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29–672 PDF 2006

S. HRG. 109–557

THE MCCARRAN-FERGUSON ACT: IMPLICATIONS

OF REPEALING THE INSURERS’ ANTITRUST EXEMPTION

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 20, 2006

Serial No. J–109–89

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois, prepared 

statement .............................................................................................................. 62

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 2

prepared statement .......................................................................................... 106

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust Bureau Office 

of the Attorney General for the State of New York, New York, New York .... 4

Hunter, J. Robert, Insurance Director, Consumer Federation of America, 

Washington, D.C. ................................................................................................. 8

Klawiter, Donald, Chair, Section of Antitrust Law, American Bar Association, 

Washington, D.C. ................................................................................................. 12

McRaith, Michael, Illinois Director of Insurance, Chair, Broker Activities 

Task Force, National Association of Insurance Commissioners, Chicago, 

Illinois ................................................................................................................... 10

Racicot, Marc, former Governor of Montana, and President, American Insurance Association, Washington, D.C. ................................................................... 6

Thompson, Kevin, Senior Vice President, Insurance Services Office, Jersey 

City, New Jersey .................................................................................................. 14

QUESTIONS AND ANSWERS 

Responses of Elinor Hoffmann to questions submitted by Senator Specter ....... 27

Responses of Robert Hunter to questions submitted by Senator Specter ........... 30

Responses of Donald Klawiter to questions submitted by Senators Specter 

and Leahy ............................................................................................................. 32

Responses of Michael McRaith to questions submitted by Senators Specter 

and Leahy ............................................................................................................. 35

Responses of Marc Racicot to questions submitted by Senators Specter and 

Leahy ..................................................................................................................... 50

Responses of Kevin Thompson to questions submitted by Senator Leahy ......... 60

SUBMISSIONS FOR THE RECORD 

Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust Bureau Office 

of the Attorney General for the State of New York, New York, New York, 

prepared statement .............................................................................................. 64

Hunter, J. Robert, Insurance Director, Consumer Federation of America, 

Washington, D.C., prepared statement .............................................................. 78

Independent Insurance Agents & Brokers of America, Inc., Alexandria, Virginia, letter ........................................................................................................... 92

Klawiter, Donald, Chair, Section of Antitrust Law, American Bar Association, 

Washington, D.C., prepared statement and attachment .................................. 96

McRaith, Michael, Illinois Director of Insurance, Chair, Broker Activities 

Task Force, National Association of Insurance Commissioners, Chicago, 

Illinois, prepared statement ................................................................................ 108

Racicot, Marc, former Governor of Montana, and President, American Insurance Association, Washington, D.C., prepared statement ................................ 128

Thompson, Kevin, Senior Vice President, Insurance Services Office, Jersey 

City, New Jersey, prepared statement ............................................................... 140

(1)

THE MCCARRAN-FERGUSON ACT: IMPLICATIONS OF REPEALING THE INSURERS’ ANTITRUST EXEMPTION 

TUESDAY, JUNE 20, 2006

UNITED STATES SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 9:30 a.m., in 

room SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senator Leahy. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Good morning, ladies and gentlemen. The 

Judiciary Committee will now proceed with our hearing on the 

McCarran-Ferguson Act, and examine the issue as to whether 

there ought to be antitrust coverage for the insurance industry, 

whether McCarran-Ferguson ought to be repealed or modified. 

The issue has been the subject of a number of legislative proposals. House bill 2401, introduced by Congressman DiFazio, would 

eliminate the antitrust exemption under McCarran, and is a byproduct of earlier legislation which was introduced by Congressman Brooks, then chairman of the House Judiciary Committee. 

In the Senate, we have Senate bill 1525, introduced by Senator 

Leahy, which relates to the issue that McCarran would not apply 

to medical malpractice insurers who engage in any form of price 

fixing, bid-rigging, or market allocation, and Senate 2509, Senator 

Sununu, which would authorize Federal regulation for insurers 

who opt into the program. 

The issue has been the subject of an investigation by the New 

York Attorney General’s Office, which found that there was bid-rigging and customer allocation schemes among some major insurers, 

and the country’s largest broker. We have a panel today of six witnesses, evenly divided: three advocating for repeal of McCarranFerguson and three opposing it. 

This is a very important subject where there is a significant 

question as to whether regulation by the States is sufficient and 

whether there should be special status accorded to the insurance 

industry to be exempt from the antitrust laws, with those laws 

being very, very important in enforcing competition in the economy 

generally. 

2

Without objection, my full statement will be made a part of the 

record. 

We will now turn to our first witness. Our first witness is Ms. 

Elinor Hoffmann, Assistant Attorney General, Antitrust Bureau, in 

the New York Attorney General’s Office. 

She has had 25 years of litigation experience, including numerous antitrust cases. She is an Adjunct Professor of Law at Brooklyn 

Law School, Phi Beta Kappa and Magna Cum Laude from New 

York University, and a law degree from Brooklyn Law School, and 

a Master’s in law from New York University. 

Thank you for joining us here today, Ms. Hoffmann. We look forward to your testimony. 

Ms. HOFFMANN. Good morning. On behalf of the New York State 

Attorney General, thank you for the opportunity to testify here 

today. 

The antitrust laws reflect our society’s belief that competition in 

the commercial marketplace enhances consumer welfare and promotes our economic and political freedom. 

Unrestricted competition, however, may not be consistent with 

other significant public policies or regulatory schemes that also 

serve the public interest. So we exempt conduct from antitrust 

scrutiny to the extent necessary—but only to the extent necessary—to obtain—

Chairman SPECTER. Ms. Hoffmann, you have just begun your testimony, less than a minute in. I want to turn to you, Senator 

Leahy, to have your opening statement. We just adopted a new 

rule. If you are less than a minute into your testimony, you are 

subject to interruption. 

[Laughter]. 

Chairman SPECTER. You are subject to interruption, and you will 

be accorded the full time when you begin again, providing your 

microphone is on. 

Ms. HOFFMANN. Thank you, Senator. 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator LEAHY. These are known as the Specter rules, which I 

want you to know, we all follow. 

With respect, I did want to be here. I apologize, I started off a 

little late this morning. I had breakfast this morning with Cardinal 

McCarrick, one of the finest clerics to serve here, who is now retiring, which means they will find hundreds of other things for him 

to do and will have him working even harder than he does now. 

He is a great person, and it was a very inspirational breakfast. 

As far back as 1945, the insurance industry has operated largely 

beyond the reach of Federal antitrust laws. The McCarran-Ferguson Act created this exemption. So long as the insurance business is regulated by the States, there is no room for Federal oversight. 

The drafters may well have been well advised at the time, and 

perhaps it was a worthwhile policy, but the times have changed. 

The common refrain of tort reform proponents is ‘‘out-of-control juries and large malpractice awards drive insurance costs higher,’’ 

3

and medical professionals, we are told, are being crushed by excessive costs. 

Just recently, the Senate considered legislation to cap punitive 

damages in medical malpractice cases. One study found that 

among the 15 best-rated medical malpractice insurance providers, 

premiums rose dramatically between 2002 and 2005—dramatically—but the cost of the claims paid out remained flat, so it was 

hard to see just how, somehow, claims were pushing up the cost 

of premiums. 

Claims are not driving the premiums. Insurance costs among 

competing companies are rising in lock step with each other. That 

was the other thing. They were not paying out any claims, but the 

costs were going up and they were in lock step. Maybe there were 

other causes. 

I have introduced a bill, the Medical Malpractice Insurance Antitrust Act of 2005, along with Senators Kennedy, Durbin, Rockefeller, Boxer, Feingold, Salazar, Obama and Mikulski. It would repeal the antitrust exemption for medical malpractice insurance, 

and only for the most egregious cases of price fixing, bid rigging, 

and market allocation. It is a narrow bill. 

My bill targets a particularly troublesome aspect of the problem, 

and I think we should look at it. If insurers around the country are 

operating in an honest and appropriate way, they should not object 

to being asked to abide by the same antitrust laws as virtually all 

other business. 

There is no reason why they should be treated differently than 

other businesses. We all want to be treated alike, in an egalitarian 

manner, because nobody is above the law, except for insurance 

companies. 

American consumers, from sophisticated multinational businesses to individuals shopping for personal insurance, have the 

right to be confident that the cost of the insurance reflects competitive market conditions, not collusive behavior. 

I recognize the insurance industry’s unique characteristics, including the dependence on collected claim and loss data. But I 

think you can combine those legitimate needs while still providing 

Federal regulators with the tools to investigate and prevent collusion and other anti-competitive behavior. 

