Client Alert

Introduction of the 'Insurance Industry Competition Act' May Bring New Federal Antitrust Scrutiny to the Insurance Industry

March 2, 2007

On February 15, 2007, Senator Patrick Leahy introduced the “Insurance Industry Competition Act,” S. 618, 110th Cong. (2007), to the Senate. The bipartisan legislation, which has now been introduced in both houses of Congress, would amend the 1945 McCarran-Ferguson Act to eliminate the insurance industry’s 62-year old status of immunity from federal antitrust law.

The McCarran-Ferguson Act 15 U.S.C. §§ 1011-15 (2000), affords insurers an exemption from the federal antitrust laws when two conditions are met: (1) the challenged practice must be part of the “business of insurance” and (2) the practice must be “regulated by State law.” Id. § 1012(b). In practice, the McCarran-Ferguson Act allows insurance companies to share related information without facing federal antitrust scrutiny. Common insurance industry practices that would normally raise competition questions include cooperative ratemaking efforts, and other rate-related matters, through memberships or subscriptions of state-licensed rating or advisory organizations.

Exempt from federal antitrust regulation, the insurance industry has long been subject to allegations of anticompetitive conduct such as collusion and price fixing. Normally, such conduct would give rise to a federal antitrust complaint pursuant to Sections 1 and 2 of the Sherman Act. See 15 U.S.C.S. §§ 1-2 (2007). The new legislation, motivated in part by the aftermath of Hurricane Katrina, has been promoted as an effort to protect insurance consumers by preserving legitimate competition in the insurance industry. Although similar efforts in the past have met with limited success, the unavailability of low-cost insurance in the Gulf Coast may provide the impetus for congressional approval of the new legislation. In his statement introducing the bill, Senator Patrick Leahy stated, “If there ever was, there is no longer any justification to exempt the insurance industry from federal government oversight. Such oversight could provide confidence that the industry is not engaging in the most egregious forms of anticompetitive conduct – price fixing, agreements not to pay, and market allocations.” ¹

Implications of the Insurance Industry Competition Act

Passage of the Insurance Industry Competition Act would have a number of negative implications for the insurance industry. First, passage of the Act would allow the federal antitrust agencies to regulate the market conduct of insurance companies. Removal of the current antitrust exemption would provide the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission with an opportunity to monitor the activities of insurance companies for anticompetitive behavior; the likely result being an increase in the number of antitrust challenges levied against insurance companies. To avoid such a challenge, insurance companies would need to review, and possibly modify, their current policies to ensure compliance with the federal antitrust laws.

Second, passage of the legislation could have the unintended consequence of reducing competition in the insurance industry. Several commentators have pointed out that the McCarran-Ferguson Act creates efficiencies by allowing information costs to be shared across the insurance industry, thereby reducing the cost burden of small- and medium-sized companies. By eliminating broad access to information at a reduced cost, the Insurance Industry Competition Act may inhibit the ability of smaller insurance companies to compete effectively. Moreover, by raising the operating costs of small companies, the Act may discourage new entrants.

Finally, passage of the Act may stimulate an increase in private class action lawsuits against insurance providers. As certain provisions of the federal antitrust laws create a private right of action, it is conceivable that passage of the Act will open the door for private plaintiffs to file antitrust complaints against insurance companies. Although passage of the Insurance Industry Competition Act is far from a certainty, insurance companies should have an awareness of the antitrust implications of the Act while also remaining cognizant of the impact that passage of the Act could have on their future operations.

¹    Leahy Leads Bipartisan Effort to Hold Insurance Companies Accountable Under the Antitrust Laws, http://leahy.senate.gov/press/200702/021507c.html.