If federal antitrust becomes widely applicable to the insurance business, not only will this dramatically impact the insurance industry directly, but also it promises to fundamentally alter the structure of insurance regulation.

In the absence of either McCarran or state action doctrine antitrust immunity, the general application of antitrust to the insurance business could proscribe a wide variety of activities and practices heretofore deemed appropriate and beneficial. Furthermore, other activities, even though they may not ultimately be found to be a violation of antitrust, might be deterred because of the threat of lengthy, time consuming, and costly litigation which potentially could result in very large treble damage judgments.

Although it is beyond the scope of this book to evaluate the seemingly infinite number of ways antitrust could challenge current and potential future industry conduct, a few illustrations highlight the problem. Although the property and liability insurers appear most vulnerable to antitrust challenge due to a history of collective ratemaking activities, life insurers and their agents are not immune.

Pricing. A traditional and continuing major focus of antitrust has been price fixing. Property and liability insurers’ long history of collective ratemaking through rating bureaus is particularly vulnerable to antitrust challenge despite the substantial strides made in recent years to restructure collective efforts in a manner not detrimental to competition.

Problems can also emerge with respect to pricing outside the rating bureau context on both the life and health and the property and liability sides of the business. For example, an insurer possessing a significant share of a market (which might be defined as a particular type of insurance policy in a state or even smaller geographical area) competing with low prices might find itself the subject of an antitrust suit by a disgruntled competitor alleging monopolization. There is a very indistinct line between competitive prices and predatory prices, especially with respect to insurance where the actual cost of the product is not known until some time in the future.

Insurers differ from most other businesses in that they do not know the true cost of their products until years after they are sold. Collective gathering and sharing of information is essential to the ability to reasonably predict future costs. Despite its importance to accurate pricing, the sharing or exchanging of current or projected future prices or other ratemaking information could be highly susceptible to charges of price fixing.

Policy Forms. There is substantial room for uncertainty as to the legality under antitrust laws of insurer collective work on policy form development even though it is often encouraged by state regulatory policy and conducted within the framework of state regulatory policy approval standards and mechanisms. Joint efforts of competitors to exclude coverages on standardized policy forms have been challenged as concerted refusals to deal, that is, boycotts.

Selling Practices. Selling practices not only by insurers, but also by agents, could be subject to challenge.

A prime area of alleged potential antitrust violations would be tying. A tying arrangement exists whenever a seller will only sell a product or service (the tying product) if the consumer also purchases another product or service (the tied product) even though the tied product may be less desirable or not wanted at all. Tying arrangements involving insurance may be classified into three categories. First, the sale of one type of insurance is tied to another (for example, conditioning the sale of a health insurance policy on the purchase of a life insurance policy or conditioning the sale of a personal life insurance policy on the purchase of a business policy). Second are those arrangements in which the sale of the insurance product is tied to the sale of a noninsurance product (for example, "I will grant you a mortgage loan if you also buy my life insurance policy"). Third are situations involving the sale of a noninsurance product being tied to the sale of an insurance product. For example, even though being a member of an insured group is a fundamental group underwriting concept, antitrust actions have been brought alleging illegal tying in that conditions the availability of group insurance on being a member of a group. A tying arrangement may be found violating the Sherman and/or the Clayton Act either as a per se violation or as failing a rule of reason analysis.

Also, a widespread failure to engage in rebating might be susceptible to antitrust challenge as a conspiracy giving rise to an unreasonable restraint of trade, perhaps a per se violation. Insurers, as well as agents, may be held accountable for anticompetitive conduct of their agents such as engaging in explicit or implicit agreements not to rebate. Furthermore, insurers need to be aware that the imposition of certain restrictions on agents’ rebating or other agent business practices or activities (such as territorial or customer restrictions) could give rise to vertical restraint antitrust issues.

Pooling. State policy includes maximization of the availability of insurance to those needing coverage. Among the techniques used are sanctioning various voluntary pooling arrangements and mandatory residual market mechanisms. The insurance industry is replete with voluntary pools to serve a wide variety of needs such as providing markets for extraordinary large coverages or particularly risky businesses, enabling small insurers to combine in a manner to make them better able to compete with their larger brethren, etc. In order to function, participants in pools use common classifications, rates, and policy forms, and engage in other joint activity. Because of the essential activity in concert, pooling activities could run afoul of antitrust laws if applicable. Although antitrust contains a body of law pertaining to permissible and impermissible joint ventures, most likely some insurance pools would be prohibited and the legality of others determinable only after lengthy and complex litigation involving the application of the rule of reason.

