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and insurance companies, along with the new SEC restrictions on higher-yield commercial paper in money market funds. As a result, large portfolio managers began dumping high-yield investments on the market (even though they may have been performing) so as not to face a media attack and the attendant fearful reactions of their pensioners, investors, and stockholders. Perhaps you saw the article in the April 16, 1991, Wall Street Journal in which Professor Glenn Yago of the State University of New York stated:

"The government's response to the junk bond market turned a market correction into a regulatory rout. It dismantled the junk bond market and led to a broader capital crunch that caused the present recession..... In order to

the capital and credit markets the government has proven itself able and willing to destroy them through zealous over-regulation.

To conclude my own personal perspective, I still puzzled cver the criticism from Washington from the tax point of view, that the industry's solvency-oriented reporting is too conservative and results in under-taxation. Such a view resulted in the passaçe by Congress last year of an $8 billion dollar tax increase on the life insurance industry. on the other hand, state regulation is now being criticized as being insufficient in solvency regulations. As to my company, it is a small, sound and rapidly growing life company, paying income tax while showing statutory losses to the state regulators kindled by our pattern of growth.



The PALC feels that state regulation under the leadership of the Naticnal Association of Insurance Commissioners (NAIC) has done a rather remarkable job over the years, evidenced in the attached charts. Life insurance is not simple. Its intricacies cannot be understood overnight. Life insurance companies can't be rated fairly by the regulators or the public ratings agencies through the use of a rigid set of numerical ratios. Granted, people need to be assured as to the solvency of any insurer from whom they purchase a policy. However, the danger is that the emphasis will place more on the identification of solvency problems rather than developing workable plans of action and solutions to deal with troubled companies.

Pressures are now building here in Washington to amend the McCarran-Ferguson Act and to set strict national solvency standards.


pressures have spurred state regulators to attempt to do too much in too short a time. Sudden regulatory changes, additional requirements, and the lack of understanding as to their ultimate impact will, in our opinion, lead the state regulators to force an unnecessary constriction of companies, lessen competition, and perhaps spur additional insolvencies. State regulators are on the defensive, and in a manner normally out



of character, are impulsively reacting to the threat of a Federal intrusion or take-over. They are removing some of the reinsurance tools needed to provide temporary financing of business expansion; requiring expensive audits over and above their own company examinations; increasing securities valuation reserves; and promulgating rules requiring more expensive certifications. Meanwhile, back at the ranch, the managements of smaller companies like mine are tying to react to the crises, comply with the new requirements, pay the additional costs of compliance, and still stay in business.

Recently, Mr. Woodall editorialized (see attached) on how he felt that the reaction of state regulators to federal pressures

actually endangering the state regulatory scheme. His editorial "hit a nerve" in the industry, as evidenced by the responses we have received from our member companies. We believe that the life insurance industry wants strong but fair regulation; it wants as much uniformity as is necessary for the regulatory scheme to be effective; and it wants regulation to remain at the state level, but also provide constitutional due process. Any additional authorization needed by the state regulators should be granted by the state legislatures. Interstate compacts authorized by the v. s. Constitution could be utilized by state regulators to achieve


necessary authority for instituting a uniform regulatory scheme and to address national solvency standards. Such compacts have been used since colonial times and there are now 140 of them between different states. An article in 2 J. Ins. Reg. Vol. 2 entitled, "Enhancing State Regulation Through The Compact clause," concludes that interstate compacts are almost uniquely suited to state insurance regulation:

"As an interstate compact organization and agency, the NAIC would preserve the very best of both worlds. The preservation of the diversity, experimentation, local control, local responsiveness to' policyholders and conditions, and accommodation to state tort and other laws so essential to effective regulation would be preserved. The ability to establish binding, uniform national standards, regulations, and functions through an interstate compact and by using the SSO (Support and Services office) as an interstate compact agency could fill the opposite need for uniformity and coordinated administration."


As co the jurisdiction of state regulators in dealing with fraud, they have already started utilize "The Racketeer Influenced and corrurt Organization Act" or RICO to address instances of insurance fraud. Twenty-nine states also now have RICO statues of their own statutes patterned after the federal act - which can be used by state departments of insurance.

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Today, the life industry, and especially the smaller companies, face an added complication. Due to all of the publicity and resulting unnecesary panic, the rating vultures are circling overhead - each with its own private method of predicting which companies will succumb first. This understandably leads to lack of consumer confidence in the industry and can confuse and scare consumers. Perhaps the most constructive thing Congress could look into would be the proliferation of these private life insurance company rating agencies, their secret formulas for determining the financial strength of insurers, and the fees charged to the companies being rated. Certainly, they should not be given immunity from legal actions as one such rating agency proposed earlier this month in testimony before the U. s. Senate Committee on Connerce, Science and Transportation.

In conclusion, we would ask that your subcommittee, and the public for that matter, not fall into what Professor Spencer Kimball of the University of Chicago Law School calls a "trap. Professor Kimball stated in a recent public address that he is now preparing for publication in a future issue of the Journal of Insurance Regulation that this trap is a natural one one to be anticipated :

"Those persons (advocating some form of federal interaction) have tended to look at state regulation with all its defects -- and it has many and then to compare it with an imaginary federal regulatory agency that works perfectly. As you know well, there is no such federal regulatory agency in existence, and there is no reason to suppose one newly developed for insurance would work better than those now in existence."

Professor Kimball goes on to look at the federal systems in being that deal with similar matters, such as the regulators of banks, savings and loan associations, and the Pension Benefit Guaranty Corporation. Those systems, says Professor Kimball, "are all in serious trouble, in more trouble than is state regulation of insurance, even after the Executive Life debacle." He then says that even though state regulation of insurance cannot be said to work perfectly or perhaps even well, it has never worked so badly as the existing comparable federal regulatory systems.

In the same vein, James M. Jackson in the article in 9 J. Ing. Reg. Vol. 2 2. 153 states:

"Despite current difficulties, however, it is doubtful whether exchanging the 125 year experience and history of basically competent state insurance regulation for some undefined and untested federal regulatory scheme would solve more problems than it would create. Recent federal experience in the regulation of financial institutions, to say nothing of the nisadventures of HUD and other 'grant'-type agencies, does not inspire confidence that trading state for federal regulation holds much propise."

In summary, it is the position of the NALC that state regulation under the leadership of the National Association of Insurance Commissioners (NAIC) has done a rather remarkable job over the years. We support the continuation of state regulation and oppose any change in the McCarran-Ferguson Act, but we are also concerned over the possible over-regulation by the stato commissioners and the negative impact it could have on the solvency and market position of smaller companies.

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