[Senate Hearing 109-557]
[From the U.S. Government Publishing Office]
S. Hrg. 109-557
THE MCCARRAN-FERGUSON ACT: IMPLICATIONS OF REPEALING THE INSURERS'
ANTITRUST EXEMPTION
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 20, 2006
__________
Serial No. J-109-89
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
Michael O'Neill, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois, prepared statement................................... 62
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 2
prepared statement........................................... 106
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust
Bureau Office of the Attorney General for the State of New
York, New York, New York....................................... 4
Hunter, J. Robert, Insurance Director, Consumer Federation of
America, Washington, D.C....................................... 8
Klawiter, Donald, Chair, Section of Antitrust Law, American Bar
Association, Washington, D.C................................... 12
McRaith, Michael, Illinois Director of Insurance, Chair, Broker
Activities Task Force, National Association of Insurance
Commissioners, Chicago, Illinois............................... 10
Racicot, Marc, former Governor of Montana, and President,
American Insurance Association, Washington, D.C................ 6
Thompson, Kevin, Senior Vice President, Insurance Services
Office, Jersey City, New Jersey................................ 14
QUESTIONS AND ANSWERS
Responses of Elinor Hoffmann to questions submitted by Senator
Specter........................................................ 27
Responses of Robert Hunter to questions submitted by Senator
Specter........................................................ 30
Responses of Donald Klawiter to questions submitted by Senators
Specter and Leahy.............................................. 32
Responses of Michael McRaith to questions submitted by Senators
Specter and Leahy.............................................. 35
Responses of Marc Racicot to questions submitted by Senators
Specter and Leahy.............................................. 50
Responses of Kevin Thompson to questions submitted by Senator
Leahy.......................................................... 60
SUBMISSIONS FOR THE RECORD
Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust
Bureau Office of the Attorney General for the State of New
York, New York, New York, prepared statement................... 64
Hunter, J. Robert, Insurance Director, Consumer Federation of
America, Washington, D.C., prepared statement.................. 78
Independent Insurance Agents & Brokers of America, Inc.,
Alexandria, Virginia, letter................................... 92
Klawiter, Donald, Chair, Section of Antitrust Law, American Bar
Association, Washington, D.C., prepared statement and
attachment..................................................... 96
McRaith, Michael, Illinois Director of Insurance, Chair, Broker
Activities Task Force, National Association of Insurance
Commissioners, Chicago, Illinois, prepared statement........... 108
Racicot, Marc, former Governor of Montana, and President,
American Insurance Association, Washington, D.C., prepared
statement...................................................... 128
Thompson, Kevin, Senior Vice President, Insurance Services
Office, Jersey City, New Jersey, prepared statement............ 140
THE MCCARRAN-FERGUSON ACT: IMPLICATIONS OF REPEALING THE INSURERS'
ANTITRUST EXEMPTION
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TUESDAY, JUNE 20, 2006
United States Senate,
Committee on the Judiciary,
Washington, DC.
The hearing was convened, pursuant to notice, at 9:30 a.m.,
in room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senator Leahy.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. Good morning, ladies and gentlemen. The
Judiciary Committee will now proceed with our hearing on the
McCarran-Ferguson Act, and examine the issue as to whether
there ought to be antitrust coverage for the insurance
industry, whether McCarran-Ferguson ought to be repealed or
modified.
The issue has been the subject of a number of legislative
proposals. House bill 2401, introduced by Congressman DiFazio,
would eliminate the antitrust exemption under McCarran, and is
a byproduct of earlier legislation which was introduced by
Congressman Brooks, then chairman of the House Judiciary
Committee.
In the Senate, we have Senate bill 1525, introduced by
Senator Leahy, which relates to the issue that McCarran would
not apply to medical malpractice insurers who engage in any
form of price fixing, bid-rigging, or market allocation, and
Senate 2509, Senator Sununu, which would authorize Federal
regulation for insurers who opt into the program.
The issue has been the subject of an investigation by the
New York Attorney General's Office, which found that there was
bid-rigging and customer allocation schemes among some major
insurers, and the country's largest broker. We have a panel
today of six witnesses, evenly divided: three advocating for
repeal of McCarran-Ferguson and three opposing it.
This is a very important subject where there is a
significant question as to whether regulation by the States is
sufficient and whether there should be special status accorded
to the insurance industry to be exempt from the antitrust laws,
with those laws being very, very important in enforcing
competition in the economy generally.
Without objection, my full statement will be made a part of
the record.
We will now turn to our first witness. Our first witness is
Ms. Elinor Hoffmann, Assistant Attorney General, Antitrust
Bureau, in the New York Attorney General's Office.
She has had 25 years of litigation experience, including
numerous antitrust cases. She is an Adjunct Professor of Law at
Brooklyn Law School, Phi Beta Kappa and Magna Cum Laude from
New York University, and a law degree from Brooklyn Law School,
and a Master's in law from New York University.
Thank you for joining us here today, Ms. Hoffmann. We look
forward to your testimony.
Ms. Hoffmann. Good morning. On behalf of the New York State
Attorney General, thank you for the opportunity to testify here
today.
The antitrust laws reflect our society's belief that
competition in the commercial marketplace enhances consumer
welfare and promotes our economic and political freedom.
Unrestricted competition, however, may not be consistent
with other significant public policies or regulatory schemes
that also serve the public interest. So we exempt conduct from
antitrust scrutiny to the extent necessary--but only to the
extent necessary--to obtain--
Chairman Specter. Ms. Hoffmann, you have just begun your
testimony, less than a minute in. I want to turn to you,
Senator Leahy, to have your opening statement. We just adopted
a new rule. If you are less than a minute into your testimony,
you are subject to interruption.
[Laughter].
Chairman Specter. You are subject to interruption, and you
will be accorded the full time when you begin again, providing
your microphone is on.
Ms. Hoffmann. Thank you, Senator.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. These are known as the Specter rules, which
I want you to know, we all follow.
With respect, I did want to be here. I apologize, I started
off a little late this morning. I had breakfast this morning
with Cardinal McCarrick, one of the finest clerics to serve
here, who is now retiring, which means they will find hundreds
of other things for him to do and will have him working even
harder than he does now. He is a great person, and it was a
very inspirational breakfast.
As far back as 1945, the insurance industry has operated
largely beyond the reach of Federal antitrust laws. The
McCarran-Ferguson Act created this exemption. So long as the
insurance business is regulated by the States, there is no room
for Federal oversight.
The drafters may well have been well advised at the time,
and perhaps it was a worthwhile policy, but the times have
changed. The common refrain of tort reform proponents is ``out-
of-control juries and large malpractice awards drive insurance
costs higher,'' and medical professionals, we are told, are
being crushed by excessive costs.
Just recently, the Senate considered legislation to cap
punitive damages in medical malpractice cases. One study found
that among the 15 best-rated medical malpractice insurance
providers, premiums rose dramatically between 2002 and 2005--
dramatically--but the cost of the claims paid out remained
flat, so it was hard to see just how, somehow, claims were
pushing up the cost of premiums.
Claims are not driving the premiums. Insurance costs among
competing companies are rising in lock step with each other.
That was the other thing. They were not paying out any claims,
but the costs were going up and they were in lock step. Maybe
there were other causes.
I have introduced a bill, the Medical Malpractice Insurance
Antitrust Act of 2005, along with Senators Kennedy, Durbin,
Rockefeller, Boxer, Feingold, Salazar, Obama and Mikulski. It
would repeal the antitrust exemption for medical malpractice
insurance, and only for the most egregious cases of price
fixing, bid rigging, and market allocation. It is a narrow
bill.
My bill targets a particularly troublesome aspect of the
problem, and I think we should look at it. If insurers around
the country are operating in an honest and appropriate way,
they should not object to being asked to abide by the same
antitrust laws as virtually all other business.
There is no reason why they should be treated differently
than other businesses. We all want to be treated alike, in an
egalitarian manner, because nobody is above the law, except for
insurance companies.
American consumers, from sophisticated multinational
businesses to individuals shopping for personal insurance, have
the right to be confident that the cost of the insurance
reflects competitive market conditions, not collusive behavior.
