MORE NEW POLICIES

Indeed, new policies must be written so the premiums can be used to keep the company afloat and to pay off the death claims of old policyholders. Moreover, premium rates have been boosted as much as 166 per cent to provide more income for the company.

In an interview, Judge Grimball refused to answer when asked if he would buy his life insurance from New South.

Ex-Gov. McNair, for his part, said that he would have no problem buying life insurance today from New South because "I think policyholders are fully protected."

Not everyone here in Columbia has gone along with the scheme, but most critics shy from going on the record.

Howard Clark, who was chief insurance commissioner when the state supreme court said the lien was not an asset, tried to yank New South's license. Judge Grimball, however, blocked him with an unwritten order.

Both Price Waterhouse Co., the major accounting firm, and the American Academy of Actuaries have refused to join Judge Grimball in recognizing the lien as an asset, thus confirming that New South is, in fact, insolvent.

And Joseph Nobeck, an actuary who was an expert witness in hearings against the bail-out scheme, said in a recent interview: "On the New South application form for new policies there should be printed in bold face-perhaps red ink-'You are buying this policy from an insolvent company,'

Senator BROOKE. Is the New South Life Insurance Co. a member of your association?

Mr. DILLARD. No sir.

Senator BROOKE. Has your association had occasion to look into the facts of the New South case?

Mr. DILLARD. Well, I think most of us are familiar with the facts surrounding it, and probably many of us have been offered the opportunity to help bail it out. I know I was offered that opportunity on behalf of my company, to bail it out.

Senator BROOKE. You didn't accept the offer?

Mr. DILLARD. I didn't accept the offer, no, sir.

Senator BROOKE. As I understand it, South Carolina has a life and health guaranty plan, but it doesn't appear to be of much help to the policyholders of New South, who cannot borrow against their policies or obtain their cash surrender value as they were promised in their contracts. Don't you agree?

Mr. DILLARD. Yes. The reason for that, of course, though, is the New South was insolvent before the South Carolina legislature passed the law, and made the guaranty law effective. Otherwise it would have applied.

Senator BROOKE. But the policyholders are injured though?

Mr. DILLARD. Yes. As I understand it, based on a very complex situation, they have put a policy lien against the cash values, the loan values of all of the policies, yes, sir.

Senator BROOKE. Has New South actually been declared insolvent? Mr. DILLARD. Well, the trial court arrived at a rather peculiar result in that case, and sort of boot-strapped the operation by setting up the loans on those policy reserves as an asset, at least technically restoring it to solvency by that action, which is a rather peculiar way to do it. Senator BROOKE. What would you say the status of it is?

Mr. DILLARD. It is my understanding, and I will have to say this is hearsay, or what I read in the papers, my understanding is that they are continuing to write business, and continuing to collect premiums off all of the business.

Senator BROOKE. So you presume they are solvent?

Mr. DILLARD. I don't think they are, but then that is what the result has been in South Carolina, I understand. I don't say they are solvent, no, sir.

Senator BROOKE. If you were the regulator in South Carolina, would you handle it that way?

Mr. DILLARD. No, sir.

Senator BROOKE. Well, that very well may be an example of the weakness of State regulation, isn't that right?

Mr. DILLARD. Well, that could be, yes, although my reading of that, what I know of that case, indicates to me that there is not only a matter of some weakness in regulation, but principally a matter of fraud and dishonesty, because of the manner in which the records were altered in the case.

Senator BROOKE. I don't even know that I should mention this, and it certainly has nothing to do with my reasons for developing this legislation, but there have been a number of indictments and convictions of the insurance commissioners around the country, unfortunately. It is a bad run on the insurance commissioners. I hope that won't continue, because obviously, if that continues the public's confidence in insurance regulation will be eroded.

That also is a matter of grave concern so far as the regulation of insurance companies. This is something that I am sure you are very much concerned with yourself, Mr. Dillard. I know of your very distinguished record and service.

Mr. DILLARD. Senator, I think that when you have dishonest people, you have them in the Federal Government just like you have them in the State government, and it would be just as easy to have a dishonest Federal administrator of insurance as it would a State one.

Senator BROOKE. I haven't heard of too many Federal insurance regulators or banking regulators, thank God, who have been indicted. I don't remember any, do you? Not that we have any monopoly on virtue.

But, as I have said, this will require even closer scrutiny of some of the activities of State regulators.

Mr. DILLARD. It has to be a concern, of course.

Senator BROOKE. As I say, we had a spate of indictments and convictions.

You mention your concern about the fact that S. 1710 provides for only one guaranty fund, but you recognize that the Federal Insurance Commission would be expected to establish different fees for life and health and for property and casualty companies, reflecting the difference in the type of exposure each type of company has.

I don't quite understand that concern. Could you expand upon that? Mr. DILLARD. Well, of course, our feeling is that any problem in the life field particularly is a problem that is de minimus as far as the amount of money is concerned, as compared with the property and casualty field.

In the case of these guaranty funds, State guaranty funds, there is a division between the life side and the health side, for example, because the health side has the aspects of casualty insurance. So we felt that any structure that was set up on the guaranty side should clearly

differentiate between the life and the casualty sides, or the various lines of business, because of the very difference in the amount of risk. Now the life insurance business has a great ability to resurrect itself. It can build itself back up, even when it has been stolen from or impaired, and this is not true in property and casualty insurance. The life business has that faculty, because of the type of business it is. That is the reason we think that the matter of any guaranty funds ought to take those facts into consideration in fixing a rate for the coverage. Senator BROOKE. Now are annuities covered under the present State life and health guaranty plans?

