in the District of Columbia. No member insurer shall be assessed an amount greater than two (2) percent of the member's net direct written premiums in any one year. (section 107)

An administrative framework for orderly management is provided for through the creation of a Board of Directors (sections 106 and 107). Safeguards are vested in the Commissioner of the District of Columbia who may delegate his authority. (section 119) and, at the same time, there are sufficient guarantees to assure performance by the Board of Directors. A Plan of Operation is to be established (section 108) containing broad "must" provisions under the overall supervision of the Commissioner of the District of Columbia who is given sufficiently broad authority-mandatory and discretionary (section 109). These are supplemental to authorities now contained in the insurance statutes.

In order to accomplish the goal-protection of the insurance buying publicin a more meaningful way and to afford even better protection, provisions were made to aid in the detection and prevention of insurer insolvencies. (section 112) Examinations are provided for (section 112) by the Commissioner of the District of Columbia and his relationship to the Board of Directors of the Association is defined (section 112).

Provisions are included (section 118) for the termination of the Association in case specified conditions exist, provided the rights of the insured are substantially protected.

TITLE

II-MINIMUM

FINANCIAL REQUIREMENT OF LIFE INSURANCE

COMPANIES

Title II has the effect of increasing capital and surplus requirement of stock life insurance companies and corresponding surplus requirement of mutual life insurance companies, authorized to do business in the District of Columbia. D.C. Code, section 35-508 was enacted in 1934 during a period of unprecedented depression. The combined amount for capital and surplus of $150,000 for stock and the amount for surplus of $100,000 for mutual life insurance companies then required may have been adequate for the protection of policyholders.

The Act of May 4, 1950 increased the minimum surplus of $150,000 for mutual life insurance companies.

The last amendment by an Act of August 31, 1964 increased the minimum capital to $200,000. The requirement that surplus shall at all times be equal to at least 50 per centum of such capital stock remained unchanged, making the combined total $300,000.

The Amendment here proposed would require a combined capital and surplus in an aggregate amount of $1,500,000 for stock life insurance companies and a surplus of also $1,500,000 for mutual life insurance companies, in lieu of the present requirement of $300,000 and $150,000 respectively.

Over the years there has been a general trend throughout the nation to increase the minimum capital and surplus requirement for stock life insurance companies and to increase the surplus requirement for mutual life insurance companies to the same level. As of June 1971 only 2 states had a lower requirement, 4 states had an equal requirement, and 44 states a requirement which was considerably higher than the current requirement of the District of Columbia. The proposed increases in financial requirement are comparable to the requirement in other states. As of June 1971 27 states now require a combined amount of $750,000 or more, and of those, 6 require $1,500,000 or more. These requirements are being steadily updated.

Adequacy of capital and surplus is of course essential to the protection of policyholders, it is particularly important in the first few years of a company's operation. The company is then most subject to the great hazards of inexperience. To permit persons to operate a life insurance company without an adequate amount of capital and surplus may be of benefit to promoters but it jeopardizes the security of dependent beneficiaries. This becomes a very serious matter when it is realized that usually at a man's death his estate consists principally of proceeds of life insurance policies.

The "grandfather clause" in the Act of August 31, 1964 is clarified in the proposed section 203 of Title II and is to apply again in a similar fashion as first enacted, for stock life insurance companies, and is now made applicable to mutual life insurance companies, authorized to do business in the District of Columbia.

Since the combined capital and surplus for stock companies, and the surplus for mutual companies are used as a basis for special and excess investments, section 202 of Title II merely carries the proposed changes to the other sections of the law which refer to such provisions.

Note: The tabulation shows the initial minimum capital and surplus requirements in each state for foreign stock_life insurance companies, writing life and disability insurance, assuming youngest qualifying age if age is a requirement. Percentage surplus requirements are shown when applicable and expressed in the combined column as an amount applied to minimum capital required.

TITLE III-LIBERALIZATION OF AMOUNT LIMITATIONS

The current version of section 35-710 was originally created in 1934 and amended in 1940, 1950, 1960, 1961, 1962, and 1966. However, the amount limitations pertaining to group term life insurance were not fixed until 1950 to be a flat amount of $20,000 per risk. In 1966, this amount was changed not to exceed the lesser of $40,000 and 150% of compensation with a lower limit of $20,000. Title III has the effect of increasing these limits to the lesser of $100,000 and 300% of compensation with a lower limit of $30,000. The amount limits still follow the pattern established by the 1966 legislation but compensate for the forces of inflation.

