[Senate Hearing 110-25]
[From the U.S. Government Publishing Office]
S. Hrg. 110-25
THE MCCARRAN-FERGUSON ACT AND ANTITRUST IMMUNITY: GOOD FOR CONSUMERS?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 7, 2007
__________
Serial No. J-110-16
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Michael O'Neill, Republican Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Leahy, Patrick J., Leahy, a U.S.Senator from the State of Vermont 1
Kennedy, Hon. Edward, a U.S. Senator from the State of
Massachusetts, prepared statement.............................. 85
Specter, Hon. Arlen, a U.S. Senator from the the State of
Pennsylvania................................................... 3
Whitehouse, Sheldon, a U.S. Senator from the State of Rhode
Island, prepared statement..................................... 140
WITNESSES
Homan, Michael M., Homeowner, New Orleans, Lousisiana............ 9
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America, Washington, D.C....................................... 11
Landrieu, Hon. Mary L., a U.S. Senator from the State of
Louisiana...................................................... 6
Lott, Hon. Trent, a U.S. Senator from the State of Mississippi... 4
Racicot, Marc, former Governor of Montana and President, American
Insurance Association, Washington, D.C......................... 12
Voss, Susan E., Iowa Insurance Commissioner, and Vice Chair,
Financial Conditions Committee, National Association of
Insurance Commissioners, Washington, D.C....................... 13
QUESTIONS AND ANSWERS
Responses of J. Robert Hunter to questions submitted by Senator
Specter........................................................ 19
Responses of Marc Racicot to questions submitted by Senators
Leahy, Specter, and Landrieu................................... 22
Responses of Susan Voss to questions submitted by Senators Leahy,
Specter, Grassley, and Landrieu................................ 29
SUBMISSIONS FOR THE RECORD
American Council of Life Insurers (ACLI), Gary E. Hughes,
Executive Vice President and General Counsel, and David Leifer,
Senior Counsel, Washington, D.C., letter....................... 43
Homan, Michael M., Homeowner, New Orleans, Louisiana, statement.. 46
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America, Washington, D.C., statement and attachments........... 52
Independent Insurance Agents & Brokers of America, Inc.,
Alexandria, Virginia, statement................................ 80
Landrieu, Hon. Mary L., a U.S. Senator from the State of
Louisiana, statement........................................... 88
Lott, Hon. Trent, a U.S. Senator from te Statement of
Mississippi, statement......................................... 93
National Association of Mutual Insurance Companies (NAMIC),
Washington, D.C., statement.................................... 96
National Association of Professional Insurance Agents,
Alexandria, Virginia, statement................................ 101
National Council on Compensation Insurance, Inc. (NCCI), Mary
Jane Cleary, Washington Affairs Executive and Counsel,
Washington, D.C., letter and attachments....................... 102
Property Casualty Insurers Association of America, Washington,
D.C., statement................................................ 111
Racicot, Marc, former Governor of Montana and President, American
Insurance Association, Washington, D.C., statement............. 117
Voss, Susan E., Iowa Insurance Commissioner, and Vice Chair,
Financial Conditions Committee, National Association of
Insurance Commissioners, Washington, D.C., statement........... 127
THE MCCARRAN-FERGUSON ACT AND ANTITRUST IMMUNITY: GOOD FOR CONSUMERS?
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WEDNESDAY, MARCH 7, 2007
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 9:35 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
Leahy, Chairman of the Committee, presiding.
Present: Senators Leahy, Specter, Hatch, and Grassley.
OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
Chairman Leahy. Good morning. When Hurricane Katrina
ravaged the Gulf Coast in 2005, it caused unimaginable
devastation to the region's residents. My friend from
Mississippi and my friend from Louisiana, Senator Lott and
Senator Landrieu, have expended every effort to provide help to
those who have suffered. They remind us in caucus, on the
floor, in the hallways, in the dining rooms of the Senate, and
in our offices that the victims are not confined to any one
demographic group. The devastation did not care whether you
were old or young, man or woman, white or black, or whether you
had a political affiliation with either the Republican or
Democratic parties.
So today we focus on a subject that has concerned me for
some time, a topic that in the wake of the behavior of certain
insurance companies in the Gulf Coast has been thrust into the
forefront. Our topic is the Federal antitrust immunity of the
insurance industry contained in Federal law and whether we
should end that so that the insurance industry will operate by
the same good competition laws that apply to most other
industries. I have never quite understood in today's day and
age why they should have this special privilege that other
companies do not have.
Our Nation's competition laws can be powerful tools to
ensure that consumer welfare is the benchmark for fair and
accountable industry practices. Consumers benefit through lower
prices, more choices, and better services. Those benefits come
from competition.
The antitrust immunity for the insurance industry,
contained in the 1945 McCarran-Ferguson Act--I was 5 years old.
It is about time we relook at that--raises serious concerns
with me. Insurance industry practices affect all of us. If the
antitrust immunity is used in a way that distorts the market,
that leads to higher prices and poorer service, consumers
throughout the country can be harmed.
The potential for insurance industry abuse became clear on
the Gulf Coast in the wake of Hurricane Katrina. Residents, who
lost so much as a result of the 2005 hurricanes and then were
let down by a woefully unprepared Government, were then left to
face insurance companies refusing to fulfill their commitments
and help rebuild. No one should have to go through what these
Americans have been through.
Senator Lott and Senator Landrieu can relate as well as
anyone to the difficulty their constituents have had with
insurers, insurers that have no problem collecting premiums
when times are good, but cannot be found when tragedy strikes.
Their States were hit hardest by Hurricane Katrina, and I
commend both these Senators for their tireless efforts.
