National Association Of Insurance Commissioners Research Articles

The Demand for Preferred Stock with Sinking Funds and Without: A Note

IN THE 1970S THERE was a noticeable increase in the amount of preferred stock issued by utility companies. During this period the historically positive yield differential between high grade preferred stocks and high grade corporate bonds turned negative. A substantial fraction of the demand for preferred stock has come from casualty and stock life insurance companies [10]. Much of the corporate demand for preferred stock may be attributed to the 85 percent exclusion of preferred dividends from net income for federal income tax purposes. Insurance companies must follow the valuation rules of the National Association of Insurance Commissioners (NAIC). For example, bonds may be carried at amortized original cost (book value) if they are investment grade (equivalent to Moody's Baa or higher), but they have to be carried at a lower value if they have lower ratings. Common stock is carried at market price. The NAIC recently adopted a rule permitting insurance companies to carry sinking fund preferreds at book value rather than marking them to the market. The 1979 edition of the Valuation of Securities: Procedures and Instructions booklet published by the NAIC allows preferred stock held by property and casualty companies to: Commencing with the December 31, 1978 Annual Statement, be valued for statement purposes at cost, providing the is subject to a 100% mandatory sinking fund ... over a period not longer than 40 years from the date of issue [11]. Holding assets which are accounted for at book value rather than market value reduces the variance of reported equity. The benefit of this provision for insurance companies is that during a period of rising interest rates, sinking fund preferred stock held by insurance companies will not contribute to erosion of reported asset base and balance sheet equity. It is likely that in some instances the provision would enable insurance companies to continue to write new policies at a growth rate that would not otherwise be possible due to state statutes which limit the maximum value of policies written in relation to balance sheet asset value. Whether or not bookkeeping rules have a significant impact on security prices has long been an interesting question [4] [6]. This paper examines the impact of the change in NAIC rules upon the pricing of preferred stock.1

Discussion: On the Pricing of Preferred Stock

Professors Sorensen and Hawkins (hereafter SH) have utilized regression analysis to examine the pricing of preferred stocks both before and after a particular event. This event, the NAIC event, occurred in 1979 when the National Association of Insurance Commissioners (NAIC) adopted a rule permitting insurance companies to carry sinking fund preferred issues at book value rather than at the market value required before. SH results indicate nine to 12 variables have a significant effect on the pricing of preferred stock.

A Note on the Cost of Fractional Premiums

Proposals for point-of-purchase disclosure to life insurance buyers invariably assume that premiums are to be paid annually. In the model life insurance solicitation regulation promulgated by the National Association of Insurance Commissioners, for example, the interest adjusted indexes are calculated with annual premiums [5, pp. 545-552]. Many life insurance buyers, however, pay premiums more frequently than annually. According to one recent tabulation, for example, about 75 percent of the life insurance by amount and about 80 percent of the life insurance policies are paid for on a basis other than annually [4, p. 14]. Under these circumstances, it is important that the cost of paying premiums on other than an annual basis be disclosed in some meaningful fashion. Because of the precedent found in the federal truth-in-lending law, the author has recommended that the cost of paying fractional premiums be disclosed in terms of the annual percentage rate (APR), as that phrase is used in the law [1, pp. 741-742]. The proper method for calculating the APR precisely is through iteration (successive approximations). In the examples of disclosure prepared by the author, the APR's were calculated from tables promulgated by the Federal Reserve System for use in connection with the truth-in-lending law [6]. These tables, which were constructed by iteration, are elaborate, and using them to derive APR's for fractional premiums is cumbersome. The purpose of this note is to present several methods by which APR's for fractional premiums may be approximated without using a computer (which is essential for iteration) or elaborate tables. The carrying charges included in fractional premiums sometimes include a small element of life insurance. For example, companies that consider a premium fully earned when it is paid, normally do not collect a fractional premium due after the insured's death. If an insured pays an annual premium and dies four months later, such a company would make no premium refund to the beneficiary. But if the insured had paid a semi-annual premium, the company would not collect the other semi-annual premium. In the discussion that follows, this small element of life insurance is disregarded. First, it is of minor significance and would complicate the calculations Joseph M11. Belth, Ph.D., is professor of insurance in the School of Business at Indiana University (Bloomington), author of Life Insurance: A Consumer's Handbook (1973), and editor of The Instirance Foruim. The author wishes to acknowledge his indebtedness to Stephen G. Kellison, F.S.A., whose extensive work on interest theory served as the

