tive regulation of those rates tends to interfere with the ability of management to make the kind of pricing decisions that clearly reflect the relationship between supply and demand. Rating laws interfere with the kind of competitive conditions which essentially ought to measure the adequacy of a rate. Insurance management must constantly be alert to devise the best way to find the best price to best serve the public, and this requires a closeness to the market the regulator does not have. He cannot move as fast as management. He emphasized that the present system of rate regulation seriously interferes with that process. As to increased concentration, Mr. McHugh stated that for the past 20 years there has been a growing concentration in the auto insurance business. He did not view this as serious in terms of the guidelines issued by the antitrust division for measuring dangerous market percentages. The concentration poses no serious problems, but this is not to say that it could not do so sometime in the future. If it did occur, he expressed the hope that the antitrust laws would be available and that they would have a deterrent effect upon this development.

Professor Williams commented that one of the objectives of rate regulation is equity, or the prevention of unfair discrimination. He asked whether that standard would be abandoned if the present rating laws were discarded.

Mr. McHugh stated that he did not believe that the Robinson-Patman Act applies to the insurance business because it is aimed at goods, wares and merchandise, and insurance does not fit into those categories. Federal laws directed at unfair discrimination in the pricing area are almost without exception keyed to the impact on competition. That has not been the thrust of state concern about unfair discrimination. State regulators are concerned about equity with the thought that there is something morally wrong in treating one class of people differently from another. If the states continue that concern, he would propose that these state provisions be specifically aimed at preventing unfair discrimination, but a question arises as to how to do it. It is true that the rating laws have been the essential tools in preventing this discrimination, but there are other ways, such as through special state anti-rebate laws and unfair trade practices. If the prohibitions are now limited essentially to the life, accident and health areas, they could be extended to the property and casualty fields. This is an area where companies could continue to be supervised at the state level by enforcement after the fact.

Professor Kimball asked what special advantages Mr. McHugh's proposal had over the no-filing law as applied in California. Mr. McHugh stated that the proposals are essentially different in degree. State Farm has supported a California rate law as the best type of regulation, but for the same reason that the California rating law is good. This proposal is that much better, Mr. McHugh cited 2 major advantages, the first in regard to the investment income issue. He noted that sooner or later that issue will have to be resolved because it is plaguing the business. The industry is satisfied it makes no sense to include investment income in rate regulation, but it will have a hard time convincing the people. An antitrust approach to the problem resolves that issue completely. Whatever income a company has is bound to be reflected in the price as it is in any other business, and all income would have a bearing on the overall objectives of a company and its prices.

As to the second advantage, Mr. McHugh stated that an antitrust approach would permit companies to make rates without regard to political boundaries or state lines. He commented that it makes no sense to have one rate in New Jersey that has to be different from the rate charged right across the river in New York, if the same conditions exist. If a company were free to make its own determinations, the play of market conditions would dictate what the rate ought to be.

Professor Kimball asked if Mr. McHugh felt that the investment income problem would continue to be a problem under the California type rating law. Mr. McHugh felt that it would still be a problem, but to a lesser degree.

Mr. Stewart asked whether the prior approval rating laws may have a tendency to artificially maintain rates at a level that would tend to keep marginal companies in business which a normal market would weed out. Mr. McHugh felt that this was inevitable. One of the reasons many companies found it profitable to belong to rating bureaus was because they can exist under a sheltered price structure. State rating laws tend to perpetuate that situation.

In response to a question from Mr. Tom Hunt, Mr. McHugh felt that there would be no need to amend the McCarran Act in order to adopt a California type statute. It would still be state regulation and the no-filing law has at all times met the test of the McCarran Act. In terms of economic and competitive philosophy, it is more consistent with federal law than the prevailing pattern of state regulation.

Mr. Lorne Worthington noted that some people believe rating laws are necessary because rates are made in concert, and asked whether regulation would be necessary if rates were not made in concert, and specifically whether under the present system, Mr. McHugh felt that there should be some type of regulation over those companies who file their rates independently of the rating bureaus. Mr. McHugh felt that logically one could make a good case for the necessity of giving special consideration to those companies that meet together and agree on prices as distinguished from companies who make their rates independently. He stated that he has been seriously concerned, however, about the sizeable portions of the business now being done by State Farm, All State and other large independents and thought omission of regulation for independents might upset the balance. He felt that the system should treat all companies the same way.