Now that the Gulf Coast is rebuilding, two of the area's
biggest home insurers--Allstate and State Farm--are moving out
and abandoning the area. A recent editorial in the Times
Picayune implored the Louisiana Insurance Commissioner to make
sure Allstate's refusal to write new home insurance policies in
New Orleans ``is not another systematic effort by the company
to cancel thousands of policies for which homeowners have been
paying premiums.''
They are not moving out because the companies have hit on
hard times. I believe State Farm last year announced a net
income of over $5 billion.
Both Allstate and State Farm want to keep their special
status, exempt from the antitrust laws. They want to keep that
status, but both--both--rejected my offer to come here today
and explain to the Committee why they deserve it. I think they
hope that their lobbyists can keep it for them and they will
never have to tell the public why they deserve it.
The bottom line is right now we do not know what
anticompetitive acts insurers may be engaging in because the
antitrust immunity insurers enjoy acts as a curtain that hides
their activity from Federal antitrust authorities.
The Insurance Industry Competition Act that I have
introduced with Senators Specter and Lott and Reid and Landrieu
would pull back that curtain to give the Department of Justice
and the Federal Trade Commission the authority to apply our
Federal competition laws to insurance companies.
Our antitrust laws are about good competition policy.
Competition is good for consumers; it is actually good for our
economy. It is the cornerstone of our economic system. Insurers
may object to being subject to the same antitrust laws as
everybody else, but if they are operating in an honest and
appropriate way, they should not have anything to fear.
So I hope that this hearing will spark a serious,
thoughtful debate about insurance industry practices--those
that benefit consumers and those that do not. Insurers often
say that their behavior is pro-competitive. Well, if that is
true, they should have been willing to come in and testify, and
application of the antitrust laws should not be controversial.
Under our Federal antitrust laws, pro-competitive behavior is
encouraged. It is time to pull back the curtain of immunity and
let the light shine in.
Senator Specter?
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman. I am glad to see
the Committee moving ahead this year to act to repeal McCarran-
Ferguson. Legislation was introduced last year. We had a
hearing last year. We made some progress. And with the
intervening events on Katrina and what has happened in the Gulf
States, there is additional ammunition and facts to support
repeal of McCarran-Ferguson. And I join you, Senator Leahy, in
welcoming our distinguished colleagues, Senator Lott and
Senator Landrieu.
The McCarran-Ferguson law provides that there will be
antitrust exemption where insurers are subject to State
regulation. But it continues that exemption even though there
is, in fact, no State regulation, and that has left an enormous
void. The situation in New York with respect to the Marsh,
McLennan case and what has happened in the Gulf States provide
ample evidence of anticompetitive activities, collusion, and
violations of the antitrust laws, which ought to be subject to
Federal prosecution.
The legislation this year eliminates two of the safe
harbors, which was in the legislation introduced last year, and
I would be interested in any comment by the insurance industry,
if they have it, with respect to those two safe harbors. We
know that the legislation introduced by Congressman Brooks in
1994 fell under the weight of almost 50 State harbors. But the
legislation leaves latitude for the Department of Justice and
the FTC to identify practices which are not anticompetitive.
But, still, the weight of the Federal Government can be brought
to bear. And I think the realities are that unless you have a
State like New York with the resources of the Attorney General
and the initiatives of an Attorney General like Attorney
General Spitzer, this is not a matter that ought to be left to
the States. Simply stated, too important.
So I am glad to see the Committee moving forward. I hope we
can get this legislation to the floor, enact it, and work with
the House to pass some effective antitrust legislation to
enable the antitrust laws to go forward without this exemption.
I am going to have to excuse myself for a few minutes. We
have the county commissioners from Pennsylvania in town today,
and the corridor and the anteroom is blocked off with quite a
number of my constituents.
Chairman Leahy. I wondered who all those people were.
Senator Specter. I know that my colleagues, Senator Lott
and Senator Landrieu, will understand that temporary priority.
Thank you.
Chairman Leahy. Thank you.
Senator Lott, of course, is the Deputy Republican Leader in
the Senate, he has been the distinguished Majority Leader of
the Senate, and he is one of the leaders of the Republican
Party. Senator Landrieu is the senior Senator from Louisiana.
She is considered in our caucus a leading voice on this whole
question of how we respond to the thousands of constituents
whose homes were damaged or destroyed by the hurricanes and now
nearly 2 years later are struggling.
What I am going to do is go by seniority. We will ask
Senator Lott to speak first, then Senator Landrieu to speak,
and then if either of you after you speak care to join us up
here on the dais, please feel free.
Senator Lott?
STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM THE STATE OF
MISSISSIPPI
Senator Lott. Thank you, Senator Leahy.
First, a bit of Whip work. I understand that the votes we
had been told would occur at 10 o'clock have been moved to this
afternoon.
Chairman Leahy. That is right.
Senator Lott. So we have a little more latitude there,
thank goodness.
I want to begin by thanking you, Mr. Chairman, for
scheduling this hearing. While there was a hearing last year, I
do not think it got quite as much attention or as much interest
as it has developed over the past few months. But you have
taken up this issue with courage and enthusiasm, and we do
appreciate that very much.
I have visited with Senator Specter several times over the
last year about this subject. The two of you are experts in
this area, and you have been talking about your concerns in
this area before. And now is the time where we ask ultimate
questions and actually act. So I thank you very much for
providing us this forum.
I do want to say what a pleasure it is to be here with my
colleague from Louisiana. When you bleed together, you form a
bond that, you know, nothing can interfere with. And we have
stood together, we have fought together, we have worked
together to try to help our constituents that were devastated
by the most cataclysmic natural disaster in the history of our
country, Hurricane Katrina. We have worked together, and the
cosponsorship of this bill is symbolic of how we have
approached this. This is not an issue that is partisan or
philosophical, and you do not have to be a lawyer to ask
questions about how this happened and what does it really mean
and how does it affect people that need help.
