[Congressional Record Volume 148, Number 43 (Wednesday, April 17, 2002)]
[Extensions of Remarks]
[Page E560]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               PROTECTING MUTUAL INSURANCE POLICYHOLDERS

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                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                       Wednesday, April 17, 2002

  Mr. LaFALCE. Mr. Speaker, I am pleased to join today with my 
colleague from Massachusetts, Mr. Frank, in introducing the 
``Protection of Policyholders Act.'' This legislation seeks to strike 
provisions in current law that undermine the ownership rights of 
millions of policyholders in mutual insurance companies and severely 
weaken State regulation of insurance.
  In recent years, some 70 million Americans have learned that they own 
a valuable asset that few had previously been aware of--their insurance 
policies with mutual insurance companies. As policyholders, they 
collectively own 100 percent of mutual insurance companies, which were 
structured under state law as cooperatively-owned corporations. Until 
recently, mutual companies could convert to stock ownership, but State 
law required that the company's accumulated profits be divided among 
policyholders by giving them 100 percent of the stock in the new 
company. These shares would then pay stock dividends and could 
appreciate in value like regular corporate stock.
  Over the past decade, the mutual insurance industry has sought to 
change state laws to permit mutual companies to convert to stock 
ownership without distributing stock to policyholders. Under these 
revised state laws, mutual companies could form ``hybrid'' mutual 
holding companies in which policyholders would continue to own 51% of 
the insurance company through a non-insurance mutual holding company. 
The remaining 49% ownership of the insurance company would be sold as 
stock to investors, most often to the former officers and directors of 
the mutual company. Where this has occurred, policyholders have not 
received any stock or any benefit of the dividends paid by the new 
insurance subsidiary of the mutual holding company. Moreover, 
policyholders often experience insurance rate increases to cover the 
costs of paying competitive dividends to the new stockholders.
  A number of states, including New York, Massachusetts, Illinois, 
Indiana and others, refused to enact these mutual conversion changes 
out of fairness to policyholders and concerns about appropriate 
regulation of these hybrid corporate structures. The insurance industry 
responded by inserting in the comprehensive financial reform 
legislation Congress enacted in 1999, a provision that would permit 
state-chartered mutual companies to relocate to another state with more 
liberal conversion rules without jeopardizing their licenses, 
operations, or insurance policies. This controversial provision was 
adopted by the House only because it was paired in a floor amendment 
with a broadly supported provision to prohibit discrimination in 
insurance sales against victims of domestic violence.
  These so-called mutual ``redomestication'' provisions of the 1999 
Gramm-Leach-Bliley Act now permit a mutually owned insurance company 
that cannot convert to stock ownership, or cannot convert without 
distributing 100 percent of the stock to policyholders, to relocate to 
another state that permits such conversions. Federal law has become the 
instrument for overturning pro-consumer state insurance law and an 
accomplice in robbing mutual policyholders of their ownership fights.
  The mutual redomestication provisions in current Federal law now 
empower mutual insurance companies to blackmail state legislatures, 
saying, in essence, if you don't enact the conversion laws we want, 
we'll simply move to another state. Despite a 200-year tradition of 
state regulation of insurance, these provisions strip states of their 
right to regulate insurance companies as they deem appropriate and rob 
policyholders of valuable ownership rights. These provisions are anti-
State, they are anti-consumer, and they should be repealed by Congress.

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