Mr. Makholm stated that the Sentry statement also made reference to the fact that there are certain prior approval states that are rather costly, and he felt that this should be placed in proper context. As mentioned before the subcommittee several times, delay is the most important cost factor, and the second is the rate level. A third point is that the insurance industry can't object to the cost of good administration. However, at times Sentry has felt that the inquiries have been made with respect to rather technical matters rather than substantive matters. For that reason, it feels that the costs should be viewed in the context, of the total problem. There are considerations far more important than the cost of administration.

Professor Kimball asked if in a state where administration is crassly political, could a no filing law be effectively used to harrass the companies and prevent them from using new rates quickly, much as in a prior approval state? Mr. Makholm felt that it is possible for the administration of the law to deviate somewhat from the structure of the law. If one had a no filing law which was administered as a prior approval law, it would result in additional costs, so a situation like that could develop if the administration does not follow the provisions of the law.

Professor Kimball noted that in the Sentry statement it is suggested that non-discriminatory treatment of policy holders with respect to dividends should be enforced by regulation. He questioned what is meant by enforcement of non-discriminatory policy.

Mr. Makholm stated that presently under state law Sentry feels that it is not permitted to discriminate with respect to dividends, and there is no disagreement with that point by Sentry. He felt that the company must be guided by that kind of approach and it does not object to regulation of that nature.

Professor Kimball referred to Sentry's suggestions for a minimum rate law. He questioned whether that would be similar to the workmen's compensation provisions.

Mr. Makholm felt that perhaps that would be a possible technique, but the importance of a standard of inadequacy must be emphasized. The exact technique to assure that would be difficult to devise. The suggestion was in the nature of "brainstorming".

Mr. DuRose asked if Mr. Makholm had any opinion as to how successful the system would be, or how successfully a company could operate, if the California system were adopted in all 50 states. Would it be workable?

Mr. Makholm stated that he would be apprehensive. He stated he saw no need for what seems to be a disruptive development. He felt there are other facts that are as important or more important than the structure of the law itself. He stated he would be apprehensive of supporting a single type of law, such as the prior approval law or a no filing law for all jurisdictions. This is not to say, however, that Sentry did not approve of the Alliance support of changes in the rate law in Florida and Georgia and in other states.

Mr. DuRose commented that Sentry then feels, in general, that where a prior approval law is operating effectively, it should be left alone. Mr. Makholm agreed.

Mr. Kernel L. Armbruster, Assistant Secretary, Insurance Law Department, The St. Paul Insurance Companies, addressed the subcommittee and introduced Mr. Tom McCann of the underwriting department. He stated that the company prefers and believes that the California type law would offer the best possibility of improvement. It is not the perfect answer, but it would offer the best possibilities of improvement.

Professor Kimball noted that the statement from Mr. Armbruster indicates that California has not had the type of marketing problems that exist in many states, and he questioned whether there was hard data to support that statement. Mr. Armbruster stated that there was no specific data, but the statement was made from general observations as to what the company views in the market place, and the number of complaints from the California department.

Professor Kimball commented on the proposal offered by St. Paul that companies operating on a similar basis should be able to utilize the same filings by notifying the department of their intention to do so. This appears to be reasonable, aside from the question of establishing standards for "similar lines". He asked for a further elaboration on that point.

Mr. Armbruster agreed that this would be difficult, and would depend on the precise operationa! basis devised. He stated he did not know what standards could be used, but felt that there could be some manner of comparison. If a company has already fought the battle for a particular area, it seems rather inefficient to have to go through it all again. Mr. McCann stated that this suggestion was in reference to the marketing approach and companies that generally have approximately the saine expense considerations. If a rating bureau has secured approval, it is rather nonsensical to go through the routine of having to file again.

Professor Williams asked if Mr. Armbruster felt that workmen's compensation might be an exception to the general philosophy on rating. He replied that as a matter of principal, perhaps no logical reason exists for the differentiation, but if the company had to choose one line, that might be it.

In response to a question from Mr. Worthington, Mr. Armbruster replied that his company goes through the same process in determining rates in California as it does with respect to other states. Mr. Worthington then questioned if the company includes competition as a factor in determination of rates.

Mr. McCann replied that the company follows approximately the same procedure and gives no special consideration to competition. He stated that the company's experience is that it is generally able to maintain a more adequate working rate level in California than other states, and that has some influence on the company's ability to take broader risks.

