Insurer Antitrust Exemption Should Be Eliminated, Federal Commission Says

A federal commission rocked the insurance world last week with a recommendation that Congress consider eliminating the industry's limited federal antitrust exemption, dismissing concerns about what the loss of data sharing privileges might mean for small carriers and consumers.

The recommendation was contained in a report by the Antitrust Modernization Commission. Four of the 12 members of the commission specifically called for repeal of the McCarran-Ferguson Act, which gives insurers their shield from federal oversight, along with three other antitrust exemptions involving shipping and exporting.

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

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 the cited exemptions “should not be delayed.” He added that Congress should create another commission to examine all the other exemptions “now on the books.”

The commission dismissed in its report any potentially detrimental effect on small insurers in terms of sharing loss data, contending that ending the exemption should ultimately 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 report noted.

“Insurance companies would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings,” the commission added, warning that “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.”

Jonathan Jacobson, a commission member from New York, added in additional remarks that, regarding exemptions enjoyed by the insurance and shipping 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.”

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.'”

However, 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.”

He said that “if these were valid bases for an exemption, there would 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 some important public goal, and whether an exemption is truly necessary to ensure that this goal is served.”

He concluded that “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…than by relying purely on the generalist overview reflected in our official recommendations,” he said.

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

“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 Hurricane Katrina claims,” said Ben McKay, PCI's senior vice president of federal government relations.

He said an antitrust repeal would “punish the millions of consumers who rely on small and medium-sized 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 also pointed out that the commission's report simply calls for a review of McCarran-Ferguson, not necessarily repeal.

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

The National Association of Mutual Insurance Companies focused on a comment in the report by the full commission that it is unnecessary to protect small insurers by exempting the sharing of information from federal antitrust laws because regulators and the courts are unlikely to call such sharing anticompetitive unless price fixing is determined.

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

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

Moreover, Mr. Detlefsen said, “the full report, and comments by Commissioner Jacobson, seems oblivious to the negative consequences for both insurers and consumers that would result from the legal uncertainty and expense of private antitrust litigation to settle such questions, whose inevitability they acknowledge should the limited insurance antitrust exemption be repealed.”

In its statement, PCI said that, contrary to what the commission said in the report, “existing state and federal laws expressly prohibit insurers from collusion, and theexemption only allows insurers limited authority to share specific lossdata that ultimately makes the market more competitive by providing small and medium-sized companies the ability to compete with larger insurers.”

Defending the exemption, PCI said it “believes the law positively impacts consumers and will aggressively advocate for its retention.”

“To use the tests outlined in the report, McCarran does meet the goal 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 to correctly make their own determinations as to the price of their product.”

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

Dennis Kelly, an AIA representative, said the report “fails to make the connection between government regulation and antitrust enforcement.”

While the commission report talks about the importance of maintaining a free market, noted Mr. Kelly, “in the property-casualty insurance world, states have imposed government price controls instead of allowing the free market to determine the range 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 federal regulation and antitrust enforcement that could result in fewer areas for the free market to thrive.

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