go far in requiring objective, justifiable, and non-discriminatory bases for the provision, classification, and rating of insurance by federally-chartered insurers, thereby requiring that the effects of competition be fair in relation to the consumer as well as in relation to other competitors. Unfortunately, the language of subsection 107 (c) does not go quite far enough in this regard, makes the mistake of paralleling state provisions that rely primarily on "laundry lists" of characteristics, and places too much reliance on correlation, which does not necessarily describe causation, as the basis for empirical justification of the use of given criteria. Basically, the motivation for any anti-discrimination provision is to prevent reliance on arbitrary, subjective, and unjustifiable criteria as bases for refusals to insure and in developing rates and rating classifications. Discrimination on such bases could be prohibited without specific mention of any of the types of criteria involved; however, society has properly seen fit to prohibit use of certain criteria, c.g., race and sex, even though data can be produced that objectively demonstrate at least a correlation between those criteria and insurance loss exposure. To implement the desired objectives of prohibiting unfair discrimination and promoting a fair competitive system to a maximum degree, we would recommend substitution of the following for subsection 107 (c) of S.1710: Sec. 107. (c) It shall be unlawful for any federally-quaranteed insurer to .(1) refuse to insure or continue to insure, or limit the amount of coverage available to, an individual or risk on the basis of age, sex, race, marital status, national origin, or any characteristic that does not bear a statistically significant, reliable, and objective relationship to the extent of the risk or the coverage issued or to be issued; or (2) classify, or charge a rate or premium, unless the clas- Open Competition Ratemaking By virtue of the provision of secs. 109 (c), 203 (a) (4), and 204 (a) (4), subject to minor exceptions stated in the latter, federally-chartered insurers are exempted from state rate regulation and are subjected to the applicability of federal antitrust laws. Provision is not made for rate regulation of any kind by the federal regulator. Subject to the qualifications stated above concerning antidiscrimination provisions and those following, this can lead to a satisfactory and adequate system of benefit to the insurance Some of the specific provisions of the bill could be improved, however, to effect more appropriately the intent of the bill. consumer. Indirect rate control. Compliance by federally-chartered insurers with state laws regarding policy forms is specifically required by sec. 203 (a) (4). Even though that requirement is coupled with an exception as to "laws relating to rates or premiums," the opportunity for state control over rates indirectly through regulation of forms and benefits is significant and ought to be foreclosed. Currently, perhaps the most pervasive example of indirect rate control is found in relation to disability insurance generally and credit life and disability coverages specifically. Benefits under these coverages are generally required to be reasonable in relation to premiums charged; rates, per se, are not subject to approval by the state. This has led to forms of "loss ratio regulation" in relation to individual disability coverages and "benchmark loss ratios" and "prima facie rates" for credit life and disability coverages. It is, at best, questionable whether these forms of indirect rate regulation would be precluded by the exception to the requirement of sec. 203 (a) (4), and it is safe to predict that similar forms of regulation would be made applicable to other coverages to the extent that the 203(a) (4) exception proved inadequate. It is appropriate, in delineating the federal/state regulatory interrelationship, to continue state authority to require the mandatory offer of certain coverages (e.g., no-fault automobile insurance) and to require or prohibit certain provisions in relation to specific types of coverages (e.g., some life insurance mandatory policy provisions, prohibition of contractual cross-references to charter or bylaws requirements, etc.) It is questionable if it is necessary for that purpose to allow state retention of the power to approve policy forms, especially when approval is contingent upon benefits being reasonable in relation to premiums, given that that power can be used directly or indirectly to control rates. (Similarly, policy provisions required by the life insurance "nonforfeiture laws" mandate the use of certain mortality tables and interest assumptions, with a direct effect on reserve requirements contrary to sec. 204 (a) (1) and an indirect effect on premiums charged.) We suggest the following revision of the language of sec. 203 (a) (4) (which has the added advantage of further promotion of competition within the business of insurance) and a specific exemption from state contractual form approval requirements under sec. 204(a): Sec. 203. (a)... (4) that the contracts of insurance or suretyship it proposes to use are in compliance with the provision of this Act and, with the exception of (A) laws or regulations relating directly or indirectly to rates, premiums, or reserves and (B) laws or regulations that the Commission shall by rule determine to impose an unnecessary or inappropriate burden on competition in view of the purposes of this Act, that such contracts are in compliance with any applicable laws or regulation of the State or States in which the contracts are issued or proposed to be issued. Sec. 204. (a)... or.... (x) which require the approval of insurance policies; Alternative rate regulation. Sec. 204 (a) (4), in exempting federallychartered insurers from state rate regulation, provides for the retention of state authority over rates related to residual market mechanisms and those related to "any line of insurance (other than reinsurance) in which the Commission determines that the insurer completes principally for the producers' business rather than the business of the ultimate consumer. The meaning of the quoted phrase is, at best, uncertain, especially in the absence of any definition of "producers". Presumably, the exception is directed at situations in which so-called "reverse competition" results in choice of the highest-rate coverage, the classic example being in the field of credit life and disability insurance. Any exception directed at the classic "reverse competition" situation should be more clearly drawn. Even more important, however, it should be recognized that, first, retention of state rate authority in that specific area is undesirable in view of the purposes of the act and, second, rate competition in other situations often works to the disadvantage of the insurance consumer. First, the classic response of state regulation to "reverse competition" in credit insurance has been a system of rigid and inflexible, "bench-mark loss ratios" and "prima facie rates". Invariably, the imposition of these requirements has led to the evolution of increasingly complicated and inflexible measures designed to close the loopholes inevitably found by those who would evade the purposes of the regulation. (See, e.g., Calif. Admin. Code S$2248.1 2248.25; Calif. Ins. Dept. Bulls. 73-8, 73-9, 73-10, 73-11.) The ultimate result of these developments, which have only arguably provided any meaningful long-term consumer protection, has been to prevent competition as to forms of coverage provided by insurers which wish to comply with the intent and letter of the law and to delay or preclude introduction of new administrative systems of benefit to the consumer that do not "fit" into the inflexibly prescribed molds (e.g., outstanding-balance premium payments in licu of single premiums). In addition, inertia and the effects of political pressure have often resulted in the imposition of demonstrably inadequate rates for credit insurance, creating significant potential for insurer insolvency and/or constriction of the market for those coverages. Both the anti-competitive effects of traditional regulatory systems and the potential for adverse effect upon the financial stability of federally-chartered insurers are contrary to the purposes of S.1710 and, therefore, argue strongly against the inclusion of the exception found in subpart (B) of sec. 204 (a) (4). Beyond the classic "reverse competition" situation, there are other segments of the business of insurance in which competition may not, in fact probably will not, work as an effective regulator of rates, even with full compliance with the antitrust laws, and to which the exceptions of sec. 204 (a) (4) will not apply. Potentially the most serious of these, in terms of adverse effect upon the insurance consumer and upon satisfactory operation of the insurance mechanism, exists within the field of personal lines property and liability insurance. Within this area, and unique within the context of business conduct generally, the personal lines property and liability insurer, as seller, picks and chooses among those to whom sales are made, often traditionally on subjective, arbitrary, and unjustifiable bases. Experience has proven that when rates for these lines are not subject to regulatory control, i.e. when open competition rating is introduced without more, rate "competition" quickly evolves into pricing an unwanted segment out of the voluntary market with consequent enlargement of the involuntary or "residual" market. Even in relation to the "desired" segment of the market, "competition" among insurers more often than not leads to ever-increasing complexity of rating classification systems and fragmentation of the market, making it virtually impossible for any insurance consumer to be adequately informed about available choices within the marketplace. Although a broad antidiscrimination provision, as previously suggested, will go far in limiting the adverse consequences of such forms of competition, that is not of itself sufficient for this purpose, and it is not a satisfactory means for providing for uncontemplated and unforseeable adverse effects of competition within specific segments of the business of insurance. Even the carefullyconsidered and highly-sophisticated proposal of the Michigan Insurance Bureau, "The Essential Insurance Act of 1977", recognizes the potential for difficulty within a truly competitive rating system and the necessity for imposition of alternative systems on a flexible basis. 99-073 0 - 78 - 42 Finally, within a system of fully competitive insurance pricing and even in the absence of "cut-throat" competition (which could be dealt with under the antitrust laws), an insurer could become so over-zealously competitive as to endanger its financial stability. In any such instance, the federal regulator, by virtue of its guarantee responsibilities, must itself have flexibility in resolving the deficiency, including the authority to remove the insurer's ratemaking from the fully competitive arena. For all of the above reasons and due to the potential variability of situations in relation to which competition may not work as an effective regulator, as well as the potential variability, quantitative and qualitative, if the alternative established is recourse to state systems of rate regulation, we recommend that the federal regulator be given power to impose alternative methods of rate regulation when competition proves to be ineffective, on the basis of amendment of subsection 204 (a) (4) and the addition of a new section, to read as follows: Sec. 204. (a) A federally-chartered insurer shall be exempt (4) which provide for the regulation or fixing of rates or premiums or of classes of risks established by insurers operating in that State, except regulation of any assigned risk plan or other residual market mechanism established under State law. Sec. 20x. (a) The Commission may, subject to the requirements (1) competition is not an effective regulator of the rates or premiums or classes of risks established; or (2) a majority of federally-chartered insurers engaged in providing such type or types of insurance, or of federallychartered insurers providing a substantial proportion of such type or types of insurance, are competing in an irresponsible manner detrimental to the maintenance of a stable market for such insurance; or (3) there are widespread violations of this Act or of the Federal antitrust laws as specified in section 109 (c); or |