All but a few of the written statements also supported the proposition. However, one stock insurer and the NAII would subject dividends to the same standards and type of regulation as initial rates which, if these two had their way, would be regulated under a no-filing law. Orally the AMIA said that it would not object to regulation of dividends with respect to unfair discrimination on a no-filing basis but it emphasized that Dividend Plans are not Rating Plans and should not be handled in the same way.

Evaluation of Survey. In their written statements the insurers and insurer organizations were asked whether the survey findings were justified by the evidence presented, whether the evidence itself was valid, and whether the results influenced their attitude toward rate regulation. No one claimed that the survey evidence was abused but a few statements questioned whether the sample was large enough or truly representative of insurer opinion. One statement reserved judgment on the validity of the evidence but suggested that some questions were too ambiguous or complex, the sample was too small, and the questions emphasized too heavily the immediate and impressionistic reactions of respondents. One insurer recommended that the questionnaire be sent to all property and liability insurers. Most statements accepted the survey results, possibly because they agreed with their bias.

In order to obtain greater representation from small mutual insurers, the National Association of Mutual Insurance Companies was asked to submit a written statement prior to the hearing. Their position was not specifically mentioned in the discussion of the thirteen propositions because they agreed with the majority position in all cases, including the support for a no-filing law. This is surprising in view of the large number of small and medium-sized companies in their membership and the oft-expressed fear of these companies that the large insurers would squeeze them out of business under such a law. However, the NAMIC report did contain two minority reports that stressed this very point and objected strenuously to the majority report as that of a stacked committee. The NAMIC representative also testified orally that small companies did (in his opinion without foundation3) fear no-filing and file-and-use laws and that if NAMIC polled its membership, the minority report would probably become the majority report. The AMIA in its testimony stressed the importance of preserving the solvency of all legitimate suppliers of insurance, which in their opinion includes most small insurers.

No insurer was converted by the analysis of the insurer questionnaire but several reported increased confidence in their prior positions.

Eight new Questions. Each of the eight new questions included in a suggested outline for written statements is presented below together with a brief summary of the replies.

1. Is competition such an adequate regulator of insurance rates that no direct rate regulation is necessary? Why or why not? What other types of regulation might be employed?

Only State Farm stated that competition could replace all direct rate regulation and even it qualified this statement with respect to unfair discrimination. This insurer advocated placing insurance under the Sherman Act with some modification to permit rating bureaus to operate. State authorities would continue to regulate unfair discrimination but the exact nature of this regulation has not been defined as yet.

The remaining insurers and insurer organizations did not believe that competition was a sufficient regulator, particularly with respect to rate adequacy and unfair discrimination. Indeed they argued that competition may create rate inadequacies and unfair discrimination. At the minimum they advocated a no-filing law.

2. Some insurers argue that the California non-filing approach has been satisfactory to most insurers only because most other states have a "prior approval" statute. Do you agree that if no-filing statutes become more common, certain problems might arise? Why or why not? What problems?

All but a few statements expected at most some small problems for states adopting new procedures but one mutual insurer, the MIRB, and the AMIA were more pessimistic in their outlook. The AMIA, for example, argued that 1) not all

3 He noted that under the new Indiana law there is a provision requiring retroactive correction of "bad faith" filings of grossly inadequate rates designed for the sole purpose of securing certain business. Burn's Ind. Stat. §39-524 (1968 Cum. Pocket Supp.).

4 A more complete statement will soon appear in a paper by Donald McHugh to be published as part of the lecture series on insurance regulation by the S. S. Huebner Foundation edited by Herbert S. Denenberg and Spencer L. Kimball.

39-280 0 - 71 pt, 17A 4

states have the special combination of environmental factors that are conducive to the no-filing system and 2) because currently the no-filing laws are superimposed upon a national pattern of prior approval and the bureau system, open competition is kept within a reasonable bounds in states with no-filing laws.

3. Regardless of the type of law enacted, should rating bureaus be permitted to exist? Why? Should their rates be advisory or should members be permitted to agree to burcau rates? Why?

All written statements supported the continuation of rating bureaus because of the credible rates they develop, the services they provide for their members and subscribers at a cost less than these insurers could perform the services themselves, and because they permit an efficient use of scarce talents. With respect to their proper role, however, there was a clear difference of opinion. All but one or two stock insurers, the AIA, and the IRB advocated advisory bureau rates. In oral testimony the IRB said that it is revising its constitution to move as close to this position as possible under existing laws. The major argument in favor of advisory rates was to permit maximum flexibility to the membership. Most mutual insurers and their organizations, on the other hand, would permit insurers to agree to adhere to bureau rates as a stabilizing force as long as there was sufficient regulation to prevent excessive rates and alternative routes for insurers who prefer not to adhere.

