[Senate Hearing 109-557]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-557
 
  THE MCCARRAN-FERGUSON ACT: IMPLICATIONS OF REPEALING THE INSURERS' 
                          ANTITRUST EXEMPTION

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 20, 2006

                               __________

                          Serial No. J-109-89

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois, prepared statement...................................    62
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     2
    prepared statement...........................................   106
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust 
  Bureau Office of the Attorney General for the State of New 
  York, New York, New York.......................................     4
Hunter, J. Robert, Insurance Director, Consumer Federation of 
  America, Washington, D.C.......................................     8
Klawiter, Donald, Chair, Section of Antitrust Law, American Bar 
  Association, Washington, D.C...................................    12
McRaith, Michael, Illinois Director of Insurance, Chair, Broker 
  Activities Task Force, National Association of Insurance 
  Commissioners, Chicago, Illinois...............................    10
Racicot, Marc, former Governor of Montana, and President, 
  American Insurance Association, Washington, D.C................     6
Thompson, Kevin, Senior Vice President, Insurance Services 
  Office, Jersey City, New Jersey................................    14

                         QUESTIONS AND ANSWERS

Responses of Elinor Hoffmann to questions submitted by Senator 
  Specter........................................................    27
Responses of Robert Hunter to questions submitted by Senator 
  Specter........................................................    30
Responses of Donald Klawiter to questions submitted by Senators 
  Specter and Leahy..............................................    32
Responses of Michael McRaith to questions submitted by Senators 
  Specter and Leahy..............................................    35
Responses of Marc Racicot to questions submitted by Senators 
  Specter and Leahy..............................................    50
Responses of Kevin Thompson to questions submitted by Senator 
  Leahy..........................................................    60

                       SUBMISSIONS FOR THE RECORD

Hoffmann, Elinor, Esq., Assistant Attorney General, Antitrust 
  Bureau Office of the Attorney General for the State of New 
  York, New York, New York, prepared statement...................    64
Hunter, J. Robert, Insurance Director, Consumer Federation of 
  America, Washington, D.C., prepared statement..................    78
Independent Insurance Agents & Brokers of America, Inc., 
  Alexandria, Virginia, letter...................................    92
Klawiter, Donald, Chair, Section of Antitrust Law, American Bar 
  Association, Washington, D.C., prepared statement and 
  attachment.....................................................    96
McRaith, Michael, Illinois Director of Insurance, Chair, Broker 
  Activities Task Force, National Association of Insurance 
  Commissioners, Chicago, Illinois, prepared statement...........   108
Racicot, Marc, former Governor of Montana, and President, 
  American Insurance Association, Washington, D.C., prepared 
  statement......................................................   128
Thompson, Kevin, Senior Vice President, Insurance Services 
  Office, Jersey City, New Jersey, prepared statement............   140


  THE MCCARRAN-FERGUSON ACT: IMPLICATIONS OF REPEALING THE INSURERS' 
                          ANTITRUST EXEMPTION

                              ----------                              


                         TUESDAY, JUNE 20, 2006

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:30 a.m., 
in room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senator Leahy.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Chairman Specter. Good morning, ladies and gentlemen. The 
Judiciary Committee will now proceed with our hearing on the 
McCarran-Ferguson Act, and examine the issue as to whether 
there ought to be antitrust coverage for the insurance 
industry, whether McCarran-Ferguson ought to be repealed or 
modified.
    The issue has been the subject of a number of legislative 
proposals. House bill 2401, introduced by Congressman DiFazio, 
would eliminate the antitrust exemption under McCarran, and is 
a byproduct of earlier legislation which was introduced by 
Congressman Brooks, then chairman of the House Judiciary 
Committee.
    In the Senate, we have Senate bill 1525, introduced by 
Senator Leahy, which relates to the issue that McCarran would 
not apply to medical malpractice insurers who engage in any 
form of price fixing, bid-rigging, or market allocation, and 
Senate 2509, Senator Sununu, which would authorize Federal 
regulation for insurers who opt into the program.
    The issue has been the subject of an investigation by the 
New York Attorney General's Office, which found that there was 
bid-rigging and customer allocation schemes among some major 
insurers, and the country's largest broker. We have a panel 
today of six witnesses, evenly divided: three advocating for 
repeal of McCarran-Ferguson and three opposing it.
    This is a very important subject where there is a 
significant question as to whether regulation by the States is 
sufficient and whether there should be special status accorded 
to the insurance industry to be exempt from the antitrust laws, 
with those laws being very, very important in enforcing 
competition in the economy generally.
    Without objection, my full statement will be made a part of 
the record.
    We will now turn to our first witness. Our first witness is 
Ms. Elinor Hoffmann, Assistant Attorney General, Antitrust 
Bureau, in the New York Attorney General's Office.
    She has had 25 years of litigation experience, including 
numerous antitrust cases. She is an Adjunct Professor of Law at 
Brooklyn Law School, Phi Beta Kappa and Magna Cum Laude from 
New York University, and a law degree from Brooklyn Law School, 
and a Master's in law from New York University.
    Thank you for joining us here today, Ms. Hoffmann. We look 
forward to your testimony.
    Ms. Hoffmann. Good morning. On behalf of the New York State 
Attorney General, thank you for the opportunity to testify here 
today.
    The antitrust laws reflect our society's belief that 
competition in the commercial marketplace enhances consumer 
welfare and promotes our economic and political freedom.
    Unrestricted competition, however, may not be consistent 
with other significant public policies or regulatory schemes 
that also serve the public interest. So we exempt conduct from 
antitrust scrutiny to the extent necessary--but only to the 
extent necessary--to obtain--
    Chairman Specter. Ms. Hoffmann, you have just begun your 
testimony, less than a minute in. I want to turn to you, 
Senator Leahy, to have your opening statement. We just adopted 
a new rule. If you are less than a minute into your testimony, 
you are subject to interruption.
    [Laughter].
    Chairman Specter. You are subject to interruption, and you 
will be accorded the full time when you begin again, providing 
your microphone is on.
    Ms. Hoffmann. Thank you, Senator.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. These are known as the Specter rules, which 
I want you to know, we all follow.
    With respect, I did want to be here. I apologize, I started 
off a little late this morning. I had breakfast this morning 
with Cardinal McCarrick, one of the finest clerics to serve 
here, who is now retiring, which means they will find hundreds 
of other things for him to do and will have him working even 
harder than he does now. He is a great person, and it was a 
very inspirational breakfast.
    As far back as 1945, the insurance industry has operated 
largely beyond the reach of Federal antitrust laws. The 
McCarran-Ferguson Act created this exemption. So long as the 
insurance business is regulated by the States, there is no room 
for Federal oversight.
    The drafters may well have been well advised at the time, 
and perhaps it was a worthwhile policy, but the times have 
changed. The common refrain of tort reform proponents is ``out-
of-control juries and large malpractice awards drive insurance 
costs higher,'' and medical professionals, we are told, are 
being crushed by excessive costs.
    Just recently, the Senate considered legislation to cap 
punitive damages in medical malpractice cases. One study found 
that among the 15 best-rated medical malpractice insurance 
providers, premiums rose dramatically between 2002 and 2005--
dramatically--but the cost of the claims paid out remained 
flat, so it was hard to see just how, somehow, claims were 
pushing up the cost of premiums.
    Claims are not driving the premiums. Insurance costs among 
competing companies are rising in lock step with each other. 
That was the other thing. They were not paying out any claims, 
but the costs were going up and they were in lock step. Maybe 
there were other causes.
    I have introduced a bill, the Medical Malpractice Insurance 
Antitrust Act of 2005, along with Senators Kennedy, Durbin, 
Rockefeller, Boxer, Feingold, Salazar, Obama and Mikulski. It 
would repeal the antitrust exemption for medical malpractice 
insurance, and only for the most egregious cases of price 
fixing, bid rigging, and market allocation. It is a narrow 
bill.
    My bill targets a particularly troublesome aspect of the 
problem, and I think we should look at it. If insurers around 
the country are operating in an honest and appropriate way, 
they should not object to being asked to abide by the same 
antitrust laws as virtually all other business.
    There is no reason why they should be treated differently 
than other businesses. We all want to be treated alike, in an 
egalitarian manner, because nobody is above the law, except for 
insurance companies.
    American consumers, from sophisticated multinational 
businesses to individuals shopping for personal insurance, have 
the right to be confident that the cost of the insurance 
reflects competitive market conditions, not collusive behavior.
    I recognize the insurance industry's unique 
characteristics, including the dependence on collected claim 
and loss data. But I think you can combine those legitimate 
needs while still providing Federal regulators with the tools 
to investigate and prevent collusion and other anti-competitive 
behavior.
    Individuals and businesses are compelled, sometimes by law 
and sometimes by prudence, to purchase many kinds of insurance. 
I just want to make sure they are being treated fairly and are 
not subject to insurance company activities that create, not 
better insurance packages for the individual, but higher 
profits for those selling them.
    So, thank you, Mr. Chairman.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Senator Leahy.
    Ms. Hoffmann, we return to you with the full five minutes.

