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"Proposition 103: A Model for Insurance Regulation"

Testimony of Douglas Heller

Foundation for Taxpayer and Consumer Rights

Before the

Committee on Commerce, Science and Transportation

United States Senate

Washington, D.C.

October 22, 2003

Mr. Chairman and Members of the Committee:

Thank you for inviting the Foundation for Taxpayer and Consumer Rights
(FTCR) to present its views on insurance regulation and engage in this
important discussion on the state of insurance regulation and proposals
to improve it.

FTCR is a nonpartisan, nonprofit organization that conducts research,
education and advocacy activities on insurance matters and other
consumer issues, including healthcare and energy. In particular, FTCR
has done extensive work on issues related to auto, home and medical
malpractice insurance and has long been an advocate of insurance
industry regulation. FTCR's founder, Harvey Rosenfield, is the author of
Proposition 103, the California insurance reform initiative that
provides the state with the nation's most stringent system of insurance
regulation. I am FTCR's senior consumer advocate and insurance
specialist.

We would like to thank Chairman McCain for holding this oversight
hearing and we appreciate the effort of Senator Hollings, who, in
drafting S. 1373, has provided a model for discussing the strength and
efficacy of insurance regulation. This proposal reflects many of the
provisions of California's Proposition 103, which have provided a stable
and affordable insurance market for the past 15 years in California, a
stark contrast to the skyrocketing prices and industry turmoil that
characterizes the property-casualty marketplace in many other states.

While we believe that insurance regulation should remain the purview of
state regulators, lawmakers and courts, we commend Senator Hollings for
putting forward a compelling proposal to protect insurance consumers
across the nation. Senator Hollings proposal comes at a time when
insurance companies are pushing to deregulate the insurance industry at
the state level and by proposing an optional federal charter system with
rules that would allow insurers to choose their regulator in a manner
that will undoubtedly reduce regulatory oversight of the insurance
industry.

It is our belief that the most effective way to protect consumers and
ensure reasonable insurance rates is through the tools of a prior
approval insurance regulation system. Our research has shown that
insurance company regulation, when properly implemented, can save
consumers billions of dollars and maintain profitability within the
insurance industry, thereby providing customers with the most choice in
the market. In other words, the regimen of insurance regulation creates
the environment that is most conducive to marketplace competition while
also affording consumers necessary protection against insurance company
profiteering.

In addressing the questions at hand, FTCR would like to present the
following thesis:

> Insurance products are such an integral part of the economic life of
> Americans, that ensuring both the affordability and quality of the
> products is crucial to the financial security and well-being of
> American consumers and businesses. Effectively regulating the
> insurance marketplace is the best way to produce reasonable and stable
> rates for consumers and appropriate market conduct by carriers

Our reports, analyses and experience have confirmed this thesis time
after time over the 15 years since the enactment of Proposition 103 in
California. To illustrate the success of and need for a strong
regulatory regime for insurance, we bring together a variety of data and
analysis in this testimony to make the following points:

I.  Proposition 103 has saved California consumers billions of dollars
    through its prior approval regulatory structure, including more than
    \$62 million saved for doctors and homeowners in the past two months
    alone as a result of FTCR's rate challenges.

II. Insurance follows an economic cycle inversely related to the
    nation's financial markets. Aggressive investing practices have
    created volatility in insurance rates over the past five years,
    culminating in the massive price spikes and underwriting
    restrictions that appeared on the heels of the collapse of Enron,
    Worldcom and declining interest rates.

III. The antitrust exemptions provided to insurers are anti-competitive
     and allow companies to set prices collusively rather than compete
     on the insurers' actual abilities to assess and carry risks.

IV. Insurance companies project higher losses in order to push for
    higher rates and imply a crisis, and then quietly change their data
    in the years to come.

V.  Tort limitations imposed during previous crisess have had no
    demonstrable effect on insurance rates.

# Proposition 103 regulation saves consumers billions of dollars 

In 1988, California voters, facing skyrocketing insurance premiums and
angry at the failure of tort reform to deliver its promised savings,
went to the ballot box and passed Proposition 103, the nation's most
stringent reform of the insurance industry's rates and practices --
applicable to all lines of property-casualty insurance, including auto,
homeowners, commercial and medical-malpractice.

Proposition 103:

-   **Mandated an immediate rollback of rates of at least 20%** -- rate
    relief to offset excessive rate increases by establishing a baseline
    for measuring appropriate rates.

-   **Froze rates for one year**. Ultimately, because of the delay
    caused by insurance company legal challenges to Proposition 103,
    rates remained frozen for four years pursuant to decisions by the
    state's insurance commissioner.

-   **Created a stringent disclosure and "prior approval" system of
    insurance regulation**, which requires insurance companies to submit
    applications for rate changes to the California Department of
    Insurance for review before they are approved. Proposition 103 gives
    the California Insurance Commissioner the authority to place limits
    on an insurance company\'s profits, expenses and projections of
    future losses (a critical area of abuse).

-   Authorized consumers to **challenge insurance companies'** rates and
    practices in court or before the Department of Insurance.

-   **Repealed anti-competitive laws** in order to stimulate competition
    and establish a free market for insurance. Proposition 103 repealed
    the industry\'s exemption from state antitrust laws, and prohibited
    anti-competitive insurance industry \"rating organizations\" from
    sharing price and marketing data among companies, and from
    projecting \"advisory,\" or future, rates, generic expenses and
    profits. It repealed the law that prohibited insurance
    agents/brokers from cutting their own commissions in order to give
    premium discounts to consumers. It permits banks and other financial
    institutions to offer insurance policies. And it authorizes
    individuals, clubs and other associations to unite to negotiate
    lower cost group insurance policies.

-   **Promoted full democratic accountability** to the public in the
    implementation of the initiative by making the Insurance
    Commissioner an elected position.

A copy of the text of Proposition 103 are submitted as Appendix A.

Insurers spent \$80 million in their unsuccessful effort to defeat
Proposition 103, including the cost of sponsoring three competing ballot
measures that would have enacted "tort reform." Having seen how "tort
reform" laws passed at the behest of the insurance industry in 1975 and
1986 had had no effect on premiums, the voters rejected each of the
industry's 1988 measures.

Proposition 103 worked. Insurance companies refunded over \$1.2 billion
to policyholders, including motorists, homeowners and doctors. In the
closely studied area of auto insurance, California was the only state in
the nation in which auto insurance liability premiums actually dropped
between 1989 and 2001, according to NAIC data. A 2001 study by the
Consumer Federation of America concluded that the prior approval
provision of Proposition 103 blocked over \$23 billion in rate increases
for auto insurance alone through 2000.

Despite the clear success of Proposition 103, the insurance industry
continues to resist regulatory oversight and, instead pushes for less
accountability and less intervention. The industry typically criticizes
insurance regulation as slowing down the process of adjusting rates and
introducing products that companies want to provide to consumers.
Insurers argue for "speed to market" rules that would set a national
standard of scrutiny; not surprisingly, that standard is far weaker than
the regulatory strictures of Proposition 103 and the prior approval
method of insurance ratemaking.

This professed goal of efficiency must be weighed next to the need to
protect against high rates and low-quality products. Just as new drugs
must be put through a battery of tests to ensure safety prior to being
placed on the market, insurance products need to be fully vetted before
they are sold to consumers. The prior approval structure of California's
Proposition 103 gives the insurance commissioner and the public the
ability to ensure that consumers have access to insurance products that
provide high quality coverage and are not priced to gouge consumers.

A.  Prior Approval and Consumer Participation Allow the Public to
    Scrutinize Insurers' Books, Hold Firms Accountable

The chief tool necessary to effectively regulate insurance companies is
the right of government to approve, deny or alter insurance rates before
companies can change consumers\' rates. Of course, the quality of the
regulator determines, at least in part, the efficacy of the regulation.
As a safety valve against an understaffed or unwilling regulator,
Proposition 103 provides the public with the opportunity to analyze and
challenge rates and industry practices in the courts as well as before
the agency in order to offer a competitive perspective on rate changes
proposed by insurers. This tool of participation also serves as a way to
hold the insurance commissioner accountable to the regulatory structure,
by allowing the public to challenge rate hikes or practices that the
Commissioner might have otherwise approved.

Proposition 103's prior approval system establishes a set of boundaries
for insurance companies to use in setting rates for consumers. The
formula includes limits on, or guidelines for administrative expenses,
profits, the methods of projecting future losses and other aspects of
developing a rate. Effective insurance regulation prohibits insurers
from engaging in bookkeeping practices that inflate their claims losses
and limits the amount insurers can set aside as surplus and reserves. It
also forbids insurers from passing through to consumers the costs of the
industry\'s lobbying, political contributions, institutional
advertising, unsuccessful defense of discrimination cases, bad faith
damage awards, and fines or penalties.

A prior approval system places the burden on the insurance company to
justify its rates in advance, rather than on the consumer or regulator
to find inappropriate rates after the fact and only then begin the
process of scrutiny. It is our belief that pre-emptive regulation is far
more efficient and fair than the alternatives.

A series of recent examples of the power of the prior approval system
and the tangible benefit of consumer participation in California follow:

-   On August 22, 2003, California Insurance Commissioner John Garamendi
    ordered the state's second largest medical malpractice insurer,
    SCPIE Indemnity, and its affiliate American Healthcare Indemnity, to
    cut it's proposed rate hike for physicians by 36%, in response to a
    rate challenge brought by FTCR. As part of the challenge, FTCR
    actuaries and insurance experts opened SCPIE's books to review the
    company's financial data and actuarial projections. FTCR also
    interviewed the firm\'s actuaries, economists and consultants in
    order to demonstrate that the insurer's proposed 15.6% rate increase
    was excessive.

