U.S. SENATE,

SUBCOMMITTEE ON ANTITRUST

AND MONOPOLY OF THE COMMITTEE

ON THE JUDICIARY, Washington, D.C.

The subcommittee met at 10 a.m. in room 2228, Dirksen Senate Office Building, Hon. Philip A. Hart [chairman of the subcommittee] presiding. Present: Senator Hart.

Staff present: Howard E. O'Leary, chief counsel and staff director; Dean E. Sharp, assistant counsel; Patricia Bario, editorial director; Janice Williams, chief clerk; and Peter N. Chumbris, minority chief counsel.

Senator HART. The subcommittee will be in order.

Permit me a very brief opening statement. Last year, some of you may recall, we held initial hearings on the life insurance industry.

The theme there was that consumers couldn't make rational buying decisions at the time of purchase of life insurance because detailed information on costs and benefits wasn't available. We heard a great deal about the costs to consumers from the rapid agent turnover in companies, and from the high ratio of policies allowed to lapse in the first several years after the purchase.

After the hearing we decided that the best way to get more detailed costing information which would help consumers was to run the most popular policies through a proving ground.

The results of that will be presented to the subcommittee today.

In a sense, this session falls more in the area of a housekeeping rather than an investigative hearing. We also gathered a great deal of information from 195 of the leading life insurance companies regarding lapse ratios, agent turnover, and general information concerning sales practices.

All of the pricing data was computerized with the assistance of Massachusetts Mutual Life Insurance Co., whose contribution to the subcommittee is most certainly appreciated.

Today we have two assignments: First, to get the data in the record, with detailed reporting on just how it was gathered, classified, tabulated, and summarized.

Second, to learn from our witnesses what may lie ahead in terms of planned analysis and projects by the subcommittee's consultants and staff, the National Association of Insurance Commis

sioners, individual State commissioners, and the Society of Actuaries.

In case anyone is curious about the legislative purpose of this hearing, it obviously is to help in perfecting a legislative package on life insurance which I have put the staff to work on.

At this point, without objection, we will receive for the record the press release announcing the hearing.

[From the office of Senate Antitrust and Monopoly Subcommittee-For release: Friday, July 12, 1974]

Chairman Philip A. Hart (D-Mich) today announced the Senate Antitrust and Monopoly Subcommittee Tuesday will hold a one-day hearing on the life insurance industry. "Following our initial hearings last year, the Subcommittee sent out questionnaires to about 195 of the leading companies, asking, among other things, about pricing on their best-selling policies in 1972, percentages and number of policies which lapse and agent turnover," Hart said. "This information has been tabulated and compiled. At this point, we want to make that data public in order to obtain comment on it from the industry and other experts.'

The Subcommittee investigation in the life insurance area grew out of Senator Hart's concern that consumers are handicapped in making life insurance buying decisions because they are not given enough accurate and reliable information about prices and benefits of policies at the point of sale.

"There is no breakdown of the premium-how much goes for death protection and how much for savings, and no yearly price data," Hart said. "The result is that many people buy policies which are not the best for them." The witness list is:

TUESDAY, JULY 16, 1974, 10 A.M., ROOM 2228 DIRKSEN SENATE OFFICE BUILDING

Mr. E. J. Moorhead, FSA, Winston-Salem, N.C., Actuarial Consultant to the Senate Antitrust and Monopoly Subcommittee and the NAIC Cost Comparison Committee; President, American Academy of Actuaries. Mr. C. Norman Peacor, FSA, Executive Vice President and Chief Actuary, Massachusetts Mutual Life Insurance Company; accompanied by Mrs. Anita Cassanelli, Mathematical Assistant.

Mr. Alfred Whitney, Princeton, Mass., Statistical Consultant to the Senate Antitrust and Monopoly Subcom

mittee.

Senator HART. We welcome first the actuarial consultant to the subcommittee, president of the American Academy of Actuaries, a man widely respected in the field of life insurance, Mr. E. J. Moorhead, of Winston-Salem, N.C.

