A federal commission rocked the insurance world last week with arecommendation that Congress consider eliminating the industry'slimited federal antitrust exemption, dismissing concerns about whatthe loss of data sharing privileges might mean for small carriersand consumers.

The recommendation was contained in a report by the AntitrustModernization Commission. Four of the 12 members of the commissionspecifically called for repeal of the McCarran-Ferguson Act, whichgives insurers their shield from federal oversight, along withthree other antitrust exemptions involving shipping andexporting.

One insurer group said the commission did not have a fullunderstanding of the way the exemption worked, and others disputedthe conclusions in the report and by individual commissioners.

One commission member, John Shenefield–a lawyer at Morgan LewisWashington who was also in charge of antitrust enforcement in theCarter administration–said the repeal of the cited exemptions“should not be delayed.” He added that Congress should createanother commission to examine all the other exemptions “now on thebooks.”

The commission dismissed in its report any potentiallydetrimental effect on small insurers in terms of sharing loss data,contending that ending the exemption should ultimately have noeffect on such industry practices.

“Like all potentially beneficial competitor collaborationgenerally…such data sharing would be assessed by antitrustenforcers and the courts under a rule-of-reason analysis that wouldfully consider the potential pro-competitive effects of suchconduct, and condemn it only if, on balance, it wasanticompetitive,” the report noted.

“Insurance companies would bear no greater risk than companiesin other industries engaged in data sharing and other collaborativeundertakings,” the commission added, warning that “to the extentthat insurance companies engage in anticompetitive collusion,however, then they appropriately would be subject to antitrustliability.”

The report said various factors have driven the movement towardderegulation, noting that technological progress has facilitatedthe growth of competition in “industries previously considerednatural monopolies.”

Jonathan Jacobson, a commission member from New York, added inadditional remarks that, regarding exemptions enjoyed by theinsurance and shipping industries, for example, “sufficientevidence was presented at those hearings, in my view, andsufficient independent analysis strongly confirms that theseexemptions have outlived any utility they may have had, and shouldbe repealed.”

Mr. Jacobson, an antitrust partner at Wilson Sonsini Goodrich& Rosati, was joined by two other members of the panel in hisadditional comments–Debra Valentine and John Warden.

“At each hearing, the commission was presented with substantialevidence of anticompetitive activities the exemptions do or canpermit,” Mr. Jacobson said. “And, in each case, the response wasbasically the same–that 'our industry does many good things, doesnot restrain competition and needs the exemption to avoid potentialtreble-damage litigation.'”

However, Mr. Jacobson added, “this litany provides no basis foran exemption. Virtually every industry does good things. Conductthat does not restrain competition is not prohibited, with orwithout an exemption. And freedom from private litigation issomething, again, that every industry would like.”

He said that “if these were valid bases for an exemption, therewould be immunities from the antitrust laws everywhere.”

The “real question in each case,” according to Mr. Jacobson, is“whether the application of normal antitrust rules will impair someimportant public goal, and whether an exemption is truly necessaryto ensure that this goal is served.”

He concluded that “none of the industries we examined came closeto meeting that standard of proof.”

“In my view, the commission would have better served the countrythrough a more focused review of these four and other widelyapplicable exemptions…than by relying purely on the generalistoverview reflected in our official recommendations,” he said.

Among the first insurance groups to react, the Property CasualtyInsurers Association of America said in a statement that thecommission findings reflected a misunderstanding of the exemptionand what it allows insurers to do.

“The clamor over the limited exemption provided byMcCarran-Ferguson is a misguided attempt to punish large insurersfor their perceived mishandling of a small percentage of HurricaneKatrina claims,” said Ben McKay, PCI's senior vice president offederal government relations.

He said an antitrust repeal would “punish the millions ofconsumers who rely on small and medium-sized companies to protecttheir homes, autos and businesses. Because repeal wouldsignificantly damage these insurers' ability to compete effectivelyin the market, consumers would pay higher prices and have fewerinsurance choices.”

PCI also pointed out that the commission's report simply callsfor a review of McCarran-Ferguson, not necessarily repeal.

The American Insurance Association echoed that sentiment, notingthe report “contains some good news–it does not specificallyrecommend repeal of the McCarran-Ferguson exemption.”

The National Association of Mutual Insurance Companies focusedon a comment in the report by the full commission that it isunnecessary to protect small insurers by exempting the sharing ofinformation from federal antitrust laws because regulators and thecourts are unlikely to call such sharing anticompetitive unlessprice fixing is determined.

Robert Detlefsen, NAMIC's vice president of public policy, saidsuch a statement by the commission makes them “unduly confidentthat courts with little or no experience adjudicating insuranceissues would be able to distinguish clearly between'pro-competitive' cooperative insurance practices and those thathave 'anticompetitive effects.'”

He added, “We are not nearly as optimistic about this prospectas is the commission.”

Moreover, Mr. Detlefsen said, “the full report, and comments byCommissioner Jacobson, seems oblivious to the negative consequencesfor both insurers and consumers that would result from the legaluncertainty and expense of private antitrust litigation to settlesuch questions, whose inevitability they acknowledge should thelimited insurance antitrust exemption be repealed.”

In its statement, PCI said that, contrary to what the commissionsaid in the report, “existing state and federal laws expresslyprohibit insurers from collusion, and theexemption only allowsinsurers limited authority to share specific lossdata thatultimately makes the market more competitive by providing small andmedium-sized companies the ability to compete with largerinsurers.”

Defending the exemption, PCI said it “believes the lawpositively impacts consumers and will aggressively advocate for itsretention.”

“To use the tests outlined in the report, McCarran does meet thegoal ofconsumer welfare, which is achieved through competition,”said Mike Koziol, PCI's assistant vice president and counsel.“McCarran allows insurers, big and small, to access information tocorrectly make their own determinations as to the price of theirproduct.”

Mr. Koziol added that PCI “continues tomaintain that insuranceis unique. The ultimate price of the product isknown only in thefuture [and] past information sharing is critical sothatprojections as to the correct future price can be made.”

Dennis Kelly, an AIA representative, said the report “fails tomake the connection between government regulation and antitrustenforcement.”

While the commission report talks about the importance ofmaintaining a free market, noted Mr. Kelly, “in theproperty-casualty insurance world, states have imposed governmentprice controls instead of allowing the free market to determine therange of insurance prices that competitors offer.”

Ironically, he said, were Congress to repeal McCarran-Ferguson,the result would be a multilayered morass of state and federalregulation and antitrust enforcement that could result in fewerareas for the free market to thrive.

“That, clearly, runs counter to the commission's conclusions,”Mr. Kelly said.