David D. Smith has extensive experience analyzing competition in the insurance industry. He has dealt with this industry both at EI and in his previous position at the Antitrust Division of the U.S. Department of Justice.

The McCarran-Ferguson Act’s Antitrust Exemption: Lessons from Europe

The insurance industry has been granted certain exemptions from the competition laws in both the United States and the European Union (EU). The EU has begun a review of its exemption and will issue a report by March 2009. There are indications that the EU is likely to drop its current exemption. For example, EU Competition Commissioner Neelie Kroes has stated, “Sector specific competition regulations are exceptional legal instruments. If there are to be special rules for a particular sector, I need to be convinced that they are justified in terms of bringing real benefits to competition and to consumers.” Similarly, the EU recently completed a Sector Inquiry into European business insurance and concluded that, “...in respect of the Block Exemption Regulation, the Sector Inquiry has not produced compelling reasons, as regards business insurance, to prolong it beyond 2010.”

The EU’s executive branch, the European Commission (“EC”), has a regulation that provides a “block exemption regulation” (BER) from competition laws for insurers. That regulation is scheduled to expire in 2010. Thus, the default future policy in Europe will be to have no exemption. On April 17, 2008, the EC Competition Commission began a Consultation, or investigation, to determine if the block exemption should be renewed. If the Commission does drop the block exemption, it would also need to decide if and how it would protect pro-competitive collaborative activities involving insurers. Absent new legislation, the enforcement officials would likely analyze the pro-competitive and anticompetitive effects of collaboration among insurance companies by using the competition analysis outlined in the Guidelines on the Applicability of Article 81 of the EC Treaty to Horizontal Cooperation Agreements.

In the United States, the McCarran-Ferguson Act, which exempts some insurance company activity from the antitrust laws, has been federal law since 1945. In contrast to the situation in the EU, this exemption will continue unless Congress changes the law; there is no expiration date.

The United States may be able to learn valuable lessons from the EC’s Consultation. The EC’s investigation will provide Americans with an opportunity to follow a debate on the need for antitrust exemptions specific to the insurance industry. Policy makers in the United States can take advantage of this opportunity by monitoring these arguments to determine whether they provide any guidance on what to do about the American insurance industry’s exemption. Also, if Europe drops its BER, it will provide a before-and-after occasion that might be suited to an event study.

In the United States, the McCarran-Ferguson Act exempts from the federal antitrust laws collaborative behavior by the insurance industry under certain circumstances. In particular, conduct is exempt if it constitutes “the business of insurance,” is “regulated by State Law,” and is not an “agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation.” In the insurance industry, some cooperation among competitors for activities such as sharing loss information, developing standardized policy forms, forming voluntary joint-underwriting agreements, and participating in residual market mechanisms can substantially increase efficiency. Nonetheless, this special treatment of one industry has been under attack for complicating antitrust enforcement and creating economic distortions across industries. Most recently, the Senate held hearings in March 2007 to consider repealing the Act, but they have not led to any changes in the law.

The EC originally granted two individual competition law exemptions to the insurance industry in 1990. Subsequently, in 1992, the EC Competition Commission adopted a BER. When this exemption expired at the end of March 2003, it was replaced with the current BER. This regulation, which runs for seven years and expires on March 31, 2010, grants exemptions from competition law to certain types of agreements in the insurance industry. These exemptions allow agreements between competitors on calculations of average cost for a specified risk, studies on the probable impact of various undertakings, non-binding standard policies, non-binding models of the profitability of various insurance policies, reinsurance, and the technical specifications of security devices.

Under the Implementation Regulation, the Commission is required to submit a report to the European Parliament and Council on the BER by March 9, 2009. The report will evaluate the effects of the exemption, and also propose any amendments it deems appropriate. As part of the Consultation that it has undertaken to develop background for its report, the Commission sent questionnaires to certain affected parties, public authorities and consumer organizations. Interested parties were also invited to submit comments to the Commission on the Consultation. The EU National Competition Authorities were involved in the draft Consultation, and will continue to be involved in the review.

Although McCarran-Ferguson and the BER are structured somewhat differently, the issues analyzed in the Commission’s report and associated Consultation will be similar to those considered in evaluating McCarran-Ferguson in the United States. As a result, it should be possible to apply many of the findings from the BER effort to McCarran-Ferguson. For example, the ABA has recommended that McCarran-Ferguson be repealed and replaced with certain “safe harbors,” such as cooperating in the collection and dissemination of past-loss experience data, and cooperating to develop standardized policy forms. Some safe harbors are currently included in the BER.

While U.S. policy makers may learn much from the ongoing EC review, one must recognize that this report will have its limitations. First, the review may not cover all of the topics that are relevant to a U.S. decision to repeal McCarran-Ferguson. For example, the EC report may not discuss boycotts and coercion, since these are not explicitly addressed in the European law. Second, because there are institutional differences between the U.S. and EU, the lessons of the EC report must be interpreted with care when applying them to the United States. For instance, in the United States the McCarran-Ferguson exemption from the federal antitrust laws still leaves the industry regulated by the states, while no similar regulatory oversight would be present in the EU. In addition, private litigation in front of juries is more common in the United States, which can affect the appropriate policy. For example, the arguments for safe harbors might be stronger in the United States than in Europe because private litigation is more common in the States.

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