whether it should be written or should not be written. It is being written pursuant to existing law. The probability is that in the future this business will greatly expand. Undoubtedly, at some time in the future we may need some additional and more detailed legislation. When and if that time comes, we will very respectfully come before your committee and ask for it. At the present time we have a very simple bill giving such authority as we think is now needed for the appropriate regulation of this business, and we respectfully urge that the committee favorably receive it. That is all I have to say. Chairman MATTHEWS. Thank you, Mr. Jordan. Mrs. Weis, do you have anything? Chairman MATTHEWS. Thank you. If there is no other witness now to appear either for or against H.R. 10964 we will go to the next item of business. (No response.) (At 10:30 a.m., March 17, 1960, the committee began hearing on H.R. 10684.) (The Honorable John L. McMillan, chairman of the Committee on the District of Columbia, filed the following statement on H.R. 10964.) STATEMENT OF HON. JOHN L. MCMILLAN, CHAIRMAN OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA EXPLANATION OF SEPARATE ACCOUNTS BILL This bill adds a section to the Life Insurance Act of the District of Columbia (sec. 35-501 et seq. of the D.C. Code, 1951 ed.) and also makes a minor amendment to one of the existing sections of the act (ch. III, sec. 35, subsec. (7), (9), and (10), D.C. 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. 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 1959 (S. Rept. No. 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." As has previously been reported to the Congress (annual reports of the Board of Commissioner of the District of Columbia for the years 1956 at pp. 43-44 and 1958 at p. 35) two companies that are issuing variable annuities have been organized in the District of Columbia and were issued certificates of authority under the Life Insurance Act. Shortly after they began to operate, the Securities and Exchange Commission instituted an action to enjoin these companies, Variable Annuity Life Insurance Co. of America and Equity Annuity Life Insurance Co., from offering their annuity contracts to the public without registering them under the Securities Act of 1933 and complying with 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. The Supreme Court, however, on March 23, 1959, in a 5-to-4 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 none of the exceptions in that act were applicable 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 Insurance 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. 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 regulation, however, the Superintendent of Insurance has been of the view that separate accounts are not authorized by the District of Columbia life insurance law. 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 provides 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 stat ment required by sections 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 provisions 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 life insurance company from investing more than 2 percent of its admitted assets in any one issue of the bonds or other evidence 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 to 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 53437-60 4 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 investments, of course, varies quite widely between corporations 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 1percent 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. H.R. 10684: A BILL TO AMEND SECTIONS 1 AND 5B OF THE LIFE INSURANCE ACT FOR THE DISTRICT OF COLUMBIA Chairman MATTHEWS. We will go now to H.R. 10684 which was introduced by myself. I introduced this bill at the request of five of our insurance companies in the District-A bill to amend sections 1 and 5b of the Life Insurance Act for the District of Columbia. So, we shall proceed now to have testimony concerning H.R. 10684, and without objection I would like to have a copy of this bill filed for the record at this point. [H.R. 10684, 86th Cong., 2d sess.] A BILL To amend sections 1 and 5b of the Life Insurance Act for the District of Columbia Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) subparagraph (i) of paragraph (1) of subsection (c) of section 1 of chapter V of the Life Insurance Act (D.C. Code, section 35-701(c) (1) (i)) is amended to read as follows: "(i) For all ordinary policies of life insurance issued on the standard basis, excluding any disability and accidental death benefits in such policies, the Commissioners 1941 standard ordinary mortality table for such policies issued prior to the operative date of the last paragraph of section 5b (d) of this chapter, and the Commissioners 1958 standard ordinary mortality table for such policies issued on or after such operative date; provided that for any category of such policies issued on female risks all modified net premiums and present values referred to in this section may be calculated according to an age not more than three years younger than the actual age of the insured." (b) Clause (B) of paragraph (2) of such subsection (D.C. Code, sec. 35701 (c) (2) (B)) is amended to read as follows: "(B) A net one-year term premium for such benefits provided for in the first policy year. "Reserves according to the Commissioners reserve valuation method for (i) life-insurance policies providing for a varying amount of insurance or requiring the payment of varying premiums, (ii) annuity and pure endowment contracts, (iii) disability and accidental death benefits in all policies and contracts, and (iv) all other benefits, except life insurance and endowment benefits in lifeinsurance policies, shall be calculated by a method consistent with the principles of this paragraph (2), except that any extra premiums charged because of impairments or special hazards shall be disregarded in the determination of modified net premiums." SEC. 2. (a) Subsection (d) of section 5b of chapter V of the Life Insurance Act (D.C. Code, sec. 35-705b (d)) is amended to read as follows: "(d) The adjusted premiums for any policy referred to in subsection (a) shall be calculated on an annual basis and shall be such uniform percentage of the respective premiums specified in the policy for each policy year excluding any extra premiums charged because of impairments or special hazards, that the present value, at the date of issue of the policy, of all such adjusted premiums shall be equal to the sum of (i) the then present value of the future guaranteed benefits provided for by the policy; (ii) 2 per centum of the amount of insurance, if the insurance be uniform in amount, or of the equivalent uniform amount, as hereinafter defined, if the amount of insurance varies with duration of the policy; (iii) 40 per centum of the adjusted premium for the first policy year; (iv) 25 per centum of either the adjusted premium for the first policy year or the adjusted premium for a whole life policy of the same uniform or equivalent uniform amount with uniform premiums for the whole of life issued at the same age for the same amount of insurance, whichever is less: Provided, however, That in applying the percentages specified in (iii) and (iv) above, no adjusted premium shall be deemed to exceed 4 per centum of the amount of insurance or uniform amount equivalent thereto. "In the case of a policy providing an amount of insurance varying with duration of the policy, the equivalent uniform amount thereof for the purpose of this subsection shall be deemed to be the uniform amount of insurance provided by an otherwise similar policy, containing the same endowment benefit or benefits, if any, issued at the same age and for the same term, the amount of which does not vary with duration and the benefits under which have the same present value at the date of issue as the benefits under the policy: Provided, however, That in the case of a policy providing a varying amount of insurance issued on the life of a child under age ten, the equivalent uniform amount may be computed as though the amount of insurance provided by the policy prior to the attainment of age ten were the amount provided by such policy at age ten. "Except as otherwise provided in the next succeeding paragraph of this subsection, all adjusted premiums and present values referred to in this section shall for all policies of ordinary insurance be calculated on the basis of the Commissioners 1941 standard ordinary mortality table, provided that for any category of ordinary insurance issued on female risks, adjusted premiums and present values may be calculated according to an age not more than three years younger than the actual age of the insured. Such calculations for all policies of industrial insurance shall be made on the basis of the 1941 standard industrial mortality table. All calculations shall be made on the basis of the rate of interest, not exceeding 3% per centum per annum, specified in the policy for calculating cash surrender values, if any, and paid-up nonforfeiture benefits: Provided, however, That in calculating the present value of any paid-up term insurance with accompanying pure endowment, if any, offered as a nonfeiture benefit, the rates of mortality assumed may be not more than 130 per centum of the rates of mortality according to such applicable table: Provided further, That for insurance issued on a substandard basis, the calculation of any such adjusted premiums and present values may be based on such other table of mortality as may be specified by the company and approved by the Superintendent. "In the case of ordinary policies issued on or after the operative date of this paragraph as defined herein, all adjusted premiums and present values referred to in this section shall be calculated on the basis of the Commissioners 1958 standard ordinary mortality table and the rate of interest, not exceeding 31⁄2 per centum per annum, specified in the policy for calculating cash surrender values, if any, and paid-up nonforfeiture benefits, provided that for any category of ordinary insurance issued on female risks, adjusted premiums and present values may be calculated according to an age not more than three years younger than the actual age of the insured: Provided, however, That in calculating the |