THE INSURANCE INDUSTRY TUESDAY, APRIL 2, 1963 U.S. SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY Washington, D.C. The subcommittee met, pursuant to notice, at 2:05 p.m., in room 2228, New Senate Office Building, Senator Thomas J. Dodd presiding. Present: Senators Dodd, Hruska, and Keating. Also present: Horace L. Flurry, staff director and counsel; Peter N. Chumbris, counsel for the minority; James E. Bailey, counsel for the minority; Cecil Mackey, assistant counsel; Jess E. Gross, special consultant; Paul S. Green, editorial director; and Gladys E. Montier, clerk. (Present at this point: Senator Dodd (presiding).) Senator DODD. I will call this hearing to order. I have a brief statement which I want to make. Today the Antitrust and Monopoly Subcommittee resumes hearings on the insurance industry with attention directed to the operations of foreign insurance companies. In the interval since the last hearings were held on insurance, many events of significance to the industry have taken place. It was in 1960 that the subcommittee began its inquiry into the operations of foreign insurance companies. The witnesses who appeared at that time raised many questions, but provided few definitive answers. Since then efforts have been made by various groups to deal with some of the problems, but at the same time, new problems have arisen. The present hearings have been scheduled in recognition of the importance of this segment of the insurance industry to the Nation's economy. It is well known that there is an active and extensive foreign market for the placement of insurance on U.S. risks. The subcommittee hopes to obtain more complete and accurate information than has been available heretofore as to the nature and extent of this foreign market. We need to know more about the kind of insurance which is being purchased abroad, the channels of placement and the amount of such insurance. In a time when the United States is confronted with a serious balance of payments problem and continues to suffer gold losses, the question of how many dollars leave the country annually as payment of insurance premiums to foreign insurance companies takes on new significance. The subcommittee has not as yet received a satisfactory explanation of why the United States, with its vast capital resources, has not been able to provide insurance capacity more nearly commensurate with the country's needs. The domestic insurance industry apparently has 6367 remained either unwilling or unable to afford insurance coverage for a wide range of legitimate risks. Instances have been brought to the attention of the subcommittee where certain U.S. corporations, as a normal business practice, meet virtually all their insurance needs in the foreign market, sometimes through domestic brokers, sometimes bypassing domestic brokers and going directly to the foreign broker. Other corporations have gone so far as to set up their own captive insurance companies chartered in foreign countries. Experienced surplus line brokers have expressed the opinion that almost all large industrial corporations in this country buy at least part of their insurance abroad. If this is true, it certainly warrants thorough examination. Use of the foreign market by U.S. insureds is by no means limited to the case of the large corporate buyer, however. Many types of insurance necessary to the private citizen in his individual capacity are typically acquired in the foreign rather than the domestic market. In these cases where insurance is procured from alien insurance companies, the American public is deprived of the benefits which accrue from domestic regulation of insurance companies. In addition, the laws of some States apparently restrict access to the foreign market so as to make it difficult, if not impossible, for a potential insured to obtain necessary coverage abroad in full compliance with State regulations even though the desired coverage may not be available through domestic licensed companies. The insurance buyers are not the only ones who are confronted with problems under the existing regulatory framework. Brokers and insurance companies have their problems, too. Surplus line brokers have expressed the view that existing surplus line laws often impose what they consider unnecessary obstacles to their freedom to meet their clients' insurance needs. In addition, there have been expressions of opinion from insurance companies that present laws impair the ability of domestic insurers to meet the needs of the domestic buyers and limit their ability to compete with foreign insurers. It is important that there be a clarification of all the issues in this field and a better understanding of the objectives of existing regulation. Only then can there be a meaningful evaluation of the situation. (At this point, Senator Keating entered the hearing room.) Senator DODD. In certain areas, domestic companies have found that they can make a profit by writing insurance which was previously left to alien insurers. This is encouraging and means that premium dollars which had formerly gone abroad can now be kept in this country. It also means that more domestic insureds will have the benefit of local service and