Individuals and businesses are compelled, sometimes by law and 

sometimes by prudence, to purchase many kinds of insurance. I 

just want to make sure they are being treated fairly and are not 

subject to insurance company activities that create, not better insurance packages for the individual, but higher profits for those 

selling them. 

So, thank you, Mr. Chairman. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Senator Leahy. 

Ms. Hoffmann, we return to you with the full five minutes. 

4

STATEMENT OF ELINOR R. HOFFMANN, ASSISTANT ATTORNEY 

GENERAL, ANTITRUST BUREAU, OFFICE OF THE ATTORNEY 

GENERAL FOR THE STATE OF NEW YORK, NEW YORK, NEW 

YORK 

Ms. HOFFMANN. Thank you, Senator. Good morning. On behalf of 

the New York Attorney General, thank you for the opportunity to 

testify here today in favor of the repeal of the McCarran-Ferguson 

exemption from the antitrust laws. 

The antitrust laws reflect our society’s belief that competition in 

the commercial marketplace enhances consumer welfare and promotes our economic and political freedoms. 

Unrestricted competition, however, may not be consistent with 

other significant public policies or regulatory schemes that also 

serve the public interest, so we exempt conduct from antitrust scrutiny to the extent necessary—but only to the extent necessary—to 

attain other important goals. 

The McCarran-Ferguson exemption from the antitrust laws is an 

industry-specific exemption, unlike, say, the labor exemption, 

which is a broad-based policy exemption that crosses many sectors. 

It was enacted in 1945 as part of a bill to address the concerns 

of the insurance industry in the States after the Supreme Court’s 

decision holding that insurance, unquestionably, was part of interstate commerce. 

The insurers wanted to continue to engage in collective conduct 

like rate setting and policy term agreements that they deemed necessary for solvency. McCarran preserves the power of the States to 

regulate and tax, but affords an exemption from the antitrust laws 

for the industry. 

McCarran states that the Federal antitrust laws apply to the 

business of insurance to the extent that such business is not regulated by State law. Agreements and actions taken to boycott, coerce 

and intimidate are not exempt. 

Thus, in some senses the exemption is narrow, but it runs very 

deep. It was intended to protect the industry from the chilling effect that antitrust exposure might have on joint activities designed 

to ensure prudent transfers of risk. But, importantly, it protects 

price fixing, cartel-like behavior that in most industries would be 

summarily condemned. 

Since 1945, some participants in the insurance sector have, on 

occasion, engaged in anti-competitive conduct that has nothing to 

do with the original purpose of McCarran. 

Recently, New York and other States found evidence of serious 

misconduct in the insurance industry. Information obtained during 

our investigation supports our allegations of collusion to subvert 

the competitive process. 

More specifically, we have discovered, among other things, stark 

evidence of bid-rigging and customer allocation. For example, we 

found evidence that Marsh & McClennan, one of the world’s largest 

insurance brokers, steered unsuspecting clients to insurers with 

which it had lucrative payoff arrangements based on volume or 

profitability of the business that Marsh brought to the insurers. 

These arrangements were often called contingent commissions, or 

overrides. 

5

In order to make the scheme work really well, Marsh solicited 

fictitious bids from insurers so that business could be steered to the 

insurer favored by Marsh on a particular deal, that is, the insurer 

who would pay Marsh the most. 

The customer thought it was getting the benefits of competition, 

but it was not. Marsh’s clients may have been unaware of the 

scheme, but the insurers were not unaware. Marsh sometimes even 

circulated the favored bidder’s quote and ask other bidders to protect it by submitting a higher, non-competitive quote. 

As a result of our investigation, hundreds of millions of dollars 

in restitution will be paid to customers injured by this type of anticompetitive conduct. Twenty officers and executives have pled 

guilty, six companies have settled, and a total of over $3 billion in 

restitution and penalties has been recovered due to antitrust and 

other violations. 

The investigations and litigation are ongoing. In addition to a 

pending lawsuit that we have against Liberty Mutual, Florida has 

sued Marsh under State laws alleging antitrust and RICO violations, and there is a pending class action before the District Court 

in New Jersey, where McCarran is the subject of extensively 

briefed Motions to Dismiss. 

We brought our case against Marsh in State court and we plead 

State law claims, including claims under New York’s Donnelly Act, 

New York’s antitrust law. Donnelly has its own antitrust exemption for insurance. It exempts property and casualty insurers, but 

not brokers and not the business of insurance. 

Had we prosecuted our case in Federal court under Federal antitrust law, we likely would have encountered a defense under 

McCarran, delaying, or maybe precluding, settlement. That is not 

to say we would have lost, but as enforcers we are not inclined to 

invite delay in reaching the merits. 

This is not just New York State’s problem, it is a pervasive national problem. McCarran, because it precludes Federal antitrust 

enforcement of serious anti-competitive conduct in the insurance 

sector, requires State enforcement agencies and litigants to examine each State’s laws to determine whether that State exempts the 

business of insurance, or any part of it, from State antitrust scrutiny. 

Some States follow Federal law in whole or in part, others exempt insurance from State antitrust law to some extent, and still 

others have no exemption at all. Remedies and outcomes may differ 

from State to State. Differences in State laws may pose an impediment to class certification in some instances. 

The impact of McCarran is that it encourages inefficient multiple 

proceedings under disparate laws brought by diverse sets of public 

and private plaintiffs, with the clear potential for inconsistent results. 

Chairman SPECTER. Ms. Hoffmann, how much more time will 

you need? 

Ms. HOFFMANN. About two more minutes. 

Chairman SPECTER. Why do you not summarize at this point? 

Ms. HOFFMANN. Sure. 

6

There are other ways, in fact, for the insurance industry to 

achieve its legitimate goals. Exchanges of information are permitted in other industries, consistent with the antitrust laws. 

In sum, experience with McCarran indicates that there is the 

need to reexamine industry-specific exemptions periodically. Markets change in many cases, eliminating the need for broad exemptions. McCarran is one example of an exemption that has no apparent business justification and impedes free and open competition in 

a major sector of the U.S. economy. 

Chairman SPECTER. Thank you very much, Ms. Hoffmann. 

[The prepared statement of Ms. Hoffmann appears as a submission for the record.] 

Chairman SPECTER. We turn now to Mr. Marc Racicot, president 

of the American Insurance Association, former Governor of Montana. He had served as Chairman of the Republican National Committee. He is a graduate of Carol College in Helena, Montana, and 

the University of Montana Law School. 

Thank you for joining us, Governor Racicot, and we look forward 

to your testimony. 

STATEMENT OF MARC RACICOT, FORMER GOVERNOR OF 

MONTANA, PRESIDENT, AMERICAN INSURANCE ASSOCIATION, WASHINGTON, DC 

Mr. RACICOT. Thank you, Mr. Chairman, and good morning. I am 

delighted to be here this morning to speak on behalf of property 

and casualty insurers across the country and around the globe that 

are members of the American Insurance Association. We are, of 

course, appreciative of the opportunity to be here to discuss 

McCarran-Ferguson. 

It is important to note that McCarran is a power-sharing statute 

that reflects Congress’ judgment to delegate, not abdicate, authority over insurers to States that regulate the business of insurance 

themselves. 

In doing so, McCarran provides insurers with an antitrust regime that recognizes the insurance regulatory role entrusted to the 

States. Because of the delicate balance of power contained in 

McCarran, we believe the discussion of a repeal or limitation of 

McCarran’s antitrust provisions cannot be divorced from a corresponding discussion of the nature of State insurance regulation. 

Within this framework, my testimony today will focus on two 

things: first, some perspective on the McCarran discussion over the 

years; second, the role of McCarran in today’s debate over needed 

reform of the insurance regulatory system. 

In 1944, as was mentioned, the Supreme Court held in Southeastern Underwriters that insurance was indeed a product of interstate commerce and, therefore, subject to Federal scrutiny. 

As the case centered around how insurers collected and analyzed 

data to appropriately price risks, it necessarily focused congressional attention on several pressing questions dealing with the primacy of State regulations, State taxation of insurers, application of 

Federal antitrust laws, and whether, and how, insurers could collaborate on drafting uniform policy forms. 

Congress responded by enacting McCarran a year later, as the 

committee is well aware. McCarran entrusted the States with auVerDate 0ct 09 2002 12:18 Sep 08, 2006 Jkt 029672 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\29672.TXT SJUD4 PsN: CMORC
7

thority to regulate and tax the business of insurance, giving them 

three years from enactment to implement their regulatory systems, 

and said no Federal law should be presumed to interfere with that 

authority unless clearly designated to do so. 

