Invalued are fundamental, basic and long held principles of business, commerce, and government which have been adopted, established and pursued with deliberation and for many decades. And with success, plus prospects for even greater advantage to all immediately concerned and to the entire nation's economy and well-being.

Chief among these principles is one resident and explicitly contained in the McCarran-Ferguson Act-enacted over 35 years ago by the Congress.

In it is the direct and vigorous message and declaration that "the continued regulation and taxation by the several states of the business of insurance is in the public interest."

Under that Act, the "business of insurance" plainly includes the relationship and activity between insurance companies and policy holders, the type of policy which can be issued, its reliability, interpretation, and enforcement.

The Supreme Court has included within the phrase "business of insurance" the fixing of rate (United States vs. South Eastern Underwriters 322 U.S. 533, (1944)); the selling and advertising of policies (F.T.C. vs. National Casualty Co. 357 U.S. 560 (1958)); the licensing of companies and their agents (Robertson vs. California 328 U.S. 440 (1946)); and others.

So for over a century our national policy has been for regulation and taxation by the several states of the business of insurance. That policy is grounded in deliberate Congressional enactment. The reasons for it have been amply stated in the legislative history on McCarran-Ferguson Act, as well as in Supreme Court opinion. Those reasons and the rationale of the Act are still applicable today.

But now we are being asked to change all this. We are being asked to liquidate the McCarran-Ferguson Act. Only as to the life insurance business in certain of its aspects but no one need delude himself-it would be succeeded by additional aspects in short order-it was Justice Harlan, who wrote in F.T.C. vs. Travelers Health Association:

"One innovation with the Act (McCarran-Ferguson) is apt to lead to another, and may ultimately result in a hybrid scheme of insurance regulation bringing about uncertainties, and possible duplications which should be avoided."

It may be argued that the present system of state regulation has been failing in regard to life insurance cost indexes and related items, and hence federal jurisdiction should attack. The Supreme Court disposed of this type of reasoning in its opinion in F.T.C. vs. National Casualty Co. by ruling that it is the eristence of state regulatory legislation and not the effectiveness of such regulation, that is the controlling factor.

But there are other reasons why national legislation should not preempt the field and intrude upon territory heretofore reserved for state action.

1. Enforcement. If any statute is needed in this particular, the state is in a better position to formulate, administer and enforce it than the national government is:

(1) A state is in close proximity to the people and transactions affected;

(2) The States have the machinery-laws, personnel, and expertise-which are required for understanding and enforcement of our laws or regulations. The federal government has no such machinery or means;

(3) The States have a more effective motivation to do a good job. Their Insurance Departments, Commissioners and staffs are located among the people they serve;

(4) The States and their Departments have demonstrated repeatedly and often, their responsiveness, capability and flexibility in treating with familiar problems. They have done it through the National Association of Insurance Commissioners; through Convention Examinations; through model laws they have sponsored, and in a host of other ways. In fact, even in this very field of life insurance cost estimates, the life insurance industry has been fruitfully active as will be shown when representatives of the Joint Special Committee on Life Insurance Costs testify later in these hearings. The Report it has prepared and published will prove to be very helpful indeed.

(2) Revenues. There is another inducement and motivation which States have in the premises. It is one especially compelling since it hits at the purse-the revenues of each State. I have been informed that the fees and taxes enacted and collected by states from insurance companies is in the range of a billion dollars annually.

There is awareness that state-federal hybrid or dual regulation of insurance will soon edge states out of the picture entirely. The nature of federal jurisdic

tion is to encroach, to dispossess, to pre-empt, till it is in entire, monopolistic control. That means a cut off of state tax revenues if the states no longer render regulation.

Even from the standpoint of revenue alone, it seems ironic that in these days of revenue sharing concept, partially in force and rapidly gaining greater favor, that such a momentum would be arrested and reversed at a billion dollars annual rate.

But revenue sharing is only one aspect of a large, steady wave of the future. More and more it is becoming apparent that the federal government is illadvised to reach out and grasp for additional power in such matters as these.

Senator HART. I would like to reinforce one point that Senator Hruska made. Getting an overview of anything is tough, if it is more complicated than 2 plus 2; and most things are.

I think an overview of this picture will be as large an assignment as most people have been given, and I hope that we can, at the conclusion of what may appear to some to be rather drawn out hearings, have a record that will permit informed third parties to make a wise, prudent judgment with the overview.

