[Senate Hearing 110-25]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 110-25

 
 THE MCCARRAN-FERGUSON ACT AND ANTITRUST IMMUNITY: GOOD FOR CONSUMERS?

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 7, 2007

                               __________

                          Serial No. J-110-16

                               __________

         Printed for the use of the Committee on the Judiciary




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35-166 PDF                    WASHINGTON  :  2007

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                       COMMITTEE ON THE JUDICIARY

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










                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Leahy, Patrick J., Leahy, a U.S.Senator from the State of Vermont     1
Kennedy, Hon. Edward, a U.S. Senator from the State of 
  Massachusetts, prepared statement..............................    85
Specter, Hon. Arlen, a U.S. Senator from the the State of 
  Pennsylvania...................................................     3
Whitehouse, Sheldon, a U.S. Senator from the State of Rhode 
  Island, prepared statement.....................................   140

                               WITNESSES

Homan, Michael M., Homeowner, New Orleans, Lousisiana............     9
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America, Washington, D.C.......................................    11
Landrieu, Hon. Mary L., a U.S. Senator from the State of 
  Louisiana......................................................     6
Lott, Hon. Trent, a U.S. Senator from the State of Mississippi...     4
Racicot, Marc, former Governor of Montana and President, American 
  Insurance Association, Washington, D.C.........................    12
Voss, Susan E., Iowa Insurance Commissioner, and Vice Chair, 
  Financial Conditions Committee, National Association of 
  Insurance Commissioners, Washington, D.C.......................    13

                         QUESTIONS AND ANSWERS

Responses of J. Robert Hunter to questions submitted by Senator 
  Specter........................................................    19
Responses of Marc Racicot to questions submitted by Senators 
  Leahy, Specter, and Landrieu...................................    22
Responses of Susan Voss to questions submitted by Senators Leahy, 
  Specter, Grassley, and Landrieu................................    29

                       SUBMISSIONS FOR THE RECORD

American Council of Life Insurers (ACLI), Gary E. Hughes, 
  Executive Vice President and General Counsel, and David Leifer, 
  Senior Counsel, Washington, D.C., letter.......................    43
Homan, Michael M., Homeowner, New Orleans, Louisiana, statement..    46
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America, Washington, D.C., statement and attachments...........    52
Independent Insurance Agents & Brokers of America, Inc., 
  Alexandria, Virginia, statement................................    80
Landrieu, Hon. Mary L., a U.S. Senator from the State of 
  Louisiana, statement...........................................    88
Lott, Hon. Trent, a U.S. Senator from te Statement of 
  Mississippi, statement.........................................    93
National Association of Mutual Insurance Companies (NAMIC), 
  Washington, D.C., statement....................................    96
National Association of Professional Insurance Agents, 
  Alexandria, Virginia, statement................................   101
National Council on Compensation Insurance, Inc. (NCCI), Mary 
  Jane Cleary, Washington Affairs Executive and Counsel, 
  Washington, D.C., letter and attachments.......................   102
Property Casualty Insurers Association of America, Washington, 
  D.C., statement................................................   111
Racicot, Marc, former Governor of Montana and President, American 
  Insurance Association, Washington, D.C., statement.............   117
Voss, Susan E., Iowa Insurance Commissioner, and Vice Chair, 
  Financial Conditions Committee, National Association of 
  Insurance Commissioners, Washington, D.C., statement...........   127












 THE MCCARRAN-FERGUSON ACT AND ANTITRUST IMMUNITY: GOOD FOR CONSUMERS?

                              ----------                              


                        WEDNESDAY, MARCH 7, 2007

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Specter, Hatch, and Grassley.

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

    Chairman Leahy. Good morning. When Hurricane Katrina 
ravaged the Gulf Coast in 2005, it caused unimaginable 
devastation to the region's residents. My friend from 
Mississippi and my friend from Louisiana, Senator Lott and 
Senator Landrieu, have expended every effort to provide help to 
those who have suffered. They remind us in caucus, on the 
floor, in the hallways, in the dining rooms of the Senate, and 
in our offices that the victims are not confined to any one 
demographic group. The devastation did not care whether you 
were old or young, man or woman, white or black, or whether you 
had a political affiliation with either the Republican or 
Democratic parties.
    So today we focus on a subject that has concerned me for 
some time, a topic that in the wake of the behavior of certain 
insurance companies in the Gulf Coast has been thrust into the 
forefront. Our topic is the Federal antitrust immunity of the 
insurance industry contained in Federal law and whether we 
should end that so that the insurance industry will operate by 
the same good competition laws that apply to most other 
industries. I have never quite understood in today's day and 
age why they should have this special privilege that other 
companies do not have.
    Our Nation's competition laws can be powerful tools to 
ensure that consumer welfare is the benchmark for fair and 
accountable industry practices. Consumers benefit through lower 
prices, more choices, and better services. Those benefits come 
from competition.
    The antitrust immunity for the insurance industry, 
contained in the 1945 McCarran-Ferguson Act--I was 5 years old. 
It is about time we relook at that--raises serious concerns 
with me. Insurance industry practices affect all of us. If the 
antitrust immunity is used in a way that distorts the market, 
that leads to higher prices and poorer service, consumers 
throughout the country can be harmed.
    The potential for insurance industry abuse became clear on 
the Gulf Coast in the wake of Hurricane Katrina. Residents, who 
lost so much as a result of the 2005 hurricanes and then were 
let down by a woefully unprepared Government, were then left to 
face insurance companies refusing to fulfill their commitments 
and help rebuild. No one should have to go through what these 
Americans have been through.
    Senator Lott and Senator Landrieu can relate as well as 
anyone to the difficulty their constituents have had with 
insurers, insurers that have no problem collecting premiums 
when times are good, but cannot be found when tragedy strikes. 
Their States were hit hardest by Hurricane Katrina, and I 
commend both these Senators for their tireless efforts.
    Now that the Gulf Coast is rebuilding, two of the area's 
biggest home insurers--Allstate and State Farm--are moving out 
and abandoning the area. A recent editorial in the Times 
Picayune implored the Louisiana Insurance Commissioner to make 
sure Allstate's refusal to write new home insurance policies in 
New Orleans ``is not another systematic effort by the company 
to cancel thousands of policies for which homeowners have been 
paying premiums.''
    They are not moving out because the companies have hit on 
hard times. I believe State Farm last year announced a net 
income of over $5 billion.
    Both Allstate and State Farm want to keep their special 
status, exempt from the antitrust laws. They want to keep that 
status, but both--both--rejected my offer to come here today 
and explain to the Committee why they deserve it. I think they 
hope that their lobbyists can keep it for them and they will 
never have to tell the public why they deserve it.
    The bottom line is right now we do not know what 
anticompetitive acts insurers may be engaging in because the 
antitrust immunity insurers enjoy acts as a curtain that hides 
their activity from Federal antitrust authorities.
    The Insurance Industry Competition Act that I have 
introduced with Senators Specter and Lott and Reid and Landrieu 
would pull back that curtain to give the Department of Justice 
and the Federal Trade Commission the authority to apply our 
Federal competition laws to insurance companies.
    Our antitrust laws are about good competition policy. 
Competition is good for consumers; it is actually good for our 
economy. It is the cornerstone of our economic system. Insurers 
may object to being subject to the same antitrust laws as 
everybody else, but if they are operating in an honest and 
appropriate way, they should not have anything to fear.
    So I hope that this hearing will spark a serious, 
thoughtful debate about insurance industry practices--those 
that benefit consumers and those that do not. Insurers often 
say that their behavior is pro-competitive. Well, if that is 
true, they should have been willing to come in and testify, and 
application of the antitrust laws should not be controversial. 
Under our Federal antitrust laws, pro-competitive behavior is 
encouraged. It is time to pull back the curtain of immunity and 
let the light shine in.
    Senator Specter?

