Senator HART. Thank you, Professor. I had an opportunity to read only about a third of your prepared statement. I appreciate very much the kind of summary you gave us of the whole statement.

You simply have no ifs, ands, or buts or reservations about the availability of group life. That is, you have no reservation at all.

Mr. KIMBALL. None whatever, no, none. I think there are circumstances under which it is unwise for a person to have too much group life. I think that is not a decision that should be made for him by the State.

Senator HART. Let there be printed, at the close of the professor's testimony, the Wisconsin document you have several times cited.

[The document referred to can be found as exhibit X to Mr. DuRose's prepared statement. P.-.]

Senator HART. There were a number of points that you made. One I would attempt to ask you to develop more fully.

You made some comment about the effect on agents. You did that in connection with the argument which apparently is directed against disclosure: that it would produce a self-service purchasing, do-ityourself kind of shopping.

Develop that a little more fully, both features.

Mr. KIMBALL. My main point would be, with respect to the agents, based upon an a priori skepticism about the effect, the direct effect on consumers of any price disclosure rule.

I have serious doubts whether large numbers of consumers will intelligently price shop for their insurance, whatever the price disclosure method. It seems to me most likely that the impact upon the life insurance market will come through the agents who will dislike being connected with companies that are unnecessarily high priced. Now, there are some limitations upon the mobility of agents. For example, they may have substantial nonvested commissions that they would lose if they moved from one company to another. So I would not expect that effect to develop with great speed. Perhaps it would develop with all deliberate speed, to use a well-known phrase. That is to say, agents would be likely over time to reject companies that were high priced under disclosure rules.

Gradually, companies that were seriously out of line, I think, would be forced to exit from the market unless they were able to improve their situation.

Senator HART. That reminds me, you did make a point that there might be pockets, assuming the gradual decline of the so-called higher cost insurance, the lowering of costs would be obtained by refusing to write lower economic social groups or whatever.

You tell us that may be a problem to which we will respond later, but it is not so clear a problem as to prevent us from moving as promptly as possible to disclosure.

Mr. KIMBALL. I have grave doubts as to whether that problem would be a serious problem. Simply, intellectual honestly impels me to say that I can see it as a logical problem, one that conceivably could develop because of the impact that underwriting might have upon the cost rating of companies.

I have grave doubts that it would be a serious problem. I think it could be dealt with in many ways if it were to develop. It undoubtedly would develop gradually, and high risk pools are possible in life insurance as they are in automobile insurance or anywhere else.

Senator HART. Mr. Sharp?

Mr. SHARP. Professor Kimball, on page 19 of your statement you state that the Wisconsin disclosure requirement has many deficiencies. The fact that term life insurance, variable life insurance policies whose benefits are varied, policies of $5,000 or less of face amount, substandard policies these are all exempt. Could that be what you are getting at here?

Mr. KIMBALL. It is a large part of it. In addition is the fact that I think that the Wisconsin disclosure requirement has chosen the wrong method of calculating costs. It should have chosen the Belth method.

On the other hand, as I said earlier, I think it is a very important first step; and I hope that the commissioner will, in his own good time, strengthen it to provide more adequate rules.

Mr. SHARP. Are you familiar with this-I do not want to get into it with you if you don't know. I was curious about the types of deception in section 2.14-do you have a copy of that? Are you familiar with it?

Mr. KIMBALL. I did not hear, I am sorry.

Mr. SHARP. Are you familiar with the regulation itself?

Mr. KIMBALL. The Wisconsin regulation?

Mr. SHARP. Yes.

Mr. KIMBALL. Yes. That is to say, I studied it rather carefully at one point. I have not in recent weeks.

Mr. SHARP. I am wondering, perhaps, if you could provide it for the record-do you have a copy of it by any chance?

Mr. KIMBALL. If I am not mistaken, it was one of the exhibits in Commissioner DuRose's document. If not, I can provide it for the record certainly.

[See exhibit X to Mr. DuRose's prepared statement.]

Mr. SHARP. I just have two questions concerning section 2.14(4). I think, is called, "Deceptive Practices Defined."

Do you have that?

Mr. KIMBALL. Yes, I have that.

