creates an almost impossible situation. That is what the words seem to say to us.

We mentioned in our statement, Mr. Chairman, a simultaneous absence of underwriting profit with the dropping of the market. The National Association of Insurance Commissioners annual meeting was held in Montreal last spring in June, I think. It was in May, I think, that the market sustained a slight illness. Now, I do not have the figures here, but they are available. The faces the national association was meeting that year were longer than they had been for many, many a year. The market during the meeting did not recover. By the use of simple arithmetic and a study of the statement of one stock company, it was readily determined that the loss sustained during the previous week had been $25 million.

It was a paper loss, mind you. Now, we don't hope or we don't expect that anything like that is going to happen to our grand country and our economy in these days, but it has happened. And if the two things happen simultaneously, I don't mind saying-I discussed this one night with the president of a pretty large company.

I said "What, sir, might happen if this loss trend continued and we had a market, a sick market for, say, 8 or 10 months?"

And after consideration, he said, "Well, Mort, I expect it would take my successor some 25 years to recover."

Now, these are facts.

Senator MCINTYRE. I believe in the testimony of last week, it was indicated to me you have in this insurance business, a type of business that might be called a home office. In other words, I am thinking now of people up in New Hampshire who might be involved in the insurance business and simply operating out of their own home. I believe it was indicated in this testimony that eventually the whole trend, regardless of what we do here, is that these small home offices are going to drop by the wayside. Now, with particular attention to New Hampshire, do you feel that this would be true?

I am not particularly directing my question to this bill, but the trend of insurance today is that the small insurance firms are dropping by the wayside?

Mr. WHITE. Of course. I think that is true in any business today. You have to increase your volume to hold your position.

Senator MCINTYRE. So that regardless of what the Senate might do in this bill, this is not going to reverse or accelerate that trend? Mr. WHITE. I am afraid I would have to say it would accelerate it. If I may, Mr. Chairman.

Senator MCINTYRE. Certainly.

Mr. WHITE. There is another aspect of this business that is not often mentioned, not talked about, but which should be considered. You indicate that you have a feeling that we might feel the way we do because our pocketbooks are being affected. This is true. But I would like to call your attention to the fact that it is the total acquisition cost of business that is the key to whether or not a company makes any money.

Let me try to illustrate. Company Y may have agents in their homes, as you point out. Company Y may pay, if you please, 25 percent commission to that agent. It may not have but one fieldman covering the entire New England area. It may have no branch offices.

It may have no service offices. It may spend no money on national advertising programs. That is the way it chooses to operate, and almost all of its total acquisition cost is paid to agents as commissions.

Now, company X, on the other hand, chooses to do business in a different fashion. And this is their choice. They pay the agent a very nominal commission. They have fieldmen running all over New England. They may have a dozen fieldmen. They may have a branch office in Boston to cover the entire area, they may have service offices in various offices in various cities throughout New England.

They may buy full-page ads in the Saturday Evening Post and Life magazine and Look magazine. They may even go on television two or three times a week. They have chosen to spend millions of dollars in acquisition cost in that fashion while paying the agents a low commission.

This is their right and their privilege.

But either way, the total acquisition cost is the money spent to get the business on the books. One does it one way; one does it another

way.

So when you just confine your discussion to commissions, you are not really talking about the entire picture of the difference in the company operations.

Senator MCINTYRE. You say that New Hampshire more or less stands alone in the type of regulation it has for insurance.

Mr. WHITE. Yes, it does.

Senator MCINTYRE. Do you believe that taking into account Commissioner Knowlton, that there would be any efforts to change the insurance regulatory laws in New Hampshire if this bill passed the senate and the house in New Hampshire?

Mr. WHITE. No; I think Mr. Knowlton would be a discouraging factor as long as he was here.

Senator MCINTYRE. In the last analysis, many of these States, regardless of whether you get a file and use law or prior approval law, the shoe of the commissioner makes a great difference, doesn't it? Mr. WHITE. Yes, sir; it certainly does.

Senator MCINTYRE. I am sorry. I have to go to the Banking and Currency Committee. I will be right back.

Senator BEALL. Thank you. Those are all the questions I have. Thank you very much. You certainly made a splendid statement. The next witness is Mr. Stringfellow, general manager of the National Association of Mutual Insurance Agents.

Come up, sir.

You may either read your statement or talk extemporaneously. STATEMENT OF WILLIAM A. STRINGFELLOW, GENERAL MANAGER OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE AGENTS

Mr. STRINGFELLOW. Senator Beall, I have a printed statement, but in deference to your time element here, I will highlight the prepared

statement.

