Actuarial Notes

Antitrust Law

Study guide: Exam 6U

Antitrust Law is the body of competition law — federally, the Sherman Act (1890), the Clayton Act and the Federal Trade Commission Act (both 1914) — that prohibits agreements in restraint of trade and monopolisation. For insurers its reach is set by the McCarran-Ferguson Act, which applies the federal antitrust laws to the business of insurance only where that business is not regulated by state law, and always to boycott, coercion and intimidation.

\text{Federal antitrust applies if} \begin{cases} \text{the conduct is not the business of insurance, or} \\ \text{it is not regulated by state law, or} \\ \text{it is a boycott, coercion or intimidation} \end{cases}

  • Why insurance needed an exemption. Sound pricing needs pooled data — industry loss experience, development and trend — and early fire and casualty rates were set collectively by bureaus. After South-Eastern Underwriters (1944) that was price-fixing under Sherman Act section 1; McCarran-Ferguson (1945) let it continue under state supervision (History of Insurance Regulation).
  • "Business of insurance" is read narrowly. Under Group Life & Health v. Royal Drug (1979) and Union Labor Life v. Pireno (1982), courts ask whether the practice (1) transfers or spreads the policyholder's risk, (2) is an integral part of the policy relationship between insurer and insured, and (3) is limited to entities within the insurance industry. An insurer's agreements with pharmacies, and its use of a peer-review committee to judge providers' charges, failed the test; cooperative ratemaking and policy-form development sit at its core.
  • The boycott exception. In Hartford Fire Insurance Co. v. California (1993), primary insurers and reinsurers, including London market reinsurers, were alleged to have agreed to withhold reinsurance to force changes to the standard commercial general liability form. The Court held that such conduct could be a boycott outside the exemption, and that the Sherman Act reached the foreign reinsurers.
  • Practice today. Advisory organisations such as ISO collect statistics and file prospective loss costs and standard forms rather than final rates; each insurer adds its own expense and profit loadings, decides its own deviations and chooses whether to use the forms. Competitors keep to historical, aggregated data and do not exchange current or planned prices, commissions or underwriting intentions. State antitrust and unfair-trade-practices laws apply alongside (State and Federal Insurance Regulation).
  • Health insurance lost the exemption in 2021 (the Competitive Health Insurance Reform Act of 2020), with safe harbours kept for collecting historical loss data, developing loss development factors, actuarial services not involving a restraint of trade, and non-mandatory standard forms. Property-casualty business keeps it; bills for full repeal recur.
  • Where the actuary meets it. Using industry development factors or ISO loss costs is the protected core. Sharing a company's own rate plans with a competitor, or joining any concerted refusal to deal, is not.

Protected or Exposed? Decide whether each practice falls within the McCarran-Ferguson exemption.

  1. Twelve auto insurers report claims data to a licensed statistical agent, which publishes aggregated loss development factors by state.

  2. Several commercial insurers agree not to accept business from any agency that places accounts with a new low-price competitor.

  3. An auto insurer agrees with a network of body shops on the hourly labour rate the shops will charge its claimants.

Answer

  1. Protected. Pooling historical loss data to estimate expected costs spreads risk, is integral to the insurer–insured relationship and involves only insurers. It is state-regulated statistical activity — and exactly the kind of collaboration that even the 2021 health-insurance repeal preserved.
  2. Exposed. A concerted refusal to deal aimed at excluding a competitor is a boycott, which the Sherman Act reaches whatever the state regulates. State supervision cannot cure it.
  3. Exposed. An agreement with third-party providers over their prices does not spread policyholder risk and is not confined to the insurance industry — the reasoning of Royal Drug. It is not the "business of insurance", so the federal antitrust laws apply in full.