> Instead of the company's proposed 15.6% increase that was originally
> set to go into effect on January 1, 2003, the Commissioner only
> allowed SCPIE and its affiliate to increase premiums by 9.9% beginning
> on October 1, 2003. The net impact is a \$16 million savings for the
> insurer's 9,000 physicians in 2003 and an additional \$7.2 million of
> savings in 2004 premiums. (SCPIE has applied for an additional 2004
> increase that FTCR will likely challenge.)

## 

> According to the decision issued by the commissioner, SCPIE tried to
> justify its rate hike by claiming that it should not be subject to a
> strict application of rate regulations and that it did not have the
> burden of proving its rates were reasonable, despite California\'s
> clear regulatory requirements. The Commissioner rejected that argument
> and, to ensure regulatory compliance by SCPIE and other insurers,
> officially designated portions of his ruling as legal precedent.

-   FTCR challenged a recent 9.9% increase proposal by the state's
    largest medical malpractice provider, NORCAL Mutual. The ensuing
    scrutiny by California Department of Insurance regulators, led the
    company to slash its rate request by 70%, resulting in a \$11.6
    million savings to NORCAL-insured doctors.

-   Using the consumer participation tools of Proposition 103, FTCR
    recently blocked a 10% rate hike for homeowner's insurance
    policyholders with the Northern California Auto Club, the state's
    fourth largest homeowner's insurance provider. This resulted in a
    \$26 million savings for the company's 330,000 policyholders.

-   In 1998, FTCR challenged a rate decrease proposal by auto insurer
    Allstate. The Commissioner allowed the company to reduce rates, but
    FTCR\'s analysis indicated that rates should have dropped further.
    In response to our challenge, Allstate agreed to reduce its auto
    insurance premium by \$43 million in addition to the reductions
    associated with its initial rate decrease proposal.

To ensure that the public is able to effectively intervene and challenge
inappropriate insurance rates and practices, Proposition 103 requires
insurers to reimburse consumers or consumer representatives when the
group contributes to a decision rendered by the Insurance Commissioner
with respect to rates. Pursuant to Proposition 103, consumer groups are
also provided funding for participation in all aspects of insurance
regulation. This has allowed groups acting on behalf of consumers a
reasonable opportunity to enforce the rules set forth in Proposition
103.

## Auto Insurance: Regulation Protects Consumers From a National Trend

In the years since the implementation of Proposition 103, auto insurance
rates in California have defied the national upward trend. The following
tables summarize insurance industry data drawn from annual reports
published by the National Association of Insurance Commissioners.[^1] We
provide an analysis of data for the years 1989-2001, encompassing the
entire period following the implementation of Proposition 103 for which
data is available.

**The average auto liability premium [dropped]{.underline} 22% in
California between 1989 and 2001.** Prior to Proposition 103, auto
insurance premiums in California rose dramatically each year.
Pre-election rate increases by insurance companies in anticipation of
Proposition 103's passage, and post-election rate increases taken while
Proposition 103 was stayed pending California Supreme Court review,
pushed the average liability premium in California to \$519.39 by 1989.

According to the latest NAIC data, California's average auto liability
insurance premium for 2001 was \$404.48 \-- 22% [less]{.underline} than
the 1989 figure. The average premium decrease in California becomes even
more striking when adjusted for inflation.[^2] The average premium in
1989, in 2001 dollars, was \$741.81. In comparison, the average
California auto liability premium in 2001 was [45% lower.]{.underline}

**Comparison of Average Liability Premiums, 1989-2000**

  ----------------------- ----------------------- -----------------------
  Year                    California Premium      California Premium
                                                  (2001 dollars)

  1989                    \$519.39                \$741.81

  1990                    \$501.34                \$679.32

  1991                    \$522.95                \$679.99

  1992                    \$510.71                \$644.67

  1993                    \$512.52                \$628.15

  1994                    \$502.76                \$600.80

  1995                    \$514.53                \$597.92

  1996                    \$508.71                \$574.20

  1997                    \$492.31                \$543.23

  1998                    \$447.51                \$486.22

  1999                    \$405.85                \$431.43

  2000                    \$391.24                \$402.37

  2001                    \$404.48                \$404.48
  ----------------------- ----------------------- -----------------------

**While auto premiums in California *fell 22%,* premiums throughout the
rest of the nation *rose* 30.2%.** Another measure of the impact of
Proposition 103 is a comparison with average liability premiums in other
states. While liability premiums for the rest of the country grew 30.2%
since 1989, California's [dropped]{.underline} 22%. Tables 2 and 3 below
compare California's average premium to the rest of the nation\'s
average.

**Comparison of Average Liability Premiums, 1989-2000**

Calculation is liability premiums/liability written car-years (

  ----------------------- ----------------------- -----------------------
  Year                    California              Rest of Nation[^3]

  1989                    \$519.39                \$317.32

  1990                    \$501.34                \$338.55

  1991                    \$522.95                \$358.82

  1992                    \$510.71                \$381.69

  1993                    \$512.52                \$400.80

  1994                    \$502.76                \$411.40

  1995                    \$514.53                \$419.45

  1996                    \$508.71                \$431.45

  1997                    \$492.31                \$434.17

  1998                    \$447.51                \$423.39

  1999                    \$405.85                \$402.60

  2000                    \$391.24                \$398.44

  2001                    \$404.48                \$413.13
  ----------------------- ----------------------- -----------------------

###### Comparison of Growth/Decline in Average Liability Premiums, 1989-2000

  ----------------------- ----------------------- -----------------------
  Period                  California % Change     Rest of Nation % Change

  1989-90                 -3.5%                   6.7%

  1990-91                 4.3%                    6.0%

  1991-92                 -2.3%                   6.4%

  1992-93                 0.4%                    5.0%

  1993-94                 -1.9%                   2.6%

  1994-95                 2.3%                    2.0%

  1995-96                 -1.1%                   2.9%

  1996-97                 -3.2%                   0.6%

  1997-98                 -9.1%                   -2.5%

  1998-99                 -9.3%                   -4.9%

  1999-2000               -3.6%                   -1.0%

  2000-2001               3.3%                    3.7%

  1989-2001               -22.1%                  30.2%
  ----------------------- ----------------------- -----------------------

This sharp drop in California\'s average premium relative to that of
other states brought California\'s rank down from the 2^nd^ highest
rates in the nation in 1989 to 22^nd^ in 2001.

**Comparison of Growth in Average Liability Premiums, 1989-2000**

![](media/image2.pct)

**California\'s overall post-Proposition 103 premium decline defies
national trend toward higher rates.** In addition to lowering auto
liability premiums, Proposition 103 has slowed premium growth for other
types of automobile coverage at the same time that the rest of the
nation saw its premiums increase drastically. California\'s
comprehensive premiums have fallen 10% while comprehensive premiums for
the rest of the nation have shot up by 40%. Collision premiums in
California have gone up 20%, in contrast to the rest of the country\'s
40%.

**Comparison of Average Combined Collision and Comprehensive Premiums,
1989-2001**

![](media/image3.pct)

**Combined liability, collision and comprehensive premiums are down 9.2%
for Californians, up 35% nationally since Proposition 103**

In 1989 Californians paid \$875.60 for liability, collision and
comprehensive combined coverage on average. Nationwide consumers paid
\$606.40 for the combined coverage. However, with Proposition 103 in
effect, California drivers' fortunes have changed, as combined average
premium in California 2001 was \$795.36, a 9.2% decline while
nationally, motorists paid \$817.87, a 34.9% increase

B.  **Insurance Regulation Has Allowed California To Be A More
    Profitable Market For Insurance Companies Than The National Average,
    While Keeping Rates Low**

Despite the insurance industry's automatic negative reaction to
insurance regulation, California under the strict regulation of
Proposition 103 has been a more profitable environment for insurers than
the nation as a whole. According to the most recent data available from
the National Association of Insurance Commissioners, in the majority of
lines of insurance returns are better in California than
countrywide.[^4]

Whether one compares return on net worth or profit on insurance
transactions (both are measures of profitability used by NAIC), the
findings consistently show that California is generally more profitable
for insurers than the nation as a whole.

# 

# Table 7. Insurer Profitability in California vs. Countrywide Average 

  ---------------------------- --------------------- ---------------------
  Return on Net Worth          10 Year Average       
                               1992-2001             

  Line of insurance            California            Countrywide

  Private Passenger Auto       13.7%                 9.8%
  (Total)                                            

  Homeowners Multiple Peril    5.7%                  (3.4%)

  Commercial Auto (Total)      10.0%                 7.2%

  Farmowners Multiple Peril    7.3%                  0.9%

  Medical Malpractice          12.5%                 9.6%
  ---------------------------- --------------------- ---------------------

Notably, workers compensation has not been as profitable in California
as that line has been nationally. Workers compensation insurance,
however, was deregulated in California in 1993 and is in crisis
currently.

California has been a profitable marketplace for insurers specifically
because of the regulatory regime. Regulation serves to restrain the
companies from damaging themselves as well as hurting consumers.
Insurance regulation is not meant to produce the lowest premiums, it is
meant to produce the most appropriate premiums for the risk insured;
insurance regulation guards against both excessive and inadequate, as
well as unfairly discriminatory rates. As a result, regulated lines of
insurance result in more stable rates for customers, even if they are
not the lowest prices at certain points in time.