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

    Senator Specter. Thank you, Mr. Chairman. I am glad to see 
the Committee moving ahead this year to act to repeal McCarran-
Ferguson. Legislation was introduced last year. We had a 
hearing last year. We made some progress. And with the 
intervening events on Katrina and what has happened in the Gulf 
States, there is additional ammunition and facts to support 
repeal of McCarran-Ferguson. And I join you, Senator Leahy, in 
welcoming our distinguished colleagues, Senator Lott and 
Senator Landrieu.
    The McCarran-Ferguson law provides that there will be 
antitrust exemption where insurers are subject to State 
regulation. But it continues that exemption even though there 
is, in fact, no State regulation, and that has left an enormous 
void. The situation in New York with respect to the Marsh, 
McLennan case and what has happened in the Gulf States provide 
ample evidence of anticompetitive activities, collusion, and 
violations of the antitrust laws, which ought to be subject to 
Federal prosecution.
    The legislation this year eliminates two of the safe 
harbors, which was in the legislation introduced last year, and 
I would be interested in any comment by the insurance industry, 
if they have it, with respect to those two safe harbors. We 
know that the legislation introduced by Congressman Brooks in 
1994 fell under the weight of almost 50 State harbors. But the 
legislation leaves latitude for the Department of Justice and 
the FTC to identify practices which are not anticompetitive. 
But, still, the weight of the Federal Government can be brought 
to bear. And I think the realities are that unless you have a 
State like New York with the resources of the Attorney General 
and the initiatives of an Attorney General like Attorney 
General Spitzer, this is not a matter that ought to be left to 
the States. Simply stated, too important.
    So I am glad to see the Committee moving forward. I hope we 
can get this legislation to the floor, enact it, and work with 
the House to pass some effective antitrust legislation to 
enable the antitrust laws to go forward without this exemption.
    I am going to have to excuse myself for a few minutes. We 
have the county commissioners from Pennsylvania in town today, 
and the corridor and the anteroom is blocked off with quite a 
number of my constituents.
    Chairman Leahy. I wondered who all those people were.
    Senator Specter. I know that my colleagues, Senator Lott 
and Senator Landrieu, will understand that temporary priority.
    Thank you.
    Chairman Leahy. Thank you.
    Senator Lott, of course, is the Deputy Republican Leader in 
the Senate, he has been the distinguished Majority Leader of 
the Senate, and he is one of the leaders of the Republican 
Party. Senator Landrieu is the senior Senator from Louisiana. 
She is considered in our caucus a leading voice on this whole 
question of how we respond to the thousands of constituents 
whose homes were damaged or destroyed by the hurricanes and now 
nearly 2 years later are struggling.
    What I am going to do is go by seniority. We will ask 
Senator Lott to speak first, then Senator Landrieu to speak, 
and then if either of you after you speak care to join us up 
here on the dais, please feel free.
    Senator Lott?

STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM THE STATE OF 
                          MISSISSIPPI

    Senator Lott. Thank you, Senator Leahy.
    First, a bit of Whip work. I understand that the votes we 
had been told would occur at 10 o'clock have been moved to this 
afternoon.
    Chairman Leahy. That is right.
    Senator Lott. So we have a little more latitude there, 
thank goodness.
    I want to begin by thanking you, Mr. Chairman, for 
scheduling this hearing. While there was a hearing last year, I 
do not think it got quite as much attention or as much interest 
as it has developed over the past few months. But you have 
taken up this issue with courage and enthusiasm, and we do 
appreciate that very much.
    I have visited with Senator Specter several times over the 
last year about this subject. The two of you are experts in 
this area, and you have been talking about your concerns in 
this area before. And now is the time where we ask ultimate 
questions and actually act. So I thank you very much for 
providing us this forum.
    I do want to say what a pleasure it is to be here with my 
colleague from Louisiana. When you bleed together, you form a 
bond that, you know, nothing can interfere with. And we have 
stood together, we have fought together, we have worked 
together to try to help our constituents that were devastated 
by the most cataclysmic natural disaster in the history of our 
country, Hurricane Katrina. We have worked together, and the 
cosponsorship of this bill is symbolic of how we have 
approached this. This is not an issue that is partisan or 
philosophical, and you do not have to be a lawyer to ask 
questions about how this happened and what does it really mean 
and how does it affect people that need help.
    I want to note that there is a homeowner here--I am sure 
Senator Landrieu got him here--Michael Homan from New Orleans, 
and he is going to tell his personal story. We are fellow slab 
owners. It is a strong association that has been formed. And I 
think it will be interesting to hear his story.
    You know, I did not come at this issue from the standpoint 
of a plaintiff lawyer or somebody that had it in for the 
insurance industry. I did not, and I still do not. All I want 
is for them to do the right thing and to properly pay people 
for the insurance coverage that they had.
    I could go on a long litany of questions and concerns, 
disappointments, hurt, and horror that I have found since 
Hurricane Katrina. I had all of my insurance for over 50 years 
with State Farm, and when I practiced law, I practiced law with 
a predominantly insurance company defense firm. But somehow 
along the line there, I missed the point that McCarran-Ferguson 
actually gives an exemption from our antitrust laws to the 
insurance industry. And as I witnessed the behavior of the 
industry in their response to Katrina, which until this day 
continues, even though there have been some fits and starts, 
some indications maybe they are going to do more, and denials 
that there was any kind of collusion or that there is any kind 
of price fixing, I got more and more curious about the history, 
the rationale, and the wisdom of such a broad exemption from 
Federal oversight.
    So I took the time to go back and look at it, like any 
semi-good lawyer ought to. How did this happen? And I found 
that until 1944, regulation of business of insurance resided 
securely with the States based on the rationale that this 
business did not meet the legal definition of ``interstate 
commerce.'' That year, 1944, the insurance industry was turned 
on its head by a Supreme Court decision in the case of United 
States v. South-Eastern Underwriters Association. By signaling 
that the business of insurance is interstate commerce, the case 
brought about a knee-jerk reaction from Congress in a bill that 
would eventually be known as McCarran-Ferguson.
    Soon after that decision, Senators McCarran and Ferguson 
introduced a bill that within just 2 weeks and without any 
hearings and without any significant debate--basically no 
debate--passed the Senate. The House passed a similar measure 
with little debate. A review of the Congressional Record shows 
clearly that the intent of both Houses was to provide only a 
temporary moratorium rather than a permanent exemption.
    It was while the bill was being discussed by the conference 
Committee that a seemingly innocuous phrase was inserted. It 
was this modification--not in either the House or the Senate 
versions of the bill--that, when judicially interpreted, turned 
a temporary moratorium into a permanent exemption.
    The House approved the conference report without debate. 
The Senate, in contrast, finally woke up and debated the 
conference report for 2 days. Again, the record of the debate 
clearly shows that a permanent exemption was not the intent of 
those who voted for its passage.
    So clear was the intent that President Roosevelt, upon 
signing the bill, stated the following in the press release: 
``After a moratorium period, the antitrust laws...will be 
applicable in full force and effect to the business of 
insurance....''
    So what happened? The problem resides in the interpretation 
of that phrase, ``regulated by State law.'' Under the McCarran-
Ferguson Act, insurers are exempt from Federal antitrust 
scrutiny as long as they are regulated by State law. Courts 
have interpreted this phrase to require only that State 
regulators have jurisdiction over particular conduct, 
regardless of whether that authority is ever exercised.
    Now, here is what I found the problem is. You know, when I 
came to Washington, I guess I was pure in a lot of areas. As 
the years have gone by, I have found I am not pure in any area 
because I find that there is always another side to the story. 
There is a colorization. Yes, I think State insurance 
commissioners have a primary role. I do not want, you know, 
insurance regulation just to be taken over by the Federal 
Government. But I have also found this. Insurance commissioners 
are in a terrible quandary. If they do not allow the insurance 
companies to jack up their rates 200 percent, 400 percent, or 
endlessly, they run the risk of the company, whether it is 
Allstate in some States or State Farm in my State, saying, 
``Hey, we are out of here. We are not going to provide property 
and casualty insurance. Oh, but we will continue to pick off 
that nice plum auto insurance and commercial insurance.'' And 
the insurance commissioner is in a real difficult position.
    But it goes beyond that. You know, antitrust laws. 
Shouldn't every corporation in America have to comply with 
that? How do we make sure that there is not price fixing or 
collusion or anticompetitive conduct of one kind of another? 
There should be some Federal role here.
    I cannot for the life of me understand why we have allowed 
this exemption to stay in place so long. If there is no 
problem, then what is their concern? I have been surprised by 
their reaction to this, saying ``You cannot possibly do this.'' 
And, of course, what they are going to do is often what 
happens. The big guys are going to call the little guys in my 
State and tell them, ``Wait a minute. The ones that are going 
to be hurt by this are the little insurers. They need this rate 
information.''
    Mr. Chairman, I know you wanted us to limit our time, and I 
do not want to get too carried away because I get so angry and 
so passionate about what I have experienced here, and I have 
been so disappointed by the response of an industry when we 
needed them the worst. And I found there are many problems in 
the law, and I am going to do my best to find a way to fix as 
many of them as we can--not for myself. They even, you know, 
had the temerity to say, ``It is just because you are mad about 
your house.'' Yeah, I am. But the Good Lord made sure I lost my 
house so I would feel the pain of everybody else that did. 
Thirty-seven thousand people in my State were devastated by 
this hurricane, and many more injured, not to mention those in 
my neighboring State of Louisiana that continues to have 
terrible problems because they had a flood. We had a hurricane.
    [The prepared statement of Senator Lott appears as a 
submission for the record.]
    Chairman Leahy. Well, Senator Lott, I know your concerns. 
You and I had the privilege of representing the United States 
overseas in the last few weeks. We traveled together, and we 
had long discussions of it. I know how passionate you feel, and 
I appreciate you being here.
    Senator Landrieu, would you please?

