Spitzer Attacks Insurer Antitrust Exemption

The McCarran-Ferguson Act, which has kept insurance regulation in the hands of the states since its passage in 1944, should be repealed, according to New York State Attorney General Eliot Spitzer.

In testimony submitted to the federal Antitrust Modernization Commission, Mr. Spitzer said McCarran-Ferguson has become outdated and is potentially a hurdle to enforcing antitrust laws, and should be phased out.

"The McCarran-Ferguson exemption to the federal antitrust laws for the business of insurance illustrates an industry-specific exemption that is ripe for reexamination–and, in our view, repeal," Mr. Spitzer said.

"The exemption has interfered with the ability of public and private enforcers to readily use the full panoply of federal antitrust remedies to correct, deter and obtain compensation for abuses in the insurance sector," he added.

"A uniform federal antitrust standard would facilitate antitrust enforcement and benefit plaintiffs and defendants alike, in contrast to disparate actions, under different laws, that may yield inconsistent results," according to the attorney general.

However, Mr. Spitzer also argued that repeal of McCarran-Ferguson should not be the death knell of the state regulatory system. Rather, he said that any repeal should be fashioned to subject insurance companies to federal antitrust laws as well as the state regulators.

"Because state regulation of insurance is complex and reaches far beyond the concerns of antitrust law, state regulation should not be preempted," he said. "By the same token, state regulation should not exempt insurers from the federal antitrust laws. Rather, the state-action doctrine, as it is applied generally, should be adequate to deal with the insurance industry as well."

Overall, Mr. Spitzer argued that the McCarran-Ferguson Act is an example of a regulation that has been passed by the marketplace, and called for lawmakers and regulators to keep a closer eye on the regulatory system.

"Experience with McCarran-Ferguson indicates that there is a need to reexamine industry-specific exemptions periodically," he said. "Markets change, in many cases eliminating the need for broad exemptions. McCarran-Ferguson is one example of an exemption that has no apparent business justification and impedes free and open competition in a major sector of the U.S. economy."

Industry officials disagreed and defended McCarran's exemptions. Julie Gackenbach, assistant vice president of government affairs for the Property Casualty Insurers Association of America, said the limited antitrust exemption has proved to be "essential" to property-casualty insurers and their policyholders.

"The existence of this exemption allows companies to exchange critical data regarding losses and other factors, facilitates the development and operation of assigned-risk plans, facilitates participation and oversight of state guaranty funds, permits state control over liquidations of insurers, and promotes competition in the marketplace," she added.

Craig Berrington, senior vice president and general counsel for the American Insurance Association, noted in his testimony that should the McCarran-Ferguson exemption be substantially changed or eliminated, insurers could find themselves in a legal limbo between the federal government and state regulators.

"If McCarran-Ferguson did not exist, the federal antitrust laws would preempt state regulation," he noted. "Actions taken by insurers under those state laws could be–and would be–attacked day in and day out as inconsistent with federal antitrust law, thus placing insurers in the impossible position of being caught between state regulation and federal antitrust review."

Mr. Berrington noted that the changes that have occurred since McCarran-Ferguson was passed–most notably passage of the Gramm-Leach-Bliley Act–have made the insurance's industry's antitrust exemption all the more important as insurers now have to compete with other industries in the financial services arena.

"Of course, the insurance industry is the only major industry with a McCarran-type law," he said in his testimony. "But this is because the other equivalent industries–banks and securities–are primarily regulated by the federal government. It is critical that insurance not be placed at a competitive disadvantage as compared to other sectors of the financial services industry that do not exist in an environment permeated by government price and product controls."

Sunset Would Be Risky

Mr. Berrington said in his testimony that the AIA is concerned that any sunset provisions added to McCarran-Ferguson could have serious unintended consequences, and that opening up the legislation for debate adds a risk commonly found in Washington.

"AIA does not believe that a sunset provision for the limited exemption under McCarran would be useful," he said. "In fact, it may be dangerous to the extent that there is a possibility for politics to regularly be injected into this area and/or for decisions in this area to be required under the pressure of deadlines."

Mr. Berrington noted that the AIA has been seeking to address concerns regarding the industry's antitrust exemption. The group worked with the House Judiciary Committee in the early 1990s on legislation to identify "safe harbors" under McCarran, and continues to work on the reform of the state regulatory system with the House Financial Services Committee.

The AIA also supports creation of an optional federal charter, Mr. Berrington noted, which would allow insurers to choose a federal regulator over the current system but leave the McCarran-Ferguson exemption in place for those who remain in the state regulatory system.

Looking forward, "AIA believes that the emphasis today should be on insurance regulatory reform and not on changes to McCarran," Mr. Berrington said. "The nature of any reform will determine the extent to which current antitrust principles applicable to insurance should be modified."

Flag: Spitzer's Logic

Head: The Case Against McCarran-Ferguson

o "The McCarran-Ferguson exemption to the federal antitrust laws for…insurance illustrates an industry-specific exemption that is ripe for reexamination–and, in our view, repeal."

o "The exemption has interfered with the ability of public and private enforcers to readily use the full panoply of federal antitrust remedies to correct, deter and obtain compensation for abuses in the insurance sector."

o "A uniform federal antitrust standard would facilitate antitrust enforcement and benefit plaintiffs and defendants alike, in contrast to disparate actions, under different laws, that may yield inconsistent results."