I should explain that Senator Hurska, who planned to be here, is involved in another subcommittee meeting-the Appropriations Subcommittee and expresses his regrets.

Mr. MOORHEAD. Thank you.

Senator HART. You may proceed as you see fit. We will print in full the rather brief statement that you have. As you go along, if there is any additional footnoting, feel free to do it.

[The statement referred to appears as exhibit 1 at the end of Mr. Moorhead's oral testimony.] Mr. MOORHEAD. Thank you, Mr. Chairman. I have a prepared testimony consisting of six sections and two appendixes, and with your permission, I shall refrain from reading all of it, but will attempt to indicate what I think are the highlights by going through the text and just reading portions of it, and perhaps, commenting a bit on the portions that I shall read.

By way of preamble, I do feel I should thank you, sir, for the privilege of attempting to help the American public through my relationship with your subcommittee, and for the opportunity to work with Mr. Sharp in the planning of all this operation.

As you will see, sir, my testimony is in six parts-first, identification; then the purposes of the pricing study; the third describes the companies and policies that are included in the study; the fourth describes the cost comparison methods being analyzed; the fifth is a highly technical section involving some essential but rather abstruse subjects, that is, mortality, lapse, interest and term insurance rates that are used in the study; the sixth is an attempt to describe the intentions for analysis of the pricing study material as this witness sees them.

Then we have two appendixes: one, simply a list of the companies whose policies are in the study; and, second, some material relating to the work of the National Association of Insurance Commissioners' Cost Comparisons Task Force.

So, if I may proceed from the beginning of my prepared testimony, in the first section, "Identification," I will read just the third and fourth paragraphs because they place in juxtaposition the work of the two operations that are involved:

In March 1973 Senator Hart announced my appointment as actuarial consultant to this subcommittee for its life insurance investigation. My consulting duties have been devoted mainly to the planning of the pricing study, which is the principal subject of this hearing today.

I am associated also in a consulting capacity with the Life Insurance Cost Comparisons Task Force of the National Association of Insurance Commissioners; the task force chairman is the Honorable Stanley C. DuRose.

The appointment of the same actuarial consultant by both these bodies is one of the happy evidences of cooperation between them in the search for the best aids for life insurance buyers in the comparison of policy costs.

The second section, entitled, "Purposes of This Pricing Study," is brief, but I think essential, and I intend to read that short section in full.

I should preface it by saying that these are my own descriptions of the purposes, and are not necessarily all-inclusive; but I believe they are a fair statement of how the materials can be used for the benefit of the American public. The section reads as follows:

This study may reasonably be said to have five objectives, as follows:

(a) To display the range of prices for substantially similar policies that exist among companies selling individual life insurance;

(b) To permit drawing conclusions about the similarities and differences among, and the relative validities of, several methods of price comparison that have been proposed or are in use; and to examine the extent to which indicated price attractiveness depends upon the method that is used, or upon the factors used to implement the method.

The emphasis there is that the determination must be not only the mathematical formula that is involved but the particular set of interest, mortality, lapse, or term insurance factors that are incorporated into the formula in order to make the comparison momentous.

Continuing:

(c) To permit drawing conclusions about the ease with which policies markedly unattractive in price, measured in relation to similar policies available elsewhere to the same buyer, can be sold.

I think it might be agreed that (c) is the heart of this whole discussion.

(d) To see what relationships exist within stock life insurance companies between the indicated prices of their participating and their nonparticipating policies.

(e) To lead to hypotheses about the need for new regulation or legislation designed to serve the interests of life insurance buyers, relating particularly to the avialability of valid comparative information at the time they purchase life insurance.

Section (e) is a matter you have stressed in your public appearances on this subject.

The third section of this prepared testimony describes the companies that are in the study and the policies that are in the study, having in mind that as the opening paragraph indicates there are, according to public record, more than 1,800

life insurance companies domiciled or licensed to operate in the United States, and we are using in this pricing study a very much smaller number than 1,800.

