Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance, B-304474, March 4, 2005

B-304474 Mar 04, 2005 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights This opinion responds to a request from the House Financial Services Committee in connection with the Committee's examination of the possibility of comprehensive insurance regulatory reform. The opinion addresses the evolution of the McCarran-Ferguson Act's exemption from the federal antitrust laws for certain insurance-related activities. Today, only those activities directly tied to ratemaking and other functions at the core of and unique to the insurance industry, and activities directly related to the relationship between insurer and insured, are deemed to be the "business of insurance" potentially immune from the antitrust laws, provided they are also "regulated by State law" and do not constitute "an agreement to boycott, coerce, or intimidate, or (an) act of boycott, coercion, or intimidation." View Decision Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance, B-304474, March 4, 2005 B-304474 March 4, 2005 The Honorable Michael G. Oxley Chairman Committee on Financial Services House of Representatives Subject: Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance Dear Mr. Chairman: The enclosed opinion responds to your request concerning the McCarran-Ferguson Act's exemption from the federal antitrust laws for the insurance industry. In connection with the Committee's examination of the possibility of comprehensive insurance regulatory reform, you asked us to address three issues: (1) the evolution of the exemption and its present-day scope as determined by the courts; (2) the types of insurance-related activities being conducted today which might violate the federal antitrust laws in the absence of the exemption; and (3) the types of antitrust laws currently in effect in the States. As agreed with your staff, this opinion responds to the first question; we are responding to the remaining questions by separate report. As summarized below, Part I of the opinion provides an overview of the federal antitrust laws and the application of those laws to the insurance industry prior to passage of the McCarran-Ferguson Act, 15 U.S.C. 1011 et seq ., in 1945. Part II of the opinion sets forth the Act's provisions relating to the antitrust exemption for insurance activities, which applies only to those practices that: (a) constitute the "business of insurance"; (b) are "regulated by State law"; and (c) do not constitute "an agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation." Part III of the opinion discusses the courts' considerable narrowing of the exemption over the last 60 years, and includes a detailed review of the key cases that have addressed whether particular activities are the "business of insurance." Courts consider three factors in determining what constitutes the "business of insurance": (1) whether the activity has the effect of transferring or spreading a policyholder's risk; (2) whether the activity is an integral part of the policy relationship between insurer and insured; and (3) whether the activity is limited to entities within the insurance industry. Today, only those activities directly tied to ratemaking and other functions at the core of and unique to the insurance industry, and activities directly related to the relationship between insurer and insured, are deemed to be the business of insurance potentially immune from the federal antitrust laws (provided they are also regulated by State law and do not constitute an act of boycott, coercion, or intimidation). Although many of the earlier court decisions suggest that additional insurance-related activities qualify for the exemption, it is unlikely that a court would rule the same way today. Attachment A to the opinion lists these "business of insurance" cases from 1959 to the present. Background Beginning in the late 19th century, Congress enacted a series of antitrust laws whose purpose was to ensure a competitive business economythe Sherman Act, 15 U.S.C. 1-7, the Clayton Act, 15 U.S.C. 12-27, and the Federal Trade Commission (FTC) Act, 15 U.S.C. 41-58. The Sherman Act declared contracts, combinations, and conspiracies in restraint of interstate or foreign commerce, as well as monopolies or attempts to monopolize interstate or foreign commerce, to be illegal under certain circumstances. The Clayton Act declared price discrimination, exclusive dealings arrangements, corporate mergers, and interlocking directorates to be illegal under certain circumstances.