I am very pleased to have this opportunity to come before your committee in support of the recommendations for changes in the Life Insurance Act of the District of Columbia as contained in H.R. 10964 introduced by Representative McMillan on March 9, 1960.

The Life Insurance Act of the District of Columbia represents legislation of long standing, of clear purpose, and of great value, and in the insurance industry it is generally recognized that the insurance laws of the District of Columbia are of the highest standards, particularly the administration of these laws by the Superintendent of Insurance. It has proved to be an excellent statute and the insurance companies which operate under it represent a very important segment of the insurance industry in the United States. With a law of this kind, however, it is natural and inevitable that changing conditions and the public interest may require amendments and additions. It is my purpose in this statement to assess these changing conditions and to cite the need for this legislation in the public interest.

First as to changing conditions: The life insurance industry has, for many years, furnished the American public with the protection they need against the vicissitudes of life. Insurance provides the individual through his own initiative and because of his own self-respect and self-reliance the opportunity to protect himself and his family. The great pooling and redistribution system which is private insurance has the means readily at hand, and the responsibility, to meet any new demands for protection as they arise.

It is part of that responsibility to extend and modernize our service in the annuity field-a field which has traditionally represented one of the great public service functions of the life insurance industry. It would hardly seem necessary for me to spend much time here attempting to prove that the public urgently needs a new economic weapon-a means of retirement programing that will afford them an opportunity to participate in the economic growth of the country and to protect themselves against the constant erosion of the purchasing power of the dollar and a means of providing them with a lifetime income that will respond to changes in the cost of living.

The constant quest for better ways to accomplish retirement objectives stems from the fact that the early traditional plans had one basic flaw: They provided fixed benefits which rapidly became inadequate under the impact of inflation. The variable annuity is an attempt to correct this situation, since the purpose of the variable annuity is not only to guarantee retiring persons an income for life, but to protect their income against a diminishing purchasing power caused by rising prices.

The difference between variable annuities and fixed dollar annuities was recently described in the report of the Senate Finance Committee on the Life Insurance Income Tax Act of 1955 (S. Rept. 291, 86th Cong., 1st sess.):

"Variable annuities differ from the ordinary or fixed dollar annuities in that the annuity benefits payable under the variable annuity vary with the insurance company's overall investment experience. The fixed dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of the actual investment earnings. Both the fixed dollar annuities and the variable annuities, however, are based upon the principle of paying out either specified amounts or specified units with values which vary with investment experience, over the life of each member of an annuitant group. Thus in both cases the insurance company bears the mortality risk. In view of this, your committee believes variable annuities should in general be treated like other annuities for tax purposes."

The variable annuity principle represents a development within the insurance industry which is necessary to adequate retirement programing. As part of this development, the Variable Annuity Life Insurance Co. and the Equity Life Insurance Co., both organized under the laws of the District of Columbia, are now issuing variable annuity contracts to the general public pursuant to certificates of authority issued under the Life Insurance Act of the District of Columbia.

A year after the first company began to operate, the Securities and Exchange Commission petitioned to have these contracts and these companies, Variable Annuity Life Insurance Co. of America and Equity Annuity Life Insurance Co., register under the Securities Act of 1933 and the Investment Company Act of 1940. Both the U.S. District Court for the District of Columbia and the U.S. Court of Appeals for the District of Columbia Circuit denied relief on the ground that compliance with these acts was unnecessary because the operation of

these companies was subject to the detailed regulation of the insurance departments. Congress in enacting Public Law 15 provided that the regulation of insurance should be a function of the various States and the District of Columbia. The Supreme Court, however, on March 23, 1959, in a five-to-four decision reversed these decisions and held that variable annuities were "securities" within the broad definition of that term in the Securities Act of 1933; that the exceptions usually applicable to insurance contracts in that act were inapplicable and hence that registration of variable annuities was necessary before they could be offered to the public. The Court also held that companies issuing variable annuities were required to register with the Commission under the Investment Company Act of 1940. Securities and Exchange Commission v. Variable Annuity Life Ins. Co., 359 U.S. 65.