Mr. SHARP. Section 214 (4) (c), "The use of comparisons or analogies," and so forth, "are defined to be prohibited unfair practices or deceptive acts in the selling of insurance," under this act.

In section 2.14 (4) (c) it says: "The use of comparisons or analogies or the manipulation of amounts and numbers in such a way as to mislead the prospective purchaser concerning the cost of the insurance protection to be provided by the insurance contract or any other significant aspect of the contract***." Could you give us an explanation or give us an example of the kind of deceptive practices that are referred to here? Or would you rather provide this for the record?

Mr. KIMBALL. I think I would rather provide this for the record. I can certainly dream up a number that will fit the description there. The language is general enough that one would have to exercise some imagination to come up with specifics.

I will be glad to do that.

Mr. SHARP. As well as, under section 2.14 (4) (f) 2. The source of the increase in cash surrender value, including the period of time to which such increase is related.

Could you explain or perhaps give an example where is a misleading statement concerning the source of the increased cash values?

You may provide that for the record if that would be better, if you prefer.

Mr. KIMBALL. I would prefer to.

Mr. SHARP. Yes; that is what I mean.

Mr. KIMBALL. You catch me off base on these.

Mr. SHARP. No, no; certainly not.

I would just like to ask you, again dealing with the name given to these regulations; that is, surrender cost index-is that what they are called?

Mr. KIMBALL. Yes.

Mr. SHARP. What is this index called, exactly?

Mr. KIMBALL. One has to look at the title of the thing. "Life Insurance Surrender Value Comparison Index."

Mr. SHARP. In your Law Review article, on page 1041, you discussed the background of this. Could you for the record here just briefly explain the background for calling this what it is now calledwhat was it called before the change?

I understand there was a change here. Why do you feel this is, from a consumer's standpoint, perhaps misleading?

Mr. KIMBALL. Before the change, it was described in terms that included the word "price." I am not sure of the exact terminology, but it was a price index of some sort.

I would not regard this as a misleading title. I think that it is a grossly inadequate title, because the numbers that are provided in this way are numbers that do, in fact, in my judgment, give us a measure of the price of the insurance for the specified period, the 10 or the 20 years.

It is an inadequacy of the title, of the term, rather than inaccuracy of the term that I object to.

Mr. SHARP. Do you think this could mislead consumers into not thinking it is a real price index?

Mr. KIMBALL. I think it is quite possible that it might.

On the other hand, if an index of any sort is going to be used in the marketplace, one can be sure that agents will use it as effectively as they can. And they will say, "Company A has an index of such and such, and my company has an index of such and such."

That comparison will be the effective sales device that will be used. I think the term that is used in the regulation is of less importance. In my judgment, what it represented was an erroneous conception that I think the commissioner had with respect to the limitations upon the meaning of the price disclosure process. I think that what the index does provide is, in fact, a measure of price for the specified period; not nearly as effective as one, I might add, as one which is exhibited on a year-by-year basis in accordance with the kinds of tables that Mr. Belth has proposed.

Mr. SHARP. One of the points you make in your article is:

However, the notion that death changes the price of insurance, up until the time of death, misconceives the whole measure of insurance. If one buys a $100,000 term life insurance policy for a premium of $1,000, the price of protection is exactly $1,000, whether the insured dies or not.

It says in your footnotes that the New York Association of Life Underwriters made this criticism in their analysis of the report of the interest adjusted cost method proposed by the study committee-this

is the Moorhead committee report—and that this is really the reason why the name was changed.

Could you explain the basis for this misconception, so we could have

it clear for the record?

Mr. KIMBALL. Well, the misconception, as I understand it, is based upon a notion that whether a person dies or not has an effect upon the cost. If he dies, let us say, in 9 years instead of 10 years, the cost of the insurance has somehow been less. Now, in point of fact, every year, year by year, premium payment by premium payment, the policyholder is paying part of his premium for savings, and part of his premium for protection.

There is a sense in which the cost is reduced because of the early death, but that is only because there has not been the last payment. If we are focusing on a 10-year period, which is what is done here, and the cost of the protection is precisely the same as the surrender value comparison index-I am not sure that I can articulate adequately the basis of the misconception, because I think it is so totally a failure to conceive of the nature of this number, which is a price figure. Mr. SHARP. I have one last question I want to ask you.

