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Does not that put the residents of the District at some disadvantage ? Mr. HOLLEMAN. Certainly; under the present situation it does.

Senator STEVENSON. That does not alter your thinking though about the necessity of some limits?

Mr. HOLLEMAN. No; I believe there should be some limits. Senator STEVENSON. All right. Thank you very much, Mr. Holleman. We appreciate your helping us out this morning.

That concludes the testimony before the subcommittee. As I indicated earlier, we will keep the record open for another 4 weeks. Should anyone wish to submit any additional statements, we will move as expeditiously as we can on all of these bills upon the receipt of those statements.

It certainly will be impossible to report any of the bills before we adjourn, but I do hope that we will report them out shortly after we reconvene in January.

Thank you very much.

At this point in the record I will insert material the committee has received on S. 2208. (The material follows:)

AMERICAN INSURANCE ASSOCIATION,

Washington, D.C., July 6, 1971. Re S. 2208, The District of Columbia Insurance Act of 1971. Hon. ADLAI E. STEVENSON III, Chairman, Subcommittee on Business, Commerce, and Judiciary, Committee

on the District of Columbia, 6222 New Senate Office Building, Washing

ton, D.C. DEAR SENATOR STEVENSON: On behalf of the American Insurance Association, whose members write the great majority of property and casualty insurance in the District of Columbia, I would like to comment on the proposed District of Columbia Insurance Act of 1971, which you introduced as S. 2208 on June 30.

With respect to Title I, which would create a post assessment insurer insolvency program for the District of Columbia, our Association has consistently opposed enactments of this sort. We feel that the interstate nature of the property and casualty insurance business requires national treatment of the insolvency problem. In addition, we view such a post insolvency assessment program as unnecessary in the District of Columbia, in view of the rigorous license renewal process by which the District of Columbia Insurance Department winnows out all companies whose financial condition threatens harm to policy holders in the District. Within the past twenty years, the Insurance Department has refused to renew the licenses of some two hundred companies in questionable financial condition.

The American Insurance Association supports the provisions of Title IV, which would, among other things, increase the capital and surplus requirements for stock, mutual, and reciprocal fire and casualty insurance companies in the District of Columbia.

The American Insurance Association supports the provisions of Title V, which would have the effect of not requiring contract bonds where the amount of the work and material contract does not exceed $10,000. The present limitation of $2,000 is, in our view, unnecessarily low.

Finally, we urge the addition of another title, eliminated from the draft submitted to you, which wou'd reconcile the District fire rating law with the provisions of its casualty rating law, making both laws of the “file and use" variety. A "file and use” rating law provides insurers with greater flexibility in changing rates to meet market conditions. Moreover, a "file and use” law protects the public interest by allowing the Superintendent to suspend any rate that he finds to be inadequate, excessive, or unfairly discriminatory.

We would appreciate being notified if and when hearings on the captioned measure are scheduled. Sincerely,

LESLIE CHEEK III,

Assistant Manager.

PREPARED STATEMENT SUBMITTED BY STATE FARM INSURANCE

S. 2208 SHOULD BE AMENDED TO PROVIDE FOR THE CREATION OF CUSTODIAL ACCOUNTS

TO HELP PREVENT INSOLVENCY OF INSURANCE COMPANIES

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At last count, about 40 states had laws on the books to protect the public from the consequences of car insurance company bankruptcies (there have been about 160 property and liability insurance companies placed in liquidation over the past ten years). These laws, known as insurance guaranty funds, operate much like the Federal Deposit Insurance Corporation protects bank depositors. When an insurer goes under, the guaranty fund steps in to settle claims.

S. 2208 is designed to provide such protection in the District of Columbia. However, it should be amended along the lines of the recent Illinois guaranty legislation to provide for the creation of a custodial account which may help prevent insolvencies in the first place. Significantly, when the Senate Commerce Committee was considering national insurance guaranty legislation in the last Congress, a critical feature was the provision in state insolvency plans of state action "ensuring the availability of sound assets of participating insurers." The Senate Report stated that “to prevent insurance company insolvencies," a state plan would require “a domiciliary company to set aside certain assets as a condition of doing business in the state.” See S. Rep. 91–1421, (91st Cong., 2d Sess.), pp. 6, 27.