 STATEMENT OF ELINOR R. HOFFMANN, ASSISTANT ATTORNEY GENERAL, 
ANTITRUST BUREAU, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE 
                OF NEW YORK, NEW YORK, NEW YORK

    Ms. Hoffmann. Thank you, Senator. Good morning. On behalf 
of the New York Attorney General, thank you for the opportunity 
to testify here today in favor of the repeal of the McCarran-
Ferguson exemption from the antitrust laws.
    The antitrust laws reflect our society's belief that 
competition in the commercial marketplace enhances consumer 
welfare and promotes our economic and political freedoms.
    Unrestricted competition, however, may not be consistent 
with other significant public policies or regulatory schemes 
that also serve the public interest, so we exempt conduct from 
antitrust scrutiny to the extent necessary--but only to the 
extent necessary--to attain other important goals.
    The McCarran-Ferguson exemption from the antitrust laws is 
an industry-specific exemption, unlike, say, the labor 
exemption, which is a broad-based policy exemption that crosses 
many sectors.
    It was enacted in 1945 as part of a bill to address the 
concerns of the insurance industry in the States after the 
Supreme Court's decision holding that insurance, 
unquestionably, was part of interstate commerce.
    The insurers wanted to continue to engage in collective 
conduct like rate setting and policy term agreements that they 
deemed necessary for solvency. McCarran preserves the power of 
the States to regulate and tax, but affords an exemption from 
the antitrust laws for the industry.
    McCarran states that the Federal antitrust laws apply to 
the business of insurance to the extent that such business is 
not regulated by State law. Agreements and actions taken to 
boycott, coerce and intimidate are not exempt.
    Thus, in some senses the exemption is narrow, but it runs 
very deep. It was intended to protect the industry from the 
chilling effect that antitrust exposure might have on joint 
activities designed to ensure prudent transfers of risk. But, 
importantly, it protects price fixing, cartel-like behavior 
that in most industries would be summarily condemned.
    Since 1945, some participants in the insurance sector have, 
on occasion, engaged in anti-competitive conduct that has 
nothing to do with the original purpose of McCarran.
    Recently, New York and other States found evidence of 
serious misconduct in the insurance industry. Information 
obtained during our investigation supports our allegations of 
collusion to subvert the competitive process.
    More specifically, we have discovered, among other things, 
stark evidence of bid-rigging and customer allocation. For 
example, we found evidence that Marsh & McClennan, one of the 
world's largest insurance brokers, steered unsuspecting clients 
to insurers with which it had lucrative payoff arrangements 
based on volume or profitability of the business that Marsh 
brought to the insurers. These arrangements were often called 
contingent commissions, or overrides.
    In order to make the scheme work really well, Marsh 
solicited fictitious bids from insurers so that business could 
be steered to the insurer favored by Marsh on a particular 
deal, that is, the insurer who would pay Marsh the most.
    The customer thought it was getting the benefits of 
competition, but it was not. Marsh's clients may have been 
unaware of the scheme, but the insurers were not unaware. Marsh 
sometimes even circulated the favored bidder's quote and ask 
other bidders to protect it by submitting a higher, non-
competitive quote.
    As a result of our investigation, hundreds of millions of 
dollars in restitution will be paid to customers injured by 
this type of anti-competitive conduct. Twenty officers and 
executives have pled guilty, six companies have settled, and a 
total of over $3 billion in restitution and penalties has been 
recovered due to antitrust and other violations.
    The investigations and litigation are ongoing. In addition 
to a pending lawsuit that we have against Liberty Mutual, 
Florida has sued Marsh under State laws alleging antitrust and 
RICO violations, and there is a pending class action before the 
District Court in New Jersey, where McCarran is the subject of 
extensively briefed Motions to Dismiss.
    We brought our case against Marsh in State court and we 
plead State law claims, including claims under New York's 
Donnelly Act, New York's antitrust law. Donnelly has its own 
antitrust exemption for insurance. It exempts property and 
casualty insurers, but not brokers and not the business of 
insurance.
    Had we prosecuted our case in Federal court under Federal 
antitrust law, we likely would have encountered a defense under 
McCarran, delaying, or maybe precluding, settlement. That is 
not to say we would have lost, but as enforcers we are not 
inclined to invite delay in reaching the merits.
    This is not just New York State's problem, it is a 
pervasive national problem. McCarran, because it precludes 
Federal antitrust enforcement of serious anti-competitive 
conduct in the insurance sector, requires State enforcement 
agencies and litigants to examine each State's laws to 
determine whether that State exempts the business of insurance, 
or any part of it, from State antitrust scrutiny.
    Some States follow Federal law in whole or in part, others 
exempt insurance from State antitrust law to some extent, and 
still others have no exemption at all. Remedies and outcomes 
may differ from State to State. Differences in State laws may 
pose an impediment to class certification in some instances.
    The impact of McCarran is that it encourages inefficient 
multiple proceedings under disparate laws brought by diverse 
sets of public and private plaintiffs, with the clear potential 
for inconsistent results.
    Chairman Specter. Ms. Hoffmann, how much more time will you 
need?
    Ms. Hoffmann. About two more minutes.
    Chairman Specter. Why do you not summarize at this point?
    Ms. Hoffmann. Sure.
    There are other ways, in fact, for the insurance industry 
to achieve its legitimate goals. Exchanges of information are 
permitted in other industries, consistent with the antitrust 
laws.
    In sum, experience with McCarran indicates that there is 
the need to reexamine industry-specific exemptions 
periodically. Markets change in many cases, eliminating the 
need for broad exemptions. McCarran is one example of an 
exemption that has no apparent business justification and 
impedes free and open competition in a major sector of the U.S. 
economy.
    Chairman Specter. Thank you very much, Ms. Hoffmann.
    [The prepared statement of Ms. Hoffmann appears as a 
submission for the record.]
    Chairman Specter. We turn now to Mr. Marc Racicot, 
president of the American Insurance Association, former 
Governor of Montana. He had served as Chairman of the 
Republican National Committee. He is a graduate of Carol 
College in Helena, Montana, and the University of Montana Law 
School.
    Thank you for joining us, Governor Racicot, and we look 
forward to your testimony.