Perhaps you can find the flaw in the reasoning. Let us say I have $400 to spend on insurance, and I am going to buy a nonparticipating, guaranteed cost policy from one of a group of insurance companies. And I go shopping under the present methods used today.

Now, I am 30 years old. Premium cost to me is $400. I go to these various companies and I am looking at this over a 20-year period, from 30 to age 50. In your experience, or in your opinion, would it make a difference whether or not each policy I am examining from the various companies varies as to the length-the age of the policy? For example, what I am getting at here is: Let us say one company has a whole life policy I am looking at. Another company has a paid-up life to 65. Another one has a life to 85.

Would I be comparing apples and oranges if I went out and said, "For $400 look how much death protection I get over the 20-year period, and look how much savings?" Is this kind of a rough-hand way perhaps of getting at what Dr. Belth has done in a very technically sound manner? What is wrong with what I have just pointed out? Mr. KIMBALL. I think that what you have suggested is completely accurate, unless you use a very sophisticated method of cost comparison. What you have pointed out is completely accurate and is the principal problem with other methods of cost comparison, because they are quite unable to compare policies with different amounts of insurance year by year or with nonlevel premiums or with other gimmicks that are in the policy.

But there is one thing that is common to all life insurance policies, no matter what their detailed form; and that is protection against death.

Now, the cost of life insurance protection can, if you make some appropriate assumptions with respect to the investment value that you have in the policy-that is to say, assume an interest rate and two or three other fairly important assumptions, the mortality table, the lapse table, and so on-you can reduce any of those to a cost of protection over the entire life of the poli

In that way, you can get numbers that you can compare, even though the products are apples and oranges. Those apples and oranges each contain one item that is the same; that is to say, protection, life insurance protection. And that you can price by making assumptions and difficult calculations. When you do, you have numbers that are comparable, remembering always that the assumptions are very important in doing so, and can be argued about at great length. That is to say, the particular assumption that should be made can be argued

about.

Mr. SHARP. Thank you very much.

Senator HART. Mr. Chumbris?

Mr. CHUMBRIS. Mr. Chairman, thank you very much.

Professor Kimball, the temptation is great to ask you a lot of questions, but the hour is late and we have one more witness. Senator Hruska had asked a series of questions of Mr. Moorhead yesterday, and I asked a series of questions of Professor Belth the day before. In reading your paper and in answering some of the questions, you have anticipated with your answers some of the questions that we had for the other two witnesses.

So I am going to forgo that, unless you would like to submit answers to the questions if we mail them to you, the ones the other two witneses have responded to. That would save time and give you a chance to put it in whatever way you would like to do it.

Mr. KIMBALL. I would be glad to supplement my statement in any way you would like. Although the statement is not organized on the framework of the questions you provided, it was my impression that it was responsive to those questions.

Mr. CHUMBRIS. That is right. Because of the late hour, I will forgo that series of questions. There is one thought that has come to my mind in the last 2 or 3 days of these hearings, and in reading much material on this. I would like to get your reaction.

We have been concerned and some of the people who have testified are concerned about the young man who has a family and does not really have too much money, and is being misled in buying an ordinary policy, because he is being forced to buy less protection so that he can get some savings. The thought is that he should really buy term so he would better protect his family.

It appears to me that he is the type of person, perhaps, that we ought to place him in that position of buying so much protection and so much savings, because he is going to be the last man in the world who is going to take that extra money and put it in some type of an investment. His wife is going to need this for the children, she is going to need a new refrigerator, a new dishwasher, and that is going to come first. He will put his savings off and put it off and put it off.

I am not a life insurance man. I am just like everyone else here. But since you are a life insurance man, I was just wondering if some thought came to you or can be given to that, because that seems to be the criticism of the Consumers' Union of Mr. Nader and a few other witnesses. You may respond to just that projection that I am throwing out. That is something we ought to get clear from an expert such as

you.

Mr. KIMBALL. I think that my friends in the life insurance industry would be offended at your calling me a life insurance man, sir.

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