conduct of its insurance business. Such staff of the controlled insurer must be adequate for the conduct of its affairs and compliance with the applicable insurance laws and regulations. And the principal officers and directors should be held personally responsible for acts or omissions of the licensed insurer which are contrary to New York Insurance Law or regulations.

Sixth, despite the fact that indirect evasion of the insurance laws is currently prohibited under New York law, the complexity of holding company operations makes it desirable for the statute to state explicitly that no person, licensed or unlicensed, who controls a licensed insurance company, and no parent, affiliate or subsidiary of such controlling person, should, for or on behalf of the insurance company, do either directly or indirectly through the medium of another entity, anything that is prohibited to the insurance company by statute, or by the regulations and orders of the Superintendent.

If New York regulation of potentially proliferating holding company complexes is to be effective, the Superintendent must have available a range of remedies adequate for the variety of situations with which he may be faced. Thus, we suggest in the event that any controlling person fails to comply with any requirement relating to its examination, disclosure or reporting, or receives dividends improperly, or does, with respect to the licensed insurer, any act proscribed by insurance law or regulations, or orders of the Superintendent, the Superintendent should be empowered to revoke, or to refuse to issue or renew, the license of its subsidiary insurer (if the subsidiary is a foreign authorized insurer) or to commence an appropriate proceeding under Article XVI (if the subsidiary is domestic).

In addition to those penalties applicable to the insurer and its officers and directors, we recommend that such violations of law should subject both the controlling parent and its officers, directors and controlling persons to liability to the state for a monetary penalty. Should such violation result in financial harm to the insurer or any of its policyholders, the Superintendent or the Attorney General should be authorized, in addition to the aforesaid monetary penalty, to institute action to recover the amount of any such loss for the benefit of the insurer or aggrieved policyholder.

Where the controlling interests are not to be found in New York, the Insurance Law should be amended to confer jurisdiction on the courts of

1 Again as in Part II we would not preclude all cooperative uses of personnel or conventional arrangements for the common management of licensed insurers associated together for underwriting purposes.

2 A similar depletion proceeding is authorized for Welfare Funds by Section 37-1 (6) of the Insurance Law.

this state, with the basis for such jurisdiction being the ownership or control of insurers licensed to do business in this state. By the same token New York should not become a domestic haven for non-insurance interests controlling insurance companies which operate outside its jurisdiction. The Superintendent should have all necessary power to aid other states in enforcing their regulation of any such interests that may be domiciled in New York.

The foregoing discussion of regulatory requirements has assumed that the insurer is controlled by a non-insurer or by an unlicensed insurer. Where the holding company is, itself, a licensed insurer and its intercorporate dealings are with its own subsidiaries and affiliates, the present statutory and administrative powers of the Insurance Department over the parent licensee lessen the potential dangers. However, the present statutory provisions should be supplemented to enable the Superintendent by general regulation, as and to the extent he finds it appropriate, to extend to insurance parents supervision comparable to that we recommend for non-insurance parents.

There are, obviously, many technical and legal questions relating to the formation and operation of holding companies that for present purposes we have considered outside our central task. Nevertheless, we were asked to examine whether elimination of small minority stock. interests in subsidiary insurance companies would be desirable. We conclude that it is. Corporate law generally in New York and elsewhere provides methods, although sometimes rather circuitous ones, for eliminating such interests as long as their value is compensable. Where a relatively small minority interest remains in an insurance company after a reorganization under which a new holding company has exchanged its shares for those of the insurer, we believe it would be both appropriate and feasible to provide directly for the elimination of such interests by permitting dissenting and unlocatable minority stockholders to be bought out at market or at a price arrived at through appraisal proceedings.

33-762 O 70 pt. 4- 18

PART VI

CONCLUSION

The main thrust of this report is to protect the interests of the policyholders and the public in sound insurance enterprises and to enable the insurance industry itself better to serve those interests by meeting the very real challenges with which it is now faced.

We believe that the proliferation of control over insurance enterprises by non-insurance interests will not, in the long run, well serve either the policyholders or the public or, indeed, the insurance industry. We are satisfied, moreover, that the needs and problems to which non-insurance holding companies have been a response have, in large part, been brought about by excessive restraints in insurance laws and regulations that no longer appear to be required in the interests of the policyholder or the public.