I want to note that there is a homeowner here--I am sure
Senator Landrieu got him here--Michael Homan from New Orleans,
and he is going to tell his personal story. We are fellow slab
owners. It is a strong association that has been formed. And I
think it will be interesting to hear his story.
You know, I did not come at this issue from the standpoint
of a plaintiff lawyer or somebody that had it in for the
insurance industry. I did not, and I still do not. All I want
is for them to do the right thing and to properly pay people
for the insurance coverage that they had.
I could go on a long litany of questions and concerns,
disappointments, hurt, and horror that I have found since
Hurricane Katrina. I had all of my insurance for over 50 years
with State Farm, and when I practiced law, I practiced law with
a predominantly insurance company defense firm. But somehow
along the line there, I missed the point that McCarran-Ferguson
actually gives an exemption from our antitrust laws to the
insurance industry. And as I witnessed the behavior of the
industry in their response to Katrina, which until this day
continues, even though there have been some fits and starts,
some indications maybe they are going to do more, and denials
that there was any kind of collusion or that there is any kind
of price fixing, I got more and more curious about the history,
the rationale, and the wisdom of such a broad exemption from
Federal oversight.
So I took the time to go back and look at it, like any
semi-good lawyer ought to. How did this happen? And I found
that until 1944, regulation of business of insurance resided
securely with the States based on the rationale that this
business did not meet the legal definition of ``interstate
commerce.'' That year, 1944, the insurance industry was turned
on its head by a Supreme Court decision in the case of United
States v. South-Eastern Underwriters Association. By signaling
that the business of insurance is interstate commerce, the case
brought about a knee-jerk reaction from Congress in a bill that
would eventually be known as McCarran-Ferguson.
Soon after that decision, Senators McCarran and Ferguson
introduced a bill that within just 2 weeks and without any
hearings and without any significant debate--basically no
debate--passed the Senate. The House passed a similar measure
with little debate. A review of the Congressional Record shows
clearly that the intent of both Houses was to provide only a
temporary moratorium rather than a permanent exemption.
It was while the bill was being discussed by the conference
Committee that a seemingly innocuous phrase was inserted. It
was this modification--not in either the House or the Senate
versions of the bill--that, when judicially interpreted, turned
a temporary moratorium into a permanent exemption.
The House approved the conference report without debate.
The Senate, in contrast, finally woke up and debated the
conference report for 2 days. Again, the record of the debate
clearly shows that a permanent exemption was not the intent of
those who voted for its passage.
So clear was the intent that President Roosevelt, upon
signing the bill, stated the following in the press release:
``After a moratorium period, the antitrust laws...will be
applicable in full force and effect to the business of
insurance....''
So what happened? The problem resides in the interpretation
of that phrase, ``regulated by State law.'' Under the McCarran-
Ferguson Act, insurers are exempt from Federal antitrust
scrutiny as long as they are regulated by State law. Courts
have interpreted this phrase to require only that State
regulators have jurisdiction over particular conduct,
regardless of whether that authority is ever exercised.
Now, here is what I found the problem is. You know, when I
came to Washington, I guess I was pure in a lot of areas. As
the years have gone by, I have found I am not pure in any area
because I find that there is always another side to the story.
There is a colorization. Yes, I think State insurance
commissioners have a primary role. I do not want, you know,
insurance regulation just to be taken over by the Federal
Government. But I have also found this. Insurance commissioners
are in a terrible quandary. If they do not allow the insurance
companies to jack up their rates 200 percent, 400 percent, or
endlessly, they run the risk of the company, whether it is
Allstate in some States or State Farm in my State, saying,
``Hey, we are out of here. We are not going to provide property
and casualty insurance. Oh, but we will continue to pick off
that nice plum auto insurance and commercial insurance.'' And
the insurance commissioner is in a real difficult position.
But it goes beyond that. You know, antitrust laws.
Shouldn't every corporation in America have to comply with
that? How do we make sure that there is not price fixing or
collusion or anticompetitive conduct of one kind of another?
There should be some Federal role here.
I cannot for the life of me understand why we have allowed
this exemption to stay in place so long. If there is no
problem, then what is their concern? I have been surprised by
their reaction to this, saying ``You cannot possibly do this.''
And, of course, what they are going to do is often what
happens. The big guys are going to call the little guys in my
State and tell them, ``Wait a minute. The ones that are going
to be hurt by this are the little insurers. They need this rate
information.''
Mr. Chairman, I know you wanted us to limit our time, and I
do not want to get too carried away because I get so angry and
so passionate about what I have experienced here, and I have
been so disappointed by the response of an industry when we
needed them the worst. And I found there are many problems in
the law, and I am going to do my best to find a way to fix as
many of them as we can--not for myself. They even, you know,
had the temerity to say, ``It is just because you are mad about
your house.'' Yeah, I am. But the Good Lord made sure I lost my
house so I would feel the pain of everybody else that did.
Thirty-seven thousand people in my State were devastated by
this hurricane, and many more injured, not to mention those in
my neighboring State of Louisiana that continues to have
terrible problems because they had a flood. We had a hurricane.
[The prepared statement of Senator Lott appears as a
submission for the record.]
Chairman Leahy. Well, Senator Lott, I know your concerns.
You and I had the privilege of representing the United States
overseas in the last few weeks. We traveled together, and we
had long discussions of it. I know how passionate you feel, and
I appreciate you being here.
Senator Landrieu, would you please?