Mr. Worthington questioned that if the company found itself in a good competitive position in California, it might cut its profit factor from 5% to 22%, for example, to compete more effectively.

Mr. McCann agreed that that might be possible depending on what the company chooses as its goal. As a procedural matter, in a competitive situation like California, the company is able to sell their policies at a rate level that is adequate to produce some profit.

So competition has nothing to do with it, Mr. Worthington commented, and it is primarily the benefit in being able to institute rates speedily. Mr. Armbruster agreed. Mr. Worthington questioned if the prior approval system could be speeded up, whether it would be just as good as a no filing law. Mr. Armbruster stated that in pure theory, one would have to agree. If the company could achieve an adequate rate level anywhere it would be entirely satisfied. However, this has not been possible during 20 years of activity, which leads one to conclude that the real answer lies in a change in the law. Competition plays a role in every rate level determination, and one must be aware of this in any area of operation. Certainly in California where rate levels are adequate, it permits underwriting companies to be freer in accepting risks.

In response to a question from Mr. DuRose, Mr. Armbruster stated that some of the St. Paul companies file independently of rating bureaus while others work with them. Mr. DuRose then asked whether there was any experience to judge which system produces the most adequate rates; whether the independent filers obtain more adequate rates than the bureau filings, or whether they are equal.

Mr. McCann stated that this varies. The company writes a considerable volume of professional liability insurance, and generally it has been able to maintain adequate rate levels. In this area perhaps the political pressure hasn't been as great. On the other hand, when bureaus have trouble in getting changes in rate levels in other lines, it generally follows that all companies have their problems.

Mr. Armbruster was asked by Mr. Voller if he felt there would be a problem if many states adopted a California law, and he felt that it would not.

Mr. Hunt noted that it was indicated that file and use places the burden of proof of a bad faith filing on the company, rather than on the department and he questioned whether this would bring about a less subjective type of law. He questioned whether under prior approval there are many states where it is felt that the burden of proof is on the department rather than on the company.

Mr. Britson stated that he did not know all the states, but Louisiana was one. He noted that the department must show that the filing is wrong.

Mr. Simpson noted that Mr. Armbruster mentioned the broad class of risks under the California law, and he questioned how one could explain why California

was the first state to pass an automobile cancellation bill. Mr. McCann stated that this would still come into the picture because no matter what the rate level, there are still risk characteristics. No matter what the rate level, there are a certain number of risks that will not be insurable at any particular rate. Many people today have conceded that there are areas such as this that will forever have to be taken care of. However, the degree to which this will be necessary will be minimized if companies can secure an adequate rate level. No one said that the California law was the perfect solution, he stated.

Mr. Thomas Dunavant, Allstate Insurance Company, appeared before the subcommittee and stated that Allstate's views were expressed in the initial questionnaire and supplementary statement.

Professor Kimball noted Allstate's response to question 1.3 on the questionnaire. He asked Mr. Dunavant to elaborate on the kinds of difficulties he was referring to and whether he had any suggestions for solving these problems.

Mr. Dunavant commented that to state that there are no difficulties would imply a perfect case which the company has never seen. There have been minor difficulties in the no filing states, he stated, definitely associated with the rate making examination. Most of the difficulties were insignificant. They do, however, constitute situations which it is felt could have been avoided. These questions arose principally in the development of technical information relevant to the general conclusions that were being sought. He noted in certain file and use states the company has some difficulty in connection with rate filings, in that it is sometimes necessary to make elaborate preparations, and a certain amount of travel is involvedmore than was anticipated. These are relatively insignificant costs, he stated, but they have in cach case resuited in some delay. The reduction in premium revenue that occurs from a delay is far more significant than any of the costs of preparation.

Mr. Dunavant pointed out that when a rate decrease is involved, there is a loss to the company-in competitive position which it feels is incalculable. Once the company makes the judgment of the level at which it wants to operate, any delay in introducing that level constitutes a reduction in the competitive market of customers.

Professor Kimball asked if either the cost or the trouble in the California system would bother Allstate. Mr. Dunavant felt that there is no great objection to either the costs or the trouble. In response to further questions, he stated that there have been some difficulties in file and use states, generally because of the way the law is administered. He stated that he was not aware of any roll back situations.