McCarran also said that Federal antitrust laws would apply to 

the extent that such businesses were not regulated by State law, 

or in any case where insurers had engaged in, or attempted to engage in, an act of boycott, intimidation, or coercion. 

Following the passage of McCarran, all States enacted unfair 

competition and trade practices laws directed specifically to insurers and adopted prohibitions on acts of boycott, intimidation, or coercion by insurers, as well as Sherman Act-and Clayton Act-type 

prohibitions on unfair restraint of trade. 

When implementing these regulatory structures, the States also 

faced the question always raised when dealing with a regulated industry, and that is how to balance the roles of regulation and antitrust policy. 

They responded by placing all collective activity by insurers 

under regulatory control, scrutiny and review, effectively replacing 

antitrust litigation with regulatory oversight of any collective activity. 

Not coincidentally, the same type of balance exists for other financial services institutions and industries, such as banking and 

securities. Federal courts have held that this balance is critical and 

that antitrust scrutiny is inappropriate where activity is subject to 

regulation, otherwise, chaos would rule. 

Private antitrust litigation constantly would battle Federal regulatory systems, creating enormous uncertainty for businesses and 

customers, to no one’s benefit. One important distinction, from an 

antitrust perspective, however, is that the banking and securities 

industries are principally Federally regulated, while insurance is 

principally State regulated. 

When Federal antitrust laws balance against Federal regulation 

for a specific industry, courts give precedence to the specific regulatory system Congress has set up for that industry over broad 

non-specific language of the antitrust laws. 

McCarran comes under fire periodically. Whenever an affordability or availability problem arises in any line of insurance, critics in those circumstances tend to blame McCarran. Their misguided solution is to repeal McCarran. 

Ironically, when the problem subsides, those who have argued 

that McCarran should have been repealed never credit McCarran 

for having cured the problem. The reality is that when insurance 

prices spike or availability shrinks, it is all because of some underlying problem that needs to be addressed. 

To be fair to all customers and to stay in business, insurers must 

be able to price prices to cover policy losses. When government 

price controls prevent that, insurers are forced to pull back from 

the marketplace. Instead of looking at insurer activity under 

McCarran, it would always be better to examine cost driver-related 

problems and fix them. 

In the early 1990s, as was mentioned, AIA worked with Congress 

to develop legislation to retain essential McCarran antitrust exemptions through specifically identified safe harbors. After the 

8

1994 elections, congressional interest moved from amending 

McCarran to enacting wide-ranging insurance regulatory reform. 

Today, we believe that regulatory reform is the way to go. 

Since McCarran only applies to the businesses of insurance regulated by the States, it obviously would not apply to pricing activities of Federally chartered insurance agencies or insurance industries operating under a national charter. 

As was mentioned by the Chairman, Senate bill 2509 sets about 

to do just that. We think it is time for that particular issue to be 

entertained by the committee and by Congress. 

AIA members are certainly willing to take the risks inherent in 

that approach recommended in that legislation because we strongly 

believe that a competitive marketplace is critical to being able to 

serve our customers in the years ahead. 

Mr. Chairman, thank you for the opportunity to present. I am 

available, obviously, as you know, for questions. 

Chairman SPECTER. Thank you very much, Governor Racicot. 

[The prepared statement of Mr. Racicot appears as a submission 

for the record.] 

Chairman SPECTER. Our next witness is Mr. Bob Hunter, Director of Insurance, Consumer Federation of America, formerly the 

Texas Commissioner of Insurance, and president and founder of 

the National Insurance Consumer Organization. He has worked 

both as underwriter and actuary in the insurance industry. 

Thank you for coming in today, Mr. Hunter. The floor is yours. 

STATEMENT OF J. ROBERT HUNTER, INSURANCE DIRECTOR, 

CONSUMER FEDERATION OF AMERICA, WASHINGTON, DC 

Mr. HUNTER. Thank you, Mr. Chairman, Ranking Member 

Leahy. 

Adam Smith wrote this in 1776: ‘‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.’’ That is why we passed antitrust laws. 

But in insurance, this is a trade enjoying an unusually broad exemption, an exemption, by the way, slipped in in the conference 

committee in 1945, after both Houses passes the legislation it did 

not have it in. 

While it should not require a study to prove that collusion harms 

buyers, you have study after study by Federal agencies that all call 

for an end to the antitrust exemption. As a result of this call, in 

1994 the House Judiciary Committee passed a sharp cut-back of 

the exemption in a bipartisan vote. 

Since 1994, collusive behavior in insurance companies continues. 

We just heard about the bid-rigging, et cetera that New York has 

uncovered. Again, State regulation has failed to catch it. It was at 

least 20 years ago that I first warned the State regulators about 

the perils of the contingency commission arrangements. 

Anti-competitive price and market allocation signals by insurers 

have exacerbated the insurance crisis in homeowners’ insurance on 

the Nation’s coasts. The Nation has suffered another hard market, 

starting in the year 2000, a period when insurers returned to the 

price levels established by the rate bureaus. 

9

These cartel-like bureaus, such as the Insurance Services Office, 

day after day produce price guidance on 70 percent of the rate that 

many insurers use as the basis for their pricing. They manipulate 

data and project pricing into the future, using steps that legal experts told Congress, when the House was reviewing it, would be illegal absent the McCarran immunity. 

Rate bureaus have cartel-like control of rate-making data. They 

establish price classes for people to be charged. They establish territories that are used to rate people and the data that are collected 

and the format they establish assure significant uniformity in the 

market. The antitrust exemption has been the most potent enabler 

of these, and many other anti-competitive practices. 

Along the coast today, on May 9, 2006, ISO’s CEO signaled that 

the market was over-exposed on the coastline of America, and days 

later, leading insurers announced they were dropping over 150,000 

homes. 

In March, another rate guidance organization, Risk Management 

Solutions, announced it was changing its hurricane model, causing 

home insurance hurricane rates to jump 40 percent on the Gulf 

Coast, and by up to 30 percent all the way up to Maine. 

The old models were developed after Hurricane Andrew, based 

on long-term 10,000-year damage projections. Insurance commissioners, including me, were told that the large price jumps that we 

were asked to approve at that time were scientifically proper and 

would bring price stability. 

We were assured there would be no need to raise rates after catastrophic weather events because the storms would have already 

been anticipated when the rates were set, even including Category 

5 storms hitting Miami, nor would there be rate drops if no storms 

came. Insurance would bring stability rather than turmoil after 

large, infrequent storms, we were told. 

However, the new RMS model breaks that promise, and instead 

of a 10,000-year projection, makes a mere 5-year projection, with 

higher hurricane activity expected. It is clear that the insurance 

companies pressured the modelers to achieve this result. The other 

modelers followed suit. 

It is shocking and unethical that scientists at these modeling 

firms, under pressure from the insurers, have completely changed 

their minds all at the same time, after a decade of using models 

they assured the public were scientifically sound. Worse, the 

changes have nothing to do with science, but rather with collusive 

pressure brought by the insurance companies. 

Support for ending the exemption is strong. The New York Times 

editorialized, ‘‘Bust the Insurance Cartel,’’ and similar headlines in 

many editorials. Business Week and other leading business journals also called for the end. 

Consumer groups, small business groups, AARP, the American 

Bar Association, the American Bankers Association, labor unions, 

medical groups, and others supported repeal when the House Judiciary Committee last reviewed this. Rate bureaus and insurers 

claim that, despite their history of rampant collusion, they have 

gone straight and now a modeling of competition. 

A simple question can test this bold claim: does the insurance industry unconditionally support a bill that repeal’s McCarran’s 

10

broad antitrust immunity? A straight repeal, not tied to proposals 

to gut the meager consumer protections that we enjoy today? 

Mr. Chairman and members of the committee, now is the time 

to repeal the McCarran-Ferguson Act’s antitrust exemption. We estimate it would save consumers about 10 percent, or $45 billion a 

year. 

Chairman SPECTER. Thank you very much, Mr. Hunter. 

[The prepared statement of Mr. Hunter appears as a submission 

for the record.] 

Chairman SPECTER. Our next witness is Mr. Michael McRaith, 

Director of the Division of Insurance for Illinois, Department of Financial and Professional Regulation. Prior to his appointment as 

Director, Mr. McRaith spent 15 years in private practice in Chicago. 

He has a bachelor’s degree from Indiana University and a law 

degree from Loyola University School of Law in Chicago. 