Predictive Ability of Alternative Income Numbers in Nonlife Insurance

This study compares the ability of two sets of income numbers to predict a market risk measure: 1) statutory, and 2) a surrogate of income produced according to generally accepted accounting principles (GAAP). The major conclusion is that investors using GAAP income data are able to make better predictions of market risk levels than those using only data. However, neither income data set can outperform a prediction model which allows for the mean reversion behavior of the market risk measure. Recently, the subject of insurance accounting procedures has received attention in the insurance and accounting literature. The set of accounting procedures required by state law for insurers is referred to in the literature as the statutory system, or the cash/accrual system, and differs from procedures normally employed under generally accepted accounting principles (GAAP). The purpose of the system, according to the National Association of Insurance Commissioners (NAIC), is to preserve the confidence of the policyowners, and to help them assess an insurer's claim paying ability [21]. A primary purpose of GAAP is to provide information for investor decision making purposes. Insurer Accounting Techniques The accounting techniques that are used by nonlife insurers differ from GAAP techniques in various ways. First, insurers recognize as assets only those items which are readily convertible into cash. These assets are called admitted assets, and only admitted assets are included on the balance sheet of a nonlife insurer. Most remaining assets (with certain exceptions such as land, EDP equipment, and buildings), not readily convertible into cash, cannot be included in determining the solvency of an insurer and are omitted from the balance sheet. William Kross currently is Assistant Professor, Krannert Graduate School of Management, Purdue University. He was an Assistant Professor of Accounting, Illinois State University whlen this article was submitted and later accepted for publication. He is a Certified Public Accountant and holds the Ph.D. degree. The author thanks Professors William Kinney (Iowa), and Robert Eskew (Purdue), and the participants of the University of Iowa Accounting Research Seminar for their helpful comments.

Replacement of Life Insurance: Its Regulation and Current Activity

The issue of replacement of life insurance policies long has been shrouded by hostile emotions against those engaging in such activity. However, many replacements are advantageous for the policyowner, and current replacement regulations possibly have been barriers to legitimate replacement activity. The paper is divided into sections describing the history of constraints on replacement activity, the status of current replacement regulation, the results of an investigation by the Wisconsin Insurance Department of its own replacement regulation, and a proposal for a new regulation emphasizing a variation of the interest-adjusted cost comparison format. The National Association of Insurance Commissioners (NAIC) [6] defines the replacement of life insurance as any transaction where new life insurance is purchased and the agent knows that existing life insurance has been or is to be: lapsed, surrendered, converted into paid-up insurance, continued as extended term insurance or another form of non-forfeiture benefit, converted to otherwise reduce the amount of existing life insurance or its duration, reissued in such a manner that over 50 percent of the tabular cash value is released on the existing policy, assigned as collateral to a loan, or any transaction where an amount over 50 percent of the tabular cash value is borrowed. A priori few compelling reasons exist to presume that a replacement is necessarily disadvantageous to the policyowner. However, the replacement of a policy which is caused by misrepresentation or incomplete comparison (termed twisting) should be the object of regulatory prohibitions. Unfortunately, an effort to combat twisting often has resulted in barriers to legitimate replacement activity. In this paper the history of regulatory constraints is traced from its origin in the early 1900's to the promulgation of the Model Life Insurance Replacement Regulation by the NAIC in 1970. The more important deviations from the model bill which have been enacted by the states are reviewed. The results of a study of the characteristics of replacement activity William C. Scheel, Ph.D., CPCU, is Associate Professor of Finance in the University of Connecticut-Storrs. Dr. Scheel is a frequent contributor to this Journal and serves as an Assistant Editor. Jack L. VanDerhei is a Huebner Fellow at the University of Pennsylvania. He holds the MBA degree.

