Report to Congress: Repealing Anti-Trust Exemption Would Change Insurers’ Pricing Habits

August 4, 2005

A new government report finds that if the insurance industry lost its current exemption from federal anti-trust laws, insurance companies would probably no longer be allowed to rely on rating organizations for projections of future costs to set their prices.

Insurers might still be able to pool their historical loss and claims data as they now do through various rating organizations but would not be permitted to engage in joint trending practices.

The Government Accountability Office report describes the potential effects of the federal antitrust exemption included in the McCarran-Ferguson Act on insurer activities. The GAO report was prepared at the request of the Committee on Financial Services in the House of Representatives, whose chairman is Rep. Michael G. Oxley.

Rating organizations commonly provide “advisory prospective loss costs” by projecting historical loss costs into the future. These costs are calculated by trending—analyzing past data trends and using actuarial judgment about the future.

The report says it is difficult to reach firm conclusions about the application of federal antitrust laws to insurance activities because often the courts have not considered these issues. “However, over the years, most experts have said that collection of historical data would likely not violate federal antitrust laws absent McCarran; however, they are less certain that courts would find joint trending to be consistent with federal antitrust law absent McCarran, ” it adds.

GAO said that generally, larger carriers expressed less concern about maintaining the McCarran exemption than smaller carriers.

The McCarran-Ferguson Act, enacted in 1945, established the power of the states to regulate insurance companies. It also exempted certain “business of insurance” practices from federal antitrust laws, including the Sherman, Clayton, and Federal Trade Commission Acts.

The report notes that court decisions do not provide a clear indication of which insurance practices might violate antitrust laws if there were no exemption because decisions are typically based on the facts of each case. Because they are uncertain what courts might decide, legislators at both the state and federal levels have included “safe harbors” for certain insurance activities such as the collection of historical data.

“Some experts have suggested that absent the McCarran exemption, activities in the property/casualty area, especially joint rate-making, might violate federal antitrust laws, citing concerns over the collective projection of insurer losses into the future,” according to the report.

The report acknowledges that joint trending has its supporters, as well as its critics.

“According to industry representatives, regulators, and other experts, this rate-making process has certain benefits, but also raises antitrust concerns. Generally, they believe the process reduces the costs associated with pricing and regulating insurance, makes it easier for new firms to enter the insurance market, and allows consumers to better compare products,” the report says.

“However, some experts believe that under some circumstances joint trending might constitute price fixing absent the McCarran exemption, and that standardized risk classifications and products might restrict new insurers or products from entering the market, thus limiting innovation, consumer choice, and competition. Further, according to most experts, courts are more likely to find joint trending a violation of federal antitrust laws than the joint collection of historical data,” it continues.

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