I recognize the insurance industry's unique
characteristics, including the dependence on collected claim
and loss data. But I think you can combine those legitimate
needs while still providing Federal regulators with the tools
to investigate and prevent collusion and other anti-competitive
behavior.
Individuals and businesses are compelled, sometimes by law
and sometimes by prudence, to purchase many kinds of insurance.
I just want to make sure they are being treated fairly and are
not subject to insurance company activities that create, not
better insurance packages for the individual, but higher
profits for those selling them.
So, thank you, Mr. Chairman.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman Specter. Thank you very much, Senator Leahy.
Ms. Hoffmann, we return to you with the full five minutes.
STATEMENT OF ELINOR R. HOFFMANN, ASSISTANT ATTORNEY GENERAL,
ANTITRUST BUREAU, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE
OF NEW YORK, NEW YORK, NEW YORK
Ms. Hoffmann. Thank you, Senator. Good morning. On behalf
of the New York Attorney General, thank you for the opportunity
to testify here today in favor of the repeal of the McCarran-
Ferguson exemption from the antitrust laws.
The antitrust laws reflect our society's belief that
competition in the commercial marketplace enhances consumer
welfare and promotes our economic and political freedoms.
Unrestricted competition, however, may not be consistent
with other significant public policies or regulatory schemes
that also serve the public interest, so we exempt conduct from
antitrust scrutiny to the extent necessary--but only to the
extent necessary--to attain other important goals.
The McCarran-Ferguson exemption from the antitrust laws is
an industry-specific exemption, unlike, say, the labor
exemption, which is a broad-based policy exemption that crosses
many sectors.
It was enacted in 1945 as part of a bill to address the
concerns of the insurance industry in the States after the
Supreme Court's decision holding that insurance,
unquestionably, was part of interstate commerce.
The insurers wanted to continue to engage in collective
conduct like rate setting and policy term agreements that they
deemed necessary for solvency. McCarran preserves the power of
the States to regulate and tax, but affords an exemption from
the antitrust laws for the industry.
McCarran states that the Federal antitrust laws apply to
the business of insurance to the extent that such business is
not regulated by State law. Agreements and actions taken to
boycott, coerce and intimidate are not exempt.
Thus, in some senses the exemption is narrow, but it runs
very deep. It was intended to protect the industry from the
chilling effect that antitrust exposure might have on joint
activities designed to ensure prudent transfers of risk. But,
importantly, it protects price fixing, cartel-like behavior
that in most industries would be summarily condemned.
Since 1945, some participants in the insurance sector have,
on occasion, engaged in anti-competitive conduct that has
nothing to do with the original purpose of McCarran.
Recently, New York and other States found evidence of
serious misconduct in the insurance industry. Information
obtained during our investigation supports our allegations of
collusion to subvert the competitive process.
More specifically, we have discovered, among other things,
stark evidence of bid-rigging and customer allocation. For
example, we found evidence that Marsh & McClennan, one of the
world's largest insurance brokers, steered unsuspecting clients
to insurers with which it had lucrative payoff arrangements
based on volume or profitability of the business that Marsh
brought to the insurers. These arrangements were often called
contingent commissions, or overrides.
In order to make the scheme work really well, Marsh
solicited fictitious bids from insurers so that business could
be steered to the insurer favored by Marsh on a particular
deal, that is, the insurer who would pay Marsh the most.
The customer thought it was getting the benefits of
competition, but it was not. Marsh's clients may have been
unaware of the scheme, but the insurers were not unaware. Marsh
sometimes even circulated the favored bidder's quote and ask
other bidders to protect it by submitting a higher, non-
competitive quote.
As a result of our investigation, hundreds of millions of
dollars in restitution will be paid to customers injured by
this type of anti-competitive conduct. Twenty officers and
executives have pled guilty, six companies have settled, and a
total of over $3 billion in restitution and penalties has been
recovered due to antitrust and other violations.
The investigations and litigation are ongoing. In addition
to a pending lawsuit that we have against Liberty Mutual,
Florida has sued Marsh under State laws alleging antitrust and
RICO violations, and there is a pending class action before the
District Court in New Jersey, where McCarran is the subject of
extensively briefed Motions to Dismiss.
We brought our case against Marsh in State court and we
plead State law claims, including claims under New York's
Donnelly Act, New York's antitrust law. Donnelly has its own
antitrust exemption for insurance. It exempts property and
casualty insurers, but not brokers and not the business of
insurance.
Had we prosecuted our case in Federal court under Federal
antitrust law, we likely would have encountered a defense under
McCarran, delaying, or maybe precluding, settlement. That is
not to say we would have lost, but as enforcers we are not
inclined to invite delay in reaching the merits.
This is not just New York State's problem, it is a
pervasive national problem. McCarran, because it precludes
Federal antitrust enforcement of serious anti-competitive
conduct in the insurance sector, requires State enforcement
agencies and litigants to examine each State's laws to
determine whether that State exempts the business of insurance,
or any part of it, from State antitrust scrutiny.
Some States follow Federal law in whole or in part, others
exempt insurance from State antitrust law to some extent, and
still others have no exemption at all. Remedies and outcomes
may differ from State to State. Differences in State laws may
pose an impediment to class certification in some instances.
The impact of McCarran is that it encourages inefficient
multiple proceedings under disparate laws brought by diverse
sets of public and private plaintiffs, with the clear potential
for inconsistent results.
Chairman Specter. Ms. Hoffmann, how much more time will you
need?
Ms. Hoffmann. About two more minutes.
Chairman Specter. Why do you not summarize at this point?
Ms. Hoffmann. Sure.
There are other ways, in fact, for the insurance industry
to achieve its legitimate goals. Exchanges of information are
permitted in other industries, consistent with the antitrust
laws.
In sum, experience with McCarran indicates that there is
the need to reexamine industry-specific exemptions
periodically. Markets change in many cases, eliminating the
need for broad exemptions. McCarran is one example of an
exemption that has no apparent business justification and
impedes free and open competition in a major sector of the U.S.
economy.
Chairman Specter. Thank you very much, Ms. Hoffmann.
[The prepared statement of Ms. Hoffmann appears as a
submission for the record.]
Chairman Specter. We turn now to Mr. Marc Racicot,
president of the American Insurance Association, former
Governor of Montana. He had served as Chairman of the
Republican National Committee. He is a graduate of Carol
College in Helena, Montana, and the University of Montana Law
School.
Thank you for joining us, Governor Racicot, and we look
forward to your testimony.
STATEMENT OF MARC RACICOT, FORMER GOVERNOR OF MONTANA,
PRESIDENT, AMERICAN INSURANCE ASSOCIATION, WASHINGTON, DC
Mr. Racicot. Thank you, Mr. Chairman, and good morning. I
am delighted to be here this morning to speak on behalf of
property and casualty insurers across the country and around
the globe that are members of the American Insurance
Association. We are, of course, appreciative of the opportunity
to be here to discuss McCarran-Ferguson.
It is important to note that McCarran is a power-sharing
statute that reflects Congress' judgment to delegate, not
abdicate, authority over insurers to States that regulate the
business of insurance themselves.
In doing so, McCarran provides insurers with an antitrust
regime that recognizes the insurance regulatory role entrusted
to the States. Because of the delicate balance of power
contained in McCarran, we believe the discussion of a repeal or
limitation of McCarran's antitrust provisions cannot be
divorced from a corresponding discussion of the nature of State
insurance regulation.
Within this framework, my testimony today will focus on two
things: first, some perspective on the McCarran discussion over
the years; second, the role of McCarran in today's debate over
needed reform of the insurance regulatory system.
In 1944, as was mentioned, the Supreme Court held in
Southeastern Underwriters that insurance was indeed a product
of interstate commerce and, therefore, subject to Federal
scrutiny.
As the case centered around how insurers collected and
analyzed data to appropriately price risks, it necessarily
focused congressional attention on several pressing questions
dealing with the primacy of State regulations, State taxation
of insurers, application of Federal antitrust laws, and
whether, and how, insurers could collaborate on drafting
uniform policy forms.