Regulatory Tests in the Life and Health Insurance Industry

The Regulatory Tests in the Life and Health Insurance Industry have evolved from a very detailed set of twenty-nine diagnostic sets to the present (1974) early warning system of nine regulatory tests primarily to provide for wider use of the tests by the various state insurance departments, the majority of such departments not having the necessary staff for the detailed analysis required by the large set of tests. None of these tests has ever measured directly the solvency of insurers. The tests are designed to indicate those insurers most in need of further and more detailed analysis. The present (1974) form of the National Association of Insurance Commissioners (NAIC) Life and Health Insurance Company Regulatory Tests appears markedly different from that shown for 1972. The concept of such tests has changed from a detailed set of twenty-nine diagnostic tests to only nine tests designed for the preliminary determination of insurers to be investigated more thoroughly.* The 1972 Tests were developed, largely through research conducted by the Illinois Insurance Department, as a system through which a knowledgeable and well trained staff could interpret and diagnose the strengths and weaknesses of each insurer. A number of other state insurance departments already had developed sets of tests for these purposes. A wide difference of opinion prevailed among these states as to which tests were significant. When the specifications for the 1972 NAIC Tests were announced, the states with smaller and less well trained staffs were overwhelmed. No practical way could be found in which the proposed twenty-nine tests John 0. Montgomery, F.S.A. and F.L.M.I., is Deputy Insurance Commissioner and Chief Actuary in the State of California Insurance Department. Currently he is chairman of two NAIC Task Forces (A3 and Cl) and of NAIC Technical subcommittee on Valuation and Nonforfeiture Value Regulation (C3). He was responsible for the determination of proof of alleged computer fraud with respect to the investigation of the Equity Funding Life Insurance Company. Previous to his present employment, he served the Occidental Life Insurance Company in various autuarial capacities. This paper was delivered at the 1975 Annual Meeting of ARIA. * These tests are impossible to discuss without using phrases from the NAIC publication "Using the Early Warning System For Life and Health Insurers". Gratitude is expressed for permission by the NAIC to refer to portions of that text and previous materials appearing in various published proceedings of the NAIC. The comments and suggestions by members of the NAIC (A3) Life and Health Insurance Regulatory Test Task Force and its Advisory Committee, as well as the work of the actuarial staff of the California Insurance Department, are also gratefully acknowledged.

Effect of Including Investment Income in Ratemaking upon Profitability of Non-Life Insurers

This paper seeks to determine if underwriting profits by insurance lines written in states which consider investment income in the ratemaking process are significantly different from those in states which do not. Difference in means tests are initially employed in four selected insurance lines to determine whether the mandatory inclusion of investment return has any discernible effect on industry profitability by line. Multiple regression analysis is used on private passenger automobile data to determine the effect on profitability of nine exogenous variables. While five explanatory variables are statistically significant, investment income is not. Controversy over whether investment return (or a portion thereof) earned by insurers should be considered in the determination of the premium rate structure has existed in the property and liability insurance industry since the publication of the McCullough Report in 1947. Insurance company officials historically have resisted the contention that the test of reasonableness for profitability should be the rate of return on equity capital, defined as the sum of investment returns on capital and/or surplus, equity in the unearned premium reserve and underwriting profits. This question simmered until inflationary pressures in the late 1960s and early 1970s forced losses and premiums upward to new levels. In response to public pressure for price relief. an increasing number of regulatory authorities and state legislatures began to advocate the inclusion of investment income in the ratemaking process as a solution to rapidly increasing rate levels. In 1971, the National Association of Insurance Commissioners (NAIC) adopted the Blanks Committee proposal that each insurer be required to allocate investment return by line of business and to the capital and surplus accounts in the insurance expense exhibit of the convention blank. While the official purpose of the proposal is to provide an additional method of solvency surveilance by state authorities, information by line is necessary only in the evaluation of profitability. Consequently, this procedure may be viewed as the first NAIC approved step toward the inclusion of investment income in the ratemaking process. Jerry W. Caswell is a member of the Insurance faculty at Georgia State University. He has published in this Journal and in Business Horizons. Steve C. Goodfellow is in the Department of Risk Management and Insurance at Florida State University. He was a special accounts supervisor, Aetna Insurance Company and an Independent Insurance Agent.