Mr. Worthington commented that the committee has generally been discussing the factors that are taken into consideration in attempting to determine if a rate is unfairly discriminatory. Because of the changing social emphasis in the country, it is difficult to develop these considerations, and it appears now that some new definitions are necessary. Mr. Dunavant felt that although unfair discrimination is a complex matter, he is not aware of any criteria in the case of Allstate that was acceptable 10 years ago that is not acceptable today. He felt that in every case the company has either retained the criteria or refined it more completely.

Mr. Worthington noted that the territory system is accepted as a necessity, yet territories themselves have created unfair situations, although everyone felt they had to have them. Now it is being said that maybe it is unfair for companies to charge rates that are so high that people can't afford to purchase insurance, yet the companies say they have to have the rates. Then the unions got interested in this, and group insurance was instituted which is in fact discrimination on a mass basis.

Mr. Dunavant stated that it is true that there have been problems of unfair discrimination on territory, simply because of the problem of rating risks very close to any line of demarcation. An illustration that was used was the possible difference that could exist in New Jersey as compared to people living across the river in New York. This is not the same type of problem as the differences between those living in Council Bluffs and Omaha, for the geographic and social factors are different. The 2 neighboring states are under different administrations, and this creates a special type of difference which he felt sure most companies would like to avoid. To some extent, these differences within a state can be neutralized. There is another question which arises within a single jurisdiction, and that is the problem of rates being sharply different between 2 risks on the opposite sides of the street. This probably cannot be justified on any basis, other than reducing unfair discrimination to the lowest practical order, and then saying it is not unfair.

Mr. Worthington questioned whether the companies will try to find a way to solve this problem, or whether the federal government will possibly do it for them. Mr. Dunavant stated that in determining classification, territory, or any part of the pricing system, the industry should direct its attention to the costs of providing coverage rather than to the ability of the individual to pay the price. He stated that this point has already been expressed by others. It amounts to a subsidization of a group of people and it is not properly a function of private enterprise. This sort of thing may very well come about, Mr. Dunavant stated, but he felt it should be considered as a matter of government, rather than through the voluntary action of the companies.

Mr. Faulstic commented that many criticisms have been voiced in regard to inadequate rates and unreasonable delays in approvals. He noted that it could be the case that standards being used in the companies are different than those used by the insurance commissioners who represent the broad public interest.

Mr. Dunavant stated that it is not his intent to suggest that all filing delays are always the fault of the commissioners. There is a difference of opinion and the company can accept these. This is not true in some instances, however, and very few states say that it is their fault.

Mr. Faulstich commented that these could be honest differences of opinion. Mr. Dunavant agreed that there could be factors at work on the commissioners which the companies perhaps are not aware of. Allstate's position is well known. It does not make rates by a formula or subscribe to a 5% or 6% profit factor or any guide as such. He expressed the belief that the thrust of rate regulation has too often been directed to the regulation of profits and not to the whole rate. Therefore, its position is that where the level of Allstate rates is equal to or lower than the level of other rates already approved for other companies serving the same market, then it is a readily approvable rate and any further tests for the purpose of determining excessiveness are unnecessary. That theory has not been universally accepted, yet it has achieved wide acceptance.

He noted that comments have been made in respect to the dividend question, based upon the fact that the total price would still not be in line with the going prices. Allstate feels that is a valid concept, not only in insurance, but in other businesses in the country. Generally it is Allstate's feeling that where it is possible to determine that a rate is prospectively adequate, at least on a break even basis, any other statistical test to determine its inadequacy has no purpose.

Mr. Faulstich commented that if a company wanted to avoid delays perhaps there should be a clarification of the term "excessive", perhaps to say that if it is lower than the going market price, it would not be deemed excessive. Mr. Dunavant stated that he would feel that would be appropriate if the prior approval type laws are to be retained. As to Allstate's suggestions, he felt that adoption of the California definitions for excessiveness and inadequacy represents the minimum change in current rate regulatory laws to bring them to reasonably acceptable standards.