The stable profitability associated with regulatory controls creates an
environment in which insurers want to sell in the state. That is why
there are so many insurers serving California customers. There are over
200 companies selling auto insurance in California, 150 selling
homeowners and almost 50 selling medical malpractice insurance.

II. **The Insurance Cycle and the Impact of Enron, WorldCom and Low
    Interest Rates**

Over the last three decades-plus, the nation has experienced three major
insurance crises, in the mid-1970s, the mid 1980s and the early 2000s.
Each of these crises swept the nation with massive rate increases,
insurers pulling or threatening to pull out of local markets and a
legislative push for changes to tort laws. Each of these crises also
occurred at the same time as a national downturn in the economy that
dramatically reduced insurance company investment returns.

A.  **The Insurance Cycle**

The present insurance "crisis" -- apparent in homeowners, auto,
commercial liability as well as medical and other malpractice lines --
constitutes the apogee of a financial cycle to which the insurance
industry is constantly subject. As one consumer organization explains:

> Insurers make most of their profits from investment income. During
> years of high interest rates and/or excellent insurer profits,
> insurance companies engage in fierce competition for premium dollars
> to invest for maximum return. Insurers severely underprice their
> policies and insure very poor risks just to get premium dollars to
> invest. This is known as the "soft" insurance market. But when
> investment income decreases --- because interest rates drop or the
> stock market plummets or the cumulative price cuts make profits become
> unbearably low --- the industry responds by sharply increasing
> premiums and reducing coverage, creating a "hard" insurance market
> usually degenerating into a "liability insurance crisis." A hard
> insurance market happened in the mid-1970s, precipitating rate hikes
> and coverage cutbacks, particularly with medical malpractice insurance
> and product liability insurance. A more severe crisis took place in
> the mid-1980s, when most liability insurance was impacted. Again, in
> 2002, the country is experiencing a "hard market," this time impacting
> property as well as liability coverages with some lines of insurance
> seeing rates going up 100% or more.[^5]

Fitch, a Wall Street rating firm, recently began a discussion of the
current "crisis" by harkening back to the last one:

> We need to look back at the hard market of the mid-1980s.... The last
> major hard market turn was in the mid- 1980s, and was inspired greatly
> by a sharp drop in interest rates. In years prior to the mid-1980s,
> cashflow underwriting was prevalent in which a significant amount of
> naive capital was attracted to the property/casualty industry on the
> lure of making strong investment returns on the premium "float"
> between the time premiums were collected and claims were paid.
> Naturally, much of the naive capacity was directed at long-tail
> casualty and liability lines at both the primary and reinsurance
> levels in order to maximize the float. In the early 1980s, nominal
> interest rates were running in the mid-teens. When interest rates
> dropped off and significant reserve deficiencies were simultaneously
> detected, many insurers suffered large losses to both earnings and
> capital. The result was a sharp turn in the market, especially in
> long-tail lines, and the emergence of a so-called "liability insurance
> crisis." The liability insurance crisis included a sharp drop in
> availability of coverages, and huge price increases (in many cases
> several-fold).[^6]

Indeed, by early 2002, insurers had already begun licking their chops as
they looked forward to an infusion of profits from the latest "crisis."
In its "Groundhog Forecast 2002," the Insurance Information Institute
projected a 14.7% increase in premiums, the industry's "fastest pace
since 1986" -- the last crisis.[^7] The Auto Insurance Report
proclaimed, "The Stars Are Lining Up for Solid Profits in '02-'03."[^8]
"How Much longer to P-C Nirvana?" asked the National Underwriter,
saying, "Like kids on a long car trip headed for summer vacation, many
insurance company employees and the agents that represent them have
found themselves wondering just how much longer this trip to
property-casualty nirvana can last."[^9] Said an industry executive:
"This manic behavior leads our customers to believe we don't know what
we're doing, and I think they have a point. This is a generation of
insurance professionals who need to learn how to be successful with
something other than low premiums."[^10]

##### Interest Rates and the Cycle

The current push for higher insurance rates is driven in part by the
historically low interest rates. There is an inverse relationship
between interest rates and insurance rates and, as the graph below
illustrates, when interest rates go down a crisis ensues and,
inevitably, rates increase.

###### When Interest Rates Fall, A Crisis Ensues

![](media/image4.pct)

Over the past three decades, there has been an insurance crisis and a
concurrent spike in insurance premiums each time the nation has
experienced a major decline in interest rates. The notable exception to
this is when interest rates dipped in 1992. Still reeling from
California's adoption of Proposition 103 after the 1980s crisis, the
insurance industry aborted another run-up in prices in 1992 and 1993
despite the declining economy and interest rates. As one insurance
executive explained, "The last soft market was driven purely by the need
for cash to invest. . . . We all know we can't do the dumb things we did
last time. . . . We will not see a repeat of 1985-86."[^11] Arguing
against a push to raise rates, a senior officer at the Insurance
Services Office, an industry data provider, said: \"Remember the fallout
from the last recovery: California's Proposition 103 and other
price-suppression laws, threats to the industry on the antitrust front,
and virulent consumer hostility.\"[^12]

Despite its apparent awakening after the passage of Proposition 103, the
insurance industry has fallen into its old ways in recent years, as the
most recent insurance-cycle crisis and the ensuing rate increases have
been particularly aggressive.

In this crisis as with previous crises, insurers have made it difficult
for consumers to obtain and maintain coverage. After the very liberal
underwriting practices of the mid 1990s, in which obtaining coverage was
not particularly difficult for consumers and businesses, the trend over
the past two years has been to shut consumers out of the insurance
market by implementing very restrictive underwriting guidelines.

Increasingly, companies are punishing policyholders -- especially in the
homeowners insurance market -- for having filed legitimate claims. In
fact, during this crisis, insurers have begun to drop customers simply
for inquiring with their insurer about a possible claim, even if they do
not file a claim. Additionally, using the national claims database known
as the Comprehensive Loss Underwriting Exchange (CLUE), insurers have
been denying policies to consumers who have previous claims or even mere
inquiries, regardless of the nature of the claim.

B.  The Role of Enron, Worldcom and the Corporate Scandals of 2001-2002

While internally acknowledging the insurance cycle and the role of
investments, particularly in mandatory financial filings, the insurance
industry has largely blamed factors such as higher medical bills,
increased labor costs, litigation costs and jury awards when it presents
its view of the insurance market to lawmaers and the public generally.
The industry does not, unfortunately, blame Enron and WorldCom for rate
hikes. More importantly, the companies do not blame themselves and the
insurance executives who decided to risk a growing percentage of
policyholder premiums on investments in Enron, WorldCom and other
corporations. They should. And insurance commissioners should hold
insurance companies accountable for the billions of policyholder premium
dollars that have been squandered as a result of risky investment
practices.

Ten property and casualty insurance companies reviewed by FTCR lost a
combined \$274.1 million in 2001-2002 as a result of investments in *the
big five frauds* -- WorldCom, Enron, Adelphia, Global Crossing and Tyco.
[^13] State Farm, for example, lost more than \$74 million as a result
of that company's investments in Enron and WorldCom alone.

**1. Americans are more exposed to corporate corruption than they
think**

With the excitement surrounding the stock market bubble of the 1990s,
insurance companies increasingly invested in private corporations.
Typically, insurance industry executives assert that company portfolios
are largely tied up in municipal and other government bonds, with only
limited exposure to corporate America. However, by 2001, the
particularly disgraced energy, high-tech and telecom sectors figured
heavily in insurance companies\' portfolios. As a result of this
indulgence in higher risk investments, the spate of recent corporate
scandals and the insurers' investment follies significantly impacted
consumers, whose premium dollars have been placed in insurance company
portfolios replete with stocks and corporate bonds.

In a 2002 study, FTCR identified billions of premium dollars lost as a
result of changes in property and casualty insurers' investment
strategies.[^14]

Among FTCR's findings:

-   [State Farm Mutual Auto]{.underline} lost \$60.7 million on
    ***WorldCom*** investments in 2002 and \$42.6 million associated
    with its ***Tellabs*** holdings.

-   [Allstate]{.underline} lost \$23.3 million when it shed several
    hundred thousand shares of ***Tyco*** stock as the public became
    aware of Tyco CEO Dennis Kozlowski's alleged criminal fraud in the
    first half of 2002. The insurer also lost \$11.7 million when it
    discarded ***Qwest*** ***Communications*** stock, another firm
    investigated by the SEC for its accounting practices.

-   [Fireman\'s Fund]{.underline} wrote off the entire cost of its
    ***Winstar*** stocks and bonds -- \$85.4 million --after that
    wireless communications company filed for bankruptcy in April 2001.
    Additionally, the insurer took a \$28.6 million hit on
    ***WorldCom***.

The Enron factor:

-   ***Enron***, the company whose fraudulent accounting and subsequent
    bankruptcy inaugurated the current era of corporate scandals, was
    held by many of the insurers reviewed for this analysis. In 2001,
    Enron losses cost [State Farm Mutual Auto]{.underline} \$13.5
    million, [Farmers]{.underline} \$9 million, [Fireman\'s
    Fund]{.underline} \$6.2 million, [Northern California Auto
    Club]{.underline} \$4.4 million, [United Services Automobile
    Association]{.underline} \$4.3 million and [Allstate]{.underline}
    \$3.6 million. [Fireman\'s Fund]{.underline} continued to hold \$5
    million dollars in Enron bonds into 2002.