A Procedure for Calculating the Annual Change in Value for Investments

In performing the planning function for their organizations, executives of P-L insurance companies have a major factor to consider. This factor is the determination of the value of all securities held at the end of the accounting period. The significance of this factor is its effect on future business of the firm. Insurance companies have certain regulatory constraints placed upon the volume of business they may write in relation to their liabilities, reserves, and surplus accounts. Changes in the value of an insurance company's capital market assets can affect the amount of business the company may write by reducing or increasing surplus. Executives of companies in most other industries do not have constraints placed on the amount of business they may conduct because of the value of their capital market assets. The values of securities, under generally accepted accounting principles, are primarily determined by the cost or market value, whichever is lower. Normally, once the values of the securities are recorded in the company's books, they will remain constant, except for annual amortization during the period the firm holds the securities. Under the statutory accounting system used by P-L insurance companies, the values of investments are determined by the company at the end of each year, based upon the suggested values of the National Association of Insurance Commissioners. The accounting records of the insurance companies are then changed to reflect the new values for the coming year. For the insurance companies' planning purposes, some estimate of the annual change in the value of their investments is desirable. Considering the recent activity (the ups and downs) of the stock and bond markets in the past year, any attempt to simulate these markets for short run planning purposes is very difficult. At best, it is thought to be a game of chance. In a British study by M. G. Kendall and a later similar American study by Harry Robert both support this contention. Robert states:

The Impropriety of Benefits-Premiums Ratios in Life Insurance Price Disclosure

Several ratios have been suggested by Joseph M. Belth [1] to describe the relationship between benefits and premiums in life insurance from the buyer's viewpoint. Herbert S. Denenberg and Harwood Rosser [2] have used a ratio method as a ranking device in a supplement to the Pennsylvania Insurance Department's Shopper's Guide to Life Insurance. It will be demonstrated in this article that these measures may be unreliable both as instruments of price disclosure and as a means of ranking policies for cost comparison purposes. Since the National Association of Insurance Commissioners is presently considering the adoption of a ratio index to be used within a system of price disclosure in life insurance, it is particularly timely to consider the merits of ratios as net cost indexes.' Ratios are only one of a number of different classes of net cost indexes.2 Attention will be confined here to one particular ratio index; however, the results are generally applicable to most ratio measures that have been

