It is important to note that a payroll deduction plan is the keynote of the program. The credit union has the only facilities for accepting a payroll deduction thus far. So, to enjoy the full benefits of the insurance program it will be necessary to go through the credit union. As an incentive to eligible personssuch as retirees who wish to participate-this may be done by applying through the credit union. As a matter of fact, ANY SHAREHOLDER IN THE CREDIT UNION IS ELIGIBLE. The wholehearted support of the UAW membership will contribute greatly to the success of this pioneering venture of group auto insurance. It is anticipated that many additional benefits will be derived from this program as it progresses. Your cooperation will certainly make it beneficial to all who participate.

UNITED AUTOMOBILE, AEROSPACE IN AGRICULTURE IMPLEMENT

WORKERS OF AMERICA-UAW,
Fremont, Calif.

DEAR SIR AND BROTHER: For the past several years the membership of the UAW and other Unions, as well as the public at large, have been complaining about the high-handed and arbitrary attitude of Automobile Insurance Companies. Their total disregard for the rights and welfare of the countless number who pay premiums for automobile insurance is apparent by their arrogance, abuse and dictatorial attitude in that they have literally thumbed their noses at any suggestions, either by Congress or the General Public, to correct the injustice perpetrated against a helpless people.

For example, some of the more comman abuses are:

A. Policies are being cancelled after one accident, even though the policyholder has paid premiums for years. Our investigation reveals that in many cases, increase in premiums exceeded the cost of repairs by 10 to 20 times. B. Arbitrary raising of premiums without explanation or reason.

C. Cancelling policyholders when they reach 65, or charge retirees higher premiums when they can least afford it.

D. Refuse to insure those who live in low cost neighborhoods, or charge higher premiums to insure those in minority groups.

E. Unwarranted delays in payment of claims.

F. Cancelling policyholders and then advising them they can be covered for a higher premium. This has become quite common in the last 4 years.

Most all of us have had some pretty sad experiences which leads us to believe this to be a real racket.

Your Local Union. along with our Sister Local, No. 560, of Milpitas had decided it is time to break the stranglehold that Automobile Insurance "Octopus" has wrapped around us. In the good, old UAW spirit-of-determination and initiative, the Officers are negotiating with an insurance carrier who specializes in writing business for Unions and other groups. Some of the features being proposed are:

1. Lower Premium Cost. 2. Simplified Claims Service. 3. Repairs made at the shop of the insured's choice. 4. A waiver of premium up to six (6) months when a policyholder is disabled and unable to work. 5. A Board of Arbitration consisting of two members from the UAW Locals and two members representing the insurance Carrier. along with one impartial person to provide a fair hearing for possible or unjust treatment. 6. The insurance payment on a monthly basis through a payroll deduction program.

All told, such a proposed deal merits your consideration and if all goes well, we can button down a firm agreement. Then each member will receive a fully explanatory brochure with a tear-off card attached to be filled out and mailed back to the Local Union Office. If there are enough members interested, the sign-up dates can be decided, all matters finalized and we can once again, through solidarity and support, give our members a service and savings long

needed.

Fraternally,

FLOYD M. BUENO,

Financial Secretary, U.A.W. Local No. 1364

From the San Jose (Calif.) Mercury, Oct. 14, 1968

CAR INSURANCE OVERHAUL DUE?

(By Wallace Turner)

NEW YORK-The automobile insurance system, into which American motorists paid about $10.6 billion last year and got back $6.4 billion, is about to be divided by deep policy disagreements while falling rapidly into disfavor with its customers and in the political arena.

The $4.2 billion difference went to pay agents' commissions, to pay attorneys, to finance adjusters, investigators, and to operate the companies. Precious little went to profit, with some companies losing money on their automobile policies. interviews across the nation in the last two weeks have uncovered these omens of impending upheaval :

-In Washington, high officials of the old regime are hurrying to get $1.6 million committed to a fact study before a new President is inaugurated. Regardless of who wins, the data would be available for the first time to answer questions about automobile insurance patterns and needs.

