Statement of

The National Association of Life Underwriters

Mr. Chairman, members of the Committee, my name is

H. James Douds, and I am General Counsel of The National Association of Life Underwriters, which is now made up of 132,000 life and health insurance agents, general agents and managers doing business in virtually all of the communities in all of the fifty states of the Country. The members of NALU would naturally be individually affected by the enactment of a measure like S. 1710, but I think it will interest you to know that these life and health insurance field people represent 971 of the presently state-regulated life insurance companies that would be even more directly affected by the bill.

As we understand it, S. 1710 would provide a federal chartering alternative for insurance companies and establish a Federal Insurance Guaranty Fund to protect insurance company policyholders. Insurers, whether or not federally chartered, would

be eligible to participate in the guaranty fund, and federally chartered insurers would be required to participate. Insurers, under the bill, could elect to become federally chartered, in which case they would obtain certain immunities from state insurance regulation and taxation; or they could opt to continue under the present system of state regulation, and, even so, they

could still become federally guaranteed (although not federally chartered) by meeting the financial and other requirements prescribed by a Federal Insurance Commission which is also to be created by the enactment of S. 1710.

S. 1710, as we understand from Senator Brooke's remarks

when the bill was introduced earlier this year, is a refinement of

S. 3884, which was in turn introduced "as a working document" as the 94th Congress adjourned. Neither bill, we take it, is to be

taken as definitive, as the Senator has stated that "No doubt this

legislation will be further modified as comments are received on the version of the bill (S. 1710] which I introduce today."

We are grateful that S. 1710 is not to be considered

as being in final form, because, as it now stands, the bill contains certain provisions and carries other clear inferences which make it impossible for us to support it. As an overall observation, we look upon S. 1710 as a federal attempt to solve what we regard as a state problem, and thus we seriously doubt whether S. 1710 can be amended in such a way as to enable us to endorse it. At the same time, however, we appreciate the opportunity

to appear before your Committee in the matter, and we do want to be as constructive and helpful as possible under the circumstances. Therefore, we would like to enumerate some of the criticism we have of S. 1710, for whatever value this might have in determining whether S. 1710 can be appropriately amended so as to garner the

support of some of us who, sympathetic as we are with Senator Brooke's concern over the consequences of insurance company insolvencies, do not feel that federal chartering of insurance companies in the manner proposed by the bill is the way to meet the problem. First, the argument we have already alluded to: insurance

is an industry--and one of the last, we might say--which has heretofore, with the blessing of the Congress, managed to elude federal regulation. If guarantees against the insolvencies of insurance companies are needed, they should be awarded under the hand of the states, not the federal government. There is ample evidence that

substantial progress is being made toward this end, in that, as the testimony of the National Association of Insurance Commissioners has so clearly shown, the number of operative state guaranty funds is impressive and growing. At the same time, as Senator Brooke himself said in introducing S. 1710 in June, the outlook from a financial solvency viewpoint has improved since the dark days of a potential GEICO insolvency a year before. (It must be remembered, too, that while the idea for the original federal chartering proposal grew out of concern in the GEICO matter, that same potential financial disaster was averted, not by any federal action or device, but by the ingenuity of the very state regulation that S. 1710 seeks in so many ways to supplant).

Second, and more pertinent from the NALU point of view,

we understand that nothing in S. 1710 is intended to affect the

:

qualification, licensing or general activities of insurance agents. State regulation of these facets of the business is to be left in place. If so, certain aspects of the bill should be made clear in this regard. For example, Section 101 (b) (7) would give the Federal Insurance Commission the power "to require information and reports from all federally guaranteed insurers or applicants for a guaranty or charter, their managers and agents" (emphasis added). "Managers and agents", in the lexicon of the insurance business, are actually the field sales people NALU represents, whereas in the more usual legal usage the terms refer to corporate representatives generally. Perhaps the inclusion of clarifying language in the Definitions section of the bill would be appropriate to clarify this point, if in fact field sales people are not to be generally affected by the bill. Similar clarification should also be made in Section 108 of the bill, which gives the Commission supervisory authority over the "agents" of federally guaranteed insurers. If agents are indeed to be broadly affected by S. 1710, then we would also oppose the bill on that ground.

Thirdly, and even more disturbing, is the section of the bill--Section 101 (b) (10) --giving the Commission the power to prescribe "such rules and regulations as it may deem necessary to carry out the provisions of this Act." This is a power which, in our opinion, would almost as a guaranteed certainty be the subject of bitter dispute as time went on. We say this because, on the

one hand, S. 1710 is supposed to set up a cooperative dual regulatory venture between state and federal governments under which large parts of the industry are to be left unaffected under the new scheme of things; yet at the same time the Federal Insurance Commission is to be charged with doing all that it can to assess the solvency and managerial quality of insurers, to prevent insolvencies, and to rehabilitate ailing insurers. In trying to do this, the Commission really could not do its job properly unless it were to infringe on almost all of the territory now within the regulatory domain of the states, certainly with respect not only to federally chartered insurers, but federally guaranteed insurers as well, not to mention applicant-insurers for one or the other category. Once again, this regulatory power is one which would have to be circumscribed very, very carefully, and one could seriously question whether such a legislative drafting job could be satisfactorily

accomplished.

Fourth, Section 202 (e) (8)--page 53--of the bill

provides that, with the approval of the Federal Insurance Commission, federally chartered insurers shall have the power "to conduct any other business which is complementary or incidental to the insurance business or the functions performed therein."

No one knows better than the members of your Committee, Mr. Chairman, the unfortunate consequences that can flow from this kind of broadly permissive legislative language: misunderstanding, misinterpretation, overreaching, and litigation, to name just some.