August 1, 1977, includes drafts of amendatory language for sections incorporating our proposed revisions. I would like to submit the letters and memorandums of Mr. Birkinsha for the record for your careful consideration and analysis. We believe that enactment of S.1710 would represent a breakthrough for insurance regulation and that such a law would provide significant protection and benefit to the insurance consumer. We commend this Committee and its staff for the superlative effort evidenced in this bill. Attachments: Letter and memorandum of Jack E. Birkinsha to Letter and memorandum of Jack E. Birkinsha to In devising a federal system of insurance regulation complementary to the existing system of state regulation, primary attention must be given to identifying and protecting the interests of the insurance consumer, and care must be taken to avoid creating a regulatory shield for insurance operations that serve neither the consumer interest nor the long-term interests of the insurance industry. Secondarily, but nevertheless significantly, overlap of state and federal regulatory authority must be avoided to prevent the wastefulness of duplication of effort and confusion of responsibility, the ultimate cost of which would inevitably be passed on to the insurance consumer. S.1710, "The Federal Insurance Act of 1977", would establish a regulatory system that, to a significant degree, fulfills those objectives. Enactment of your proposal would be a milestone in the history of insurance regulation premised on protection of the public interest and would provide a model for the successful integration of consumer, industry, and government interests. You and your staff are to be commended highly for this accomplishment. Even with the regard that we have for the work that you have done to date, however, we do feel that improvements can be made to further the general objectives of your proposal. First, to promote fair and equitable availability of essential insurance coverages on an objective basis, we feel that subsection 107(c) of the bill should be more fully addressed to the prohibition of any arbitrary and unjustifiable discrimination in the provision, classification, and rating of insurance. Second, we believe that there is need for further consideration and specification of the interrelationship between state and federal regulatory authority, both to avoid unnecessary overlap and to promote competition within the business of insurance. Third, in dealing with that interrelationship, we believe that it would be in the interest of the insurance consumer to provide for regulatory flexibility at the federal level to deal with situations in which competition, albeit fully in compliance with the antitrust laws, does not serve as an adequate and acceptable regulator of the business of insurance. Finally, we believe that some technical improvements can be made in the bill in the areas of terminology and the mesh between reinsurance arrangements and federal guarantee of insurance obligations. Each of these matters is dealt with in greater detail in the enclosed memorandum. We would be happy, of course, to discuss all or any of these matters with you or your staff at your convenience, and we would be most appreciative of an opportunity to present our thoughts at the hearings to be held on S.1710. Sincerely, Jack E. Birkinsha Secretary & General Counsel CC: Honorable William Proxmire In an effort to promote revitalized adherence to the basic principles of insurance, and to assure greater fairness and equity in the availability of essential insurance coverages on an objective basis, many states have recently made significant additions to the traditional prohibitions of discrimination based upon race, religion, and national origin. Michigan, for example, now prohibits discrimination based on marital status or sex and requires that refusals to insure or continue to insure, or limitations on the amount of insurance made available, based on residence, age, handicap, or lawful occupation bear a reasonable relationship to the extent of the risk or the coverage to be issued. (M.C.L.A. $500.2027.) Other states have adopted similar measures (e.g., Ore. Admin. Rules, Rule IC-61, effective January 1, 1975), while others have extended such prohibitions to additional classifications (e.g., Ill. Ins. Dept. Rules & Regs., Rule 26.04, effective July 1, 1976). The desirability and necessity of creating a uniform standard for prohibition of discriminatory practices is recognized in subsection 107(c) of S.1710. In this specific context, the requirement is applicable to all federally-guaranteed insurers to ensure nondiscriminatory availability of that for which the federal government provides a significant financial backup. Such a provision is of even more significance in the "Federal Insurance Act of 1977" in relation to the reliance upon competition as the rate regulator for federally-chartered insurers. As emphasized in the recent report of the Michigan Insurance Bureau, "Essential Insurance in Michigan An Avoidable Crisis" (March 14, 1977), one cannot deal with questions of insurance availability and rate regulation as if they exist in separate, independent vacuums; rather, they are necessarily interrelated and interdependent and must be dealt with on that basis. The primary thrust of Title II of S. 1710 (providing for federal insurance charters) is the promotion of competition, especially as the regulator of rates, within the business of insurance. Within the context of the voluntary system of federal guarantee and federal chartering, it would be impractical and counter-productive to construct a special system for insurance availability as a counter-balance to open competition rating; federally-chartered insurers cannot, for example, be mandated to take all applicants under a full-insuranceavailability type of system when state-chartered competitors are not subject to the same requirement. The federal system can, however, go far in requiring objective, justifiable, and non-discriminatory bases for the provision, classification, and rating of insurance by federally-chartered insurers, thereby requiring that the effects of competition be fair in relation to the consumer as well as in relation to other competitors. Unfortunately, the language of subsection 107 (c) does not go quite far enough in this regard, makes the mistake of paralleling state provisions that rely primarily on "laundry lists" of characteristics, and places too much reliance on correlation, which does not necessarily describe causation, as the basis for empirical justification of the use of given criteria. Basically, the motivation for any anti-discrimination provision is to prevent reliance on arbitrary, subjective, and unjustifiable criteria as bases for refusals to insure and in developing rates and rating classifications. Discrimination on such bases could be prohibited without specific mention of any of the types of criteria involved; however, society has properly seen fit to prohibit use of certain criteria, e.g., race and sex, even though data can be produced that objectively demonstrate at least a correlation between those criteria and insurance loss exposure. To implement the desired objectives of prohibiting unfair discrimination and promoting a fair competitive system to a maximum degree, we would recommend substitution of the following for subsection 107(c) of S.1710: Sec. 107. (c) It shall be unlawful for any federally-quaranteed insurer to - .(1) refuse to insure or continue to insure, or limit the (2) classify, or charge a rate or premium, unless the clas- Open Competition Ratemaking By virtue of the provision of secs. 109 (c), 203(a) (4), and 204 (a) (4), subject to minor exceptions stated in the latter, federally-chartered insurers are exempted from state rate regulation and are subjected to the applicability of federal antitrust laws. Provision is not made |