As of June 1971 only 4 states had the same limits as the District of Columbia. 19 states had higher limits and 27 states had no limits. Since that time an additional state eliminated the limits. The tendency in recent years is to increase or eliminate the limits. Group life insurance coverage is written in a manner that at times persons are covered who reside outside the state in which most members of the group are residing. The situation in the District of Columbia is quite different. Many associations have their headquarters in the District of Columbia, therefore, in some cases the members of the group are dispersed over many, if not all the states.

Changes in the amount limits under the group life law should be such that they are as compatible as possible with laws in other states. Some overlap cannot be avoided but it should not be such that other states feels a need to create laws to make their citizens ineligible for group life coverage under a master policy issued in the District of Columbia.

Assignment of Incidents of Ownership

The current version of D.C. Code, section 35-710 neither prohibits nor expressly permits the assignment of incidents of ownership. Such assignment, therefore, may be made if contained in a group life insurance policy as a contractual right of the insured certificate holder.

The purpose of amending D.C. Code, section 35-711 is to make certain that the proceeds attributable to an interest in a group life insurance policy which has been completely assigned by the owner thereof will be excludable from the assignor's estate for Federal estate tax purposes.

Section 2042 of the Federal Internal Revenue Code of 1954 provides that there shall be included in the Federal gross estate of a decedent proceeds of insurance on his life which are receivable either by his executor or, if he possessed any incidents of ownership in the policy at his death, by any other beneficiary. In Revenue Ruling 69-54, 1969-1C.B. 221, the United States Internal Revenue Service ruled in effect that an insured could not assign all his incidents of ownership in group life insurance unless both the group policy and applicable state law permit an absolute assignment of all his incidents of ownership, including the right to convert group coverage into individual insurance upon termination of employment. The Federal Government has since lost several court cases which in effect hold that State law need not specifically permit such an assignment so long as it does not prohibit assignment, and the Internal Revenue Service has announced its agreement with one of these cases. However, the Service has not modified Revenue Ruling 69-54.

In view of the uncertainty in the Federal estate tax law, 37 states (at latest count), including Maryland and Virginia, have passed legislation specifically permitting the assignment of interests in group life insurance. (The amendment is based on the Maryland, Texas, Illinois and New York statutes.)

The amendment adds a new clause (d) which provides that, subject to the terms of the policy, any person insured under a group life insurance contract may assign any or all of his rights and benefits under the policy to any person other than his employer. The proposed clause (d) makes it clear that any such assignment is valid whether it is made before or after the effective date of the clause. On the other hand, proposed clause (d) protects the insurer on account of any payment which it may make or any individual policy which it may issue prior to receipt by it of notice of the assignment.

Arizona, Arkansas, District of Columbia, Montana, and Pennsylvania.

HIGHER LIMITS

Colorado, Florida, Hawaii,1 Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Nebraska, Nevada, New Hampshire,23 North Carolina, Ohio, Oklahoma, South Carolina, Texas, West Virginia, and Wisconsin.

4

NO LIMITS

Alabama, Alaska, California, Connecticut, Delaware, Georgia, Idaho, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New Mexico, New York, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, and Wyoming.

TITLE IV-AMENDMENT OF THE FIRE AND CASUALTY ACT-MINIMUM CAPITAL AND SURPLUS REQUIREMENTS

This title would double the current minimum capital and surplus requirements for fire and casualty stock companies other than surety insurance companies and eliminate the different requirement for the latter type. Domestic and foreign stock insurers alike other than domestic surety insurance companies are required to have a paid-up capital stock of $150,000 and in addition must maintain a surplus of not less than $150,000. These limits were established in 1940 and this title would increase the capital figure to $300,000 and the surplus figure to $300,000. The law currently provides for a paid-up capital stock of $500,000 and a surplus of not less than $250,000 for domestic surety insurance companies. The more favored treatment for foreign stock surety insurance companies is being eliminated. There is little reason to believe that surety insurance should be treated differently than workmen's compensation, liability insurance or multi-line commercial insurance contracts.