# 2. Insurers Change Investment Strategies in the late 1990s 

FTCR studied investment data for ten major insurers between1998-2001.
The study also examined available 2002 data, and reviewed data going
back to 1994 for four companies exhibiting the riskiest investment
behavior.

For this analysis, FTCR reviewed public filings to measure the
percentage of an insurer's portfolio that is invested in stocks (both
common and preferred) and corporate bonds.[^15] Real estate holdings,
which are reported separately from stock and bond holdings, were not
reviewed.

Nine of the ten companies reviewed increased their level of investment
in the corporate sector between 1998 and 2001. The companies\' holdings
in 1998 consisted on average of 48% stocks and corporate bonds combined,
with the rest invested in government bonds. By 2001, the average
percentage invested in corporate America was up to 57% \-- a 19%
increase in the size of insurers\' corporate investments relative to
their overall portfolios. At the end of 2001, seven of the 10 companies
for which FTCR obtained data had over 50% of their investments in stocks
and corporate bonds.

For four of the companies that had most heavily invested in the stock
and corporate bond markets in 2001 -- USAA, Liberty Mutual, State Farm
and Nationwide -- FTCR analyzed portfolios for an extended period,
1994-2001, and found that the companies had greatly increased
investments in the corporate sector relative to their overall
investments.

-   In 2001 United Services Automobile Association had more than
    four-fifths of its entire portfolio -- 82% -- invested in the
    corporate sector. This represents a 61% increase in the companies'
    investments in corporations since 1994.

-   Corporate investments accounted for 73% of Liberty Mutual\'s
    portfolio in 2001, representing a 248% increase over the insurer\'s
    1994 corporate investments, which accounted for 21% of its portfolio

-   State Farm Mutual Auto\'s percentage was 58% in 2001, a 32% increase
    over its level of corporate investing before the company jumped into
    the nineties stock bubble.

-   Nationwide Mutual\'s ratio of corporate investments to its overall
    holdings jumped 37 percentage points over this period to 65% -- a
    132% increase.

The following graph shows the rise in the percentage of these
companies\' portfolios tied up in corporate sector investments.

###### Corporate Investment as a % of Investment Portfolio 1994-2001

![](media/image5.pct)

###### 3. Heavy in Stocks

It is important to note that a large portion of corporate holdings is
invested in stocks and not in the generally more stable corporate bonds.
 

The stock investments of the ten companies reviewed averaged 37% of
their overall investments in 2001, eight percentage points more than
1998 levels.  United Services Automobile Association invested more than
half of its portfolio --57% -- in stocks alone (up from 40% in 1994).
 Nationwide Mutual was close behind with 46% (the company invested only
25% in stocks in 1994), and State Farm Mutual Auto\'s stock holdings
represented 43% of its portfolio (compared to 27% in 1994). 42% of
Liberty Mutual's holdings were in stocks in stocks in 2001, up from 10%
in 1994.

# 4. Insurers' Major Losses

Insurance portfolios are replete with corporate stock and bond picks
that chronicle the recent bankruptcies, earnings restatements and fraud
indictments. A glance at stock and bond transactions in 2001 for a
handful of big insurance companies illustrates why investment income
fell dramatically by remaining too heavily invested in the stock and
corporate bond markets.

The 2001 figures below represent the sum of the amounts lost by a given
insurer on all transactions of a given company\'s stocks and bonds for
the entire year, 2001.

**A Selection of Insurers\' Major Stock and Bond Losses in
2001**[^16]**:**

+-----------------------------------+-----------------------------------+
| **Allstate**                      | **Fireman's Fund**                |
+-----------------------------------+-----------------------------------+
| -   Adelphia: \$1.1 million[^17]  | -   Broadcom: \$31.2 million      |
|                                   |                                   |
| -   AOL/Time Warner: \$2.2        | -   Cisco: \$26.3million          |
|     million                       |                                   |
|                                   | -   Enron: \$6.2 million          |
| -   Cisco: \$6.9 million          |                                   |
|                                   | -   WorldCom/MCI: \$28.6 million  |
| -   Enron: \$3.6 million          |                                   |
|                                   | -   Winstar: \$85.4 million       |
| -   Global Crossing: \$5.9million |                                   |
|                                   |                                   |
| -   Qwest: \$11.7 million         |                                   |
|                                   |                                   |
| -   WorldCom/MCI: \$2.4 million   |                                   |
+-----------------------------------+-----------------------------------+
| **Farmers**                       | **Nationwide**                    |
+-----------------------------------+-----------------------------------+
| -   Enron: \$9 million            | -   Enron: \$734,513              |
|                                   |                                   |
| -   Dynegy: \$1.1 million         | -   EMC Corp.: \$4 million        |
|                                   |                                   |
|                                   | -   Compaq: \$1.2 million         |
+-----------------------------------+-----------------------------------+
| **State Farm**                    | **USAA**                          |
+-----------------------------------+-----------------------------------+
| -   Enron: \$13.5 million         | -   Enron: \$4.3 million          |
|                                   |                                   |
| -   Level 3 Communications Inc:   | -   JDS Uniphase (telecom         |
|     \$55 million                  |     supplier): \$7.6 million      |
|                                   |                                   |
| -   Bank of America: \$29.1       | -   USAA emerging markets fund:   |
|     million                       |     \$63.6 million (fund heavily  |
|                                   |     invested in international     |
| -   XO Communications Inc.:       |     energy and telecommunication  |
|     \$19.8 million                |     stocks)                       |
|                                   |                                   |
| -   Battle Mountain Gold: \$9.9   |                                   |
|     million                       |                                   |
+-----------------------------------+-----------------------------------+

### 

The data reviewed for the first two quarters of 2002 show equally
precipitous declines in the portfolios of major insurers with
particularly dramatic losses resulting from WorldCom and Tyco holdings.

The investment losses and other data detailed above are not meant to be
exhaustive. They paint a picture, rather, of the sort of investment
failures that have cut into insurance companies\' profitability in
recent years and led to a national run-up in insurance rates.

In light of these findings, it is useful to review the preamble to the
International Association of Insurance Supervisors' "Supervisory
Standard on Asset Management by Insurance Companies," which reads:

In order to ensure that an insurer can meet its contractual liabilities
to policyholders, such assets must be managed in a sound and prudent
manner taking account of the profile of the liabilities held by the
company and, indeed, the complete risk-return profile.[^18]

Instead of following these standards, we have found that insurance
companies ignored their responsibility and jumped headlong into the
stock market bubble --- only to fall hard when it burst with the string
of frauds and bankruptcies that decimated the Dow and NASDAQ.

The mismanagement of policyholder premium, however, has been largely
ignored as companies simply replenish the dissipated investments through
rate hikes.[^19] As a result of insurers' increased exposure to
corporate risk during this insurance cycle, the impact of corporate
fraud on companies and, in turn, policyholders was far greater than
should ever have been expected.

Not surprisingly, with the recent rebounding of the stock market, it is
becoming evident that insurers wish to start selling more policies in
order to gain investment capital. Companies that earlier this year had
committed to reducing exposure and refusing to sell insurance are once
again entering the market and selling new policies. If the stock market
continues this expansion, and especially if interest rates increase, a
loosening of the insurance market -- a stabilizing and possibly lowering
of rates as well as a liberalizing of underwriting practices ­-- is
inevitable.

It is not, however, good public policy to allow insurers to foist these
economic cycles onto individual consumers and business consumers of
insurance by allowing the rating and underwriting chaos that consumers
have endured in recent years. Unregulated, or loosely regulated
insurance companies will invest recklessly, knowing that the firms can
simply pass through their investment mistakes and troubles.

Under this system, individuals and businesses face unnecessary premium
volatility as rates follow the investing cycles: when insurers'
investment returns are high rates will drop and when investment returns
drop, rates increase, and when the stock market, bond market and
interest rates all collapse at once rates will skyrocket. Furthermore,
without regulatory oversight to enforce more responsible practices,
consumers bear much more of the burden of bad economic times than they
gain in benefits during the good times.

#######  THE INSURANCE INDUSTRY SHOULD BE SUBJECT TO ANTITRUST LAWS

In 1945 the McCarran-Ferguson Act exempted the insurance industry from
federal antitrust laws and in subsequent years the insurance industry
won antitrust exemptions from virtually every state. As a result,
insurer-controlled \"rating bureaus\" freely distribute proposed pricing
data, including projected losses, expenses, profits, and overhead
charges, to all insurers who wished to obtain the information, allowing
tacit price collusion.

As a result of this exemption, insurers are able to fix rates through
the use of advisory rates established by an insurance industry owned
organization, the Insurance Services Office (ISO). The ISO projects loss
trends, allowing insurers to share data and projections for pricing
rather than requiring companies to develop product pricing
competitively. As a result of the anti-competitive environment, insurers
know that they can price insurance too low when, for example, investment
returns are high, because the companies know that the industry can act
in concert to raise prices at a future date. Without the antitrust
exemption, insurers would need to price more responsibly and based on
their actuarial needs because they would not be assured of the higher
future prices that collusion allows.

Proposition 103 repealed the insurance industry\'s exemption from the
antitrust laws in California and prohibited the operation of \"rating\"
and \"advisory\" organizations set up by the industry to circulate
pricing and policy information to insurance companies.

There is no reason to maintain this exemption from the nation\'s
antitrust laws elsewhere, as there is no reason to provide the industry
with anti-competitive tools that allow it to act collusively against the
interest of consumers. The antitrust exemption should be repealed.