  STATEMENT OF HON. MARY L. LANDRIEU, A U.S. SENATOR FROM THE 
                       STATE OF LOUISIANA

    Senator Landrieu. Yes, Mr. Chairman. I am pleased to join 
my colleague Senator Lott. He and I have fought many battles 
together, and won more than we have lost, thank goodness, over 
the last 18 months. And we intend to win some more for the 
people that we represent. Because as both of us have said time 
and time again, this Government was caught flat-footed with 
very limited response to the greatest natural disaster to hit 
the United States. And we need to fix many different aspects of 
that response.
    But we are here this morning to talk about one aspect that 
needs serious fixing. Mr. Chairman, there is an insurance 
crisis along the Gulf Coast and probably over the Atlantic 
Coast, if not in the whole Nation. In New Orleans today and in 
parts of South Louisiana and Mississippi, even people that 
might have a plan and money to rebuild cannot do so because 
they cannot either get or afford insurance for the rebuilding.
    So the billions of dollars that the Federal Government has 
sent down to the States, all the efforts that the States and 
the local governments are making, are put at risk because of 
this real and serious insurance crisis. It needs to be 
addressed, Mr. Chairman, not just in the courts where justice 
may come, but come quite slowly, and, unfortunately, too late 
for many. Justice needs to be found here in Congress through 
the repeal of this Act, if it was unintended, as Senator Lott 
stated, or through other actions of the Banking Committee and 
others to give people real relief.
    Mr. Chairman, this is a crisis. I have recently heard of 
one company that has raised premiums by 145 percent. In Orleans 
and Jefferson Parish, it is not unheard of for carriers to be 
raising rates by 50 percent. It is not just homeowners who are 
at risk, all 250,000 who have lost their homes. But, Mr. 
Chairman, it is our shopping centers, our commercial sector 
that is having difficulty finding insurance. And if they cannot 
find insurance, the rebuilding is slowed down and people's 
lives and fortunes and futures are put at risk. This insurance 
crisis right now goes to the heart of rebuilding, and Congress 
does have a role.
    And so I want to thank you, Mr. Chairman, for calling this 
hearing. Perhaps repeal of this statute is a way to move 
forward, and there are other options at other committees. But I 
want to make just three brief points.
    I know that some of my critics say, ``Senator Landrieu, all 
you ever worry about is what the Federal Government can do or 
what governments can do to help people in crisis.'' Now, I will 
say that I am guilty of believing that Government should be 
bold and strong--not big and wasteful, but bold and strong. But 
I also believe the private sector should work, and at the heart 
of the private sector working is private insurance.
    Mr. Chairman, the Flood Insurance Program that we have only 
covers up to $250,000 worth of damage. Can I say again that 
there were homeowners that had homes worth $1 million, 
$750,000, $500,000. This is not unheard of in our middle-class 
communities to have homes of $350,000, $400,000, and $500,000. 
Our flood insurance has not kept pace with this, so people that 
even if they had flood insurance, they did not have proper 
coverage.
    Without the right kind of private sector insurance and the 
right kind of, I guess, government-regulated flood insurance, 
our people have no chance of a full recovery after this 
catastrophic disaster or in the future.
    So I cannot tell you how important it is for us to unturn 
every stone where we might find a solution. There is urgency 
about this problem, and I stand shoulder to shoulder with my 
colleague from Mississippi until we find a solution to the 
people along the Gulf Coast.
    This is, as we have said, America's only energy coast, Mr. 
Chairman. This is not a coast the country can do without. And 
without real and meaningful and serious insurance reform, our 
recovery is at risk. There will not be anybody there to run the 
pipelines. There will not be anybody there to produce the oil 
and gas, because we will not be able to live anywhere near this 
coast, and that is not fair to the people who have lived here 
for over 300 years.
    So I thank you for your attention, and as you know, I am 
cosponsoring several other bills. But I really appreciate the 
attention of this Committee, and I will be pleased to stay for 
a few minutes Thank you, Mr. Chairman.
    Chairman Leahy. Well, thank you, and I would invite both of 
you to come join us up here. And I realize you both have other 
things to do, so feel free to stay as long or as little time as 
you would like.
    [The prepared statement of Senator Landrieu appears as a 
submission for the record.]
    Chairman Leahy. We will just take a moment here while we 
put the other names out. I will just tell you who is going to 
be appearing.
    We are going to have Dr. Michael Homan, who is an associate 
professor of theology at Xavier University in Louisiana, and he 
and his wife had moved to New Orleans and purchased a home 6 
years ago. The home was severely damaged from the winds of 
Hurricane Katrina and the flood waters that remained in their 
house for 2 weeks after the levees failed. Dr. Homan is now 
engaged in a legal battle with Allstate Insurance Company.
    We have J. Robert Hunter, who is currently the Director of 
Insurance for the Consumer Federation of America. He comes 
before this Committee with a wealth of knowledge of the 
insurance industry. In the past, he has served as the 
Commissioner of Insurance for the State of Texas, as the head 
of the Federal Insurance Administration in both the Ford and 
Carter administrations, and is President and Founder of the 
National Insurance Consumer Organization.
    Governor Racicot, the former Governor of the State of 
Montana, is well known to all of us here. He began his tenure 
as President of the American Insurance Association August 1, 
2005. He had before that experience in both the public and 
private sectors, joining AIA from the law firm of Bracewell and 
Giuliani where he had been a partner in the government 
relations strategy section. In addition to serving as Governor 
of Montana, he served as a special prosecutor and Attorney 
General for the State of Montana, which, of course, with a 
number of former prosecutors on this Committee on both sides of 
the aisle, we are always delighted to see.
    Commissioner Voss is from the Iowa Insurance Division, and 
I wonder, Senator Grassley, if you might take over and 
introduce her. You know her best.
    Senator Grassley. I sure would like to do that.
    I know, from working with Susan very closely on a Federal 
program she administers called the Senior Health Insurance 
Information Program, how hard she and her staff worked to help 
us get Part D put in place, Part D of Medicare. I thank you 
very much for that.
    Obviously, her major responsibilities are helping the 
insurance industry and governing the insurance industry in the 
State of Iowa. She has been with the division since 1993. In 
1999 she was appointed First Deputy Commissioner for the Iowa 
Division, and the Iowa Insurance Division is our Department of 
Commerce in State government there. And she has now been the 
Iowa Insurance Commissioner since January 1, 2005. So I welcome 
you.
    And I am also a good friend of Bob Hunter's. I do not know 
whether he wants to admit that or not.
    [Laughter.]
    Senator Grassley. Actually, I have known him longer than I 
have known Susan.
    Chairman Leahy. And he is good friend of mine. That may 
kill you back in Iowa, but--
    Senator Grassley. Well, anyway, I welcome you, too, Bob. 
And I have been in the Governor's office in Montana when you 
were still Governor, so I am glad to have you with us as well.
    At 10 minutes after the hour, I am going to leave because I 
have a news conference with Senator Thune that I have to go to, 
but I will hopefully be back after that.
    Chairman Leahy. Would you all please stand and raise your 
right hand? Do you swear that the testimony you are about to 
give to this Committee will be the truth, the whole truth, and 
nothing but the truth, so help you God?
    Mr. Homan. I do.
    Mr. Hunter. I do.
    Mr. Racicot. I do.
    Ms. Voss. I do.
    Chairman Leahy. Let the record show that all were sworn in, 
which is customary here, and I am going to limit your opening 
statements to 3 minutes each. That is to give us time for 
questions, only because we have a joint meeting of the Congress 
this morning which will pretty well wipe us all out. Your whole 
statement, however, will be made part of the record.
    Mr. Homan, please. Press the little button.