Mr. Worthington asked what kind of responses had been received subsequent to making the State Farm proposal public-as to the desirability of the approach. Mr. McHugh stated that the returns are not yet all in on that question. Many people with whom he had talked had indicated a willingness to seriously study and consider the proposal, and there is no doubt many companies in the industry find it very attractive, although no one has publicly so stated. He commented that the statements of the American Insurance Association before the Hart Committee were generally pretty close to this approach, and he felt that many federal officials are inclined to believe there is considerable merit to it. The NAII official position is to urge the improvement of the state rating laws along the lines of the California approach, although the State Farm proposal has never been specifically presented to them as such. He stated that it will seek support from that organization as well as everyone in the business.

Mr. Hunt asked if State Farm feels a no filing law is better than a file and use law. Mr. McHugh stated that it would prefer a no filing statute, but it is a matter of judgment whether or not it is vastly superior. Since State Farm believes that only market conditions ought to determine rates in the auto insurance field, it naturally feels that laws in that direction are preferable.

Mr. DuRose questioned what would happen under the proposed system if an independent filer would adopt rates by reference to the rate of another independent filer. Mr. McHugh stated that this would be no problem and that it happens in business all the time, although there could be a point at which that process runs afoul of the antitrust law. It is ramifications of that problem which occupy the antitrust division more than any others and it is a very subtle thing, he stated.

Mr. DuRose asked whether it might be possible for a state to enact antitrust legislation similar to the federal antitrust laws. Mr. McHugh felt that it is possible but he felt that it really would not be forthcoming. The best evidence is to measure the effectiveness of present state antitrust regulation, and he felt that everyone agrees it has been woefully ineffective. Problems of how to measure the effects of competition are so complex they are beyond the ability of the staff of the office of state attorney generals. The federal government has a tremendous staff which does nothing but work in this narrow field. Neither could one expect the state insurance departments to take on this work, for there is no effective way they could be tuned in to measure competition. Mr. McHugh felt that antitrust activities could only be effectively carried out at the federal level.

Mr. Mark Kai Kee commented that Congress has not been concerned with fair treatment of the individual policy holders. He noted that under existing state regulations, each state has a special unit which concentrates on rate regulation and he asked whether effectiveness in this area would be lost with the adoption of a proposal such as suggested. Mr. McHugh stated he could see no reason why it would be lost. Whatever expertise that has been developed currently under the rating laws could very easily still be employed in the same manner in the enforcement of the unfair trade practice laws.

Professor Williams asked whether the insurance business is sufficiently different that it should be subject to different equity standards. Mr. McHugh felt it was and should be.

Next to appear before the committee was Mr. F. A. Holderman, American Mutual Insurance Alliance, accompanied by Mr. John S. Hamilton, Jr., vice president, and Raymond Kisch, Counsel. He stated that he wished to emphasize the posture of the American Mutual Insurance Alliance with respect to rate regulation, noting that, at one time it was strongly committed to a policy of prior approval rate regulation. In 1961, however, it changed its stand substantially and in appearances before the NAIC committee studying the same problem this subcommittee is studying, the

Alliance announced that it was adopting a state-by-state position, which it h followed since that time. It has adopted this position for several reasons.

First, the Alliance supports state regulation because it feels that there are many differing conditions among the various states that no one solution is equal workable in every jurisdiction. He noted that this is essentially the position of t NAIC as evidenced by the report of its subcommittee in 1960. The Alliance positi is flexible, he stated, and it does not support change for change's sake. It feels that system that is working well and fitting the needs of the public and the indust should be left alone to function well. Mr. Holderman stated that the Alliance h supported various kinds of rate regulation in the last 7 years, for example, it support open competition or no filing laws in Georgia and Florida.

Mr. Holderman stated that the Alliance recognizes that the business, politic and social climate today is substantially different than it was when the prior approv rate regulation law was approved. At that time there was a greater concentration business in the hands of bureau companies and there was a real need for a pri approval mechanism to prevent excessive rates. Today competition has a mu greater bearing on rates, he commented. It has become a very competitive busine and the Alliance recognizes that in many cases today, rate competition is probab an adequate regulator to prevent excessive rates. The Alliance feels, however, that should place a caveat on any support it expressed for a no filing or California ty law, in that it feels that workmen's compensation insurance should remain und prior approval for it appears to be serving the needs of the public and has work well. The Alliance also supports the preservation of rating bureaus, and whatev law is adopted should provide for the proper operation of the rating bureaus. Th should not be given priority, but should receive equal treatment.