The Court's several opinions in that case make it quite clear that the result of its decision is dual or concurrent regulation of variable annuity companies issuing contracts of this type, by the SEC and by the insurance commissioners of the several States. The staff of the SEC responsible for the administration of the Securities and Investment Company Acts recognizes that this is the necessary result of the Supreme Court's decision. At a June 11, 1959, meeting of the executive committee of the National Association of Insurance Commissioners, senior staff representatives acknowledged that the SEC and State insurance authorities will exercise concurrent jurisdiction over life insurance companies issuing variable annuities. The Superintendent of Insurance will thus continue to exercise the jurisdiction that he already has been exercising over the issuance and sale of variable annuities, but in addition the SEC will also exercise concurrent jurisdiction over their investment aspects.

As was recognized in at least one of the Court's opinions, strict, technical compliance by companies writing variable annuities with every provision of the Investment Company Act is probably impossible and the Commission has broad dispensing powers to provide exemptions from the act or parts of it. Shortly after the decision of the Supreme Court applications were filed by Variable Annuity Life Insurance Co. of America and Equity Life Insurance Co. for certain exemptions from the provisions of the Investment Company Act. The Commission has not yet acted upon these applications.

In the course of the proceedings, however, it became clear that the Commission was concerned with the possibility that the assets of a life insurance company writing variable annuities which were derived from payments by such annuitants (after deduction of the amounts provided by the contract) might be subjected to claims ensuing from the sale of its conventional life policies and from adverse mortality among the variable annuitants themselves.

Further, the SEC staff recognized that establishment of separate accounts by life companies issuing variable annuities would simplify the problem of dual regulations, however, the Superintendent of Insurance has been of the view that separate accounts are not authorized by District of Columbia life insurance law. This bill adds a section to the Life Insurance Act of the District of Columbia (sec. 35-501 et seq. of the District of Columbia Code, 1951 ed.) and also makes a minor amendment to one of the existing sections of the act (ch. III, sec. 35, subsecs. (7), (9), and (10), District of Columbia Code, 1951 ed., sec. 35-535). The principal purpose is to require life insurance companies incorporated in the District of Columbia to establish a separate account or accounts in connection with the recently developed contracts providing for payments which vary directly according to investment experience, to give the Superintendent of Insurance more detailed authority to regulate such separate accounts, and also to give him authority to refuse to allow any life insurance company whether or not incorporated in the District of Columbia to issue variable contracts if he believes that the company does not satisfy the tests laid down in the bill.

A collateral purpose is to simplify and facilitate regulation both of the Securities and Exchange Commission and the Superintendent of Insurance with respect to life insurance companies issuing contracts providing for payments which vary with investment experience.

Section 41(a) of the proposed bill provides for separate accounts and is intended to guard against their impairment. It provides that every domestic life insurance company which issues contracts where the payments vary according to investment experience shall establish one or more separate accounts, as directed by the Superintendent of Insurance and that all amounts received by the company from the sale of variable contracts, after deductions provided by the policies, shall be added to such separate account or accounts. It pro

vides also that the assets in such separate account shall not be chargeable with any liabilities growing out of any other business that the company may conduct. Since the mortality risk is assumed by the company rather than the variable contract holders, section 41(a) goes on to provide that additions or withdrawals shall be made by the company to or from the separate account as mortality experience varies from the assumptions made in determining the amounts that the company is obligated to pay under the variable contracts. The company is required at all times to keep sufficient assets in the separate account to meet all of its obligations to make the required payments under applicable contracts. Section 41(b) provides that a foreign or alien life insurance company may be authorized to do business in the District and to issue contracts which vary according to investment experience only if it is authorized to do so under the laws of its domicile.

Section 41 (c) permits the Superintendent of Insurance to refuse to allow a life insurance company, whether organized under the laws of the District of Columbia or elsewhere, to issue or deliver contracts in the District which vary directly according to investment experience, if he believes that the condition of the company and its method of operation in connection with the issuance of such contracts may render its operations hazardous to the public or to its policyholders in the District. The Superintendent is also authorized to consider, in determining the qualifications of a company to issue such contracts in the District, such things as the history of the company, the character and responsibility of its officers and directors, and in the case of a company incorporated outside the District, whether the regulation provided by the laws of its domicile affords a degree of protection to policyholders and the public substantially equal to that provided by the laws and regulations in force in the District of Columbia.

