualty insurance scene and a major source of competition, innovation and public service would be destroyed. (3) S-1710 will deprive consumers of many vital regulatory safeguards, rights and remedies they now enjoy under state law, and will weaken overall regulatory effectiveness. As noted, the Brooke bill gives federally chartered insurers virtually complete freedom to raise or lower rates at will, as long as the broad boundary lines of the federal antitrust laws (essentially, avoidance of concerted action) and the general anti-discrimination provisions of S-1710 are not overstepped. |