Replacement of Life Insurance: A Financial Approach

In seeking a solution for the problem of life insurance policies, the NAIC followed in the path of full disclosure. Full disclosure laws seek to provide the consumer with as much relevant information as possible without interfering with the consumer's right to make the final decision. The NAIC Model Life Insurance Replacement Regulation adopted was a good first step toward providing the consumer with good, relevant information. This paper develops a new financial disclosure section for the Model Regulation and suggests a modification in procedures under the Regulation. Both the new section and the modified procedure seek to provide the consumer with more relevant information and more adequate protection against a twist. The problem of life insurance replacement began in the early 1870's and was one reason for the establishment of the National Association of Insurance Commissioners.' Replacements by agents became a problem at the turn of the century. In 1905 the Armstrong Committee became interested in a special part of the replacement problem, twisting.2 The NAIC made some recommendations relative to twisting in 1912. In the 1930's, ninety-four companies signed an agreement requiring that a question relative to replacement be included in applications for life insurance, and requiring the company that is replacing to notify the company that is being replaced. Even the Temporary National Economic Committee, in 1940, cited lapses and replacement as detrimental activities. A question of magnitude arises. Is replacement of sufficient economic impact to require the attention of insurance regulators? A recent estimate Peter R. Kensicki, D.B.A., C.L.U., is Assistant Professor of Finance at Ohio University. He was a Consultant to the Comptroller General (the Insurance Commissioner) of the State of Georgia. Dr. Kensicki is also Chairman of the Board and President of the Institute of Research Studies, and is a Trustee of the Griffith Foundation for Insurance Education. This paper was presented at the 1973 Annual Meeting of ARIA. 1The major problem in the 1870's was mergers of life insurance companies. Subsequent reinsurance into the new corporation resulted in a large number of lapses due to the failure of the new company to notify insureds of the change. Since nonforfeiture values as they are known today were practically nonexistent, the reserves behind the reinsured policies would inure to company surplus. 2Twisting is an industry term for a replacement that is induced by use of misleading representations or incomplete or fraudulent comparison.

A Multivariate Model for Predicting Financially Distressed P-L Insurers

This paper is concerned with insurance company insolvency and the ability to identify a firm with a high probability of financial distress. Financial distress is defined as a firm that entered into liquidation, receivership, conservatorship, or rehabilitation during the time period of the study (1966-1971). Multiple discriminant analysis was used in this study to classify firms into two groups (solvent or distress). The model developed was able to classify correctly forty-nine out of fifty-two firms included in the study. One solvent firm was classified as being distress while two of the distress firms were classified as belonging to the solvent group. The six variables that were used to classify firms were: 1) agents balances/total asset ratio, 2) stocks-cost (preferred and common) /stocks-market (preferred and common) ratio, 3) bonds-cost/bonds-market ratio. 4) (loss adjustment expenses paid + underwriting expenses paid) /net premiums written ratio, 5) combined ratio, and 6) premiums written direct/surplus ratio. Insurance regulation involves at least three distinct activities; agent and company licensing, rate regulation, and company solvency. This paper is concerned with the latter of these three responsibilities of the insurance commissionerinsurance company solvency. More specifically, it is concerned with those property-liability insurance companies that experienced financial distress in the time period 1966 to 1971. Financial distress is defined as those firms that entered into liquidation, receivership, conservaThe authors are respectively: Assistant Professor of Risk Management and Insurance in the University of Georgia, and Associate Professor of Finance and Faculty Research Associate, University of Missouri-Columbia. The authors would like to express their appreciation to the University of Missouri Research Council and the Insurance Departments of the states of Arkansas, Illinois, Indiana, New York, Ohio, Pennsylvania, Texas, and especially Missouri for their support and cooperation. This paper was presented at the 1972 Annual Meeting of A.R.I.A. torship, or rehabilitation during this period. Insurance company insolvency has been a major concern of regulators, consumers, and insurance company executives for many years. L. B. Brainerd, past president of the National Association of Casualty and Surety Executives (NACSE), said that insurance company insolvency is the main area of concern of insurance regulation, and that regulation in this area has been lax compared with the other areas of insurance company regulation.' He advocates stricter supervision, rather than reimbursing of policyholders for their losses due to insurance company insolvency. Presently, the National Association of Insurance Commissioners (NAIC) has a model bill that will reimburse policyowners for losses up to $50,000 due to insurance company insolvency. This or simiI Business Insurance. October 25, 1971. n28

An Empirical Examination of the Predictive Ability of Alternate Sets of Insurance Company Accounting Data

In recent years, there has been a great deal of controversy and discussion within the AICPA and the National Association of Insurance Commissioners concerning differences between insurance accounting principles and conventional accounting principles.' Suggestions advanced by these groups vary from requiring supplementary adjustments to the insurance company Annual Statement to account for existing differences, to recommendations that the Annual Statement itself be completely changed so that it is prepared in accordance with conventional accounting principles. These normative statements have been offered with little, if any, empirical evidence to support their appeals. As a partial response to this problem, I report some empirical evidence concerning the effect of the use of different accounting procedures to value investments.