We appreciate you coming in, Mr. McRaith, and we look forward 

to your testimony. 

STATEMENT OF MICHAEL MCRAITH, ILLINOIS DIRECTOR OF 

INSURANCE, CHAIR, BROKER ACTIVITIES TASK FORCE, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, 

CHICAGO, IL 

Mr. MCRAITH. Thank you, Chairman Specter and Ranking Member Leahy. I appreciate the invitation to testify this morning on behalf of the National Association of Insurance Commissioners. 

I am Michael McRaith, Director of Insurance in Illinois, and an 

active participant in the NAIC’s continued leadership on national 

insurance matters. I also serve as chairman of the Broker Activities Task Force for the NAIC. 

As insurance commissioners, our core priority is consumer protection. Insurance is a uniquely personal and complex contract. 

Analogies to other financial sector products, including the banking 

industry, are inherently misleading. With debt or equity financial 

products, even with deposits, a consumer assumes the risk; with insurance, the consumer transfers the risk. 

Consumers pay in advance for a benefit that may never be needed, or may be needed significantly in excess of the price paid. Insurance is a product unique to the individual or unique to the insured property, business, or community. Insurance is always local 

and personal, if not intimate. 

Today the question of McCarran will be interpreted differently by 

different witnesses. Some will use this discussion to propound the 

need for a Federal regulator. The creation of a massive Federal bureaucracy to benefit a small segment of the largest carriers in the 

insurance industry at the expense of consumers is an idea that this 

committee and the U.S. Congress should unequivocally reject. 

The reasons for rejection are so expansive, I will resist the urge 

today to engage in that dialogue and focus instead on the question 

at hand. With the limitation exemption of McCarran, State-based 

regulation fosters a competitive marketplace. 

With more than 5,000 insurers in the United States, only 296 

have more than 500 employees. These smaller insurers do not have 

as prominent a voice in Washington, but they serve niche markets 

11

and they provide more personalized service, or maybe a longstanding farm mutual serving a rural community in your home 

State. 

State-based regulation affords comprehensive cradle-to-grave supervision, ensures carrier solvency, monitors market conduct of carriers and producers, and enforces unfair competition and deceptive 

practices statutes. 

Discussion of McCarran’s appeal must be considered in the broad 

economic context. Repeal of the exemption cannot be viewed in a 

legalistic vacuum. Any repeal, even with a list of permissible items, 

will subject regulation of the industry to years of uncertainty and 

stability, amounting ultimately to installation of the courts as a de 

factor regulator. 

Moreover, the discussion of enumerated permissible practices implicitly illustrates the difference between insurance and other industries. The business of insurance exemption in McCarran authorizes insurers to engage in supervised, but cooperative, activities. 

These practices foster competition, consumer choice and awareness, 

and help maintain marketplace integrity. 

But the label of an antitrust exemption is a misnomer because 

States extensively and actively regulate the entire industry. We 

closely supervise the conduct of the very organizations involved 

with the cooperative activity. 

Price fixing, bid-rigging, tying, boycotting, other anti-competitive 

practices that negatively impact consumers, those are simply not 

allowed. 

Attorney General Spitzer of New York should be commended for 

bringing the abusive contingent commission practices into the spotlight. NAIC members have worked on these issues with attorneys 

general from around the country. NAIC members have guided resolutions that have returned more than $1 billion to policyholders 

and imposed businesses reforms that prioritized consumer protections. 

McCarran’s limited exemption is intertwined with extensive 

State-based regulation. A repeal would not improve—not improve—

the affordability, reliability, or availability of insurance to consumers. 

Repealing the exemption would inject uncertainty, reduce stability and predictability, deter capital infusions, and ultimately 

eliminate, if not reduce, competition and raise costs. Consumer 

benefits and protections are enhanced with McCarran’s limited exemption. 

The NAIC looks forward to continued work with Federal and 

State officials, consumers, the large and small industry participants, and all interested parties to ensure that prevention and 

punishment of anti-competitive practices continues. 

Thank you. 

Chairman SPECTER. Thank you very much, Mr. McRaith. 

[The prepared statement of Mr. McRaith appears as a submission for the record.] 

Chairman SPECTER. Our next witness is Mr. Donald Klawiter, 

Chairman of the American Bar Association’s Section of Antitrust 

Law, partner in the antitrust practice group of the office of Morgan, Lewis & Bockius. He has had several supervisory positions 

12

with the Antitrust Division of the Department of Justice. He has 

an undergraduate and law degree from the University of Pennsylvania. 

With all that background, Mr. Klawiter, in ML&B, why did you 

come to Washington? 

Mr. KLAWITER. I have always been in Washington, Mr. Chairman. 

STATEMENT OF DONALD C. KLAWITER, CHAIR, SECTION OF 

ANTITRUST LAW, AMERICAN BAR ASSOCIATION 

Mr. KLAWITER. Chairman Specter, Senator Leahy, I appreciate 

the opportunity to present the views of the American Bar Association on the insurance exemption from the antitrust laws in the 

McCarran-Ferguson Act. 

Just over 60 years ago, Congress enacted the McCarran-Ferguson Act as a limited exemption from the antitrust laws for the 

insurance industry. It was enacted as an attempt to reaffirm the 

supremacy of State regulation in response to Federal criminal antitrust challenges. It was a time when many industries were regulated, either at the Federal or the State level, and enjoyed exemptions from the Federal antitrust laws. 

The world is very different today. Over those 60 years, our competition policy has moved decisively from promoting the benefits of 

regulation and regulatory oversight to fostering the benefits of free 

and open competition. 

In the late 1970s, the National Commission for the Review of the 

Antitrust Laws and Procedures, where Senators Kennedy and 

Hatch served with distinction as commissioners, focused enormous 

attention on the need to repeal and limit industry-specific antitrust 

exemptions, and many were repealed by the Congress after that 

commission’s work. 

The current Antitrust Modernization Commission is, today, 

studying the remaining exemptions that have been presented and 

there have been proposals to eliminate or sunset many of the exemptions, including the insurance industry exemption. 

This committee should be commended for your focus on this issue 

today. In 60 years, we have learned that industry-specific exemptions from the antitrust laws are rarely justified, and that the antitrust laws are a flexible instrument of the law that transcends industries and special competitive circumstances. 

The American Bar Association favors repeal of the McCarranFerguson Act. It is our strong position that the insurance industry 

should be subject to the same antitrust laws and rules as all other 

industries. 

We believe, however, that the law should be replaced by a series 

of safe harbors to make clear that certain types of conduct by insurers that are necessary, pro-competitive, and beneficial to the 

American economy should be encouraged. 

Safe harbors would provide the industry with an opportunity to 

conduct necessary pro-competitive joint activities without the 

chilling concerns of possible antitrust litigation. 

Among the safe harbors we would propose would be the following. First, the industry should be able to collect and disseminate 

past loss experience data over a large number of insured. This is 

13

essential to the industry’s ability to make assessments of risk. 

Small companies, in particular, need this base of information to 

compete effectively against larger companies. 

Second, standardization of policy forms contributes to consumer 

understanding and assists in reliable data collection efforts. 

Third, where the risks are too large or too uncertain for a single 

insurer to underwrite, the insurers traditionally have cooperated in 

creating pools or joint ventures, writing large risk and then sharing 

that risk. As in any joint venture, the parties need to agree on 

rates and policy language to complete the underwriting job. 

Fourth, State regulators often require insurers to cooperate in 

underwriting residual risk, particularly in inner city areas. These 

cannot be insured in the voluntary market. This conduct should be 

allowed, as long as it is authorized and actively supervised by the 

States. 

Fifth, we are reluctant to suggest an exclusive list of cooperative 

activities, and we suggest that the industry should propose other 

features of joint activity that would be pro-competitive. This is not 

intended to be an open-ended provision. Indeed, it must be very 

specific and unambiguous to be effective. 

These safe harbors are intended to protect legitimate pro-competitive joint activity by insurers, while still subjecting the insurance industry to the antitrust rule of law. While most, if not all, 

of the safe harbor conduct would be permissible, or even encouraged, under current antitrust precedent, the idea of safe harbors is 

to remove all doubt, especially where there is no antitrust precedent or frame of reference in many of these areas because 

McCarran has been the law for 60 years. 

Thank you for the opportunity to appear before you today and 

present the views of the American Bar Association. Competition is 

the hallmark of the American economy. The United States has very 

successfully spread the gospel of competition to the rest of the 

world, with remarkable results in international acceptance and enforcement over the years. 

