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endorse the major goal of the proponents of S. 1710, which is to

protect policyholders against the great losses they stand to

suffer from insurance company insolvencies.

As you have seen,

however, we do have certain reservations about the proposal, more

of them having to do with Title II (federal chartering) than with

Title I (the guaranty program). Perhaps the proposal would be

more acceptable if the federal chartering Title were to be taken

out of the bill.

In any case,

we are grateful for the opportunity to

present our views, and while we regret that we cannot endorse

s. 1710, we appreciate Senator Brooke's remarks in the September

6 issue of the Washington Insurance Newsletter to the effect that

proposals such as this often take several years to gain acceptance

and that he is always willing to consider proposed

changes to

the bill.

We hope that some of the points in our statement will

be helpful as S. 1710 is given additional in-depth consideration.

We trust--and we feel sure the Senator would share this sentiment

--that the further passage of time might see such additional sig

nificant progress at the state level that adoption of a federal

program might even be rendered unnecessary.

The CHAIRMAN. Thank you, Mr. Douds.
Mr. Hiestand.



Mr. HIESTAND. Thank you, Mr. Chairman. I am Jean C. Hiestand. Our General Counsel, Donald P. McHugh, was to present this statement, but he had an unfortunate accident on the weekend and he asked me to express his appreciation for the opportunity to appear here and his regret at being unable to present the statement.

These hearings and the report of the Department of Justice have focused attention on two of the most fundamental issues involving the insurance industry, competition and solvency.

Particularly in the area of competition, we are hopeful this examination will lay the groundwork for prompt legislative reform.

These hearings can provide a most constructive impetus for expanded and more effective regulatory action in the solvency area.

In our presentation here, we will address both of these important issues. First, we strongly support the precept of S. 1710 that competition is the most efficient arbiter of insurance prices. We endorse the Department of Justice conclusion that State rate regulation has not served the public interest. For many years, we have been urging that the McCarran Act be amended so as to apply the Federal antitrust laws to ratemaking activities in personal lines of insurance, although we would achieve these results in a fashion different from S. 1710, avoiding the need for any Federal regulatory superstructure.

Second, in the area of solvency, we are not yet convinced that State regulation is unequal to the task, if the States undertake a more efficient, intensive, and innovative program of solvency regulation. Most particularly, if regulators are freed from the unnecessary, burdensome, and sometimes counterproductive responsibilities in the area of rate regulation, they can focus major attention on the essential end of State regulation-protecting the public from the consequences of insolvencies. Only if accelerated attention at the State level proves insufficient should the Federal Government displace the States in the area of solvency regulation.

State Farm believes the time has come to deregulate the pricing of personal lines of insurance. Rate regulation is preventing insurance companies from adequately responding to fast changing conditions. The rigidity inherent in administrative regulation of rates has not only created the problems known to all insurers as "the regulatory lag,” but has also deterred innovation in and experimentation with different forms of rating techniques. Unnecessary regulation has led to market constrictions in some States and, in certain instances, to severe financial stress on companies. More particularly, political interference with the State rate regulatory process is severely disrupting the ability of insurers to manage their businesses in accordance with the legitimate needs of the marketplace.

We agree with the thoughtful studies which have repeatedly concluded that rigorous price competition—not rate regulation-most effectively and efficiently promotes the public interest.

We amplify the following points in the ensuing section of our statement. First, structural conditions are appropriate for competition. Second, rate regulation has sanctioned cartel pricing. Third, rate regulation is not needed to prevent ruinous price cutting. Fourth, rate regulation is not needed to prevent excessive rates. Fifth, rigid rate regulation has frequently worked against the consumer and restricts insurance markets. Sixth, State experience shows that competition works.

We then present our proposal to amend the McCarran Act to deregulate and apply the Federal antitrust laws to the pricing of automobile insurance. We first proposed this program 10 years ago. We presented it to the Antitrust Monopoly Subcommittee in 1969 and we present it again today.

The essential provisions are as follows:

1. The McCarran Act should be amended so as to deregulate insurance pricing--rates, rating plans, rating territories, rating classifications, and policyholder dividends-for the personal lines of property and casualty insurance, including automobile insurance and homeowners insurance, and for very limited, related commercial lines. Deregulation would be accomplished by necessary preemption of State rating laws. Our amendment to the McCarran Act would leave intact the authority for States to regulate comprehensively the business of insurance in almost all respects, including regulation relating to solvency, licensing of companies and agents, the insurance contract, complaints, and unfair trade practices.