Congress responded by enacting McCarran a year later, as
the committee is well aware. McCarran entrusted the States with
authority to regulate and tax the business of insurance, giving
them three years from enactment to implement their regulatory
systems, and said no Federal law should be presumed to
interfere with that authority unless clearly designated to do
so.
McCarran also said that Federal antitrust laws would apply
to the extent that such businesses were not regulated by State
law, or in any case where insurers had engaged in, or attempted
to engage in, an act of boycott, intimidation, or coercion.
Following the passage of McCarran, all States enacted
unfair competition and trade practices laws directed
specifically to insurers and adopted prohibitions on acts of
boycott, intimidation, or coercion by insurers, as well as
Sherman Act-and Clayton Act-type prohibitions on unfair
restraint of trade.
When implementing these regulatory structures, the States
also faced the question always raised when dealing with a
regulated industry, and that is how to balance the roles of
regulation and antitrust policy.
They responded by placing all collective activity by
insurers under regulatory control, scrutiny and review,
effectively replacing antitrust litigation with regulatory
oversight of any collective activity.
Not coincidentally, the same type of balance exists for
other financial services institutions and industries, such as
banking and securities. Federal courts have held that this
balance is critical and that antitrust scrutiny is
inappropriate where activity is subject to regulation,
otherwise, chaos would rule.
Private antitrust litigation constantly would battle
Federal regulatory systems, creating enormous uncertainty for
businesses and customers, to no one's benefit. One important
distinction, from an antitrust perspective, however, is that
the banking and securities industries are principally Federally
regulated, while insurance is principally State regulated.
When Federal antitrust laws balance against Federal
regulation for a specific industry, courts give precedence to
the specific regulatory system Congress has set up for that
industry over broad non-specific language of the antitrust
laws.
McCarran comes under fire periodically. Whenever an
affordability or availability problem arises in any line of
insurance, critics in those circumstances tend to blame
McCarran. Their misguided solution is to repeal McCarran.
Ironically, when the problem subsides, those who have
argued that McCarran should have been repealed never credit
McCarran for having cured the problem. The reality is that when
insurance prices spike or availability shrinks, it is all
because of some underlying problem that needs to be addressed.
To be fair to all customers and to stay in business,
insurers must be able to price prices to cover policy losses.
When government price controls prevent that, insurers are
forced to pull back from the marketplace. Instead of looking at
insurer activity under McCarran, it would always be better to
examine cost driver-related problems and fix them.
In the early 1990s, as was mentioned, AIA worked with
Congress to develop legislation to retain essential McCarran
antitrust exemptions through specifically identified safe
harbors. After the 1994 elections, congressional interest moved
from amending McCarran to enacting wide-ranging insurance
regulatory reform. Today, we believe that regulatory reform is
the way to go.
Since McCarran only applies to the businesses of insurance
regulated by the States, it obviously would not apply to
pricing activities of Federally chartered insurance agencies or
insurance industries operating under a national charter.
As was mentioned by the Chairman, Senate bill 2509 sets
about to do just that. We think it is time for that particular
issue to be entertained by the committee and by Congress.
AIA members are certainly willing to take the risks
inherent in that approach recommended in that legislation
because we strongly believe that a competitive marketplace is
critical to being able to serve our customers in the years
ahead.
Mr. Chairman, thank you for the opportunity to present. I
am available, obviously, as you know, for questions.
Chairman Specter. Thank you very much, Governor Racicot.
[The prepared statement of Mr. Racicot appears as a
submission for the record.]
Chairman Specter. Our next witness is Mr. Bob Hunter,
Director of Insurance, Consumer Federation of America, formerly
the Texas Commissioner of Insurance, and president and founder
of the National Insurance Consumer Organization. He has worked
both as underwriter and actuary in the insurance industry.
Thank you for coming in today, Mr. Hunter. The floor is
yours.
STATEMENT OF J. ROBERT HUNTER, INSURANCE DIRECTOR, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, DC
Mr. Hunter. Thank you, Mr. Chairman, Ranking Member Leahy.
Adam Smith wrote this in 1776: ``People of the same trade
seldom meet together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public or in some
contrivance to raise prices.'' That is why we passed antitrust
laws.
But in insurance, this is a trade enjoying an unusually
broad exemption, an exemption, by the way, slipped in in the
conference committee in 1945, after both Houses passes the
legislation it did not have it in.
While it should not require a study to prove that collusion
harms buyers, you have study after study by Federal agencies
that all call for an end to the antitrust exemption. As a
result of this call, in 1994 the House Judiciary Committee
passed a sharp cut-back of the exemption in a bipartisan vote.
Since 1994, collusive behavior in insurance companies
continues. We just heard about the bid-rigging, et cetera that
New York has uncovered. Again, State regulation has failed to
catch it. It was at least 20 years ago that I first warned the
State regulators about the perils of the contingency commission
arrangements.
Anti-competitive price and market allocation signals by
insurers have exacerbated the insurance crisis in homeowners'
insurance on the Nation's coasts. The Nation has suffered
another hard market, starting in the year 2000, a period when
insurers returned to the price levels established by the rate
bureaus.
These cartel-like bureaus, such as the Insurance Services
Office, day after day produce price guidance on 70 percent of
the rate that many insurers use as the basis for their pricing.
They manipulate data and project pricing into the future, using
steps that legal experts told Congress, when the House was
reviewing it, would be illegal absent the McCarran immunity.
Rate bureaus have cartel-like control of rate-making data.
They establish price classes for people to be charged. They
establish territories that are used to rate people and the data
that are collected and the format they establish assure
significant uniformity in the market. The antitrust exemption
has been the most potent enabler of these, and many other anti-
competitive practices.
Along the coast today, on May 9, 2006, ISO's CEO signaled
that the market was over-exposed on the coastline of America,
and days later, leading insurers announced they were dropping
over 150,000 homes.
In March, another rate guidance organization, Risk
Management Solutions, announced it was changing its hurricane
model, causing home insurance hurricane rates to jump 40
percent on the Gulf Coast, and by up to 30 percent all the way
up to Maine.
The old models were developed after Hurricane Andrew, based
on long-term 10,000-year damage projections. Insurance
commissioners, including me, were told that the large price
jumps that we were asked to approve at that time were
scientifically proper and would bring price stability.
We were assured there would be no need to raise rates after
catastrophic weather events because the storms would have
already been anticipated when the rates were set, even
including Category 5 storms hitting Miami, nor would there be
rate drops if no storms came. Insurance would bring stability
rather than turmoil after large, infrequent storms, we were
told.
However, the new RMS model breaks that promise, and instead
of a 10,000-year projection, makes a mere 5-year projection,
with higher hurricane activity expected. It is clear that the
insurance companies pressured the modelers to achieve this
result. The other modelers followed suit.
It is shocking and unethical that scientists at these
modeling firms, under pressure from the insurers, have
completely changed their minds all at the same time, after a
decade of using models they assured the public were
scientifically sound. Worse, the changes have nothing to do
with science, but rather with collusive pressure brought by the
insurance companies.
Support for ending the exemption is strong. The New York
Times editorialized, ``Bust the Insurance Cartel,'' and similar
headlines in many editorials. Business Week and other leading
business journals also called for the end.
Consumer groups, small business groups, AARP, the American
Bar Association, the American Bankers Association, labor
unions, medical groups, and others supported repeal when the
House Judiciary Committee last reviewed this. Rate bureaus and
insurers claim that, despite their history of rampant
collusion, they have gone straight and now a modeling of
competition.
A simple question can test this bold claim: does the
insurance industry unconditionally support a bill that repeal's
McCarran's broad antitrust immunity? A straight repeal, not
tied to proposals to gut the meager consumer protections that
we enjoy today?
Mr. Chairman and members of the committee, now is the time
to repeal the McCarran-Ferguson Act's antitrust exemption. We
estimate it would save consumers about 10 percent, or $45
billion a year.
Chairman Specter. Thank you very much, Mr. Hunter.
[The prepared statement of Mr. Hunter appears as a
submission for the record.]