    STATEMENT OF MICHAEL M. HOMAN, HOMEOWNER, NEW ORLEANS, 
                           LOUISIANA

    Mr. Homan. Chairman Leahy and members of this Committee, 
thank you for holding a hearing on this important issue.
    Like many in the Gulf Coast region, my family's lives were 
forever changed by Hurricane Katrina. But what brings me here 
today is the second personal tragedy that my family and I have 
suffered since Katrina because of the bad faith of Allstate 
Insurance over the past 18 months.
    My wife, two children, and I currently live in a FEMA 
trailer in the front yard of our collapsing home in New Orleans 
as we continue to battle with Allstate over our insurance 
claim. We insured everything we had with Allstate. This 
included wind and flood. They cashed every check we gave them. 
We slept well every night thinking we were adequately insured 
with the self-designated ``good hands'' people, but we were not 
in good hands.
    I was inside our house during Katrina, and it was like 
being on a large boat rocking back and forth from the wind 
gusts. The winds ultimately racked our two-story house so that 
now it leans severely. The house next door to ours is leaning 
in the same direction.
    After the levees failed, flood waters covered the first 3 
feet of our house, and this water remained for more than 10 
days, damaging the foundation and piers, causing our house to 
lean even more. Right now as I speak, our home is in danger of 
falling onto our neighbor's house.
    We filed a claim for wind and flood with Allstate the day 
after Katrina. We expected things to move along quickly, but we 
were wrong. We called Allstate every day for several months, 
and we wrote them frequently. But we rarely received answers. 
They played a shell game with us, providing us with ten 
different agents through this ordeal, and it took 9 months to 
even get a wind adjustor to come to our house.
    The third flood adjustor we had arrived in October of 2005, 
and right away he could see our house was leaning, and he 
ordered an engineer from Allstate to assess whether it was 
racked from wind or flood. We did not care either way. 
Everybody told us they would say it was racked from flood and 
they would pay us. You know, either way, we did not--just so we 
had enough money to fix our house. But then we waited and 
waited, and the engineers never showed up. We were told that 
everything hinged on that report, and we were told to be 
patient.
    Several months passed, and we were running out of savings. 
We had to pay for our rent on top of our mortgage. We were 
insured so that Allstate would pay us additional living 
expenses should our house be destroyed or be in an unlivable 
state like ours was. But Allstate said they would not pay any 
of that until they received the engineer's report. Because of 
our financial situation, my family and I were forced to move 
back into our structurally unsound home and spent 9 months 
living in the upstairs portion that did not flood.
    Finally, in February of 2006, after 6 months of phone calls 
and letters, two men from Haag Engineering arrived at our 
house. They spent 15 minutes there taking pictures, and then 
they left. We did not hear anything until May of 2006 when I 
received a letter from Allstate saying they were denying our 
claim for structural damage because of the Haag engineers' 
report. So we were terrified. We had a $150,000 mortgage for a 
property that was worth now about $30,000. We thought about 
declaring bankruptcy, but we did not want to live with bad 
credit.
    Fortunately for us, the Haag engineers' report is full of 
huge mistakes. They have pictures that do not belong to our 
house. They call our house ``the Wilson house.'' You know, it 
was ridiculous. They said it was not windy enough during 
Katrina to make a house lean, even though lots of houses in our 
neighborhood have collapsed.
    My story is not unique. I have heard from dozens of other 
people in the same situation as us that the insurance company 
gets an engineering firm to write the report they desire, and 
then they deny the claim. And the insurance company will not be 
liable because they relied on expert witnesses, so-called 
expert witnesses.
    I see I am out of time, so I will stop there.
    [The prepared statement of Mr. Homan appears as a 
submission for the record.]
    Chairman Leahy. Well, thank you, and I apologize for 
limiting the time but, otherwise, we would not be able to have 
the hearing today.
    Mr. Hunter?