Mr. Holderman then complimented the subcommittee and the Kentucky Le islative Research Commission for publication of Research Report No. 46-Insuranc A Study of Administration of Kentucky Rating Laws. This, he stated, is a ve interesting and effective study which should be of much value. He noted th Professor Williams had stated that a member of the academic staff would analy the various loss ratios to determine the effect of various types of rating regulation Mr. Holderman expressed the hope that such a study would be made and publishe for he felt that it would be of much benefit.

Professor Kimball stated that the research staff intends in the future to stu some insurance departments in other states with regard to their rating regulatio and hopes to be able to make these findings available at the proper time. He not that a study of the second kind has been made, but the results are fairly inconclusiv Perhaps some results will be published, however.

Professor Kimball noted that the Alliance maintains the position that ra regulation should depend on the environmental factors that operate in a state. I asked Mr. Holderman to elaborate on the various factors which might exist th induce it to support 3 different methods in 3 different states.

Mr. Holderman expressed the opinion that the increased industry support th is being evidenced today in support of a California law stems from the problem some areas regarding the difficulties involved in securing adequate rates. Cons quently, adequate rates are one of the factors the Alliance considers when it loo at rating regulation in different jurisdictions. He noted that the Alliance is neither rating nor advisory organization and has no rate making function or statistic collection function. It must look to the rating bureaus and individual companies see their needs in the market, and the play and the responsiveness of the market be suited to their needs. It considers these issues with its member companies. T Alliance has a rate regulation law committee which meets twice a year to review t situation on a state-by-state basis and forms its opinion based on consideration the facts in a state and the degree of rate adequacy, the status of the domest market in the state that is exercising price leadership, the presumed adequacy future improvements, the competency of administration of the law, and the gener legal and court structure. All these factors are taken into consideration when t Alliance issues an opinion as to what it feels should be done in any particul jurisdiction.

Professor Kimball commented that one of the arguments made in favor of filing laws is the weight of the political considerations involved in some jurisdiction in the approval process. In this connection, Professor Kimball asked:

1. How is it possible within the framework of prior approval to minimi

political considerations in the rate regulation process-political considerations from both the industry side and the other side?

2. Are political considerations in the country as a whole so important in so many states that they should be an important determinant with respect to the kind of rate regulatory structure that should exist?

3. Is it not possible for political forces to play as significant a role under a no filing type of law as it would under a prior approval law. He noted that there could be industry pressure to prevent a commissioner from intervening, when he ought to be intervening.

Mr. Holderman stated that the Alliance has given much thought and debate to these questions. As to the question of whether prior approval would be more responsible to criticisms from either side, he suggested that more information like that contained in the Kentucky research report would be helpful. That report constitutes objective fact finding and not subjective opinion. He felt that in this area the improvement in the quality of state regulation which has taken a marked upturn in the last several years will be helpful. It could result in tighter regulation in a state which could be good or bad depending on the many variables within that particular state. He felt that there is room for improvement in the structure of regulation, and there should be further studies of improved safeguards against the abuse of the public hearing. He felt that all kinds of rate regulation can be improved.

Obviously, political forces are important, he stated, and if anyone feels that they can be eliminated by any system of regulation or by no regulation, they are thinking in a vacuum. There is some hope that by relieving the regulator of the prior approval function, he may be taken off the spot in terms of rate excessiveness. The interplay of competitive forces will control this and give the industry a more adequate rate. This is one way the law is operating in California, he stated, and it will be interesting to see what happens in the states newly adopting this system. Mr. Holderman felt that in effect the political aspects are going to be just as important, and that even in Mr. McHugh's proposal, the political facts of life will have to be faced in the price of insurance. When in the minds of the public and the legislature, the price becomes prohibitive, a major problem is created.

Professor Kimball observed that one of the aspects of the Alliance approach is line by line variations. He noted that Mr. Holderman had made a strong argument in favor of maintaining the existing workmen's compensation approach. Professor Kimball commented that this appears to be inconsistent with the view of most other respondents to the subcommittee questionnaire. Most of the industry officials felt that there should be equal treatment among lines. He noted that the Alliance had also made several other points in reference to subsidy of different classes of risks and asked whether it was their feeling that an approach similar to workmen's compensation might have application also in the automobile insurance field.

