Insurers Could Lose Antitrust Exemption, Report Warns

NU Online News Service

Legislation in Congress to repeal the insurance industry's limited federal antitrust exemption may gain passage because of negative publicity over carriers handling of hurricane claims according to a report by an insurance technology consulting firm.

If the insurers 1945 exemption from the McCarran-Ferguson Act should be eliminated it would be potentially harmful to insurance buyers, the note by the New York-based Advisen Ltd. firm concludes.

Such a legislative "evisceration" would potentially reduce competition within the insurance industry, Advisen found.

The current exemption, Advisen noted, is a narrow and limited one attached to activities that are regulated by a state such as joint development of insurance forms and the sharing of loss data for purposes of policy pricing.

The rationale for the sharing of loss data is that insurance premiums are based on the analysis of historical claims, and many smaller insurers do not have sufficient claims statistics for ratemaking purposes. Unless insurers pool claims data, neither they nor regulators can know the cost of insurance products and whether rates are appropriate, Advisen said.

The Advisen note from David Bradford, chief knowledge advisor, comments that the proposed legislation "appears to be political grandstanding in the wake of the negative publicity from the settlement of 2005 hurricane claims."

While the antitrust exemption has withstood repeated attacks in the past, Advisen said the current political environment "makes a repeal of the antitrust exemption more likely this time around."

Because insurers can pool claims information, small insurance companies are not disadvantaged as compared to the very largest companies, which may themselves have enough data for making rates, Advisen's note said.

Without access to pooled data, many small companies would be less able to compete effectively, and would be more prone to insolvency, since they could not actuarially price their products, Mr. Bradford wrote.

Advisen cited past research by Patricia M. Danzon of the Wharton School of the University of Pennsylvania who found it likely that repeal of the exemption would "actually reduce competition, increase the cost of insurance, and reduce the availability for some high-risk coverages, because the threat of antitrust litigation would make insurers unwilling to engage in efficiency-enhancing cooperative activities."

Advisen said the activities enabled by the antitrust exemption - the aggregation of claims experience for ratemaking purposes and the creation of standardized policy forms - have nothing to do with "agreements not to pay" and "market allocations." "Nor do they enable "price fixing" - they only permit insurers to collectively compile sufficient claims information to determine the cost of the products they sell."

The Jersey City, N.J.-based Insurance Services Office (ISO) is the organization that collects loss information for most lines of insurance, and promulgates loss costs, which insurers have the option, but not the obligation, to use in setting premiums.

Advisen noted that Professor Danzon had found that "both theory and evidence indicate that the availability of those ISO services has increased the number of firms in the market and has increased rather than reduced competition.