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

    Mr. Hunter. Thank you, Mr. Chairman. I am here on behalf of 
Consumer Federation and several other consumer groups, 
including Consumers Union, nine groups in all who are offering 
our enthusiastic support of S. 618 today.
    In the last 3 years, the property/casualty insurance 
industry realized record profits despite all these hurricanes. 
Over the 3 years, the profits were $157.4 billion, equal to a 
profit of approximately $525 for every American. At the same 
time, we have heard what is going on on the coast, access of 
insurance being denied and the claims not being settled.
    Coastal residents have suffered as a result of the 
antitrust exemption. Like all of America, the exemption allows 
anticompetitive practices, such as joint price setting that 
impacts the majority of the rates for many companies affiliated 
with cartel-like rate bureaus; joint policy language 
development by these bureaus; use of the same or similar low-
ball claims settling computer programs by many companies, and 
other practices that would be illegal if it were not for the 
exemption of McCarran.
    In the Katrina situation, several of these practices did 
specific harm. First, claims were being settled under the 
outrageously unfair anti-concurrent-causation clause adopted 
simultaneously by many insurers through the actions of rate 
bureaus.
    Second, ISO, the rate bureau, signaled that the market was 
overexposed on the coastline. Days later, 150,000 homes were 
dropped, and the exodus continues today.
    Third, the unregulated rate guidance organization, Risk 
Management Solutions that does its modeling of hurricanes, 
changed its model, causing home insurance rates to jump 40 
percent on the Gulf Coast and by 30 percent up to Maine. The 
new model breaks the promise of the use of a long-term model to 
achieve stable prices and instead uses a mere 5-year time, 
under the theory that it is a high hurricane activity and they 
have to raise prices. It is shocking, it is unethical, that 
scientists have, under pressure from the insurers, which is 
obvious, completely changed their minds, all at the same time 
after 10 years of assuring everybody that the models they were 
using were scientifically sound. I encourage you to look at the 
revelations in the Tampa Tribune where some of these experts 
they used now say that it was not a scientific effort.
    Finally, many insurers use identical or similar claims 
processing systems that are designed to systematically underpay 
claims. These systems have been recommended by common 
consultants and sold and maintained by common vendors--all the 
earmarks of possible collusion to underpay claims. The 
President and Congress ought to look into it.
    Consider this startling statement from the President of the 
Association of Property/Casualty Claims Professionals: ``I was 
ashamed. It was as if some small group of high-level financial 
magnates decided that the only way to save the industry's 
financial fate from this mega disaster was to take a hands-off 
approach, hide behind the waves, and the flood exclusion. The 
carriers behaved as one.'' This is from the President of the 
Property/Casualty Claims Professionals.
    I have run out of time, too.
    [The prepared statement of Mr. Hunter appears as a 
submission for the record.]
    Chairman Leahy. Again, I apologize. And I have read the 
statements. They will be part of the record, and I do 
appreciate that.
    Governor Racicot?

   STATEMENT OF MARC RACICOT, PRESIDENT, AMERICAN INSURANCE 
                 ASSOCIATION, WASHINGTON, D.C.

    Mr. Racicot. Good morning. Thank you.
    Last June, I testified before this Committee on McCarran, 
and I appreciate the opportunity to be here again this morning 
to do the same thing, and I would like to focus on three 
critical issues--briefly, obviously: first, McCarran's role in 
balancing insurance regulation and antitrust enforcement; 
second, the scope of McCarran's limited Federal antitrust 
protection; and third, the downside of McCarran repeal.
    Congress enacted McCarran in 1945, and it did two things: 
it delegated to the States the authority to regulate and tax 
the business of insurance, and it withheld application of 
Federal antitrust laws to the extent that States, in fact, 
regulated the business. So McCarran authorized the States to 
determine how the balance of State regulation and Federal 
antitrust enforcement would be drawn, but did so on the 
condition that the Federal antitrust laws would apply to the 
business of insurance to the extent that a State did not 
regulate the industry.
    Thereafter, States weighed the benefits of broad regulation 
against open-ended antitrust litigation and decided to strike 
the balance in favor of comprehensive regulation. They all 
adopted pervasive insurance regulatory schemes, including 
numerous antitrust type protections. Not surprisingly, that 
same balance has been adopted for federally regulated banking 
and securities industries.
    In achieving that balance, the Federal courts have held 
that antitrust scrutiny is inappropriate where an activity is 
carried out in conformity with a regulatory system established 
by Congress. If that were not the case, chaos would rule. 
Private antitrust litigation constantly would battle regulatory 
systems for primacy, creating enormous uncertainty for 
businesses and consumers to no one's benefit.
    Thus, McCarran strikes the same balance of regulation 
versus antitrust enforcement for insurance that exists for 
federally regulated banks and securities firms, and without 
McCarran, that balance would be undercut.
    There is a persistent misunderstanding about the nature of 
McCarran's protection, and I hope to make my testimony very 
clear on this point today. McCarran is less of an insurance 
antitrust exemption and more of a guide for the States in 
balancing the regulation and antitrust enforcement roles for 
the business of insurance. Equally important, McCarran 
antitrust protection only applies to the business of insurance 
to the extent that it is regulated by State law. It does not 
apply to activities that constitute boycott, intimidation, or 
coercion, whether or not those activities are regulated, and it 
does not provide any protection from the numerous antitrust 
provisions in State law.
    Which leads to the question of whether Senate bill 618 
repealing McCarran's narrow antitrust protection would be 
helpful or harmful. We strongly believe it would be harmful. 
The balance between regulation and antitrust enforcement would 
be destroyed, replaced by an uncertain system that adds another 
layer of Federal antitrust enforcement in addition to the one 
that is already there, on top of the State regulatory system. 
We do not think that is in the best interest of either 
consumers or the people of this country or the individual 
States.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Racicot appears as a 
submission for the record.]
    Chairman Leahy. Well, thank you very much, Governor. 
Commissioner Voss?