Mr. DILLARD. Yes, annuities are covered under present life and health guaranty plans in all of the States which have enacted such plans.

Senator BROOKE. Now you raise questions about investment provisions in S. 1710, and I have stated many times that I am open to any suggestions for changes.

Could you also amplify your concern and supply for the record any alternate set of investment criteria that you feel would be desirable? Mr. DILLARD. Yes, we could amplify that; yes, sir. I think maybe there was one remark in our legislative committee that was typical, when he said,

I don't believe there is a company represented around this table that can make its portfolio comply with the restrictions in S. 1710.

As you know, Senator, the State laws are very comprehensive in their scope. They are not broad in the sense that they leave it to the companies' discretion, but they are very specific, and they do cover a great scope of types of investments. And they have been developed over many years in most States through a process of legislative action, so as to protect the solvency of the companies, but at the same time permit the companies to make the proper kinds of investments without artificial restrictions on the type of investments they make.

Senator BROOKE. I would be very grateful for any alternate investment criteria you might wish to recommend.

Mr. DILLARD. We would be glad to do that, sir.

Senator BROOKE. Thank you very much, Mr. Dillard. You have been very helpful. We are certainly grateful to you.

The CHAIRMAN. Thank you, Mr. Dillard, for a very powerful and effective statement. We appreciate your testimony.

Now I am going to ask the next witnesses to come forward together as a panel, and I will call out their names.

Mr. Marvin L. Pearce, president, Professional Insurance Agents; Mr. Edward J. Kremer, chairman, Federal affairs committee, Independent Insurance Agents of America; Mr. H. James Douds, general counsel, the National Association of Life Underwriters; Mr. Jean C. Hiestand, vice president, counsel, State Farm Insurance Cos.; and Dr. Dennis Reinmuth, director of special projects, League Insurance Group.

We would like to have it arranged so each of the main witnesses will be sitting at the table with access to the microphone, and those who are accompanying them sit perhaps behind. What is your name, sir? Mr. REINMUTH. Reinmuth.

The CHAIRMAN. Perhaps you should move over to a microphone. Gentlemen, I am going to ask the clerk to turn the time-light on here, because we would appreciate it if you make each statement about 10 minutes. You don't have to feel your throat is cut when the red light goes on, but we would appreciate it if you would terminate as soon as that happens. When the green light is on, it means you are all set. When it turns yellow, you have 1 minute left. The green is on 9 minutes, the yellow on 1 minute, and red means we hope you will be able to conclude as soon as possible.

Our first witness is Mr. Marvin L. Pearce, of the Professional Insurance Agents.

Mr. Pearce.

STATEMENT OF MARVIN L. PEARCE, PRESIDENT, PROFESSIONAL INSURANCE AGENTS, ACCOMPANIED BY EDWARD O'ROURKE, STATE LEGISLATION AND REGULATION COMMITTEE, PIA

Mr. PEARCE. Mr. Chairman, my name is Marvin L. Pearce, of Fremont, Ohio. I have owned and operated an insurance agency in partnership with my brother since 1946. I am also president of the Professional Insurance Agents, formerly the National Association of Mutual Insurance Agents. PIA is a national association of 30,000 property and casualty insurance agents from all 50 States, Puerto Rico, and the Virgin Islands, with headquarters in Washington, D.C.

With me today is Edward H. O'Rourke, an agent from Louisville, Ky., and a member of PIA's State legislation and regulation committee. He is also a member of the board of directors of the Kentucky Insurance Guaranty Association and is appearing with me today because of his firsthand knowledge of the regulation of insurers for solvency in his State.

Mr. Chairman, I would like to summarize as briefly as possible my prepared statement, but I would respectfully request my entire statement be put in the record.

The CHAIRMAN. All statements will be printed in full in the record. Mr. PEARCE. In addition, Mr. O'Rourke has brought a memorandum. to Senator Proxmire and the committee from Insurance Commissioner Harold B. McDuffy, Commonwealth of Kentucky, president-elect of the National Association of Insurance Commissioners, and we would like to have this entered into the record also.

The CHAIRMAN. Without objection, it will be printed in the record. [Mr. Pearce's prepared statement and the memorandum referred to follow:]

STATEMENT BY

MARVIN L. PEARCE, CPCU, CIC, CLU, PRESIDENT

OF THE

PROFESSIONAL INSURANCE AGENTS

ON S. 1710

THE FEDERAL INSURANCE ACT OF 1977

SUBMITTED TO

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

UNITED STATES SENATE

SEPTEMBER 14, 1977

Mr. Chairman, my name is Marvin L. Pearce of Fremont, Ohio. I have owned and operated an insurance agency in partnership with my brother since 1946. I am also President of the Professional Insurance Agents (PIA), formerly the National Association of Mutual Insurance Agents (NAMIA). PIA is a national association of 30,000 property and casualty insurance agents from all 50 states, Puerto Rico and the Virgin Islands, and with headquarters in Washington, D.C.

With me today is Edward H. O'Rourke, an agent from

Louisville, Kentucky, and a member of PIA's State Legislation and Regulation Committee. He is also a member of the Board of Directors of the Kentucky Insurance Guaranty Association and is appearing with me today because of his first-hand knowledge of the regulation of insurers for solvency in his state.