# 

# INSURANCE COMPANIES' LOSS ESTIMATES ARE INFLATED

# 

# The insurance industry bases rates on a series of actuarial analyses and calculations. A key data set in these calculations is the incurred losses that insurers report on an annual basis. Incurred losses represent the projected payments a company will make for claims filed in a given year. These projections are based on a combination of the assessed value of those claims that have been filed as well as those that have not yet been filed, but the insurer expects, known as \"incurred but not reported\" losses. In short, the data reported annually as \"incurred losses\" are estimates of losses that are meant to be an insurer\'s best guess as to their liabilities for the year. 

# 

# The \"best guess\" data are used to assess a company\'s financial condition, to develop new rates and, often, the data are used as fodder for legislative efforts to push changes in tort law. FTCR has recently analyzed fifteen years of loss projections in the field of medical malpractice insurance and found that companies dramatically and consistently exaggerate incurred losses initially, only to adjust the losses downward in future years. 

#  

According to the data (we have reviewed reported losses since the
beginning of the last insurance crisis in 1986), malpractice insurance
companies have historically inflated their loss projections and then
revised their reported losses downward in subsequent years. The research
shows that the "incurred losses" that medical malpractice insurance
companies initially report for policies in effect in each of the years
examined were, on average, 33% higher than the amount they actually paid
out on those policies.

We have also found that insurers\' reported losses were significantly
inflated during the \"insurance crisis\" of the late 1980\'s. In 1989,
for example, medical malpractice insurers\' loss estimates were
overstated by 40%. Based on this investigation, the "incurred loss" data
reported by medical malpractice insurers do not represent, or even
approximate, the actual losses a company will sustain as a result of
claims against its policyholders.

It is, therefore, our view that policymakers must not rely upon the
insurance industry\'s current loss projections, because those figures
are not based on hard or otherwise reliable data. In order to protect
the public from the abuse of unreliable accounting practices, new
regulatory and accounting reforms are needed. Additionally, regulators
and law enforcement officials should seek to resolve the outstanding
question as to whether insurance companies have simply failed to find
accurate tools for projecting losses or are intentionally inflating
their reported losses.

### Incurred Losses vs. Actual Losses

The distinction between \"incurred\" and actual losses, commonly known
as \"paid losses,\" is central to understanding an insurance company's
true financial condition and to evaluate the losses insurers report. It
is a distinction insurers do not often make in public debate.

Insurers calculate their rates for a given year based on their
\"incurred losses\" for that year. When insurers say they have an
\"incurred loss\" of a certain amount in a given year, however, they do
not mean that they have actually paid out that amount in that year.
Rather, they mean that they [estimate]{.underline} that they will
ultimately pay out that amount on claims they predict they will receive
that are covered by policies in effect in that year. In other words
\"incurred losses\" represent projected losses. Thus, if an insurer
reports in 2003 that its \"incurred losses\" for 2002 were \$100, the
insurer has not paid out \$100 for 2002 claims. Rather, the insurer
estimates that it will ultimately pay out -- over a period of several
years -- \$100 for claims covered by policies in effect in 2002.

An insurer\'s \"incurred losses\" are, therefore, by definition, a
guess. Statistical and mathematical methodologies have been developed
which, using standard actuarial techniques, can be applied to make that
guess an educated one. However, absent a regulatory formula that both
mandates the use of such techniques and reviews insurers' compliance,
insurers have enormous discretion in determining incurred losses.

Each year, the insurer receives more information about the \"incurred
losses\" it had guessed it would ultimately pay for claims covered by
policies in effect in a previous year. As time goes on new claims are
reported to the insurer, the insurer receives more details about
existing claims, and the insurer ultimately pays a specific amount -- or
no amount -- on each claim. As it receives this new information, the
insurer adjusts the original guess it made. The more time that elapses,
therefore, the less guesswork is involved and the more accurate an
estimate for a previous year becomes.

In medical malpractice, the average claim is paid approximately 5 and
1/2 years after the claim arises; most claims are paid within 10 years.
An insurer\'s estimate of its true liability for claims it guesses it
has incurred in a given year is therefore substantially accurate after
10 years.

[]{.mark}

Projecting the number of claims an insurance company must pay out, and
the amount of those claims, and setting rates based on these guesses, is
inherent in the nature of the insurance business. In exchange for a
premium an insurer receives from an insured in the present, the insurer
agrees to pay claims against that insured in the future; there is no way
for the insurer to know at the time it receives the premium exactly how
much it will pay for claims against the insured, nor even whether there
will be any claims against that insured at all.

Insurers therefore may not fairly be criticized for estimating their
future losses and changing those estimates every year\--that is the
nature of the business.[^20]

Insurers may fairly be criticized, however, when they mischaracterize
these [estimates]{.underline} of future losses as [actual]{.underline}
losses -- which they do frequently. For example, the most commonly used
measure of success in the insurance industry is the loss ratio: the
ratio of an insurer\'s incurred losses in a given year to its earned
premiums in that year. While the earned premium number is a hard number
and does not meaningfully change over time, the incurred loss number is
a guess. Yet insurers discuss the loss ratio as if each number were a
hard number. For example, if an insurer reports a loss ratio for 2002
of, say, 110, it typically characterizes itself as actually paying out
\$1.10 for each premium dollar it takes in in 2002. The implication is
that the company is losing money. In fact, it has not paid out \$1.10 in
2002, but only guessed that when a final accounting of 2002 claims is
completed years later, it will have paid out \$1.10.

For example, here is how the Florida coalition of insurance companies,
hospitals and the medical lobby characterize the industry\'s financial
status:

> In 2001, medical liability insurers nationally paid out \$1.40 for
> every \$1.00 they received in premiums.[^21]

In fact, this dire portrayal is based on incurred losses, and is, by
definition, only an estimate of what insurers will pay out in the
future. Yet the statement expressly -- and falsely \-- states that that
amount was [paid out.]{.underline}

Similarly, the North Carolina Access to Quality Healthcare Coalition
discussed North Carolina\'s medical malpractice incurred loss ratio of
113 for 2001 as follows:

> \"In 2001, according to NAIC data, North Carolina professional
> liability [insurers paid \$1.13 in claims for every \$1 in premiums
> they received]{.underline}.\" (Emphasis in original). (Fact sheet,
> N.C. Access to Quality Healthcare Coalition).

Again, the numbers are referring to incurred losses, and insurers only
[estimated]{.underline} that they will pay out \$1.13. Again, the
insurance industry incorrectly states that that amount was [paid
out.]{.underline}

The description of projections as actual payments is false, and it is a
misrepresentation that has misled policymakers, the news media and the
public.

The difference between an insurer\'s initial estimate of its incurred
losses for a given year\'s policies and the amount of its actual losses
on that year\'s policies has important implications for the current
medical malpractice insurance debate. This is because the rates an
insurer charges for a given year are necessarily based on its incurred
loss estimates for claims covered by that year\'s policies, not on its
ultimate paid losses on that year\'s policies. Thus, if the amount an
insurer ultimately pays out for claims covered by a given year\'s
policies is less than the amount the insurer initially estimated it
would pay out for claims covered by those policies, the insurer\'s rate
(and the premiums paid by policyholders) for that year would have been
too high. Similarly, if the amount the insurer ultimately pays out is
more than the amount the insurer initially guessed it would pay out, the
insurer\'s rate for that year would have been too low.

It should be obvious that in a weakened economy such as today\'s,
insurance companies stand to gain by reporting sudden and substantial
increases in incurred losses. Such increases are used to justify sudden
spikes in premiums, such as those in the current malpractice
marketplace. They also provide tax breaks for insurers. And the
increased estimates of incurred losses are the foundation of the
industry\'s argument that only by enacting tort reform will premiums go
down.

Whether the insurer charged a rate that was too low or too high, and the
amount by which that rate was too low or too high, cannot be known with
confidence until 10 years after the insured pays the premium. Whether
the rates doctors are being charged in 2003 for medical malpractice
insurance are too low or too high, therefore, will not be known for
certain until 2012.

Unfortunately, there is no opportunity to go back ten years and lower
rates that, in hindsight, proved to be too high.

Nor is there any way to retroactively repeal the application of tort law
restrictions put in place at the behest of the industry based on loss
estimates that turned out to be far in excess of reality.

### 

### Data Show Companies Overestimated Losses

After 10 years of claims information being reported to insurers and
incurred losses being restated, the initial incurred loss estimated for
each year from 1986 through 1992 by the medical malpractice insurance
industry has proved to be at least 26% overstated. (Except where stated,
these figures reflect an analysis of "claims made coverage" a common
form of medical malpractice insurance.)

• During the key crisis years -- 1986 through 1990 -- incurred losses
were initially estimated to reach \$10.7 billion. Ten years later the
reported losses for that period totaled \$7.1 billion, meaning that
original loss estimates during the crisis were 34% higher than the
actual losses reported ten years later.

• The initial incurred loss estimate for 1988 -- the apogee of the
crisis \-- has proved to be 37% overstated.

• In total, for the 7 years 1986 through 1992, malpractice insurers\'
initial incurred loss estimates were \$16.8 billion; they reported
incurred losses of \$11.6 billion for those years 10 years after the
initial estimates, for a total overstatement of \$5.2 billion, or 31%.

• Initial incurred loss estimates for "occurrence coverage" policies for
the years 1986-92 totaled \$12.9 billion, but the reported incurred
losses for these years was corrected to \$8.3 billion ten years later, a
total overstatement of \$4.6 billion, or 35%.

