Federal insurance antitrust exemption: Insurer, consumer friend or foe?

July 3, 2006

Congress opened debate on the insurance industry’s exemption from federal antitrust laws, with some larger insurers indicating a willingness to relinquish the exemption in exchange for regulatory reform that would free them from state regulation.

Yet the industry’s biggest rating organization that operates under the exemption argued that its services save typical and smaller insurers, and therefore consumers, millions of dollars per year. A national consumer group estimated that eliminating the exemption would save insurance consumers at least 10 percent on current premiums, or about $45 billion per year.

The U.S. Senate Judiciary Committee heard testimony recently on whether to continue the limited insurance antitrust exemption contained in the 1945 McCarran Ferguson Act. The act placed responsibility for insurance regulation with the states and has permitted insurers to engage in certain joint data collection, price trending and form and policy development activities. The law makes possible rating organizations such as Insurance Services Office, the National Council on Compensation Insurance and the American Association of Insurance Services.

Kevin B. Thompson, senior vice president with Insurance Services Office Inc. told lawmakers that insurers’ access to advisory organization materials “deserves to be preserved and protected.” He warned that “[s]ince repeal or substantial modification of the McCarran-Ferguson Act’s limited antitrust exemption is likely to create legal uncertainty and have a chilling effect on legitimate insurer use of those materials, no change should be considered without proof that it is needed and that it will help, not harm, competition in the property/casualty insurance business.”

He argued that ISO’s products and services reduce an insurer’s operating costs by providing information and services that an insurer needs to write business at relatively lower costs than would be possible using its own resources. Many insurers, especially smaller ones, do not generate enough of their own loss information to predict expected costs reliably, according to ISO.

Thompson said that his company’s information permits insurers to be more confident in making pricing decisions, leading to lower premiums. The information also helps small insurers to compete with large insurers in places where they have low premium volume or no business.

However, Marc Racicot, president of the American Insurance Association, said a repeal or limitation of McCarran’s antitrust provisions “cannot be divorced” from a discussion of state insurance regulation.

“Repeal of McCarran might impact legitimate information gathering undertaken pursuant to state law and regulation, thus undercutting the ability of the states to decide the types of information they want to allow insurers to collect, share and analyze under state supervision. As a result, a repeal of McCarran cannot be justified as a matter of law. Nor would it be sound public policy,” Racicot testified.

But if Congress were to shift regulation of the industry from the states to Washington, the federal antitrust exemption would take on new meaning. AIA supports the National Insurance Act of 2006, which would allow insurers, agents and brokers to opt into a federal regulatory system. S. 2509 would dispense with state government price controls in favor of price competition among insurers.

Racicot told the Senate committee that AIA’s members are willing to open themselves to federal antitrust law as part of the price for being freed from state regulation because they “strongly believe that a competitive market, without government rate and price controls, is critical to being able to serve their customers in the years ahead.”

“We are willing to shift McCarran’s current balance between regulatory supervision and antitrust policy to one that reduces the role of regulation and returns that role to the federal government, and increases the role of the federal antitrust laws. However, we do not believe it is appropriate to repeal McCarran-Ferguson in the context of insurance pricing without initiating the paradigm shift that would result from S. 2509,” Racicot said.

Elinor Hoffmann, assistant attorney general from the Office of the Attorney General for New York, asked Congress to reexamine McCarran because it hinders antitrust enforcement. She cited her department’s investigations of bid-rigging and questionable brokerage fees. New York Attorney General Eliot Spitzer prosecuted cases under federal antitrust law, but the McCarran-Ferguson Act likely would have delayed, or maybe precluded, settlement, she said.

“A uniform federal antitrust standard would facilitate antitrust enforcement and benefit plaintiffs and defendants alike, in contrast to disparate actions, under different laws, that may yield inconsistent results,” she said.

Hoffmann said the McCarran-Ferguson exemption “precludes federal antitrust enforcement of serious anticompetitive conduct” in insurance, and requires state enforcement agencies to examine each state’s varying laws on antitrust activities.

She urged Congress to heed any particular requirements of the insurance industry and carve out provisions to save certain activities from antitrust restrictions if necessary.

The argument for complete repeal came from J. Robert Hunter, director of Insurance for the Consumer Federation of America. He maintained that “anticompetitive behavior has been a prime cause” of a homeowners insurance crisis along America’s coastlines. Also, state attorneys general have had to jump in to stop bid-rigging, market allocation arrangements and hidden kickbacks to brokers because state regulators failed to act.

He argued that organizations such as ISO restrain competition because they make “loss costs” that represent about 60 to 70 percent of the rate; share expense data so insurers can compare costs; and establish classes of risk that are adopted by many insurers.

“The business cycle of the property/casualty insurance industry is exacerbated by the availability of pure premium and other rate guides the rate bureaus publish. These guides are not used by many insurers during the ‘soft’ market periods but become a kind of safe harbor when the periodic hard market strikes the commercial property/casualty market,” Hunter said.

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