Chairman Specter. Our next witness is Mr. Michael McRaith,
Director of the Division of Insurance for Illinois, Department
of Financial and Professional Regulation. Prior to his
appointment as Director, Mr. McRaith spent 15 years in private
practice in Chicago.
He has a bachelor's degree from Indiana University and a
law degree from Loyola University School of Law in Chicago.
We appreciate you coming in, Mr. McRaith, and we look
forward to your testimony.
STATEMENT OF MICHAEL MCRAITH, ILLINOIS DIRECTOR OF INSURANCE,
CHAIR, BROKER ACTIVITIES TASK FORCE, NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS, CHICAGO, IL
Mr. McRaith. Thank you, Chairman Specter and Ranking Member
Leahy. I appreciate the invitation to testify this morning on
behalf of the National Association of Insurance Commissioners.
I am Michael McRaith, Director of Insurance in Illinois,
and an active participant in the NAIC's continued leadership on
national insurance matters. I also serve as chairman of the
Broker Activities Task Force for the NAIC.
As insurance commissioners, our core priority is consumer
protection. Insurance is a uniquely personal and complex
contract. Analogies to other financial sector products,
including the banking industry, are inherently misleading. With
debt or equity financial products, even with deposits, a
consumer assumes the risk; with insurance, the consumer
transfers the risk.
Consumers pay in advance for a benefit that may never be
needed, or may be needed significantly in excess of the price
paid. Insurance is a product unique to the individual or unique
to the insured property, business, or community. Insurance is
always local and personal, if not intimate.
Today the question of McCarran will be interpreted
differently by different witnesses. Some will use this
discussion to propound the need for a Federal regulator. The
creation of a massive Federal bureaucracy to benefit a small
segment of the largest carriers in the insurance industry at
the expense of consumers is an idea that this committee and the
U.S. Congress should unequivocally reject.
The reasons for rejection are so expansive, I will resist
the urge today to engage in that dialogue and focus instead on
the question at hand. With the limitation exemption of
McCarran, State-based regulation fosters a competitive
marketplace.
With more than 5,000 insurers in the United States, only
296 have more than 500 employees. These smaller insurers do not
have as prominent a voice in Washington, but they serve niche
markets and they provide more personalized service, or maybe a
longstanding farm mutual serving a rural community in your home
State.
State-based regulation affords comprehensive cradle-to-
grave supervision, ensures carrier solvency, monitors market
conduct of carriers and producers, and enforces unfair
competition and deceptive practices statutes.
Discussion of McCarran's appeal must be considered in the
broad economic context. Repeal of the exemption cannot be
viewed in a legalistic vacuum. Any repeal, even with a list of
permissible items, will subject regulation of the industry to
years of uncertainty and stability, amounting ultimately to
installation of the courts as a de factor regulator.
Moreover, the discussion of enumerated permissible
practices implicitly illustrates the difference between
insurance and other industries. The business of insurance
exemption in McCarran authorizes insurers to engage in
supervised, but cooperative, activities. These practices foster
competition, consumer choice and awareness, and help maintain
marketplace integrity.
But the label of an antitrust exemption is a misnomer
because States extensively and actively regulate the entire
industry. We closely supervise the conduct of the very
organizations involved with the cooperative activity.
Price fixing, bid-rigging, tying, boycotting, other anti-
competitive practices that negatively impact consumers, those
are simply not allowed.
Attorney General Spitzer of New York should be commended
for bringing the abusive contingent commission practices into
the spotlight. NAIC members have worked on these issues with
attorneys general from around the country. NAIC members have
guided resolutions that have returned more than $1 billion to
policyholders and imposed businesses reforms that prioritized
consumer protections.
McCarran's limited exemption is intertwined with extensive
State-based regulation. A repeal would not improve--not
improve--the affordability, reliability, or availability of
insurance to consumers.
Repealing the exemption would inject uncertainty, reduce
stability and predictability, deter capital infusions, and
ultimately eliminate, if not reduce, competition and raise
costs. Consumer benefits and protections are enhanced with
McCarran's limited exemption.
The NAIC looks forward to continued work with Federal and
State officials, consumers, the large and small industry
participants, and all interested parties to ensure that
prevention and punishment of anti-competitive practices
continues.
Thank you.
Chairman Specter. Thank you very much, Mr. McRaith.
[The prepared statement of Mr. McRaith appears as a
submission for the record.]
Chairman Specter. Our next witness is Mr. Donald Klawiter,
Chairman of the American Bar Association's Section of Antitrust
Law, partner in the antitrust practice group of the office of
Morgan, Lewis & Bockius. He has had several supervisory
positions with the Antitrust Division of the Department of
Justice. He has an undergraduate and law degree from the
University of Pennsylvania.
With all that background, Mr. Klawiter, in ML&B, why did
you come to Washington?
Mr. Klawiter. I have always been in Washington, Mr.
Chairman.
STATEMENT OF DONALD C. KLAWITER, CHAIR, SECTION OF ANTITRUST
LAW, AMERICAN BAR ASSOCIATION
Mr. Klawiter. Chairman Specter, Senator Leahy, I appreciate
the opportunity to present the views of the American Bar
Association on the insurance exemption from the antitrust laws
in the McCarran-Ferguson Act.
Just over 60 years ago, Congress enacted the McCarran-
Ferguson Act as a limited exemption from the antitrust laws for
the insurance industry. It was enacted as an attempt to
reaffirm the supremacy of State regulation in response to
Federal criminal antitrust challenges. It was a time when many
industries were regulated, either at the Federal or the State
level, and enjoyed exemptions from the Federal antitrust laws.
The world is very different today. Over those 60 years, our
competition policy has moved decisively from promoting the
benefits of regulation and regulatory oversight to fostering
the benefits of free and open competition.
In the late 1970s, the National Commission for the Review
of the Antitrust Laws and Procedures, where Senators Kennedy
and Hatch served with distinction as commissioners, focused
enormous attention on the need to repeal and limit industry-
specific antitrust exemptions, and many were repealed by the
Congress after that commission's work.
The current Antitrust Modernization Commission is, today,
studying the remaining exemptions that have been presented and
there have been proposals to eliminate or sunset many of the
exemptions, including the insurance industry exemption.
This committee should be commended for your focus on this
issue today. In 60 years, we have learned that industry-
specific exemptions from the antitrust laws are rarely
justified, and that the antitrust laws are a flexible
instrument of the law that transcends industries and special
competitive circumstances.
The American Bar Association favors repeal of the McCarran-
Ferguson Act. It is our strong position that the insurance
industry should be subject to the same antitrust laws and rules
as all other industries.
We believe, however, that the law should be replaced by a
series of safe harbors to make clear that certain types of
conduct by insurers that are necessary, pro-competitive, and
beneficial to the American economy should be encouraged.
Safe harbors would provide the industry with an opportunity
to conduct necessary pro-competitive joint activities without
the chilling concerns of possible antitrust litigation.
Among the safe harbors we would propose would be the
following. First, the industry should be able to collect and
disseminate past loss experience data over a large number of
insured. This is essential to the industry's ability to make
assessments of risk. Small companies, in particular, need this
base of information to compete effectively against larger
companies.
Second, standardization of policy forms contributes to
consumer understanding and assists in reliable data collection
efforts.
Third, where the risks are too large or too uncertain for a
single insurer to underwrite, the insurers traditionally have
cooperated in creating pools or joint ventures, writing large
risk and then sharing that risk. As in any joint venture, the
parties need to agree on rates and policy language to complete
the underwriting job.
Fourth, State regulators often require insurers to
cooperate in underwriting residual risk, particularly in inner
city areas. These cannot be insured in the voluntary market.
This conduct should be allowed, as long as it is authorized and
actively supervised by the States.
Fifth, we are reluctant to suggest an exclusive list of
cooperative activities, and we suggest that the industry should
propose other features of joint activity that would be pro-
competitive. This is not intended to be an open-ended
provision. Indeed, it must be very specific and unambiguous to
be effective.
These safe harbors are intended to protect legitimate pro-
competitive joint activity by insurers, while still subjecting
the insurance industry to the antitrust rule of law. While
most, if not all, of the safe harbor conduct would be
permissible, or even encouraged, under current antitrust
precedent, the idea of safe harbors is to remove all doubt,
especially where there is no antitrust precedent or frame of
reference in many of these areas because McCarran has been the
law for 60 years.