the protection of domestic regulation. In this connection, the subcommittee has noted with considerable interest the growth of the nonadmitted U.S. insurance business in the surplus line field. We are seeking further information on this type of operation and hope to gain a clearer picture of why it is necessary or desirable for companies that are licensed in some States to do business in other States on an unlicensed or nonadmitted basis, and why some insurance companies which operate on an admitted basis have chosen to form subsidiaries which operate as nonadmitted companies. The U.S. Supreme Court's decision in the Todd Shipyards case will undoubtedly have far-reaching effects on the insurance industry. On its facts, the case held that the State of Texas could not constitutionally impose a tax on insurance premiums paid by a Texas citizen or one doing business in Texas to an insurance company not licensed in Texas, when all acts between the parties relating to the formation and carrying out of the contract took place outside of Texas, even though the risk covered was located in Texas. As is normal, lawyers have differed in their interpretations of the meaning of the decision. On one hand, it has been suggested that the holding of the case is quite narrow and that future application should be confined to identical fact situations. At the other end of the spectrum is the view that the decision effectively limits the power of the States to regulate or tax all out-of-State placements of insurance by nonadmitted companies whether or not acts take place within the State. I would not care to venture an opinion on the merits of this important constitutional question, but a thorough discussion by interested parties who will be affected by the decision should prove valuable. In the area of State surplus line legislation, the subcommittee is aware of the work of the National Association of Insurance Commissioners and its efforts to draft a model surplus line law. We have followed this project through the successive drafts of the model act and have also followed the progress of the proposed Information Bureau. I would like to say that an invitation to appear at the hearings was extended to the officials of the NAIC, but they were of the opinion that an appearance at this time would be premature in view of the scheduled meeting next week of the NAIC executive committee. For the record, I would like to acknowledge the fact that Mr. Rufus Hayes, commissioner of the State of Louisiana and president of the NAIC, and Mr. F. Britton McConnell, insurance commissioner of the State of California and chairman of the executive committee of the NAIC, have offered their full cooperation to the subcommittee in connection with this inquiry. We have several witnesses. We will hear some today. In view of the situation on the floor of the Senate. I think it will be necessary for us to meet only half days. We will do the best we can under those circumstances. I am glad that Senator Keating was able to get here today. So, Mr. Counsel, will you go right ahead, unless, Senator Keating, you have some questions. Go right ahead with your witnesses, Counsel. Mr. MACKEY. Mr. Chairman, the first witness is Mr. Robert Gyory, who is an insurance buyer for General Telephone & Electronics Corp., and is also chairman of the subcommittee for nonadmitted insurance of the American Society of Insurance Management. Mr. Gyory has with him Mr. Charles Groves, who will act as counsel. Mr. Groves is insurance buyer for Colorado Fuel & Iron Corp. and is also with the American Society of Insurance Management. Senator DODD. We will be glad to hear your testimony. STATEMENT OF ROBERT S. GYORY, CHAIRMAN, SUBCOMMITTEE FOR NONADMITTED INSURANCE, AMERICAN SOCIETY OF INSURANCE MANAGEMENT, GENERAL TELEPHONE & ELECTRONICS CORP., NEW YORK, N.Y.; ACCOMPANIED BY CHARLES H. GROVES, COUNSEL Mr. GYORY. Mr. Hornby, vice president of legislation of our group, and Mr. Severin are in the audience here. My name is Robert S. Gyory, and I am chairman of the subcommittee for nonadmitted insurance of the American Society of Insurance Management. I am appearing here to testify by invitation of this subcommittee on its hearings concerning surplus lines insurance. The American Society of Insurance Management is a national organization incorporated under the laws of Illinois. We have existed as a national organization since 1950, although our predecessor organization traces its origin to the early 1930's. (At this point, Senator Hruska entered the hearing room.) Mr. GYORY. Our interests are nationwide and we serve our members through the facilities of over 30 chapters on a statewide basis. Currently, our membership consists of approximately 1,350 member companies. These companies vary in size from small to large, and are engaged in practically every type of business known to our economy. They are truly representative of the buyers or consumers of insurance. In October 1960, some of us were made aware of an activity of immense importance to consumers of insurance throughout the entire country. The unauthorized insurance committee of the National Association of Insurance Comimssioners was considering a draft of a uniform