Special treatment of certain industries, whether more lenient 

treatment or stricter treatment, makes us look inconsistent or even 

hypocritical to those we seek to educate and influence around the 

world, especially the countries of Eastern Europe, which are just 

beginning to develop their economies. 

The American Bar Association believes strongly that competition 

in the insurance industry can be enhanced, consistent with necessary joint activities, to the benefit of all segments of the economy. 

I would be happy to answer any questions the committee may 

have. 

Chairman SPECTER. Thank you very much, Mr. Klawiter. 

[The prepared statement of Mr. Klawiter appears as a submission for the record.] 

Chairman SPECTER. Our final witness is Mr. Kevin Thompson, 

Senior Vice President, Insurance Services Office. In that position, 

he is responsible for filing activities required by regulators at the 

States. He has 30 years of professional insurance experience. He 

has a bachelor’s degree in mathematics and education from New 

York University. 

14

We appreciate you coming in today, Mr. Thompson, and we look 

forward to your testimony. 

STATEMENT OF KEVIN THOMPSON, SENIOR VICE PRESIDENT, 

INSURANCE SERVICES OFFICE, JERSEY CITY, NEW JERSEY 

Mr. THOMPSON. Thank you, Mr. Chairman and Ranking Member 

Leahy, for the opportunity to discuss the vital role ISO plays in the 

property and casualty insurance industry in the United States 

today. 

The property and casualty insurance industry today is intensely 

competitive and fragmented. Not only do insurers compete in the 

way they package and price their products, but they also compete 

in the way they distribute and service them. 

Within the industry, ISO provides insurers with critical insurance information that promotes competition between all insurers 

and adds economies of scale to functions vital to each individual insurer. 

Access to a broad base of reliable information and standardized 

coverage parts that comply with State requirements permits any 

insurer to enter new insurance markets and compete in existing 

ones that might not otherwise be possible if it had to rely solely 

on its own information and resources. 

ISO’s charter specifically states that all ISO information and 

services are purely advisory. That is, insurers select among any of 

ISO’s services and use them as they choose. ISO does not develop 

rates. Instead, ISO provides advisory prospective cost information. 

Rate setting is a matter between individual insurers and their regulators. 

ISO provides statistical and actuarial information and analyses, 

policy forums, data processing, and related services for a broad 

spectrum of commercial and personal lines of insurance. 

ISO is actively regulated by the States as an advisory organization and performs its various functions in each of the 50 States, the 

District of Columbia, Puerto Rico, Guam, and the Virgin Islands. 

ISO information is available to any property and casualty insurer, and insurers are free to use, modify, or not use ISO information as they determine their own strategies in the highly competitive insurance marketplace. 

The pro-competitive benefits of ISO’s products and services are 

well-documented and include, first, accurate projections of future 

claims payments. Pricing insurance is difficult. Unlike most businesses, insurers cannot set a price based on known costs and production and distribution. When pricing a policy, an insurer needs 

to project the cost of future insurance claims by examining historical data. 

This method is reliable only when the insurer uses a sufficient 

amount of accurate data. ISO’s actuaries are highly trained to compile, edit for quality, process, and combine data for many companies into statistically credible pooled databases accessible by any 

insurer which, along with his own data and other information, enable an insurer to independently determine its own prices and competitive strategies. 

Second, economies of scale. For many States and lines of insurance, if individual insurers had to replicate the pooled databases, 

15

actuarial analyses, professional staff, and data processing provided 

by ISO, the costs would be so great that a number of insurers could 

decide to not enter, or not remain, in some markets. Insurers would 

incur higher expenses in replicating ISO materials, thereby making 

insurance more expensive. 

Third, ease of market entry. Access to ISO’s products and services enables insurers of all sizes to more easily enter product lines 

or geographic markets they might not otherwise consider worth the 

risk of the start-up costs. 

Fourth, availability of a credible industry database. ISO’s data 

compilations increase data quality for both insurers and regulators 

and facilitate research and development of new products and innovations to existing products. 

ISO submits summaries of this information to insurance regulators, as required by law, to help the regulator evaluate the state 

of the insurance market in each jurisdiction. 

In conclusion, by improving insurers’ knowledge of their true 

costs and by introducing economies of scale, ISO confers benefits to 

the insuring public through lower costs. 

The pall that would be cast over these essential operations by the 

repeal or substantial modification of the already limited antitrust 

exemption contained in McCarran-Ferguson could be enough to severely curtail these benefits. The result would be a disservice, not 

only to insurers, large and small, but also to the insuring public 

as a whole. 

That is why, when considering any possibility of amendment or 

repeal of the McCarran-Ferguson Act, care must be taken to ensure 

access to vital advisory organization products and services it preserved and protected. 

Once again, thank you for the opportunity to discuss the vital 

role ISO plays in the property and casualty insurance industry in 

the U.S. today. 

Chairman SPECTER. Thank you very much, Mr. Thompson. 

[The prepared statement of Mr. Thompson appears as a submission for the record.] 

Chairman SPECTER. We now proceed with questions by members 

of the panel. Our customary rule is five minutes, and we will observe that, but there are only two of us here. 

Ms. Hoffmann, what was the gravamen of the matter that you 

referred to? What insurance companies were involved in that 

Marsh matter? 

Ms. HOFFMANN. Marsh? I believe it was AIG, Liberty Mutual, 

ACE, Zurich. 

Chairman SPECTER. Liberty Mutual, AIG. Who else? 

Ms. HOFFMANN. I think, Zurich and ACE. 

Chairman SPECTER. Will you speak up? Who was the last one 

you mentioned? 

Ms. HOFFMANN. ACE. 

Chairman SPECTER. You say you believe. Are you sure about 

that, as to what companies were involved? I really do not like to 

identify companies unless you know they were involved. 

Ms. HOFFMANN. I am basing that on the document that I read 

that I have attached to my written testimony. 

16

Chairman SPECTER. Well, did you prepare your written testimony? 

Ms. HOFFMANN. Yes, I did. 

Chairman SPECTER. What was involved? You did not give us very 

much detail. You said there was a pay-off here involving Marsh. 

You said that there were hundreds of millions of dollars involved 

in restitution. 

You did not mention any criminal charges in your written testimony. In the written testimony of Mr. McRaith, there is a reference 

to criminal prosecutions and guilty pleas. What was the case all 

about? Let us hear. 

Ms. HOFFMANN. The Marsh case involved the existence of contingent commissions. These are commissions that were paid by insurers to Marsh based on volume or profitability of business that 

Marsh brought to insurers. 

Chairman SPECTER. Were there criminal prosecutions brought by 

the State Attorney General’s Office? 

Ms. HOFFMANN. Yes, there were. 

Chairman SPECTER. And against whom were those prosecutions 

brought? 

Ms. HOFFMANN. Individuals. Civil cases. 

Chairman SPECTER. That does not tell me very much. From what 

companies? What were their positions? 

Ms. HOFFMANN. I do not know the exact positions of the individuals. I believe that individuals from Marsh and AIG pleaded guilty, 

and from Zurich. 

Chairman SPECTER. The written testimony you submitted says, 

‘‘Marsh moved business to the insurance companies that paid it the 

highest commission, and to make the scheme work, Marsh solicited 

fictitious or cover bids to make the incumbent insurers’ rates appear competitive. 

Three insurance company executives, two AIG and one from 

ACE, pleaded guilty to criminal charges in connection wit the 

scheme. Two employees from Zurich American Insurance Company 

also pleaded guilty to criminal charges in connection with the bidrigging scheme.’’ 

Can you tell us a little more, by way of amplification, as to exactly what conduct was involved there? 

Ms. HOFFMANN. I do not recall the specific conduct attributed to 

those individuals. 

Chairman SPECTER. Well, could you provide that information to 

the committee, please? 

Ms. HOFFMANN. I will. 

Chairman SPECTER. Mr. McRaith, in your written statement you 

refer to a task force of some 15 States. The NAIC appointed a 15–

State task force to develop a three-pronged national plan to coordinate multi-state action on broker commission issues. 

You refer in your testimony to common law fraud, which resulted 

in a number of guilty pleas on criminal charges of fraud related to 

bid rigging. At least 17 guilty pleas and 8 indictments have been 

entered based on related charges. 

Were any criminal charges brought by Illinois State officials? 

Mr. MCRAITH. No, Mr. Chairman. 

Chairman SPECTER. Why not? 

17

Mr. MCRAITH. The criminal charges were brought by New York 

officials. 

Chairman SPECTER. Did Marsh function in Illinois? 

