1. Description of the Industry

The insurance business may roughly be divided into

three broad categories: (i) life insurance, (ii) health insurance, and (iii) property and casualty insurance. There are a total of approximately 5,000 insurance companies selling these various types of insurance. The property and casualty insurance industry is comprised of approximately 2,900 insurance companies selling fire, automobile, general liability, worker's compensation, inland marine, ocean marine, homeowners, fidelity, and crime insurance. In addition, some insurance underwriters also offer surety bonds. The total premium volume for the industry in 1975 amounted to slightly less than $50 billion dollars.

From many points of view, the most important person in the entire insurance transaction is the agent. The agent works with the insurance consumer to establish the necessary coverages by type and magnitude through an analysis of the consumer's economic circumstances and existing insurance portfolio (if any). The agent is also a valuable link in the claims process should the need arise. In recognition of the important role played by the agent in the insurance distribution process, the marketing mechanisms of the industry generally revolve around him. The industry has evolved several marketing systems, each of which uses agents somewhat differently. However, each system has as its goal the attainment of efficiency and the distribution and servicing of the insurance product.

In the property and casualty insurance field,

insurance underwriters either market their product through the American agency system (independent agents) or through so-called captive agents (direct writers).

Independent agents

generally represent several companies, dividing their policies among those companies in accordance with their client's choice based on consultation with the agent. An independent agent "owns his expirations," which means that, if his client so chooses, at the time the policies expire, the independent agent may place the renewal of such policies with an insurer different from the original company. On the other hand, "direct writing" companies operate through (i) the mail, (ii) salaried representatives, or (iii) exclusive agents. The compensation to direct writer salesmen may be in the form of salary or, perhaps, through commissions, based on premium volume. Unlike their independent agent counterparts, direct writer salesmen do not own the expirations and cannot place insurance with another expirat 1/

company.

1/ Another facet of the marketing mechanism of the property and casualty insurance industry is the insurance broker. Unlike the insurance agent, the broker solicits business from his clients and then places that business with insurers, While the broker is the agent of the insurance consumer, he normally receives his compensation (commissions) from the insurance companies.

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Not only are there differences between insurance

companies which use independent agents and those which are direct writers, but there are also differences among independent agencies themselves. The average independent agency is a

small competitor employing as few as six people who perform all of the operations of the agency. Other agencies are large firms which sell insurance on a national, or even an international, basis and employ hundreds of people who perform highly specialized functions, Some agents specialize in the

sale of personal lines insurance (insurance sold to individuals and households), while others specialize in the sale of commercial lines (insurance sold to commercial enterprises). Most agencies, however, operate to some degree in both markets.

No one knows for certain how many independent agencies exist in the country. The Insurance Information Institute estimates that there were about 350,000 persons engaged in the agency and brokerage field at the end of 1974, but this figure includes company agents and exclusive agency company representatives. IIAA estimates that the total number of agencies in the country is approximately 75,000 all differing in size, the types of accounts that they handle, profitability, and marketing strategy.

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Insurance agents compete primarily on the basis of

the quality of services they provide to the public. The price

of the insurance is a factor which is usually outside of the

control of the agent.

Price competition between agencies

does take place, but this price competition is based on the price competition between the companies that the agencies represent.

In addition to being a complex subject, insurance requires specific knowledge that is beyond the experience of most consumers. For that reason, the ability of a professional insurance agent to advise insurance purchasers on coverages, costs, and insurance underwriters is of tremendous value to the consumer. In addition, in the event of loss, the assistance which an independent insurance agent may render the consumer in connection with his insurance claim could be invaluable. It is for these reasons, that the glorification of the price of insurance to the virtual exclusion from consideration of the economic value to the consumer of independent insurance advice is unwise and, in a legislative context, could work positive harm on the insurance consuming public.

3. Role of the State Regulator

Insurance is currently regulated by the various states. State insurance regulators have a dual role. The public tends to think of the insurance regulator's task in terms of preventing insurers from exploiting the consumer. While this is certainly an important regulatory function, insurance regulators must also prevent the establishment of insurance rates which are so

claims.

inadequate as to impair the ability of companies to pay their 2/ In other words, regulators are also responsible for assuring the solvency of the insurance underwriters doing business within their jurisdictions. They seek to assure that the public has access to viable insurance companies which are able to provide adequate insurance services to the public. There is no question that the Act contemplates a

radical restructuring of the current property and casualty insurance regulatory scheme, Such radical changes in regulatory structure of the industry will inevitably impact the industry's market structure.

III.

Analysis of the Act and Its Implications

1. Summary of the Act

The Act would establish an independent agency entitled the Federal Insurance Commission ("Commission"). The Commission would be responsible for the administration of the Federal Insurance Guaranty program established by the Act.

Title I of

the Act would establish a fund made up of fees paid by insurance companies whose obligations are guaranteed by the Commission, With respect to the fund, the Commission would be authorized to issue Federal guarantee certificates to any insurer, whether State-chartered or Federally-chartered, which makes applications and meets the requirements of the Commission.

Under Section 103

2/ Further, insurance regulators are required to assure that insurance rates are not excessive or unfairly discriminatory.