Nonadmitted Insurance Act. It was being offered as a uniform bill intended ostensibly to provide an "orderly" and "reasonable" access to the unadmitted market. We were amazed, upon reading the suggested draft, to discover that this bill would produce the exact opposite effect and if this bill were to be adopted by the National Association of Insurance Commissioners and subsequently enacted by the several States, the surplus lines market would be choked off. The unauthorized insurance committee had invited various representatives of the insurance industry to present their views of the model bill but representation from the insurance buying public had not been included. This apparent oversight was brought to the attention of the National Association of Insurance Commissioners, and, as a result, the chairman of the unauthorized insurance committee extended and invitation to form a consumers committee, which would act as an advisory subcommittee to the parent group. At the first meeting of this advisory committee, held in St. Louis November 1, 1960, it was stated by the advisory subcommittee that a monopoly for the admitted insurance industry would be created by this bill and that it virtually would destroy a market which most buyers of corporate insurance had to utilize because the domestic market was incapable and/or unwilling to provide the necessary coverages; that American industry requires considerable capacity which often could not be met by the admitted market; that new and unusual types of coverages to meet the ever-changing demands of American business had to be developed on relatively short notice; that the unadmitted market was also essential as a competitive force in keeping the total insurance market in balance. And here we are talking of filed rates. During this meeting of the unauthorized insurance committee, the question was raised as to whether this group of insurance buyers represented the thinking of insurance consumers in general, and because this question was raised, the insurance consumers' committee petitioned the American Society of Insurance Management to assume the responsibility of this committee and thus furnish the National Association of Insurance Commissioners' Unauthorized Insurance Committee with a more representative viewpoint. The existing wide diversification of American Society of Insurance Management membership, together with the support of other business study groups, dispelled any notion that the consumers' committee represented just a few giant industrial corporations. We have had many objections and serious reservations regarding the various drafts of the model bill. Typical of this is our vigorous objection to a section which appears in one form or another in all drafts with the exception of one point, and I quote: CONDITIONS FOR PLACEMENT OF INSURANCE No insurance coverage except as described in section 9 shall be placed with, or written by, a nonadmitted insurer unless : (a) The full amount of insurance required is not procurable from insurers actually transacting that kind and class of insurance in this State; and the amount of insurance exported shall be only the excess over the amount procurable from admitted insurers actually transacting and insuring that kind and class of insurance. (b) The premium rate at which the coverage is to be exported shall not be lower than the lowest rate in actual current use by any admitted insurer. (c) The policy or contract form under which the insurance is to be exported provides coverage identical with similar contracts in actual current use in this State by the majority of admitted insurers actually writing similar coverages on similar risks; except, that a coverage may be exported under a unique form of policy designed for use with respect to a particular subject of insurance, if a copy of such form is filed with the commissioner by the surplus lines agent desiring to use it. Said form shall be deemed approved by the commissioner unless, within ten days after receipt, he finds its use is not reasonably necessary for the principal purposes of the coverage, or that its use would be contrary to the purposes of this Act. We suggest these provisions are anticompetitive and restrictive. When the third edition of the proposed Nonadmitted Insurance Act became available to us, upon analysis, it was found to be no better than its predecessors. At this point, the consumers committee met with the industry advisory subcommittee which similarly was opposed to the proposed bill in an attempt to ascertain whether these two groups could confer and jointly arrive at some recommendations which might be useful to the parent committee. The consensus of these meetings was that the third draft of the uniform bill had so many objectionable features and was so unworkable that it became impossible to come up with satisfactory amendments. Accordingly, the two committees agreed that a revision in updating of the 10 guiding principles, covering surplus line legislation, adopted by the National Association of Insurance Commissioners convention in December 1957, would be far more preferable in providing a much better framework for State regulation of nonadmitted and surplus lines insurance. |