 STATEMENT OF SUSAN E. VOSS, IOWA INSURANCE COMMISSIONER, AND 
     VICE CHAIR, FINANCIAL CONDITIONS COMMITTEE, NATIONAL 
    ASSOCIATION OF INSURANCE COMMISSIONERS, WASHINGTON, D.C.

    Ms. Voss. Thank you for inviting me to come here today. I 
am working with a small group of commissioners at the NAIC to, 
in fact, review Senate 618, and I want you to know just very 
briefly that we support the underlying intent of Senate 618 
because our No. 1 goal is to protect consumers by enabling 
investigations to take place. We want to make sure that the 
consumers are protected from the bad actors, and we would 
suggest that with our State experience and limited use of the 
antitrust provisions, we could work collaboratively together as 
sort of a cooperative federalism to ensure that those bad 
actors no longer prey on our consumers.
    We understand that there are practices out there that need 
to be reviewed, but we also would caution you that there are 
examples when we at the State level know that providing 
information between carriers can be important to our consumers. 
And we want to make sure that we strike a balance between any 
regulation that you would see fit with the exemption of this 
antitrust--with the repeal of this antitrust exemption, that we 
can continue to seek positive rates for our consumers and 
protect them as it is important.
    We are totally in agreement that we want to protect against 
offensive conduct. We just want to make sure that whatever 
types of exemption that you see fit to pass does not impede our 
continued work with State regulation and to protect our 
consumers and our industry. We would very much like to continue 
working with you in a strong dialog to see that whatever is 
crafted is best for our consumers and our industry overall.
    The NAIC is continuing to review Senate 618. In fact, we 
are meeting in New York City beginning this weekend to further 
review your proposal, and with your permission, we would like 
to present you with additional information once we have met 
this next week.
    Thank you.
    [The prepared statement of Ms. Voss appears as a submission 
for the record.]
    Chairman Leahy. Of course, and we will leave the record 
open for that, and I appreciate that.
    Mr. Homan, you know, I am listening to your story, and I am 
thinking of my own home in Vermont. If something like that had 
happened, with all the memories of the home, how much it would 
hurt to lose the home, but even more, how much it would hurt to 
think I am not going to get the money to rebuild it.
    The situation you have described, is this similar to what 
your neighbors have had? I mean, you must have talked to other 
people there. Are they facing the same problem in rebuilding?
    Mr. Homan. Yes. Since Katrina, of course, I have gotten to 
know my neighbors, at least those who are back, better than 
ever before. We are working all together. I would estimate that 
in my neighborhood of Mid-City New Orleans, approximately a 
third to half the people are back, and you can just go down the 
line. The people that are back, the insurance company settled 
with them, you know, in a fair and adequate means, and they 
were able to rebuild. My neighbor right across the street right 
now--Steve--is just days away from moving back into his house. 
And, you know, we are just still waiting. We know once we 
settle--we have just settled with the Road Home just a couple 
weeks ago, and we think we will have enough funds to rebuild 
with that. It will be a little bit short because they canceled 
our SBA loan because we are getting the Road Home funds.
    But, in any case, we think we will be fine. But we will 
start rebuilding in a month or two, and it is going to take 
another year. So it is a long time. You know, I have a 6-year-
old kid and an 11-year-old daughter who are going through this. 
So I question my parenting skills a lot of times because of 
this. But, in any case, you know, I would say a third to half 
the people are back.
    Chairman Leahy. Thank you.
    Mr. Hunter, based on your experience, would Mr. Homan's 
situation have been resolved the same way if he had been 
insured by one of the other major property insurers?
    Mr. Hunter. Well, we know, for example, that Haag 
Engineering was used by more than one insurance company. I am 
sure Senator Lott can tell you about Haag Engineering in 
Mississippi, for example, with a different insurance company 
than Allstate. And so your chances of being in Mr. Homan's 
situation with a different insurance company is certainly high. 
Obviously, I think there are some examples that are different, 
but just being with another insurance company would not assure 
a different result.
    Chairman Leahy. You have talked about the Risk Management 
Solutions, RMS, using models, as I understand, to set premium 
rates that take into account long-range weather disaster 
predictions and so on, and used to assure there would be no 
need to raise rates after a catastrophic weather event. Can 
such a system work for consumers?
    Mr. Hunter. Sure, a long-term modeling system would bring 
stability. In fact, that was the way it was sold to us when I 
was working with the State of Florida, working with the 
academic task force after Hurricane Andrew. We were told that 
one of the things they had to do was price hurricanes in a new, 
different way, and they were right. The insurance companies did 
underprice it before Andrew, and they went to this long-term 
modeling, and it was sold on the basis that once we have a 
long-term, say 10,000-year, projection, we will bring stability 
into the coast. That means big rate increases today.
    Then I became Insurance Commissioner in Texas, and they 
came over and they said, ``We have got these new models. You 
are going to have to double, triple, quadruple the rate.'' I 
had to go to my Governor, Ann Richards, and say, ``Gee, we have 
got to double, triple, quadruple the rate, but we are buying 
stability.'' Now they have switched to a 5-year model, which is 
a total, in my view, renege of the promise, and I encourage you 
to read the Tampa Tribune series. It is obvious that it is 
unraveling, that it was pressed on them by insurance companies, 
and a lot of these big rate increases that we are facing along 
the coast have to do with collusion and pressure being brought 
to bear on these modelers to raise the rate and to throw away 
the science.
    Chairman Leahy. Thank you.
    Governor Racicot, I was listening to your testimony, and 
you were talking about the things that are allowed under 
McCarran-Ferguson, that the Congress has allowed by passing 