    STATEMENT OF MARC RACICOT, FORMER GOVERNOR OF MONTANA, 
   PRESIDENT, AMERICAN INSURANCE ASSOCIATION, WASHINGTON, DC

    Mr. Racicot. Thank you, Mr. Chairman, and good morning. I 
am delighted to be here this morning to speak on behalf of 
property and casualty insurers across the country and around 
the globe that are members of the American Insurance 
Association. We are, of course, appreciative of the opportunity 
to be here to discuss McCarran-Ferguson.
    It is important to note that McCarran is a power-sharing 
statute that reflects Congress' judgment to delegate, not 
abdicate, authority over insurers to States that regulate the 
business of insurance themselves.
    In doing so, McCarran provides insurers with an antitrust 
regime that recognizes the insurance regulatory role entrusted 
to the States. Because of the delicate balance of power 
contained in McCarran, we believe the discussion of a repeal or 
limitation of McCarran's antitrust provisions cannot be 
divorced from a corresponding discussion of the nature of State 
insurance regulation.
    Within this framework, my testimony today will focus on two 
things: first, some perspective on the McCarran discussion over 
the years; second, the role of McCarran in today's debate over 
needed reform of the insurance regulatory system.
    In 1944, as was mentioned, the Supreme Court held in 
Southeastern Underwriters that insurance was indeed a product 
of interstate commerce and, therefore, subject to Federal 
scrutiny.
    As the case centered around how insurers collected and 
analyzed data to appropriately price risks, it necessarily 
focused congressional attention on several pressing questions 
dealing with the primacy of State regulations, State taxation 
of insurers, application of Federal antitrust laws, and 
whether, and how, insurers could collaborate on drafting 
uniform policy forms.
    Congress responded by enacting McCarran a year later, as 
the committee is well aware. McCarran entrusted the States with 
authority to regulate and tax the business of insurance, giving 
them three years from enactment to implement their regulatory 
systems, and said no Federal law should be presumed to 
interfere with that authority unless clearly designated to do 
so.
    McCarran also said that Federal antitrust laws would apply 
to the extent that such businesses were not regulated by State 
law, or in any case where insurers had engaged in, or attempted 
to engage in, an act of boycott, intimidation, or coercion.
    Following the passage of McCarran, all States enacted 
unfair competition and trade practices laws directed 
specifically to insurers and adopted prohibitions on acts of 
boycott, intimidation, or coercion by insurers, as well as 
Sherman Act-and Clayton Act-type prohibitions on unfair 
restraint of trade.
    When implementing these regulatory structures, the States 
also faced the question always raised when dealing with a 
regulated industry, and that is how to balance the roles of 
regulation and antitrust policy.
    They responded by placing all collective activity by 
insurers under regulatory control, scrutiny and review, 
effectively replacing antitrust litigation with regulatory 
oversight of any collective activity.
    Not coincidentally, the same type of balance exists for 
other financial services institutions and industries, such as 
banking and securities. Federal courts have held that this 
balance is critical and that antitrust scrutiny is 
inappropriate where activity is subject to regulation, 
otherwise, chaos would rule.
    Private antitrust litigation constantly would battle 
Federal regulatory systems, creating enormous uncertainty for 
businesses and customers, to no one's benefit. One important 
distinction, from an antitrust perspective, however, is that 
the banking and securities industries are principally Federally 
regulated, while insurance is principally State regulated.
    When Federal antitrust laws balance against Federal 
regulation for a specific industry, courts give precedence to 
the specific regulatory system Congress has set up for that 
industry over broad non-specific language of the antitrust 
laws.
    McCarran comes under fire periodically. Whenever an 
affordability or availability problem arises in any line of 
insurance, critics in those circumstances tend to blame 
McCarran. Their misguided solution is to repeal McCarran.
    Ironically, when the problem subsides, those who have 
argued that McCarran should have been repealed never credit 
McCarran for having cured the problem. The reality is that when 
insurance prices spike or availability shrinks, it is all 
because of some underlying problem that needs to be addressed.
    To be fair to all customers and to stay in business, 
insurers must be able to price prices to cover policy losses. 
When government price controls prevent that, insurers are 
forced to pull back from the marketplace. Instead of looking at 
insurer activity under McCarran, it would always be better to 
examine cost driver-related problems and fix them.
    In the early 1990s, as was mentioned, AIA worked with 
Congress to develop legislation to retain essential McCarran 
antitrust exemptions through specifically identified safe 
harbors. After the 1994 elections, congressional interest moved 
from amending McCarran to enacting wide-ranging insurance 
regulatory reform. Today, we believe that regulatory reform is 
the way to go.
    Since McCarran only applies to the businesses of insurance 
regulated by the States, it obviously would not apply to 
pricing activities of Federally chartered insurance agencies or 
insurance industries operating under a national charter.
    As was mentioned by the Chairman, Senate bill 2509 sets 
about to do just that. We think it is time for that particular 
issue to be entertained by the committee and by Congress.
    AIA members are certainly willing to take the risks 
inherent in that approach recommended in that legislation 
because we strongly believe that a competitive marketplace is 
critical to being able to serve our customers in the years 
ahead.
    Mr. Chairman, thank you for the opportunity to present. I 
am available, obviously, as you know, for questions.
    Chairman Specter. Thank you very much, Governor Racicot.
    [The prepared statement of Mr. Racicot appears as a 
submission for the record.]
    Chairman Specter. Our next witness is Mr. Bob Hunter, 
Director of Insurance, Consumer Federation of America, formerly 
the Texas Commissioner of Insurance, and president and founder 
of the National Insurance Consumer Organization. He has worked 
both as underwriter and actuary in the insurance industry.
    Thank you for coming in today, Mr. Hunter. The floor is 
yours.

  STATEMENT OF J. ROBERT HUNTER, INSURANCE DIRECTOR, CONSUMER 
             FEDERATION OF AMERICA, WASHINGTON, DC

    Mr. Hunter. Thank you, Mr. Chairman, Ranking Member Leahy.
    Adam Smith wrote this in 1776: ``People of the same trade 
seldom meet together, even for merriment and diversion, but the 
conversation ends in a conspiracy against the public or in some 
contrivance to raise prices.'' That is why we passed antitrust 
laws.
    But in insurance, this is a trade enjoying an unusually 
broad exemption, an exemption, by the way, slipped in in the 
conference committee in 1945, after both Houses passes the 
legislation it did not have it in.
    While it should not require a study to prove that collusion 
harms buyers, you have study after study by Federal agencies 
that all call for an end to the antitrust exemption. As a 
result of this call, in 1994 the House Judiciary Committee 
passed a sharp cut-back of the exemption in a bipartisan vote.
    Since 1994, collusive behavior in insurance companies 
continues. We just heard about the bid-rigging, et cetera that 
New York has uncovered. Again, State regulation has failed to 
catch it. It was at least 20 years ago that I first warned the 
State regulators about the perils of the contingency commission 
arrangements.
    Anti-competitive price and market allocation signals by 
insurers have exacerbated the insurance crisis in homeowners' 
insurance on the Nation's coasts. The Nation has suffered 
another hard market, starting in the year 2000, a period when 
insurers returned to the price levels established by the rate 
bureaus.
    These cartel-like bureaus, such as the Insurance Services 
Office, day after day produce price guidance on 70 percent of 
the rate that many insurers use as the basis for their pricing. 
They manipulate data and project pricing into the future, using 
steps that legal experts told Congress, when the House was 
reviewing it, would be illegal absent the McCarran immunity.
    Rate bureaus have cartel-like control of rate-making data. 
They establish price classes for people to be charged. They 
establish territories that are used to rate people and the data 
that are collected and the format they establish assure 
significant uniformity in the market. The antitrust exemption 
has been the most potent enabler of these, and many other anti-
competitive practices.
    Along the coast today, on May 9, 2006, ISO's CEO signaled 
that the market was over-exposed on the coastline of America, 
and days later, leading insurers announced they were dropping 
over 150,000 homes.
    In March, another rate guidance organization, Risk 
Management Solutions, announced it was changing its hurricane 
model, causing home insurance hurricane rates to jump 40 
percent on the Gulf Coast, and by up to 30 percent all the way 
up to Maine.
    The old models were developed after Hurricane Andrew, based 
on long-term 10,000-year damage projections. Insurance 
commissioners, including me, were told that the large price 
jumps that we were asked to approve at that time were 
scientifically proper and would bring price stability.
    We were assured there would be no need to raise rates after 
catastrophic weather events because the storms would have 
already been anticipated when the rates were set, even 
including Category 5 storms hitting Miami, nor would there be 
rate drops if no storms came. Insurance would bring stability 
rather than turmoil after large, infrequent storms, we were 
told.
    However, the new RMS model breaks that promise, and instead 
of a 10,000-year projection, makes a mere 5-year projection, 
with higher hurricane activity expected. It is clear that the 
insurance companies pressured the modelers to achieve this 
result. The other modelers followed suit.
    It is shocking and unethical that scientists at these 
modeling firms, under pressure from the insurers, have 
completely changed their minds all at the same time, after a 
decade of using models they assured the public were 
scientifically sound. Worse, the changes have nothing to do 
with science, but rather with collusive pressure brought by the 
insurance companies.
    Support for ending the exemption is strong. The New York 
Times editorialized, ``Bust the Insurance Cartel,'' and similar 
headlines in many editorials. Business Week and other leading 
business journals also called for the end.
    Consumer groups, small business groups, AARP, the American 
Bar Association, the American Bankers Association, labor 
unions, medical groups, and others supported repeal when the 
House Judiciary Committee last reviewed this. Rate bureaus and 
insurers claim that, despite their history of rampant 
collusion, they have gone straight and now a modeling of 
competition.
    A simple question can test this bold claim: does the 
insurance industry unconditionally support a bill that repeal's 
McCarran's broad antitrust immunity? A straight repeal, not 
tied to proposals to gut the meager consumer protections that 
we enjoy today?
    Mr. Chairman and members of the committee, now is the time 
to repeal the McCarran-Ferguson Act's antitrust exemption. We 
estimate it would save consumers about 10 percent, or $45 
billion a year.
    Chairman Specter. Thank you very much, Mr. Hunter.
    [The prepared statement of Mr. Hunter appears as a 
submission for the record.]
    Chairman Specter. Our next witness is Mr. Michael McRaith, 
Director of the Division of Insurance for Illinois, Department 
of Financial and Professional Regulation. Prior to his 
appointment as Director, Mr. McRaith spent 15 years in private 
practice in Chicago.
    He has a bachelor's degree from Indiana University and a 
law degree from Loyola University School of Law in Chicago.
    We appreciate you coming in, Mr. McRaith, and we look 
forward to your testimony.

