Impact of the Abolition of McCarran-Ferguson Antitrust Exemption for the "Business of Insurance"

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Identical, bipartisan bills, S. 618 and H.R. 1081, that would eliminate the current McCarran-
Ferguson Act (15 U.S.C. §§ 1011-1015)antitrust exemption for the “business of insurance,” in ^th
force since 1945, have been introduced in the 110 Congress. Their impact, if enacted, is unclear.
They would each amend 15 U.S.C. § 1012(b) to make the antitrust laws and the Federal Trade
Commission Act (FCTA) “as it relates to unfair methods of competition” specifically applicable
to such business. The FCTA, “as it relates to areas other than unfair competition”(emphasis
added) would, however, continue to apply to the “business of insurance” “to the extent that [it] is
not regulated by State law.” Due largely to the importance of information sharing to insurers, the
insurance industry in the past has cooperated in a variety of ways, including sharing loss
information, jointly developing policy forms and rates, operating residual market mechanisms,
and participating in state guaranty funds. Some forms of cooperation, particularly joint rate
making and mandatory advisory rates, have already been curtailed because of antitrust concerns.
Other forms of industry cooperation, however, might be considered illegal under federal antitrust
laws if S. 618 or H.R. 1081 were to become law. The precise impact of these bills on the
insurance industry would depend critically on future court decisions. In particular, the
cooperation that insurance companies currently undertake might be judged legally permissible
under the “state action” doctrine. Before this area of law would be settled, however, it would
arguably involve numerous lawsuits. This report will be updated as events warrant.

Insurance Industry Cooperation................................................................................................2
Some Possibilities for Resolution of Problems.........................................................................4
Author Contact Information............................................................................................................5

hen Senator Leahy introduced S. 618 on February 15, 2007, 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 by the manner in which W

insurers operating in the Gulf Coast region have been interpreting their policy-
related responsibilities, he stated that “[i]f there ever was, there is no longer any justification to ¹
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). The
bills have been referred to their respective Judiciary Committees, with the House bill also being
referred to the Committees on Energy and Commerce and Financial Services, “for consideration
of such provisions as fall within the jurisdiction of the committee concerned.”
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 remove the “to the extent ...” language ²
so that the federal antitrust laws would be 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 specify that the Federal Trade Commission (FTC) ³⁴
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 ⁵
law.”
Both measures would delete 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

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time, that the antitrust laws would nevertheless be applicable to boycotts, coercion, or ⁶
intimidation, or agreements to create or further those activities. In addition, they would each
restore the authority of the Federal Trade Commission, pursuant to its 15 U.S.C. § 46(a) powers, ⁷
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 permit the Department
of Justice and the FTC to “issue joint statements of their antitrust enforcement policies regarding ⁸
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. Hearings before the
House Judiciary Committee have not yet been scheduled.
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

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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 ⁹
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” ¹⁰
raises similar antitrust concerns as 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 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, which might be considered market allocation. State guaranty funds are
intended to protect the policyholders in the case of insurer insolvency. In general, states require

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insurers to join these associations, which may open the possibility of challenges on grounds of
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 likely drive 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 ¹¹
the “state action” doctrine.
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 ¹²
to Congress. In response, Congress enacted the “Local Government Antitrust Act of 1984,”
which, inter alia, prescribes that
^{No da}^m^a^g^e^s^,ⁱⁿ^teres^t^on^da^m^a^g^e^s^,^cos^t^s^{or at}^torn^e^y^’^s^f^ees^ma^y^{be recov}^e^red^uⁿ^d^{er ... (15}
^U^.^S^.^C^.^{15, 1}⁵^{a, o}^r¹⁵^{c) i}ⁿ^an^y^c^l^ai^m^ag^aⁱ^ns^t^{a pers}^on^bas^e^{d on}^any^offⁱ^ci^a^l^actⁱ^oⁿ^di^rec^t^e^d^b^y¹³
^{a local g}^o^v^e^rnm^eⁿ^t^{, or of}^fⁱ^cial^{or em}^plo^y^{ee t}^h^ereof^actiⁿ^gⁱⁿ^an^offⁱ^{cial capacit}^y^.
Subsequent to the enactment of the Local Government Act, the number of challenges to
municipal activity significantly abated. While inserting a similar provision into a bill such as S.