STATEMENT OF HON. MARY L. LANDRIEU, A U.S. SENATOR FROM THE
STATE OF LOUISIANA
Senator Landrieu. Yes, Mr. Chairman. I am pleased to join
my colleague Senator Lott. He and I have fought many battles
together, and won more than we have lost, thank goodness, over
the last 18 months. And we intend to win some more for the
people that we represent. Because as both of us have said time
and time again, this Government was caught flat-footed with
very limited response to the greatest natural disaster to hit
the United States. And we need to fix many different aspects of
that response.
But we are here this morning to talk about one aspect that
needs serious fixing. Mr. Chairman, there is an insurance
crisis along the Gulf Coast and probably over the Atlantic
Coast, if not in the whole Nation. In New Orleans today and in
parts of South Louisiana and Mississippi, even people that
might have a plan and money to rebuild cannot do so because
they cannot either get or afford insurance for the rebuilding.
So the billions of dollars that the Federal Government has
sent down to the States, all the efforts that the States and
the local governments are making, are put at risk because of
this real and serious insurance crisis. It needs to be
addressed, Mr. Chairman, not just in the courts where justice
may come, but come quite slowly, and, unfortunately, too late
for many. Justice needs to be found here in Congress through
the repeal of this Act, if it was unintended, as Senator Lott
stated, or through other actions of the Banking Committee and
others to give people real relief.
Mr. Chairman, this is a crisis. I have recently heard of
one company that has raised premiums by 145 percent. In Orleans
and Jefferson Parish, it is not unheard of for carriers to be
raising rates by 50 percent. It is not just homeowners who are
at risk, all 250,000 who have lost their homes. But, Mr.
Chairman, it is our shopping centers, our commercial sector
that is having difficulty finding insurance. And if they cannot
find insurance, the rebuilding is slowed down and people's
lives and fortunes and futures are put at risk. This insurance
crisis right now goes to the heart of rebuilding, and Congress
does have a role.
And so I want to thank you, Mr. Chairman, for calling this
hearing. Perhaps repeal of this statute is a way to move
forward, and there are other options at other committees. But I
want to make just three brief points.
I know that some of my critics say, ``Senator Landrieu, all
you ever worry about is what the Federal Government can do or
what governments can do to help people in crisis.'' Now, I will
say that I am guilty of believing that Government should be
bold and strong--not big and wasteful, but bold and strong. But
I also believe the private sector should work, and at the heart
of the private sector working is private insurance.
Mr. Chairman, the Flood Insurance Program that we have only
covers up to $250,000 worth of damage. Can I say again that
there were homeowners that had homes worth $1 million,
$750,000, $500,000. This is not unheard of in our middle-class
communities to have homes of $350,000, $400,000, and $500,000.
Our flood insurance has not kept pace with this, so people that
even if they had flood insurance, they did not have proper
coverage.
Without the right kind of private sector insurance and the
right kind of, I guess, government-regulated flood insurance,
our people have no chance of a full recovery after this
catastrophic disaster or in the future.
So I cannot tell you how important it is for us to unturn
every stone where we might find a solution. There is urgency
about this problem, and I stand shoulder to shoulder with my
colleague from Mississippi until we find a solution to the
people along the Gulf Coast.
This is, as we have said, America's only energy coast, Mr.
Chairman. This is not a coast the country can do without. And
without real and meaningful and serious insurance reform, our
recovery is at risk. There will not be anybody there to run the
pipelines. There will not be anybody there to produce the oil
and gas, because we will not be able to live anywhere near this
coast, and that is not fair to the people who have lived here
for over 300 years.
So I thank you for your attention, and as you know, I am
cosponsoring several other bills. But I really appreciate the
attention of this Committee, and I will be pleased to stay for
a few minutes Thank you, Mr. Chairman.
Chairman Leahy. Well, thank you, and I would invite both of
you to come join us up here. And I realize you both have other
things to do, so feel free to stay as long or as little time as
you would like.
[The prepared statement of Senator Landrieu appears as a
submission for the record.]
Chairman Leahy. We will just take a moment here while we
put the other names out. I will just tell you who is going to
be appearing.
We are going to have Dr. Michael Homan, who is an associate
professor of theology at Xavier University in Louisiana, and he
and his wife had moved to New Orleans and purchased a home 6
years ago. The home was severely damaged from the winds of
Hurricane Katrina and the flood waters that remained in their
house for 2 weeks after the levees failed. Dr. Homan is now
engaged in a legal battle with Allstate Insurance Company.
We have J. Robert Hunter, who is currently the Director of
Insurance for the Consumer Federation of America. He comes
before this Committee with a wealth of knowledge of the
insurance industry. In the past, he has served as the
Commissioner of Insurance for the State of Texas, as the head
of the Federal Insurance Administration in both the Ford and
Carter administrations, and is President and Founder of the
National Insurance Consumer Organization.
Governor Racicot, the former Governor of the State of
Montana, is well known to all of us here. He began his tenure
as President of the American Insurance Association August 1,
2005. He had before that experience in both the public and
private sectors, joining AIA from the law firm of Bracewell and
Giuliani where he had been a partner in the government
relations strategy section. In addition to serving as Governor
of Montana, he served as a special prosecutor and Attorney
General for the State of Montana, which, of course, with a
number of former prosecutors on this Committee on both sides of
the aisle, we are always delighted to see.
Commissioner Voss is from the Iowa Insurance Division, and
I wonder, Senator Grassley, if you might take over and
introduce her. You know her best.
Senator Grassley. I sure would like to do that.
I know, from working with Susan very closely on a Federal
program she administers called the Senior Health Insurance
Information Program, how hard she and her staff worked to help
us get Part D put in place, Part D of Medicare. I thank you
very much for that.
