proaches rates must conform to three basic standards: i.e., they may not be excessive, inadequate or unreasonably discriminatory. This is checked either by an insurance department review prior to rate changes or by a subsequent rate examination of the insurer after the rates go into effect. Another example is the NAIC accident and health insurance regulatory law which enables the commissioner to disapprove policies whose benefits are unreasonable in relation to the premium charges. Thus, in the critical area of pricing, the states have long exercised control which is not in the arsenal of the FTC.

In addition to controls over prices, insurance policy forms must be filed with the commissioner subject to his power of approval or disapproval. There are a multitude of statutory requirements relating to the content of an insurance policy. Through the policy approval power and the statutory standards available, much of the source of misrepresentation, deception or other unfair practices is deterred in advance.

Every insurer, as a condition of doing business and continuing its license, is subject to periodic examination. Insurers are required to maintain files on complaints received by them. As a part of the examination, the insurer's handling of complaints is reviewed and improvements required where appropriate. In addition, insurance departments have established complaint procedures whereby departments intervene on behalf of an aggrieved party in a situation so warranting.

Within the last four years, among many actions taken, the California Department of Insurance has taken action against admitted insurers that resulted in refunds of premiums of $850,000.00 by an insurer to defrauding members of the public who had purchased policies of insurance by misrepresentation; the filing of an Accusation by the Department of Insurance against a life and disability carrier with the resulting refund of $300,000.00 to its policyholders and a complete revision of the company's claims practices; the filing of an action against a life and disability carrier with the result that the company's claims practices were completely changed and new auditing procedures installed and refund of $50,000.00 made to its policyholders; and the filing of an action against an insurer for alleged fraud and misrepresentation in the sale of its products with the result that $100,000.00 was made in restitution of moneys paid and also rescission made to every person who purchased the company's product. In addition, based upon an investigation carried on by the Los Angeles office of the Department, criminal indictments were brought in an adjoining County against 21 individuals and one general agency of an insurer. In addition, my predecessor, Richard S. L. Roddis, brought to a conclusion litigation that once and for all conferred jurisdiction upon the California Department of Insurance over those non-admitted insurers who were soliciting residents of California by mail from their domiciliary states. The matter of mail solicitations by non-admitted insurers had been a constant source of aggravation to the various state insurance departments. This case spells out clearly the jurisdiction of the several states to assert control of these non-admitted insurers.

10

For the last four years, the California Department of Insurance has handled an average of 12,331 complaints annually through its four offices in San Diego, Los Angeles, San Francisco and Sacramento. Of this yearly average, 49.6% were claims arising out of disability contracts and 24.1% were claims arising out of automobile policies. This annual average of 12,331 cases does not include investigations handled by the Investigation Bureau in the California Department of Insurance. For the same four years the average investigation volume handled annually was 6,149 cases. Many of these cases related to licensees of the Department (agents and brokers), but many of these investigations dealt with the protection of the public in their dealings with the Department's licensees. If the average figures were taken into consideration of the Department's Investigation Bureau and its Policy Service Bureau, the average volume of cases handled by the California Department of Insurance was 18,400 cases per year. For the year 1968, the New York Department of Insurance processed 14,956 complaints and investigations through its New York City and Albany offices.

The New York Department has been very active in all aspects of consumer protection and the Order of the New York Department of Insurance on the

1947 Proceedings of the NAIC 391.

E.g., Uniform Individual Accident and Sickness Policy Provisions Law, 1950 Proceedings of the NAIC 399.

10 People v. United National Life Ins. Co., (1967), 66 Cal. (2d) 577, 427 P (2d) 199; "Mail Order Insurers: A Case Study in the Ability of the States to Regulate the Insurance Business," 50 Marquette Law Review 175.

alleged cancellation of certain property risks in minority areas of BedfordStuyvesant, although subsequently annulled by Court Order, shows an alertness by them to remedy abuses against any segment of the public.

The Department of Insurance of the Commonwealth of Pennsylvania, through its Bureau of Policyholders' Services, for the last two years has processed annually an average of 12,500 complaints from members of the public and the Department of Insurance of the State of Illinois, for the year 1969, opened in excess of 11,000 cases of complaints from members of the public and closed 10,900 that year, with an indication that approximately 30% of those persons complaining to the Department of Insurance had meritorious claims.

