Keep the McCarran-Ferguson Act Insurance Exemption

Federal antitrust laws are intended to ensure a competitive market by prohibiting companies from acting in concert with each other, such as through price-fixing or sharing arrangements that exclude other competitors. The McCarran-Ferguson Act delegated to the states oversight of the insurance industry, effectively exempting certain concerted activities by insurance companies from federal antitrust scrutiny to the extent that the activities are regulated by the states.

That oversight resulted in an understanding that certain concerted activities by insurance companies should be allowed to best serve customers and the market, resulting in regulations to ensure the activities are properly conducted. Many states require insurance companies to offer certain coverages or certain levels of policy limits. To comply with those requirements and eliminate customer confusion, insurance companies can use similar forms subject to state review under form filing regulations.

States also require insurance companies to calculate premiums using “actuarially sound” rates. Insurance companies use past loss experience data to predict future loss trends to determine rates. The more loss data available, the more accurate the rate. Because it is in the consumer’s best interest to have accurate rates, states permit insurers to share their loss data with third-party rating organizations that collect the data, analyze it for future loss trends and redistribute the data back to insurers for use as a component in their individual rate filings.

Finally, states require insurers to share claims information for fraud fighting purposes. Just as with forms, there are state regulations to provide the proper oversight for rating and fraud activities.

Legal authority to share certain information sets the insurance industry apart from most other industries but does not make it unique. Internet access and credit cards are examples of markets where “compatibility makes certain forms of competition impractical or even unwanted.” In such markets, regulation of the business conduct, rather than antitrust litigation, protects consumer interests and serves the market. Also, insurance is not the only industry exempt from federal antitrust laws. Agricultural marketing co-ops, newspaper joint operating agreements, and professional football, baseball, basketball and hockey team agreements for sale of television rights enjoy similar exemptions. Those industries need compatibility with regard to marketing, operating agreements and television rights as does the insurance industry with regard to rating, forms and fraud activities.

Nevertheless, there is currently pending in Congress Senate Bill 618, which would give the federal government authority over the insurance industry, through federal antitrust laws, and give the Federal Trade Commission “gap-filling” authority to regulate insurance companies where state laws do not exist or are “deemed” insufficient. S. 618 would replace an established state regulatory structure with a federal structure that has no recognition of accepted, compatible sharing activities, leaving those activities subject to an uncertain future and unnecessarily disrupting the market.

Repealing McCarran would immediately impact the regulatory environment in which the industry functions and affect industry expenses. In the sweep of a pen, all insurance activities will become subject to federal antitrust litigation and FTC review, creating a regulatory void. With no federal precedent to provide a platform from which to act, federal antitrust litigation could take years to resolve and may result in differences among courts.

The Microsoft antitrust litigation took more than three years of litigation to resolve. How long it would take to litigate the activities of an entire industry?

FTC regulations will subject the industry to additional oversight because it will not replace the existing regulatory patchwork created by 50 sets of state laws but would add bits and pieces of regulations after a review of each state’s laws to determine gaps and insufficiencies. Insurance companies would incur litigation expenses and increased operating expenses to comply with an emerging regulatory structure.

• Insurers might need new work processes to replace shared activities, such as contracting with the same modeling consultants; accessing pooled customer prior loss and underwriting information; accessing pooled fraud information; using CLUE, BI Index and NICB information; and inland marine rating processes.
• Although larger companies may have sufficient loss and cost data to develop actuarially sound rates, they may not have the necessary data to develop rates for new products.
• Smaller companies might not have access to shared data if sharing is found to violate antitrust laws.
• Consumers may have fewer choices as the market constricts, because new companies will not enter the market and existing companies might hesitate to enter a new line of business or launch a new product. That could lead to price increases.
• Conflicts could emerge between state laws requiring public access to rate filing information and antitrust laws prohibiting price-fixing.

The McCarran exemption has resulted in state regulation of shared activity where compatibility among insurer operations benefits consumers. Without McCarran, there could be prohibitions against long-established sharing of form, rate and claim information, plus an uncertain regulatory environment; new multi-layered regulatory structure composed of state laws, federal laws and court decisions; expensive litigation; and less favorable rates.

Regulatory certainty would develop as a new regulatory structure emerges, pieced together from existing state law, new federal law and federal antitrust judicial decisions. But how long would it take and at what cost?

Although many in the industry favor insurance regulatory reform by adopting a federal structure to co-exist with the existing 50-state structure, repealing McCarran to obtain a new structure is costly, inefficient and could lead to unnecessary market disruptions.