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Critical Issue Report Of myth and men Misunderstanding of McCarran-Ferguson once again gives rise to political moves By Phil Zinkewicz Some years ago, a very young, very inexperienced insurance trade press reporter was covering an industry meeting where the subject under discussion was inadequate pricing in the auto insurance market. Several insurance company chief executives participated in a special panel, and each in turn bemoaned the competitive pressures that were driving prices down to the point where profitability was all but impossible. When the question and answer period came around, this naîve novice reporter walked calmly to the microphone and asked the following question: “If you all agree that automobile insurance prices are inadequate, why don’t you get together, agree on the prices you feel are appropriate and set those rates?” Needless to say, this question was met with raucous laughter from the panel as well as the audience of a few hundred attendees; and, needless to say, this reporter’s career in the insurance trade press was destined to be short-lived. The rest of this story points to a widely held belief. Later that day, during the reporter’s discussion with her by now very embarrassed editor, the editor asked her if she had never heard of antitrust laws. She said: “But I heard that the industry is exempt from antitrust laws because of the McCarran-Ferguson Act.” That observation cannot be laughed off because even today a myth is being perpetuated that McCarran-Ferguson allows insurers to collude in price setting, claims handling and product development. In fact, it is a myth that is periodically brought out of the closet and dusted off whenever there are disruptions in the insurance market. Moreover, it is a myth that is easy for the general public to believe when it is presented to them by politicians eager to pursue their own personal or political agendas. This time around, the market disruption that is causing McCarran-Ferguson to be “re-examined” is the troubled homeowners insurance market in the Southeast and Gulf states as the result of the 2005 visitations of Hurricane Katrina and her sinister siblings. Katrina herself resulted in an estimated insured loss of $40.6 billion, the largest loss in the history of insurance. It affected some 1.7 million policyholders. The problem is that some of those claims are in litigation over disputes as to whether the losses occurred as the result of flood damage or wind damage. Homeowners policies exclude coverage for flood damage; flood insurance is arranged through the National Flood Insurance Program. Given the confusion, the public understandably is outraged and ready to believe anything bad about the insurance industry. Move to repeal To assuage the public’s anger, some politicians once again have taken off against McCarran-Ferguson. A bipartisan coalition of senators and representatives has introduced legislation in both chambers of Congress that would repeal the act. Interestingly, one of the big guns in the move to repeal McCarran-Ferguson is Senator Trent Lott (R-Miss.), who suffered a devastating loss of his own property from Hurricane Katrina and was a plaintiff in a suit against State Farm, a lawsuit that has since been settled. The question must be asked: Are those, including Senator Lott, seeking to repeal McCarran-Ferguson doing so because they believe insurers have used the act’s antitrust protection to deny claims from Katrina or to set homeowners rates in the Southeast at exorbitant prices? If so, they are wasting everyone’s time. The fact is, you can take McCarran-Ferguson, place it inside a steel drum, haul it out to the middle of the Atlantic Ocean and sink it, and it would have no effect on the litigation over claims from Katrina or any other such event. The litigation has to do with contract interpretation—whether damages were caused by wind, which is covered by the homeowners policy, or flood, which isn’t. It has nothing at all to do with McCarran-Ferguson. Pat Borowski of the National Association of Professional Insurance Agents (PIA National) says that, despite all the attempts over past years to repeal McCarran-Ferguson, few people—both in the industry and those who are just observers of the industry—have any real knowledge of what the act encompasses. “The McCarran-Ferguson Act was passed in 1945, and it is one of the most concise pieces of legislation ever to come out of Congress,” she says. “Other laws that come out of Capitol Hill run hundreds of pages and are so complex they boggle the mind. McCarran-Ferguson runs about a page and a half, and yet I don’t think even some of my colleagues have read it.” For those who have not read it, the Insurance Information Institute offers its own summary. The limited antitrust exemption under McCarran-Ferguson allows insurers to pool historic loss information so they will be better able to project future losses and charge an actuarially based price for their products. 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, says the I.I.I. In other words, if Senator Lott, or other supporters of McCarran-Ferguson repeal, believes that insurers are colluding over pricing or claims handling, they can proceed against those insurers under existing state or federal antitrust laws and McCarran-Ferguson would not offer those insurers any protection whatsoever. Another crucial fact about the McCarran-Ferguson Act, according to the I.I.I., is that it has nothing to do with claims handling or settlement practices. Consumers are protected in every state by unfair claims statutes that grant insurance regulators the authority to investigate insurers that refuse to pay valid claims, and state courts provide a judicial remedy for contract violations and for torts committed by insurers. That is why some of the claims resulting from Katrina are in litigation now, not because of McCarran-Ferguson. Acting in concert The reason it’s so easy for the public to buy into the McCarran-Ferguson plot is that property and casualty insurance companies do often move in the same direction, but that has nothing to do with McCarran-Ferguson. The problem is that many—perhaps most—insurers possess lemming-like characteristics, and they don’t always share bad news with the insurance-buying public. Remember the early 1980s, when insurers were eager to take advantage of high interest rates for investment purposes? They were practically giving their products away, and they were doing it en masse. Unfortunately, that led to large losses; and in the mid-1980s, to the insurance buying public’s dismay, insurers pulled away from writing many coverages, again en masse. It’s small wonder that the public believes insurers sit behind closed doors to collude on prices and claims handling and that McCarran-Ferguson allows them to do that. So is McCarran-Ferguson really in trouble this time around? Probably not. Dennis Kelly, a spokesman for the American Insurance Association, says it’s all a matter of educating politicians and the public on the limitations of the act. The question is how many times the industry is going to have to reinvent the wheel. Says Borowski: “There will always be politicians who, without truly understanding McCarran-Ferguson, will seek to satisfy their constituents when things go wrong by blaming the act. If education is needed out there, it is our responsibility. This is our industry. It belongs to us—agents, brokers and companies. We have to make sure that the industry is working for the benefit of the public because the public are, after all, our customers.” * The author |
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