Federal authorities should be given legal power to step in and prosecute misbehaving insurers if state prosecutors can’t or won’t do the job, a key senator declared last week.

Senate Judiciary Committee Chairman Arlen Specter, R-Pa., made his comments during a hearing to examine potential language repealing McCarran-Ferguson Act protection exempting insurers from federal antitrust legislation and making insurance regulation the sole province of the states.

Sen. Specter argued that if the states aren’t going to push for criminal prosecutions of insurance companies and their executives, then federal attorneys should be allowed to. “It’s not sufficient to say that [state prosecutors] have the authority” to prosecute antitrust cases, he told Marc Racicot, president of the American Insurance Association. “The question is if they are using it.”

Sen. Specter had earlier questioned Illinois Insurance Director Michael McRaith as to why his state did not file any criminal complaints against executives accused of illegal activities by New York Attorney General Eliot Spitzer, despite Mr. McRaith’s admission that the activities uncovered by Mr. Spitzer’s office harmed Illinois consumers.

Mr. McRaith responded that the Illinois attorney general worked with Mr. Spitzer and ensured that Illinois policyholders were paid restitution.

Sen. Specter, however, questioned if that was enough. Restitution, he said, “brings the defrauded people back to zero, or at least some of them,” but does not provide the disincentive to violate antitrust laws that criminal prosecutions and prison sentences would.

Sen. Patrick Leahy, D-Vt., the ranking Democratic member of the panel, echoed Sen. Specter’s opinion, noting “the federal antitrust law has a great deal of punch,” including potential sentences of up to 10 years in prison.

Mr. Racicot, a former attorney general and governor of Montana, argued that “virtually every state has the capacity” to prosecute for antitrust violations under their own law. He defended the lack of prosecutions in Illinois by noting that, as a former prosecutor himself, attorneys will typically centralize prosecutions in dealing with large multistate crimes.

Mr. McRaith also defended the decision to seek monetary damages rather than criminal convictions, arguing that punishments involving payments of hundreds of millions, or even a billion dollars, “have been as severe as under federal law.”

Sen. Specter requested more information on what prosecutions and convictions state authorities have sought, adding that federal lawmakers will be guided by what they are shown. “If we are to act, we need to act on hard evidence,” he said.

Mr. Racicot said repeal of McCarran-Ferguson would be misguided and would have no bearing on insurance rates.

However, New York Assistant Attorney General Elinor Hoffmann said McCarran-Ferguson is “one example of an exemption that has no apparent business justification and that impedes free and open competition of a major sector of the U.S. economy.”

Robert Hunter, director of insurance for the Consumer Federation of America, called the exemption a “potent enabler” of anticompetitive behavior leading to establishment of “cartel-like bureaus” used by the insurance industry, citing the Insurance Services Office by name.

Rating bureaus manipulate historic data to make an estimate of claims and adjustment expenses for a future time period, he said, which the House Judiciary Committee determined in 1993 would be illegal but for the McCarran-Ferguson exemption. “This is why there are no similar rate bureaus in other industries,” he said.

Additionally, Mr. Hunter said that “collusion appears to be involved” in the increasing costs of coverage for coastal properties.

He said that Risk Management Solutions announced in March that it is changing its hurricane model–upon which homeowners and other property insurance rates are based–to increase annualized losses. He said the change comes after RMS promised that a model created after Hurricane Andrew in 1992 would prevent such increases.

Other modeling firms are also changing models, because insurers will gravitate to the model allowing them to charge the most, according to Mr. Hunter.

Kevin Thompson, ISO senior vice president of insurance services, said groups such as ISO are needed to collect the massive amounts of data insurers need to accurately price coverage. Without it, or if insurers were required to collect such information individually, rates would increase substantially or coverage would become simply unavailable, he said.