All but one insurer testifying at the oral hearing opposed a rating bureau that would develop pure premiums for all insurers because this would either freeze all insurers into a common classification pattern or encourage too much competition. The IRB also expressed concern about the additional expense that would be incurred because each insurer would have to prepare its own rating manuals.

4. In those states where you have had serious difficulties with rate regulation, which do you prefer: 1) a reform in the rating laws or 2) a reform in the administration of those laws? Why? If you prefer the latter, how do you propose that it be achieved?

All but one or two mutual insurers, the MIRB, and the AMIA prefer to change the rating laws because they fear that any reforms in administration may be temporary. Several acknowledged that the administration may also have to be reviewed because each type of rating law is capable of being administered in many different ways. The AMIA emphasizes this latter point and prefers first to try to improve the administration of the current law. It supports the use of more tax revenues to upgrade state insurance departments, would insulate insurance departments from political pressures wherever possible (e.g., abolish public hearings before rates become effective), and support statutory provisions requiring prompt decisions on rate filings.

5. Has your experience in Florida and Georgia since they shifted from a "prior approval" approach to a "no-filing" law indicated that this would be a desirable change to make in more states? Give as much detailed support of your answer as you

can.

Although Florida now has a no-filing law, it differs from the California law in that it provides for the annual collection of premium and loss statistics. The Georgia approach is not technically a no-filing law. Instead rates must be filed but for informational purposes only.

The experience in these two states under their new laws has convinced most insurers submitting written statements that similar changes would be desirable in other states. However, two mutual insurers maintained that it is too early to tell. Two stock insurers, the MIRB and the AMIA had some reservations, particularly with respect to Georgia. Rates are still inadequate in both states, they argue, and prior consultation has been encouraged with respect to rate changes. The Georgia department may also be unduly critical of voluntary adherence to burcau rates. Finally the Rate Monitoring System introduced in Georgia to keep track of rate changes is cumbersome and costly. Perhaps, these critics maintained, the situation will improve over time. The AMIA emphasized that, regardless of the experience in these two states, the environmental factors in other states may not favor the same type of law.

6. With respect to each of the three major approaches to rate regulation listed below, what major changes would you make in the typical rating statute to make this approach as satisfactory as possible? What procedures would you ask the state insurance departments to adopt in order to project its administration?

6.1. No filing law

Most participants had no changes to suggest in the California-type statute but a few mutuals or mutual organizations suggested one or more of the following changes:

1) Define all three rating standards.

2) Require the filing of statistical experience as under the Florida statute. 3) Exclude workmen's compensation.

One stock insurer advocated specific recognition of the group property insurance concept in all rating laws.

The only administrative suggestions were that the law not be administered as a prior approval statute and that examiners devote less of their attention to accidental, minor violations of the law.

6. File-and-use laws

More participants had suggestions for improving typical file-and-use laws no-filing laws but the number was still small. Both stock and mutual insurers were included in this group which suggested one or more of the following:

1) Define "excessiveness" and "inadequacy".

2)

Allow insurers some time to adjust to subsequent disapprovals.

3) Shift the burden of proof to the insurance department disapproving a rate.

4) In order to avoid flash filings require rates once filed to remain in effect at least six months.

5) Exclude workmen's compensation insurance.

The only administrative suggestion was not to administer the law as if it were a prior approval statute.

6.3. All-industry laws

About the same number of insurers had suggestions for improving the allindustry laws and typical file-and-use laws. Their suggestions included the following:

1) Define the rating standards.

2) Expressly provide for projected experience as acceptable supporting information.

3)

Permit insurers to use without question any rate approved for some other insurer.

4) Require the insurance department to act within a stated period.

5) Require documentation of disapprovals.

Respect for the decme period was a frequent suggestion for improving the administration of these laws. Commissioners with laws permitting hearings were requested to use this power sparingly.

7. In your opinion which of these three approaches to rate regulation would be most acceptable to the general public? Why?

Most insurers and insurer organizations believe that the approach they favor is also the one that would be most acceptable to the public. The majority, therefore, thought the public would prefer a no-filing statute because this approach is most likely to produce low rates, an adequate supply of insurance, and produce innovations.

The Automobile Club of Southern California, while preferring a no-filing law itself, said that the public might feel its interest was being better protected under a fileand-use statute. One minority report to the NAMIC observed that "in an age where everything is more and more regulated, it is almost amusing to think that lobbyists pushing file-and-use laws think that this is the one field where the government is not going to regulate in the future". The MIRB believes that the public will prefer its present law if it is working well and some change if it is not. In the same vein the

AMIA believes that the public is most interested in the achievement of certain goals, not the particular means used to achieve these goals.