Mr. Faulstich asked if Allstate feels there is no limit on profit by insurance companies so long as their rate is lower. Under those standards if the rate contemplated a 50% profit, it might still be o.k. He questioned whether the general public would feel the commissioners were doing their job under such an arrangement. Mr. Dunavant felt that the general public would be alarmed if there were a 50% profit margin, however, that is far beyond any expectation. This might be acceptable within a more modest range of profit, which has occurred in the business. Mr. Dunavant felt that the public generally was rather disinterested in what a company's profit is, and more interested in what he must pay for the product. I suggest: If a company can operate so as to offer substantial price savings to its customers, he felt that logically, most consumers even knowing the price included profit, would buy that company's policy in place of one with a higher price and lower profit. He felt that there is no interest by the public in a company's profit margin under these circumstances.

Mr. Stewart asked, in those states where Allstate is free to adjust its rates, what is the most frequently it adjusts them for any line or general classification? Mr. Dunavant stated that as a general rule, not more often than annually, but there have been some exceptions. An exception was made in one state where rates had been very inadequate for a long time. A filing was submitted in July one year, and another in March or April of the following year. That was in a prior approval

state. Usually it is on an annual basis in California, although that would not rule out any possibility of some minor adjustment within that year.

Mr. Stewart commented that concern was expressed about the California system in regard to a "flash filing" or "predatory filing". He questioned whether Allstate finds this is a problem under a no filing law, and if so, whether some kind of safeguard could be instituted to prevent it.

Mr. Dunavant commented that Mr. Stewart is probably speaking of those cases where a no filing law would permit a company to alter its rates from day to day to capitalize on a particular situation. He felt that this is a more imagined problem than a real one and he was not aware of any situation in California where that had occurred.

Mr. DuRose commented that Wisconsin casualty rate laws are different with respect to the provision that independent filings cannot be disapproved without a hearing. He questioned whether that type of provision could be incorporated in prior approval law and whether it would be an improvement.

Mr. Dunavant felt that kind of provision can be of some help and it has been. However, when the chips are down, it is rather a clumsy shield. Allstate has suffered its most serious problems under such a situation.

Mr. DuRose raised a question regarding underwriting standards in various areas in relation to adequacy of rates. He questioned whether Allstate experiences less difficulty in underwriting in places where it can file for an adequate rate. Mr. Dunavant stated that is true without question. Marketing can be more aggressive when adequate rates are available. This difficulty could be geographically within a state, or it could be between states within a specific classification.

Mr. DuRose commented on claim adjusters, and questioned whether they were less liberal in states where there is a less than adequate rate. Mr. Dunavant stated that it is not Allstate's intent that its claim policy have any relation to the rate structure. It maintains uniform claim adjustments across the country, and they are not in any way directly related to the underwriting. There could, however, be an inverse relationship.

Mr. DuRose asked about cancellation practices in states where inadequate rate levels are believed to exist. Mr. Dunavant stated that he could discuss Allstate's 5 year renewal guarantee. The company has not had any mass cancellation problems. He felt, however, that the tendency toward nonrenewal would be heightened because of rate inadequacies.

Mr. Britson asked if homeowner's premium volume increased or decreased after Hurricane Betsy. Mr. Dunavant had no information on this.

Mr. DuRose raised a question about group insurance and mass merchandising. He questioned whether the rate laws should be drafted so that in a sense they would encourage a climate for group automobile insurance such as in the accident and health and life insurance fields. Mr. Dunavant stated that he was not in a position to speak for or against group insurance. He noted that some definitions of fictitious fleets have developed as separate administrative rulings and are regarded as separate parts of the insurance law. He stated that he could see no reason to bring them into the rate law as such.

Mr. DuRose commented that perhaps the reason that fictitious fleets could not be established in automobile lines was because of the unfair discrimination provision of the rate law. Mr. Dunavant stated he could not answer that-he had never seen an adequate defense of fictitious fleet rules.

Mr. George E. DeWolf, Assistant General Counsel, National Association of Independent Insurers, accompanied by Mr. Gill, addressed the subcommittee, and submitted a copy of his statement. He felt it would be appropriate to emphasize that NAII feels that there is a great deal of urgency and importance in reviewing rate laws at this time, since it is part of the reason NAII representatives spend so much time in Washington and responding to questions. He stated that NAII has nothing new to say regarding its position, for it has been on public record for a long time. What it is interested in is that there seem to be more and more people at this hearing joining its point of view. He noted that the last time he appeared at a rate regulation hearing in the early 1960's NAII was a voice in the wilderness on a no approval law. NAII wanted as much competition as possible and that is when they presented the file and use bill. He felt it is interesting that agents in Florida and