Several lines were omitted from an article on the life insurance industry in yesterday's editions of The Washington Post, resulting in an incorrect statement of insurance company financial holdings. The article should have said: "Life insurance companies held about 40 percent of all corporate bonds in the country in 1977, and about 30 percent of all commercial mortgages. "They held only 5 per cent of corporate stocks, including shares they manages as trustees, but were still the biggest holders of voting stock in such corporations as Union Pacific, Standard Oil of Indiana, VEPCO and Union Oil.
It is one of the distinctive American forms of saving: seven U.S. families out of every eight have life insurance.
The average amount per family last year was $36,900. The total paid in premiums to life insurance companies, for life and health policies, $75 billion: was 5 percent of personal income and more than Americans spent for new cars.
The companies to which these premiums went are among the most powerful accumulators of capital and dispensers of long-term loans in the economy.
Their gross assets last year were $350 billions and five of them, the largest in the field-Prudential, Metropolitan Life. Equitable, New York Life and John Hancock-had 40 percent of this total.
Life insurance companies held about 40 percent of all corporate stocks, including shares they managed as trustees, but were still the biggest holders of voting stock in such corporations as Union Pacific. Standard Oil of Indiana, Vepco and Union Oil.
They also own large amounts of valuable real estate, as their holdings in this area illustrate.
Prudential last year owned half the Washington and Capital Hiltons; an office building at 1800 K NW: a building at 1718 P NW. Another at 1030 15th NW. The Wilson Motel in Arlington. The land beneath buildings at 1140 Connecticut Ave., 1919 M NW. 2100 M NW. 1225 Connecticut and 1150 17th NW.
Equitable owned the land under five buildings on M. L and 16th streets NW.
Metropolitan owned the building at 2120 M NW, an investment that had some mony to it.One tenant in that building was a group from the Federal Trade Commission that was trying to develop a consumers guide to life insurance cost.
The companies reacted to that protect with alarm, as they have to most other proposals for federal surveillance and control, and the Senate Appropriations Committee force the FTC to shelve the plan.
For all its power over long-term economic expansion. the life insurance industry is to a large extent unregulated by the federal government.
It is regulated mainly by the states. Its activities were largely exempted from the federal antitrust laws in 1945. Because many large life insurors are mutual companies which in effect are owned by policy holders rather than stock companies whose shares are traded on public exchanges. they are also exempt from many disclosure and other regulations of the Securities and Exchange Commission.
The large life insurance companies are in many ways as powerful as the nation's largest banks. But they wield that power much less visible.
A special presidential commission is now looking into the 1945 McCarran-Ferguson Act that shelters the insurance industry from the anti-trust laws. The question is whether it should be altered or repealed.
The industry is understandably sensitive on the issue.
Richard Minck, executive vice president of the American Council of Life Insurance. the life industry's trade organization. said. "The life insurance business is highly competitive. Enforcement agencies usually look at four factors in judging whether a particular industry should be subject to close scrutiny for possible anti-trust violation.
"Those four factors are: market concentration. the ease of entry for a new company. the profitability of companies. and behavior of prices.
"In the case of the life insurance business. the 10 largest companies have less than 50 percent of the market, and that percentage has been declining steadily. Since 1950 the number of life insurance companies has about tripled [to about 1,750] so there can't be any substantial barriers to entering the business.
"The average profitability has been relatively low and fairly stable. Finally, the price of life insurance products has decreased continuously over the last 25 years.
"In addition to the business being very competitive, it is closely regulated by the state insurance departments under the Fair Trade Practices Acts enacted by the states in the 1940s and 1950s. Those acts provide buyers with many needed protections and serve as a counterpart to federal trade regulations applicable to other businesses."
The life insurance industry has plenty of lobbyists to help uphold its position.
The ACLI corps includes Robert B. Smith, former aided to former Sen. Sam J. Ervin Jr. (D-N.C.), Jack Forsythe, onetime aide to the late Sen. Lister Hill (D-Ala). former Civil Aeronautics Board official Charles King, and Otto Meletzke, a former housing official.
Former Virginia Gov. Linwood Holton has just signed on as general counsel and will do lobbying, too. Prudential maintains a trio on the scene and Metropolitan Life and others have lobbyists here.
There are several other groups and individual company lobbyists as well.
The tremendous financial power wielded by life companies with their big reserves of cash-their income in 1977 from investments alone was almost $22 billion on top of the $75 billion in premiums-has made the industry subject to criticism as a massive uncontrolled social force.
This is particularly true of mutual life companies-the five biggest life companies are all mutuals-because they don't have any stockholders to exert voting rights within the company.
With stock companies. there is some record of stockholder control and it is possible to trace the personal and corporate interests involved by seeing who owns voting stock.
Thus, studies by the Senate subcommittee headed by the late Lee Metcalf (D-Mont.) showed that Rockefeller interests, through the Chase Manhattan Corp. and the Rockefeller Family Group, held big blocks of voting stock in Aetna, as did Morgan Guaranty: that Morgan. Rockefeller and Mellon interests held big blocks of voting stock in Connecticut General. and that the Continental Assurance life company. with $2.6 billion assets. was controlled through the Loew's Corp. by the Preston and Laurence Tiseh family group.