Thank you for the opportunity to appear before you today
and present the views of the American Bar Association.
Competition is the hallmark of the American economy. The United
States has very successfully spread the gospel of competition
to the rest of the world, with remarkable results in
international acceptance and enforcement over the years.
Special treatment of certain industries, whether more
lenient treatment or stricter treatment, makes us look
inconsistent or even hypocritical to those we seek to educate
and influence around the world, especially the countries of
Eastern Europe, which are just beginning to develop their
economies.
The American Bar Association believes strongly that
competition in the insurance industry can be enhanced,
consistent with necessary joint activities, to the benefit of
all segments of the economy.
I would be happy to answer any questions the committee may
have.
Chairman Specter. Thank you very much, Mr. Klawiter.
[The prepared statement of Mr. Klawiter appears as a
submission for the record.]
Chairman Specter. Our final witness is Mr. Kevin Thompson,
Senior Vice President, Insurance Services Office. In that
position, he is responsible for filing activities required by
regulators at the States. He has 30 years of professional
insurance experience. He has a bachelor's degree in mathematics
and education from New York University.
We appreciate you coming in today, Mr. Thompson, and we
look forward to your testimony.
STATEMENT OF KEVIN THOMPSON, SENIOR VICE PRESIDENT, INSURANCE
SERVICES OFFICE, JERSEY CITY, NEW JERSEY
Mr. Thompson. Thank you, Mr. Chairman and Ranking Member
Leahy, for the opportunity to discuss the vital role ISO plays
in the property and casualty insurance industry in the United
States today.
The property and casualty insurance industry today is
intensely competitive and fragmented. Not only do insurers
compete in the way they package and price their products, but
they also compete in the way they distribute and service them.
Within the industry, ISO provides insurers with critical
insurance information that promotes competition between all
insurers and adds economies of scale to functions vital to each
individual insurer.
Access to a broad base of reliable information and
standardized coverage parts that comply with State requirements
permits any insurer to enter new insurance markets and compete
in existing ones that might not otherwise be possible if it had
to rely solely on its own information and resources.
ISO's charter specifically states that all ISO information
and services are purely advisory. That is, insurers select
among any of ISO's services and use them as they choose. ISO
does not develop rates. Instead, ISO provides advisory
prospective cost information. Rate setting is a matter between
individual insurers and their regulators.
ISO provides statistical and actuarial information and
analyses, policy forums, data processing, and related services
for a broad spectrum of commercial and personal lines of
insurance.
ISO is actively regulated by the States as an advisory
organization and performs its various functions in each of the
50 States, the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands.
ISO information is available to any property and casualty
insurer, and insurers are free to use, modify, or not use ISO
information as they determine their own strategies in the
highly competitive insurance marketplace.
The pro-competitive benefits of ISO's products and services
are well-documented and include, first, accurate projections of
future claims payments. Pricing insurance is difficult. Unlike
most businesses, insurers cannot set a price based on known
costs and production and distribution. When pricing a policy,
an insurer needs to project the cost of future insurance claims
by examining historical data.
This method is reliable only when the insurer uses a
sufficient amount of accurate data. ISO's actuaries are highly
trained to compile, edit for quality, process, and combine data
for many companies into statistically credible pooled databases
accessible by any insurer which, along with his own data and
other information, enable an insurer to independently determine
its own prices and competitive strategies.
Second, economies of scale. For many States and lines of
insurance, if individual insurers had to replicate the pooled
databases, actuarial analyses, professional staff, and data
processing provided by ISO, the costs would be so great that a
number of insurers could decide to not enter, or not remain, in
some markets. Insurers would incur higher expenses in
replicating ISO materials, thereby making insurance more
expensive.
Third, ease of market entry. Access to ISO's products and
services enables insurers of all sizes to more easily enter
product lines or geographic markets they might not otherwise
consider worth the risk of the start-up costs.
Fourth, availability of a credible industry database. ISO's
data compilations increase data quality for both insurers and
regulators and facilitate research and development of new
products and innovations to existing products.
ISO submits summaries of this information to insurance
regulators, as required by law, to help the regulator evaluate
the state of the insurance market in each jurisdiction.
In conclusion, by improving insurers' knowledge of their
true costs and by introducing economies of scale, ISO confers
benefits to the insuring public through lower costs.
The pall that would be cast over these essential operations
by the repeal or substantial modification of the already
limited antitrust exemption contained in McCarran-Ferguson
could be enough to severely curtail these benefits. The result
would be a disservice, not only to insurers, large and small,
but also to the insuring public as a whole.
That is why, when considering any possibility of amendment
or repeal of the McCarran-Ferguson Act, care must be taken to
ensure access to vital advisory organization products and
services it preserved and protected.
Once again, thank you for the opportunity to discuss the
vital role ISO plays in the property and casualty insurance
industry in the U.S. today.
Chairman Specter. Thank you very much, Mr. Thompson.
[The prepared statement of Mr. Thompson appears as a
submission for the record.]
Chairman Specter. We now proceed with questions by members
of the panel. Our customary rule is five minutes, and we will
observe that, but there are only two of us here.
Ms. Hoffmann, what was the gravamen of the matter that you
referred to? What insurance companies were involved in that
Marsh matter?
Ms. Hoffmann. Marsh? I believe it was AIG, Liberty Mutual,
ACE, Zurich.
Chairman Specter. Liberty Mutual, AIG. Who else?
Ms. Hoffmann. I think, Zurich and ACE.
Chairman Specter. Will you speak up? Who was the last one
you mentioned?
Ms. Hoffmann. ACE.
Chairman Specter. You say you believe. Are you sure about
that, as to what companies were involved? I really do not like
to identify companies unless you know they were involved.
Ms. Hoffmann. I am basing that on the document that I read
that I have attached to my written testimony.
Chairman Specter. Well, did you prepare your written
testimony?
Ms. Hoffmann. Yes, I did.
Chairman Specter. What was involved? You did not give us
very much detail. You said there was a pay-off here involving
Marsh. You said that there were hundreds of millions of dollars
involved in restitution.
You did not mention any criminal charges in your written
testimony. In the written testimony of Mr. McRaith, there is a
reference to criminal prosecutions and guilty pleas. What was
the case all about? Let us hear.
Ms. Hoffmann. The Marsh case involved the existence of
contingent commissions. These are commissions that were paid by
insurers to Marsh based on volume or profitability of business
that Marsh brought to insurers.
Chairman Specter. Were there criminal prosecutions brought
by the State Attorney General's Office?
Ms. Hoffmann. Yes, there were.
Chairman Specter. And against whom were those prosecutions
brought?
Ms. Hoffmann. Individuals. Civil cases.
Chairman Specter. That does not tell me very much. From
what companies? What were their positions?
Ms. Hoffmann. I do not know the exact positions of the
individuals. I believe that individuals from Marsh and AIG
pleaded guilty, and from Zurich.
Chairman Specter. The written testimony you submitted says,
``Marsh moved business to the insurance companies that paid it
the highest commission, and to make the scheme work, Marsh
solicited fictitious or cover bids to make the incumbent
insurers' rates appear competitive.
Three insurance company executives, two AIG and one from
ACE, pleaded guilty to criminal charges in connection wit the
scheme. Two employees from Zurich American Insurance Company
also pleaded guilty to criminal charges in connection with the
bid-rigging scheme.''
Can you tell us a little more, by way of amplification, as
to exactly what conduct was involved there?
Ms. Hoffmann. I do not recall the specific conduct
attributed to those individuals.
Chairman Specter. Well, could you provide that information
to the committee, please?
Ms. Hoffmann. I will.
Chairman Specter. Mr. McRaith, in your written statement
you refer to a task force of some 15 States. The NAIC appointed
a 15-State task force to develop a three-pronged national plan
to coordinate multi-state action on broker commission issues.
You refer in your testimony to common law fraud, which
resulted in a number of guilty pleas on criminal charges of
fraud related to bid rigging. At least 17 guilty pleas and 8
indictments have been entered based on related charges.
