Brown’s explanation of the auto insurance business goes like this: The companies invest a certain percentage of their premium dollars and give the profits from those investments to their stockholders. The percentage invested is so high that, year after year, the amount retained for the payment and processing of claims will fall short of what is needed. As a result, Brown has argued, the companies are able to go before the board and argue for increased rates on the basis that the old rates did not cover the cost of paying the claims. Brown put it this way, “It’s as though I invested half of my paycheck in stocks every week and then went to my boss and told him I couldn’t live on what he was paying me.” After Brown was finished, McLean said in an arctic tone, “In view of your announced sensitivity to them, Mr. Brown, there are no questions.” He then went on to read a statement which he apparently had prepared during the coffee break. Last year, working with Dallas lawyer Bert Bader, who also was present at the June hearing and critical of the rate increase, the AFL-CIO had sought in district court to force the insurance commissioners to consider investment income during the ratemaking procedures. The suit failed, and the opinion written by Judge Charles Betts has given comfort to both sides in the dispute. This particular morning, McLean reminded Brown, “The court said that investment profits were not within the scrutiny of the board.” As Bader told the commissioners later that morning, the judge also had said that the question of considering investment profits was a valid one, but one which the legislature, rather than the courts, would have to deal with. When McLean finished his statement, Brown sought clarification on a point, and McLean snapped, “If I didn’t question you, I don’t expect you to question me.” The insurance men in the auditorium greeted the commissioner’s mot with prolonged applause and cheering. When it died down, Brown said, “It looks like the people here are in your corner, and you are in theirs, just as we said at the outset. We’ll see you in the legislature.” “That’s fine,” McLean said. “We’ll enforce the law any way you write it.” Then Cmsr. Manford, after telling Brown that his statement had been “an eloquent, but immoral, deviation from the truth,” announced that the AFL-CIO could consider the commission’s books open for inspection. Afterwards, outside the auditorium, Brown told the Observer that lobbying any kind of insurance reform through the legislature would be a rough job because of the dearth of statistical data on the operations of the companies which do business within Texas. In preparing the court fight which the union lost, $25,000 was expended on research, including the services of a fulltime insurance expert, he said. All that was discovered, Brown said, was that the information on file with the commission says little or nothing about the profitability of writing car insurance in Texas. “But the auto insurance business is a profit-making business,” Brown said. TO LEARN MORE about ratemaking, the Observer telephoned Joe Eddins, the chief auto actuary working under McDonald, and secured an interview. When this reporter arrived at Eddins’ fice later that afternoon, his door was closed and his secretary reported that he would be “in conference” for the rest of the day, but that McDonald would be happy to help. When McDonald was asked by the Observer whether Eddins would be available for an interview before this story was written, McDonald did not respond. In an earlier, four-hour interview with a reporter from the Houston Chronicle, Eddins had said that the rates are figured each year on the basis of data supplied by the insurance companies. The loss experience of all companies is lumped together and is displayed by geographical areas \(26 eight 3 When the Observer asked McDonald who on his staff compiled loss reports, he replied that the work is done, not by the state, but by statistical agencies which are The public is shown a completed rate book .. approved by the insurance commissioners. The three major agents are the National Bureau of Casualty Underwriters, the Mutual Insurance Rating Bureau, and the National Association of Independent Insurers. The insurance code of the state of Texas requires every company writing automobile coverage in the state to file each year “a report showing its premiums and losses on each classification of motor vehicle risks written within the state.” 4 When asked where these could be perused, McDonald replied that these reports were not given to the insurance board or its staff at all, but to one or another of the approved statistical agents, where they are, he said, available for inspection by members of the insurance board and its staff. The law requires that the operations of such statistical agents be checked out every five years by the state, but not if a thorough audit has been prepared reasonably recently by another state. McDonald said that the state of New York and the National Association of Insurance Commissioners are now investigating the operations of the National Bureau of Casualty Underwriters. Texas never has prepared such an audit on its own. A source within the insurance industry has told the Observer that the staff which works on auto policy rates consists, other than Eddins and McDonald, of “three clerks who earn $380 a month.” McDonald told the Observer that in preparing the new schedule each year, he had the services of “14 or 15” workers, counting himself, Eddins, their staff of three, and staff mem bers borrowed from other offices within the agency. Once the new rates are set, they are printed, not by the board, but by the Texas Automobile Insurance Service Office, which is a lobby and service organization owned and operated by many insurance companies. McDonald said that the TAISO “gets a hearing” before the board, as anyone would, and confirmed that the Office has, in the past \(the last time was two years plete rate book, based upon figures supplied by the insurance board through its statistical agents. This year, he said, the Service Office had made suggestions, but not in every category of coverage. McDonald said that he considers it proper for the TAISO to print and sell the rate book”the Auto Bible,” as it is called because “the farther government stays out of business, the better.” Similarly, he approves of the collation of ratemaking statistics by the bureaus owned and operated by insurance companies. “There’s the expense the state must go to to set up these kind of agencies .. . you have to pay the employees. We people who deal with rates are figure-happy .. . except that you have to draw the line somewhere between practicality and expense.” THUS IT IS that, asking for figures which would seem to be necessary in making rates according to article 5.14 of the Texas Insurance Code, those interested in the problem are told that the figures are held elsewhere, and that there is no single compilation showing the operations of all the insurance companies in Texas in the auto field. McDonald told the Observer that the board holds no information showing the total premiums paid in Texas last year for auto coverage, nor the total claims paid out. Similarly, the board’s staff professes ignorance of such factors as the percentage of the premium dollar expended in claims processing, a cost which the board allows the companies to figure in with claims paid. In the AFL-CIO suit, Eddins estimated that factor at a little under 13%. Houston Chronicle reporter Dave McNeely reported last month that last year, the insurance companies in Texas took in $417 million in auto policy premiums and paid out some 56% in claims. He said that the total figure accepted by the board as the companies’ auto losses in Texas was $13 million. According to the figuring accepted by the board, dividends to stockholders are subtracted from premium income, and total claims costs thus come to 71%. 5 A man within the insurance industry told the Observer that the standard breakdown of the auto premium dollar, fairly constant nationwide, brings expenses to about 33.8%-20% for agents’ commissions, 3.8% for state tax on premiums, 10% for home office expense. “If you have 66.2% in losses, that would let you break even,” he said, adding, “Month in and month out, year in and year out, July 22, 1966
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