Comments on the Economic Implications of the Proposed Florio Amendment to the Nondiscrimination in Insurance Act

GAO was asked to analyze a substitute to H.R. 100, proposed legislation which would prohibit distinctions based on race, color, religion, sex, or national origin in the marketing and pricing of insurance and pension contracts. The bill would have required that: (1) sex-distinct premiums and benefits in the contracts be equalized; and (2) no one's benefits be reduced as part of the equalization process. The substitute bill would: (1) allow sex distinctions to continue in existing contracts; (2) delete the provision that no one's benefits would be reduced as part of the equalization process; (3) prohibit targeted marketing of insurance; and (4) extend the transition period.

GAO found that some of the economic effects of the substitute bill would be significantly different from those of the originally proposed legislation. In particular, the increases in unfunded liabilities created by the original bill for life insurance companies and pension plans would be reduced by between $18.3 and $21.6 billion. These reductions would result largely from allowing sex distinctions to continue in existing life insurance contracts and in pensions and annuities currently being paid to retirees. Therefore, the redistributive effects of the substitute bill would be smaller than those of the original bill. The efficiency effects would be the same under the substitute bill as under the original bill, unless the legislation were interpreted as prohibiting the use of risk factors correlated with sex. In this case, efficiency losses would increase because the size of price changes would increase and policyholders would be more likely to change their purchases of insurance, and the positive effects associated with substituting other risk factors would no longer be possible. In addition, the original bill would have imposed $800 million in administrative costs and the substitute bill makes these changes unnecessary. Finally, because the substitute bill would reduce the unfunded liabilities and extend the period for implementing the act's requirements, it would virtually eliminate the risk of insurance company insolvency resulting from the legislation.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Lawrence H. Thompson Team: General Accounting Office: Office of the Chief Economist Phone: (202) 275-6209