The graph below illustrates the change in the combined (occurrence and
claims-made policies) incurred losses, as reported by the nation\'s
medical malpractice. providers over the course of ten years. The graph
shows that the losses insurers initially reported are far higher than
the restated losses that are reported ten years later. Even after
revising the original 1988 projections upward in 1989, that year\'s
losses, along with every year\'s losses, eventually fell precipitously
as the incurred loss estimates were refined over time.

![](media/image6.wmf)

The data indicate that medical malpractice insurers overstated their
anticipated losses for each of the years analyzed for this study.
Additionally, it appears that the losses reported during the insurance
crisis of the mid- to late-1980s were more inflated than those of the
mid-1990s -- although fewer years of restated loss data are available
for the mid-1990s.

According to the data (claims made and occurrence policies combined):

-   In 1989, medical malpractice insurers announced losses for that year
    of \$4.4 billion; by 1998, that number had been revised downward to
    \$2.7 billion in losses.

-   For the years 1986 through 1990, insurers' initial incurred loss
    estimates were overstated by an average of 36%.

-   During the following four years (1991-1994), initial incurred loss
    estimates appear to have been overstated by 24%.[^22]

# C. Reported Losses and the Present Crisis

The current crisis is roughly two years old; there is no data to assess
the accuracy of the insurers \"incurred loss\" reports for recent years.
In contrast to the previous years\' data, because we have fewer than
five years of restated incurred loss estimates for each year beginning
with 1997, we cannot yet know what the ultimate payouts will be for
claims incurred in those years with any reasonable degree of accuracy.

[]{.mark}

We can, however, examine the recent incurred loss reports to determine
whether the insurers have reported a sudden spike in incurred losses,
following the pattern of the 1980s crisis.

As revealed in the table below, there is a noteworthy and sudden
increase in reported incurred losses between 2000 and 2001, the
beginning of the current crisis. After four years during which total
malpractice incurred losses hovered between \$5.09 to \$5.27 billion,
the estimate for 2001 jumped 17% to nearly \$6 billion.

+-------------+--------------------------------------------------------+
| ###### I    |                                                        |
| nitial Incu |                                                        |
| rred Loss E |                                                        |
| stimate Pas |                                                        |
| t Five Year |                                                        |
| s Medical M |                                                        |
| alpractice  |                                                        |
|             |                                                        |
| **(Claims   |                                                        |
| Made and    |                                                        |
| Occurrence  |                                                        |
| Policies    |                                                        |
| Combined)** |                                                        |
+-------------+--------------------------------------------------------+
| Year        | Insurers\' initial estimates of incurred losses for    |
|             | year                                                   |
+-------------+--------------------------------------------------------+
| 1997        | \$ 5,273,973,000                                       |
+-------------+--------------------------------------------------------+
| 1998        | \$ 5,217,410,000                                       |
+-------------+--------------------------------------------------------+
| 1999        | \$ 5,093,117,000                                       |
+-------------+--------------------------------------------------------+
| 2000        | \$ 5,116,965,000                                       |
+-------------+--------------------------------------------------------+
| 2001        | **\$ 5,985,382,000**                                   |
+-------------+--------------------------------------------------------+

Loss inflation during the last insurance crisis -- when insurers had
multiple motives to show greater losses -- was pronounced compared to
the years which immediately followed. That said, for those non-crisis
years in which at least five but less than 10 years of claims
information is now available, insurers\' initial incurred loss estimates
also appear to be substantially overstated.

As noted, insurance companies have a financial incentive to overstate
losses during periods when their investments are performing poorly. By
contrast, in periods of economic growth, such as the mid-1990s, insurers
seek to maximize their investment income during such periods by lowering
prices in order to attract capital and to expand market share. They have
nothing to gain by overstating losses at such times; indeed, inflating
losses would reduce insurers' authority under state laws to write
additional policies.

In view of this data, it is to be expected that insurers\' incurred loss
estimates for 2001, 2002 and 2003 ­-- and thus their proposed rates for
coming years -- are inaccurate. We have clear evidence that the
malpractice rates insurers charged during the last insurance crisis and
the years following it were grossly excessive -- by an average of
between 31% (for claims-made coverage) and 35% (for occurrence
coverage). We should not be surprised to discover in the future that the
incurred loss estimates medical malpractice insurers are reporting
today, and the resultant rates that companies are charging, have been
similarly inflated.

These results should raise a red flag for insurance regulators and
lawmakers. The information presented here suggests that the industry\'s
accounting practices are in need of revision, including far greater
scrutiny by insurance and financial regulators.

#### LIMITING LIABILITY AND RESTRICTING CONSUMER RIGHTS DOES NOT REDUCE RATES BUT DOES REDUCE THE QUALITY OF THE INSURANCE PRODUCT

The insurance industry, in every state legislature and in Congress,
proposes restricting the rights of policyholders or those injured by
policyholders as the best way to restrain rates. Rather than regulate
insurance companies' actuarial practices, administrative costs and
profits, the insurance industry typically calls on government to
regulate the ability of consumers to be compensated for an injury. The
failure of these proposals is borne out in the data that clearly shows
that there is no correlation between rates and legal liability.

The fallacy of the efficacy of tort restrictions lies in the belief that
insurers will automatically reduce rates if they are relieved of
liability. In fact, without the requirements of regulation, insurers do
not and will not reduce rates regardless of whether or not the law
limits the rights of policyholders or other claimants.

##### A. Limits on Third Party Bad Faith Lawsuits Does Not Reduce Insurance Rates

A 1999 study by FTCR found that states that ban injured victims of auto
accidents to sue the driver's insurance companies for low-balling or
unfairly denying or delaying claims payments actually have faced greater
rate increases than states that allow the suits, known as third party
bad faith suits. The data directly contradict the insurance industry
assertion that banning a third party bad faith cause of action will
lower rates.

The insurance industry has suggested that limiting the right to sue
brings premiums down and that the converse is also true: allowing such
suits raises premiums. Data from the National Association of Insurance
Commissioners, however, shows no relationship between the right of third
parties to sue and premium levels. According to the study, which
reviewed premiums from 1989-1996, California was the only state with a
ban on third party suits that saw a reduction in premiums and, other
than Pennsylvania, consumers in all states with these tort restrictions
saw rate increases of more than 25%, with most states above the national
average of 35.8% for this time period. Of course, California was the
only state with the regulatory structure of Proposition 103 in place to
restrain rates.

According to the data, a limitation on third party bad faith liability
has not resulted in lower premiums as insurers promise. A copy of this
study is available at
http://www.consumerwatchdog.org/insurance/rp/rp000156.pdf.

##### B. Medical Malpractice Caps Do Not Reduce Insurance Rates

#### 

A March 2003 report by FTCR compared the impact on premiums of the tort
restrictions of California's Medical injury Compensation Reform Act of
1975 (MICRA) with the regulatory strictures of Proposition 103. The
study found that physicians' premiums increased by 450% over the first
13 years with the malpractice caps contained in MICRA and declined after
the passage of Proposition 103. A copy of that study is available at
http://www.consumerwatchdog.org/healthcare/rp/rp003103.pdf.

Despite the allegation that caps will lower rates, the reality is that
even under California's MICRA law insurers have sought major increases
in recent years. A major malpractice insurer, SCPIE, has increased rates
by 23% since 1999 and the state's largest medical malpractice insurer,
NORCAL Mutual, has increased rates by 26% since 2001. Indeed, during the
aforementioned Proposition 103 rate challenge, SCPIE stated that
California's strict malpractice caps law did not hold down insurance
rates. In written testimony, SCPIE's actuary and Assistant Vice
President James Robertson stated:

\"While MICRA was the legislature\'s attempt at remedying the medical
malpractice crisis in California in 1975, it did not substantially
reduce the relative risk of medical malpractice insurance in
California.\"

This is not dissimilar to filings by Aetna and St. Paul Companies in the
mid-1980s in which the companies refused to lower rates in Florida after
that state imposed a liability cap. According to St. Paul Fire & Marine
Insurance Company's 1987 filing with the Florida Department of
Insurance:

"The conclusion of the study is that the noneconomic cap of \$450,000,
joint and several liability on the noneconomic damages, and mandatory
structured settlements on losses above \$250,000 will produce little or
no savings to the tort system as it pertains to medical malpractice."

In short, liability caps reduce an insurers exposure without any
mandatory impact on rates, while insurance regulation necessarily
impacts rates as it is, by definition, a mechanism for controlling
rates.

##### 

##### C. Regulating Rates Not Rights Makes the Difference

Throughout the country, lawmakers have experimented with a host of
liability-limiting tools ostensibly imposed to keep rates down. These
restrictions, which include the approaches discussed above, as well as
no-fault insurance and a variety of others such as periodic payments and
elimination of the collateral source rule, fail to restrain rates
because they do not address rates. The flaw in the promise of tort
restrictions is that it depends upon insurers to reduce rates without
requiring the companies to do so. It should be noted that a more
important flaw in these programs is the injustice of barring a victim
from access to their rights to compensation for their injuries.

The insurance industry presses for tort restrictions with the promise
that rates will go down, but the industry never agrees to mandatory rate
decreases and regulatory oversight of the companies. The insurance
industry has invested millions of dollars to promote the notion that
lawsuits are the sole barrier to affordable insurance, yet after the
industry successfully shields itself from lawsuits, there is no
commensurate rate decrease.

The lesson from decades of legislation restricting victims' and
consumers' rights is that the insurance crises keep happening and rates
continue to cycle higher and higher unless lawmakers address the real
problem by regulating rates.

######### CONCLUSION

In this testimony we have presented the view that the preeminent public
interest in protecting insurance consumers requires that insurance rates
and practices are subject to a strong and thorough regulatory regime
that promotes accountability.