Section 41(d) provides that every life-insurance company which issues contracts which vary according to investment experience in the District of Columbia shall file with the Superintendent, in addition to the annual statement required by section 35-407 of the District of Columbia Code, such other periodic and special reports as the Superintendent may prescribe.

Section 41(e) limits the applicability of this section to contracts which vary according to investment experience. In this connection it might be noted that the provsions of the Life Insurance Act generally are applicable to companies writing variable contracts as well as to companies writing ordinary life insurance and other forms of fixed dollar contracts and that these provisions, except as they may be obviously inapplicable, must be complied with by companies that issue contracts which vary according to investment experience. Certain provisions of the Life Insurance Act refer particularly to participating contracts. There are certain similarities between variable contracts and participating contracts and under one possible interpretation it might be said that a variable contract is a form of participating contract. In fact, however, the variable contract is a different kind of policy from the fixed dollar contract, whether participating or not, and requires to some extent a different kind of regulation. For this reason the Superintendent is given authority, by section 41(f) to issue whatever reasonable rules and regulations may be necessary to carry out the purpose of this section.

Section 41(g) deals with a separate problem. Ordinary life-insurance companies have most of their assets invested in fixed-income securities even though there is no statutory limitation in the Life Insurance Act restricting the portion of their assets that may be invested in common stocks or similar equity securities. The assets attributable to the variable contract business of a life-insurance company, on the other hand, are expected by its policyholders to be invested to a much larger degree in equity-type securities since the central purpose of the variable contract is to provide payments which vary with the investment experience of the company and which, it is hoped, will eliminate the disadvantage of reduced purchasing power in a period of continuing inflation. Section 35 of chapter III, as amended (sec. 35-535 of the District of Columbia Code) now imposes a number of carefully prescribed limitations upon the manner in which life companies incorporated in the District may invest their assets. All of these limitations will be applicable to life-insurance companies writing contracts which vary according to investment experience with the exception of the changes made by section 41 (g) of this bill.

Among the limitations imposed by section 35 are those which restrict the lifeinsurance company from investing more than 2 percent of its admitted assets in any one issue of the bonds or other evidences of indebtedness of any single

corporation, from investing more than 1 percent of its admitted assets in any one issue of the preferred stock of any single corporation and from investing more than 1 percent of its admitted assets in the common stock of any one corporation.

As mentioned above, these limitations are not troublesome in an ordinary life insurance company since as a matter of company policy only a small portion of its assets will be invested in securities of this kind. The company issuing variable contracts, however, may wish to invest substantially all of its assets attributable to such contracts in common stocks and in such case these limitations are likely to impose an unreasonable restriction upon the company in its effort to secure the best investment results in the interest of its policyholders. A 1-percent limitation means that a company issuing variable contracts and investing only in common stocks will be forced to maintain an unusually large portfolio. Even if it could divide its assets with precise equality this would mean investing in the common stocks of 100 separate companies. In actual practice a precise division of this kind is not possible and the number of investments is much more likely to be 200 or more. The quality of equity-type investment, of course, varies quite widely between corporation and stock issues. For this reason there are many successful investment companies which maintain a portfolio consisting of not more than 50 issues. In this way they are able to concentrate on what they consider the highest quality investments and to pass on the benefits of this investment policy to their contract holders. A 1-percent limitation means that even though an investment may be of the highest quality and may meet all of the stringent tests prescribed by the Life Insurance Act, a life insurance company issuing variable contracts will not be able to obtain for itself what it considers an adequate measure of such an investment.

To meet this problem section 41(g) provides that a life company issuing variable contracts may invest an additional 2 percent of the assets held by it in such separate accounts in the common stock of any single corporation. This will substantially reduce the number of issues in which a life company maintaining separate accounts must invest and accordingly will go a long way toward solving the problem.

