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Most insolvencies can be traced to three categories of cause :
1. Uncontrollable events or acts of God, such as economic depressions and catastrophic losses as those resulting from hurricanes or floods. Examples are the insurers who became insolvent due to the fall in value of their assets, chiefly securities, during the Great Depression.
2. Poor management, involving inadequate underwriting standards, marketing errors which reduce premium volume, underreserving and inept investment techniques.
3. Dishonest management, that converts company funds for personal use of falsified assets.
It is evident from these causes of insolvency that some may be detected far enough in advance for the regulator to stop the deterioration before it causes insolvency, or at least before it invades the funds set aside for obligations to policyholders or claimants.
Nevertheless, it is also evident from the cause of insolvency that in spite of the best efforts of competent regulators, some insolvencies can not be detected in time. One commentator, conversant with the subject, has pointed out:
"Expansion of and improvement in the quality of examination and audits of annual statements will curb insolvency. Still, crimes are committed regardless of the number of policemen hired and insolvencies will occur regardless of the thoroughness or frequency of examination."
Therefore, the American Mutual Insurance Alliance, recognizing its responsibility to work for an improved "insurance environment” believes that it is imperative that a post-insolvency assessment plan be enacted.
Prior to May 1969, only eight states had laws providing some form of insurance insolvency protection for their citizens. No state had a law providing coverage for all lines of property and casualty Insurance.
In 1970, twenty states enacted post-assessment insolvency laws covering virtually all lines of property and casualty insurance. Thus, combined with the four states passing similar laws in late 1969, this brought to 24 the number of states with insolvency-fund laws covering all property and casualty lines.
In 1971 and 1972, twenty one additional states adopted post-assessment insolvency fund laws covering virtually all lines of property and casualty insurance, bringing the total to 45. To this figure must be added the newly enacted New Mexico statute. In addition, New Jersey has insolvency laws applicable to automobile and workmen's compensation insurance.
Thus, 47 states provide insolvency protection to 96% of the countrywide property and casualty insurance premium volume. Only Alabama, Arkansas, Oklahoma, and the District of Columbia do not have such protective legislation.
The American Mutual Insurance Alliance is pledged to securing the enactment of consumer protection laws against insurance company insolvencies in all 50 states and the District of Columbia. We shall continue to press for the enactment of this consumer protection program until all the states and the District of Columbia have taken appropriate action. Accordingly, we urge the enactment of Title I of H.R. 4083.
TITLE IV-INCREASE THE MINIMUM CAPITAL AND SURPLUS REQUIREMENT FOR
PROPERTY AND CASUALTY INSURANCE COMPANIES
Title IV would double the minimum capital and surplus which property and casualty insurance companies licensed and authorized to do business in the District of Columbia shall maintain at all times.
The existing requirement was enacted 40 years ago, and, it is obvious that if the requirement was adequate then it no longer is today. The adjustment is in line with increases in minimum capital and surplus requirements which have been adopted by many state legislatures.
We support Title IV. It must be recognized that the minimum capital and surplus requirement is but one tool available to the insurance superintendent to control the solvency of insurance companies. Although there are a number of very reputable domestic companies that would not meet the newer requirements, we believe that their continued operations are protected by Section 14 of the Fire and Casualty Act. These companies have demonstrated in the past sound fiscal management, and they provide an invaluable service to District of Colum. bia residents. Some of those companies specialize in certain lines of insurance and their expertise in those specialties goes far beyond that of the larger companies. Conclusion
? "The Public Interest Now in Property and Liability Insurance Regulations"-State of New York Insurance Department, January 7, 1969.
* Testimony of Dr. Richard M. Heins before the National Association of Insurance Commissioners, Subcommittee on Insolvency, Proceedings of NAIC, 1963, Volume I, page 41.
The high level of insurance regulation in the District of Columbia has served District resi ts vell. There has not been a single insolvency of a domestic insurer in the District since the mid 1930's.