-   First and foremost, insurance companies should be subject to strict
    prior approval system of rate regulation to ensure that consumers
    neither pay excessive premiums nor shoulder the unmitigated swings
    of the insurance cycle. Insurers should be required to justify rates
    and products (demonstrating, for example, the quality of the
    coverage to be offered) in advance of placing insurance products in
    the marketplace. As part of the regulatory process, insurers\' books
    should be subject to an additional layer of regulatory
    accountability by giving the public an independent right to
    challenge rate hike proposals and other regulatory actions.

-   Insurance companies, which are currently exempt from antitrust laws,
    are able to collude through the sharing of data in a manner that
    leaves consumers without a competitive market for insurance
    products. The industry should be stripped of this unique exemption
    from the nation's laws against anticompetitive practices.

-   Insurance companies use loss projection techniques that are
    demonstrably inaccurate and possibly intended to inflate companies'
    apparent losses. These projections, at least for the medical
    malpractice line of insurance, are consistently higher than the
    actual losses insurers pay out over time and should be viewed
    skeptically by insurance regulators. Similarly the data should not
    be accepted as grounds for changing tort laws.

-   The insurance industry alternative to rate regulation, dubbed "tort
    reform" by insurers, has not achieved its promised goal of reducing
    insurance rates. Statutory changes that have limited the legal
    rights of policyholders and insurance claimants over the past thirty
    years have consistently failed to produce savings specifically
    because these laws never limit the rates insurers can charge.

Although the insurance industry will argue for deregulation, much in the
same way private energy companies argue for deregulation, the path of
strict rate regulation and market conduct enforcement will provide the
most security in the most fair and public manner for consumers and
insurers. As with energy deregulation, in which many of the major firms
either filed for bankruptcy or fell to penny-stock status in the wake of
deregulation, a move to further undermine or overturn the insurance
regulatory regime would be at the peril of consumers and the insurers.

The model for reforming the insurance industry is California\'s
voter-approved ballot initiative Proposition 103. The initiative has
produced a stable and competitive insurance market for fifteen years in
California, with above average profits for insurers and below average
premiums for consumers.

**Appendix A**

## Complete Text of Proposition 103

**I. Complete Text Of Proposition 103 As Approved By The California
Electors, November 8, 1988**

Insurance Rate Reduction and Reform Act

Section 1. Findings and Declaration.

The People of California find and declare as follows:

Enormous increases in the cost of insurance have made it both
unaffordable and unavailable to millions of Californians.

The existing laws inadequately protect consumers and allow insurance
companies to charge excessive, unjustified and arbitrary rates.

Therefore, the People of California declare that insurance reform is
necessary. First, property-casualty insurance rates shall be immediately
rolled back to what they were on November 8, 1987, and reduced no less
than an additional 20%. Second, automobile insurance rates shall be
determined primarily by a driver\'s safety record and mileage driven.
Third, insurance rates shall be maintained at fair levels by requiring
insurers to justify all future increases. Finally, the state Insurance
Commissioner shall be elected. Insurance companies shall pay a fee to
cover the costs of administering these new laws so that this reform will
cost taxpayers nothing.

Section 2: Purpose.

The purpose of this chapter is to protect consumers from arbitrary
insurance rates and practices, to encourage a competitive insurance
marketplace, to provide for an accountable Insurance Commissioner, and
to ensure that insurance is fair, available, and affordable for all
Californians.

Section 3: Reduction and Control of Insurance Rates.

Article 10, commencing with Section 1861.01 is added to Chapter 9 of
Part 2 of Division 1 of the Insurance Code to read:

Insurance Rate Rollback

1861.01.(a) For any coverage for a policy for automobile and any other
form of insurance subject to this chapter issued or renewed on or after
November 8, 1988, every insurer shall reduce its charges to levels which
are at least 20% less than the charges for the same coverage which were
in effect on November 8, 1987.

\(b\) Between November 8, 1988, and November 8, 1989, rates and premiums
reduced pursuant to subdivision (a) may be only increased if the
commissioner finds, after a hearing, that an insurer is substantially
threatened with insolvency.

\(c\) Commencing November 8, 1989, insurance rates subject to this
chapter must be approved by the commissioner prior to their use.

\(d\) For those who apply for an automobile insurance policy for the
first time on or after November 8, 1988, the rate shall be 20% less than
the rate which was in effect on November 8, 1987, for similarly situated
risks.

\(e\) Any separate affiliate of an insurer, established on or after
November 8, 1987, shall be subject to the provisions of this section and
shall reduce its charges to levels which are at least 20% less than the
insurer\'s charges in effect on that date.

Automobile Rates & Good Driver Discount Plan

1861.02. (a) Rates and premiums for an automobile insurance policy, as
described in subdivision (a) of Section 660, shall be determined by
application of the following factors in decreasing order of importance:
(1) The insured\'s driving safety record.

\(2\) The number of miles he or she drives annually.

\(3\) The number of years of driving experience the insured has had.

\(4\) Such other factors as the commissioner may adopt by regulation
that have a substantial relationship to the risk of loss. The
regulations shall set forth the respective weight to be given each
factor in determining automobile rates and premiums. Notwithstanding any
other provision of law, the use of any criterion without such approval
shall constitute unfair discrimination.

\(b\) (1) Every person who (A) has been licensed to drive a motor
vehicle for the previous three years and (B) has had, during that
period, not more than one conviction for a moving violation which has
not eventually been dismissed shall be qualified to purchase a Good
Driver Discount policy from the insurer of his or her choice. An insurer
shall not refuse to offer and sell a Good Driver Discount policy to any
person who meets the standards of this subdivision. (2) The rate charged
for a Good Driver Discount policy shall comply with subdivision (a) and
shall be at least 20% below the rate the insured would otherwise have
been charged for the same coverage. Rates for Good Driver Discount
policies shall be approved pursuant to this article.

\(c\) The absence of prior automobile insurance coverage, in and of
itself, shall not be a criterion for determining eligibility for a Good
Driver Discount policy, or generally for automobile rates, premiums, or
insurability.

\(d\) This section shall become operative on November 8, 1989. The
commissioner shall adopt regulations implementing this section and
insurers may submit applications pursuant to this article which comply
with such regulations prior to that date, provided that no such
application shall be approved prior to that date.

Prohibition on Unfair Insurance Practices

1861.03 (a) The business of insurance shall be subject to the laws of
California applicable to any other business, including, but not limited
to, the Unruh Civil Rights Act (Civil Code Sections 51 through 53), and
the antitrust and unfair business practices laws (Parts 2 and 3,
commencing with section 16600 of Division 7, of the Business and
Professions Code).

\(b\) Nothing in this section shall be construed to prohibit (1) any
agreement to collect, compile and disseminate historical data on paid
claims or reserves for reported claims, provided such data is
contemporaneously transmitted to the commissioner, or (2) participation
in any joint arrangement established by statute or the commissioner to
assure availability of insurance.

\(c\) Notwithstanding any other provision of law, a notice of
cancellation or non-renewal of a policy for automobile insurance shall
be effective only if it is based on one or more of the following
reasons: (1) non-payment of premium; (2) fraud or material
misrepresentation affecting the policy or insured; (3) a substantial
increase in the hazard insured against.

Full Disclosure of Insurance Information

1861.04. (a) Upon request, and for a reasonable fee to cover costs, the
commissioner shall provide consumers with a comparison of the rate in
effect for each personal line of insurance for every insurer.

Approval of Insurance Rates

1861.05. (a) No rate shall be approved or remain in effect which is
excessive, inadequate, unfairly discriminatory or otherwise in violation
of this chapter. In considering whether a rate is excessive, inadequate
or unfairly discriminatory, no consideration shall be given to the
degree of competition and the commissioner shall consider whether the
rate mathematically reflects the insurance company\'s investment income.

\(b\) Every insurer which desires to change any rate shall file a
complete rate application with the commissioner. A complete rate
application shall include all data referred to in Sections 1857.7,
1857.9, 1857.15, and 1864 and such other information as the commissioner
may require. The applicant shall have the burden of proving that the
requested rate change is justified and meets the requirements of this
article.

\(c\) The commissioner shall notify the public of any application by an
insurer for a rate change. The application shall be deemed approved
sixty days after public notice unless (1) a consumer or his or her
representative requests a hearing within forty-five days of public
notice and the commissioner grants the hearing, or determines not to
grant the hearing and issues written findings in support of that
decision, or (2) the commissioner on his or her own motion determines to
hold a hearing, or (3) the proposed rate adjustment exceeds 7% of the
then applicable rate for personal lines or 15% for commercial lines, in
which case the commissioner must hold a hearing upon a timely request.

1861.06. Public notice required by this article shall be made through
distribution to the news media and to any member of the public who
requests placement on a mailing list for that purpose.

1861.07. All information provided to the commissioner pursuant to this
article shall be available for public inspection, and the provisions of
Section 6254(d) of the Government Code and Section 1857.9 of the
Insurance Code shall not apply thereto.

1861.08. Hearings shall be conducted pursuant to Sections 11500 through
11528 of the Government Code, except that: (a) hearings shall be
conducted by administrative law judges for purposes of Sections 11512
and 11517, chosen under Section 11502 or appointed by the commissioner;
(b) hearings are commenced by a filing of a Notice in lieu of Sections
11503 and 11504; (c) the commissioner shall adopt, amend or reject a
decision only under Section 11517 (c) and (e) and solely on the basis of
the record; (d) Section 11513.5 shall apply to the commissioner; (e)
discovery shall be liberally construed and disputes determined by the
administrative law judge.