-In Manhattan, the American Insurance Assn., one of three industry groups whose members sell all the automobile insurance, is approaching a decision on whether to ask that an entirely new method be devised for deciding who is to be paid off after an accident. Indications are that AIA will support switching to a "no fault" system, which is resisted by other important industry groups.

-In Chicago, the American Mutual Insurance Alliance, another industry association, has devised experiments testing public acceptance of an accelerated settlement program that requires the accident victim to promise not to sue in return for immediate payment of medical costs and acceptance of liability by the faulty driver's insurer.

-In St. Louis, the president of the American Trial Lawyers Assn. asked for a new system that would allow both parties in a car wreck to collect from each other's insurance company. Now one driver is found to be at fault, and the other collects.

The changes that seem to be over the horizon will be the product of public complaints directed at the high cost of automobile insurance, at delays and inequities in compensation of accident victims, and at failure of some companies.

The volume of customer complaints against the insurance system has declined in the last year as the companies have moved to meet some of them and regulation has tightened. The companies have created non-cancellable policies, as an example, while the states have tightened their regulation systems.

Still, not everyone is satisfied. Moreover, the urge for insurance reform has gained the attention of important figures in the federal government.

Last June and July the Senate Anti-trust and Monopoly subcommittee, headed by Sen. Philip A. Hart (D-Mich.), held eight days of hearings that explored complaints about the automobile insurance system and some of the shortcomings of state regulation of insurance. The hearings will resume early next year. More than a year ago Warren Magnuson (D-Wash.), chairman of the Senate Commerce Committee, sponsored a resolution directing the Department of Transportation to spend two year studying automobile insurance and then to report with facts and recommendations. An appropriation of $1.6 million was provided. The report is due in May, 1970.

Richard Barber, a deputy assistant secretary of transportation for policy development, said these broad areas will be covered:

-How does the present automobile insurance system work? How are rates set? Who is denied insurance? What are the strengths and weaknesses of the system?

-How does the system work as viewed by the accident victim? Is he compensated adequately and promptly?

-Knowing how it all works, what can be done to improve it?

The first question to be resolved is whether to replace the present "blame" system of paying off accident victims with one where no fault is assessed.

At present the settlement is worked out on the theory that one driver is wrong, and the other right. This has led to a situation wherein a law suit is filed, or at least threatened, to achieve recompense. A lawyer is retained on contingency fee of one-quarter to one-third of the amount of the eventual settlement.

Many observers have criticised this "fault system" as unrealistic, in that the difference in right and wrong is arbitrarily assigned when neither driver is to blame.

Critics have proposed many programs to meet this problem. Most of these have in common the theme that anyone hurt or whose property was damaged in an automobile accident would be paid directly and without having to get a lawyer or go to court.

Blame for the accident would not be placed, and so the concept is known as the "non-fault" system.

Insurance companies have been slow to accept this, but a study committee of the American Insurance Assn. voted earlier this year to adopt an interim report in which these two statements were made:

"In the opinion of the committee, this (present) system is not working satisfactorily and there is no expectation it will do so in the future..

"This committee recommends an insurance system which would cover motorists against their economic loss and hospitalization and medical expense arising out of automobile accidents without regard to fault."

From the San Jose (Calif.) News, Oct. 21, 1968

NEW NO-BLAME INSURANCE PLAN COULD CUT AUTO PREMIUM COSTS WASHINGTON-A new kind of auto insurance which backers say could cut premium costs nearly in half and would pay medical expenses without regard to who caused an accident, was proposed today by a segment of the insurance industry.

The plan, which would not deal with the cost of automobile repairs, was advanced by the American Insurance Association, composed of 160 companies that write about 40 per cent of the nation's automobile insurance.

The plan faces stiff opposition from other segments of the industry. It could not be put into effect without changes in state laws, or federal legislation.

T. Lawrence Jones, president of the American Insurance Association, said the proposed plan was designed to meet growing criticism of the industry which has led Congress to call for an investigation of it by the Department of Transportation.

In a statement prepared for a news conference, Jones said the plan could cut insurance costs to motorists by as much as 45 per cent.

