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Independent Insurance Agents of America, Inc., letter to Senator Proxmire

from Edward J. Kremer, chairman, Federal Affairs Committee
International Co-operative Insurance Federation, report of the Commission

on Inflation and Insurance
Kentucky Department of Insurance, memorandum to Senator Proxmire

from Harold B. McGuffrey, commissioner of insurance -
Kentucky Insurance Guaranty Association, statement of Edward H.

O'Rourke, member of board of directors..--
League Insurance Group:

Letter to Senator Proxmire from Dennis F. Reinmuth, director of

special projects...
Letters and memorandums from Jack E. Birkinsha, secretary and

general counsel, to Senator Brooke---

Suggested revisions for S. 1710...

Legal and General Insurance Company (United Kingdom), indexed family

income plan.

Life Insurers Conference, comments on S. 1710.-

Massachusetts Insurance Commission, subsequent answer to written ques-

tion of Senator Brooke from James M. Stone -

Massachusetts Mutual Life Insurance Co., statement received for the


National Association of Insurance Commissioners:

Answers to subsequent written questions of Senator Proxmire..

Reprint of the McKinsey study of the early warning system and

explanatory materials --

National Association of Mutual Insurance Cos., statement received for the


New England Mutual Life Insurance Co., statement of Edward E. Phillips,


New York Life Insurance Co., letter from R. Manning Brown, Jr., chair-

man of the board...
Securities and Exchange Commission:

Letter from Chairman Williams to Senator Brooke, enclosing litiga-

tion release and complaint against Sierra Life Insurance Co--
Responses to questions raised at hearing contained in letter of Novem-

ber 18, 1977, from Chairman Williams..

State Farm Insurance Cos. of Bloomington,, II., attachments to state-

ment of Donald P. McHugh, vice president and general counsel:

Draft-McCarran act amendments.

Model policyholder security account statute-

Section-by-section analysis.

Washington Post, reprint of article titled “How an Insolvent Firm Keeps
Selling Insurance''

Average annual inflation rates 1965–70 and 1970–74 in percent.
Average delay of settlement..
Breakdown of the expenditure incurred by nonlife insurance companies
Comparison of estimated Federal guarantee fund accumulation versus

actual State guarantee fund experience...

Current investment practices, selected countries, 1975.

Distribution of inflation rates for 16 countries.-

Indices relevant to automobile repair costs.

Industry profitability all lines countrywide property and liability insurance-

Percentages increases in Consumer Price Index.

Stock market indices.

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Washington, D.C. The committee met at 9:40 a.m., in room 5302, Dirksen Senate Office Building, Senator William Proxmire, chairman of the committee, presiding.

Present: Senators Proxmire, Sparkman, Brooke, and Lugar.




The CHAIRMAN. The committee will come to order.
The committee today begins 3 days of hearings on S. 1710,

the Federal Insurance Act of 1977.

In the past couple of years there has been increasing concern about the financial condition of insurance companies. The GEICO situation received a great deal of press attention and caused much anxiety to policyholders. It raised considerable doubts about the ability of the present system to cope with a major insurance insolvency.

The bill before us today seeks to bolster the financial stability of the property casualty insurance industry by offering on a voluntary basis a Federal alternative to the present system of State regulation of insurance companies.

S. 1710 would, in effect, create a dual insurance system similar to the dual banking system which has long existed in this country.

We do this in the following ways. First, by establishing a Federal insurance guarantee program similar to the Federal Deposit Insurance Corporation for financial institutions as an alternative to the present network of State guarantee funds; and, second, by providing a Federal chartering alternative for insurance companies similar to that which is available to banks and savings and loan associations under the dual banking system.

I am reluctant at this point to take yet another step toward involving th Federal Government in private business and toward encouraging more bureaucracy and more red tape. The burden of proof in this case must rest with those that argue that more Federal intervention in the insurance industry is needed. They will have to make a strong case that the problems arising in interstate insurance transactions threaten the interest of policyholders and the public generally, and that State legislation alone cannot deal with these problems.


I'm sure that points will be made on both sides of the issue in the course of these hearings. Senator Brooke is the author of S. 1710. He and his staff have done an excellent job of drafting the legislation and arranging this initial set of hearings to air the basic questions.

Senator Brooke, I understand you have an opening statement.


Senator BROOKE. Thank you, Mr. Chairman.

Mr. Chairman, on June 16 of this year I introduced S. 1710, titled The Federal Insurance Act of 1977. This bill is a revised version of S. 3884 whieh I introduced at the end of the 94th Congress. The bill grew out of my concern about the financial condition of the property casualty insurance business.

In 1974 and 1975 property casualty companies experienced the 2 worst years in their history with combined underwriting losses totaling $7 billion for the 2 years, and there was a considerable concern at that time that one or more major insurance companies would be declared insolvent.

A year ago newspaper headlines were speculating on the possibility of the failure of the Government Employees Insurance Co., GEICO, and the effect of such a failure on the policyholders of that company. The New York Times on June 11 of last year reported that there was a consensus that the already strained guarantee fund pools could not handle the intense claim activity of a GEICO portfolio.

The weakened financial condition of the property casualty industry and the possibility of a major company failure prompted me to consider what steps might be taken to insure protection for policyholders and to improve the quality of regulation for solvency.

Since last year the outlook for the property casualty insurance industry has improved. According to Best's Review, in 1976 underwriting losses totaled $2.2 billion. While preliminary first quarter figures for 1977 indicate underwriting losses in the range of $184 million, it is expected that second quarter figures will show a turnaround in underwriting results. Also, the GEICO situation appears to have turned around. But the mere fact that the $2.2 billion in underwriting losses can be regarded as an improvement shows how deeply troubled the property casualty industry has been.