The enactment of Title I of H.R. 4083 will protect District of Columbia residents from losses resulting from insurance company insolvencies which are beyond the control of the District insurance regulator.
Title IV will update one of the existing tools available to the District of Columbia Superintendent to insure that the excellent insolvency record presently existing in the District will continue in the future.
We urge the adoption of this legislation.
PREPARED STATEMENT OF JOHN J. 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 companies have long been recognized as the most competitive and progressive segment of the fire-casualty insurance business. They have originated by far most of the many policy coverage innovations and improvements in the past twenty-five 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. We estimate that our companies write approximately 54% of the insured vehicles in the District of Columbia.
There are five titles to H.R. 4083 and inasmuch as Titles I and IV are the only ones germane 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 a 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.
Four years ago, our Board of Governors took positive action on this matter in support of the development of reasonable proposals for state post-solvency assessment-type funds and further directed its staff to seek state legislation to better accomplish our objectives in preventing insolvencies.
Title IV would raise the capital and surplus requirements for fire and casualty companies to operate in the District.
We are pleased to respond in support of both Title I and Title IV of H.R. 4083.
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 protection of these individuals. In view of all this, a bill was introduced in the 91st 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 thirty-seven years. Of course, this connotes the efficiency and high degree of regulation of the Insurance Department of the District of Columbia.
However, in order to silence the critics of state regulation, insolvency assessment-type of guaranty funds came into existence in forty-seven states. These funds pay insurance claims of policyholders and claimants from monies collected from licensed insurers in that 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 postinsolvency fund.
Therefore, NAII supports this legislation.
Title IV 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.
GOVERNMENT OF THE DISTRICT OF COLUMBIA,
DEPARTMENT OF INSURANCE,
Washington, D.C., April 6, 1973. Honorable W. S. STUCKEY, JR., Chairman, House District Subcommittee on Business, Commerce and Taxation,
Room 1310, Longworth Building, Washington, D.C. DEAR SIR: In yesterday's hearing conducted by you on H.R. 4083, you requested this department to furnish information showing the domestic insurance companies by name, year of organization, and capitalization.
We hope that the enclosed information is satisfactory. Please do not hesitate to ask for any additional information. Needless to say we will be more than glad to furnish it. Respectfully,
Deputy Superintendent and Actuary. Enclosure.
cc: Robert Washington, Chief of Staff
Committee on the D.C. cc: Rebecca Moore
LIFE INSURANCE COMPANIES, DOMICILED IN THE DISTRICT OF COLUMBIA
I Started as a Fraternal and Mutualized by Act of Congress.
Started as a Mutual Company reinsuring a Fraternal and another Mutual Company (1964).
1 W. Va. 1885 reincorporated in District of Columbia 1902.
By reinsurance. 3 Dormant. Note: The initial surplus shown includes subsequent changes. Current statutory minimum: Capital (C) $200,000; Surplus (S) 50 percent of prevailing capital. Note: Companies (stock or mutual) in order to be authorized in other States need to meet the requirements of the respective States. A company newly formed now with minimum capital and surplus can only be admitted in out of the 50 States if a stock company or in 2 out of 50 States if a mutual company.
However, any company operating under a grandfather clause in another State, meeting District of Columbia minimum, it complying with other requirements may be admitted in District of Columbia as long as current minimum remains unchanged.
Mr. STUCKEY. I would like to ask a few brief questions. Do you have a list of the domestic insurance companies in the District and their license dates?
Mr. LOMBARD. I have a listing here, Mr. Chairman, of the domestic property insurance companies that would be possibly affected by the new increased capital requirements. I will be glad to leave several of those with you.
[The document referred to follows:]
DISTRICT OF COLUMBIA, LICENSED PROPERTY INSURANCE COMPANIES, DEC, 31, 1972
The seven domestic companies who have a million dollars or less in policyholder surplus are listed. Five of those companies, at the moment, do have less than the new limits, but we have not attempted