End Insurers' Trust Exemption, U.S. Panel Says

WASHINGTON--A federal commission recommended today that Congress consider eliminating insurers' limited antitrust exemption, saying recent trends point to the benefit of ending such arrangements.

The recommendation was contained in the report of the Antitrust Modernization Commission. Four of the 12 members of the commission specifically called for repeal of McCarran-Ferguson and three other antitrust exemptions, including the Shipping Act, the Export Trading Company Act and the Webb-Pomerene exemption.

An insurance trade group reacted that the commission did not have a full understanding of the way the law worked.

One commission member, John Shenefield, a lawyer at Morgan Lewis Washington who was also in charge of antitrust enforcement in the Carter administration, said the repeal of those exemptions "should not be delayed."

But, in addition, he said, Congress should create another commission to examine all the other exemptions "now on the books."

The commission dismissed in its report the potential effect that eliminating the exemption from collecting loss data would have on small insurers. It said eliminating the exemption should have no effect on such industry practices.

"Like all potentially beneficial competitor collaboration generally,...such data sharing would be assessed by antitrust enforcers and the courts under a rule of reason analysis that would fully consider the potential pro-competitive effects of such conduct and condemn it only if, on balance, it was anticompetitive."

The commission added, "Insurance companies would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings." It also noted, "To the extent that insurance companies engage in anticompetitive collusion, however, then they appropriately would be subject to antitrust liability."

The report said various factors have driven the movement toward deregulation, noting that technological progress has facilitated the growth of competition in "industries previously considered natural monopolies."

In addition, the report said, "critiques of regulation have pointed out that federal regulatory agencies were sometimes 'captured' by firms they regulated, to the detriment of the public interest, and that the costs of regulation were significantly more than anticipated."

The general conclusion is that, "in many instances, "regulation reflects successful rent-seeking by private economic interests and generally reduces consumer welfare by restricting output," the commission concluded.

Jonathan Jacobson, a commission member from New York, added in additional remarks that, regarding exemptions enjoyed by the shipping and insurance industries, for example, "sufficient evidence was presented at those hearings, in my view, and sufficient independent analysis strongly confirms, that these exemptions have outlived any utility they may have had and should be repealed."

The specific antitrust exemptions he cited were the McCarran-Ferguson insurance exemption, the Shipping Act, the Export Trading Act and the Webb-Pomerene Act.

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

"At each hearing, the commission was presented with substantial evidence of anticompetitive activities the exemptions do or can permit." Mr. Jacobson said.

"And, in each case, the response was basically the same--that 'our industry does many good things, does not restrain competition, and needs the exemption to avoid potential treble damage litigation.'"

Mr. Jacobson added, "This litany provides no basis for an exemption. Virtually every industry does good things. Conduct that does not restrain competition is not prohibited, with or without an exemption. And freedom from private litigation is something, again, that every industry would like.

"If these were valid bases for an exemption, there would be immunities from the antitrust laws everywhere," he added. "The real question in each case is whether the application of normal antitrust rules will impair some important public goal, and whether an exemption is truly necessary to ensure that this goal is served."

He concluded, "None of the industries we examined came close to meeting that standard of proof.

"In my view, the commission would have better served the country through a more focused review of these four and other widely applicable exemptions (such as the Capper-Volstead Act) than by relying purely on the generalist overview reflected in our official recommendations," he concluded.

Among the first insurance groups to react, the Property Casualty Insurers Association of America (PCI) said in a statement that the commission findings reflected a misunderstanding insurers' exemption and what it allows.

"The clamor over the limited exemption provided by McCarran-Ferguson is a misguided attempt to punish large insurers for their perceived mishandling of a small percentage of [2005] Hurricane Katrina claims," said Ben McKay, PCI's senior vice president, federal government relations. The commission was created in 2002.

Mr. McKay added that an antitrust repeal would "punish the millions of consumers who rely on small and medium-size companies to protect their homes, autos and businesses. Because repeal would significantly damage these insurers' ability to compete effectively in the market, consumers would pay higher prices and have fewer insurance choices."

PCI pointed out that the AMC report simply calls for a review of McCarran-Ferguson, not necessarily repeal.

This article was updated April 4, 11:37 a.m.EDT.