The U.S. Senate Judiciary Committee last month received testimony on whether to continue the insurance antitrust exemption contained in the 1945 McCarran-Ferguson Act. The law placed responsibility for insurance regulation with the states and has permitted insurers to employ joint data collection, price trending and common policy language. It makes possible organizations such as Insurance Services Office, the National Council on Compensation Insurance and the American Association of Insurance Services.
ISO, the industry’s largest rating organization, urged Congress to keep the antitrust exemption intact, arguing that it helps smaller and medium-sized insurers contain expenses and compete. Kevin B. Thompson, ISO senior vice president, told Congress that without ISO’s materials many insurers would have to significantly increase their costs, which would get passed along to policyholders. He estimated that a typical insurer pays approximately $75,000 per year for all of ISO’s general liability prospective loss costs, rules and forms. Yet for just one line of insurance, it cost ISO more than $11 million in 2005 to produce those products.
Many smaller insurers do not generate enough of their own loss information to predict future losses and costs reliably, ISO added. Rating bureaus’ information provides insurers — and regulators — with more confidence in pricing decisions, which means less margin for error can be built into rates, leading to lower premiums.
Also, common policy forms that ISO, AAIS, NCCI and other organizations develop make comparison shopping by policyholders and agents possible, as well as supply some “legal certainty” to reduce the likelihood of lawsuits over coverage.
While ISO tried to point out the benefits, Marc Racicot, president of the American Insurance Association, desirous of big changes that include a federal insurance regulator, indicated a willingness to relinquish the protections under McCarran. Racicot agreed that under the current state-based regulatory system, repeal of the exemption would not be sound public policy. However, if Congress were to shift regulation of the industry from the states to Washington, the federal antitrust exemption would no longer apply to federally chartered insurers, because the states would no longer regulate their activities.
Racicot told the Senate committee that his group’s members are willing to take the risks inherent in this approach on the antitrust side because they “so strongly believe that a competitive market, without government rate and price controls, is critical to being able to serve customers in the years ahead.”
What risks would Racicot’s insurers face? There is at least one potential risk for those giving up their McCarran protection: more visits by state attorneys general and other public investigators. N.Y. Assistant Attorney General Elinor Hoffmann urged Congress to review McCarran because it “precludes federal antitrust enforcement of serious anticompetitive conduct” in insurance. She testified that had her boss, Eliot Spitzer, prosecuted his bid-rigging and other cases under federal antitrust law, McCarran likely would have delayed, or maybe precluded, settlement.
Yet it appears that most of the risk for a dual system of regulation, which AIA supports, would fall not on the insurers choosing a federal charter, but on other insurers and policyholders who could see the cost and comparison-shopping benefits now realized under McCarran-Ferguson reduced if the larger carriers stop participating.