Insurance Rate Regulation: The Reasons Why

Contrary popular belief, the key provisions of the All-Industry laws were not produced by the All-Industry Committee. Nor did thiey result from cooperation between the Committee and the National Association of Insurance Commissioners. A cartel, composed of stock property insurers, dominated property-liability insurance before the mid-1940's. The All-Industry laws were designed (under the leadership of Commissioner Dineen and with the help of the mutuals) as a means by which the states could bring the previously unregulated cartel under their control. Although suitable for the economic and political environment in which they were enacted, the laws are not necessarily appropriate today. In 1909, only a few months after Kansas adopted the first U.S. insurance rate regulation law, the Governor of Kansas wrote his Insurance Commissioner complaining that rates were being raised and demanding know what the Commissioner was doing to protect the people of the

A Statement before the NAIC on Protection of the Public Interest and the Misstatement of Age Clause in Life Insurance Contracts

I would like to thank The Honorable J. Richard Barnes, C.L.U., Commissioner of Insurance for the State of Colorado, and the other members of the Subcommittee on Life Insurance of the National Association of Insurance Commissioners for extending to me the privilege of presenting this statement on protection of the public interest in the matter of age statements in life insurance applications. My statement will point out that practically all current insurance contracts include three major misrepresentations by omitting essential information. It will also show that, as insurance commissioners, you have been derelict in your duty to protect the public from the activities of insurers in current settlement practices with regard to age statements. I shall review the problem and call upon the state insurance commissioners, individually in their own states, to issue immediately regulations and install procedures in keeping with their responsibilities in this area. The practice of using death certificates as prima facie evidence of birth date and age in the settlement of life insurance policies has no justification in equity, is a cruel exception to the legal principle that

A Critical Analysis of State Surplus Lines Laws

There has been a gradual but continual decline of interest in surplus lines regulation since enthusiasm peaked in the early 1960's. The current environment could easily lead one to believe that states have modified and amended their state surplus lines laws so that they are now effective regulators of surplus lines activity. It is, however, the contention of this paper that such is not the case. The vast majority of states do not have complete and comprehensive surplus lines laws and most states make little effort to enforce the laws that they do have for controlling this insurance activity. The most devastating criticism of surplus lines laws, however, is that they are generally impractical, unreasonable, inconsistent, and inequitable. In such an environment of ineffective regulation, one must therefore conclude that the majority of surplus lines insurance activity existing in this country goes uncontrolled, unregulated, and untaxed. In the early 1960's there suddenly emerged unprecedented concern relating to the regulation of surplus lines insurance. Trade publications began to carry articles and news releases that questioned the effectiveness of the laws that were supposedly regulating non-admitted insurance activity. State regulators of insurance also began serious self-examinations of their surplus lines laws. This concern was reflected in the decision of the National Association of Insurance Commissioners' Subcommittee on Unauthorized Insurance to study surplus lines regulation with the ultimate goal of formulating a model surplus lines law. The catalyst that stimulated this reaction was undoubtedly an announcement in the Spring of 1960 which indicated that the Senate Antitrust and Monopoly Subcommittee was planning a series of hearings on surplus lines insurance.1 Samuel H. Weese, Ph.D., formerly on the faculty of the University of Florida, is Insurance Commissioner for the State of West Virginia. This paper was submitted in December 1968. 'The majority of the information found in That this attitude of urgency and uncertainty had become contagious throughout many states can best be illustrated by reference to a speech made in the Spring of 1961 before the American Society of Insurance Management by Donald P. McHugh, who was at the time counsel to the Senate Antitrust and Monopoly Subcommittee.2 In that speech Mr. McHugh disavowed any responsibility for the movement to develop stronger state surplus lines laws. He made it quite clear that there was little justification for state legislatures to act solely on the conviction that Congress would act if they did not. It must seem curious to one outside the insurance industry that the activities of a congressional investigation could produce such a sudden and automatic response from state regulatory officials. this article is taken from the author's doctoral dissertation, Non-Admitted Insurance Activities in the United States, University of Pennsylvania, 1968. 2McHugh Warns That Hasty Surplus Laws Will be Ill-Advised, National Underwriter, May 19, 1961, Page 2. Mr. McHugh is presently Vice President and General Counsel for State Farm Insurance Companies.

