the decision of this Committee to probe in public hearings the important questions raised by this bill. These developments 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 that this examination will lay the groundwork for prompt legislative reform. Likewise, 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 rate-making 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 super-structure. 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. I. COMPETITION 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. The conclusions of Department of Justice study in particular bear quoting at length: "The Department observed that over the past ten years there have inadequacies of state rate regulation. "In addition, the evidence compiled by the Department on the effects of rigid rate regulation in automobile ir:surance indicates that such regulation has fostered greater adherence to bureau rates, discouraged rate reductions, contributed to instability in insurance company operations, established various forms of cross-subsidization between good and bad drivers, imposed unnecessary restrictions on the collective merchandising and the direct writing of insurance, and aggravated the availability problem in which marginal or high risk drivers have difficulty obtaining coverage in the open market at the prevailing rates. "On the other hand, the long-run experience of at least one major insurance state under an open competition system, in which the state has relied on market forces to control prices, suggests that unrestricted price competition can provide an effective substitute for rate regulation as a means of achieving reasonable prices and maximum efficiency in the sale and distribution of insurance. A comparison of the experience of the same insurers under certain open competition and prior approval systems suggests that competition fosters independent pricing, operating stability, and flexibility in the pricing structure. The relatively favorable performance of the insurance companies under the highly competitive system suggests that it provides a more effective mechanism for accomplishing the basic insurance goals of providing a reliable insurance mechanism and generally available coverage at a price reasonably related 1. Structural Conditions Are Appropriate Today, reliance upon the interplay of natural economic forces in a competitive market is, in our judgment, fully appropriate to insurance particularly with respect to personal lines of fire and casualty coverages such as automobile and homeowners insurance.3/ In these lines there are literally hundreds of companies vigorously competing for business, selling essentially similar products, with low levels of concentration relative to other industries, ease of entry, no significant economies of scale and no technological or other significant barriers to entering this business. Under traditional economic criteria, an industry with these characteristics would be highly competitive and would perform with high efficiency at reasonable price levels closely related to costs. There is no valid reason, we believe, not to apply to these lines of insurance the same rules of 2/ Justice Department Report at pp. v-vii. 3/ See Joskow, "Cartels, Competition and Regulation In the Property-Liability Insurance Industry," The Bell Journal of Economics and Management, Autumn 1973. |