Another major advantage, he said, would be its prompt payment of hospital and medical expenses without the need of determining fault, which now can take years of litigation.

However, the plan was quickly attacked by the nation's largest auotmobile insurer, State Farm Mutual, for eliminating any payments for "pain and suffering."

State Farm President Edward B. Rust, in a statement timed for the AIA's announcement, said such costs account for 60 per cent of liability payments under the present system. Such a major step as eliminating them should not be taken without further study, he said.

Rust said his company is sending questionnaires to each of its 11 million policy holders to determine their views on "pain and suffering" and other questions raised by the new proposal.

Rust also questioned the wisdom of eliminating fault as a factor in paying accident costs. "What happens when you tell 100 million drivers they are not financially responsible for the way they drive?" he asked.

Judson B. Branch, chairman of Allstate Insurance Co. agreed and said the proposed plan would force careful drivers to subsidize the careless ones.

In addition, he said, “our actuaries tell us that ultimately the proposed plan may well cost more than the present system, while providing less protection to the innocent."

The National Association of Independent Insurers, which represents 480 companies, said each motorist would be burdened with insuring himself against all his losses, both those caused by himself and those caused by other motorists.

Vestal Lemmon, president of the association, said hot rodders, speeders and drunken drivers would get substantial rate reductions while car owners with families would bear a bigger share of the premium burden.

He said also a substantial part of insurance costs for commercial vehicles would be shifted to private car owners, because the truck owners as well as car owners would be immune from liability suits.

Jones said the AIA plan was based on a year-long study by a special committee of the association. Its basic features have been under discussion within the industry for the past several years.

The AIA plan would be compulsory, with motorists required to purchase the insurance in order to register or operate a car within his state. He would be covered for accident losses suffered in another state.

Besides paying medical costs, the plan would recompense the victim for "economic loss," said Jones.

A REVIEW OF SUMMARY REPORT, PRICES, AND PROFITS IN THE PROPERTY OF LIABILITY INSURANCE INDUSTRY AND THE HOFFLANDER MASON CRITIQUE THEREOF

(By Bernard L. Webb, Assistant Professor of

Actuarial Science and Insurance, Georgia State College)

The perennial debate concerning the use of investment income in rate making for property and liability insurance has entered a new, and possibly final, stage. The debate has even reached into the halls of the United States Senate.

Prices and Profits in the Property and Liability Insurance Industry, the report of a study conducted by Arthur D. Little, Inc., (A.D.L.) for the American Insurance Association (A.I.A.) has caused a great deal of the controversy. The study was sponsored by the A.I.A. to forestall a movement toward the use of investment income in rate making. It is ironic that it may be the catalyst which will bring about the change which the A.I.A. sought to oppose.

The purpose of this review is to discuss both the Summary Report of the Arthur D. Little study and the critique of that study by Alfred E. Hofflander and R. Hal Mason.

The A.D.L. study is based on the assumption that the yield to investors in any enterprise should vary with the risk assumed by the investor. This assumption is generally accepted by both theoretical economists and practicing financial analysts. The study then proceeds to demonstrate, at least to the satisfaction of A.D.L. and the A.I.A., that the yield in the property and liability industry is lower than that in other industries with comparable risks.

While the relationship between risk and rate of return is generally accepted, the methods used to measure yield and risk are open to some question.

The A.D.L. study measures risk by the variance of rates of return about their mean value. The use of this unit of measure is based on the definition of risk as uncertainty. The greater the variance of the rates of return the greater will be the uncertainty as to the rate of return which will actually be realized by a given firm.

Hofflander and Mason question this measure of risk on the basis that "... most of the differences in insurer operating results are due to differences in: (1) composition and performance of investment portfolios, (2) the mix of business underwritten, (3) geographical diversification of business, and (4) management philosophies and goals." That is, they believe that variations in rate of return are due more to conscious decisions of management than to chance variations.