Senator BEALL. The statement will be put in the record and be available to all members of the committee.

Mr. STRINGFELLOW. Thank you, sir.

(The statement referred to follows:)

STATEMENT

(Filed by the National Association of Mutual Insurance Agents for presentation to the Subcommittee on Business and Commerce of the District of Columbia Senate Committee on S. 1184, a bill to amend and consolidate the laws providing for regulation of certain insurance rates in the District of Columbia and for other purposes.)

Mr. Chairman, I am William A. Stringfellow, general manager of the National Association of Mutual Insurance Agents. This organization represents approximately 11,000 independent mutual fire and casualty agents and has for 32 years served as their national organization. We have members in the District of Columbia who are directly members of this association, and this appearance is on their behalf, as well as that of our members generally.

It is a matter of record that the regulation of the business in the District, both as to fire and casualty, has been exemplary. There have been no complaints referred to our offices on the part of our members nor on the part of the mutual agency companies whom they primarly represent.

The Insurance Department of the District of Columbia is highly regarded in the industry, and it is our observation and conviction that its operation under both the fire and casualty laws has been met with general approbation. The continuance of the very capable Superintendent in office for a relatively long period has contributed to orderly, consistent regulation.

Consequently, we would suggest that on the part of our local members in the District of Columbia there is satisfaction with the present laws governing the regulation of the fire business and there is no complaint as to administration. Insofar as our members are concerned, there is no occasion for the change in insurance regulation which this bill contemplates.

As a national propositon, this association has stood firmly for a conservative approach to the regulation of the insurance business. We believe that prior approval of rates by the insurance department of the State (or other jurisdiction involved) is essential to sound practices in rate regulation and the protection of the public.

We believe that insurance rates in the fire and casualty business should be carefully scrutinized by appropriate administrative agencies before their use is permitted.

Over the years (both before and after the Southeastern Underwriters Association case) most of the jurisdictions have followed the practice of prior approval. While it may be that those companies and bureaus who offered experimentation in coverages and prices have been somewhat delayed in their efforts, the evidence fully supports the proposition that innovation in forms and pricing has abounded under the so-called prior approval practice and philosophy. The homeowners forms, the so-called multiperil forms, package concepts in generalthese and other innovations have spread with almost incalculable rapidly under the prior approval concept.

"The fastest growing branch of the business, homeowners', is also the most bitterly competitive. To broader contracts and lower rates have been added rate deviations and commissions, frequently competitively set above the scale calculated in the rates. Premium volume in the stock company field increased more than tenfold, from less than $60 million in 1955 to over $700 million in 1961 * * * Experience on homeowners' leaves something to be desired. Only 1959 developed a sizable profit margin and experience has yet to reflect fully the broadened coverage and reduced rate levels of the latest policies" (Best's Insurance Reports, 1962).

We suggest that certain restraints on experimentation are healthy. An insurance policy does not lend itself readily to the caveat emptor philosophy. It is, in our judgment, prudent that innovations be subject to some restraints before they are offered wholesale to the public. An insurance policy is not like a piece of bread or a bolt of cloth. Those who would experiment with it should have their results reviewed before they are offered to the public.

We do not subscribe to the theory that competition alone will adequately regulate the insurance business, and we sincerely believe that such a philosophy would imperil the solvency of companies. We believe it would tempt companies to offer insurance at rates not compatible with sound financial judgment.

We would suggest that the tendency toward lax regulation, apparent in recent years, has already developed red flags in this direction. It is a matter of common knowledge within the industry that underwriting results have seriously deteriorated in recent years. Companies can be handicapped and endangered in their operations by financial reverses without becoming insolvent and the first quarter figures for 1963 indicate that the loss picture for companies is becoming increasingly grim. "The 57 fire and casualty companies represented among the stockholdings of insurance securities trust fund showed an increase of nearly 10 percent in premium volume but a jump of 2.4 points in loss ratio to 67.6 percent, the highest quarterly loss ratio in many years" (Best's Weekly News Digest, July 1, 1963). In our judgment, a portion of this responsibility can be charged to excessive price competition.

"Profit is the mainspring of our private enterprise system but the stock property and casualty companies, collectively, have not produced a satisfactory underwriting profit since 1955. While it is true that catastrophic storm losses in both 1960 and 1961 overbalanced the progress that many companies have been making on other lines, the fact remains that progress has been painfully slow" (Best's Insurance Reports, 1962).