2. Although the Federal antitrust laws would be made to apply to rating activities for these property and casualty lines, we would exempt joint collection of loss statistics and joint collection of data relevant to the identification, prevention or reduction of losses.

3. The amendment would contain a qualification which permits State regulation and private joint action in the establishment and operation of residual market plans for these lines, with attendant antitrust immunity. Residual market plans would be prohibited from charging rates which could adversely affect the voluntary market.

4. To assist in developing shopper's guides and otherwise marking rating information readily available to consumers, States would be authorized to require the filling of insurance price information on these coverages after insurance rates have been placed into effect.

This approach is somewhat different from the approach suggested by S. 1710. and the Justice Department report. The major differences

1. Our plan would have mandatory application to all insurance companies writing covered lines of insurance. We believe that the public cannot get the full benefit of price competition if companies have the choice of either vigorously competing under the antitrust laws or remaining under State rate regulation.

2. Only personal lines of property and casualty insurance (and certain very closely related commercial lines) would now be covered by our proposal.

3. Certain limited joint activities in the gathering of statistics should be specifically allowed.


4. Our proposal deals only with insurance pricing. It would be implemented without involvement of any Federal agencies, other than those agencies which enforce the antitrust laws.

With regard to competition and insurer solvency, we believe rate regulation is not essential to solvency and withdrawal of weak companies in a competitive system need not harm the public.

We have carefully considered the proposals of S. 1710 to establish a Federal mechanism for reimbursement of consumer losses from insurer insolvency, the regulatory and supervisory authority in connection therewith, and, to a lesser extent, the prevention of insolvencies. It is our present judgment that these problems, and the mechanisms to solve them, can be handled at the State level--but only if the States undertake expanded and accelerated efforts in this area. There are tools at hand for States to improve their record. There is a heavy burden of proof on those who would displace State regulation for solvency. We have as yet seen no convincing evidence that would satisfy that burden.

We believe that if insurance departments are freed from their responsibilities in the rate regulatory area, they can direct greater efforts to preventing insolvencies and diminishing the public impact of companies which leave the marketplace. They will be better able to identify a troubled company before it becomes insolvent and either assist it in correcting its problems or help it withdraw from the market through merger, reinsurance or orderly liquidation.

We do share Senator Brooke's concern about the potential domino effect of a large insolvency. We think the fact that 16 States have enacted access to assets legislation, mentioned by previous witnesses is significant-and we support that legislation and we would hope it would be enacted in all important States thereby alleviating the possibility of a very serious domino effect should a large insolvency occur.

Further, we have presented to the committee, as we presented to the Antitrust Monopoly Subcommittee in 1969, our policyholder security account proposal, a proposal which would give to the insurance commissioner the early warning which he should have, a concept recognized in this bill, and it would assist him in preserving good assets of insurance companies so as to reduce the possibility that insolvencies might occur and to assure that whatever insolvencies might occur would have a minimum impact.

Therefore, in summary, we believe that the Congress should move to deregulate insurance pricing. The need and the public benefits are clear. As to the solvency issue, we believe there is not yet a clear demonstration of need to alter the present reliance on State regulatory officials. If States no longer need to direct their attention to rate regulation, they will be able to be more vigilant and creative in their efforts to prevent insolvencies or to reduce their impact.

Insurance rate regulation and insolvency, although related historically, are not so intertwined that they must be dealt with at the same level of government or by the same regulatory body. Only if under the new configuration, where competition is allowed to set rates, State regulators demonstrate that they are still unable to deal effectively with insolvencies, should Congress seriously consider adopting an approach to the solvency problem similar to the one suggested in S. 1710.

Thank you.

[Complete statement follows.]

99-073 0 - 78 . 37






My name is Donald P. McHugh, Vice President and General Counsel of State Farm Insurance Companies. Accompanying me here today is Jean C. Hiestand, Vice President Counsel of State Farm Insurance. State Farm

is the nation's largest automobile insurer, insuring

more than 18 million automobiles. Also, as the largest

writer of homeowners dwelling insurance, we insure more than 6 million homes. We appreciate this invitation to express our views on several critically important insurance issues raised by s. 1710.

1977 has been marked by two particularly

important developments in the regulation of insurance. The first was the release in January of the landmark report by the United States Department of Justice entitled "The Pricing and Marketing of Insurance."1/

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The second is the introduction of S. 1710 in June and

1/ "The Pricing and Marketing of Insurance," A Report of the U.S. Department of Justice to the Task Group on Antitrust Immunities, January, 1977.

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