 STATEMENT OF MICHAEL MCRAITH, ILLINOIS DIRECTOR OF INSURANCE, 
 CHAIR, BROKER ACTIVITIES TASK FORCE, NATIONAL ASSOCIATION OF 
              INSURANCE COMMISSIONERS, CHICAGO, IL

    Mr. McRaith. Thank you, Chairman Specter and Ranking Member 
Leahy. I appreciate the invitation to testify this morning on 
behalf of the National Association of Insurance Commissioners.
    I am Michael McRaith, Director of Insurance in Illinois, 
and an active participant in the NAIC's continued leadership on 
national insurance matters. I also serve as chairman of the 
Broker Activities Task Force for the NAIC.
    As insurance commissioners, our core priority is consumer 
protection. Insurance is a uniquely personal and complex 
contract. Analogies to other financial sector products, 
including the banking industry, are inherently misleading. With 
debt or equity financial products, even with deposits, a 
consumer assumes the risk; with insurance, the consumer 
transfers the risk.
    Consumers pay in advance for a benefit that may never be 
needed, or may be needed significantly in excess of the price 
paid. Insurance is a product unique to the individual or unique 
to the insured property, business, or community. Insurance is 
always local and personal, if not intimate.
    Today the question of McCarran will be interpreted 
differently by different witnesses. Some will use this 
discussion to propound the need for a Federal regulator. The 
creation of a massive Federal bureaucracy to benefit a small 
segment of the largest carriers in the insurance industry at 
the expense of consumers is an idea that this committee and the 
U.S. Congress should unequivocally reject.
    The reasons for rejection are so expansive, I will resist 
the urge today to engage in that dialogue and focus instead on 
the question at hand. With the limitation exemption of 
McCarran, State-based regulation fosters a competitive 
marketplace.
    With more than 5,000 insurers in the United States, only 
296 have more than 500 employees. These smaller insurers do not 
have as prominent a voice in Washington, but they serve niche 
markets and they provide more personalized service, or maybe a 
longstanding farm mutual serving a rural community in your home 
State.
    State-based regulation affords comprehensive cradle-to-
grave supervision, ensures carrier solvency, monitors market 
conduct of carriers and producers, and enforces unfair 
competition and deceptive practices statutes.
    Discussion of McCarran's appeal must be considered in the 
broad economic context. Repeal of the exemption cannot be 
viewed in a legalistic vacuum. Any repeal, even with a list of 
permissible items, will subject regulation of the industry to 
years of uncertainty and stability, amounting ultimately to 
installation of the courts as a de factor regulator.
    Moreover, the discussion of enumerated permissible 
practices implicitly illustrates the difference between 
insurance and other industries. The business of insurance 
exemption in McCarran authorizes insurers to engage in 
supervised, but cooperative, activities. These practices foster 
competition, consumer choice and awareness, and help maintain 
marketplace integrity.
    But the label of an antitrust exemption is a misnomer 
because States extensively and actively regulate the entire 
industry. We closely supervise the conduct of the very 
organizations involved with the cooperative activity.
    Price fixing, bid-rigging, tying, boycotting, other anti-
competitive practices that negatively impact consumers, those 
are simply not allowed.
    Attorney General Spitzer of New York should be commended 
for bringing the abusive contingent commission practices into 
the spotlight. NAIC members have worked on these issues with 
attorneys general from around the country. NAIC members have 
guided resolutions that have returned more than $1 billion to 
policyholders and imposed businesses reforms that prioritized 
consumer protections.
    McCarran's limited exemption is intertwined with extensive 
State-based regulation. A repeal would not improve--not 
improve--the affordability, reliability, or availability of 
insurance to consumers.
    Repealing the exemption would inject uncertainty, reduce 
stability and predictability, deter capital infusions, and 
ultimately eliminate, if not reduce, competition and raise 
costs. Consumer benefits and protections are enhanced with 
McCarran's limited exemption.
    The NAIC looks forward to continued work with Federal and 
State officials, consumers, the large and small industry 
participants, and all interested parties to ensure that 
prevention and punishment of anti-competitive practices 
continues.
    Thank you.
    Chairman Specter. Thank you very much, Mr. McRaith.
    [The prepared statement of Mr. McRaith appears as a 
submission for the record.]
    Chairman Specter. Our next witness is Mr. Donald Klawiter, 
Chairman of the American Bar Association's Section of Antitrust 
Law, partner in the antitrust practice group of the office of 
Morgan, Lewis & Bockius. He has had several supervisory 
positions with the Antitrust Division of the Department of 
Justice. He has an undergraduate and law degree from the 
University of Pennsylvania.
    With all that background, Mr. Klawiter, in ML&B, why did 
you come to Washington?
    Mr. Klawiter. I have always been in Washington, Mr. 
Chairman.

 STATEMENT OF DONALD C. KLAWITER, CHAIR, SECTION OF ANTITRUST 
                 LAW, AMERICAN BAR ASSOCIATION

    Mr. Klawiter. Chairman Specter, Senator Leahy, I appreciate 
the opportunity to present the views of the American Bar 
Association on the insurance exemption from the antitrust laws 
in the McCarran-Ferguson Act.
    Just over 60 years ago, Congress enacted the McCarran-
Ferguson Act as a limited exemption from the antitrust laws for 
the insurance industry. It was enacted as an attempt to 
reaffirm the supremacy of State regulation in response to 
Federal criminal antitrust challenges. It was a time when many 
industries were regulated, either at the Federal or the State 
level, and enjoyed exemptions from the Federal antitrust laws.
    The world is very different today. Over those 60 years, our 
competition policy has moved decisively from promoting the 
benefits of regulation and regulatory oversight to fostering 
the benefits of free and open competition.
    In the late 1970s, the National Commission for the Review 
of the Antitrust Laws and Procedures, where Senators Kennedy 
and Hatch served with distinction as commissioners, focused 
enormous attention on the need to repeal and limit industry-
specific antitrust exemptions, and many were repealed by the 
Congress after that commission's work.
    The current Antitrust Modernization Commission is, today, 
studying the remaining exemptions that have been presented and 
there have been proposals to eliminate or sunset many of the 
exemptions, including the insurance industry exemption.
    This committee should be commended for your focus on this 
issue today. In 60 years, we have learned that industry-
specific exemptions from the antitrust laws are rarely 
justified, and that the antitrust laws are a flexible 
instrument of the law that transcends industries and special 
competitive circumstances.
    The American Bar Association favors repeal of the McCarran-
Ferguson Act. It is our strong position that the insurance 
industry should be subject to the same antitrust laws and rules 
as all other industries.
    We believe, however, that the law should be replaced by a 
series of safe harbors to make clear that certain types of 
conduct by insurers that are necessary, pro-competitive, and 
beneficial to the American economy should be encouraged.
    Safe harbors would provide the industry with an opportunity 
to conduct necessary pro-competitive joint activities without 
the chilling concerns of possible antitrust litigation.
    Among the safe harbors we would propose would be the 
following. First, the industry should be able to collect and 
disseminate past loss experience data over a large number of 
insured. This is essential to the industry's ability to make 
assessments of risk. Small companies, in particular, need this 
base of information to compete effectively against larger 
companies.
    Second, standardization of policy forms contributes to 
consumer understanding and assists in reliable data collection 
efforts.
    Third, where the risks are too large or too uncertain for a 
single insurer to underwrite, the insurers traditionally have 
cooperated in creating pools or joint ventures, writing large 
risk and then sharing that risk. As in any joint venture, the 
parties need to agree on rates and policy language to complete 
the underwriting job.
    Fourth, State regulators often require insurers to 
cooperate in underwriting residual risk, particularly in inner 
city areas. These cannot be insured in the voluntary market. 
This conduct should be allowed, as long as it is authorized and 
actively supervised by the States.
    Fifth, we are reluctant to suggest an exclusive list of 
cooperative activities, and we suggest that the industry should 
propose other features of joint activity that would be pro-
competitive. This is not intended to be an open-ended 
provision. Indeed, it must be very specific and unambiguous to 
be effective.
    These safe harbors are intended to protect legitimate pro-
competitive joint activity by insurers, while still subjecting 
the insurance industry to the antitrust rule of law. While 
most, if not all, of the safe harbor conduct would be 
permissible, or even encouraged, under current antitrust 
precedent, the idea of safe harbors is to remove all doubt, 
especially where there is no antitrust precedent or frame of 
reference in many of these areas because McCarran has been the 
law for 60 years.
    Thank you for the opportunity to appear before you today 
and present the views of the American Bar Association. 
Competition is the hallmark of the American economy. The United 
States has very successfully spread the gospel of competition 
to the rest of the world, with remarkable results in 
international acceptance and enforcement over the years.
    Special treatment of certain industries, whether more 
lenient treatment or stricter treatment, makes us look 
inconsistent or even hypocritical to those we seek to educate 
and influence around the world, especially the countries of 
Eastern Europe, which are just beginning to develop their 
economies.
    The American Bar Association believes strongly that 
competition in the insurance industry can be enhanced, 
consistent with necessary joint activities, to the benefit of 
all segments of the economy.
    I would be happy to answer any questions the committee may 
have.
    Chairman Specter. Thank you very much, Mr. Klawiter.
    [The prepared statement of Mr. Klawiter appears as a 
submission for the record.]
    Chairman Specter. Our final witness is Mr. Kevin Thompson, 
Senior Vice President, Insurance Services Office. In that 
position, he is responsible for filing activities required by 
regulators at the States. He has 30 years of professional 
insurance experience. He has a bachelor's degree in mathematics 
and education from New York University.
    We appreciate you coming in today, Mr. Thompson, and we 
look forward to your testimony.