That should be our objective. It is.

Our first witness is Mr. Ralph Nader, one of the few Americans about whom it truthfully may be said, needs no introduction.

STATEMENT OF RALPH NADER; ACCOMPANIED BY PETER J. PETKAS, ASSOCIATE

Mr. NADER. Thank you, Mr. Chairman.

Distinguished members of the Senate Subcommittee on Antitrust and Monopoly, thank you for your invitation to testify on the competitive aspects of life insurance and the consumer interest.

Accompanying me today is my associate, Peter Petkas, who will be pleased to answer additional questions after the summary of the testimony.

I would like to submit the whole testimony for the record with your permission, and summarize it so that we can perhaps have more time for questions.

Senator HART. Let the prepared testimony be printed in the record in full. We welcome this summary.

[The statement follows. Testimony resumes on p. 19.]

STATEMENT OF RALPH NADER

Mr. Chairman, distinguished members of the Senate Subcommittee on Antitrust and Monopoly, thank you for your invitation to testify on the competitive aspects of life insurance and the consumer interest. Accompanying me today is my associate, Peter J. Petkas, Esq.

These hearings, which you have scheduled, are the first comprehensive investigations into the life insurance industry in the history of the United States Congress. It would therefore not be excessive to regard your Subcommittee's effort as one of historic proportions. This is the case both with regard to its resultant impact on this gigantic aggregation of capital and the millions of policyholders and beneficiaries whose reliance on the industry, in return for ample payments, has not been reciprocated with the trust that is its legal responsibility. In this period of disclosure of consumer abuses, from automobiles to drugs to food to loan transactions, few industries averted the scrutiny of Congressional committees such as yours. Partly because of historical accident awarding jurisdiction to the states and partly because of the focus of government attention on auto insurance reform, the life insurance industry is, perhaps, the last giant industry to come under the legislative microscope. Its contrived complexity, secrecy and public relations have fulfilled a strongly supplementary camouflage function. Hidden behind this camouflage, are two principal levers of maximizing life insurance company profit or surplus-deception, and ironi

cally, gross waste. Neither redounds in any way to the consumer's benefit. For almost seventy years the life insurance industry has been a smug sacred cow feeding the public a steady line of sacred bull.

The scope of the inquiry before this Subcommittee can be encouraged by the size of the population concerned and the magnitude of the monetary stakes. About 140 million Americans are covered by some form of life insurance sold by this $235 billion asset industry. Total life insurance in force at the end of 1971 was $1.6 trillion. There is now over $789 billion worth of ordinary life insurance in force and the industry's five top companies (Prudential, Metropolitan, Equitable, New York Life and John Hancock) share over 41% of this total and control over 44% of the assets of the entire 1805 company industry. According to a 1961 National Industrial Conference Board study more than 5% of total consumer expenditures went to life insurance companies. Last year, the industry reported $23 billion in premium receipts. An additional $13 billion a year is now going to these same companies in the form of health insurance premiums. The lion's share of these premiums go to a handful of companies.

No other concentrated group of corporations, except the auto manufacturers, claim a larger share of the consumer dollar. Unlike the auto companies, however, there is likely to be a greater potential of divergent views or dissent accessible to this Subcommittee, particularly if the united-front-minded trade associations are advised to avoid undue pressuring against the coming forward of any smaller companies or employees who have such divergent facts and judgments. There are also some companies whose prices for equal benefits are considerably lower than the giants in the industry-a phenomenon which provides important data about the uses of secrecy and the need for disclosure of comparable value to the consumer, as Professor Joseph Belth has demonstrated in his new book.

In a superlative of duplicative atrophy, the entire life industry is “regulated" by 50 different state insurance departments plus the District of Columbia and Puerto Rico. As a practical matter, it is exempt from antitrust regulation and from other federal consumer laws. Remarkably, there has never been a systematic investigation of competition and concentration in this industry by any federal agency or by Congress or by the academic community.' It would be accurate to say that the states have contributed very little to this subject as well, except for some materials in the Armstrong Committee Report (of the New York State legislature) in 1905. These hearings will have to pioneer this enormous task.

AN OVERVIEW

Mr. Chairman, here are some of the findings of our present testimony.

1. Life insurance tragically fails to sufficiently protect its ultimate consumers the widows and children-from the financial risk of premature death of the breadwinner, according to data in a little noticed industry study (discussed later).