Insurance guaranty funds, in the limited form presently contemplated by S. 2208, created by assessments on car insurance companies, have been criticized by some insurance executives. They point out that guaranty funds themselves do nothing to prevent insolvencies ; they simply redistribute the losses. Operators of financially sound and well managed companies have never liked the idea that their customers should be saddled with the debts of mismanaged or defrauded companies, which is the net effect of guaranty funds. The typical bankrupt car insurer is a small company, operating on the fringes of the car insurance market and reduced to bankruptcy by mismanagement or fraud.

The guaranty fund does nothing to remedy the problem posed by the appeal of insurance company income and assets to unscrupulous manipulators.

Moreover, some insurance leaders point out, guaranty funds can become a disincentive to insolvency prevention. By saddling responsible companies with the debts of insolvent firms, public pressure on regulatory authorities to reduce insolvencies is lessened, since the public is theoretically protected from the consequences. In fact, the cost of these insolvencies must ultimately reflect in the premiums paid by the policyholders of the rest of the industry.

Also, in states where the guaranty fund operates, insurance agents may feel they need not be concerned about the financial strength of the companies whose policies they sell, since the fund protects their customers in the event of failure.

Illinois has moved boldly to correct this problem with legislation that not only sets up a guaranty fund, but has additional provisions that go a long way toward preventing insolvencies.

Inasmuch as S. 2208, though applicable only to the District of Columbia, would express the will of the Congress with regard to insurance company insolvencies, it is most appropriate that this D.C. Guaranty Fund legislation include similar preventive measures.

The Illinois law, first of its kind in the nation, requires that fire and casualty insurers set aside (in a policyholders security deposit account) cash and securities equal to 65% of written premiums up to a maximum of $10 million. This account remains under the control of the insurer, and the company may conduct normal trading activities with the securities in the account. The account must be maintained in an Illinois bank with trust powers. The account is earmarked and is funded with cash and specified types of sound securities. Thus, the custodial account helps assure that the company can meet its obligations to policyholders and claimants. This special account also assists insurance regulators to monitor the fiscal health of each company and to detect early signs of financial difficulty.

Under the Illinois plan each company must furnish the insurance director on or before January 31 every year with a certified schedule of cash and securities on deposit at the end of the preceding month. Before April 1 of every year, the insurance director must obtain a certified audit of the schedule of cash and securities in the policyholder security deposit account. Whenever a company permits its account to drop below the amount required by the new law, the Commissioner can order the deficiency corrected and may impose additional controls on the offending company.

The controls provided by the proposed amendment to S. 2208 would be quite similar to those provided for in Illinois. The most significant difference is that the D.C. policyholders guaranty security deposit ammount would equal the loss reserves required to be maintained, plus 50% of the statutory unearned premium reserve, with a maximum of $10 million. It is believed that measuring the requirement in this way would provide even more protection to policyholders of District based companies.

It is believed that the Illinois law is a regulatory landmark that gives the state insurance department a powerful tool to prevent insolvencies.

The Congress should furnish to the D.C. insurance Commissioner an equally effective means of protecting the citizen of the Nation's Capital by preventing insolvencies from happening and not merely content itself with furnishing protection from some of the consequences of insolvency.

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PROPOSED AMENDMENTS TO S. 2208

S. 2208 should be amended as follows:

I. Page 2, Section 102, line 5, insert after the comma the llowing: "To provide for the maintenance of accounts to protect insurer obligations to the public,”.

II. Page 3, line 19 insert the following:

(7) "Control" (including the terms "controlling", "controlled by" and "under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or non-management services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of any other person.

