Bomb to the Archives

Nearly three years ago TNEC ("Monopoly Committee") asked SEC to investigate insurance. To make the investigation (which they limited to legal reserve life insurance), SEC appointed Ernest J. Howe and Gerhard A. Gesell. For weeks their report has been ready, emitting occasional hisses like a buried bomb, waiting for TNEC Chairman Joseph O'Mahoney to make up his mind to release it. Last week he did so. The explosion was loud. But very few people got hurt.

The report was a 466-page going-over of insurance practices in general, the Big Five life companies (Metropolitan, Prudential, New York, Equitable, Mutual of New York) in particular. Its starting point: that insurance constitutes a huge and powerful sector of the U. S. economy. Some 365 legal reserve life insurance companies in the U. S. have assets totaling over $28,000,000,000. Their annual income exceeds $5,000,000,000, about 8% of 1938's national income. Their market is nearly half the population: the $111,000,000,000 of insurance in force is held by over 64,000,000 U. S. policyholders. The largest 26 companies, through their investments, in 1937 held 11.6% of all Federal bonds, 17.4% of railroad bonds, 18.2% of utility and 11.7% of U. S. industrial bonds, 13% of urban mortgages.

The report charged that:

> The 135 directors of the Big Five life insurance companies are directors of 100 other insurance companies, 145 banks, and 534 other companies. So busy are they that they frequently miss board meetings.

> The annual company reports sent to policyholders are too condensed, often cannot be understood even by experts. Furthermore, only 39% of the companies regularly send any reports to their policyholders.

> The biggest companies have frequently colluded on rate setting. Two to four times a year Dr. Arthur Hunter of New York Life acts as host to representatives of some 20 large insurance companies. In Dr. Hunter's office, where no minutes are kept, they discuss annuity rates, policy provisions, etc., generally come to a single course of action for all. Since 1933 annuity rates have been hiked four times. But at the end of each year Host Hunter destroys the records of the conferences.

> The Association of Life Insurance Presidents spent $181,246 (almost half its income) in 1937 on lobbying.

> Only a small percentage of policies remains in force until their purpose is served. Out of $126,675,000,000 of insurance which terminated from 1928-37, over 51% lapsed, over 26% was surrendered, only 6.59% was paid at death. An important cause: high-pressure selling.

> The cheapest place to buy insurance is at a savings bank. But only two States (New York and Massachusetts) allow banks to sell insurance and they limit the amount. The average annual net cost of an ordinary $1,000 straight life policy at savings banks in 1938 was $2.72. Other cost figures: New York Life $8.77, Aetna $10.32, Mutual Life of N. Y. $8.56, Travelers $10.29, Home Life of N. Y. $8.15, etc.

> Sorest point of all: highest-cost insurance (largely because of the necessarily high cost of selling it) is industrial ("burial"), sold to the lowest income groups, mainly by Prudential and Metropolitan. Out of 193,714,000 "burial" policies sold from 1928-37, 187,761,000 (97%) were surrendered or lapsed.

To these charges, U. S. insurance men were quick to reply. Some charges (such as lack of competition, lapsation and surrender figures) they simply branded as false, others they said were based on insufficient evidence, misleading use of "meagre . . . trifling testimony." To all they opposed their own record: from 1929 to 1938, policyholders had lost only 6/10 of 1% through insurance company failures--a far better safety record than the banks'.

Although their rebuttal was not included in SEC's report, it must have had its effect. Said Senator O'Mahoney: "By and large the insurance companies have come through this study in pretty good shape." And last week SECommissioner Sumner Pike submitted his recommendations to TNEC. Compared with the SEC report, his advice was mild. Main items:

1) For regulation the policyholders should continue to rely mainly on strengthened State insurance commissions, 2) but the Federal Government should help by giving advice to the commissions, 3) and provide, if possible, insurance for the low-income group--perhaps through extension of social security benefits--thereby eliminating high-cost industrial insurance. He agreed with a 35-year-old opinion on industrial insurance: it must either stay as it is, with all its weaknesses, or be prohibited entirely.

But TNEC was not set up to cure abuses in the insurance business. Its job was to find out what makes the U. S. economy tick (or fail to)--a problem in applied economics. The economy, said SEC, suffers from a lack (or the timidity) of venture capital. The insurance companies, representing "by far our most dynamic savings institutions," invest mainly in bonds, thus causing capital-starvation among small, new or risky businesses. Even Commissioner Pike thought insurance portfolios should find "room for the . . . common stocks of substantial corporations."

To such an innovation, most insurance men are dead opposed. They remember the experience of Canada's Sun Life, which once held over 50% of its assets in common stocks. In the 1929-30 stockmarket Sun Life lost $44,000,000 on its investments. In 1932 the Canadian Government stepped in, limited common stock holdings to 15%. As long as life insurance is supposed to be safe, it can hardly be expected to take the economy's longer chances. Said Chairman O'Mahoney: "Such a plan [enforced stock-buying] would make the present situation worse." But he agreed that some venture-capital encouragement must be devised.

At week's end the Howe-Gesell bomb was sputtering its way into the archives, there to join the last previous over-all insurance investigation, the famed Armstrong Report of 1906 (which stimulated State regulation). It was not likely to get much attention in a Congress interested in just two things: defense and taxes.

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