 STATEMENT OF KEVIN THOMPSON, SENIOR VICE PRESIDENT, INSURANCE 
            SERVICES OFFICE, JERSEY CITY, NEW JERSEY

    Mr. Thompson. Thank you, Mr. Chairman and Ranking Member 
Leahy, for the opportunity to discuss the vital role ISO plays 
in the property and casualty insurance industry in the United 
States today.
    The property and casualty insurance industry today is 
intensely competitive and fragmented. Not only do insurers 
compete in the way they package and price their products, but 
they also compete in the way they distribute and service them.
    Within the industry, ISO provides insurers with critical 
insurance information that promotes competition between all 
insurers and adds economies of scale to functions vital to each 
individual insurer.
    Access to a broad base of reliable information and 
standardized coverage parts that comply with State requirements 
permits any insurer to enter new insurance markets and compete 
in existing ones that might not otherwise be possible if it had 
to rely solely on its own information and resources.
    ISO's charter specifically states that all ISO information 
and services are purely advisory. That is, insurers select 
among any of ISO's services and use them as they choose. ISO 
does not develop rates. Instead, ISO provides advisory 
prospective cost information. Rate setting is a matter between 
individual insurers and their regulators.
    ISO provides statistical and actuarial information and 
analyses, policy forums, data processing, and related services 
for a broad spectrum of commercial and personal lines of 
insurance.
    ISO is actively regulated by the States as an advisory 
organization and performs its various functions in each of the 
50 States, the District of Columbia, Puerto Rico, Guam, and the 
Virgin Islands.
    ISO information is available to any property and casualty 
insurer, and insurers are free to use, modify, or not use ISO 
information as they determine their own strategies in the 
highly competitive insurance marketplace.
    The pro-competitive benefits of ISO's products and services 
are well-documented and include, first, accurate projections of 
future claims payments. Pricing insurance is difficult. Unlike 
most businesses, insurers cannot set a price based on known 
costs and production and distribution. When pricing a policy, 
an insurer needs to project the cost of future insurance claims 
by examining historical data.
    This method is reliable only when the insurer uses a 
sufficient amount of accurate data. ISO's actuaries are highly 
trained to compile, edit for quality, process, and combine data 
for many companies into statistically credible pooled databases 
accessible by any insurer which, along with his own data and 
other information, enable an insurer to independently determine 
its own prices and competitive strategies.
    Second, economies of scale. For many States and lines of 
insurance, if individual insurers had to replicate the pooled 
databases, actuarial analyses, professional staff, and data 
processing provided by ISO, the costs would be so great that a 
number of insurers could decide to not enter, or not remain, in 
some markets. Insurers would incur higher expenses in 
replicating ISO materials, thereby making insurance more 
expensive.
    Third, ease of market entry. Access to ISO's products and 
services enables insurers of all sizes to more easily enter 
product lines or geographic markets they might not otherwise 
consider worth the risk of the start-up costs.
    Fourth, availability of a credible industry database. ISO's 
data compilations increase data quality for both insurers and 
regulators and facilitate research and development of new 
products and innovations to existing products.
    ISO submits summaries of this information to insurance 
regulators, as required by law, to help the regulator evaluate 
the state of the insurance market in each jurisdiction.
    In conclusion, by improving insurers' knowledge of their 
true costs and by introducing economies of scale, ISO confers 
benefits to the insuring public through lower costs.
    The pall that would be cast over these essential operations 
by the repeal or substantial modification of the already 
limited antitrust exemption contained in McCarran-Ferguson 
could be enough to severely curtail these benefits. The result 
would be a disservice, not only to insurers, large and small, 
but also to the insuring public as a whole.
    That is why, when considering any possibility of amendment 
or repeal of the McCarran-Ferguson Act, care must be taken to 
ensure access to vital advisory organization products and 
services it preserved and protected.
    Once again, thank you for the opportunity to discuss the 
vital role ISO plays in the property and casualty insurance 
industry in the U.S. today.
    Chairman Specter. Thank you very much, Mr. Thompson.
    [The prepared statement of Mr. Thompson appears as a 
submission for the record.]
    Chairman Specter. We now proceed with questions by members 
of the panel. Our customary rule is five minutes, and we will 
observe that, but there are only two of us here.
    Ms. Hoffmann, what was the gravamen of the matter that you 
referred to? What insurance companies were involved in that 
Marsh matter?
    Ms. Hoffmann. Marsh? I believe it was AIG, Liberty Mutual, 
ACE, Zurich.
    Chairman Specter. Liberty Mutual, AIG. Who else?
    Ms. Hoffmann. I think, Zurich and ACE.
    Chairman Specter. Will you speak up? Who was the last one 
you mentioned?
    Ms. Hoffmann. ACE.
    Chairman Specter. You say you believe. Are you sure about 
that, as to what companies were involved? I really do not like 
to identify companies unless you know they were involved.
    Ms. Hoffmann. I am basing that on the document that I read 
that I have attached to my written testimony.
    Chairman Specter. Well, did you prepare your written 
testimony?
    Ms. Hoffmann. Yes, I did.
    Chairman Specter. What was involved? You did not give us 
very much detail. You said there was a pay-off here involving 
Marsh. You said that there were hundreds of millions of dollars 
involved in restitution.
    You did not mention any criminal charges in your written 
testimony. In the written testimony of Mr. McRaith, there is a 
reference to criminal prosecutions and guilty pleas. What was 
the case all about? Let us hear.
    Ms. Hoffmann. The Marsh case involved the existence of 
contingent commissions. These are commissions that were paid by 
insurers to Marsh based on volume or profitability of business 
that Marsh brought to insurers.
    Chairman Specter. Were there criminal prosecutions brought 
by the State Attorney General's Office?
    Ms. Hoffmann. Yes, there were.
    Chairman Specter. And against whom were those prosecutions 
brought?
    Ms. Hoffmann. Individuals. Civil cases.
    Chairman Specter. That does not tell me very much. From 
what companies? What were their positions?
    Ms. Hoffmann. I do not know the exact positions of the 
individuals. I believe that individuals from Marsh and AIG 
pleaded guilty, and from Zurich.
    Chairman Specter. The written testimony you submitted says, 
``Marsh moved business to the insurance companies that paid it 
the highest commission, and to make the scheme work, Marsh 
solicited fictitious or cover bids to make the incumbent 
insurers' rates appear competitive.
    Three insurance company executives, two AIG and one from 
ACE, pleaded guilty to criminal charges in connection wit the 
scheme. Two employees from Zurich American Insurance Company 
also pleaded guilty to criminal charges in connection with the 
bid-rigging scheme.''
    Can you tell us a little more, by way of amplification, as 
to exactly what conduct was involved there?
    Ms. Hoffmann. I do not recall the specific conduct 
attributed to those individuals.
    Chairman Specter. Well, could you provide that information 
to the committee, please?
    Ms. Hoffmann. I will.
    Chairman Specter. Mr. McRaith, in your written statement 
you refer to a task force of some 15 States. The NAIC appointed 
a 15-State task force to develop a three-pronged national plan 
to coordinate multi-state action on broker commission issues.
    You refer in your testimony to common law fraud, which 
resulted in a number of guilty pleas on criminal charges of 
fraud related to bid rigging. At least 17 guilty pleas and 8 
indictments have been entered based on related charges.
    Were any criminal charges brought by Illinois State 
officials?
    Mr. McRaith. No, Mr. Chairman.
    Chairman Specter. Why not?
    Mr. McRaith. The criminal charges were brought by New York 
officials.
    Chairman Specter. Did Marsh function in Illinois?
    Mr. McRaith. Marsh certainly did have clients in Illinois. 
Yes, Mr. Chairman.
    Chairman Specter. Did you investigate to make a 
determination as to whether there were criminal violations by 
Marsh in Illinois?
    Mr. McRaith. Mr. Chairman, the Division of Insurance, in 
conjunction with the Illinois Attorney General, did review 
conduct by Marsh in relation to policyholders in Illinois. The 
criminal charges--
    Chairman Specter. My red light is on. But with your 
permission, Senator Leahy, why do we not make this 10-minute 
rounds? Since there are only the two of us present, we will not 
keep anybody waiting.
    Come back to the question about why Illinois did not bring 
criminal charges.
    Mr. McRaith. The criminal conduct that we know of, Mr. 