Corresponding changes are made by section 41(g) to the percentage limitations now imposed upon investment in any one issue of the bonds or preferred stocks of any single corporation. The present 2-percent limitation with respect to bonds is enlarged to include an additional 2 percent of the assets held by a company in its separate variable contract accounts, and the present 1-percent limitation in the case of preferred stocks is similarly enlarged.

Finally, may I say these companies support H.R. 10964 for the reason that it will give to the Insurance Superintendent of the District of Columbia the requisite authority to satisfy himself that the conditions or methods of operation in connection with the issuance of contracts on a variable basis will not be such as would render the operation of any insurance company doing business in the District of Columbia hazardous to the public or the policyholders in the District of Columbia. I believe that the regulatory powers conferred upon the Department of Insurance under existing laws and the additional powers as contemplated in House bill 10964 are broad enough and comprehensive enough to assure this protection in the public interest.

Chairman MATTHEWS. Thank you, Mr. Marsh.

As I understand it, this bill would give you, you might say, a little more flexibility according to the tempo of the time; but at the same time you would not be rid of any of the appropriate regulations and any of the existing authority to control these operations?

Mr. MARSH. That is correct, sir. That is a good summary.

Chairman MATTHEWS. Mr. McMillan.

Mr. MCMILLAN. Is H.R. 10964 in its present form satisfactory to you, Mr. Marsh, and to Mr. Earnest?

Mr. MARSH. Yes, sir.

Mr. MCMILLAN. Without amendment?

Mr. MARSH. Yes, sir.

Mr. MCMILLAN. Do you know of any opposition from any other source?

Mr. MARSH. No; I don't know of any.

Mr. MCMILLAN. I haven't heard of any. I didn't know if there was any complaint from the other insurance companies.

Chairman MATTHEWS. Thank you, Mr. Chairman.

Mrs. Weis?

Mrs. WEIS. Well, I am late.

Chairman MATTHEWS. This charming lady is one of the most faithful members of this committee. We are talking about H.R. 10964. All right, Mr. Marsh, thank you very much. We are very pleased to have had you with us.

Now could we have Mr. Irving Bryan of the Office of the Corporation Counsel. Is he here this morning?

STATEMENT OF IRVING BRYAN, OFFICE OF THE CORPORATION COUNSEL

Mr. BRYAN. Yes, sir.

Chairman MATTHEWS. Mr. Bryan, we would appreciate your making a statement if you will.

Mr. BRYAN. Mr. Chairman, H.R. 10964 was introduced at the request of the Commissioners. Naturally, they are in favor of it. I haven't anything further to add.

Chairman MATTHEWS. That is fine. Thank you very much, sir.

As I understand it, the Commissioners are in favor of H.R. 10964? Mr. BRYAN. Yes, sir.

Chairman MATTHEWS. Now do we have any other witnesses either for or against this legislation?

Yes, will you state your name, please?

STATEMENT OF RICHARD J. CONGLETON, GENERAL ATTORNEY, PRUDENTIAL INSURANCE CO. OF AMERICA, NEWARK, N.J.

Mr. CONGLETON. Mr. Chairman, my name is Richard J. Congleton, C-o-n-g-l-e-t-o-n, general attorney of the Prudential Insurance Co. of America with home offices in Newark, N.J.

We would just like to register our support of H.R. 10964 and tell you that we have obtained similar legislation in the State of New Jersey which will allow the Prudential to carry on this same kind of business.

Chairman MATTHEWS. Thank you, sir.

Are there any questions?

(No response.)

Chairman MATTHEWS. Is Mr. Jordan, our Insurance Commissioner, here this morning?

Would you care to make a statement, Mr. Jordan?

STATEMENT OF ALBERT F. JORDAN, SUPERINTENDENT, DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE

Mr. JORDAN. Mr. Chairman, I have no prepared statement. I think I might say that the Commissioners requested this bill to be introduced at my suggestion. We are faced with the fact, Mr. Chairman, that the business is now being written. It is not a question of