One can logically ask, what are the activities of those smaller states? In answer to that question I would like to relate the Insurance Deaprtment of the State of Oregon's excellent consumer protection program. The Department of Insurance in Oregon has inaugurated a "circuit rider" program that travels throughout the state. In the year 1969 the Oregon Department handled 2,945 cases and recovered $320,000 for Oregon policyholders.

These facts show that the Departments of Insurance of the several States act as a local vehicle through which the members of the public can channel their complaints against the practices of insurers and their agents. To confer this duplicate jurisdiction on the FTC not only results in a waste of money and manpower, but has a tendency to deprive the members of the public in the several states of the right to redress of their grievances on the local level. "* * * The basic motivating policy behind the legislative movement that culminated in the enactment of the McCarran-Ferguson Act served to confirm the conclusion that when Congress provided that the Federal Trade Commission Act would be displaced to the extent that the insurance business was 'regulated' by State law, it referred only to regulations by the State where the business activities have their operative force. One of the major arguments advanced by proponents of leaving regulation to the States was that the States were in closer proximity to the people affected by the insurance business and, therefore, were in a better position to regulate that business than the Federal government."

11

I subscribe to this language of Mr. Justice Stewart in the Travelers Health Association case, and the foregoing examples cited confirm that in matters of consumer relations the several states are effectively regulating the insurance business on a level closest to the people to be protected-the public.

Today we have summarized some aspects of state regulation on behalf of the insurance buying public with particular attention focused in the area of unfair and deceptive practices. States controls are pervasive. In the insurance field, they fully occupy the area covered by the FTC Act in non-insurance businesses. Furthermore such state controls are not only similiar to be also more extensive than those available under the FTC Act. In this light, what would be the impact of the proposed bill if it continues to include "insurance services."

S. 3201 would supersede part of the McCarran Act as to the inappropriateness of FTC and the Department of Justice regulatory jurisdiction of the insurance business. In turn, this would do one of two things. (1) It would set the stage for duplication or concurrent regulation by the FTC and the Department of Justice and the states. The eleven unfair practices enumerated in the proposal would also be covered by state law. There would be duplicative or overlapping state and federal procedures. Furthermore, in dealing with the broad and general concepts, inevitably disagreements will occur between state and federal authorities which may very well result in conflicting procedures and incompatible rules of substantive law. Should the taxpayers be asked to bear increased costs of an already large overburdened regulatory agency to merely duplicate some functions already assumed at the state level? This certainly seems inconsistent with the trend to retain or move functions back to the states a trend which is so viable to a federal system. Or, (2) S. 3201 might be construed as creating a federal preemption of this field or ultimately lead to this result. If this occurs, a more narrow and less protective ssytem of regulation would supplant a more comprehensive time tested system of state regulation.

11 FTC v. National Casualty Co., supra.

My question is this: in light of current criticisms of the FTC's failure to perform its delegated functions,12 why continue to dilute its current or proposed activities by having the FTC perform those functions already being adequately performed by the several states?

In this connection it is worth pointing out that the state insurance departments have offices in every state. Some states maintain multiple offices providing easier access to the public. Thus, at the state level, complaints can be processed close to home. In sharp contrast, the FTC has field offices in only 13 states. Furthermore, unlike the state insurance departments which specialize in insurance problems, the FTC offices-already understaffed and underbudgeted— must dilute their efforts over the entire spectrum of American business.

Furthermore, comments in the 1968 report of the FTC are quite germane. The FTC said that between fiscal 1962 and 1968, Congress increased its appropriation from $10.3 million to $15.2 million. However,

"Most of this increase was consumed by mandatory pay increases and new responsibilities placed on FTC by Congress. During these years, the number of employees increased only from 1126 to 1200."

"Obviously, with so small a staff-the 1200 included clerks and stenographersit was impossible to accord each application for complaint the same weight." The FTC also said:

"Still another approach to bring its workload down to manageable proportions was to actively encourage the states to move more effectively against business chicanery.”

The report stated:

"The general counsel's office also conducted the Commission's program for encouraging the states to enact laws, like the FTC Act, to protect the public from deceptive and unfair business practices."

Speaking of a closer working relationship with the states under local "FTC Acts," the Commission said:

"Certainly if the rackets can be stopped by state or local action before they grow into problems of interstate proportions, the need for federal action will be reduced, and the FTC can devote more energy to problems of regional or national significance."