Chairman, occurred primarily or was based in New York.
    Chairman Specter. Primarily. But how about other than 
primarily? Was there any in Illinois?
    Mr. McRaith. The impact was certainly felt in Illinois by 
policyholders in Illinois, Mr. Chairman.
    Chairman Specter. Well, that gives you jurisdiction. 
Senator Leahy, did you not used to be a prosecutor? That gives 
you jurisdiction in Illinois.
    Senator Leahy. I said it was the best job I ever had.
    [Laughter].
    Chairman Specter. You mean, the only job you ever had.
    [Laughter].
    Well, that gives you jurisdiction. Senator Leahy and I know 
a little something about that.
    Did you pursue it to see if there were cases of criminal 
conduct which impacted on Illinois citizens?
    Mr. McRaith. I should be clear, Mr. Chairman. As the 
Director of Insurance, as the regulator, I do not have 
independent authority to prosecute criminal charges.
    Chairman Specter. You know some of the prosecutors in 
Illinois, do you not?
    Mr. McRaith. I certainly do. Yes.
    Chairman Specter. Did you refer the matter to them?
    Mr. McRaith. We did work with the Attorney General of 
Illinois, who also worked with the Attorney General of New 
York, to ensure that the policyholders received the 
restitution.
    In terms of the discussion about criminal charges, we 
certainly were aware of the underlying conduct. I did not 
engage in any discussions with our Attorney General about 
criminal charges.
    Chairman Specter. Well, restitution is fine, Mr. McRaith. 
That brings the defrauded people back to zero, or at least some 
of them. Customarily, not all of them, because you cannot reach 
all the people affected in a civil suit.
    But you do not have any teeth in restitution. All you have 
to do is pay back the money which you should not have taken. 
But the teeth in governmental action comes with criminal 
prosecution and jail sentences, especially with white-collar 
crime.
    Would you not have liked to have had the assistance of the 
U.S. Attorney? You have a pretty active U.S. Attorney in 
Illinois, do you not?
    Mr. McRaith. We absolutely do, Mr. Chairman. Yes.
    Chairman Specter. Well, would you not like to have his 
assistance to ferret out wrongdoing and incarcerate wrongdoers?
    Mr. McRaith. As the insurance regulator in the State of 
Illinois, we had two priorities. One, is let us make sure that 
the consumers who have been harmed by this conduct receive the 
restitution that they are entitled to. Secondly, let us take 
any action that we need to take to ensure that this conduct 
does not occur again.
    Chairman Specter. Well, would number two not squarely go to 
the issue of criminal prosecutions as a deterrent?
    Mr. McRaith. From our perspective as the insurance 
regulator, we look at the licensing side. Are these agents 
licensed in Illinois who are conducting themselves in this way?
    Chairman Specter. Well, that is all well and good. But you 
also have a duty to make references, referrals.
    Mr. McRaith. Yes, sir.
    Chairman Specter. If you do not have that duty, why would 
you want to keep the U.S. Government out of it on antitrust 
violations and keep an activist like your U.S. Attorney in 
Chicago out of it?
    Mr. McRaith. Mr. Chairman, again, our Attorney General 
worked very closely with Attorney General Spitzer on a number 
of these investigations, and it was our Attorney General who 
would make the decision whether to prosecute criminal charges 
against them.
    Chairman Specter. Well, that is all right for him. But you 
are taking a public policy position here today before this 
committee that you do not think there ought to be Federal 
antitrust jurisdiction.
    Mr. McRaith. That is correct.
    Chairman Specter. And in the context where you talk about 
criminal conduct which is not being prosecuted in Illinois, the 
big question that arises in my mind is, why would you want to 
keep the Feds out of it? The Feds have a pretty good record in 
Illinois. Was there not a guy named Capone from Illinois?
    [Laughter].
    Mr. McRaith. That is correct, Mr. Chairman. If there were 
criminal conduct, Mr. Chairman, that we discovered or 
identified that occurred in Illinois, we would refer that to 
our Attorney General without hesitation.
    Chairman Specter. And did you refer it to the Attorney 
General?
    Mr. McRaith. We did not identify criminal conduct by 
individuals based in Illinois.
    Chairman Specter. But you have identified criminal conduct 
which impacted--I would like you to submit a supplement to your 
written testimony, if you would.
    Mr. McRaith. Yes.
    Chairman Specter. Governor Racicot, you say in your written 
testimony, ``There is no lack of State antitrust authority with 
regard to insurers.''
    Do you not think it would be helpful if you had the long 
arm of the Federal Government to help out, when you have an 
impact in Illinois and no action taken in Illinois to deal with 
criminal conduct which impacts on their citizens?
    Mr. Racicot. Well, Senator, with all due respect, without 
commenting upon pending litigation, frankly, I do not know the 
facts about the pending litigation intimately.
    Chairman Specter. I am not asking you about pending 
litigation. I am asking you about testimony which Mr. McRaith 
has given that there has been an impact on consumers in 
Illinois and there has been no criminal prosecution.
    Mr. Racicot. Well, that is a matter of record.
    Chairman Specter. Wait a minute. Wait a minute. I am not 
finished with my question. They stop at restitution. You are 
making the statement here, ``There is no lack of State 
antitrust authority with regard to insurers.''
    Do you stand by that? What factual material can you give 
this committee to demonstrate that there is active State 
antitrust action with respect to insurers?
    Mr. Racicot. I think there have been, already, attachments 
to the various different testimonies submitted, if I am not 
mistaken, from Mr. McRaith that lists the individual States and 
all of their various unfair trade practices legislation and 
statutory framework that allows for antitrust enforcement.
    So, virtually every State in the United States of America 
has the capacity, on the basis of State law that enacted, 
copied, or mimicked in some fashion either Sherman, Clayton, or 
other unfair trade practices or laws, the ability to go forward 
with State antitrust actions. That is how New York went 
forward, apparently quite effectively in the minds of the 
committee, to carry on this particular prosecution.
    If I might also make note of the fact, as I know the 
Senator knows because you were a prosecutor, as well as was I, 
that typically one singular case is utilized in one 
jurisdiction as a vehicle to make certain that you address all 
of the circumstances, then work restitution in other 
concomitant jurisdictions all across the country.
    So if there is a violation, a multi-state violation that 
occurs, prosecution typically takes place in one venue, then 
the remedial part of that action is taken all across the 
country as it applies to individual citizens.
    Chairman Specter. Well, Governor Racicot, I do not know 
that at all. When I was a prosecutor and I found an impact on 
the people in my jurisdiction, I brought criminal prosecutions.
    But you say there has been effective action. You are the 
president of the American Insurance Association. Would you 
undertake to provide to this committee what criminal 
prosecutions have been brought in the 50 States?
    Mr. Racicot. I believe, Mr. Chairman, we will make every 
effort to do that, as exhaustively as possible, if that is what 
the committee desires. I would point out, as Mr. McRaith also 
points out in his testimony, that there are some 3.7 million 
complaints that are lodged with various State authorities each 
year, is my recollection, if I am not mistaken.
    Of course, tracing virtually all of those might be a fairly 
monumental task, but we can certainly make the best effort at 
it if that is what the committee would desire.
    Chairman Specter. No. I am not asking you to trace 3.7 
million complaints. I am not asking you to trace any 
complaints. I am asking you to provide this committee with the 
prosecutions that have been brought by the States against 
insurance companies.
    You say here that there is no lack of antitrust authority 
with regard to insurers. Well, I would like to know what the 
insurers have done. You are the president of the group, you 
have made this assertion. I would like to see what evidence 
there is.
    Mr. Racicot. Senator, with all due respect, I stand by that 
assertion. I just mentioned the fact that there is authority in 
all 50 States.
    There is an actual exhibit report in the written testimony 
that sets forth exactly what that authority is. If you would 
like further information and evidence of every single State 
prosecution against an insurance company, we will do everything 
in our power to make certain that we supply that information to 
the committee.
    Chairman Specter. All right. That is what we would like. It 
is not sufficient to say they have the authority. The question 
is, have they exercised it? The question is, have they brought 
the prosecutions? That is why you have a Federal Government 
which can reach into States where they do not have the 
resources and undertake those cases.
    Senator Leahy?