Domestic mutual insurance companies and domestic reciprocal companies currently are required under D. C. Code, section 35-1316 to maintain a surplus of not less than $150,000. This requirement is to be increased to $300,000. Foreign mutual insurance companies currently under D. C. Code, section 35-1316 are required to maintain a surplus of not less than $200,000. This amount is to be increased to $400,000. Mutual domestic or foreign companies under D.C. Code, Section 35-1329 (non-assessable premiums) are now required to maintain a surplus of $300,000. This amount is to be increased to $600,000. Accounting only for change in the value of the dollar that has occurred in the past 30 years, this doubling of the capital and/or surplus requirement is fully justified.

The changes will bring the District of Columbia more in line with the requirements of other states. For instance, in Maryland similar requirements in the property field range from $500,000 to $1,000,000 dependent upon how many lines of insurance are being written. In Virginia the comparable figure is $800,000. As in the past the "grandfather clause" (D. C. Code, section 35-1317) as modified will apply to companies continuously doing business in the District of Columbia without adding a new line of business not previously authorized.

A need exists to increase these minimum requirements since at the present levels the District of Columbia is a target for small insurance companies from other states who seek to spread into jurisdictions having a low requirement.

1 For union groups 20/40/150 percent.

2 Under certain conditions limits apply to permanent insurance as well.

3 For union groups $20,000.

4 Trusteed plans limited to $50,000.

Some discretionary groups limited to $25,000.

These are the companies that have presented the most problems to the regulators and have in other states produced insolvencies over the years. Without adequate requirements residents of the District will be exposed to the dangers inherent in under-capitalized insurance companies, at the same time the increased minimum requirements were set at a level to make it still possible for domestic companies to be formed in the District of Columbia.

TITLE V

The original statute in 1906 required a surety bond to protect the District Government in matters of work performance by a contractor exempting work in an amount of $2,000 or less. Maintaining the spirit of the law and even if one is only to account for inflation, an increase to $10,000 is warranted and needed to preserve a realistic approach in dealing with small contractors. The updating in this respect by such increase will provide greater latitude for the District Government in dealing with small contractors.

STATEMENT OF JOHN STRINGER, COUNSEL THE AMERICAN MUTUAL INSURANCE ALLIANCE ON H.R. 4083

I am John Stringer, Washington Counsel of the American Mutual Insurance Alliance. We are the major national association of mutual property and casualty insurance companies, which write casualty and property coverages in all fifty states and the District of Columbia.

We very much appreciate the opportunity of presenting our views on H.R. 4083. Titles II, III, and V of the Bill deal with matters outside the scope of property and casualty insurance, and I shall accordingly restrict my comments to Titles I and IV.

TITLE I-DISTRICT OF COLUMBIA POST ASSESSMENT INSURANCE GUARANTEE

ASSOCIATION ACT

The Alliance has been a leading advocate of state regulation and voluntary action by the insurance industry both to help prevent insurance company insolvencies and to protect consumers against the effects of insolvencies.

We have, for instance, endorsed and actively supported amendments to state insurance codes designed to strengthen the insurance regulator's hand in dealing with high-risk insurance companies, to increase insurance department control over reserving practices of domestic insurers and to provide insurance regulators with specific power to regulate management contracts.

Moreover, we have supported legislation requiring that uninsured motorist coverage with insolvency protection be included in all automobile liability insurance policies. As a result of similar legislation enacted in 39 states, and the voluntary actions of insurers in the remaining of the states and the District of Columbia, more than 90% of all auto liability insurance policies now in effect in this country contain uninsured motorist coverages with insolvency clauses protecting policyholders and their families in cases where they cannot collect from a negligent driver because his insurer became insolvent.

However, the Alliance recognizes that the economic consequences of insurance company insolvencies affect a broader spectrum of the American public than those who just purchase automobile liability insurance. Accordingly, we have strongly supported and urged the enactment of legislation designed to extend insolvency protection to include non-car-owning pedestrians, coverage for vehicle damage, property insurance policyholders-virtually all claimants and insureds of insolvent property and casualty insurance.

The Alliance strongly urges the Subcommittee to favorably report Title I of H.R. 4083-a post insolvency assessment plan. This legislation would create an insolvency program in which all licensed carriers in the District of Columbia would be required to participate. If an insolvency occurs, these carriers, through an assessment, would provide funds out of which claimants and policyholders of insolvent insurers would be compensated. Title I is substantially similar to model legislation proposed for enactment in each state by the National Association of Insurance Commissioners.

1 Auto Insurance Reform-statement of the AMIA before the Business, Commerce and Judiciary Subcommittee of the Senate District of Columbia Committee, September 29, 1971-page 57.