Mr. MCRAITH. Marsh certainly did have clients in Illinois. Yes, 

Mr. Chairman. 

Chairman SPECTER. Did you investigate to make a determination 

as to whether there were criminal violations by Marsh in Illinois? 

Mr. MCRAITH. Mr. Chairman, the Division of Insurance, in conjunction with the Illinois Attorney General, did review conduct by 

Marsh in relation to policyholders in Illinois. The criminal 

charges—

Chairman SPECTER. My red light is on. But with your permission, Senator Leahy, why do we not make this 10-minute rounds? 

Since there are only the two of us present, we will not keep anybody waiting. 

Come back to the question about why Illinois did not bring criminal charges. 

Mr. MCRAITH. The criminal conduct that we know of, Mr. Chairman, occurred primarily or was based in New York. 

Chairman SPECTER. Primarily. But how about other than primarily? Was there any in Illinois? 

Mr. MCRAITH. The impact was certainly felt in Illinois by policyholders in Illinois, Mr. Chairman. 

Chairman SPECTER. Well, that gives you jurisdiction. Senator 

Leahy, did you not used to be a prosecutor? That gives you jurisdiction in Illinois. 

Senator LEAHY. I said it was the best job I ever had. 

[Laughter]. 

Chairman SPECTER. You mean, the only job you ever had. 

[Laughter]. 

Well, that gives you jurisdiction. Senator Leahy and I know a little something about that. 

Did you pursue it to see if there were cases of criminal conduct 

which impacted on Illinois citizens? 

Mr. MCRAITH. I should be clear, Mr. Chairman. As the Director 

of Insurance, as the regulator, I do not have independent authority 

to prosecute criminal charges. 

Chairman SPECTER. You know some of the prosecutors in Illinois, 

do you not? 

Mr. MCRAITH. I certainly do. Yes. 

Chairman SPECTER. Did you refer the matter to them? 

Mr. MCRAITH. We did work with the Attorney General of Illinois, 

who also worked with the Attorney General of New York, to ensure 

that the policyholders received the restitution. 

In terms of the discussion about criminal charges, we certainly 

were aware of the underlying conduct. I did not engage in any discussions with our Attorney General about criminal charges. 

Chairman SPECTER. Well, restitution is fine, Mr. McRaith. That 

brings the defrauded people back to zero, or at least some of them. 

Customarily, not all of them, because you cannot reach all the people affected in a civil suit. 

But you do not have any teeth in restitution. All you have to do 

is pay back the money which you should not have taken. But the 

18

teeth in governmental action comes with criminal prosecution and 

jail sentences, especially with white-collar crime. 

Would you not have liked to have had the assistance of the U.S. 

Attorney? You have a pretty active U.S. Attorney in Illinois, do you 

not? 

Mr. MCRAITH. We absolutely do, Mr. Chairman. Yes. 

Chairman SPECTER. Well, would you not like to have his assistance to ferret out wrongdoing and incarcerate wrongdoers? 

Mr. MCRAITH. As the insurance regulator in the State of Illinois, 

we had two priorities. One, is let us make sure that the consumers 

who have been harmed by this conduct receive the restitution that 

they are entitled to. Secondly, let us take any action that we need 

to take to ensure that this conduct does not occur again. 

Chairman SPECTER. Well, would number two not squarely go to 

the issue of criminal prosecutions as a deterrent? 

Mr. MCRAITH. From our perspective as the insurance regulator, 

we look at the licensing side. Are these agents licensed in Illinois 

who are conducting themselves in this way? 

Chairman SPECTER. Well, that is all well and good. But you also 

have a duty to make references, referrals. 

Mr. MCRAITH. Yes, sir. 

Chairman SPECTER. If you do not have that duty, why would you 

want to keep the U.S. Government out of it on antitrust violations 

and keep an activist like your U.S. Attorney in Chicago out of it? 

Mr. MCRAITH. Mr. Chairman, again, our Attorney General 

worked very closely with Attorney General Spitzer on a number of 

these investigations, and it was our Attorney General who would 

make the decision whether to prosecute criminal charges against 

them. 

Chairman SPECTER. Well, that is all right for him. But you are 

taking a public policy position here today before this committee 

that you do not think there ought to be Federal antitrust jurisdiction. 

Mr. MCRAITH. That is correct. 

Chairman SPECTER. And in the context where you talk about 

criminal conduct which is not being prosecuted in Illinois, the big 

question that arises in my mind is, why would you want to keep 

the Feds out of it? The Feds have a pretty good record in Illinois. 

Was there not a guy named Capone from Illinois? 

[Laughter]. 

Mr. MCRAITH. That is correct, Mr. Chairman. If there were 

criminal conduct, Mr. Chairman, that we discovered or identified 

that occurred in Illinois, we would refer that to our Attorney General without hesitation. 

Chairman SPECTER. And did you refer it to the Attorney General? 

Mr. MCRAITH. We did not identify criminal conduct by individuals based in Illinois. 

Chairman SPECTER. But you have identified criminal conduct 

which impacted—I would like you to submit a supplement to your 

written testimony, if you would. 

Mr. MCRAITH. Yes. 

19

Chairman SPECTER. Governor Racicot, you say in your written 

testimony, ‘‘There is no lack of State antitrust authority with regard to insurers.’’ 

Do you not think it would be helpful if you had the long arm of 

the Federal Government to help out, when you have an impact in 

Illinois and no action taken in Illinois to deal with criminal conduct 

which impacts on their citizens? 

Mr. RACICOT. Well, Senator, with all due respect, without commenting upon pending litigation, frankly, I do not know the facts 

about the pending litigation intimately. 

Chairman SPECTER. I am not asking you about pending litigation. I am asking you about testimony which Mr. McRaith has 

given that there has been an impact on consumers in Illinois and 

there has been no criminal prosecution. 

Mr. RACICOT. Well, that is a matter of record. 

Chairman SPECTER. Wait a minute. Wait a minute. I am not finished with my question. They stop at restitution. You are making 

the statement here, ‘‘There is no lack of State antitrust authority 

with regard to insurers.’’ 

Do you stand by that? What factual material can you give this 

committee to demonstrate that there is active State antitrust action with respect to insurers? 

Mr. RACICOT. I think there have been, already, attachments to 

the various different testimonies submitted, if I am not mistaken, 

from Mr. McRaith that lists the individual States and all of their 

various unfair trade practices legislation and statutory framework 

that allows for antitrust enforcement. 

So, virtually every State in the United States of America has the 

capacity, on the basis of State law that enacted, copied, or mimicked in some fashion either Sherman, Clayton, or other unfair 

trade practices or laws, the ability to go forward with State antitrust actions. That is how New York went forward, apparently 

quite effectively in the minds of the committee, to carry on this 

particular prosecution. 

If I might also make note of the fact, as I know the Senator 

knows because you were a prosecutor, as well as was I, that typically one singular case is utilized in one jurisdiction as a vehicle 

to make certain that you address all of the circumstances, then 

work restitution in other concomitant jurisdictions all across the 

country. 

So if there is a violation, a multi-state violation that occurs, prosecution typically takes place in one venue, then the remedial part 

of that action is taken all across the country as it applies to individual citizens. 

Chairman SPECTER. Well, Governor Racicot, I do not know that 

at all. When I was a prosecutor and I found an impact on the people in my jurisdiction, I brought criminal prosecutions. 

But you say there has been effective action. You are the president of the American Insurance Association. Would you undertake 

to provide to this committee what criminal prosecutions have been 

brought in the 50 States? 

Mr. RACICOT. I believe, Mr. Chairman, we will make every effort 

to do that, as exhaustively as possible, if that is what the committee desires. I would point out, as Mr. McRaith also points out 

20

in his testimony, that there are some 3.7 million complaints that 

are lodged with various State authorities each year, is my recollection, if I am not mistaken. 

Of course, tracing virtually all of those might be a fairly monumental task, but we can certainly make the best effort at it if that 

is what the committee would desire. 

Chairman SPECTER. No. I am not asking you to trace 3.7 million 

complaints. I am not asking you to trace any complaints. I am asking you to provide this committee with the prosecutions that have 

been brought by the States against insurance companies. 

You say here that there is no lack of antitrust authority with regard to insurers. Well, I would like to know what the insurers have 

done. You are the president of the group, you have made this assertion. I would like to see what evidence there is. 

Mr. RACICOT. Senator, with all due respect, I stand by that assertion. I just mentioned the fact that there is authority in all 50 

States. 