    Senator Leahy. Thank you, Mr. Chairman. I see you have 
asked some of the questions I was thinking of asking.
    But Mr. Klawiter, let me start with you. I am obviously 
pleased to see in your written testimony that you feel my bill, 
S. 1525, which removes malpractice insurance from McCarran-
Ferguson protection, is a good first step in the application of 
antitrust laws to the insurance industry.
    You also mention we could refine the bill further to ensure 
that we do not require a more rigorous standard than necessary. 
In what way, sir?
    Mr. Klawiter. Senator Leahy, I think it is simply a matter 
of the wording. Words like ``price fixing'' or ``market 
allocation,'' in certain circumstances, might not, in fact, be 
illegal. That may be hard to appreciate and understand.
    But, for example, vertical pricing issues, vertical 
allocation issues are very common in many industries and the 
courts have ruled, under the rule of reason, that they are a 
perfectly legitimate activity as long as there is no anti-
competitive effect.
    I think a simple amendment along the lines of price fixing, 
market allocation, et cetera that contravenes the Sherman Act, 
or the Sherman and Clayton Acts, would certainly take care of 
the issue. It is more a matter of semantics than anything else.
    Senator Leahy. Using words that are not here.
    Mr. Klawiter. Yes. Exactly. It would be really focusing it 
directly to the statute, to the Sherman Act. Because again, if 
we are going to go into areas of criminal liability, as Senator 
Specter noted before, the Federal antitrust laws have a great 
deal of punch, with 10-year prison sentences and $100 million 
fines, and issues that are really going to get people's 
attention.
    Senator Leahy. Yes. And I agree with the Chairman on that. 
Both of us, in our experience as prosecutors, was that they 
have kind of a lot of money and they happily pay a fine, and 
that is the end of it and they go on, business as usual. If all 
of a sudden you think, what, I am going to wear one of those 
iron suits and I am going to live where? The door clanks? You 
get their attention a lot more.
    Also, in talking about this in your testimony, you also 
talked about safe harbors. You want to allow for insurance 
companies to compare notes on past losses and things like that. 
I do not have a problem with that.
    Would you or your Antitrust Section be able to help us on 
what activity would be allowed and what would be disallowed?
    Mr. Klawiter. Well, I think the five categories that I 
mentioned just in my oral testimony a few minutes ago would be 
the beginning of the four.
    The fifth, is we would certainly ask you to consult with 
the industry as to others that they may think would fit within 
the category of being, again, pro-competitive, not a violation 
of the antitrust laws, but again, just giving the industry the 
flexibility to deal with these kinds of issues, things like the 
risk assessment information, the joint venture activity on a 
very large underwriting where one company itself cannot handle 
it, but maybe a group or a pool can; those things, again, 
within the context of very strict functioning of the Federal 
antitrust laws would be permissible conduct. It would be like a 
joint venture that is otherwise cleared, and that would be 
good.
    Senator Leahy. We have a lot of experience, do we not, in 
antitrust law where major industries do cooperate. I can think 
of certain safety standards in the automobile industry, safety 
standards in others. I think most would agree, in those areas 
consumers would benefit.
    Mr. Klawiter. Yes. Exactly, Senator. That is true.
    Senator Leahy. So probably going back to another way of 
asking, what kind of behavior among insurers or between 
insurers and rate service organizations is most harmful to 
competition, and thus, consumers?
    Mr. Klawiter. If the insurance companies, the insurers, 
were actually getting together to set a price, certainly 
without any form of regulation or in contravention of a 
regulatory scheme--and I say that in the context that you have 
50 States that regulate insurance; some do it better than 
others, some are much more involved, some are actively 
supervising, others are not.
    So, there are opportunities for companies to get together 
and fix prices, in the sense that we would consider them to be 
fixed, and to tie products together: in order to buy this 
insurance you also have to buy this one. That, under a normal 
antitrust theory, would be a problem.
    Those are the kinds of issues I think that the repeal of 
McCarran-Ferguson would get us to, and would allow for the 
Federal jurisdiction there that would affect this industry in 
very much the same way it affects all other industries.
    Senator Leahy. As we talk about Federal jurisdiction, 
following what Mr. McRaith was saying in his answers to Senator 
Specter, you said in your written testimony, as I understand 
it, that ``the current system of State regulations work well to 
create a competitive marketplace. State regulators adequately 
supervise State insurance activities.'' Now, of course you have 
different sized States. Illinois is a different size than 
Vermont, Montana or Wyoming.
    Ms. Hoffmann had testified about how her office uncovered 
widespread anti-competitive behavior in New York among some of 
the country's largest insurance companies, and she had a very 
aggressive team of investigators, auditors, accountants, and 
everybody else going into that.
    But you also said--and this goes back to some of the 
questions you were being asked--had her office prosecuted that 
case in Federal court, companies might have had a defense under 
the McCarran-Ferguson Act which might mitigate against having 
an aggressive U.S. Attorney like they have in Illinois, or 
others, going in there.
    Mr. McRaith, should you not have the power to use all 
available laws, all forms to root out behavior that is so 
harmful, whether it is the forum of your own State courts or 
Federal courts?
    Mr. McRaith. Senator Leahy, we have the authority at this 
time to prohibit and to ultimately punish any of the conduct--
the misconduct--just described by Mr. Klawiter. If there is 
that conduct that is found, in the State of Illinois or any 
State, it is prohibited, tying, boycotting, price fixing. I 
would like to add that in terms of penalties, the question is, 
how severe can the remedy be? Is the remedy more severe in 
Federal court under antitrust law? I think the New York 
Attorney General resolutions with AIG were over $1.5 billion. 
The resolution with Marsh McClennon was $850 million.
    In Illinois, we have resolutions with other large brokers. 
We entered, as a group of regulators, working with 10 different 
Attorneys General, into an agreement with one company where 
that company is going to pay $160 million.
    Senator Leahy. But as Ms. Hoffmann pointed out, there are 
actions they could not have taken in Federal court because they 
would have been blocked by McCarran-Ferguson. Do you agree with 
that?
    Mr. McRaith. I am far from able to question Ms. Hoffmann's 
legal analysis. As a practical matter, I would say that the 
penalties that have been imposed when this conduct has been 
found are severe, and as severe as they might have been under 
Federal antitrust laws.
    Senator Leahy. Thank you.
    And Mr. Hunter, you have had a lot of experience with 
insurance issues. You were a Federal insurance commissioner, a 
Texas insurance commissioner, and now you are Director of 
Insurance for the Consumer Federation.
    In your testimony, you estimate that if the McCarran-
Ferguson Act is repealed, consumers would save approximately 10 
percent on insurance costs each year. How do you arrive at 
that, and could it be more than that?
    Mr. Hunter. Yes. Well, it could be. That is at least. I do 
some calculations at the back. I also have other studies of the 
effects of imposing the California antitrust laws in the State 
of California when they were first imposed and a tougher 
regulatory regime imposed.
    In 1988, California had the third-highest auto insurance 
rates. Now it has about average auto insurance rates, about a 
20 percent savings if it had stayed at third place. So you have 
that, plus the calculations I made at the back of the report, 
and some other calculations.
    I would like to comment on one thing. There were huge life 
insurance market conduct violations with billions of dollars 
paid by MET Life, Prudential and others a few years ago. I do 
not think there were any criminal charges brought in any of 
that.
    I really do think that that Chairman Specter's idea of 
calling for what has happened in terms of actual numbers of 
criminal charges is very important information, and I hope the 
NAIC would help with that as well.
    Senator Leahy. Thank you. My time is up. I may have other 
questions. I want to go back and review some of this testimony, 
Mr. Chairman. I may have some other questions to submit for the 
record, if that is all right.
    Chairman Specter. Mr. Hunter, you have written in your 
testimony that California's Proposition 103, eliminating the 
State antitrust exemption in California and imposing more 
active State regulation, has proved to be successful in 
lowering prices for consumers and stimulating competition.
    Mr. Hunter. Yes.
    Chairman Specter. Could you amplify about that?
    Mr. Hunter. Sure. Yes. In 1988, the people of California 
