COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE WARREN G. MAGNUSON, Washington, Chairman JOHN O. PASTORE, Rhode Island A. S. MIKE MONRONEY, Oklahoma STROM THURMOND, South Carolina JOHN W. BRICKER, Ohio ANDREW F. SCHOEPPEL, Kansas JOHN MARSHALL BUTLER, Maryland CHARLES E. POTTER, Michigan WILLIAM A. PURTELL, Connecticut FREDERICK G. PAYNE, Maine NORRIS COTTON, New Hampshire EDWARD JARRETT, Chief Clerk BERTRAM O. WISSMAN, Assistant Chief Clerk JAMES E. BAILEY, Assistant Chief Counsel SUBCOMMITTEE ON AUTOMOBILE MARKETING PRACTICES A. S. MIKE MONRONEY, Oklahoma, Chairman STROM THURMOND, South Carolina FREDERICK G. PAYNE, Maine DAVID BUSBY, Special Counsel NOTE.-Part I of these hearings, on the subject of automobile finance and insurance, covered hearings held on the following dates: March 18, 19, 20, and 21, 1957. II CONTENTS Downey, F. Roger, administrative assistant to the commissioner of insurance, Insurance Department, State of New York, 61 Broadway, Faircloth, E. A., assistant insurance commissioner, State of Florida, Office of the Comptroller, Tallahassee, Fla__ Fox, William V., Jr., deputy insurance commissioner, State of Penn- sylvania, room 302, North Office Building, Harrisburg, Pa............ Frame, D. P., actuary, National Automobile Underwriters Association, 150 Nassau Street, New York, N. Y. Gaunitz, W. F., president, Emmco Insurance Co., 205 West Jefferson Jordan, Mr. Albert, Superintendent, Department of Insurance of the Navarre, Joseph, commissioner, State commissioner of insurance, Nyborg, Victor H., president, Association of Better Business Bureaus, Omsberg, Howard S., manager and secretary, National Automobile 569 478 445 501 463 459 Stout, Miller O., Deputy Superintendent of Insurance, 14th and E 569 AUTOMOBILE MARKETING PRACTICES-FINANCE AND INSURANCE THURSDAY, AUGUST 7, 1958 UNITED STATES SENATE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, SUBCOMMITTEE ON AUTOMOBILE MARKETING, Washington, D. C. The subcommittee met, pursuant to notice, at 10: 88 a. m., in room G-16, United States Capitol, Hon. A. S. Mike Monroney (chairman of the subcommittee) presiding. Senator MONRONEY. The Subcommittee on Automobile Marketing will resume its sitting. We have stood in adjournment over a good many months in our study and investigation of overcharging in the field of collision insurance by automobile finance companies and their subsidiaries. Senator Thurmond, another member of the committee, is on his way over. Senator Payne unfortunately is in Maine, and cannot be here today. This subcommittee, appointed by Chairman Magnuson over 3 years ago, has considered many problems in the field of automobile marketing. The automobile industry is the Nation's biggest industry in terms of employment, size, investment, and most any other standard. It is extremely important to all Americans that healthy conditions exist. in the marketing of cars. Over a year ago the Better Business Bureau and other public groups: made the allegation that the American people had been overcharged an estimated $25 million by collision-insurance companies-primarily those which were subsidiaries of automobile finance companies. The subcommittee held hearings March of 1957 and heard from three of the companies alleged to be the worst offenders. These companies admitted, in effect, that they had overcharged many of their policyholders, but stated that they had stopped doing so and had paid back all the persons who had proved that they had been overcharged. These refunds amounted to about $4,300,000. However, some insurance commissioners and others alleged that these companies had not exercised good faith either in the original overcharging or in their methods of repayment. These witnesses testified that there was much more to be done before the slate would be wiped clean. After hearing the evidence, this subcommittee agreed. We are here this morning to get a report on what has happened in the intervening months since we last adjourned these hearings. It is fitting at this time to summarize the record made at the previous hearings. NOTE. Staff member assigned this hearing, David Busby. The following facts emerged in these hearings: The public finds itself in a difficult position and without adequate means of protecting itself against overcharges on automobile collision insurance, especially when it is combined with automobile finance and other charges. In other words, a wrap-up package deal makes it impossible to determine what they are actually being charged for insurance. The car purchaser who buys his car on installment credit payments is confronted with a rate book. This rate book is ordinarily supplied to the dealer by the finance company. It sets forth the payment that the purchaser must make per month to liquidate the unpaid balance on the car plus finance charges and insurance charges. Each rate book has many pages and columns of numbers setting forth payments for different lengths of contracts and for various models and makes and vintages of automobiles. The collision insurance charge is "built into" these tables. Collision insurance rates vary by some 35 percent depending upon the degree of risk involved. Persons under 25 and families which contain drivers in such an age bracket must pay the higher rate. This is called class 2 risk classification. Even though class 1 risks were known to be by far the most common, with at least 70 percent of the automobiles falling in this category, the higher class 2 cost was built into the rate book. This required the auto dealer, in figuring proper monthly payment, to determine whether or not the car purchaser deserved the more usual class 1 rate, and, if so, to make the corrections and allowances for this lower cost category. Payments were made directly to the finance company. This company in turn took out an insurance policy with its own subsidiary collision insurance company in the name of the individual. Each company which appeared before the subcommittee admitted that it charged all persons the 35 percent higher charge for collision insurance unless the records submitted by the dealer affirmatively showed they should have been otherwise. The legality of this method is directly refuted by the rules of the National Automobile Underwriters Association, the statistical organization which makes the regulations for collision insurance. Until public disclosure of wide-scale misclassification was made, no attempt was made by the companies to go back to the car purchaser to verify the records submitted by the dealer. The profits of these insurance companies which are subsidiaries of finance companies show remarkable gains during 1954 and 1955, the first 2 years in which the 35 percent differential in rates were in effect, far outstripping the rest of the collision insurance industry. Company witnesses stated the primary purpose of the insurance subsidiary of the finance company is to protect the finance company's interest in the financed car. The finance company is the policy beneficiary to the extent of the unpaid balance. Therefore, these insurance companies must "write out of the basket" and not be selective as to the person to whom the policy is issued. Since they must write all the risks that the finance company will take, the statistical controls usual to insurance companies were not used. This was their excuse to the committee for not being able to produce records showing the number of class 1 and class 2 policies they wrote during |