Page images

PIA has consistently supported the state regulation of the business of insurance. We feel that regulation at this level is well

suited to the diversity of insurance carriers operating in this country large national insurers, regional insurers, small insurers

which serve only one or relatively few states. Furthermore, and more important, we believe that the regulation most responsive to the needs of insurance buyers is that which is closest to them, namely,

regulation at the state level.

Our association has also suported,

and continues to support, state post-assessment guaranty funds as

the means of dealing with insurer insolvencies.

In s. 1710, the "Federal Insurance Act of 1977," we are faced

with a proposal to establish a federal

chartering option as an

alternative to state supervision and a federal guaranty fund to deal

with insolvencies of both federally-chartered insurers and those

state-chartered insurers which subscribe to it.

In short, the

proposal would create a dual regulatory system for the insurance


s. 1710 is a detailed and complex bill which would bring about

profound changes in the operation of a vital segment of our economy. A thorough analysis of its provisions, and detailed comments on

them, is beyond the scope of this statement.

Our intention is to

focus on the two basic concepts, the federal chartering option and

the federal guaranty fund, rather than the many particulars of the


In his remarks upon introducing s. 1710, Senator Brooke stated that he had made certain modifications in this bill since the

earlier version was introduced in the last Congress, and that he

expected further modifications to be made as comments were received

on it.

The position of our association is that no modification can

make this bill acceptable, since its two basic concepts are them

selves not in the best interest of either the insurance industry or

the public which it serves.

In considering

this proposal, we must recognize that it also

entails another significant change in the regulation of the business

of insurance in that federally-chartered insurers would lose the

antitrust immunity granted under the McCarran-Ferguson Act.

Therefore, any discussion of s. 1710 must also include a consideration of

the effects of application of the federal antitrust laws to the

insurance industry.

For the moment, however, let us set aside this

consideration and deal with our objections to the federal charter

and federal guaranty fund proposals per se.

First, there is the matter of the cost of supporting two

separate regulatory systems.

While the bill makes it clear that

federally-chartered insurers would be exempt from state regulation

regarding the establishment and maintenance of reserves, investment practices, participation in state guaranty funds, and state regulation

of rates and risk classification (except for residual market mechanisms), such insurers would still be subject to state regulation relating to coverage forms, minimum coverage requirements, cancellation and renewal requirements and other aspects of the state's

insurance regulation which are not specifically exempted in Section 204

of the bill.

In other words, all federally-chartered insurers would

be subject to some regulation at both the state and federal level,

while state-chartered insurers would continue to be subject to all

aspects of state regulation as they are now.

This proposal would

not seem to diminish the cost of state regulation significantly,

other than perhaps through what staff reductions in examiners or

actuaries could be effected, while it would entail the additional

cost of supporting the federal regulatory system.

We have seen no estimate of what the additional cost of the

federal regulatory mechanism would be.

We can, however, point to

the fact that for the year ending December 31, 1974, the various

states spent approximately $92 million in the regulation of the

insurance industry.

It is generally conceded that many state insu

rance departments are under-funded and under-staffed to properly

perform the task of solvency regulation and that even more should

be spent.

Clearly, the cost of an additional layer of regulation

will be substantial, and it must be determined whether the benefits

justify the cost.

In the case of state regulation, the cost of the regulatory

mechanism is paid from the premium taxes levied on insurance companies. ultimately, of course, the insurance buyer bears the cost

since an allowance for taxation is built into rates.

Under the

provisions of s. 1710, the states retain their right to tax insurers,

both federally-chartered and state-chartered. The assessments paid by federally-chartered insurers to the federal guaranty fund,

according to Section 102 (c), are to be used to meet the obligations

of insolvent insurers and the expenses of the Federal Insurance

Commission in carrying out its functions.

Companies operating

under a federal charter can be expected to build an allowance for

the assessments into their rates.

Thus, policyholders of federally

chartered insurers would pay the cost of both state and federal


In addition to the cost consideration, we feel that the

federal charter option could have an adverse effect on smaller

companies, which would lead to increased concentration of the insu

rance business in the hands of the large national carriers and a

resultant lessening of competition.

The severe and well publicized

problems with rigid state regulation in some states and the prospect

of no rate regulation at the federal level would be an inducement

to seek a federal charter.

The expense savings involved in not

having to make rate filings and financial reports in all states in

which the carrier operates would be an added inducement.

It seems

inevitable that over the long term there would be a movement

towards federal chartering because of these perceived advantages, particularly among the large national carriers.

The smaller carriers, especially those which operate in only

one or a few adjoining states, would be those most likely to choose

to remain under state regulation since they are closer to the state

regulatory authorities.

Not all carriers would be able to obtain

a federal charter since they must meet not only the investment

requirements of Section 205 of the bill, but also any rules

regarding minimum amounts of capital and surplus (for stock insurers)

or guaranty fund (for other than stock insurers) which may be

promulgated by the Federal Insurance Commission under Section 202.

Clearly some insurers would be excluded from participation in the

federal regulatory scheme, most likely the smaller carriers.


companies could be placed at a competitive disadvantage in relation

to the larger, federally-chartered carriers, with the result being

an increase in the flow of business to the latter companies.

s. 1710 provides for all federally-chartered insurers to participate in the federal guaranty fund. State-chartered insurers

may elect to participate in it.

However, in the case of the latter,

if the Federal Insurance Commission is not satisfied that the

particular state's regulations provide the minimum protection

deemed essential for participation in the fund, it can, under

Section 103, require the state-chartered insurer to meet standards established by the Commission. Obviously the burden of the state guaranty funds would fall on those state-chartered insurers which do not choose, or cannot qualify, for participation in the federal guaranty fund. While it can be argued that these companies would

face a considerably reduced risk, since they would not be affected

by a major insolvency of a federally-chartered carrier, it is still possible that the insolvency of one or more state-chartered insurers

could significantly impair the financial condition of the others

and perhaps force some of them out of the market.

In his remarks upon introducing s. 1710, as well as in other

public statements, Senator Brooke pointed to the similarity of his

proposal to the dual regulatory system under which banks operate.

The implication is that what has worked well for banking should

work well for insurance too. Setting aside the significant differences between banking and insurance, we must ask: "How well has

federal regulation performed in the field of banking?"

According to

the recently released General Accounting Office study, "Federal

Supervision of State and National Banks," the results have been

mixed to say the least.

Under effective federal regulation, how

could two such massive insolvencies as U.S. National Bank and

Franklin National Bank have occurred?

We see no reason to assume

that federal regulation will automatically improve the quality of

regulation for solvency in the insurance industry.

These considerations alone would be sufficient to lead us to

view with caution the federal charter/federal guaranty fund proposal. When coupled with considerations relating to the loss of antitrust

immunity accompanying the federal charter option, we have no choice

but to oppose it.

« PreviousContinue »