Were any criminal charges brought by Illinois State
officials?
Mr. McRaith. No, Mr. Chairman.
Chairman Specter. Why not?
Mr. McRaith. The criminal charges were brought by New York
officials.
Chairman Specter. Did Marsh function in Illinois?
Mr. McRaith. Marsh certainly did have clients in Illinois.
Yes, Mr. Chairman.
Chairman Specter. Did you investigate to make a
determination as to whether there were criminal violations by
Marsh in Illinois?
Mr. McRaith. Mr. Chairman, the Division of Insurance, in
conjunction with the Illinois Attorney General, did review
conduct by Marsh in relation to policyholders in Illinois. The
criminal charges--
Chairman Specter. My red light is on. But with your
permission, Senator Leahy, why do we not make this 10-minute
rounds? Since there are only the two of us present, we will not
keep anybody waiting.
Come back to the question about why Illinois did not bring
criminal charges.
Mr. McRaith. The criminal conduct that we know of, Mr.
Chairman, occurred primarily or was based in New York.
Chairman Specter. Primarily. But how about other than
primarily? Was there any in Illinois?
Mr. McRaith. The impact was certainly felt in Illinois by
policyholders in Illinois, Mr. Chairman.
Chairman Specter. Well, that gives you jurisdiction.
Senator Leahy, did you not used to be a prosecutor? That gives
you jurisdiction in Illinois.
Senator Leahy. I said it was the best job I ever had.
[Laughter].
Chairman Specter. You mean, the only job you ever had.
[Laughter].
Well, that gives you jurisdiction. Senator Leahy and I know
a little something about that.
Did you pursue it to see if there were cases of criminal
conduct which impacted on Illinois citizens?
Mr. McRaith. I should be clear, Mr. Chairman. As the
Director of Insurance, as the regulator, I do not have
independent authority to prosecute criminal charges.
Chairman Specter. You know some of the prosecutors in
Illinois, do you not?
Mr. McRaith. I certainly do. Yes.
Chairman Specter. Did you refer the matter to them?
Mr. McRaith. We did work with the Attorney General of
Illinois, who also worked with the Attorney General of New
York, to ensure that the policyholders received the
restitution.
In terms of the discussion about criminal charges, we
certainly were aware of the underlying conduct. I did not
engage in any discussions with our Attorney General about
criminal charges.
Chairman Specter. Well, restitution is fine, Mr. McRaith.
That brings the defrauded people back to zero, or at least some
of them. Customarily, not all of them, because you cannot reach
all the people affected in a civil suit.
But you do not have any teeth in restitution. All you have
to do is pay back the money which you should not have taken.
But the teeth in governmental action comes with criminal
prosecution and jail sentences, especially with white-collar
crime.
Would you not have liked to have had the assistance of the
U.S. Attorney? You have a pretty active U.S. Attorney in
Illinois, do you not?
Mr. McRaith. We absolutely do, Mr. Chairman. Yes.
Chairman Specter. Well, would you not like to have his
assistance to ferret out wrongdoing and incarcerate wrongdoers?
Mr. McRaith. As the insurance regulator in the State of
Illinois, we had two priorities. One, is let us make sure that
the consumers who have been harmed by this conduct receive the
restitution that they are entitled to. Secondly, let us take
any action that we need to take to ensure that this conduct
does not occur again.
Chairman Specter. Well, would number two not squarely go to
the issue of criminal prosecutions as a deterrent?
Mr. McRaith. From our perspective as the insurance
regulator, we look at the licensing side. Are these agents
licensed in Illinois who are conducting themselves in this way?
Chairman Specter. Well, that is all well and good. But you
also have a duty to make references, referrals.
Mr. McRaith. Yes, sir.
Chairman Specter. If you do not have that duty, why would
you want to keep the U.S. Government out of it on antitrust
violations and keep an activist like your U.S. Attorney in
Chicago out of it?
Mr. McRaith. Mr. Chairman, again, our Attorney General
worked very closely with Attorney General Spitzer on a number
of these investigations, and it was our Attorney General who
would make the decision whether to prosecute criminal charges
against them.
Chairman Specter. Well, that is all right for him. But you
are taking a public policy position here today before this
committee that you do not think there ought to be Federal
antitrust jurisdiction.
Mr. McRaith. That is correct.
Chairman Specter. And in the context where you talk about
criminal conduct which is not being prosecuted in Illinois, the
big question that arises in my mind is, why would you want to
keep the Feds out of it? The Feds have a pretty good record in
Illinois. Was there not a guy named Capone from Illinois?
[Laughter].
Mr. McRaith. That is correct, Mr. Chairman. If there were
criminal conduct, Mr. Chairman, that we discovered or
identified that occurred in Illinois, we would refer that to
our Attorney General without hesitation.
Chairman Specter. And did you refer it to the Attorney
General?
Mr. McRaith. We did not identify criminal conduct by
individuals based in Illinois.
Chairman Specter. But you have identified criminal conduct
which impacted--I would like you to submit a supplement to your
written testimony, if you would.
Mr. McRaith. Yes.
Chairman Specter. Governor Racicot, you say in your written
testimony, ``There is no lack of State antitrust authority with
regard to insurers.''
Do you not think it would be helpful if you had the long
arm of the Federal Government to help out, when you have an
impact in Illinois and no action taken in Illinois to deal with
criminal conduct which impacts on their citizens?
Mr. Racicot. Well, Senator, with all due respect, without
commenting upon pending litigation, frankly, I do not know the
facts about the pending litigation intimately.
Chairman Specter. I am not asking you about pending
litigation. I am asking you about testimony which Mr. McRaith
has given that there has been an impact on consumers in
Illinois and there has been no criminal prosecution.
Mr. Racicot. Well, that is a matter of record.
Chairman Specter. Wait a minute. Wait a minute. I am not
finished with my question. They stop at restitution. You are
making the statement here, ``There is no lack of State
antitrust authority with regard to insurers.''
Do you stand by that? What factual material can you give
this committee to demonstrate that there is active State
antitrust action with respect to insurers?
Mr. Racicot. I think there have been, already, attachments
to the various different testimonies submitted, if I am not
mistaken, from Mr. McRaith that lists the individual States and
all of their various unfair trade practices legislation and
statutory framework that allows for antitrust enforcement.
So, virtually every State in the United States of America
has the capacity, on the basis of State law that enacted,
copied, or mimicked in some fashion either Sherman, Clayton, or
other unfair trade practices or laws, the ability to go forward
with State antitrust actions. That is how New York went
forward, apparently quite effectively in the minds of the
committee, to carry on this particular prosecution.
If I might also make note of the fact, as I know the
Senator knows because you were a prosecutor, as well as was I,
that typically one singular case is utilized in one
jurisdiction as a vehicle to make certain that you address all
of the circumstances, then work restitution in other
concomitant jurisdictions all across the country.
So if there is a violation, a multi-state violation that
occurs, prosecution typically takes place in one venue, then
the remedial part of that action is taken all across the
country as it applies to individual citizens.
Chairman Specter. Well, Governor Racicot, I do not know
that at all. When I was a prosecutor and I found an impact on
the people in my jurisdiction, I brought criminal prosecutions.
But you say there has been effective action. You are the
president of the American Insurance Association. Would you
undertake to provide to this committee what criminal
prosecutions have been brought in the 50 States?
Mr. Racicot. I believe, Mr. Chairman, we will make every
effort to do that, as exhaustively as possible, if that is what
the committee desires. I would point out, as Mr. McRaith also
points out in his testimony, that there are some 3.7 million
complaints that are lodged with various State authorities each
year, is my recollection, if I am not mistaken.
Of course, tracing virtually all of those might be a fairly
monumental task, but we can certainly make the best effort at
it if that is what the committee would desire.
Chairman Specter. No. I am not asking you to trace 3.7
million complaints. I am not asking you to trace any
complaints. I am asking you to provide this committee with the
prosecutions that have been brought by the States against
insurance companies.
You say here that there is no lack of antitrust authority
with regard to insurers. Well, I would like to know what the
insurers have done. You are the president of the group, you
have made this assertion. I would like to see what evidence
there is.