While the composition of the investment portfolio is largely under the control of management, the performance of that portfolio is not. Investment analysis is not an exact science. Many errors in judgment are made in portfolio selection. Also, the performance of a portfolio after it has been selected is subject to many chance influences: the death or sickness of a president, rumors of war (or peace), devaluation of a major foreign currency, changes in stock market fads, and others too numerous to mention. To attribute to management the power to control the performance of their investment portfolios is to endow them with omniscience and omnipotence with few (if any) of them possess.

The influence of geographical diversification upon the results of the study is not likely to be large for two reasons. First, the more severe fluctuations are spread over the entire industry through the mechanism of reinsurance. For example, the losses from a major hurricane on the Gulf coast are not borne only by companies writing direct business there, but are spread by reinsurance

over the insurance industry of the United States and most of the free world. Second, the A.D.L. study covered a period of eleven years. The influence of regional losses, particularly after the effects of reinsurance, should be quite sman over such a long period.

Furthermore, the variance is used as a comparative measure, to permit the comparison of the insurance industry with other industries. The presence of some influences which are under the control of management would not affect the comparison unless it is assumed that such influences are not present, or are present to a substantially lesser or greater degree in the other industries.

Hollander and Mason also suggest that the A.D.L. study compares apples with oranges since the insurance industry values most of its assets at market, while industrial firms value theirs at book value. This difference is more apparent than real, however. The only assets normally held by an industrial firm for which the market value would fluctuate significantly would be land and stocks of goods. Land is normally carried at cost by both insurers and industrial firms, so it should cause no distortions. Stocks of goods held by manufacturers are normally converted into cash within a few months, so that any capital gains or losses thereon are realized. Securities may be held by insurers for many years, resulting in sizeable unnrealized capital gains and losses. However, it appears that A.D.L. took these unrealized capital gains and losses into account each year as though they had been realized, thus putting the insurers on an equal footing with the industrial firms.

Capital gains and losses are not generally a significant factor for industrial firms, since the property they hold does not fluctuate in value as widely as do the securities, especially common stocks, held by insurance companies.

Hofflander and Mason also state that the assets of industrial firms are undervalued, thus overstating their rates of return. However, the assets of insurers are also understated, in that nonadmitted assets are not included. These nonadmitted assets include agents' balances over ninety days old; equipment, furniture, and fixtures; supplies; and investments which do not comply with legal requirements for insurance companies. All of these items would be included in the computations for an industrial firm. Reinsurance claims against nonadmitted reinsurers are also effectively excluded from the assets of an insurer. They are shown on the assets side of the statement, but are offset by a corresponding item on the liability side.

Hofflander and Mason question whether the period of the study (1955-1965) would be typical, or if any earlier period would show a higher return. This reviewer suspects that an earlier period would show a higher rate of return. However, a rate of return ten years old would be of interest primarily to economic historians. It would interest the financial analyst and investor about as much as the maximum rate of interest permitted under the Law of the Twelve Tables.1

Hofflander and Mason express some doubt that insurers compete with other industries for capital, since approximately half of their assets are derived from unearned premium and loss reserves. They have overlooked the fact that these reserves must be supported by an appropriate amount of risk capital, i.e., policyholders' surplus. This risk capital must be obtained either by retaining earnings or by bidding against other industries in the capital market.

These comments on the Hofflander-Mason critique of the A.D.L. study should not be taken as an indication that this reviewer considers that study to be perfect. On the contrary, this reviewer believes that Hofflander and Mason swallowed an elephant while choking on imaginary gnats.

Even the Arthur D. Little organization apparently will concede that some phases of the study are open to question. They stated in a recent news release, "We can say without doubt of contradiction that the principles of analysis employed in the Arthur D. Little study are sound." "

2

The philosophy of the study is stated as follows in the Summary Report:

"Economic theory has long maintained that a going concern must reward its investors with a return commensurate with the risks inherent in the

1 For those few who are interested, the Law of the Twelve Tables, adopted in Rome about 2400 years ago, imposed a maximum of eight and one-third per cent per annum on the interest that could be charged. The effect of this law upon the present rates of return for insurers probably can be ignored.

It is possible that they meant, "without fear of contradiction," but the published version is a far more accurate appraisal of the existing situation.