618 or H.R. 1081 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

¹¹^T^h^e^s^t^a^t^e^a^c^{tion d}^o^c^t^rⁱ^ne^w^a^s^fⁱ^r^s^{t e}ⁿ^uⁿ^cⁱ^a^t^e^d^by^the^Su^pr^e^m^e^C^our^{t in}¹⁹^{43 (}^P^a^r^k^e^r^v^.^B^r^ow^n,³¹^{7 U}^.^S.³⁴¹⁾^{. I}^t^is
^ba^se^{d on}^the^c^onc^e^p^t^of^f^e^de^ra^lis^m^,^a^{nd is the}^re^a^s^on^the^f^e^de^ra^{l a}ⁿ^titrust^la^w^s^a^r^e^{not a}^ppl^ic^a^b^le^to^the^sta^t^e^s^{. T}^h^e
^doc^triⁿ^e^ha^s,^ov^e^r^the^y^e^a^r^{s, be}^eⁿ^inte^rpre^te^d,^c^l^a^r^if^ie^{d a}^{nd e}^x^pa^nde^{d to}^the^poi^{nt t}^h^a^t^itⁿ^o^w^c^onf^e^r^s^aⁿ^titrust^im^m^unity
^not^on^ly^{on the}^s^t^a^t^e^s^qu^a^st^at^{es (i}ⁿ^c^l^u^diⁿ^g^st^at^{e agen}^ci^{es an}^d^o^f^fⁱ^ci^al^{s w}^h^o^actⁱⁿ^f^u^rt^h^e^ran^{ce o}^f^st^at^e-dⁱ^rect^ed^actⁱ^vⁱ^t^y^,
^{but a}^l^s^o^oⁿ^t^hos^e^w^{ho a}^c^t^p^u^r^s^uaⁿ^t^{to s}^t^a^t^e^-^s^a^nc^tio^ne^d,^b^u^t^not^ne^c^e^s^s^a^rⁱ^l^y^m^a^nda^te^{d, c}^our^s^e^s^of^a^c^tioⁿ⁾^{. I}^t^s^e^s^s^e^nc^e^is
^c^a^p^tur^e^{d i}ⁿ^t^h^e^tw^o-^pa^r^t^te^s^t^s^e^{t o}^u^{t i}ⁿ^C^a^lif^or^nia^R^e^ta^{il L}ⁱ^qu^or^D^e^a^l^e^r^s^A^s^s^’^{n v}^.^Midc^a^l^A^l^um^inum^{, I}ⁿ^c^.⁽⁴^{45 U}^.^S.⁹⁷
⁽¹⁹⁸⁰^)):^fⁱ^rst^,^t^h^{e ch}^al^l^eⁿ^g^ed^rest^r^aⁱⁿ^t^m^u^st^b^e^“cl^earl^y^artⁱ^c^u^l^at^ed^an^d^af^fⁱ^r^m^atⁱ^v^el^y^e^x^p^r^essed^{as st}^at^{e p}^o^lⁱ^c^y^”⁽^e.^g^.^{, in}^a
^l^e^gi^sl^atⁱ^v^el^y^en^act^ed^st^at^u^t^e);^secoⁿ^d^,^t^h^{e po}^lⁱ^c^y^m^u^st^b^e^“actⁱ^v^el^y^su^p^e^rvi^s^ed^{” an}^d^sub^j^ect^t^o^en^f^o^rce^m^en^t^b^y^t^h^{e st}^at^e
^itse^l^f^.
¹²^P^.^L^.^98-⁵⁴^4,¹⁵^U^.^S.C^.^§^§^34-^36.
¹³^{15 U}^.^S.C^.^§³⁶⁽^a⁾^.

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 ^rd
by Senator Metzenbaum in the 103 Congress to repeal McCarran-Ferguson’s antitrust
exemption. The clause might also include a limitation to single damages for successful challenges
to certain kinds of conduct deemed necessary.
^J^aⁿⁱ^c^e^E^.^Rubⁱⁿ ^Bai^r^{d We}^bel
^L^e^gⁱ^s^l^at^iv^{e A}^t^torn^e^y^Aⁿ^a^l^ystⁱⁿ^Fi^na^ncⁱ^a^l^E^c^oⁿ^o^mⁱ^c^{s a}ⁿ^d^Ri^sk
^j^r^u^bⁱⁿ^@^c^rs^.loc.g^ov^{, 7}^-⁹⁰⁷⁹^Asse^s^s^m^eⁿ^t
^b^w^ebel^@^c^r^s^.l^oc.g^ov^{, 7-}⁰⁶⁵²