2. Through deceptions and inadequate information, the life insurance industry dupes husbands into shortchanging their wives and children by buying too much of the wrong kind of insurance (or too little of the right kind) at excessive prices. 3. Because there is little or no meaningful and communicated price competition, the high expenses of the life insurance industry-virtually all borne by the consumer-are a national disgrace.

4. The "quiet" concentration of economic power by this industry has been substantially ignored by Congress, by the academic community and by citizens who are mistakenly asked to believe that competition over agents and empty advertisements is value competition.

5. The SEC has bended to the will of life insurance giants to block or delay accounting reforms that would put life insurance profit reports on an equal footing with other industries.

6. Criticism of the industry is responded to with collateral irrelevance, semantie nullities, or private attempts to remove academic critics from their teaching positions. Instead of rational argument, company or trade association spokesmen use pompous pontification or a kind of patronizing insurance patriotism with roots deep in the industry's chauvinistic past.

7 Vietnam veterans and other servicemen and women are being victimized by an on-going military-insurance interlock at the Veterans Administration and the Department of Defense.

1 Even the Temporary National Economic Commission, which began but never completed a massive investigation of American industry due to World War II, concentrated its attenin primarily on the investment activities of the industry and the lack of effective control by polley bolders of mutual insurance companies.

1. FAILURE TO PROTECT ITS "ULTIMATE CONSUMER": THE WIDOWS' STUDY

The Institute of Life Insurance-the public relations arm of almost the entire industry-maintains that "the main reason why a man buys life insurance is to protect his family from financial hardship when he dies." Whether or not companies sell life insurance for other purposes such as to provide a savings or investment medium or to make a profit, the primary measure of their performance is the extent to which the financial needs of widows and children are being met. The real consumers of life insurance are those who survive after the premature death of the breadwinner. The industry's own analysis of the benefits received by survivors demonstrates that it has failed miserably.

"The Widows Study" conducted by the Life Underwriter Training Council and the Life Insurance Agency Management Association and published in 1970-but never widely circulated even within the industry-provides shocking and tragic evidence of this failure. Fifty-two percent of a representative sample of all widows received less than $5,000 in benefits even though 92% were covered by some form of life insurance.

The second phase of the Widows Study dealt with the situation of widows during and at the end of a two year period of widowhood. In the words of the authors, . . "[T]he fact that a wife faces a 50-50 chance of undergoing a decline in living standards if her husband dies prematurely—and a 1 in 5 chance of undergoing a serious decline-should dispel any complacency about the adequacy of existing life insurance benefits." Without realizing the full implications of their findings, the authors heavily underscored the fact that "the life insurance industry, operating through its sales representatives had had the oppor tunity to reach these families before their husbands deaths." Indeed they had, since 92% carried insurance! The authors went on to conclude, "Judged by any standards, the amounts of life insurance received by the widows were low." (Emphasis added). As the widow of an accountant said when asked what would make it easier for other widows, "Nothing but money. If we only had a little more to live on things would be a lot easier."

Despite the widespread reliance on life insurance of all kinds for widow protection, wives generally are simply not well protected against the risk of the premature death of their husbands. Husbands do buy life insurance, but they buy too much of the wrong kind. With limited funds available, they are too often misled into putting them all into low benefit cash value policies at inflated prices.

2. THE UNKNOWN CONSUMER: THE WRONG KIND OF INSURANCE

Buyers are told in the typical sales presentation that if they buy term insurance, they'll have nothing left when the policy expires. The pitch is to the husband's ego rather than the wife and children's needs. The husband is exhorted to buy "living values" rather than death protection. If he buys a "cash value" policy he is told he can get most or all of the money he pays in premiums back through increasing cash values and so-called "dividends" which are in fact refunds of overcharge.

The tragic results of this type of selling are well documented in the Widows Study and in the table on Living Benefits vs. Death Benefits which we have attached to this statement. (Table A)

First, the face amounts of cash value policies are substantially smaller given the same premium dollar. (As one gets older, term premiums do increase but they are low when the wife's needs for insurance against the premature death of her husband are highest). Buyers with limited funds available for life insurancethat is most buyers) are sacrificing necessary protection in order to fulfill the company's promise that you will "get something back."

