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Commisioner of Insurance
Testimony of the National Association of Insurance Commissioners Before the Committee on the Judiciary United States Senate Regarding: The McCarran-Ferguson Act and Antitrust Immunity: Good for Consumers?
March 7, 2007
Susan E. Voss
Chairman Leahy, Ranking Member Specter, and members of the Judiciary Committee, thank you for inviting me to testify today.
I am pleased to be here today on behalf of the NAIC and its members to provide the Committee with our initial observations on congressional efforts to repeal the limited antitrust exemption for insurance activities granted by the McCarran-Ferguson Act ("Act"). 15 U.S.C. §1011 et seq.
The NAIC's antitrust working group, chaired by Illinois Director of Insurance Michael McRaith, represents the current phase in the evolution of the NAIC's position on repeal of the limited federal antitrust exemption. As you may recall, Director McRaith appeared before the Committee last June. He testified that: (i) insurance is a unique financial product, (ii) for which state supervision is well-suited, long-standing, and successful, and (iii) that the state system operates to prevent and punish anti-competitive practices, demonstrating that (iv) the limited federal antitrust exemption has worked well for decades to maintain a vigorous and competitive market.
Mr. Chairman, if invited, we would be pleased to submit for the hearing record any relevant comments, recommendations, or outcomes from the NAIC Spring national meeting.
Of immediate concern to many members of Congress is whether Gulf Coast victims of Hurricanes Katrina and Rita, are victims now of alleged unscrupulous insurance practices. Belief that the limited antitrust exemption blocks federal investigation by the Department of Justice and the Federal Trade Commission overlooks the fact that the alleged unscrupulous practices generally involve claims payment and claims settlement disputes. The Act's limited antitrust exemption does not necessarily shield these matters. Likewise, there are allegations that some insurers colluded not to pay policyholder claims post-Katrina. The crime of "collusion" involves (i) a secret agreement among two or more persons, (ii) to commit a fraudulent act. Collusion would be an actionable offense under federal and state deceptive and unfair trade practices laws, and a prosecutor could perhaps frame an action under Section One of the Sherman Act of 1890. 15 U.S.C. §1. Demonstration of a Section One antitrust violation requires: (i) an agreement (e.g. conspiracy, "collusion"), resulting in (ii) anticompetitive effects (e.g. "restraint of trade"), and (iii) that involves an illegal action, which (iv) was the proximate cause of injury. Alleged collusion not to pay has, arguably, an anti-competitive effect. It could generate market power in the form of wealth transfer to insurers that injure consumers who, in consideration of expected payouts on legitimate claims, paid premiums to insurers that do not assume the transferred risk by honoring the claims.
Although the shield of the McCarran exemption should not block either federal or state investigation or prosecution of anti-competitive agreements to capture market power, it is possible to distinguish those anti-competitive actions from pro-competitive joint practices, as determined under a "rule of reason" analysis.
Let me be direct: the NAIC is concerned that outright repeal risks ending certain pro-competitive practices when the real culprits are bad actors who engage in alleged unscrupulous anti-competitive practices.
S. 618 is a relatively short bill, but with far-reaching implications. As I noted earlier in distinguishing between anti- and pro-competitive practices, outright repeal risks transforming certain insurance practices that promote competitiveness, help consumers, and strengthen markets, into actionable violations of federal antitrust law. Jeopardized practices include, for instance:
Current federal expertise and capacity necessary to evaluate certain practices and conduct for pro-competitive effects is limited, at best, because of the long and successful history of state regulation over the business of insurance. In contrast, the FTC has its own enforcement history as well as developed case law to evaluate the pro- and anti-competitive effects of certain practices in the health care arena. Should S. 618 and its FTC/DOJ joint antitrust enforcement review provision become law, it would take time for federal officials to become sufficiently expert in the business of insurance. During this ramp-up period, market uncertainty concerning federal and state antitrust enforcement policy would threaten consumers and insurers. Therefore, this Committee may want to consider adding a "firewall" provision that temporarily protects from federal prosecution those practices that come before the FTC and DOJ for antitrust enforcement guidance. This presumption of legality could help maintain stability for the business of insurance during a transition period.
Repeal of the limited federal antitrust exemption for the business of insurance invites unintended consequences that could create market uncertainty and harm consumers. Some of those consequences, according to the U.S. Government Accountability Office (GAO), might include the restriction of new products or insurers from entering the market, limits on product innovation, consumer choice, and competition. GAO-05-816R, McCarran-Ferguson Federal Antitrust Exemption, at 3 (July 28, 2005). Outright repeal jeopardizes: (i) competitive market benefits from the development of joint loss costs and policy language; (ii) standardized risk classifications and policy form language that make data more credible; (iii) consolidated collection and analysis of data that improve quality and aid smaller insurers with responsible rate-setting; and (iv) publication of advisory loss costs and common policy forms that make it less costly for small and medium-sized competitors to enter or expand in the market. Outright repeal also opens the door for increased litigation to determine whether a certain practice is anti-competitive, or whether a particular state "actively" governs the practice.