Mr. Racicot. Senator, with all due respect, I stand by that
assertion. I just mentioned the fact that there is authority in
all 50 States.
There is an actual exhibit report in the written testimony
that sets forth exactly what that authority is. If you would
like further information and evidence of every single State
prosecution against an insurance company, we will do everything
in our power to make certain that we supply that information to
the committee.
Chairman Specter. All right. That is what we would like. It
is not sufficient to say they have the authority. The question
is, have they exercised it? The question is, have they brought
the prosecutions? That is why you have a Federal Government
which can reach into States where they do not have the
resources and undertake those cases.
Senator Leahy?
Senator Leahy. Thank you, Mr. Chairman. I see you have
asked some of the questions I was thinking of asking.
But Mr. Klawiter, let me start with you. I am obviously
pleased to see in your written testimony that you feel my bill,
S. 1525, which removes malpractice insurance from McCarran-
Ferguson protection, is a good first step in the application of
antitrust laws to the insurance industry.
You also mention we could refine the bill further to ensure
that we do not require a more rigorous standard than necessary.
In what way, sir?
Mr. Klawiter. Senator Leahy, I think it is simply a matter
of the wording. Words like ``price fixing'' or ``market
allocation,'' in certain circumstances, might not, in fact, be
illegal. That may be hard to appreciate and understand.
But, for example, vertical pricing issues, vertical
allocation issues are very common in many industries and the
courts have ruled, under the rule of reason, that they are a
perfectly legitimate activity as long as there is no anti-
competitive effect.
I think a simple amendment along the lines of price fixing,
market allocation, et cetera that contravenes the Sherman Act,
or the Sherman and Clayton Acts, would certainly take care of
the issue. It is more a matter of semantics than anything else.
Senator Leahy. Using words that are not here.
Mr. Klawiter. Yes. Exactly. It would be really focusing it
directly to the statute, to the Sherman Act. Because again, if
we are going to go into areas of criminal liability, as Senator
Specter noted before, the Federal antitrust laws have a great
deal of punch, with 10-year prison sentences and $100 million
fines, and issues that are really going to get people's
attention.
Senator Leahy. Yes. And I agree with the Chairman on that.
Both of us, in our experience as prosecutors, was that they
have kind of a lot of money and they happily pay a fine, and
that is the end of it and they go on, business as usual. If all
of a sudden you think, what, I am going to wear one of those
iron suits and I am going to live where? The door clanks? You
get their attention a lot more.
Also, in talking about this in your testimony, you also
talked about safe harbors. You want to allow for insurance
companies to compare notes on past losses and things like that.
I do not have a problem with that.
Would you or your Antitrust Section be able to help us on
what activity would be allowed and what would be disallowed?
Mr. Klawiter. Well, I think the five categories that I
mentioned just in my oral testimony a few minutes ago would be
the beginning of the four.
The fifth, is we would certainly ask you to consult with
the industry as to others that they may think would fit within
the category of being, again, pro-competitive, not a violation
of the antitrust laws, but again, just giving the industry the
flexibility to deal with these kinds of issues, things like the
risk assessment information, the joint venture activity on a
very large underwriting where one company itself cannot handle
it, but maybe a group or a pool can; those things, again,
within the context of very strict functioning of the Federal
antitrust laws would be permissible conduct. It would be like a
joint venture that is otherwise cleared, and that would be
good.
Senator Leahy. We have a lot of experience, do we not, in
antitrust law where major industries do cooperate. I can think
of certain safety standards in the automobile industry, safety
standards in others. I think most would agree, in those areas
consumers would benefit.
Mr. Klawiter. Yes. Exactly, Senator. That is true.
Senator Leahy. So probably going back to another way of
asking, what kind of behavior among insurers or between
insurers and rate service organizations is most harmful to
competition, and thus, consumers?
Mr. Klawiter. If the insurance companies, the insurers,
were actually getting together to set a price, certainly
without any form of regulation or in contravention of a
regulatory scheme--and I say that in the context that you have
50 States that regulate insurance; some do it better than
others, some are much more involved, some are actively
supervising, others are not.
So, there are opportunities for companies to get together
and fix prices, in the sense that we would consider them to be
fixed, and to tie products together: in order to buy this
insurance you also have to buy this one. That, under a normal
antitrust theory, would be a problem.
Those are the kinds of issues I think that the repeal of
McCarran-Ferguson would get us to, and would allow for the
Federal jurisdiction there that would affect this industry in
very much the same way it affects all other industries.
Senator Leahy. As we talk about Federal jurisdiction,
following what Mr. McRaith was saying in his answers to Senator
Specter, you said in your written testimony, as I understand
it, that ``the current system of State regulations work well to
create a competitive marketplace. State regulators adequately
supervise State insurance activities.'' Now, of course you have
different sized States. Illinois is a different size than
Vermont, Montana or Wyoming.
Ms. Hoffmann had testified about how her office uncovered
widespread anti-competitive behavior in New York among some of
the country's largest insurance companies, and she had a very
aggressive team of investigators, auditors, accountants, and
everybody else going into that.
But you also said--and this goes back to some of the
questions you were being asked--had her office prosecuted that
case in Federal court, companies might have had a defense under
the McCarran-Ferguson Act which might mitigate against having
an aggressive U.S. Attorney like they have in Illinois, or
others, going in there.
Mr. McRaith, should you not have the power to use all
available laws, all forms to root out behavior that is so
harmful, whether it is the forum of your own State courts or
Federal courts?
Mr. McRaith. Senator Leahy, we have the authority at this
time to prohibit and to ultimately punish any of the conduct--
the misconduct--just described by Mr. Klawiter. If there is
that conduct that is found, in the State of Illinois or any
State, it is prohibited, tying, boycotting, price fixing. I
would like to add that in terms of penalties, the question is,
how severe can the remedy be? Is the remedy more severe in
Federal court under antitrust law? I think the New York
Attorney General resolutions with AIG were over $1.5 billion.
The resolution with Marsh McClennon was $850 million.
In Illinois, we have resolutions with other large brokers.
We entered, as a group of regulators, working with 10 different
Attorneys General, into an agreement with one company where
that company is going to pay $160 million.
Senator Leahy. But as Ms. Hoffmann pointed out, there are
actions they could not have taken in Federal court because they
would have been blocked by McCarran-Ferguson. Do you agree with
that?
Mr. McRaith. I am far from able to question Ms. Hoffmann's
legal analysis. As a practical matter, I would say that the
penalties that have been imposed when this conduct has been
found are severe, and as severe as they might have been under
Federal antitrust laws.
Senator Leahy. Thank you.
And Mr. Hunter, you have had a lot of experience with
insurance issues. You were a Federal insurance commissioner, a
Texas insurance commissioner, and now you are Director of
Insurance for the Consumer Federation.
In your testimony, you estimate that if the McCarran-
Ferguson Act is repealed, consumers would save approximately 10
percent on insurance costs each year. How do you arrive at
that, and could it be more than that?
Mr. Hunter. Yes. Well, it could be. That is at least. I do
some calculations at the back. I also have other studies of the
effects of imposing the California antitrust laws in the State
of California when they were first imposed and a tougher
regulatory regime imposed.
In 1988, California had the third-highest auto insurance
rates. Now it has about average auto insurance rates, about a
20 percent savings if it had stayed at third place. So you have
that, plus the calculations I made at the back of the report,
and some other calculations.
I would like to comment on one thing. There were huge life
insurance market conduct violations with billions of dollars
paid by MET Life, Prudential and others a few years ago. I do
not think there were any criminal charges brought in any of
that.
I really do think that that Chairman Specter's idea of
calling for what has happened in terms of actual numbers of
criminal charges is very important information, and I hope the
NAIC would help with that as well.
Senator Leahy. Thank you. My time is up. I may have other
questions. I want to go back and review some of this testimony,
Mr. Chairman. I may have some other questions to submit for the
record, if that is all right.
Chairman Specter. Mr. Hunter, you have written in your
testimony that California's Proposition 103, eliminating the
State antitrust exemption in California and imposing more
active State regulation, has proved to be successful in
lowering prices for consumers and stimulating competition.
