Sec. 205(d)(8) says for the purposes of the limitations contained

in Subsection (d) the "property and securities enumerated in Subsection (c) shall be valued at market value or at cost, less depreciation," but

does not indicate whether there are any restrictions on the election

Sec. 106(b) would extend Federal bankruptcy law to insurer insolvencies. It would make Chapter X of the Bankruptcy Act applicable to rehabilitation or liquidation of a Federally guaranteed insurer. Heretofore, insurers have been exempt from application of the Federal Bankruptcy Act, an exception which would continue under the bills presently pending before Congress. That exemption has been retained because of the detailed state system of rehabilitation and liquidation laws. The possibly conflicting and overlapping or duplicative provisions could result in delays and confusion unless careful structuring of the provisions of applicable federal law is accomplished. For example, while Sec. 106(b) gives priority to claims of policyholders, thus avoiding the "fair and equitable" (absolute priority) operation of a Chapter X proceeding, a question does arise with respect to priority of claims of beneficiaries, assignees and third-party claimants. A better approach would be to follow state laws which give a receiver broad and general powers

without imposing the precise substantive and legal strictures of Chapter X.

Sec. 201(g) applies the provisions of the Business Corporation

Law of the District of Columbia to Federally chartered insurers. This law needs very careful study before its acceptability can be determined. The enumeration of powers would not likely be suitable for a life or health insurance company, nor can provisions required for mutual companies be found. This section also raises the question of whether the District's Business Corporation Law, which is subject to future changes by the City Council, is appropriate for regulating corporations domiciled in other sections of the country and operating nationwide.

We are concerned that under Sec. 101(d)(1), which establishes

an advisory Committee to "review the procedures, practices, and policies of the Commission," only four votes out of 13 can be spokesmen for the insurance business. The four insurance business representa tives would include representatives not only of our members but also of property and casualty insurers and of all lines of reinsurers.

Conclusion

The American Council of Life Insurance and the Health Insurance

Association of America share many of the concerns that led Senator Brooke

to develop S. 1710. However, we must respectfully oppose its enactment,

and we hope that consideration will be given to the reasons that led us

to this conclusion.

The CHAIRMAN [presiding]. Thank you very much, Mr. Dillard, for a strong incisive and clear statement. At least we know where you stand.

The question that occurs to me first is you say that you represent the life and health insurers in the country, your organization has 92 percent, as I understand it, of the life insurance in force and the health insurance in force.

What action did you take to ascertain the opinion of your constituent members? Was there a convention, was there a poll of any kind, was there any kind of determination that documents your assertion that the industry opposes this?

Mr. DILLARD. Senator, we have an elaborate committee structure that handles such matters. Our legislative committee deals principally with matters of this kind. And where it is a specialized kind of legislation, as this is, the legislative committee of the council sets up a task force. It happened that I chaired this task force, and on the task force were the representatives of the largest of the life companies, and some of the small life companies, as well as several from the health industry, a very representative task force of about 18.

With a lot of preliminary work by the staff, we spent a day reviewing the legislation and coming to the adoption of a resolution.

This resolution then was presented to our Legislative Committee, which again is a very large representative committee.

The CHAIRMAN. How large is that committee?

Mr. DILLARD. It has 17 members. The HIAA is Government Relations Committee, which has 20 members, used the same process, although the task forces met together.

Then after that was done, our Board of Directors, which has 30 representatives elected by the membership, spent a day reviewing it, as I understand, at their meeting in the first part of September, and the whole process resulted in the position we have taken here today.

The CHAIRMAN. Was there dissent? Was this a consensus view, or a unanimous view?

Mr. DILLARD. I believe that we did not have a single dissent in the task force or the Legislative Committee. The Board approved the motion unanimously.

The CHAIRMAN. One of the problems that troubles me about this situation-Senator Brooke has indicated that he is concerned about the underwriting losses suffered by property-casualty insurance companies and the ability of the State guaranty funds to handle potential insolvencies of this type.

Of course, we have to be concerned about the losses in your area, too. I wonder if you could indicate the position you are put in if we have a serious inflation? As I understand it, the life and health people, particularly the life people, would be more vulnerable, perhaps, to a serious inflation than to almost any other kind of development, including a depression.

I wonder if thought has been given to the adequacy of the State funds to weather that kind of say double-digit inflation for a number of years?

Mr. DILLARD. Senator, I think really inflation impacts us differently and much less than it does the property and casualty business, because

it is obvious that as you go along, for example, in the automobile business, the cost of repairing fenders and putting new parts on automobiles has been tending to go up very drastically.