Obviously, her major responsibilities are helping the
insurance industry and governing the insurance industry in the
State of Iowa. She has been with the division since 1993. In
1999 she was appointed First Deputy Commissioner for the Iowa
Division, and the Iowa Insurance Division is our Department of
Commerce in State government there. And she has now been the
Iowa Insurance Commissioner since January 1, 2005. So I welcome
you.
And I am also a good friend of Bob Hunter's. I do not know
whether he wants to admit that or not.
[Laughter.]
Senator Grassley. Actually, I have known him longer than I
have known Susan.
Chairman Leahy. And he is good friend of mine. That may
kill you back in Iowa, but--
Senator Grassley. Well, anyway, I welcome you, too, Bob.
And I have been in the Governor's office in Montana when you
were still Governor, so I am glad to have you with us as well.
At 10 minutes after the hour, I am going to leave because I
have a news conference with Senator Thune that I have to go to,
but I will hopefully be back after that.
Chairman Leahy. Would you all please stand and raise your
right hand? Do you swear that the testimony you are about to
give to this Committee will be the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. Homan. I do.
Mr. Hunter. I do.
Mr. Racicot. I do.
Ms. Voss. I do.
Chairman Leahy. Let the record show that all were sworn in,
which is customary here, and I am going to limit your opening
statements to 3 minutes each. That is to give us time for
questions, only because we have a joint meeting of the Congress
this morning which will pretty well wipe us all out. Your whole
statement, however, will be made part of the record.
Mr. Homan, please. Press the little button.
STATEMENT OF MICHAEL M. HOMAN, HOMEOWNER, NEW ORLEANS,
LOUISIANA
Mr. Homan. Chairman Leahy and members of this Committee,
thank you for holding a hearing on this important issue.
Like many in the Gulf Coast region, my family's lives were
forever changed by Hurricane Katrina. But what brings me here
today is the second personal tragedy that my family and I have
suffered since Katrina because of the bad faith of Allstate
Insurance over the past 18 months.
My wife, two children, and I currently live in a FEMA
trailer in the front yard of our collapsing home in New Orleans
as we continue to battle with Allstate over our insurance
claim. We insured everything we had with Allstate. This
included wind and flood. They cashed every check we gave them.
We slept well every night thinking we were adequately insured
with the self-designated ``good hands'' people, but we were not
in good hands.
I was inside our house during Katrina, and it was like
being on a large boat rocking back and forth from the wind
gusts. The winds ultimately racked our two-story house so that
now it leans severely. The house next door to ours is leaning
in the same direction.
After the levees failed, flood waters covered the first 3
feet of our house, and this water remained for more than 10
days, damaging the foundation and piers, causing our house to
lean even more. Right now as I speak, our home is in danger of
falling onto our neighbor's house.
We filed a claim for wind and flood with Allstate the day
after Katrina. We expected things to move along quickly, but we
were wrong. We called Allstate every day for several months,
and we wrote them frequently. But we rarely received answers.
They played a shell game with us, providing us with ten
different agents through this ordeal, and it took 9 months to
even get a wind adjustor to come to our house.
The third flood adjustor we had arrived in October of 2005,
and right away he could see our house was leaning, and he
ordered an engineer from Allstate to assess whether it was
racked from wind or flood. We did not care either way.
Everybody told us they would say it was racked from flood and
they would pay us. You know, either way, we did not--just so we
had enough money to fix our house. But then we waited and
waited, and the engineers never showed up. We were told that
everything hinged on that report, and we were told to be
patient.
Several months passed, and we were running out of savings.
We had to pay for our rent on top of our mortgage. We were
insured so that Allstate would pay us additional living
expenses should our house be destroyed or be in an unlivable
state like ours was. But Allstate said they would not pay any
of that until they received the engineer's report. Because of
our financial situation, my family and I were forced to move
back into our structurally unsound home and spent 9 months
living in the upstairs portion that did not flood.
Finally, in February of 2006, after 6 months of phone calls
and letters, two men from Haag Engineering arrived at our
house. They spent 15 minutes there taking pictures, and then
they left. We did not hear anything until May of 2006 when I
received a letter from Allstate saying they were denying our
claim for structural damage because of the Haag engineers'
report. So we were terrified. We had a $150,000 mortgage for a
property that was worth now about $30,000. We thought about
declaring bankruptcy, but we did not want to live with bad
credit.
Fortunately for us, the Haag engineers' report is full of
huge mistakes. They have pictures that do not belong to our
house. They call our house ``the Wilson house.'' You know, it
was ridiculous. They said it was not windy enough during
Katrina to make a house lean, even though lots of houses in our
neighborhood have collapsed.
My story is not unique. I have heard from dozens of other
people in the same situation as us that the insurance company
gets an engineering firm to write the report they desire, and
then they deny the claim. And the insurance company will not be
liable because they relied on expert witnesses, so-called
expert witnesses.
I see I am out of time, so I will stop there.
[The prepared statement of Mr. Homan appears as a
submission for the record.]
Chairman Leahy. Well, thank you, and I apologize for
limiting the time but, otherwise, we would not be able to have
the hearing today.
Mr. Hunter?
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, D.C.
Mr. Hunter. Thank you, Mr. Chairman. I am here on behalf of
Consumer Federation and several other consumer groups,
including Consumers Union, nine groups in all who are offering
our enthusiastic support of S. 618 today.
In the last 3 years, the property/casualty insurance
industry realized record profits despite all these hurricanes.
Over the 3 years, the profits were $157.4 billion, equal to a
profit of approximately $525 for every American. At the same
time, we have heard what is going on on the coast, access of
insurance being denied and the claims not being settled.