Mr. Hunter. Yes.
Chairman Specter. Could you amplify about that?
Mr. Hunter. Sure. Yes. In 1988, the people of California
enacted Proposition 103, which imposed the State antitrust laws
on the insurance industry and also created a regulatory regime
which is the toughest in the Nation. A lot of people would try
to argue, there is a balance between regulation and
competition.
Chairman Specter. Well, that is what they did.
Mr. Hunter. They did not balance it. They said, look, why
not get the best benefits of both? Why not have competition and
then use regulation as a back-stop just because they both seek
the same goal, that is, the lowest possible rates consistent
with a fair return.
Chairman Specter. Mr. Hunter, come to the point from your
written testimony where you said that it was ``a successful
formula in lowering prices for consumers and stimulating
competition.''
Mr. Hunter. Yes.
Chairman Specter. Come to that point.
Mr. Hunter. All right. Well, as I said earlier, when the
proposition passed California had the third highest auto
insurance rates in the Nation, and today they are the twentieth
highest, with about an average national rate. It is about a 20
percent lowering relative to the national average. That is a
very significant savings for consumers, in the tens of billions
of dollars.
Chairman Specter. Governor Racicot, in your testimony you
say, ``when this committee last held McCarran hearings in 1989,
the issue was the cost of commercial liability insurance.'' Was
that the last time this committee looked at McCarran-Ferguson,
was 1989, as your testimony says?
Mr. Racicot. I believe, if I am not mistaken. I could be,
Mr. Chairman. But my belief is that it was as late as 1994. If
that is a reflection that it was 1989, I assumed that that was
referring to the House proceedings. There certainly were
considerations by Congress up through 1994.
Chairman Specter. The House took a look at it in 1994, but
the last time the Senate Judiciary Committee took a look at it
was 1989. Your assistants behind you are nodding in the
affirmative, if the record may show that.
Mr. Racicot. That is my understanding, yes. I had it in
reverse.
Chairman Specter. The testimony submitted by Ms. Hoffmann
says that ``this is not just a New York State problem, it is a
pervasive national problem.''
Would you agree with that, Mr. Thompson?
Mr. Thompson. I am sorry, Mr. Chairman. You are talking
about the problem that New York uncovered?
Chairman Specter. Well, the issue raised here about Marsh,
the fraud and the criminal prosecutions, the assertions made by
Ms. Hoffmann that ``this is not just a New York State problem,
it is a pervasive national problem.''
My question to you is, do you agree with that?
Mr. Thompson. Well, I have not been involved in anything
that has been going on with the New York prosecution, other
than what was in the general press or trade press.
Chairman Specter. Well, your resume says, as a senior vice
president for Insurance Services Office, ``you are responsible
for all filing activities by regulators in the various
States.'' Are you saying you just do not have enough
information to agree or disagree with Ms. Hoffmann's statement?
Mr. Thompson. In that particular case, yes, sir.
Chairman Specter. Mr. Klawiter, do you think that is an
accurate statement?
Mr. Klawiter. The pleadings in the case, I think, show more
pervasive conduct that New York looked at, and other States
looked at as well. I think you have got to kind of focus
attention on what comes out of that record. I think if that
record demonstrates that the impact was in various States, that
would certainly be considered pervasive.
Chairman Specter. The American Bar Association, as you have
testified, has taken the position--you are head of that
section--that McCarran-Ferguson ought to be eliminated. Do you
think there ought to be Federal antitrust enforcement in the
insurance industry, like all other commerce?
Mr. Klawiter. Absolutely.
Chairman Specter. What is the basis for your statement?
What factual underpinning can you provide as to the inadequacy
of State action and the necessity for Federal antitrust
enforcement?
Mr. Klawiter. Well, I think, number one, our position is
very clearly predicated on the fact that regulation is not as
good as free and open competition. If you have a regulatory
scheme, it is going to be looked at differently by each of the
States.
Chairman Specter. Can you point with any specificity, or
could you supplement your testimony, to any antitrust
violations that have gone unprosecuted and not pursued by the
States, contrasted with the kind of vigorous antitrust
enforcement that comes out of the Department of Justice, where
you serve?
Mr. Klawiter. I am not sure, Senator, that we could
actually identify those. I think we could look to what the
States have done, and note that some of those could well have
been the subject of Federal investigation and Federal
prosecution if, indeed, McCarran-Ferguson were not the law.
Chairman Specter. All right. If you had State action where
it was insufficient, the committee would be interested in that.
I mean, you say we ought to have Federal antitrust action. The
committee is considering the issue. If we are to act, we need
to act on hard evidence. If you have State action which was
insufficient, that would be probative on the issue of bringing
in the Federal Government.
If you have the failure of States to act where there were
antitrust charges that ought to have been brought, that would
be probative for Federal action and the repeal of McCarran-
Ferguson. If you could supplement your testimony in those two
areas, the committee would be appreciative.
Mr. Klawiter. We will do that, Senator.
Chairman Specter. All right.
Ms. Hoffmann, you testified that there were pending
investigations. Did you mention Liberty Mutual? I believe you
did.
Ms. Hoffmann. Yes. We have brought a lawsuit against
Liberty Mutual, and it is pending.
Chairman Specter. And what is the gravamen of the lawsuit?
Ms. Hoffmann. The gravamen of the lawsuit, I believe, is
fraud, and we mentioned bid-rigging.
Chairman Specter. Fraud and what?
Ms. Hoffmann. Bid-rigging.
Chairman Specter. Bid-rigging. With Marsh?
Ms. Hoffmann. Yes.
Chairman Specter. And what court are you in?
Ms. Hoffmann. We are in New York State court.
Chairman Specter. Why was the determination made to utilize
a civil suit as opposed to the criminal prosecutions which you
have identified in your testimony?
Ms. Hoffmann. We brought criminal prosecutions against
individuals. I do not believe we have brought any criminal
prosecutions against the companies.
Chairman Specter. Have you brought criminal prosecutions
against individuals at Liberty Mutual?
Ms. Hoffmann. I would have to check that. I do not recall.
Chairman Specter. What determination do you use to decide
when to prosecute the company, in addition to the individuals?
You customarily cannot prosecute a company unless you have
evidence against individuals. The individuals act for the
company. But what are the standards that you use for deciding
to prosecute individuals and not the company?
Ms. Hoffmann. Do you mean criminally prosecute individuals?
Chairman Specter. That is what I am talking about.
Ms. Hoffmann. I believe that some of the standards used
were the cooperation of the company, the willingness of the
company to recognize the misconduct, and to determine and make
sure that such conduct does not occur in the future.
Also, the recognition that criminally prosecuting a company
can sometimes cause far more harm to innocent individuals--
customers, employees and a segment of the industry--than would
be warranted or wise.
Chairman Specter. Well, thank you all for coming in. We
would be interested, as I have said, in a supplement by your
organization, Governor Racicot, as to the specifics as to where
the States are acting; conversely, Mr. Klawiter, as to where
you think the Federal Government should be in the picture.
We would be interested in a supplement, as I have
indicated, Ms. Hoffmann, as to what the New York cases are all
about. You are in the prosecutor's office and you are in the
best position to give us a summary. We would like to get the
specifics as to what actions have been brought, all the matters
that are of public record.
We are not inquiring into your investigations; we
understand the dependency of those. But where you have broad
criminal prosecutions and gotten guilty pleas or convictions,
we would like to know. We would like to have an amplification
of, where you have made a judgment to prosecute individuals but
not companies, what the factors were which led you to that
conclusion.
Mr. McRaith, we would like the details as to what was done
in Illinois, what action your agency took to inform or bring in
the State Attorney General, and what the State Attorney General
did, and what your reasoning was in not wanting, say, the U.S.
Attorney from Chicago to come into the picture.
Mr. Hunter, to the extent you could give us any more
information on California, we would appreciate it, as to what
the success was there.
Thank you all very much. That concludes the hearing.
[Whereupon, at 10:54 a.m. the hearing was adjourned.]
[Questions and answers and submissions for the record
follow.]
[Additional material is being retained in the Committee
files.]
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