Insurance Industry Antitrust Exemption - Essay Example

Insurance Industry Antitrust Exemption Insurance Industry Antitrust Exemption Put here of the Antitrust Law - What is it Antitrust laws are the statutes of the federal and state that protect trade and commerce from price fixing, price discrimination, monopolies and unlawful restraints of trade. Since 1945, state regulation and taxation of insurance companies has been protected by the McCarran-Ferguson Act, 15 U.S.C.1011-1012 ("McCarran-Ferguson"). McCarran-Ferguson's overall purpose is to reserve to the states the right to regulate and tax insurance companies. To effectuate that purpose, McCarran-Ferguson provides two separate exemptions from federal preemption, a general exemption for "any law enacted by any state for the purpose of regulating the business of insurance," and a provision exempting insurance companies from federal antitrust laws in states which regulate "the business of insurance." McCarran-Ferguson Act, section 1012(b). The United States Supreme Court has made clear that the scope of the general exemption is broad, while the scope of the antitrust exemption is more limited. According to this Act, the states are given the authority to regulate the "insurance business." The regulation of the insurance business will be without the interference of the federal regulation. Unless the federal law specifically provides any regulation, there will be no interference of the federal regulation. The act provides that the "business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business." The McCarran Ferguson Act was passed by the congress which was in response to the case at the Supreme Court. The case at the court was of United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440 (1944). Prior to this case, the issuance of an insurance policy was not considered as a commercial transaction, which according to the federal regulation would fall under the COMMERCIAL CLAUSE. It was held by the court that an insurance company that conducted substantial business across state lines was engaged in interstate commerce and thus was subject to federal antitrust regulations. Within a span of one year from the Southeastern Underwriters, the McCarran Ferguson Act was enacted by the Congress. The Congress also stated that, no longer would the insurance industry would be regulated by them within their boundaries. The McCarran-Ferguson Act provides that state law shall govern the regulation of insurance and that no act of Congress shall invalidate any state law unless the federal law specifically relates to insurance. The act thus mandates that a federal law that does not specifically regulate the business of insurance will not PREEMPT a state law enacted for that purpose. A state law has the purpose of regulating the insurance industry if it has the "end, intention or aim of adjusting, managing, or controlling the business of insurance" Limited Antitrust Exemption under the McCarran Ferguson Act The limited antitrust exemption under McCarran-Ferguson allows insurers to pool historic loss information so that they are better able to project future losses and charge an actuarially based price for their products. It also allows for joint development of policy forms. The act does not exempt insurers from state antitrust laws, which explicitly prohibit insurers (and all businesses), from conspiring to fix prices or otherwise restrict competition. The McCarran-Ferguson Act in no way results in any kind of restraint on competition. Under the act, insurers remain subject to rate and form regulation in every state. The home-owners policies cover all sorts of perils and hence are believed to be a federal regulator. The act's exemption applies only if three conditions are met: 1. The insurer's action pertains to the business of insurance. 2. The action must be regulated by state law. 3. The action must not be designed to boycott, coerce or intimidate. Claim handling and settlements are not dealt or in no way related to the Act. Consumers are protected in every state by unfair claims statutes that grant state insurance regulators the authority to investigate insurance companies that refuse to pay valid claims, and state courts provide a judicial remedy for contract violations and for torts committed by insurers. Every state has got some consumer protection laws which do apply to all types of insurance transactions. The net effect of the limited exemption under McCarran-Ferguson is actually to increase competition by giving small insurers, who otherwise would have too little data to develop actuarially credible (i.e. statistically reliable) rates, the tools to compete with larger insurers who have much more data on which to base rates. The principle is simple: better data produce rates that are more accurate, and rates that are accurate are fairer to consumers. The fact that a larger number of insurers can secure the data they need to compete under McCarran means that consumers are afforded more choices, not fewer. Both large and small consumers of insurance benefit from the pooling of loss data. The reasons for this benefit is as follows - - Use of pooled data by larger insurers allows them to enter new markets in new states and to offer new products. Without this data, larger insurers would not know how to accurately price their products. This would result in less choice for insurance buyers as larger insurers would not be able to offer as many products. - For smaller insurers that do not have the resources available to accurately price coverage, the benefits of data-pooling are significant. Industry analyst Advisory notes that without access to pooled data, smaller insurers would not be able to compete as effectively and would be more prone to insolvency since they would be unable to actuarially price their products. - Smaller insurers are an important source of competition for larger national insurers and a large source of business for local agents. According to A.M. Best, of the 2,000 P/C insurers operating in the U.S., more than one-third is small (companies with adjusted policyholder surplus of up to $100 million). According to the McCarran Ferguson Act the regulations to the states are primary regulations given by the Act. There are some beliefs that insurance companies should have the regulatory option either by the states or the federal government. There is also a belief that the system of state regulation is appropriate. Irrespective of the different beliefs and assumptions, many still believe that there is a need for modernization of the state regulatory system. It is believed by many people that if the McCarran Ferguson Act is repealed, then it may reduce competition, increase the cost of insurance and also reduce availability for some high-risk coverage. This is because the threat of antitrust litigation would make insurers unwilling to engage in efficiency-enhancing activities of co-operation. References: 1. http://law.jrank.org/pages/8497/McCarran-Ferguson-Act-1945.html 2. http://www.iii.org/media/research/mcf/ 3. http://insurance.cch.com/RUPPS/antitrust-laws.htm 4. http://www.wileyrein.com/publication.cfmpublication_id=11997 Read More