8. At its May 16, 1966 meeting, this subcommittee received a report on a questionnaire sent to the chief insurance supervisory officials of 54 jurisdictions. The results suggested that although almost half the respondents did not believe that the "prior approval" approach in its present form was appropriate in the light of modern conditions, at least three-fourths did not believe that a file-and-use law or a no-filing law would be desirable for their states. How do you account for the differences between the results of this survey of supervisory officials and the 1967 survey of insurers?

Some insurers attributed the prevailing attitude of the supervisory officials to praise worthy motives while others were not so complimentary. The first group thought the supervisory officials were more concerned about the interests of the consumer than were insurers, were more apprehensive about placing too much reliance on competition, and believed that they could more effectively meet their responsibility to the public under prior approval statutes. Less praise-worthy reasons were an alleged desire of the commissioners to maintain their image, power and job, their reluctance to try new approaches because of the effort involved, their lack of confidence in insurers, and the influence of agent's associations. A few insurers attributed the difference in the two surveys primarily to the time at which each was taken.

Miscellaneous Testimony. Two additional matters discussed in the oral testimony are worthy of brief mention here are the following:

1. Although most participants believe that less restrictive rate regulation will improve the supply of insurance, they agree that this will not achieve the socialization of risk. For example, insurance may become more readily available in ghetto areas but at prices that insureds may be unable or unwilling to pay.

2. The modified prior approval approach has few friends and apparently no future.

ATTACHMENT 3

RATE LAW ADMINISTRATION

(Adapted from work by Robert Franson,

to be published in full separately).

At present on-the-spot studies of state insurance departments have been completed in California (a "no-file" state) and Kentucky (a “prior approval" state). The analysis of New York administration is not yet complete, and the results will not be available to the Subcommittee for some time.

The studies point in the direction of a system which does not require the department to review all filings which it receives or to examine all companies. For example, in California much of the regulator's time is spent rating a sample of policyholders applications and correcting errors that may be discovered. This detailed review has little connection with the adequacy or excessiveness of rates. It is a phenomenon that seemingly is not necessarily unique to the kind of rating law that state has adopted; rather it is a natural outgrowth of requiring the state routinely to perform a review function.1

The regulator should be given discretion to perform these routine review tasks only when necessary to assure that industry is complying with the law.

The problem is how to select a sample for study. Simple random sampling is inefficient because it does not focus regulatory efforts where they are most likely to be needed. Therefore some selection strategy will be necessary. Currently the State of Georgia, which was not a part of this study, is attempting to develop on a sophisticated basis a means of monitoring the industry by collection of enough information to determine when problem areas are developing that require closer attention. Geórgia's experiences may prove helpful in pointing the way to future NAIC recommendations.

It also seems that a combination of tactics is desirable. Selective review of filings may serve adequately in one line, while examinations are necessary for another. A third line may need nothing more than occasional monitoring. All of these should be within the commissioner's discretion. Finally, if these choices are made to turn on the degree and effectiveness of competition the departments and the insurers may be encouraged to develop the data on the role of competition which are now missing.

The combination of methods has important effect on staff morale too. These studies have indicated that the tedium of minute checking can lead to feelings of boredom and lack of participation in meaningful decisions.2 In contrast, examination of companies familiarizes departmental staff with the market system and sources of information--which is particularly valuable when a special investigation is required by some unusual situation. There is one real flaw in the examination system, too. Companies may raid departments, picking up the better examiners with whom they come in frequent contact. However rotation of assignments may minimize these problems. It also has the twin advantage of familiarizing staff with the total role of rate regulatory operations.

Examinations, if they are to be truly effective, must be conducted often enough and the results readied soon enough to provide current information. For example, California definitely suffers from not having enough information. Its examinations do seem to give the department a good understanding of how rates are made, the statistical support for these rates, and the way these rates are applied. But the information is not very current. The department visits each company only once every seven years on the average. The examination takes about one year, and the report takes another six months to a year to be completed. Obviously, a lot can happen which does not come to the department's attention for quite a while, as the department admits. In addition, the examination system is precisely the kind of routine activity that leads to progressively more detailed and irrelevant considerations.

The studies also demonstrated that the type of state law has little effect on the quality of the information furnished on rates. California receives the same sort of

1 This conclusion seems supported by parallel developments in other regulatory agencies. See, e.g.. Landis, James M., The Administrative Process (Yale University Press: 1938) at 45, 46.

2 Studies by Likert show that the feelings of non-participation leads to low morale. See Rensis Likert, New Patterns of Management (McGraw-Hill, 1961) and The Human Organization (McGraw-Hill, 1967).