important institutional mobilizer of savings may bring about a situation in which the nation's savings rates are unable to satisfy its capital demands. There is some thought among economists that such a situation has been developing and, thus, there is ample reason for concern when life insurance shows signs of declining vigor in the performance of this important function.

Even if there were no such national concern, there is no reason why insurance, or any other industry, should be inhibited by law from achieving the share of business that it believes it could, with vigor and skill, secure for itself, unless such inhibition is mandated for a paramount public purpose.

Moreover, the New York life insurance industry may not be holding its own in relation to the industry throughout the entire United States. While the raw figures showing relative declines in volumes of business have to be adjusted (e.g., to reflect national shifts in population and wealth) to achieve an accurate comparison, even without such adjustment the statistics are revealing. The trend, measured by the share of the United States total of all life insurance premiums written by New York licensed companies and by New York domestic companies, may be read from the following table:

With such trends in mind-even though the rate of decline appears to have slowed in the present decade-an effort to eliminate any unnecessary restrictions upon New York life insurance companies that might have contributed to this decline in relative importance is plainly desirable.

In this connection, responsible leaders of the life insurance industry seem generally agreed that they could perform more effectively if, for example, they were allowed wider discretion with respect to their portfolio investment selections, and if they were allowed to broaden the base of the services they purvey.

In the property-liability insurance field, the insurance industry is not in imminent danger of losing its historic share of a market, since the

relevant market is strictly insurance and the supplying of insurance services is virtually restricted to insurance companies. But there are other major problems. Foremost among them is the fact that the carnings record of this branch of the economy from its insurance operations as such has, over the years, been thought to be consistently substandard and in some recent years has worsened substantially. The market prices of property-liability insurance company stocks have reflected the depressed level of earnings, thus handicapping insurance management in their search for capital funds. to expand operations. Depressed stock prices have in turn probably encouraged some persons to seek to purchase such stocks at bargain prices. so as to gain access to the insurers' assets and not, necessarily, to conduct an insurance business.

An even more serious consequence of the poor earnings record of property-liability insurance has been the development of an anomalous and dismaying situation. On the one hand, markets are tight and many needed insurance services are not supplied in adequate measure-such as automobile liability insurance, fire insurance in slum areas, and, recently, full insurance protection for the enormous concentrations of value in single locations. On the other hand, substantial amounts of capital tied up in some insurance corporations are not fully utilized for insurance purposes. Some companies have more capital than they need to support their own insurance operations and have felt unable to employ that capital as effectively or as profitably as they would have wished. Solution of the problem of substandard earnings is outside the terms of reference of this Committee, but the problem is a fact of major import against which our deliberations have had to proceed.

For property-liability insurance, too, there is some reason to think that the New York based industry has suffered relative decline. Again, uncorrected for population and wealth shifts in the nation, the downward trend for New York based insurance operations may be observed from the following table:

Trying to solve the problems that face them as entrepreneurs, who must compete for men and money with other businesses, insurance executives in both the life and property-liability fields have found it expedient to enter into holding company arrangements of various types.

A 1966 canvass of 63 stock life insurance companies licensed to do business in New York showed that 46 percent were owned or controlled by other insurance companies, 17 percent were owned or controlled by non-insurance parents, and only 37 percent were independent of outside control in any form. Of course, some of these latter companies may themselves control holding company systems. In the stock fire and casualty company field for the same year, of the 267 companies licensed to conduct business in New York, 51 percent were owned or controlled by other insurance companies, 21 percent by non-insurance corporations or groups, and only 28 percent fell within the category of insurers not owned or controlled by any outside company, group or individual. In each of these fields the patterns did not significantly differ between domestic insurers and foreign companies operating in New York.

Mutual companies, by virtue of their form of organization, whether they are life or property-liability companies, face, it should be noted, the same series of problems without the ability to meet them by permitting a holding company to be formed to control them.

As this report will make clear, we believe that, with appropriate changes in the New York Insurance Law, substantially all the sound objectives of "insurance holding companies" can be achieved in ways that are preferable to a holding company solution that places an insurer under the control of non-insurance interests.

The three section of this report which immediately follow discuss the main ways of attaining these objectives without jeopardizing the vital interests of the public and the policyholders: namely, through changes in the law governing (1) diversified subsidiaries, (2) investments and (3) capitalization. The report then discusses ways of regulating those aspects. of insurance company control by non-insurance interests which give special cause for concern.