enacted Proposition 103, which imposed the State antitrust laws 
on the insurance industry and also created a regulatory regime 
which is the toughest in the Nation. A lot of people would try 
to argue, there is a balance between regulation and 
competition.
    Chairman Specter. Well, that is what they did.
    Mr. Hunter. They did not balance it. They said, look, why 
not get the best benefits of both? Why not have competition and 
then use regulation as a back-stop just because they both seek 
the same goal, that is, the lowest possible rates consistent 
with a fair return.
    Chairman Specter. Mr. Hunter, come to the point from your 
written testimony where you said that it was ``a successful 
formula in lowering prices for consumers and stimulating 
competition.''
    Mr. Hunter. Yes.
    Chairman Specter. Come to that point.
    Mr. Hunter. All right. Well, as I said earlier, when the 
proposition passed California had the third highest auto 
insurance rates in the Nation, and today they are the twentieth 
highest, with about an average national rate. It is about a 20 
percent lowering relative to the national average. That is a 
very significant savings for consumers, in the tens of billions 
of dollars.
    Chairman Specter. Governor Racicot, in your testimony you 
say, ``when this committee last held McCarran hearings in 1989, 
the issue was the cost of commercial liability insurance.'' Was 
that the last time this committee looked at McCarran-Ferguson, 
was 1989, as your testimony says?
    Mr. Racicot. I believe, if I am not mistaken. I could be, 
Mr. Chairman. But my belief is that it was as late as 1994. If 
that is a reflection that it was 1989, I assumed that that was 
referring to the House proceedings. There certainly were 
considerations by Congress up through 1994.
    Chairman Specter. The House took a look at it in 1994, but 
the last time the Senate Judiciary Committee took a look at it 
was 1989. Your assistants behind you are nodding in the 
affirmative, if the record may show that.
    Mr. Racicot. That is my understanding, yes. I had it in 
reverse.
    Chairman Specter. The testimony submitted by Ms. Hoffmann 
says that ``this is not just a New York State problem, it is a 
pervasive national problem.''
    Would you agree with that, Mr. Thompson?
    Mr. Thompson. I am sorry, Mr. Chairman. You are talking 
about the problem that New York uncovered?
    Chairman Specter. Well, the issue raised here about Marsh, 
the fraud and the criminal prosecutions, the assertions made by 
Ms. Hoffmann that ``this is not just a New York State problem, 
it is a pervasive national problem.''
    My question to you is, do you agree with that?
    Mr. Thompson. Well, I have not been involved in anything 
that has been going on with the New York prosecution, other 
than what was in the general press or trade press.
    Chairman Specter. Well, your resume says, as a senior vice 
president for Insurance Services Office, ``you are responsible 
for all filing activities by regulators in the various 
States.'' Are you saying you just do not have enough 
information to agree or disagree with Ms. Hoffmann's statement?
    Mr. Thompson. In that particular case, yes, sir.
    Chairman Specter. Mr. Klawiter, do you think that is an 
accurate statement?
    Mr. Klawiter. The pleadings in the case, I think, show more 
pervasive conduct that New York looked at, and other States 
looked at as well. I think you have got to kind of focus 
attention on what comes out of that record. I think if that 
record demonstrates that the impact was in various States, that 
would certainly be considered pervasive.
    Chairman Specter. The American Bar Association, as you have 
testified, has taken the position--you are head of that 
section--that McCarran-Ferguson ought to be eliminated. Do you 
think there ought to be Federal antitrust enforcement in the 
insurance industry, like all other commerce?
    Mr. Klawiter. Absolutely.
    Chairman Specter. What is the basis for your statement? 
What factual underpinning can you provide as to the inadequacy 
of State action and the necessity for Federal antitrust 
enforcement?
    Mr. Klawiter. Well, I think, number one, our position is 
very clearly predicated on the fact that regulation is not as 
good as free and open competition. If you have a regulatory 
scheme, it is going to be looked at differently by each of the 
States.
    Chairman Specter. Can you point with any specificity, or 
could you supplement your testimony, to any antitrust 
violations that have gone unprosecuted and not pursued by the 
States, contrasted with the kind of vigorous antitrust 
enforcement that comes out of the Department of Justice, where 
you serve?
    Mr. Klawiter. I am not sure, Senator, that we could 
actually identify those. I think we could look to what the 
States have done, and note that some of those could well have 
been the subject of Federal investigation and Federal 
prosecution if, indeed, McCarran-Ferguson were not the law.
    Chairman Specter. All right. If you had State action where 
it was insufficient, the committee would be interested in that. 
I mean, you say we ought to have Federal antitrust action. The 
committee is considering the issue. If we are to act, we need 
to act on hard evidence. If you have State action which was 
insufficient, that would be probative on the issue of bringing 
in the Federal Government.
    If you have the failure of States to act where there were 
antitrust charges that ought to have been brought, that would 
be probative for Federal action and the repeal of McCarran-
Ferguson. If you could supplement your testimony in those two 
areas, the committee would be appreciative.
    Mr. Klawiter. We will do that, Senator.
    Chairman Specter. All right.
    Ms. Hoffmann, you testified that there were pending 
investigations. Did you mention Liberty Mutual? I believe you 
did.
    Ms. Hoffmann. Yes. We have brought a lawsuit against 
Liberty Mutual, and it is pending.
    Chairman Specter. And what is the gravamen of the lawsuit?
    Ms. Hoffmann. The gravamen of the lawsuit, I believe, is 
fraud, and we mentioned bid-rigging.
    Chairman Specter. Fraud and what?
    Ms. Hoffmann. Bid-rigging.
    Chairman Specter. Bid-rigging. With Marsh?
    Ms. Hoffmann. Yes.
    Chairman Specter. And what court are you in?
    Ms. Hoffmann. We are in New York State court.
    Chairman Specter. Why was the determination made to utilize 
a civil suit as opposed to the criminal prosecutions which you 
have identified in your testimony?
    Ms. Hoffmann. We brought criminal prosecutions against 
individuals. I do not believe we have brought any criminal 
prosecutions against the companies.
    Chairman Specter. Have you brought criminal prosecutions 
against individuals at Liberty Mutual?
    Ms. Hoffmann. I would have to check that. I do not recall.
    Chairman Specter. What determination do you use to decide 
when to prosecute the company, in addition to the individuals? 
You customarily cannot prosecute a company unless you have 
evidence against individuals. The individuals act for the 
company. But what are the standards that you use for deciding 
to prosecute individuals and not the company?
    Ms. Hoffmann. Do you mean criminally prosecute individuals?
    Chairman Specter. That is what I am talking about.
    Ms. Hoffmann. I believe that some of the standards used 
were the cooperation of the company, the willingness of the 
company to recognize the misconduct, and to determine and make 
sure that such conduct does not occur in the future.
    Also, the recognition that criminally prosecuting a company 
can sometimes cause far more harm to innocent individuals--
customers, employees and a segment of the industry--than would 
be warranted or wise.
    Chairman Specter. Well, thank you all for coming in. We 
would be interested, as I have said, in a supplement by your 
organization, Governor Racicot, as to the specifics as to where 
the States are acting; conversely, Mr. Klawiter, as to where 
you think the Federal Government should be in the picture.
    We would be interested in a supplement, as I have 
indicated, Ms. Hoffmann, as to what the New York cases are all 
about. You are in the prosecutor's office and you are in the 
best position to give us a summary. We would like to get the 
specifics as to what actions have been brought, all the matters 
that are of public record.
    We are not inquiring into your investigations; we 
understand the dependency of those. But where you have broad 
criminal prosecutions and gotten guilty pleas or convictions, 
we would like to know. We would like to have an amplification 
of, where you have made a judgment to prosecute individuals but 
not companies, what the factors were which led you to that 
conclusion.
    Mr. McRaith, we would like the details as to what was done 
in Illinois, what action your agency took to inform or bring in 
the State Attorney General, and what the State Attorney General 
did, and what your reasoning was in not wanting, say, the U.S. 
Attorney from Chicago to come into the picture.
    Mr. Hunter, to the extent you could give us any more 
information on California, we would appreciate it, as to what 
the success was there.
    Thank you all very much. That concludes the hearing.
    [Whereupon, at 10:54 a.m. the hearing was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.]

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