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VI.

PROBLEMS OF DISCRIMINATION IN THE PRICING

AND DISTRIBUTION OF AUTO INSURANCE

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SUMMARY

This is a summary of the Justice Department's report to the Task Group on Antitrust Immunities on the effects of

state regulation on the pricing and distribution of in

surance since the enactment of the McCarran-Ferguson Act in

1945.

1. Background

Traditionally, the regulation of insurance had been

ceded to the states by the federal government.

However, in

1944, the Supreme Court held that the sale of propertyliability insurance was in interstate commerce and subject to the provisions of the federal antitrust laws. United States v. South-Eastern Underwriters Association, 322 U.S. 533. That decision made illegal the numerous private cartel rate-fixing agreements which had determined prices in the

property-liability field and raised questions as to the validity of the various types of state regulation of insurance. The next year Congress enacted the McCarran-Ferguson

Act which ratified the states' power to regulate insurance absent specific federal insurance legislation and provided an antitrust exemption for private concerted price-fixing activities which were subject to state regulation. The antitrust exemption was justified on the ground that com

petitive pricing in the insurance field would lead to ruinous competition and the demise of many insurance companies, thereby denying the public the benefit of a reliable insurance mechanism. All of the states adopted regulatory schemes relating to property-liability insurance rates. Some states set the rates themselves. Most adopted "prior approval" systems which feature private rate bureaus as the moving force in the determination of rates. Still other states adopted "open competition" systems which allow cartel rate setting but enable insurers to price independently with relative ease.

In life insurance and most group health insurance there is virtually no direct state regulation of rates, but individual health insurance and Blue Cross/Blue Shield services are subject to varying degrees of state rate regulation.

The basic question under study was whether continuation of the present exemption of the business of insurance from the federal antitrust laws, by virtue of the McCarran Act and state regulation, is in the public interest.

Essentially,

it was necessary to determine whether thirty years of state regulation had provided the public with the benefits normally attributed to competition, i.e., reasonable prices based on the cost of rendering the services; efficient services

-

the

rendered at the lowest possible cost; and innovation utilization of new or improved products or services and

methods of distribution.

The underlying premise of the

study was that, if regulation had not provided these benefits,

or if it now appeared that the application of the federal antitrust laws would not interfere with the basic policy objectives of insurance regulation, then legislation should be introduced to modify the statutory antitrust exemption.

2. Findings

The Department observed that over the past ten years there have been a number of states that have adopted an "open competition" system of rate regulation after attempting to administer a highly regulated system. The experimentation with competitive controls as a substitute for concerted ratemaking is evidence of the inadequacies of state rate regulation. Moreover, the emergence of independent pricing in segments of the property-liability industry, despite restrictive state laws, may be attributed to an industry structure that favors competition, to certain inherent weaknesses in rate regulation, to the successful experimentation with deregulation in a number of states, and to the

88-9340)-77-pt. 1-8

continuing Congressional investigation into insurance

industry practices.

In addition, the evidence compiled by the Department on the effects of rigid rate regulation in automobile insurance indicates that such regulation has fostered greater adherence to bureau rates, discouraged rate reductions, contributed to instability in insurance company operations, established various forms of cross-subsidization between good and bad drivers, imposed unnecessary restrictions on the collective merchandising and the direct writing of insurance, and aggravated the availability problem in which marginal or high risk drivers have difficulty obtaining coverage in the open market at the prevailing rates.

On the other hand, the long-run experience of at least one major insurance state under an open competition system, in which the state has relied on market forces to control prices, suggests that unrestricted price competition can provide an effective substitute for rate regulation as a means of achieving reasonable prices and maximum efficiency in the sale and distribution of insurance. A comparison of the experience of the same insurers under certain open competition and prior approval systems suggests that

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