1861.09. Judicial review shall be in accordance with Section 1858.6. For
purposes of judicial review, a decision to hold a hearing is not a final
order or decision; however, a decision not to hold a hearing is final.

Consumer Participation

1861.10. (a) Any person may initiate or intervene in any proceeding
permitted or established pursuant to this chapter, challenge any action
of the commissioner under this article, and enforce any provision of
this article.

\(b\) The commissioner or a court shall award reasonable advocacy and
witness fees and expenses to any person who demonstrates that (1) the
person represents the interests of consumers, and, (2) that he or she
has made a substantial contribution to the adoption of any order,
regulation or decision by the commissioner or a court. Where such
advocacy occurs in response to a rate application, the award shall be
paid by the applicant.

\(c\) (1) The commissioner shall require every insurer to enclose
notices in every policy or renewal premium bill informing policyholders
of the opportunity to join an independent, non- profit corporation which
shall advocate the interests of insurance consumers in any forum. This
organization shall be established by an interim board of public members
designated by the commissioner and operated by individuals who are
democratically elected from its membership. The corporation shall
proportionately reimburse insurers for any additional costs incurred by
insertion of the enclosure, except no postage shall be charged for any
enclosure weighing less than 1/3 of an ounce. (2) The commissioner shall
by regulation determine the content of the enclosures and other
procedures necessary for implementation of this provision. The
legislature shall make no appropriation for this subdivision.

Emergency Authority

1861.11. In the event that the commissioner finds that (a) insurers have
substantially withdrawn from any insurance market covered by this
article, including insurance described by Section 660, and (b) a market
assistance plan would not be sufficient to make insurance available, the
commissioner shall establish a joint underwriting authority in the
manner set forth by Section 11891, without the prior creation of a
market assistance plan.

Group Insurance Plans

1861.12. Any insurer may issue any insurance coverage on a group plan,
without restriction as to the purpose of the group, occupation or type
of group. Group insurance rates shall not be considered to be unfairly
discriminatory, if they are averaged broadly among persons insured under
the group plan.

Application

1861.13. This article shall apply to all insurance on risks or on
operations in this state, except those listed in Section 1851.

Enforcement & Penalties

1861.14. Violations of this article shall be subject to the penalties
set forth in Section 1859.1. In addition to the other penalties provided
in this chapter, the commissioner may suspend or revoke, in whole or in
part, the certificate of authority of any insurer which fails to comply
with the provisions of this article.

Section 4. Elected Commissioner

Section 12900 is added to the Insurance Code to read:

\(a\) The commissioner shall be elected by the People in the same time,
place and manner and for the same term as the Governor.

Section 5. Insurance Company Filing Fees

Section 12979 is added to the Insurance Code to read:

Notwithstanding the provisions of Section 12978, the commissioner shall
establish a schedule of filing fees to be paid by insurers to cover any
administrative or operational costs arising from the provisions of
Article 10 (commencing with Section 1861.01) of Chapter 9 of Part 2 of
Division 1.

Section 6. Transitional Adjustment of Gross Premiums Tax

Section 12202.1 is added to the Revenue & Taxation Code to read:

Notwithstanding the rate specified by Section 12202, the gross premiums
tax rate paid by insurers for any premiums collected between November 8,
1988 and January 1, 1991 shall be adjusted by the Board of Equalization
in January of each year so that the gross premium tax revenues collected
for each prior calendar year shall be sufficient to compensate for
changes in such revenues, if any, including changes in anticipated
revenues, arising from this act. In calculating the necessary
adjustment, the Board of Equalization shall consider the growth in
premiums in the most recent three year period, and the impact of general
economic factors including, but not limited to, the inflation and
interest rates.

Section 7. Repeal of Existing Law

Sections 1643, 1850, 1850.1, 1850.2, 1850.3, 1852, 1853, 1853.6, 1853.7,
1857.5, 12900, Article 3 (commencing with Section 1854) of Chapter 9 of
Part 2 of Division 1, and Article 5 (commencing with Section 750) of
Chapter 1 of Part 2 of Division 1, of the Insurance Code are repealed.

Section 8. Technical Matters

\(a\) This act shall be liberally construed and applied in order to
fully promote its underlying purposes.

\(b\) The provisions of this act shall not be amended by the Legislature
except to further its purposes by a statute passed in each house by roll
call vote entered in the journal, two-thirds of the membership
concurring, or by a statute that becomes effective only when approved by
the electorate.

\(c\) If any provision of this act or the application thereof to any
person or circumstances is held invalid, that invalidity shall not
affect other provisions or applications of the act which can be given
effect without the invalid provision or application, and to this end the
provisions of this act are severable.

[^1]: *State Average Expenditures & Premiums for Personal Automobile
    Insurance* 1993-2001, National Association of Insurance
    Commissioners

[^2]: The Bureau of Labor Statistics Inflation Calculator can be
    accessed at http://data.bls.gov/cgi-bin/cpicalc.pl.

[^3]: In this table and in subsequent tables, \"Rest of Nation\" data do
    not include California data.

[^4]: *Profitability by Line by State In 2001*, National Association of
    Insurance Commissioners, December 2002

[^5]: "Medical Malpractice Insurance: Stable Losses/Unstable Rates,"
    Americans for Insurance Reform, October 10, 2002

[^6]: Fitch Ratings, Inc., Insurance Special Report Review & Outlook:
    2001/2002: U.S. Property/Casualty Insurance,

    January 17, 2002, p. 19-20.

[^7]: [www.iii.org/media/industry/financials/groundhog2002/](http://www.iii.org/media/industry/financials/groundhog2002/)
    visited 11/21/02.

[^8]: Auto Insurance Report, May 13, 2002, p. 1.

[^9]: National Underwriter, July 22, 2001, p. 26.

[^10]: "Liability Insurers Urged to Take Long View for Industry's
    Financial Health," Orlando Business Journal, November 26, 2002 at
    http://orlando.bizjournals.com/orlando/stories/2002/11/25/daily25.html?t=printable.

[^11]: Business Insurance, July 13, 1992, p. 55

[^12]: Insurance Week, Oct. 19, 1992, p.15

[^13]: The companies reviewed include: Allstate Insurance Company, Auto
    Club of Northern California, Auto Club of Southern California,
    Farmers Insurance Exchange, Fireman's Fund, Liberty Mutual Insurance
    Company, Mercury Casualty Company, Nationwide Mutual Insurance
    Company, State Farm Mutual Auto, United Services Automobile
    Association.

[^14]: All data are based on Annual Statements of insurers filed with
    the California Department of Insurance. Calculations of stock and
    bond holdings are based on the actual cost of the investments (see
    also footnote 8).

[^15]: This percentage was calculated using the actual cost of
    insurers\' investments, also known as the purchase price. The
    purchase price of the insurance companies\' stock and bond holdings
    in a given year remains constant, while other measures -- such as
    book value -- may fluctuate. Moreover, the actual cost of the
    investments is useful in that it shows how the companies in this
    study chose to allocate their investment dollars over the years. In
    other words, if a given company\'s level of investment in
    corporations grew over the period of the study, it was not due to
    rising values of previously purchased stocks and corporate bonds.
    The use of the actual cost value is also consistent with the losses
    on stock and bond sales and write-offs listed below, which are
    calculated based on the initial purchase price of the investments.

[^16]: All of a given company\'s publicly traded units are grouped for
    the purposes of this report. For example, \"WorldCom\" includes MCI
    and WorldCom, \"AOL/Time Warner\" includes AOL and Time Warner, etc.
    \"Williams\" includes Williams Cos. and Williams Communications
    Group, due to the Energy company having been the owner of the
    Communications subsidiary during a portion of the period covered by
    this report and the continuing close affiliation between the two
    companies.

[^17]: Figures for stock and bond losses are based on total net
    gain/loss from all transactions of the given issuer\'s stocks and
    bonds, and/or basis adjustments for bonds, for each insurer.

[^18]: "Supervisory Standard on Asset Management by Insurance
    Companies,"International Association of Insurance Supervisors.
    Approved December 1999

[^19]: Insurance companies maintain significant surplus, beyond what is
    reserved to pay losses, that could be tapped to cover claims if
    there is a shortfall due to failed investments of policyholder
    premium.

[^20]: Indeed, insurance companies employ their own \"statutory
    accounting principles\" (SAP) -- a departure from the \"generally
    accepted accounting principles\" applicable to all other industries
    in the United States -- in recognition of their need to make loss
    projections. Under SAP accounting practices, insurers not only
    report incurred losses to regulators for purposes of justifying rate
    increases and decreases. They are also permitted to treat incurred
    losses as real losses for tax purposes. Although the IRS
    theoretically has the authority to impose penalties for grossly
    overstated loss reserves, as a practical matter it never imposes
    such penalties. See, e.g., K. Logue, Toward a Tax-Based Explanation
    of the Liability Insurance Crisis, 82 Va. L. Rev. 895, 917-18; R.
    Morais, Discounting the Downtrodden, Forbes, Feb. 25, 1985, at 82-83
    ("It is virtually impossible on a case-by-case basis to prove
    reserve redundancy") (quoting Larry Coleman, analyst for National
    Association of Insurance Commissioners).

[^21]: Heal Florida's Health Care, fact sheet available at
    http://www.healflhealthcare.org/heal_FLhealthcare/homepage.html.

[^22]: For 1991 and 1992, ten years of incurred loss estimates are
    available; for 1993, only nine years are available, and for 1993,
    only eight years are available.