Impact of the Abolition of McCarran-Ferguson Antitrust Exemption for the “Business of Insurance”
Released: 2009-02-04T00:00:00

Introduction

When Senator Leahy introduced S. 618 in the 110 th Congress, with the co-sponsorship of Senators Specter, Lott, Reid, and Landrieu, he did so by first noting that the insurance industry "has operated largely beyond the reach of federal antitrust laws for more than six decades." Concerned primarily by the manner in which insurers operating in the Gulf Coast region after Hurricanes Katrina and Rita had been interpreting their policy-related responsibilities, he stated that "[i]f there ever was, there is no longer any justification to exempt the insurance industry from federal government oversight." H.R. 1081 , an identical bill, was introduced on the same day by Representative DeFazio, with similar, bi-partisan co-sponsorship (Representatives Taylor, Melancon, Alexander, and Jones of North Carolina). Both bills remained in their respective Judiciary Committees (the Senate Judiciary Committee did, however, hold hearings on S. 618 ); neither the House Committee on Energy and Commerce nor the Committee on Financial Services, where the House bill had been referred "for consideration of such provisions as fall within the jurisdiction of the committee concerned," reported H.R. 1081 . Similar legislation may be introduced in the 111 th Congress.

Currently, 15 U.S.C. § 1012(b) declares that the antitrust laws "shall be applicable to the business of insurance to the extent that such business is not regulated by State law." Since virtually all states regulate the insurance industry, the effect is to immunize "the business of insurance" from application of the federal antitrust laws. Both bills would have removed the "to the extent ..." language so that the federal antitrust laws would have been applicable to the "business of insurance."

The single exception to the blanket application of federal antitrust law to the "business of insurance," is, however, that both bills would have specified that the Federal Trade Commission (FTC) Act, "as it relates to areas other than unfair methods of competition" would continue to be applicable to the "business of insurance to the extent that such business is not regulated by State law."

Both measures would have deleted 15 U.S.C. § 1013, in which the 79 th Congress (1) made the antitrust laws inapplicable to the "business of insurance" until June 30, 1948; but (2) specified, at the same time, that the antitrust laws would nevertheless be applicable to boycotts, coercion, or intimidation, or agreements to create or further those activities. In addition, they would each have restored the authority of the Federal Trade Commission, pursuant to its 15 U.S.C. § 46(a) powers, to investigate the insurance industry; that authority was removed in 1980 by Section 5 of P.L. 96-252 , "Federal Trade Commission Antitrust Improvements Act of 1980," except to the extent that such studies were specifically requested by Congress. Lastly, each would have permitted the Department of Justice and the FTC to "issue joint statements of their antitrust enforcement policies regarding joint activities in the business of insurance."

The Senate Judiciary Committee held a hearing on the issue entitled "The McCarran-Ferguson Act and Antitrust Immunity: Good for Consumers?" on March 7, 2007. No hearings to consider the issue were held by any of the other committees involved.

Insurance Industry Cooperation

Competitors in many industries have an economic incentive to cooperate in ways, such as creating cartels or price-fixing, that could result in general inefficiency and, ultimately, harm to the consumer. This possible consumer harm is one of the underlying reasons for the antitrust laws. Due to the specific economics of the insurance industry, however, cooperation among insurers may very well result in greater efficiencies and, possibly, lower prices for consumers.

Insurance depends critically on insurers possessing a large quantity of information to allow them to judge and price risks accurately. In a theoretical world of perfect information and competition, every consumer would pay a premium that covered his risk, and the resulting overall amount paid by consumers would be the lowest possible amount that would cover the aggregate losses to the group as a whole. If insurers can pool their information, the resulting rates can more accurately reflect risk and thus be lower for consumers as a whole, although some individual consumers may pay higher rates. Small insurers particularly benefit from information sharing, as they do not have a large volume of information of their own to analyze. The theoretically perfect world, however, assumes competition between insurers that would serve to reduce premium rates; too much cooperation between insurers could dampen this competition, reducing the consumer benefit that comes from allowing insurers to share information.

Insurer cooperation and information sharing revolves around advisory organizations, also known as ratings bureaus. Some form of these organizations has existed for nearly as long as insurance has existed in the United States. At their most basic form, they gather data from the various insurers, aggregate and analyze this data, and provide the aggregated data back to the insurers for use in setting future rates. In practice, they have done, and continue to do, a good deal more than this. Historically, rating bureaus formulated final rates that insurers might charge for particular policies and in some cases required participating insurers to use the bureau's suggested rates. Having a central organization create insurance rates, whether mandatory or not, raised serious antitrust concerns. By the early 1990s, the main advisory organizations had ceased publishing fully formed rates. Advisory organizations continue, however, to collect, aggregate, and analyze data, providing not only historical loss data but also estimates of future loss data and future insurer expense data. Some maintain that this estimation of future data, known as "trending" raises antitrust concerns similar to those inherent in the creation of final rates.