The non-insurance holding company device is an unsatisfactory response to a modern challenge. The best response, in our view, is to enable insurance enterprises directly to achieve their legitimate objectives of greater diversification, broadened activities, improved earnings and readier access to the capital markets. We are confident that these objectives can be achieved without sacrificing any of the vital interests of either the policyholders or the public. Hence our recommendations to:

1. extend the list of ancillary activities in which insurance companies. may be engaged through subsidiaries;

2. liberalize the investment restrictions applicable to life insurance companies in order to provide them with a greater opportunity to participate in growth, as distinguished from fixed dollar, investments; and

3. liberalize the permitted capital structure of insurance companies in order to expand the range of techniques available to them for raising capital for insurance and ancillary purposes.

Nevertheless, since non-insurance interests already control insurance enterprises, and more such situations may well develop, we have also felt it imperative in this report to provide for close regulation of them in an effort to forestall their becoming a vehicle for abuses which would damage the entire framework of insurance operations and weaken the protection for policyholders. Hence our proposal for close scrutiny and comprehensive supervision of the stewardship exercised over insurance operations by the non-insurance interests that may now have, or hereafter may acquire, control of insurance companies in this state.

We are not unmindful that broadening the initiatives open to insurance managements, as we have recommended in this report, may sow

the seeds of a new concern if it results in shitting needed assets, whether in money or manpower, away from insurance into other enterprises. Whether this concern ever materializes as a problem to be dealt with will in considerable part be determined by the statesmanship and wisdom of insurance management. Obviously, it is in the industry's interest to meet this challenge successfully. For, if such a problem does arise, it may necessitate other and more stringent interventions by government to secure the public interest.

We are also aware of the fact that some of our recommendations, if enacted into law, will permit the insurance industry to compete for business in areas which it is presently not permitted to enter. To the extent that such increased competition is healthy, it should be welcomed. To the extent, if any, that it tends toward any excessive concentration of power, it is our belief that the regulatory powers of the Insurance Department, including those additional powers recommended elsewhere in this report, and the antitrust laws, should be adequate to deal with the situation. If any other regulated industry feels that it should be given correspondingly increased powers to balance the expansion of the powers recommended herein for the insurance industry, it is the Committee's view that the needs of such other industry should be given careful consideration by the appropriate legislative and regulatory authorities.

It should also be pointed out that many of the recommendations of this report, if enacted into law, will impose significant additional responsibilities upon the Insurance Department and the Superintendent. If these responsibilities are to be met, substantial additional staff, funds and facilities will have to be provided to the Insurance Department. We are confident that, with such additional staff, funds and facilities the traditionally high professional competence of the Department will prove equal to the tasks imposed upon it by our recommendations, to the benefit both of the insurance industry and of the public which it serves.

We cannot conclude our assignment without observing that there is a manifest need for a re-examination and recodification of the statutory framework of insurance regulation which prevails in New York. Current economic, political and social attitudes and trends differ radically from those that prevailed when the regulatory pattern was initially set. There is, moreover, considerable evidence that portions of the New York insurance statutes have been outmoded by events, have inhibited the Insurance Department's flexible regulatory response, or should be revised to strengthen the ability of the Superintendent to take all necessary regulatory action and to make regulation itself less rigid.

Further, whatever initial steps are taken in response to this report to revise the existing framework of insurance regulation, there should be a continuing review both of the impact of those steps on the conduct of the

insurance business and of the effectiveness of regulation. We reach this judgment not only because of the complexity of the problem but also because, while we have sought to concentrate on what appear to us to be the central issues posed by the holding company phenomenon, there are pertinent aspects which we have neither explored in depth nor commented upon.

One of the more important of these aspects is the thorny one of valuation. The methods of valuing common stocks to determine their owner's financial condition and to apply the legal investment limits create potential risks for policyholders. The valuation of the stock of insurance and ancillary subsidiaries in order to determine the financial condition of their parent presents a particularly troublesome aspect of the problem when the limits on investment in subsidiaries (measured at cost) are liberalized as we recommend.

Experience with the implementation of the recommendations made in this report will provide persuasive testimony not only as to the effectiveness of the measures we recommend but also the new directions which should be taken and the further revisions in policy which should be adopted in the interest of the public, the policyholder and the insurance industry.