The FTC stated that it had received 7,500 complaints from the public. For those complaints that lent themselves to broad scale treatment, the Commission could offer industry guides, trade regulation rules, and advisory opinions. Individual offenders could be halted by appropriate action. The Commission also received requests from Congress, the Executive Branch, and on its own motion. Its report contained a long list of areas in which it functioned-automobiles, cigarettes, fair packaging and labeling, food and drug cases, soft wood lumber, home improvements, the analgesic drug industry, advertising of economic poisons, monitoring of radio, T-V, newspaper, and magazine advertising, deceptive debt collection, stationery tents, pre-fab homes, unordered stamps, nursing products, sewing machines, jewelry, sleep products, mortgage financing, employment counseling services, correspondence schools, raising chinchillas, franchises, the watch industry, photographic film and processing services, decorative wall panels, cat and dog food industry, glass fiber and drapery fabric industry, deceptive transistor counts on radios, quick freeze aerosol sprays, wool act cases, fluid milk industry, furniture manufacturers, food products by operators of chain food stores, liquid petroleum gas, sugar, corn products, rice and other products, the newspaper industry advertising rates and T-V advertising rate structures, industrial laundry and linen supply business, chinaware, the clothing industry, cement industry, food distribution industry, grocery products manufacturing, the plastic industry, glass and plastic coated containers, clorox, promotional allowances by the public utility industry, enforcement of the Packers and Stockyards Act, supervision of the Webb Pomerene Export Trade Act, the Lanham Trademark Act, etc.

A 1967 survey of state insurance departments' statistical data (the 1968 is now being completed) showed that in that year, the state insurance departments had 4499 employees, including examiners, and the budgets of the departments totaled $40.4 million. Some of the larger states had a sizable number of employees, i.e. New York-729; Texas-463; Massachusetts-301; California-299; Florida-215; Illinois-203. Some of the intermediate-sized states had good sized departments, Virginia-77; Washington-88; Wisconsin-80; Maryland-94; Kansas-90; etc.

12 Report of the ABA Commission to Study the Federal Trade Commission, American Bar Association (1969).

Our point is a simple one. To us it seems inconceivable that Congress, confronted by staggering federal budgetary needs, would add new regulatory powers and budgets affecting insurance to the Federal Trade Commission and the Department of Justice already inadequately staffed and over-burdened in handling every conceivable business in the United States when the states now provide a regulatory machinery with existing offices in 50 states, budgets of over $40 million, and approximately 4,500 employees available to regulate the problems of one specific business, i.e. insurance.

The inclusion of "insurance services" poses two fundamental issues for consideration. First, this bill would enable the FTC and the Attorney General to enter into the insurance regulatory field. Second, it would make available the federal courts for individual and class consumer actions against insurance companies after successful prosecution of a FTC or U.S. Attorney General suit. As to the first question, which we have just discussed, it would be inappropriate and unfortunate for Congress to foster the intrusion of the FTC and Attorney General into insurance regulation. This is particularly true in the absence of a documented case proving the need for such action in an area already subject to detailed regulation. This bill would emasculate the application of the McCarran Act. Neither the FTC nor the Administration has shown that such a radical move is required. If the McCarran Act is to be repealed, it should be done only after the same careful type of legislative investigation as was conducted in 1944 and 1945 before the McCarran Act was adopted.

As to the second question, the NAIC has not taken a position either for or against class actions. Mr. McLaren, a strong proponent of S. 3201, argues that establishing a federal private right to bring class action is subject to serious abuse." To safeguard against abuse, S. 3201 would not permit a class action until the FTC or Attorney General prosecutes a successful action. If Mr. McLaren's argument for safeguards is accepted, the basic issue would then seem to be the avoidance of federal intrusion in insurance regulation and the absence of class action safeguards (or the absence of class actions) versus the use of such safeguards along with federal intrusion.

In balancing these considerations, certain additional factors need to be considered. Unlike most business areas to which the eleven enumerated items in S. 3201 would apply, the insurance business is subject to intense regulation on behalf of the consumer. The insurance commissioner's function is to protect the consumer. Hence the need for private class action is less than in other areas. In fact, it was the inadequacy of private remedies through the judicial process that gave rise to insurance regulation in the first place. Furthermore, as an alternative to a private suit, the public has recourse through the commissioner which many believe to be far more effective in providing consumer protection. It has been said that "The licensing power is the staple administrative tool of the insurance departments"." However, it does not stand alone. Other powers include cease and desist orders, suits for injunctions, monetary and criminal penalties, removal of management, etc. As a result, when the public brings a complaint to the attention of the commissioner, he occupies a strategic position possessing extraordinary influence to compel redress of justified complaints. When a member of the public has been wronged, it is quite common for a commissioner to revoke the Certificate of Authority, to cause a rescission of a contract, refund or premium payment of claims.