In the opening paragraph, second sentence:

If one examines the policies of about 100 companies, including several Canadian companies that are active in this country, one can cover almost all the companies whose agents a typical buyer is likely to encounter.

This is because so many of the 1,800 companies are either very small or are not writing the type of life insurance that we are concerned with in this study-the individual sale.

On the other hand, there exists also a considerable number of other companies that are active in a limited area or in a particular market defined by socioeconomic group or by type of agency force.

For this reason, the pricing study is being conducted in two overlapping parts. The overlapping parts consist of the figures for 97 companies that are essentially all the large and medium-sized companies, and that I indicate in my testimony write a large proportion of the total business being written on individual policies.

Then, there are 98 other companies—those are the ones I referred to in the previous paragraphthat are active in a limited area or in a particular market.

That defines the 195 companies whose policies are included in the study.

Now, in the next paragraph we indicate that they were requested to supply information on their three leading policies of the cash value type-not necessarily level premium policies, but all policies that generate a cash value, as opposed to shortterm policies that generate no cash value. Those were the leading policies that they were selling in 1972. Then the information about those policies was gathered as of July 1, 1973. That is really the date to which all the information is applicable.

The next paragraph, the second sentence, I think deserves a little emphasis because it is likely to be a matter of some concern as time goes on. I will read it:

It is important to observe that the dividends reported by the companies for participating policies are those used in 1973 sales presentations; they are not estimates of dividends that will be paid in future years on these policies, nor are they histories of dividends that have been paid in past years.

At the very bottom of that second page, I say: It is recognized that there are some differences in policy provisions that affect the showing of any particular policy in a comparative study of this kind.

One such is that while most companies issue policies at age nearest birthday, some issue them at age last birthday. Information on points such as this was gathered in the questionnaire; however, the tabulations now being used do not reflect differences of this kind.

The justification for such treatment is that cost indexes are properly viewed as approximations rather than precise

measures.

And I do believe that if everybody who is involved in this recognized that these are intended to be approximations, at least some of the controversy that has developed would be swept away.

The fourth section is the methods that are being used in the pricing study. In the second paragraph of that I indicate that it was decided to examine the following methods in the pricing study, and there are eight of them.

First, the traditional method-the one that was really the only one in existence until some 15 years ago.

Second, the interest-adjusted method, which was the method finally recommended by the Joint Special Committee on Life Insurance Cost.

Then, a series of methods-Nos. 3, 4, 5, and 6-that have been presented for consideration by Prof. Joseph M. Belth of Indiana University.

No. 7 is a method of the late M. Albert Linton, an actuary, which can be called "Linton's rate of return," or "yield method."

And finally, a very new entrant in the ranks, Prof. William Scheel's risk premium index.

A description of each of these is contained in the testimony of another witness at this hearing.

In the next paragraph I stress that these eight methods must be recognized as being of three different types, in some respects it is easy to consider them together, and in other respects it is impossible to do so. These eight methods, then, are generically of three different kinds. Some of situathem-Nos. 1, 2, and 7-indicate the tion if the cash value at a particular time, such as at the end of the 20th policy year, is reflected in the calculation of the cost index; these have been called "snapshot" methods.

Some-Nos. 3, 4, and 8-develop an average of the costs or values that are found in the event of death or surrender occurring at the end of any policy year throughout the period of study; these have been called "average" methods.

The two others-both Professor Belth's developments Nos. 5 and 6-are of an entirely different kind in that they measure the cost or return for a particular policy year only, such as, for instance, the 20th year or the 10th year, or the 5th year; these have been called "single year" methods.

The next section of my testimony has to do with the technical subject of choosing the mortality, the lapse, the interest, and the term insurance rates for this study.

My intention is to answer any questions that come up rather than to read this entire section. Its matters are important, but they are matters of detail.