PIA has consistently supported the state regulation of the business of insurance. 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 industry. 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 legislation. 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 themselves 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 insurance 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 federallychartered insurers would pay the cost of both state and federal regulation. 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 insurance 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 It seems having to make rate filings and financial reports in all states in which the carrier operates would be an added inducement. 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. These 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 regulation for solvency in the insurance industry. quality of 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. |