New Accounting Rules and Procedures for Fire and Casualty Companies

As UNITS within a regulated industry, fire and casualty insurance companies have long been subject to the accounting requirements of the National Association of Insurance Commissioners. In thoroughness of detail set forth concerning the various constituent elements involved in insurance company operations, the convention statement prescribed by the NAIC has made an important contribution over the years. However, to bring fire and casualty insurance company accounting into line with generally accepted accounting principles, many accountants and analysts now believe that a new approach to the practices of these companies is in order. In fact, the Insurance Committee of the American Institute of Certified Public Accountants is in the process of preparing a proposed new code, expected to take the form of supplementary statements, which will convert statutory earnings and policyholders' surplus to earnings and surplus computed in accordance with generally accepted accounting principles. In this article an attempt is made to present the modifications of insurance accounting which would be most helpful to financial analysts and stockholders in interpreting earnings and equities in net assets. PRACTICALLY every major field of business today is coping with changes that have developed swiftly in the accounting rules and procedures to which they have been accustomed. Industrial companies of all types, public utility companies, banks and finance companies, all have seen new rules of accounting formulated and thrust upon them by regulatory or accounting bodies with varying degrees of pressure. In the field of fire and casualty insurance the groundswell for revisions of established accounting rules and procedures has been building at an accelerated pace in the last few years. A forthcoming publication of the Insurance Committee of the American Institute of Certified Public Accountants (AICPA) is expected to formulate a number of proposed changes in fire and casualty insurance company accounting which in effect will constitute a suggested new code for these companies. These changes are expected to take the form of supplementary statements which will convert statutory earnings and policyholders' surplus to earnings and policyholders' surplus computed in accordance with generally accepted accounting principles. Accounting practices of fire and casualty insurance companies have been the subject of a considerable amount of controversy and misunderstanding for a number of years. The convention statement in the form prescribed by the National Association of Insurance Commissioners has been the historic method of insurance company accounting. In thoroughness of detail set forth concerning the various constituent elements involved in insurance company operations and in the uniformity of treatment which it accords, the convention statement has made an important contribution over the years. However, to bring fire and casualty insurance company accounting into line with generally accepted accounting principles a case can be made that a new approach to accounting rules and procedures for these companies is in order.

Overinsurance. Its Meaning

The National Association of Insurance Commissioners, in 1959, asked the insurance industry to study the matter of overinsurance in health insurance in order to determine (1) whether there is a problem of overinsurance, and (2) if there is a problem, how it might be best solved. As the study has progressed, the Health Insurance Association of America, in cooperation with the Blue Cross Association and the National Association of Blue Shield Plans, has submitted seven status reports. The seven status reports prepared by the Industry Committee I and submitted to the Subcommittee 2 of the NAIC deal with the areas of group and individual Disability Income Insurance and the broad area of Hospitalization, Surgical, and Medical Insurance. This article, how-

Rechnungslegungsvorschriften für Lebensversicherungsunternehmen in den Vereinigten Staaten von Amerika

