Repealing the insurance industry's limited antitrust exemption would actually cause more harm than good for consumers, according to an analysis released last week at the National Association of Mutual Insurance Companies' annual convention.

“If policymakers repeal McCarran, consumers will suffer substantial negative consequences resulting from a combination of weakened competition in the insurance industry and a myriad of regulatory, legal and operational problems generating costs that consumers must ultimately bear,” the report said.

It further notes that small and new insurers would be especially harmed by such a move, because they “have less in-house data to analyze than do large insurers…If these companies were forced to exit insurance markets due to increased costs of estimating losses, consumers would have fewer choices and markets would not be as competitive.”

The analysis–conducted by Lawrence Powell, chair of insurance and financial services at the University of Arkansas in Little Rock, with a Ph.D. in risk management and insurance from the University of Georgia–was as much an exercise in helping to define the exemption as much as advocating for it to be maintained.

“We wanted to speak to the appropriateness of McCarran,” he said, characterizing the analysis as “an attempt to say what McCarran doesn't do and what it does.”

Mr. Powell's analysis found that insurance markets are generally competitive, but would become less so in the event the McCarran-Ferguson exemption was repealed. “Without it, prices would go up and availability would go down,” he said, explaining that smaller companies without the resources to gauge risk and set prices would increasingly be unable to compete.

Additionally, he said, other efforts involving multiple insurers acting together could be affected, he noted–such as multiple insurers combining to provide coverage for large risks, or even state residual markets or guaranty funds.

While the McCarran-Ferguson exemption is an important tool for the insurance industry, Mr. Powell said there are areas in which the market could be improved. However, he said doing so should come via regulation, and should focus on increasing competition and “allowing market forces to work.”

A key aspect of this, he said, would be to allow for greater underwriting and ratemaking freedom for insurers.

Much of the discussion about repealing the exemption has surfaced in the aftermath of Hurricane Katrina, according to Robert Detlefsen, vice president of public policy for NAMIC, and Mr. Powell noted that the actions of lawmakers have been similar after previous catastrophic events.

The problems, he said, “are always related to losses,” but in response lawmakers and others generally impose conditions on underwriting and ratemaking. “Why not address losses?” he asked, noting that measures such as better building codes or other mitigation efforts could be implemented.

It is possible many current industry practices could continue in the absence of the exemption, he acknowledged, since procedures that do not harm consumers are not considered antitrust violations.

However, he said, doing so would involve going through major legal tests of every joint action, which would carry “huge legal costs” for insurers. Additionally, he noted, removing the exemption would “open the door to private actions.”

“We've already got McCarran,” he said, “and we've had it for 62 years.”

The limited antitrust exemption was established by the McCarran-Ferguson Act, passed in 1945 in the wake of a U.S. Supreme Court decision ruling that insurance should be considered interstate commerce, subject to federal regulation.

Mr. Detlefsen said the analysis had its genesis at a NAMIC public policy conference held earlier this year, where members decided which subject they would like to see examined. The McCarran-Ferguson debate, he said, “was very salient at the time, and I think it continues to be.”

Mr. Detlefsen said that NAMIC considered a number of options when deciding how the study should be conducted and by whom.

While any number of experts from organizations and “think tanks” were available, he said NAMIC wanted to ensure the analysis was conducted by someone independent from the industry but with the expertise needed to give the analysis credibility.

“We wanted a university scholar who specializes in insurance,” he said, noting that NAMIC had examined Mr. Powell's earlier publications and spoke with insurance professionals who were familiar with his work. “All the stars kind of aligned for us,” he said.

Special Reports /

Killing Antitrust Exemption Would Do More Harm Than Good, Study Concludes

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