Litigating Antitrust Boundaries
Absent certainty in results from the application of FTC/DOJ antitrust enforcement guidelines and a "firewall" provision to provide a bridge of interim stability for consumers and markets, litigation will probably remain a preferred option for a party that seeks to probe the contours of insurer activities to determine which ones withstand federal antitrust scrutiny.
One point for certain is that it will take years of litigation to develop uniform precedents among the circuits. Even assuming that courts apply the "State Action" doctrine uniformly, the likelihood of litigation remains strong because "decisions involving antitrust law are typically based on the facts and circumstances of each case." GAO-05-816R at 2 (2005). Litigation will force states, generally, and state departments of insurance, in particular, to reallocate limited staff and financial resources away from more productive uses. It also may create sufficient uncertainty to chill the introduction of new insurance products, limit options for consumers, and impact prices.
Federal-State Prosecutorial Cooperation
The NAIC understands that Congress wants to be responsive to the public and offer more than a phone number to their state's chief insurance regulator. The NAIC, however, encourages the Congress to approach this policy matter from the perspective of "both-and," not "either-or." We believe this issue invites both federal and state action in a demonstration of cooperative federalism. Any federal legislation should include provisions that authorize federal-state collaboration to identify, investigate, and prosecute bad actors in the business of insurance who engage in anti-competitive practices.
Protecting Consumers at the State Level
Every state has its own antitrust and unfair competition laws. State regulators and attorneys general play complementary and mutually supportive roles in monitoring and investigating insurers, agents, and brokers to prevent and punish activities prohibited by those state laws. Monitoring involves reacting to conditions and changed circumstances. It also involves taking an active role and making adjustments to our methods and policies that anticipate new challenges that threaten consumers and market stability. State regulators' primary responsibility is to regulate the "business of insurance" to maintain a stable insurance market that provides products that offer reasonable benefits to consumers. Every day conscientious and highly skilled regulatory professionals monitor and investigate business activities related to the two major obligations insurers owe to consumers--issuing sound policies and paying claims on time.
Market conduct exams are part of the monitoring system. State insurance officials supervise the market conduct of industry participants by reviewing their business operations through market analysis, periodic examinations, and investigation of specific consumer complaints. When consumers have complaints about homeowners, health, automobile, and life insurance, they readily contact their state insurance departments. State officials earn consumer trust, in part, because they know the towns, cities and communities in which consumers live, and the nuances of the local insurance marketplace. Insurance products are difficult for many consumers to understand. Consumers expect state governments to have appropriate safeguards and an effective local response if problems arise. States have such systems in place.
Insurers, agents, and brokers also must accept responsibility for maintaining a competitive and fair marketplace by reporting business practices that appear to be harmful, anti-competitive, or unethical to state regulators. Preventing and correcting market conduct problems requires that regulators and responsible business participants work together toward a common goal of strengthening stability and fairness in the marketplace. We achieve such stability through extensive daily monitoring of solvency, review of rates and policy forms, and evaluating market behavior.
State Insurance Regulators: "Cops on the Beat"
An example of recent collaboration between state regulators and attorneys general is the effort over the past two years to address wrongdoing and potential conflicts of interest associated with broker compensation. In October 2004, then-New York Attorney General Eliot Spitzer filed a civil complaint against a large brokerage firm after months of investigation by the attorney general and more than a year of analysis by the New York Insurance Department. The civil complaint, which included claims based on violations of New York antitrust law, unfair business practice law, and common law fraud, has resulted in a number of guilty pleas on criminal charges of fraud related to bid-rigging. The charges stemmed from contractual and implied arrangements between insurers and brokers in which the insurer pays extra commissions to the broker based on a number of factors, such as the loss ratio or retention of business placed through the brokerage firm. These commissions were in addition to regular sales commission, and often based on the performance of the insurer's entire book of business with an individual broker. Although these types of contingent commissions have been commonplace for more than a century, allegations of "rigged" competition among certain brokers and carriers emerged. Additionally, there were allegations that brokers would freeze out insurers with less favorable commission arrangements, regardless of whether the insurance fits a customer's needs. In terms of law enforcement and insurance regulation, this conduct constitutes fraud, an unfair business practice, and a violation of state antitrust law.
Without admitting or denying the allegations against them, five of the nation's top brokers entered into consent agreements with a number of attorneys general and state insurance departments. The agreements establish settlement funds ranging from $27 million to $850 million, which are available to policyholders who release the brokers from any liability associated with the settlements.
State experience with the business of insurance is long-standing. Existing state consumer protection, antitrust, and unfair trade practice laws provide necessary tools to help stop anti-competitive conduct. If Congress intends to provide federal authority to police for antitrust violations, then provisions for federal-state collaboration should be part of any legislation because the states have policed this beat longer.
A priority of state insurance regulators is to protect consumers. We recognize that insurance is a unique financial guarantee product that is essential to protecting not just the American economy, but also the most cherished personal effects of individual consumers. It is part of the social fabric and financial safety net that enables citizens, small businesses, and global corporations to move forward each day with confidence.
The NAIC stands ready to work with this Committee and the 110th Congress to examine as a separate and distinct policy issue whether a targeted boost in existing federal enforcement power against bad actors in certain alleged anti-competitive activities would complement strong state regulatory authority--not compete against it.