While diversification of products that can properly be called insurance is not, as such, discussed in this report, it, too, is one possible response to the "holding company problem". We believe, accordingly, that the legal constraints that have made insurance product diversification (as) for example variable value contracts such as individual variable annuities) ineffective or impossible, should be re-examined and, where appropriate, removed.

1The cited figures are based on annual statement interrogatorics and, hence, refer only to ownership of a majority or near majority of the insurers' voting stock. Practical control, accordingly, undoubtedly exists in other instances as well.

A more innovative attitude toward the use of subsidiaries has major attraction as a possible response for insurance companies seeking to accommodate to current conditions.

At the present time under New York law a domestic life insurance company may not control, directly or indirectly, any company engaged in any business other than that of insurance or reinsurance except for mortgage companies, certain types of housing redevelopment companies, certain foreign investments, subsidiaries acquired by way of dividends or reorganization or the like and Federal Home Loan Banks.

Domestic property-liability insurance companies, on the other hand, may under present New York law' acquire a majority stock interest not only in other insurers and in corporations exclusively engaged in holding or operating the parent insurer's real estate but also in corporations. exclusively engaged in a business incidental to that of the insurer or a combination of the two. In addition non-life insurers may acquire any amount less than a majority of the stock of other corporations (provided no single such investment exceeds 10 percent of admitted assets). Such substantial holdings will frequently be more than enough to give the insurer de facto control and make the acquired company a subsidiary, as we use the term.2

It is our view that the management of an insurance company should be given greater latitude in the formation of, and for investments in, subsidiaries.

Insurance Subsidiaries

If the management of an insurance company, in the exercise of its discretion, determines that it is sound to organize a separate insurance corporation to conduct an insurance business, whether or not it is an insurance business the parent could be licensed to do, there would seem to be no compelling reason from the point of view of policyholders, the

IThere are certain minor exceptions which are not material for present purposes. 2By "subsidiary company" is meant a company which is controlled, directly or indirectly, by another person.

By "control" is meant the power to direct, or cause the direction of, the management and policies of a person whether through the ownership of voting securities, by contract or otherwise. Any person who owns, of record or beneficially, either directly or indirectly, more than 10 percent of the voting securities of a company, would. for our purposes, be presumed to control such a company in the absence of proof to the contrary.

shareholders or the public why management should not, under normal circumstances, be permitted to do so.

Similarly, if management wishes to acquire another company for the conduct of an insurance business and to do so either with funds available for the purpose under applicable insurance laws and regulations or by an offer of the insurer's own stock, there would seem to be no persuasive reason why management should not, in a normal situation, be permitted to do so.

Nor are the foregoing conclusions different if such an insurance subsidiary is not licensed to do business in New York.

Nevertheless, if an insurance subsidiary is formed or acquired there should be full disclosure to the appropriate regulatory authorities, and substantial compliance with the laws and regulations of the states in which the parent and the subsidiary are domiciled or do business. Regulatory scrutiny of the formation or acquisition of insurance subsidiaries should extend to:

1. the availability of the funds or assets for this purpose;

2. the fairness of the exchange of stock or assets or cash for the stock or assets to be received;

3. the impact of the new operation on the parent's existing insurance business and its effect upon both the parent's surplus and the risks inherent in the parent's investment portfolio and operations;

4. the fairness and adequacy of the financing proposed for the subsidiary;

5. the actual or potential anti-competitive effects of the subsidiary upon the insurance industry; and

6. the possibilities of undue concentration of economic power.

Discretion, based on the standards mentioned above, should be left to the Superintendent of Insurance to forbid the formation or acquisition of a subsidiary. There should also be discretion to prevent excessive proliferation of subsidiaries on evidence that it would tend to frustrate regulation, dilute responsibility, unduly weaken financial strength or otherwise be contrary to the interests of either policyholders or the public.

Ancillary Subsidiaries

Considerations similar to those which support permitting subsidiaries to conduct some portion of the insurance business apply in general to the formation of ancillary subsidiaries. 1

1By "ancilliary subsidiary" is meant a subsidiary of an insurance company engaged in a non-insurance business which is both subordinate to, and complementary or related to, an insurance business. We consider this ancillary category broader than that which now permits property-liability insurers to form subsidiaries for business incidental to that of the insurer.