(8) "Affiliate” of, or person "affiliated” with, a specific person, means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or under common control with, the person specified. (9) “Custodian” means :

(a) The Commissioner;
(b) The insurance commissioner or State Treasurer of any other State; or

(c) Any one or more national or state banks having trust powers and which agree to furnish to the Commissioner on or before the last day of January of each year, on behalf of the depositor, a certified schedule of cash and marketable securities in the policyholder security deposit account, as of the last day of December of each year, and at such other times as the Commissioner shall request; and to furnish monthly to the Commissioner a certified schedule of all transactions affecting such account during the preceding month, or more or less frequently as the Commissioner may require for individual companies. Such transaction schedules shall be kept confidential. No bank is eligible to become a policyholder security deposit for an insurer

which is affiliated or under common control with such bank. (10) (1) "Marketable securities” mean:

(a) Investments authorized in Title 35, Sections 1321 (1) 35–1321 (2), 35–1321 (3), 35–1321 (4), Sections 35–1321 (5) and 35–1321 (9).

(b) Investments authorized in Section 35–1321 (6), other than obligations of corporations described in Subsection (2). (2) The common stock, preferred stock, and debt obligations of any corporation in which the following persons and entities, in the aggregate, own directly or indirectly, ten percent or more of the voting stock or other means of establishing equity ownership do not qualify as marketable securities :

(a) The insurer;
(b) The insurer's affiliates ;
(c) An insurer under common management; or

(a) The officers and directors of those companies described in paragraphs (a), (b) and (c) of this subsection. The amount invested in the common stock and obligations of any one corporation cannot, for the purposes of Section 120, exceed five percent of the deposit required by Section 120.

III. On page 19 at line 17 insert the following:

“Section 120. Each domestic insurance company, in order to be or remain authorized to transact one or more of the kinds of insurance, as set forth in

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section 103, shall make and maintain with a custodian as defined in section 104(9), cash or marketable securities as defined in section 104(10). The amount in the policyholder security deposit account shall be not less than the lesser of: (1) The sum of the following:

(a) 100% of the reserves for losses and loss adjustment expenses.

(b) 50% of the reserves for unearned premiums, (2) $10 million.

Section 121. In determining the amount in the account required by Section 120, the reserves for losses, loss adjustment expenses and unearned premiums shall be reduced by reinsurance cessions to reinsurers which are authorized to write reinsurance in this State and are either:

(1) Domestic reinsurers which meet the requirements of Section 120,

(2) Foreign or alien reinsurers not affiliated or under common control with the insurer, or

(3) Foreign or alien reinsurers affiliated or under common control with the insurer and which comply with Section 120 to the extent of the cessions.

Section 122. Every year, on or before the first day of April, the Commissioner shall audit the schedule of cash and marketable securities in the policyholder security deposit account of each domestic insurance company to determine that it is not less than the amount required to be maintained in accordance with Section 120. The Commissioner may undertake such an audit at any other time, and the company and the custodian shall cooperate in the performance of such audit. Such securities shall be valued in accordance with the rules governing valuation of securities for annual statement purposes.

Section 123. In the case of any insurance company which has failed to maintain its policyholder security deposif account, the Commissioner may im. pose any of the following requirements:

(a) That the amount required by Section 120 (1) (b) be increased to 100% of the unearned premium reserve, or

(b) That he be given 15 days prior notice from the custodian of any

withdrawal, substitution, or exchange of cash or marketable securities. The additional requirements may remain in effect, at the Commissioner's sole discretion, until one year has elapsed from the time the deficiency was eliminated.

Section 124. Any insurance company maintaining a policyholder security deposit account, except a company to which Section 123 applies, may at any time, substitute or exchange cash or marketable securities having a current value equal to or greater than the current value of those then in the account, and for which they are to be substituted or exchanged, without specific authorization from the Commissioner of insurance.

Section 125. No interest or priority in the cash, securities or investments maintained in a policy-holders security deposit account established or maintained in compliance with the provisions of Section 120 is created in favor of any person.

PREPARED STATEMENT OF JOHN NANGLE, WASHINGTON COUNSEL, NATIONAL

ASSOCIATION OF INDEPENDENT INSURERS

NAII is a voluntary national trade association of some 533 insurers* of all types, both stock and non-stock, whose membership provides a representative cross-section of the casualty and fire insurance business in America. Our companies range in size from the smallest one-state entrepreneurs to the very largest national, writers; they reflect all forms of merchandising-independent agency, exclusive agency, and direct writer; and they include companies serving not only the general market but also those specializing in serving particular consumer groups such as farmers, teachers, government employees, military personnel, and truckers.

