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Title IV of S. 2208 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.

Senator STEVENSON. I thank you, Mr. Stringer.

Did I understand you to say you are not concerned with the limits in title III?

Mr. STRINGER. No; that is beyond our jurisdiction. It does not relate to our sphere of interest, so we have no comments to make on that.

Senator STEVENSON. You have no changes to suggest with respect to title I? Are you well satisfied?

Mr. STRINGER. We are satisfied. We support it in its entirety. I understand there are some amendments being considered, but we support it as it is.

I understood Mr. Watt to say that he was proposing an amendment to modify it. I did not understand if that was related to title IV or not, but we thought that the bill as written is pretty much in line with at least some of the State legislatures.

Senator STEVENSON. Our final witness is Mr. Vernon Holleman, president of the District of Columbia Life Underwriters Association. STATEMENT OF VERNON W. HOLLEMAN, JR., PRESIDENT, DISTRICT OF COLUMBIA LIFE UNDERWRITERS ASSOCIATION

Mr. HOLLEMAN. Thank you very much, Mr. Chairman.

I have a short prepared statement which I would like to submit for the record.

Senator STEVENSON. It is so ordered.

(The prepared statement follows:)

PREPARED STATEMENT OF THE DISTRICT OF COLUMBIA LIFE UNDERWRITERS ASSOCIATION, BY VERNON W. HOLLEMAN, JR., PRESIDENT

Mr. Chairman and Members of the Committee: As President of the District of Columbia Life Underwriters Association, representing some 1,000 life insurance agents, I would like the record to show that we are in favor of the proposed changes in Senate Bill S. 2208 affecting the life insurance industry.

Specifically, Title II has the effect of increasing capital and surplus requirements of life insurance companies authorized to do business in the District of Columbia. 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.

We as life insurance agents do not wish to discourage companies from being domiciled in the District of Columbia, but we do believe that present capital and surplus requirements are inadequate for sound business practices. Forty-four states now have higher requirements than the District of Columbia.

Under Tilte III, group life insurance limits would be increased to the lesser of $75,000 and 300 percent of compensation with a lower limit of $25,000 These increases would be in line with most other states and would be similar to Virginia and Maryland, which have a $100,000 limit and no limit respectively. Forty-six states have higher limits than the District.

We also endorse the clarification of DC Code, Section 35-710 which neither prohibits nor expressly permits the assignment of incidents of ownership of group life insurance. Such assignment may be made if contained in a group life insurance policy as a contractual right of the insured certificate holder.

In order to provide the full advantages possibly resulting from such assignment, we feel that a statutory basis should be created and thereby remove any doubt that may now exist.

Mr. Chairman, we encourage favorable action on these changes and appreciate the opportunity to testify. Thank you.

Senator STEVENSON. Mr. Holleman, can you tell us why there should be limits?

Mr. HOLLEMAN. Our feeling at this point is if an individual who is employed at a particular company has unlimited group insurance, and one company may vary a great deal from another company, he builds a false sense of security, and he does not have the portability of that life insurance. In some associations, he can move from occupation to occupation.

If you are employed in the District of Columbia in one occupation and move to another employer, you do not necessarily take that amount of group insurance with you. We feel you build a false sense of security in this particular area. When you are planning where your family is concerned, we think this is an important item.

We think no limits may discourage an individual from carrying personal life insurance at all.

Senator STEVENSON. The testimony so far has indicated that 28 States, if my recollection is correct, now have no limits in group term life insurance.

Mr. HOLLEMAN. Twenty-seven or twenty-eight, I believe.

Senator STEVENSON. If that is the case, the effect then would be on people moving from the District to other jurisdictions could increase their limits, at least in most other jurisdictions or conversely. Those that come to the District might very well, depending on what the limits are, have to decrease their coverage.

I

guess I have difficulty understanding that argument about the false sense of security people have given the fact that 27 jurisdictions already have unlimited insurance.

Why not leave it to the groups to determine what they want to offer? Mr. HOLLEMAN. By and large, that is what is happening now, but we, of course, as representatives of the agents in this business, who have to be put in a position, where we are discouraging an individual from buying personal life insurance, and we feel as a result of this, that some limits should be set.

We are not necessarily saying that $75,000 is the figure. We are saying that some limit should be put on the availability of group

insurance.

Senator STEVENSON. I just want to make sure that we are talking about the same limits in title II.

In your statement, are you referring to the limits suggested by Mr. Watt, and the proposed amendment to S. 2208, or the limits that you support are those in the bill that has been introduced?

Mr. HOLLEMAN. We support those in the bill as introduced. Senator STEVENSON. It is our understanding that neither Virginia nor Maryland have limits on the group term life insurance.

Mr. HOLLEMAN. I believe Maryland has. Perhaps in this last legislature they took off the limits. I was under the impression they had a limit of $100,000. Perhaps in the last legislature they took it off.

Senator STEVENSON. Is it also true that Virginia has no limits?

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, Washington, 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

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.

PROPOSED AMENDMENTS TO S. 2208

S. 2208 should be amended as follows:

I. Page 2, Section 102, line 5, insert after the comma the following: "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 is 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

(d) 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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