Of course, I hope that the worst is over and that the industry will make a strong recovery, but the trauma of the last few years has brought home to me the need to improve the protection available to insurance policyholders before the next brush with disaster.

On May 25 the Washington Post carried a story entitled, “How an Insolvent Firm Keeps Selling Insurance." According to that article, as of last May, the approximately 175,000 policyholders of New South Life Insurance Co. of Columbia, S.C., were unable to exercise their rights to obtain the cash surrender value of their policies or to borrow against their policies because since 1971 New South had been insolvent and policyholders' funds are being used, interest free, to bail out the company and its owners. Yet New South salemen are still selling policies to unsuspecting buyers who apparently are unaware of the company's financial condition. According to the Washington Post, about


90 percent of New South policyholders are poor blacks living in rural parts of South Carolina.

I hope that the New South case is atypical, but I think it points to the abuses which can arise under our current scheme of solvency regulation.

Presently, the policyholders obligations of insurance companies are protected by a system of State insurance guarantee funds which was set up in the late 1960's and early 1970's after a spate of insurance company bankruptcies left insurance policyholders without insurance protection. These guarantee funds are designed to provide for the payment of claims against covered individuals when their insurer fails. Since 1969 these funds have disbursed about $104 million in 106 insurance company insolvencies. However, the funds have yet to face the collapse of a major insurer, and most knowledgeable observers question their ability to do so.

Furthermore, while 46 States have guarantee funds to protect against the failure of property casualty companies, only 18 States presently offer guarantee fund protection against a life insurance company insolvency. Since each State runs its own guarantee fund, the effort to prevent or control insolvencies is fragmented and ineffective. Uniform standards for guarantee status have not been developed by the States and the prospect of a number of States scrambling to secure control of the assets of a failed insurer to meet policyholder obligations within their jurisdictions does not present a pretty picture.

Assessments to pay for insolvency are made after the fact and they are levied at the time when many companies have troubles of their own which may be aggravated by the necessity of paying an assessment, thus posing the threat of a domino effect. This threat is somewhat mitigated by the fact that assessments are limited by statute to about 1 percent of a company's premium volume in about one-half the States and 2 percent in the rest, but this very limitation means that most funds would not be able to deal with a major failure or multiple failures in a timely fashion.

Where State guarantee funds have been operated on a preassessment basis, they have proven to be subject to the whims of the State legislature. New York State's funds amassed $240 million through assessments and interest income. However, to help alleviate New York State's fiscal crisis, the New York State property and liability insurance security fund switched more than $200 million from bank certificates on deposit and Federal Government securities into New York State obligations. Thus, the New York State fund was illiquid just at the time when it was most likely to be called upon to deal with an insurance company insolvency.

Now these and other weaknesses in our present system for dealing with insurance company insolvencies have convinced me that it would be desirable to create an alternative system of regulation for solvency purposes.

The bill which is the subject of our hearings today would seek to improve the quality of insurance company regulation by providing for an alternative system of Federal regulation similar to the Federal regulatory alternative presently available to banks and savings and loan associations under what has come to be known as the dual banking system.


I believe that the existence of such a system of alternative regulation would provide a check against both inaedquate regulation and overreglation at either the State level or the Federal level. The bill consists of two titles. Title I would create a Federal insurance guarantee program similar in concept to the Federal Deposit Insurance program available in the banking field. Title II provides a Federal chartering alternative for insurance companies similar to the Federal chartering alternative presently available to banks and savings and loan associations under the dual banking system.

Mr. Chairman, I would ask that a section-by-section analysis of the bill be included in my remarks.

The CHAIRMAN. Without objection, that will be done.
[S. 1710 and the section-by-section analysis follows:]


(S. 1710, 95th Cong., 1st sess.)

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A BILL To authorize the issuance of charters for carrying on the business of insurance, to

provide for the guarantee of the insurance obligations, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


SECTION 1. This Act, together with the following table of contents, may be cited as the “Federal Insurance Act of 1977":


Sec. 1. Short title.
Sec. 2. Definitions.

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Sec. 101. Federal Insurance Commission.
Sec. 102. Federal Insurance Guaranty Fund.
Sec. 103. Federal Guaranty Certificate.
Sec. 104. Satisfaction of guaranteed obligations.
Sec. 105. Procedures to avoid default.
Sec. 106. Procedures for rehabilitation, reorganization, or liquidation of a federally guar-

anteed insurer.
Sec. 107. Regulatory authority.
Sec. 108. Supervisory authority.
Sec. 109. Competition.

Sec. 201. Chartering.
Sec. 202. Organization.
Sec. 203. Commencing business.
Sec. 204. Applicability of State law.
Sec. 205. Investments.

SEC. 2. As used in this Act-

(1) the term "Commission" means the Federal Insurance Commission;

(2) the term “federally chartered insurer" means an insurer or surety chartered under the provisions of this Act to transact an insurance or surety business;

(3) the term "federally guaranteed insurer" means an insurer or surety whose insurance obligations are guaranteed under the provisions of this Act;

(4) the term “State” means any State of the United States and the District of Columbia ;

(5) the term “fund” means the Federal Insurance Guaranty Fund established pursuant to section 102;

(6) the term "guaranteed obligation" means (A) an insurance obligation to a policy holder, a claimant or an insured, or an assignee of any of them, within the coverage of a policy guaranteed in accordance with this Act; or (B) the right of a policyholder, an insured, or an assignee of either of them for returns of premium due as a result of the termination of the policy

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