Particularly in the life business, your dollars are fixed dollars, a $1,000 policy now is $1,000 when the man is dead, and there is no difficulty usually about determining that.

Now there is some impact, obviously, on the health side, particularly in the group health. But most of us have gone to the proposition of holding our rate guarantees to less than a year's time.

I know in my own company, we don't guarantee the group rates for more than 6 months, except for a very substantial added premium. Then, too, these are on an annual basis, so the companies are able to adjust rates so as to take care of the rising health costs.

I will say we have been very concerned about rising health costs. But we think we are in a much better position to handle the inflationary spiral than the property and casualty business.

The CHAIRMAN. That puzzles me somewhat because my conversations with life insurance people in my State have indicated their deep concern with inflation, and what they say would be a devastating effect of continued high inflation.

They point to the fact that their investment income and premium income is fixed for long periods, and adjusting is difficult.

Let me ask you this: You oppose the bill, and yet you say only 22 States, as I understand it, have adopted their own life and health insurance guaranty laws.

Can you give us an estimate of what percent of policyholders are left unprotected by any State guaranty law covering these lines of insurance?

Mr. DILLARD. I am sorry, I cannot give you that estimate. I will say this, as far as the number of State laws are concerned, our problems of solvency in the life business have been really very, very minor. I happen to be chairman of the Texas Guaranty Association, and our problems there just have been minuscule. They are just so small they are hardly consequential. We ran one very small assessment, and haven't even paid out all of the money on that assessment as a matter of fact.

The CHAIRMAN. Let me see if I understand the significance of this If 22 States, only 22 States have adopted their own life and health insurance guaranty laws, does that mean in the other 28 States, the majority of the States, that there is no State protection, no legal protection in the event of default by an insurance company, life insurance company, or health insurance company?

Mr. DILLARD. No. You see, contrary to the property and casualty Guaranty Association bills, the life bills provide protection for policyholders wherever situated.

This means that for a company domiciled in a State with a life insurer guaranty plan, the protection in the event of an insolvency extends to all of the company's policyholders, even those residing in States without life guaranty plans. This is important in view of the fact that there are some States that have very few or perhaps no domiciled life insurance companies.

Further, as I stated earlier, such guaranty plans are in effect in some of the most populous States, which, incidentally, are also the States in which a majority of life insurers are domiciled.

Most of our life companies do business widely in the United States. Therefore, the protection afforded by these existing life guaranty plans is much broader and much more comprehensive than it would be if, as with the property/casualty plans, such protection were just confined to the residents of a particular enacting State.

So the truth of the matter is the protection is much broader and much more comprehensive in the life side, because if a company is doing business in a particular State that doesn't have a guaranty bill, guaranty association law, they still, if they are insolvent, they still have to protect all of the policyholders in that State under the law.

So that the coverage, you see, is much broader than it would be if it were just confined to the residents of a particular State. Because most of our life companies do business widely in the United States.

The CHAIRMAN. My time is up. I just have one other question.
You say that the proposals in S. 1710 could:

Damage the intricately woven network of State insurance regulation, lead to the loss of its diversity, and facility for innovation and experimentation.

But the intent of the Brooke bill is to create a dual insurance system similar to the dual banking system, and to use the Federal alternative to inspire better regulation at the State level.

There is no evidence that the dual banking system has stifled State innovation. To the contrary, many of the most innovative developments in banking recently, such as the NOW accounts, have been developed at the State level, in spite of the fact we have a very comprehensive Federal regulation.

What evidence do you have to suggest that Federal involvement would damage and not improve the quality of State insurance regulation?

Mr. DILLARD. Well, I suppose that is really a subjective judgment. But it seems to me that there is such a vast difference between regulating banks that operate in one State and in many places operate only in one location-as in our State, we do not permit branch banking-that the opportunity for development of regulatory ideas, when spread across 50 jurisdictions, is much greater than when concentrated in one Federal agency.

As I say, I cannot come forward with any facts or figures, and I guess it is subjective judgment.

The CHAIRMAN. Well, of course the idea behind S. 1710 is not to concentrate regulation at the Federal level at all. The idea is that the State regulation would continue, and you would have a dual system, and you would simply have an additional option for insurance companies, if they volunteered to do so, to joining the Federal system. There is nothing mandated, and it is with the understanding that the 50 States would continue their regulation.

Mr. DILLARD. This, of course, poses other problems, too, where there is duplication and no elimination of the duplication of regulation. Particularly in such matters as policy approval, and that sort of thing.