Summary: In response to a congressional request, testimony was presented on the economic impact of the proposed Fair Insurance Practices Act. GAO found that, in many cases, it is impossible to say what the consequences of the bill will be, since they will depend on the adjustments that insurance companies, pension plan sponsors, and state insurance regulators make in response to the bill. The bill requires that equalization be achieved by raising payments to the sex receiving lower payments without reducing payments to the sex receiving higher payments. Therefore, the average level of payments will rise without necessarily being accompanied by any increase in revenue and unfunded liabilities will be created or enlarged for pension plans and insurance companies. These unfunded liabilities will result in financial transfers from one group of people to another. The initial increases in pension benefits will be enjoyed by both men and women. Women will experience benefit increases from defined contribution plans while men will experience benefit increases from defined benefit plans. Increased benefits will mean higher costs to pension sponsors, most of which will eventually be recovered by smaller pension increases, smaller wage or fringe benefit increases, benefit reductions, insurance price increases, tax increases, or service reductions. The severity of disruptions will depend upon: (1) the size of the unfunded liabilities; (2) the time available for insurers and pension plans to adjust to the unfunded liabilities; (3) the uncommitted financial reserves available; and (4) legal constraints. Life insurance companies will suffer the most serious disruptions because, if their liabilities increase, they must increase their reserves or become legally insolvent. In addition, the bill will entail substantial administrative costs to revise existing pension plan provisions including: actuarial, legal, computational, and clerical costs. The bill will also change the relative benefits of different kinds of pension options and, therefore, will probably change the option choices which employees will make. These changes will tend to increase the cost of the plan.