Coastal residents have suffered as a result of the
antitrust exemption. Like all of America, the exemption allows
anticompetitive practices, such as joint price setting that
impacts the majority of the rates for many companies affiliated
with cartel-like rate bureaus; joint policy language
development by these bureaus; use of the same or similar low-
ball claims settling computer programs by many companies, and
other practices that would be illegal if it were not for the
exemption of McCarran.
In the Katrina situation, several of these practices did
specific harm. First, claims were being settled under the
outrageously unfair anti-concurrent-causation clause adopted
simultaneously by many insurers through the actions of rate
bureaus.
Second, ISO, the rate bureau, signaled that the market was
overexposed on the coastline. Days later, 150,000 homes were
dropped, and the exodus continues today.
Third, the unregulated rate guidance organization, Risk
Management Solutions that does its modeling of hurricanes,
changed its model, causing home insurance rates to jump 40
percent on the Gulf Coast and by 30 percent up to Maine. The
new model breaks the promise of the use of a long-term model to
achieve stable prices and instead uses a mere 5-year time,
under the theory that it is a high hurricane activity and they
have to raise prices. It is shocking, it is unethical, that
scientists have, under pressure from the insurers, which is
obvious, completely changed their minds, all at the same time
after 10 years of assuring everybody that the models they were
using were scientifically sound. I encourage you to look at the
revelations in the Tampa Tribune where some of these experts
they used now say that it was not a scientific effort.
Finally, many insurers use identical or similar claims
processing systems that are designed to systematically underpay
claims. These systems have been recommended by common
consultants and sold and maintained by common vendors--all the
earmarks of possible collusion to underpay claims. The
President and Congress ought to look into it.
Consider this startling statement from the President of the
Association of Property/Casualty Claims Professionals: ``I was
ashamed. It was as if some small group of high-level financial
magnates decided that the only way to save the industry's
financial fate from this mega disaster was to take a hands-off
approach, hide behind the waves, and the flood exclusion. The
carriers behaved as one.'' This is from the President of the
Property/Casualty Claims Professionals.
I have run out of time, too.
[The prepared statement of Mr. Hunter appears as a
submission for the record.]
Chairman Leahy. Again, I apologize. And I have read the
statements. They will be part of the record, and I do
appreciate that.
Governor Racicot?
STATEMENT OF MARC RACICOT, PRESIDENT, AMERICAN INSURANCE
ASSOCIATION, WASHINGTON, D.C.
Mr. Racicot. Good morning. Thank you.
Last June, I testified before this Committee on McCarran,
and I appreciate the opportunity to be here again this morning
to do the same thing, and I would like to focus on three
critical issues--briefly, obviously: first, McCarran's role in
balancing insurance regulation and antitrust enforcement;
second, the scope of McCarran's limited Federal antitrust
protection; and third, the downside of McCarran repeal.
Congress enacted McCarran in 1945, and it did two things:
it delegated to the States the authority to regulate and tax
the business of insurance, and it withheld application of
Federal antitrust laws to the extent that States, in fact,
regulated the business. So McCarran authorized the States to
determine how the balance of State regulation and Federal
antitrust enforcement would be drawn, but did so on the
condition that the Federal antitrust laws would apply to the
business of insurance to the extent that a State did not
regulate the industry.
Thereafter, States weighed the benefits of broad regulation
against open-ended antitrust litigation and decided to strike
the balance in favor of comprehensive regulation. They all
adopted pervasive insurance regulatory schemes, including
numerous antitrust type protections. Not surprisingly, that
same balance has been adopted for federally regulated banking
and securities industries.
In achieving that balance, the Federal courts have held
that antitrust scrutiny is inappropriate where an activity is
carried out in conformity with a regulatory system established
by Congress. If that were not the case, chaos would rule.
Private antitrust litigation constantly would battle regulatory
systems for primacy, creating enormous uncertainty for
businesses and consumers to no one's benefit.
Thus, McCarran strikes the same balance of regulation
versus antitrust enforcement for insurance that exists for
federally regulated banks and securities firms, and without
McCarran, that balance would be undercut.
There is a persistent misunderstanding about the nature of
McCarran's protection, and I hope to make my testimony very
clear on this point today. McCarran is less of an insurance
antitrust exemption and more of a guide for the States in
balancing the regulation and antitrust enforcement roles for
the business of insurance. Equally important, McCarran
antitrust protection only applies to the business of insurance
to the extent that it is regulated by State law. It does not
apply to activities that constitute boycott, intimidation, or
coercion, whether or not those activities are regulated, and it
does not provide any protection from the numerous antitrust
provisions in State law.
Which leads to the question of whether Senate bill 618
repealing McCarran's narrow antitrust protection would be
helpful or harmful. We strongly believe it would be harmful.
The balance between regulation and antitrust enforcement would
be destroyed, replaced by an uncertain system that adds another
layer of Federal antitrust enforcement in addition to the one
that is already there, on top of the State regulatory system.
We do not think that is in the best interest of either
consumers or the people of this country or the individual
States.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Racicot appears as a
submission for the record.]
Chairman Leahy. Well, thank you very much, Governor.
Commissioner Voss?
STATEMENT OF SUSAN E. VOSS, IOWA INSURANCE COMMISSIONER, AND
VICE CHAIR, FINANCIAL CONDITIONS COMMITTEE, NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS, WASHINGTON, D.C.
Ms. Voss. Thank you for inviting me to come here today. I
am working with a small group of commissioners at the NAIC to,
in fact, review Senate 618, and I want you to know just very
briefly that we support the underlying intent of Senate 618
because our No. 1 goal is to protect consumers by enabling
investigations to take place. We want to make sure that the
consumers are protected from the bad actors, and we would
suggest that with our State experience and limited use of the
antitrust provisions, we could work collaboratively together as
sort of a cooperative federalism to ensure that those bad
actors no longer prey on our consumers.
