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Feds Challenge McCarran Ferguson ... Again

Lars Powell, Ph.D.
Insurance Experts' Forum, December 2, 2009

The 79th Congress enacted Public Law 15, better known as the McCarran-Ferguson Act of 1945 (hereafter “McCarran”).[1] The Act provides a narrow exemption from federal antitrust laws, and pertains only to activities that (1) constitute the “business of insurance,” (2) are “regulated by State law,” and (3) do not constitute “an agreement to boycott, coerce or intimidate or an act of boycott, coercion or intimidation.” 

In practice, McCarran permits several activities conducted by insurance companies that would otherwise be prohibited or subjected to scrutiny under the federal antitrust laws.  Perhaps the most significant consequence of the Act is that it permits insurers to pool data through independent statistical agents, who produce advisory loss costs to aid insurers in the ratemaking process. It also allows standardization of risk classification and policy forms, and joint underwriting ventures. Each of these functions benefits consumers by promoting financial strength, efficiency and competition in insurance markets.

A sense of political déjà vu is justified. Federal government attempts to repeal McCarran occur predictably whenever issues involving insurance become salient on the national stage. I attribute this to a combination of policy ignorance and political ambition.[2] While few politicians understand the insurance mechanism or dynamics of the industry, most are aware of the political gains from bashing the industry.

Fast forward to 2009—the House and Senate are considering legislation to repeal McCarran as it applies to health insurance and medical professional liability insurance. Claiming that insufficient oversight by state regulators allows these insurers to collude in anticompetitive behavior, House and Senate democrats have included language in the current healthcare reform legislation based on S.1861/H.R.3596, AKA the “Health Insurance Industry Antitrust Enforcement Act of 2009.”

Given observed levels of competition and structural impediments to collusion in these markets, most informed observers agree this effort represents a solution in search of a problem. Thus, the impetus for this action appears political, rather than substantive. The best thing consumers can hope for if this bill passes is that nothing changes. There is no upside. There is no reason to expect prices to decrease. 

On the other hand, repealing McCarran for this segment of the insurance industry could have serious implications for insurance companies that would ultimately burden consumers. Private lawsuits seeking treble damages under the Clayton Act are of primary concern to carriers. In the health insurance arena, a likely target is information shared to determine usual and customary fees for medical services. 

The potential downside for property/casualty insurers is even greater than that of health insurers. Because some P&C carriers use advisory loss costs (e.g. ISO or NCCI) to improve the accuracy and credibility of rating information, this practice would also be a likely target of private lawsuits. Legal costs could prohibit smaller insurers from using advisory loss costs, acting as a substantial barrier to entry.

While those of us who study financial services regulation are not surprised by this display of ignorance and incompetence from some in the federal government, this sets new moral and intellectual low points by apparently seeking the opposite of its stated purpose. Instead of increasing competition in insurance markets, this legislation will make insurance rates less accurate, thereby increasing the cost of insurance.

Dr. Lars Powell holds the Whitbeck-Beyer Chair of Insurance and Financial Services at the University of Arkansas-Little Rock. He earned a Ph.D. in Risk Management and Insurance from the University of Georgia. His primary research interests include insurer capitalization and the effects of regulation on insurance markets. As a consultant, Powell performs a range of insurance-related tasks from legislation analysis and litigation support to insurance company formation and regulatory problem solving.


[1] McCarran-Ferguson Act, 59 Stat. 33,34 (1945), U.S.C.A. §1012 (1958).

[2] See Powell, Lawrence S., 2008. “Assault on the McCarran-Ferguson Act and the Politics of Insurance in the Post-Katrina Era,” Journal of Insurance Regulation, v26n3: 3-21 (Spring 2008)

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