Another primary activity of advisory organizations is the creation and filing of insurance policy forms. Insurance policy forms are complex legal documents, and, as controversies over insurance coverage for New York's World Trade Center and for buildings damaged in Hurricane Katrina have shown, many millions of dollars may ride on the interpretation of a handful of words. Joint creation of these forms allows for the sharing of the legal talent needed to create the forms, and, some would argue, promotes comparison shopping by consumers by reducing the confusion that could result from multiple policy forms being offered by different companies. Since the states generally require the filing of policy forms for state approval, using a jointly created form that has already been filed with the states significantly reduces the regulatory burden on a single insurer. The uniformity of policy forms, however, also may reduce consumer choice. If one were shopping for a particular policy feature that was not a part of the standard form, it might be impossible, or very costly, to find an insurance policy that would meet this particular need.

Further industry cooperation, both through the advisory organizations and other state-created mechanisms, occurs in state residual market mechanisms and state guaranty funds. Residual market mechanisms are often created to insure availability of insurance that is legally mandated, such as workers compensation or auto insurance. While such mechanisms differ significantly between states, they may have advisory organizations administering them or require some other joint action by insurers, such as splitting up high-risk insureds who are unable to find insurance in the regular market; such "splitting" might be considered market allocation. State guaranty funds are intended to protect the policyholders in the case of insurer insolvency. In general, states require insurers to join these associations, which may open the possibility of challenges alleging unfair collaboration or collusion.

If McCarran-Ferguson antitrust protection for "the business of insurance" is, in fact, curtailed or abolished, many lawsuits challenging some of these insurer practices as violations of the federal antitrust laws are likely. If all of the cited examples of cooperation were found to be in violation, it would necessitate major changes in the operation of insurers, particularly small insurers which do not have large pools of information from their own experience. Should additional data be unavailable to small insurers in some way, it would, ironically, likely spur further consolidation in the insurance industry as small insurers merge in order to gain the competitive advantage of additional information. This outcome, however, is only one of a range of possibilities. It is also possible that many of the cooperative activities that insurers engage in would be found to be permissible under the "state action" doctrine.

Some Possibilities for Resolution of Problems

Given the possibility of numerous, perhaps lengthy, lawsuits to clarify which practices of insurers are antitrust violations, and of significant upheaval in the insurance industry, Congress might take note of its solution to another litigation-related problem that arose more than 20 years ago.

Congress was confronted then with the concerns of municipalities facing antitrust suits on account of certain activities. The prospect of treble-damage antitrust liability in suits brought against municipalities—challenging, e.g. , municipal designation of an "authorized" taxicab company, operation of an airport, or the awarding of cable television franchises—was unsettling to municipalities even though defendants were often found not liable. Many municipalities voiced concerns about expenditures of both time and tax dollars (read, in the insurance context, "costs often translated into increased insurance premiums") during hearings or in other communications to Congress. In response, Congress enacted the Local Government Antitrust Act of 1984, which, inter alia , prescribes that

No damages, interest on damages, costs or attorney's fees may be recovered under ... (15 U.S.C. 15, 15a, or 15c) in any claim against a person based on any official action directed by a local government, or official or employee thereof acting in an official capacity.

Subsequent to the enactment of the Local Government Act, the number of challenges to municipal activity significantly abated. While inserting a similar provision into any bill to limit the antitrust exemption provided by McCarran-Ferguson would reduce the financial incentive to file suit for insurer antitrust violations, the absence of private damages does not remove the authority of the courts to issue injunctive relief when an antitrust violation by insurers is found. In fact, inasmuch as courts also retain jurisdiction over an injunction, oversight to insure that an injunction is followed, and contempt-of-court citations if it is not, would remain possibilities.

Another possible solution that has been part of past legislation is inclusion of some form of "safe harbor" provisions specifically protecting cooperation that might be pro-consumer, e.g. , the sharing of historical loss information that is essential to the viability of small companies. A " Provided that " clause could be inserted in the provision making the antitrust laws applicable to the "business of insurance" to clarify that information sharing is permitted—at least under certain circumstances and conditions. Similar provisions were included in, for example, S. 84 , introduced by Senator Metzenbaum in the 103 rd Congress to repeal McCarran-Ferguson's antitrust exemption. The clause might also include, as did the measures that addressed cooperative research and production joint ventures, a limitation to single damages for successful challenges to certain kinds of conduct deemed necessary.