We understand that there are practices out there that need
to be reviewed, but we also would caution you that there are
examples when we at the State level know that providing
information between carriers can be important to our consumers.
And we want to make sure that we strike a balance between any
regulation that you would see fit with the exemption of this
antitrust--with the repeal of this antitrust exemption, that we
can continue to seek positive rates for our consumers and
protect them as it is important.
We are totally in agreement that we want to protect against
offensive conduct. We just want to make sure that whatever
types of exemption that you see fit to pass does not impede our
continued work with State regulation and to protect our
consumers and our industry. We would very much like to continue
working with you in a strong dialog to see that whatever is
crafted is best for our consumers and our industry overall.
The NAIC is continuing to review Senate 618. In fact, we
are meeting in New York City beginning this weekend to further
review your proposal, and with your permission, we would like
to present you with additional information once we have met
this next week.
Thank you.
[The prepared statement of Ms. Voss appears as a submission
for the record.]
Chairman Leahy. Of course, and we will leave the record
open for that, and I appreciate that.
Mr. Homan, you know, I am listening to your story, and I am
thinking of my own home in Vermont. If something like that had
happened, with all the memories of the home, how much it would
hurt to lose the home, but even more, how much it would hurt to
think I am not going to get the money to rebuild it.
The situation you have described, is this similar to what
your neighbors have had? I mean, you must have talked to other
people there. Are they facing the same problem in rebuilding?
Mr. Homan. Yes. Since Katrina, of course, I have gotten to
know my neighbors, at least those who are back, better than
ever before. We are working all together. I would estimate that
in my neighborhood of Mid-City New Orleans, approximately a
third to half the people are back, and you can just go down the
line. The people that are back, the insurance company settled
with them, you know, in a fair and adequate means, and they
were able to rebuild. My neighbor right across the street right
now--Steve--is just days away from moving back into his house.
And, you know, we are just still waiting. We know once we
settle--we have just settled with the Road Home just a couple
weeks ago, and we think we will have enough funds to rebuild
with that. It will be a little bit short because they canceled
our SBA loan because we are getting the Road Home funds.
But, in any case, we think we will be fine. But we will
start rebuilding in a month or two, and it is going to take
another year. So it is a long time. You know, I have a 6-year-
old kid and an 11-year-old daughter who are going through this.
So I question my parenting skills a lot of times because of
this. But, in any case, you know, I would say a third to half
the people are back.
Chairman Leahy. Thank you.
Mr. Hunter, based on your experience, would Mr. Homan's
situation have been resolved the same way if he had been
insured by one of the other major property insurers?
Mr. Hunter. Well, we know, for example, that Haag
Engineering was used by more than one insurance company. I am
sure Senator Lott can tell you about Haag Engineering in
Mississippi, for example, with a different insurance company
than Allstate. And so your chances of being in Mr. Homan's
situation with a different insurance company is certainly high.
Obviously, I think there are some examples that are different,
but just being with another insurance company would not assure
a different result.
Chairman Leahy. You have talked about the Risk Management
Solutions, RMS, using models, as I understand, to set premium
rates that take into account long-range weather disaster
predictions and so on, and used to assure there would be no
need to raise rates after a catastrophic weather event. Can
such a system work for consumers?
Mr. Hunter. Sure, a long-term modeling system would bring
stability. In fact, that was the way it was sold to us when I
was working with the State of Florida, working with the
academic task force after Hurricane Andrew. We were told that
one of the things they had to do was price hurricanes in a new,
different way, and they were right. The insurance companies did
underprice it before Andrew, and they went to this long-term
modeling, and it was sold on the basis that once we have a
long-term, say 10,000-year, projection, we will bring stability
into the coast. That means big rate increases today.
Then I became Insurance Commissioner in Texas, and they
came over and they said, ``We have got these new models. You
are going to have to double, triple, quadruple the rate.'' I
had to go to my Governor, Ann Richards, and say, ``Gee, we have
got to double, triple, quadruple the rate, but we are buying
stability.'' Now they have switched to a 5-year model, which is
a total, in my view, renege of the promise, and I encourage you
to read the Tampa Tribune series. It is obvious that it is
unraveling, that it was pressed on them by insurance companies,
and a lot of these big rate increases that we are facing along
the coast have to do with collusion and pressure being brought
to bear on these modelers to raise the rate and to throw away
the science.
Chairman Leahy. Thank you.
Governor Racicot, I was listening to your testimony, and
you were talking about the things that are allowed under
McCarran-Ferguson, that the Congress has allowed by passing
that bill. But, of course, unsaid in that is that if we repeal
the law, then you have a whole different field in which you
have to act.
You acknowledge in your testimony that certain collective
activities by insurers would result in antitrust verdicts
against the insurers. But the antitrust laws, of course, were
developed to permit collective activities that benefit
consumers and prohibit those things that harm consumers.
Mr. Hunter has talked about certain collective practices by
insurers that harm consumers, including actions setting rates
that yield high prices, inclusive actions on claims practices
that would reduce payouts.
Are these the activities that you say would violate the
antitrust laws?
Mr. Racicot. I would say anything that focuses upon price
setting or collusion of any kind whatsoever would be clearly
against the law and ought to be vigorously prosecuted. What I
am suggesting--
Chairman Leahy. And would not be shielded by McCarran-
Ferguson?