Second, because of the abysmal state of price disclosure in the industry-as Professor Belth and others have demonstrated—the purchaser of a cash value policy really doesn't know what he or she is getting and how much it costs. Part of what is "bought" is a "savings account," another part is pure insurance. The consumer isn't given a breakdown of the premium for this package of protection and savings.

Third, the consumer who buys a "participating" policy-one for which he is promised something called a "dividend"-is not told that the dividends are "nothing more than a refund of a deliberate overcharge and should not be confused with ordinary dividends payable to corporate stockholders," according to Professor Dan McGill of the Wharton School of Finance. He is typically told

McGill, Life Insurance, p. 325.

that this overcharge is tax free. He is not told that they are tax free because they are merely refunds. In 1911, insurance companies sought a favorable ruling through the Treasury Department on the treatment of dividend payments for certain tax purposes. To get a favorable ruling they had to show that dividends were in fact an overcharge and not "dividends" in the commercial sense. Accertain tax purposes. To get a favorable ruling they had to show that dividends to disregard all their public and promotional statements about dividends on the grounds that "commercial necessity [i.e., the need to make sales] had resulted in making misrepresentations of facts as to dividends to their prospective purchasers." We rarely see such candor today. Based on life insurance promotion literture, most buyers of insurance do not have the benefit of the truth about "dividends."

The traditional misuse of the term "dividend" is only one example of the unnecessary semantic traps this industry has laid for the consumer. Here is another. Cash value insurance is called "permanent" insurance and term insurance is called "temporary" in sales presentations. The fact is that only 3 of the "permanent" insurance sold today will still be in force in twenty years (according to recent industry submissions to the SEC). And the most commonly sold term policy is renewable every 5 years and can be converted later in life to cash value insurance which could be carried to age 100 like so-called “permanent.”

Fourth, the typical first year premium on cash value policy may be a trap for the unwary. Most selling costs, including advertising and commissions are charged against first year premiums. In the early years cash values are low and dividend accumulation is minimal. So if you drop your policy in the first year you can't reap the benefits of any cash value you've been told will build up, and, in fact, you never get any of that first year premium back. An astonishingly high percentage of cash value policies are in fact voluntarily terminated or "lapse" in the first two years.

In the recent Variable Life Insurance Proceeding before the SEC, the Equitable Life Assurance Society, number three in the industry, revealed that 25% of its ordinary life policies (sold to 25 and 35 year old customers) lapsed in the first year, another 10% in the second year. The first year lapse rates for New York Life and Aetna were 19% and 15% respectively. Lapse data have been traditionally highly secret. No wonder that the Life Insurance Fact Book of the Institute of Life Insurance, the most widely disseminated collection of industry statistics does not publish lapse or termination rates for policies in force less than two years. The question: Why? our Subcommittee may usefully ask the Institute of Life Insurance. The Fact Book does not report lapse figures for 2 year old and younger policies. It asserts only that after the critical first two years, about 4% of the policies in force lapse each year—a figure which deserves skepticism and may be under-reported given the individual company figures just noted. The sharp dropoff requires greater substantiation than the Fact Book wishes to provide.

Mr. Chairman, let me reiterate: cash value policies-that is the type of policies that represent 72% of the $731 billion ordinary life insurance in force in 1970are a consumer fraud not because they are inherently valueless but because pur chasers are denied systematic and useful information about alternative plans available to protect their wives and children, and the price for that protection, while they are urged with all the collossal mind-bending skills at the company's and agent's disposal that Plan X is the best. It is very often the best for the agent and the company but not for the customer. In short, consumer ignorance, not the consumer, is what helps make possible the lack of selective feedback and the ease of manipulation by companies skilled in obfuscation larded with silken reminders about the potential policyholder's obligations to loved ones.

3. EXORBITANT HIDDEN EXPENSE

The cost of the distribution system for the life insurance product in the context of a market with virtually no price competition is a national disgrace. Pick up any of a number of publications by and for the industry and you'll find frequent reference to 1) the high costs of selling and 2) the failure to find, keep and adequately compensate life agents.

Gordon Crosby, Chairman of the Board of United States Life, told the 1970 meeting of the Life Insurance Institute, "The basic patterns of the [life insurance distribution] system we use today came out of the Civil War days-and we've let our distribution costs get out of hand." The National Underwriter's Life and Health Edition, a leading industry journal, commented on a study done for the