The pervasive uncertainty as to how antitrust principles will be applied in a host of different insurance contexts promises to chill not only the ardor of even the more aggressive competitors, but also the willingness of insurers to participate in collective mechanisms designed to serve various public policy objectives. The threat of litigation is real. Antitrust not only permits but encourages such actions by providing for treble damages. In particular, private parties have not been reluctant to bring antitrust actions to deter a too vigorous competitor or to obstruct efforts to control costs such as those relating to automobile and health insurance. And it is not unknown for treble damage litigation to be used for commercial shakedown. The combination of treble damages, the creativity of plaintiff antitrust lawyers, the potential of large and hugely expensive class action litigations, the civil and criminal penalties available to the government, and the uncertain results when applying antitrust law to insurance all tend to stifle even activity which might ultimately pass antitrust muster. Thus the threat of litigation promises to render insurers less willing to act in a creative and flexible manner in conducting their insurance operations and competing in the insurance markets.

The above examples of the potential impact of antitrust on insurer operations reflect only brief highlighting of a multitude of potential antitrust problems for the insurance industry. Yet, for the most part, the noted activities are rooted in sound and legitimate insurance purposes, the achievement of which the application of antitrust might very well deter, if not actually prohibit. The application of antitrust would impose a wholly new and not necessarily beneficial form of regulation on the insurance industry. Although the state action doctrine might provide some relief, it does not promise to provide an adequate substitute for a viable McCarran Act exemption. To the contrary, dependence upon the state action doctrine would constrict the range of options available to the states in responding to regulatory problems as states might feel compelled to opt for the more stringent anticompetitive approaches to ensure the successful invocation of the state action exemption.

If and when the antitrust laws become generally applicable to the insurance business, either due to judicial and/or congressional narrowing or elimination of the McCarran Act antitrust exemption, not only will such application directly impact insurers as illustrated above, but also the insurance regulatory structure will be subject to dramatic change.

First, to the extent the McCarran antitrust exemption becomes inapplicable, thereby resulting in a general application of antitrust to the insurance business, the judicially imposed preemption doctrine comes into play. As discussed earlier, whether a state law or regulation survives would be determined by the Supreme Court’s two-criteria approach in evaluating whether a particular state law or regulation should be preempted: (1) the congressional intent test and (2) the conflict test.

Although in specific instances, under the preemption doctrine, antitrust may override conduct carried out under state insurance regulation, based upon more recent cases and a generally more conservative Court, it does not appear that the Supreme Court would be inclined to apply the antitrust laws in a manner to achieve a wholesale preemption of the state insurance regulation. Consequently, to the extent the insurance antitrust exemption is narrowed or repealed, the application of the preemption doctrine promises to result in full scale dual regulation which the courts will try to accommodate as best they can. Under this likely scenario, insurers, agents, and buyers will need to thread their way through two different sets of regulatory requirements (state insurance regulation and federal antitrust laws) enforced by two very different sets of mechanisms, people, and philosophies.

Second, the narrowing or repeal of the McCarran insurance antitrust exemption not only poses the very real potential of substantial dual regulation involving federal antitrust enforcement and state insurance regulation, as will be considered, it also gives rise to the specter of substantial regulatory, as distinguished from antitrust, control by the Federal Trade Commission.

Proponents of general applicability of the federal antitrust laws to the business of insurance seek to subject the insurance industry to the full effects of competition. In the words of the United States Supreme Court,

Consequently, we rely on the free market to ensure that sellers offer products and services with the best mix of price, quality and other attributes which consumers seek. The purpose of the antitrust laws is to prevent unwarranted interference with competitive market forces. Thus it is well settled that immunities from the antitrust laws are disfavored and are not lightly to be implied.

However, the insurance marketplace is already characterized by a large number of sellers, low barriers to entry, low market concentration, active price competition due to not only interinsurance company competition but also competing products from other financial service providers including the banking and securities institutions, readily available price and product information, and other indices of a highly competitive industry. There is little to suggest that general application of the antitrust laws would lead to significant improvements in competition. Thus despite the rhetoric, repeal of the McCarran Act is not likely to have significant positive impact on competition in the insurance marketplace. In fact, the argument can be made that general application of antitrust in the business of insurance could lessen rather than enhance competition.

Application of antitrust laws should not be an end in itself. Such application can only be justified if it offers realistic expectation of sufficiently enhanced competition, which it does not. Furthermore, to apply the antitrust law to insurance on a widespread general basis could give rise to a host of problems and costs by impairing the ability of the insurance regulators to function and creating massive uncertainty among insurers as to what they can and cannot do. And repeal of the McCarran antitrust exemption could overlay state regulation with a layer of federal regulation under the auspices of the FTC, thereby creating a dual, duplicative, and potentially inconsistent system of regulation. In short, if the McCarran Act antitrust exemption were repealed or significantly limited, the interests of the insurance-consuming public could very well be sacrificed upon the alter of antitrust ideology.