There is an actual exhibit report in the written testimony that 

sets forth exactly what that authority is. If you would like further 

information and evidence of every single State prosecution against 

an insurance company, we will do everything in our power to make 

certain that we supply that information to the committee. 

Chairman SPECTER. All right. That is what we would like. It is 

not sufficient to say they have the authority. The question is, have 

they exercised it? The question is, have they brought the prosecutions? That is why you have a Federal Government which can 

reach into States where they do not have the resources and undertake those cases. 

Senator Leahy? 

Senator LEAHY. Thank you, Mr. Chairman. I see you have asked 

some of the questions I was thinking of asking. 

But Mr. Klawiter, let me start with you. I am obviously pleased 

to see in your written testimony that you feel my bill, S. 1525, 

which removes malpractice insurance from McCarran-Ferguson 

protection, is a good first step in the application of antitrust laws 

to the insurance industry. 

You also mention we could refine the bill further to ensure that 

we do not require a more rigorous standard than necessary. In 

what way, sir? 

Mr. KLAWITER. Senator Leahy, I think it is simply a matter of 

the wording. Words like ‘‘price fixing’’ or ‘‘market allocation,’’ in 

certain circumstances, might not, in fact, be illegal. That may be 

hard to appreciate and understand. 

But, for example, vertical pricing issues, vertical allocation issues 

are very common in many industries and the courts have ruled, 

under the rule of reason, that they are a perfectly legitimate activity as long as there is no anti-competitive effect. 

I think a simple amendment along the lines of price fixing, market allocation, et cetera that contravenes the Sherman Act, or the 

Sherman and Clayton Acts, would certainly take care of the issue. 

It is more a matter of semantics than anything else. 

Senator LEAHY. Using words that are not here. 

Mr. KLAWITER. Yes. Exactly. It would be really focusing it directly to the statute, to the Sherman Act. Because again, if we are 

21

going to go into areas of criminal liability, as Senator Specter noted 

before, the Federal antitrust laws have a great deal of punch, with 

10-year prison sentences and $100 million fines, and issues that 

are really going to get people’s attention. 

Senator LEAHY. Yes. And I agree with the Chairman on that. 

Both of us, in our experience as prosecutors, was that they have 

kind of a lot of money and they happily pay a fine, and that is the 

end of it and they go on, business as usual. If all of a sudden you 

think, what, I am going to wear one of those iron suits and I am 

going to live where? The door clanks? You get their attention a lot 

more. 

Also, in talking about this in your testimony, you also talked 

about safe harbors. You want to allow for insurance companies to 

compare notes on past losses and things like that. I do not have 

a problem with that. 

Would you or your Antitrust Section be able to help us on what 

activity would be allowed and what would be disallowed? 

Mr. KLAWITER. Well, I think the five categories that I mentioned 

just in my oral testimony a few minutes ago would be the beginning of the four. 

The fifth, is we would certainly ask you to consult with the industry as to others that they may think would fit within the category of being, again, pro-competitive, not a violation of the antitrust laws, but again, just giving the industry the flexibility to deal 

with these kinds of issues, things like the risk assessment information, the joint venture activity on a very large underwriting where 

one company itself cannot handle it, but maybe a group or a pool 

can; those things, again, within the context of very strict functioning of the Federal antitrust laws would be permissible conduct. 

It would be like a joint venture that is otherwise cleared, and that 

would be good. 

Senator LEAHY. We have a lot of experience, do we not, in antitrust law where major industries do cooperate. I can think of certain safety standards in the automobile industry, safety standards 

in others. I think most would agree, in those areas consumers 

would benefit. 

Mr. KLAWITER. Yes. Exactly, Senator. That is true. 

Senator LEAHY. So probably going back to another way of asking, 

what kind of behavior among insurers or between insurers and rate 

service organizations is most harmful to competition, and thus, consumers? 

Mr. KLAWITER. If the insurance companies, the insurers, were actually getting together to set a price, certainly without any form of 

regulation or in contravention of a regulatory scheme—and I say 

that in the context that you have 50 States that regulate insurance; some do it better than others, some are much more involved, 

some are actively supervising, others are not. 

So, there are opportunities for companies to get together and fix 

prices, in the sense that we would consider them to be fixed, and 

to tie products together: in order to buy this insurance you also 

have to buy this one. That, under a normal antitrust theory, would 

be a problem. 

Those are the kinds of issues I think that the repeal of 

McCarran-Ferguson would get us to, and would allow for the FedVerDate 0ct 09 2002 12:18 Sep 08, 2006 Jkt 029672 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\29672.TXT SJUD4 PsN: CMORC
22

eral jurisdiction there that would affect this industry in very much 

the same way it affects all other industries. 

Senator LEAHY. As we talk about Federal jurisdiction, following 

what Mr. McRaith was saying in his answers to Senator Specter, 

you said in your written testimony, as I understand it, that ‘‘the 

current system of State regulations work well to create a competitive marketplace. State regulators adequately supervise State insurance activities.’’ Now, of course you have different sized States. 

Illinois is a different size than Vermont, Montana or Wyoming. 

Ms. Hoffmann had testified about how her office uncovered widespread anti-competitive behavior in New York among some of the 

country’s largest insurance companies, and she had a very aggressive team of investigators, auditors, accountants, and everybody 

else going into that. 

But you also said—and this goes back to some of the questions 

you were being asked—had her office prosecuted that case in Federal court, companies might have had a defense under the 

McCarran-Ferguson Act which might mitigate against having an 

aggressive U.S. Attorney like they have in Illinois, or others, going 

in there. 

Mr. McRaith, should you not have the power to use all available 

laws, all forms to root out behavior that is so harmful, whether it 

is the forum of your own State courts or Federal courts? 

Mr. MCRAITH. Senator Leahy, we have the authority at this time 

to prohibit and to ultimately punish any of the conduct—the misconduct—just described by Mr. Klawiter. If there is that conduct 

that is found, in the State of Illinois or any State, it is prohibited, 

tying, boycotting, price fixing. I would like to add that in terms of 

penalties, the question is, how severe can the remedy be? Is the 

remedy more severe in Federal court under antitrust law? I think 

the New York Attorney General resolutions with AIG were over 

$1.5 billion. The resolution with Marsh McClennon was $850 million. 

In Illinois, we have resolutions with other large brokers. We entered, as a group of regulators, working with 10 different Attorneys 

General, into an agreement with one company where that company 

is going to pay $160 million. 

Senator LEAHY. But as Ms. Hoffmann pointed out, there are actions they could not have taken in Federal court because they 

would have been blocked by McCarran-Ferguson. Do you agree 

with that? 

Mr. MCRAITH. I am far from able to question Ms. Hoffmann’s 

legal analysis. As a practical matter, I would say that the penalties 

that have been imposed when this conduct has been found are severe, and as severe as they might have been under Federal antitrust laws. 

Senator LEAHY. Thank you. 

And Mr. Hunter, you have had a lot of experience with insurance 

issues. You were a Federal insurance commissioner, a Texas insurance commissioner, and now you are Director of Insurance for the 

Consumer Federation. 

In your testimony, you estimate that if the McCarran-Ferguson 

Act is repealed, consumers would save approximately 10 percent on 

23

insurance costs each year. How do you arrive at that, and could it 

be more than that? 

Mr. HUNTER. Yes. Well, it could be. That is at least. I do some 

calculations at the back. I also have other studies of the effects of 

imposing the California antitrust laws in the State of California 

when they were first imposed and a tougher regulatory regime imposed. 

In 1988, California had the third-highest auto insurance rates. 

Now it has about average auto insurance rates, about a 20 percent 

savings if it had stayed at third place. So you have that, plus the 

calculations I made at the back of the report, and some other calculations. 

I would like to comment on one thing. There were huge life insurance market conduct violations with billions of dollars paid by 

MET Life, Prudential and others a few years ago. I do not think 

there were any criminal charges brought in any of that. 

I really do think that that Chairman Specter’s idea of calling for 

what has happened in terms of actual numbers of criminal charges 

is very important information, and I hope the NAIC would help 

with that as well. 

Senator LEAHY. Thank you. My time is up. I may have other 

questions. I want to go back and review some of this testimony, Mr. 

Chairman. I may have some other questions to submit for the 

record, if that is all right. 

Chairman SPECTER. Mr. Hunter, you have written in your testimony that California’s Proposition 103, eliminating the State antitrust exemption in California and imposing more active State regulation, has proved to be successful in lowering prices for consumers 

and stimulating competition. 

Mr. HUNTER. Yes. 

Chairman SPECTER. Could you amplify about that? 