There is other evidence to which we address the attention of this committee. The proponents of "file and use" have urged this philosophy for a number of years. Yet, this year (with all but three State legislatures in session) not one has adopted "file and use." We believe that the only State in which it was seriously offered was Missouri and there it was killed in committee. It is significant that the various States with a great deal of experience in the matter of regulation have, generally speaking, declined the "file and use" approach and have retained their confidence in "prior approval."

The proponents of this bill have emphasized it is not a model bill for the States to follow. We do not question their sincerity; however, we believe this bill's passage will have that effect and that those who espouse the cause of the so-called "file and use" philosophy will attempt to use it as a model for State legislation. It is manifestly impossible to detach this bill from the surrounding activity in the insurance field. It cannot be neutralized. Its passage will have a strong impact on State legislation. We, as a national organization, feel that this bill should not be passed.

To come back to the District of Columbia, the evidence shows strongly that there is already a reasonable and liberal approach to the filing of competitive rates. An increase in deviations in the fire field from 77 in 1959 to 589 as of July 1, 1963, would, in our judgment, indicate that there is ample latitude for competition.

Therefore, we would suggest to this committee that as to the District of Columbia there appears to be no occasion for a change in the law. There is ample evidence that competition abounds. Our association has had no complaints from its members in the District of Columbia or the companies whom they represent as to the liberality and administration of the present laws. To the contrary, the comment has all been extremely favorable.

We believe this bill, if passed, would have a national impact on the basic controversy between the "file and use" and "prior approval" approach. Feeling strongly that a further tendency toward liberalization of rate regulation would not be in the interest of the public or our members, we would urge on this committee that this amendment not be passed.

We are grateful for this opportunity to express the views of our association. Mr. STRINGFELLOW. Mr. Chairman, I am William A. Stringfellow, general manager of the National Association of Mutual Insurance Agents, an organization of about 11,000 independent agents in most of the States of the Union and with direct members in the District of Columbia, so our statement is on behalf of our members as a national organization and on behalf of our members who are resident in the District. Much of what you have heard from Mr. White is in accord with our statement. He has covered the situation very completely and we would agree with most of what he said.

As a matter of record, the regulation of the business in the District has been exemplary. We ourselves have had no complaints from our members or our companies. We suggest that not only as a compliment

to the Superintendent, but also because we feel it goes to the question of the need for the bill.

Insofar as we have been able to determine, there has been no occasion for the bill to rectify the situation in the District.

On the basic problem, our association has stood firmly for a conservative approach to the regulation of the business. We believe in prior approval of rates. We believe that a careful scrutiny of rates and forms by the administrative authority of the State or other jurisdiction is essential to the protection of the public. And we believe that these scrutinies should be made before the use of the forms or rates is permitted.

We suggest to you that in an area of prior approval in most States, most of the States having had prior approval laws since the Southeastern Underwriters Association decision, there has been a very rapid growth in experimentation and competition.

I have a brief quotation here from Best's in which it says:

The fastest growing branch of the business, homeowners, is also the most bitterly competitive. To broader contracts and lower rates have been added rate deviations and commissions, frequently competitively set above the scale calculated in the rates. Premium volume in the stock company field increased more than tenfold, from less than $60 million in 1955 to over $700 million in 1961. Experience on homeowners leaves something to be desired. Only 1959 developed a sizable profit margin and experience has yet to reflect fully the broadened coverage and reduced rate levels of the latest policies.

That is from Best's 1962 Insurance Reports.

I selected that brief quotation because, No. 1, it takes the most recent experimentation in the field, homeowners, and it seems to us that this demonstrates that under prior approval, it is possible to experiment, it is possible for policies to be offered at rate deviations with success. We feel that certain restraints on experimentation are healthy. In our judgment, it is prudent that innovations be subject to some restraints before they are offered wholesale to the public. An insurance policy is not like a piece of bread or a bolt of cloth. Those who would experiment with it should have their results reviewed before they are offered to the public.

Again, we do not subscribe to the theory that competition alone will adequately regulate the insurance business, and we sincerely believe that such a philosophy would imperil the solvency of companies. We believe it would tempt companies to offer insurance at rates not compatible with sound financial judgment.

We would suggest that the tendency toward lax regulation, apparent in recent years, has already developed red flags in this direction. It is a matter of common knowledge within the industry that underwriting results have seriously deteriorated in recent years. There is a recent quotation, again from Best's:

The 57 fire and casualty companies represented among the stockholders of Insurance Securities Trust Fund showed an increase of nearly 10 percent in premium volume but a jump of 2.4 points in loss ratio to 67.6 percent, the highest quarterly loss ratio in many years.

That's from Best's Weekly Digest as recently as July 1 of this

year.

It doesn't take much judgment to know that a 67.6 loss ratio is not profitable.