Justice and Law Enforcement:

Ultimate Effects of McCarran-Ferguson Federal Antitrust Exemption on Insurer Activity are Unclear

GAO-05-816R: Published: Jul 28, 2005. Publicly Released: Aug 3, 2005.

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This letter transmits our briefing slides describing the potential effects of the federal antitrust exemption included in the McCarran-Ferguson Act (McCarran) on insurer activities. On May 26, 2005, we briefed Congressional staff on the results of our review. Specifically, we assessed existing insurance practices that might violate federal antitrust law absent the McCarran exemption and identified current state authorities related to antitrust laws applicable to insurance. In a separate GAO legal opinion, Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance, published in March 2005, we assessed the types of insurance-related activities that courts have found to be exempt from federal antitrust provisions under the McCarran exemption.

Because the courts have not considered which activities within the "business of insurance" might violate federal antitrust laws, it is difficult to determine which insurer activities would withstand antitrust scrutiny if the exemption were removed. Decisions involving antitrust law are typically based on the facts and circumstances of each case. With insurance activities, if the court decides that the McCarran exemption applies, it generally conducts no further analysis of the activities. Unsure about how courts would decide insurance cases, when eliminating or proposing to eliminate antitrust immunities, legislators at both the state and federal levels have included "safe harbors" for certain insurance activities such as the collection of historical data. Some experts have suggested that absent the McCarran exemption, activities in the property/casualty area, especially joint rate-making, might violate federal antitrust laws, citing concerns over the collective projection of insurer losses into the future. To price insurance policies, property/casualty insurers need to project loss costs--the amount insurers use to cover claims and the costs of adjusting those claims--into the future. Projecting loss costs requires large amounts of data on historical losses and actuarial expertise, and single insurers are not likely to have sufficient data or expertise in all of the insurance lines they sell. Thus, for a significant portion of rate-making, property/casualty insurers rely on rating organizations. Rating organizations standardize risk classifications and products to facilitate the gathering and aggregation of data on past losses and their costs. Then, they bring this historical data up to the present by estimating loss costs for events that have occurred but have not yet been reported. Finally, rating organizations issue "advisory prospective loss costs" by projecting loss costs into the future. They do this by trending--analyzing past data trends and using actuarial judgment about the future. According to industry representatives, regulators, and other experts, this rate-making process has certain benefits, but also raises antitrust concerns. Generally, they believe the process reduces the costs associated with pricing and regulating insurance, makes it easier for new firms to enter the insurance market, and allows consumers to better compare products. However, some experts believe that under some circumstances joint trending might constitute price fixing absent the McCarran exemption, and that standardized risk classifications and products might restrict new insurers or products from entering the market, thus limiting innovation, consumer choice, and competition. Further, according to most experts, courts are more likely to find joint trending a violation of federal antitrust laws than the joint collection of historical data. For some, the McCarran exemption raises the issue of insurance industry uniqueness--that is, whether insurance warrants a federal antitrust exemption that most other industries do not have. Some industry representatives said that insurance is different from other industries because when it is sold the insurer does not know what the cost of a policy will be. In addition, insurer insolvencies can pose significant social costs. Some state regulators told us that lack of certainty about future costs leads some insurers to underestimate their future costs and significantly underprice their policies, potentially leading to costly insolvencies. They said that joint rate-making provides more information and greater certainty to insurers. Other experts have suggested that insurance is not unique and that other industries--such as banking--face uncertainty about future costs, but do not have antitrust immunity.

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