Mr. HUNTER. Sure. Yes. In 1988, the people of California enacted 

Proposition 103, which imposed the State antitrust laws on the insurance industry and also created a regulatory regime which is the 

toughest in the Nation. A lot of people would try to argue, there 

is a balance between regulation and competition. 

Chairman SPECTER. Well, that is what they did. 

Mr. HUNTER. They did not balance it. They said, look, why not 

get the best benefits of both? Why not have competition and then 

use regulation as a back-stop just because they both seek the same 

goal, that is, the lowest possible rates consistent with a fair return. 

Chairman SPECTER. Mr. Hunter, come to the point from your 

written testimony where you said that it was ‘‘a successful formula 

in lowering prices for consumers and stimulating competition.’’ 

Mr. HUNTER. Yes. 

Chairman SPECTER. Come to that point. 

Mr. HUNTER. All right. Well, as I said earlier, when the proposition passed California had the third highest auto insurance rates 

in the Nation, and today they are the twentieth highest, with about 

an average national rate. It is about a 20 percent lowering relative 

to the national average. That is a very significant savings for consumers, in the tens of billions of dollars. 

Chairman SPECTER. Governor Racicot, in your testimony you say, 

‘‘when this committee last held McCarran hearings in 1989, the 

24

issue was the cost of commercial liability insurance.’’ Was that the 

last time this committee looked at McCarran-Ferguson, was 1989, 

as your testimony says? 

Mr. RACICOT. I believe, if I am not mistaken. I could be, Mr. 

Chairman. But my belief is that it was as late as 1994. If that is 

a reflection that it was 1989, I assumed that that was referring to 

the House proceedings. There certainly were considerations by Congress up through 1994. 

Chairman SPECTER. The House took a look at it in 1994, but the 

last time the Senate Judiciary Committee took a look at it was 

1989. Your assistants behind you are nodding in the affirmative, if 

the record may show that. 

Mr. RACICOT. That is my understanding, yes. I had it in reverse. 

Chairman SPECTER. The testimony submitted by Ms. Hoffmann 

says that ‘‘this is not just a New York State problem, it is a pervasive national problem.’’ 

Would you agree with that, Mr. Thompson? 

Mr. THOMPSON. I am sorry, Mr. Chairman. You are talking about 

the problem that New York uncovered? 

Chairman SPECTER. Well, the issue raised here about Marsh, the 

fraud and the criminal prosecutions, the assertions made by Ms. 

Hoffmann that ‘‘this is not just a New York State problem, it is a 

pervasive national problem.’’ 

My question to you is, do you agree with that? 

Mr. THOMPSON. Well, I have not been involved in anything that 

has been going on with the New York prosecution, other than what 

was in the general press or trade press. 

Chairman SPECTER. Well, your resume says, as a senior vice 

president for Insurance Services Office, ‘‘you are responsible for all 

filing activities by regulators in the various States.’’ Are you saying 

you just do not have enough information to agree or disagree with 

Ms. Hoffmann’s statement? 

Mr. THOMPSON. In that particular case, yes, sir. 

Chairman SPECTER. Mr. Klawiter, do you think that is an accurate statement? 

Mr. KLAWITER. The pleadings in the case, I think, show more 

pervasive conduct that New York looked at, and other States 

looked at as well. I think you have got to kind of focus attention 

on what comes out of that record. I think if that record demonstrates that the impact was in various States, that would certainly be considered pervasive. 

Chairman SPECTER. The American Bar Association, as you have 

testified, has taken the position—you are head of that section—that 

McCarran-Ferguson ought to be eliminated. Do you think there 

ought to be Federal antitrust enforcement in the insurance industry, like all other commerce? 

Mr. KLAWITER. Absolutely. 

Chairman SPECTER. What is the basis for your statement? What 

factual underpinning can you provide as to the inadequacy of State 

action and the necessity for Federal antitrust enforcement? 

Mr. KLAWITER. Well, I think, number one, our position is very 

clearly predicated on the fact that regulation is not as good as free 

and open competition. If you have a regulatory scheme, it is going 

to be looked at differently by each of the States. 

25

Chairman SPECTER. Can you point with any specificity, or could 

you supplement your testimony, to any antitrust violations that 

have gone unprosecuted and not pursued by the States, contrasted 

with the kind of vigorous antitrust enforcement that comes out of 

the Department of Justice, where you serve? 

Mr. KLAWITER. I am not sure, Senator, that we could actually 

identify those. I think we could look to what the States have done, 

and note that some of those could well have been the subject of 

Federal investigation and Federal prosecution if, indeed, 

McCarran-Ferguson were not the law. 

Chairman SPECTER. All right. If you had State action where it 

was insufficient, the committee would be interested in that. I 

mean, you say we ought to have Federal antitrust action. The committee is considering the issue. If we are to act, we need to act on 

hard evidence. If you have State action which was insufficient, that 

would be probative on the issue of bringing in the Federal Government. 

If you have the failure of States to act where there were antitrust charges that ought to have been brought, that would be probative for Federal action and the repeal of McCarran-Ferguson. If 

you could supplement your testimony in those two areas, the committee would be appreciative. 

Mr. KLAWITER. We will do that, Senator. 

Chairman SPECTER. All right. 

Ms. Hoffmann, you testified that there were pending investigations. Did you mention Liberty Mutual? I believe you did. 

Ms. HOFFMANN. Yes. We have brought a lawsuit against Liberty 

Mutual, and it is pending. 

Chairman SPECTER. And what is the gravamen of the lawsuit? 

Ms. HOFFMANN. The gravamen of the lawsuit, I believe, is fraud, 

and we mentioned bid-rigging. 

Chairman SPECTER. Fraud and what? 

Ms. HOFFMANN. Bid-rigging. 

Chairman SPECTER. Bid-rigging. With Marsh? 

Ms. HOFFMANN. Yes. 

Chairman SPECTER. And what court are you in? 

Ms. HOFFMANN. We are in New York State court. 

Chairman SPECTER. Why was the determination made to utilize 

a civil suit as opposed to the criminal prosecutions which you have 

identified in your testimony? 

Ms. HOFFMANN. We brought criminal prosecutions against individuals. I do not believe we have brought any criminal prosecutions 

against the companies. 

Chairman SPECTER. Have you brought criminal prosecutions 

against individuals at Liberty Mutual? 

Ms. HOFFMANN. I would have to check that. I do not recall. 

Chairman SPECTER. What determination do you use to decide 

when to prosecute the company, in addition to the individuals? You 

customarily cannot prosecute a company unless you have evidence 

against individuals. The individuals act for the company. But what 

are the standards that you use for deciding to prosecute individuals 

and not the company? 

Ms. HOFFMANN. Do you mean criminally prosecute individuals? 

Chairman SPECTER. That is what I am talking about. 

26

Ms. HOFFMANN. I believe that some of the standards used were 

the cooperation of the company, the willingness of the company to 

recognize the misconduct, and to determine and make sure that 

such conduct does not occur in the future. 

Also, the recognition that criminally prosecuting a company can 

sometimes cause far more harm to innocent individuals—customers, employees and a segment of the industry—than would be 

warranted or wise. 

Chairman SPECTER. Well, thank you all for coming in. We would 

be interested, as I have said, in a supplement by your organization, 

Governor Racicot, as to the specifics as to where the States are acting; conversely, Mr. Klawiter, as to where you think the Federal 

Government should be in the picture. 

We would be interested in a supplement, as I have indicated, Ms. 

Hoffmann, as to what the New York cases are all about. You are 

in the prosecutor’s office and you are in the best position to give 

us a summary. We would like to get the specifics as to what actions 

have been brought, all the matters that are of public record. 

We are not inquiring into your investigations; we understand the 

dependency of those. But where you have broad criminal prosecutions and gotten guilty pleas or convictions, we would like to know. 

We would like to have an amplification of, where you have made 

a judgment to prosecute individuals but not companies, what the 

factors were which led you to that conclusion. 

Mr. McRaith, we would like the details as to what was done in 

Illinois, what action your agency took to inform or bring in the 

State Attorney General, and what the State Attorney General did, 

and what your reasoning was in not wanting, say, the U.S. Attorney from Chicago to come into the picture. 

Mr. Hunter, to the extent you could give us any more information on California, we would appreciate it, as to what the success 

was there. 

Thank you all very much. That concludes the hearing. 

[Whereupon, at 10:54 a.m. the hearing was adjourned.] 

[Questions and answers and submissions for the record follow.] 

[Additional material is being retained in the Committee files.]

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