The independent compaines have long been recognized as the most competitive and progressive segment of the fire-casaulty insurance business. They have originated by far most of the many policy coverage innovations and improvements in the past 25 years. Their aggressive price competition has saved the insuring public more than $10 billion in premiums in the last decade alone. Our companies have continued to expand the voluntary market availability of automobile insurance at a faster rate than the rate of increase in new vehicle registration, so that currently they are serving more than half the insured motorists in the counrty. We estimate that our companies write approximately 54% of the insured vehicles in the District of Columbia.

*354 members and 179 subscribers to our statistical services.

There are five titles to S. 2208 and inasmuch as Titles I and V are the only ones germaine to the interests of our member companies, we will confine this brief statement to these titles.

Title I would provide a mechanism for the payment of covered claims to claimants and policyholders in the event of property and casualty insurance company insolvency. Funds would be paid by the companies licensed for those lines in the District in proportion to their share of the business and on a postassessment basis.

Title V would raise the capital and surplus requirements for fire and casualty companies to operate in the District.

Two years ago, our Board of Directors took positive action on this matter in support of the development of reasonable proposals for State post-insolvency assessment type funds and further directed its staff to seek state legislation to better accomplish our objectives in preventing insolvencies.

We are pleased to respond in support of both Title I and Title V of S. 2208.

Over the past few years, critics of state regulation of the insurance business have become increasingly vocal particularly at the federal level in decrying the gaps in state regulation in the insolvency area. They have argued that insolvencies in the property and casualty insurance industry have left scores of policyholders and claimants without recourse because of the lack of some type of state mechanism for protecting these individuals. In view of all this, a bill was introduced at the last session of Congress to establish a Federal Insurance Guaranty Corporation to provide the coverage said to be lacking in individual assessments against insurance companies out of which will be paid claims of policyholders and claimants of insolvent insurers. A more subtle effect of the proposal would have been the pre-emption by the federal government of the power of the states to regulate insurance.

This federal intrusion into an area of regulation that has been traditionally a matter for the states to handle has been of serious concern to state regulators and the supporters of this type of regulation, particularly when a close look at the facts indicates that the insolvency problem is really very minor and that the states had already begun to alleviate it through the inclusion of insolvency protection under statutory uninsured motorist coverage. Statistics developed by the National Association of Insurance Commissioners reveal that property and casualty insolvency represented only a rate of loss of approximately 60¢ of every $1,000 of the $10 billion of automobile insurance premiums for the period 1960 to 1965. The rate of loss actually went down in the period 1966 to 1968 to 49¢ per $1,000 paid in premiums for the insolvencies occurring during that period. Significantly, there has not been an insolvency affecting District residents in over 35 years. Of course, this connotes the efficiency and high degree of regulation of the Insurance Department in the District of Columbia.

In addition, the full impact of insolvency protection under UM coverage was not considered since it had not been completely utilized until the latter part of 1968. It is anticipated that this protection will reduce the alleged insolvency gap almost to nothing because it is estimated that 95% of the insolvencies have been auto liability carriers.

Still there will remain a small group of people who will not be covered. In order to bridge this gap and silence the critics of state regulation, an insolvency assessment type of guaranty funds came into existence in 45 states. These funds pay insurance claims of policyholders and claimants from monies collected from licensed insurers in the state. Title I is substantially similar to most of these funds in that it conforms closely with that suggested by the National Association of Insurance Commissioners and provides for a post-insolvency fund.

Therefore, NAII supports this legislation.

Title V increases the capital and surplus requirements for a property and casualty insurance company to do business in the District of Columbia. We feel that the suggested increases are reasonable requirements and support this provision.

Senator STEVENSON. The hearing is adjourned.
(Whereupon, the hearing was adjourned at 11:25 a.m.)

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