Mr. Racicot. There are State laws in virtually every single
one of the States that we are talking about this morning, State
antitrust laws, and clearly anything that is not regulated by
the State is scrutinized in a searing fashion is subject to
Federal application of the antitrust laws. And, Senator Leahy,
if I could add, the testimony we have heard this morning fills,
I think, every one of us with extraordinary sorrow and regret,
and it is very moving, and these are very serious problems. But
the repeal of McCarran-Ferguson really does not have much to do
with these issues at all, because, quite frankly, it has to do
with whether or not in the light of day you are going to allow
for the activity of insurance companies to actually bring a
better bargain to consumers. There is a good reason to take a
look at data collection. There is a good reason to compare loss
figures. There is a good reason to establish residual markets.
And you cannot do that without information.
But if you have the specter of antitrust Federal law
enforcement staring you in the face because you simply will not
proceed with the kind of disclosure that would allow for that
kind of information to be distilled and used in driving a
better bargain for consumers. That is what Congress recognized
in 1945.
Chairman Leahy. Well, my time is up, and as has been
testified, in 1945, I think as Senator Lott pointed out, there
were--you could go back in the history and have a different
view of it. It is the law today. Neither of us debate that. Our
debate is going to be whether we want the law to continue.
Senator Hatch?
Senator Hatch. Well, thank you, Mr. Chairman.
Governor Racicot, in your written testimony, you argue that
the McCarran-Ferguson Act is based on the key principle that
where there is an effective regulatory system in place, it
should not be duplicated through application of the Federal
antitrust laws.
Now, I do not disagree with you that Congress has at times
passed laws reflecting the view that active regulation was
sufficient to deter harmful behavior, making antitrust
enforcement duplicative and, of course, unnecessarily
burdensome. But I do have some questions about the rationale
for applying those arguments in the context of the insurance
industry.
First, it seems to me that this dichotomy between
regulation and antitrust enforcement arises primarily with
respect to regulated monopolies and industries subject to
common carrier regulation. In general, this type of regulation
included things such as the strong rate regulation to limit the
extraction of monopoly profits from consumers, obligations to
offer service to everyone within a specified service area, and
prohibitions on discontinuing service without obtaining
regulatory approval.
Now, the question I am going to ask is this: To what extent
do the States currently have this type of regulation for
insurance providers? And, of course, after you respond, I would
like to hear from Commissioner Voss and then Mr. Hunter as
well, if we could.
Mr. Racicot. Well, Senator Hatch, I would argue that there
is no industry in America, no financial services industry in
America that is more heavily regulated than the insurance
industry at the State level, and sometimes in our mind some
overregulated. Insurance Commissioners most certainly have the
capacity to do anything and the regulatory process is to ensure
that a company does not to go into insolvency because it simply
cannot meet its financial obligations.
So the bottom line is there is a very pervasive, universal
system of regulation and control across the United States of
America. Every State in the Union has either antitrust
provisions or deceptive practices provisions in place, and they
are vigorously enforced. And as a consequence of that, I think
what Congress recognized in 1945 was this: that it was better
in the light of day to advance discussions out into the
marketplace that allowed for data to be used in a common
fashion so as to bring a better price and a better product to
the consumers of this country. They provided for the exemption
to allow for those things without antitrust enforcement
impinging upon the industry's ability to do that.
We believe the same thing Senator Leahy talked about in his
opening comments, and that is, driving a bargain in the light
of day is in the best interest of the consumers of this
country, the more competition, the better. That is why you will
see the testimony from the National Association of Insurance
Commissioners reflects that there are in excess of 5,000
insurance companies in this country, property/casualty
companies, that provide coverage. I do not think you will find
one of them that believes that proceeding in this fashion is a
good idea for consumers or for States. And the reason for that
is they know that business is being conducted in the light of
day and that this is in the best interest of consumers.
Senator Hatch. Well, thank you.
Commissioner Voss?
Ms. Voss. Thank you, Senator. I would add that while I
think that I like to believe that State regulators do an
excellent job--and we do care about consumers. In Iowa, we have
the lowest auto rates in the country, some of the lowest worker
comp rates. So we know that there is good competition. But I
would admit that there are some bad actors out there. There are
some issues that we would enjoy the cooperation of the Federal
Government. If you go back and look at the Marsh issue and at
that time Attorney General Spitzer--I mean, we recognize there
are times where we could work together effectively on certain
issues, and we would welcome that relationship very much.
Having said that, we do know that--I believe we do an
excellent job at rate review and consumer protection when there
are unfair claim practices. And so we are concerned that we
would open the door too much. But as I have said before, I
think we welcome the ability to work with you when we believe
there are issues of bad faith and perhaps criminal activity in
our own industry. And we do know that occurs.
Senator Hatch. Well, thank you.
Mr. Hunter?
Mr. Hunter. State regulation is very weak. Half of the
regulatory money and people are in four States. Those four
States come close to perhaps meeting your standard. I would say
no State meets the State action doctrine standard that would
apply if--and, therefore, if they really wanted to oust
antitrust--if you repealed this, they would have to upgrade.
The problem is the courts oust the antitrust enforcement of
the Federal Government on just the law on the books, no matter
how weak or not even enforced. And you can look at the record
on that. And so you have a lot of States with virtually no
capacity to regulate.
Senator Hatch. My time is up, Mr. Chairman.
Chairman Leahy. I know all of you have traveled a long way
to be here. Because of the joint meeting, I am going to leave
the record open so people can submit questions. Also, if there
is no objection, I am going to leave the record open so that
both Senator Lott and Senator Landrieu can submit questions. I
know that Senator Landrieu has talked to me about Mr. Homan's
situation and has questions, and Senator Lott has, and without
objection, we will leave the record open.
I thank all of you for coming. Those who testify here on a
regular basis know that sometimes these things get truncated,
but it is appreciated and it is important.
Mr. Homan, thank you for making the trip here. Commissioner
Voss, make sure that the Senators from Iowa treat you well
while you are here in town. Take care.
[Whereupon, at 10:30 a.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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