Mr. Holderman felt that the situation is different and the practical operating conditions are different. There are many divergent views and approaches to the auto insurance situation. Workmen's compensation insurance is a scientific approach to rate-making and so far as possible, it appears that is as close as one can get to science in rate making in casualty insurance. The net result has been the ability to provide an adequate market at an acceptable return to provide benefits for injured employes, and there have been few cases of insolvency. The Alliance does not believe that rate regulation is the answer to all insolvencies, but it is a factor in maintaining a stable market. There is no point in changing present workmen's compensation rating laws, since they are working well.

Mr. Thomas Hunt asked whether one should look at rating problems on an administration by administration basis, since no state is constantly the same. He commented that perhaps change should proceed slowly, since a new administration might repair the situation.

Mr. Holderman stated that the Alliance does recognize the various kinds and qualities of administration, and he noted that there are many states where there is a history of even-handed administration of the rating laws over a long period of time. On the other hand, when the Alliance sees a situation go sour, it is inclined to suggest a remedy if the present regime does not appear to be working.

Mr. Hunt inquired as to how long the Alliance would wait before it determined that a situation was indeed sour because of no existing market for various lines, or competition or administrative malfunctioning was driving people out of business in a particular state. Mr. Holderman stated that there was no inflexible rule in this

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regard, but certainly it would not wait for many years before intervening. He stated that if, for example, there were a serious extended period of rate inadequacy in a state, the Alliance would take a look at it within probably 2 or 3 years, although this does not mean that it might not necessarily want to move faster. The guidelines are flexible.

When the Alliance does recommend a change, Professor Williams questioned if it usually is a recommendation toward a move from stricter regulation to more liberal regulation. Mr. Holderman commented that there are some states where the Alliance would suport stronger regulation.

Professor Williams asked if the Alliance would be concerned if every state were to adopt a no-filing statute, and questioned whether the results in California might be different if this were the case. Mr. Holderman stated that the Alliance feels that this is a possibility and commented that certainly the existence of the bureau system has introduced a form of stability. If the California law were carried to the ultimate it could have unfortunate consequences, depending on what happened to the bureaus. If the bureaus were continued under the application of the California system on a broad base and the validity of their product were to continue, the Alliance would have less concern about the effect of the California law.

Mr. Stewart questioned what is meant by the validity of the bureau work product. Mr. Hoiderman commented that the Alliance is basically concerned with the statistical validity of that product. It is not speaking for uniformity, but simply speaking for the right of those who wish to have a bureau product and to use it to be able to continue to use it.

Professor Kimball stated that he had the impression from the Alliance statement that it would be concerned about undue concentration and about any system that might result in the disappearance of a substantial number of small companies, even though the net result might be a more efficient industry from the public point of view. He asked whether there should be concern about the existence of small companies for their own sake. Mr. Holderman felt that there should be concern with the existence of all suppliers, large, medium or small. He stated that there are many solid small companies, and expressed the belief that their future is not necessarily doomed. Any system that prevails should give those companies a fair opportunity.

Professor Kimball commented that a competitive system such as suggested by Mr. McHugh might result in the elimination of the smaller producers in the market place, and questioned whether this was necessarily bad. Mr. Holderman felt that in the long run under such a system, the effect might be to eliminate the smaller companies, and he felt that this was not good. He felt it was not necessary that everyone had to be insured in a company that is the largest in the country.

Mr. Stewart asked for more details on the question of the smaller companies and the less efficient companies, as to the necessity for their preservation, and comments on the question of the survivability of different types of companies under open rating laws.

Mr. Holderman stated that he is not an expert in business systems, but there are of course more sophisticated systems which a larger company can employ that a smaller company cannot afford. It might be possible for them to take advantage of certain economies by combining with other like companies on some basis of agreement.

Mr. DuRose asked Mr. Holderman's reaction to a California type system, coupled with a strong requirement for comparable underwriting experience on a uniform plan with the possibility of having a bureau promulgate pure premiums with each company to use its own expense factors. He asked whether such a system would be workable. Mr. Holderman stated that this had been discussed in Alliance committee meetings for a number of years. He felt that this would be a middle between the extremes of closer regulation and wide open no-regulation. The method of enforcement of this type of law would have a great deal to do with its effect upon insurers. If in fact the insurer were required to use its own precise expense experience in making up a rating, he felt that this would cause many insurers to fluctuate so widely that those who fell above the median would be priced out of the market and be in serious trouble. He felt that the administration of this type of law would be almost impossible and there would be serious difficulties.

Mr. DuRose questioned whether providing a bench mark would be desirable in terms of a California system. Mr. Holderman stated that it might be and then again it might not. One of the problems of the California system is that it may compel