But mutual life companies have no stockholders. They are run by boards of directors whose members are also on the boards of giant banks and corporations like Exxon. Morgan. Chase Manhattan. Union Carbide. Citicorp, Mellon National. Continental Oil and the like. When it comes time to elect new directors, they are generally nominated by the old board and routinely approved by policyholders.
These interlocking relationships suggest conflict of interest and collusion to some observers and provide ammunition for those who believe anti-trust laws should apply. Collusion is extremely hard to prove but the charges have had some impact. It was in the atmosphere created by Metcalf subcommittee reports on interlocking directorates that Coy Ecklund, chairman of Equitable Life, resigned last spring from the board of Chase Manhattan. "the Rockefeller bank," to avoid any suggestion of linkage.
Although life companies look in $75 billion in premiums and $22 billion from investment of their assets, they don't pocket all the money. After deduction of set-asides for reserves, policy-holder dividends, taxes and other expenses their "net operating gain" was $3.3 billion. (Some industry critics say this would be far higher if mutuals didn't maintain excessively high reserves and unspent surpluses.)
Strange as it may seem, there is no agreed-on figure for profits of life companies because it's hard to compute net worth of mutuals. One study put after-tax profits of stock companies at around 12.3 percent of net worth in the early 1970s. (In manufacturing, for example, the profit was 14.4 percent). Several sources said the industry-including the mutuals-generally averages 12 to 14 percent on net worth.
Another controversy, involved in the FTC attempt to formulate a cost-guide, involves the value of whole-life insurance (the kind that pays cash-value if you cancel the policy after a number of years.)
Some economists and critics of the industry (including some at the FTC), argue that many persons would be better off buying cheap term insurance, which returns no cash value but has low premiums, instead of more costly whole-life policies. If you buy term priced whole-life, you can put the premiums saved in the bank and end up with more than the cash value of a whole-life policy after 15, 20 or 30 years.
The following example is based on GEICO prices for a $30,000 renewable term policy bought at age 35, vs. a $30,000 whole life.
If a man decided to buy the cheaper term policy and put the premium difference in the bank each year at an interest rate of 5.39 percent (the daily compunded rate on a normal 5.25 percent savings account), by age 65 he'd have $15,837 in the bank.
If he bought the whole-life policy instead, the cash-payment to him at age 65, if he decided to cash it in and get his money, would be $14,940.
All this assumes he is alive at 65. Suppose he died just at that age. With a term policy, his family would get the $30,000 face value of the policy, plus the $15,837 he had in the bank account. With the whole-life policy, however, it would get only the $30,000 face amount.
Some economists have calculated that if you view the portion of the whole-life premium that goes into building up cash values as an "investment" or "savings" portion, the return being paid on some policies "savings" protions was only 1 or 2 percent-far less than available at a bank.
Minck contended most whole-life policies being sold today have more favorable cash-value structures than that-the equivalent of 4.5 percent or even 6 or more even if you assume the type of calculations used by the FTC are valid, which the industry doesn't. (The industry does not concede premiums are spearable into "pure insurance" and "savings" portions.)
Minck said whole-life policies have other advantages: dividends are untaxed, policies can be kept indefinitely, premiums stay level and don't rise as you get older, and, you can borrow on the cash value.
But Albert Kramer, FTC consumer protection director, told a House sub-committee last summer that by not knowing the real costs of policies-whether term or whole-life-"consumers may lose billions of dollars as a result of uninformed purchase decisions." For now, FTC efforts to formulate a guide have been stopped.
Another insurance controversy involves the the life industry's twin brother, the property-casualty insurance industry (auto and household insurance, etc.). It too had $75 billion in premium income, but its assets are much smaller since it tneds to operate on a pay-as-you go basis.
The big criticism of property and casualty, outlined by the Federal Insurance Administration and a Senate subcommittee headed by Howard Metzenbaum (D-Ohio), is the charge that it refuses to write policies at reasonable prices for low-income urban-dwellers like blacks and inner-city residents, or charges outrageously high prices for insurance.
In New York, for example, a young driver, male with less than three years of driving experience may have to pay as much as $4,443 for auto insurance under the "assigned risk" pian even with a "clean" record.
Metzenbaum and other critics like Massachusetts Insurance Commissioner James Stone want companies to "flatten out" these peaks and spread the risk a bit more so poor people can afford insurance more easily.
So far the insurance industry has escaped federal antitrust regulation. But the immense nationwide financial scope of the industry, its embarrassing failures to provide home and auto insurance at a reasonable price for some poor people, its arcane accounting practices - all these are bringing new pressures for increased federal surveillance and regulation.
Most observers doubt the president's Commission on Antitrust Laws will recommend an outright end to the antitrust exemption at this time. But there is a good chance it will propose narrowing the exemption enough to allow the FTC and other agencies to stick their noses under the insurance tent.