A classic example occurred in 1956 when certain insurers, operated by finance companies, had misclassified thousands of automobile insurance policies resulting in overcharges to the policyholders. The state insurance departments with the assistance of coordination through the NAIC, required these insurers to make refunds on a nationwide basis. This illustrates effective class actions through the administrative process at relatively little or no cost in time or money to the insurance buying public under the existing system of state insurance regulations. Such results can be achieved without the necessity of long trials, rules of evidence, etc. (Of course, insurance department action is subject to judicial review).

In short, the NAIC believes that S. 3201's inclusion of "insurance services" would be contrary to consumer interest. First, it would introduce a relatively narrow form of federal insurance regulatory control into an area which has been long and more comprehensively occupied by the states. This, in turn, would 13 See his testimony before House Subcommittee on Commerce and Finance, February 17, 1970. 1 Patterson, The Insurance Commissioner in the United States 21 (1927).

generate, at a minimum, overlapping and conflicting regulating and at worst, a superseding of state regulation. Second, even if other appropriate safeguards against abuses to class actions cannot be devised, thereby necessitating abandoning the class action approach in the insurance area, more effective alternatives are available. These include the complaint with multiple remedies available to the Commissioner, as well as the application of regulatory controls which miti gate the number and likelihood of complaints. Thus the NAIC submits that the inclusion of “insurance services" is contrary to the consumer and public interest and that it should be deleted from S. 3201.

If, however, Congress still thinks that a federal class action in the insurance area should be sanctioned, it should be done in such a way to avoid the intrusion of the federal government into insurance regulation. If safeguards against harassment suits are desirable, it is not necessary to tie them to federal regulatory activity. For example, a consumer bringing a class action could be required to show that he has first filed a bonafide complaint with the insurer and with the state insurance commissioner and that no relief was forthcoming. Another approach would be to parallel the S. 3201 technique at the state level. That is, instead of conditioning a class action on successful FTC or U.S. Attorney General action, condition it on successful action by the state insurance regulatory official. Under the S. 3201, the agency which has the direct responsibility for regulating the business and its practices is ignored. Instead the responsibility is placed on the FTC and the Attorney General's office which have only oblique responsibility in this area and none if the standards of the McCarran Act are observed. In short, we submit that federal sanctioning of class action can be done in a manner so as to avoid overturning the existing insurance regulatory structure.

Senator Moss. We will now hear from Mr. John F. McCarthy, Sales and Marketing Executives, International, Inc.

Mr. McCarthy, we are glad to have you. We appreciate your being here and waiting over to this afternoon.

STATEMENT OF JOHN F. McCARTHY, SALES AND MARKETING

EXECUTIVES, INTERNATIONAL, INC.

Mr. McCARTHY. Thank you Senator. I prefer to testify this afternoon because I know you have a very busy schedule, as all of us do, and I think the sooner we can get most of this out of the way the better, so if you are willing to wait, so am I. I will go ahead with my prepared statement because when I start ad libbing I seem to talk longer than if I sat down and

Senator Moss. I find that is sometimes the case.

Mr. MCCARTHY. First, let me explain who I am and what Sales and Marketing Executives, International, Inc. is. I am an assistant vice president of United Utilities, Inc., presently heading up that firm's Washington Office. However, I am appearing before this committee as a member of and in behalf of Sales and Marketing Executives, International.

Sales and Marketing Executives is an affiliation of sales and marketing executives clubs located in some 148 of the principal commerce centers in 44 States and the District of Columbia. Sales and Marketing Executives membership is limited to qualified sales and marketing managers, or executives, whose job function it is to establish sales policies; to supervise, manage, direct, and train the sales and marketing personnel of his company, business or branch thereof, and to perform other managerial aspects of distribution, merchandising and marketing. These clubs have a total U.S. membership of some 20,000 professionals.

Sales and Marketing Executives has existed for quite some time but for the first time they have felt moved to appear before a Senate com