In the United States insurance supervision is a function of the individual states and the responsibility for it is lodged in the relevant Insurance Department under the direction of the Insurance Commissioner. The Insurance Commissioners are members of a national organisation, the National Association of Insurance Commissioners (N. A. I. C.) which aims at the maximum possible degree of standardization of insurance supervision. This applies in particular to the Annual Statement, which according to regulations is to be made up uniformly by all companies, and to the valuation of securities. The Insurance Departments are the competent authorities for issuing licenses. A company has to apply for a license in each state in which it wishes to do business. The license is issued for one year only and is renewed annually on July 1. The computation of premiums are not subject to insurance supervision, but the companies have to set up minimum reserves prescribed by the Insurance Departments.

AN ANALYSIS OF THE IMPACT OF VALUATION REQUIREMENTS ON THE PREFERRED STOCK INVESTMENT POLICIES OF LIFE INSURANCE COMPANIES*

s of Doctoral Dissertations 561 that market values have usually been abandoned as a useful standard during periods of economic distress. Regulations governing other financial institutions reflect the trend away from the use of market price as a valuation standard. The new regulatory plan proposed in the study includes valuation at cost for preferred stocks meeting prescribed quality standards and several additional improvements over the present system. Such stabilization of asset values should be accompanied by a revised security valuation reserve based upon empirical investment experience regarding yields, defaults, and so on. The existing reserve regulations are examined and found to be somewhat illogical, often inconsistent, and potentially inadequate in certain instances. It appears that the vast majority of life insurance companies will be relatively unaffected by the quality standards recommended, since their existing standards are generally higher than those proposed. The existence of generally able investment personnel argues for considerable flexibility and discretion in the management of the life insurance industry's assets. A trend in this direction is evident over the past decade by changes in state statutes and in regulations enacted by the National Association of Insurance Commissioners. The recommendations of the study should widen the discretion of investment management and increase the mobility of funds within the economy. Stabilized values should encourage continued purchase of preferred stocks, even in recession periods, and reduce the overvaluation and undervaluation of securities which often accompany periods of extreme business conditions. The author foresees a greater demand for preferred stocks by life insurance companies if these recommendations are adopted. Such a development could lead to a greater resort to preferred stock financing by corporations and reduce the financial risk inherent in overly heavy reliance on bond issues. A revised set of valuation requirements for preferred stocks thus appears to offer significant potential benefits. Careful consideration of these recommendations by the regulatory authorities appears to be warranted. This content downloaded from 157.55.39.191 on Tue, 11 Oct 2016 04:46:54 UTC All use subject to http://about.jstor.org/terms

VALUATION OF LIFE INSURANCE COMPANY HOLDINGS OF CORPORATE BONDS AND STOCKS—SOME RECENT DEVELOPMENTS*

To MOST ECONOMISTS the question of the valuation of life insurance company holdings of bonds and stocks must seem a colorless and uninteresting subject, a matter of bookkeeping devoid of broad economic significance. Actually, however, there are powerful forces, having great influence in the capital markets, which originate in the valuation rules prescribed for life insurance companies. The earnings of the life insurance companies are largely returned to policyholders and stockholders each year and their surpluses seldom amount to 10 per cent of policyholders' reserves, so that changes in the valuation of assets assume particular importance. Furthermore, the valuation rules in the past have had considerable influence on the type of investments the companies make. Thus we are addressing ourselves here to an important non-market force affecting both the solvency of the life insurance companies and the channeling of their funds throughout the economy. Major changes in the valuation rules governing the statements of life insurance companies were approved and put into effect by the National Association of Insurance Commissioners a few months ago. These changes were the product of several years' intensive study of valuation problems by the life insurance companies and the state regulatory authorities. This paper will attempt to set forth the basic principles of the new rules and the objectives at which they are aimed. But first it will be helpful to review the historical background of the valuation question, for it is only against this background that the matter can be fully understood.