that bill. But, of course, unsaid in that is that if we repeal 
the law, then you have a whole different field in which you 
have to act.
    You acknowledge in your testimony that certain collective 
activities by insurers would result in antitrust verdicts 
against the insurers. But the antitrust laws, of course, were 
developed to permit collective activities that benefit 
consumers and prohibit those things that harm consumers.
    Mr. Hunter has talked about certain collective practices by 
insurers that harm consumers, including actions setting rates 
that yield high prices, inclusive actions on claims practices 
that would reduce payouts.
    Are these the activities that you say would violate the 
antitrust laws?
    Mr. Racicot. I would say anything that focuses upon price 
setting or collusion of any kind whatsoever would be clearly 
against the law and ought to be vigorously prosecuted. What I 
am suggesting--
    Chairman Leahy. And would not be shielded by McCarran-
Ferguson?
    Mr. Racicot. There are State laws in virtually every single 
one of the States that we are talking about this morning, State 
antitrust laws, and clearly anything that is not regulated by 
the State is scrutinized in a searing fashion is subject to 
Federal application of the antitrust laws. And, Senator Leahy, 
if I could add, the testimony we have heard this morning fills, 
I think, every one of us with extraordinary sorrow and regret, 
and it is very moving, and these are very serious problems. But 
the repeal of McCarran-Ferguson really does not have much to do 
with these issues at all, because, quite frankly, it has to do 
with whether or not in the light of day you are going to allow 
for the activity of insurance companies to actually bring a 
better bargain to consumers. There is a good reason to take a 
look at data collection. There is a good reason to compare loss 
figures. There is a good reason to establish residual markets. 
And you cannot do that without information.
    But if you have the specter of antitrust Federal law 
enforcement staring you in the face because you simply will not 
proceed with the kind of disclosure that would allow for that 
kind of information to be distilled and used in driving a 
better bargain for consumers. That is what Congress recognized 
in 1945.
    Chairman Leahy. Well, my time is up, and as has been 
testified, in 1945, I think as Senator Lott pointed out, there 
were--you could go back in the history and have a different 
view of it. It is the law today. Neither of us debate that. Our 
debate is going to be whether we want the law to continue.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Governor Racicot, in your written testimony, you argue that 
the McCarran-Ferguson Act is based on the key principle that 
where there is an effective regulatory system in place, it 
should not be duplicated through application of the Federal 
antitrust laws.
    Now, I do not disagree with you that Congress has at times 
passed laws reflecting the view that active regulation was 
sufficient to deter harmful behavior, making antitrust 
enforcement duplicative and, of course, unnecessarily 
burdensome. But I do have some questions about the rationale 
for applying those arguments in the context of the insurance 
industry.
    First, it seems to me that this dichotomy between 
regulation and antitrust enforcement arises primarily with 
respect to regulated monopolies and industries subject to 
common carrier regulation. In general, this type of regulation 
included things such as the strong rate regulation to limit the 
extraction of monopoly profits from consumers, obligations to 
offer service to everyone within a specified service area, and 
prohibitions on discontinuing service without obtaining 
regulatory approval.
    Now, the question I am going to ask is this: To what extent 
do the States currently have this type of regulation for 
insurance providers? And, of course, after you respond, I would 
like to hear from Commissioner Voss and then Mr. Hunter as 
well, if we could.
    Mr. Racicot. Well, Senator Hatch, I would argue that there 
is no industry in America, no financial services industry in 
America that is more heavily regulated than the insurance 
industry at the State level, and sometimes in our mind some 
overregulated. Insurance Commissioners most certainly have the 
capacity to do anything and the regulatory process is to ensure 
that a company does not to go into insolvency because it simply 
cannot meet its financial obligations.
    So the bottom line is there is a very pervasive, universal 
system of regulation and control across the United States of 
America. Every State in the Union has either antitrust 
provisions or deceptive practices provisions in place, and they 
are vigorously enforced. And as a consequence of that, I think 
what Congress recognized in 1945 was this: that it was better 
in the light of day to advance discussions out into the 
marketplace that allowed for data to be used in a common 
fashion so as to bring a better price and a better product to 
the consumers of this country. They provided for the exemption 
to allow for those things without antitrust enforcement 
impinging upon the industry's ability to do that.
    We believe the same thing Senator Leahy talked about in his 
opening comments, and that is, driving a bargain in the light 
of day is in the best interest of the consumers of this 
country, the more competition, the better. That is why you will 
see the testimony from the National Association of Insurance 
Commissioners reflects that there are in excess of 5,000 
insurance companies in this country, property/casualty 
companies, that provide coverage. I do not think you will find 
one of them that believes that proceeding in this fashion is a 
good idea for consumers or for States. And the reason for that 
is they know that business is being conducted in the light of 
day and that this is in the best interest of consumers.
    Senator Hatch. Well, thank you.
    Commissioner Voss?
    Ms. Voss. Thank you, Senator. I would add that while I 
think that I like to believe that State regulators do an 
excellent job--and we do care about consumers. In Iowa, we have 
the lowest auto rates in the country, some of the lowest worker 
comp rates. So we know that there is good competition. But I 
would admit that there are some bad actors out there. There are 
some issues that we would enjoy the cooperation of the Federal 
Government. If you go back and look at the Marsh issue and at 
that time Attorney General Spitzer--I mean, we recognize there 
are times where we could work together effectively on certain 
issues, and we would welcome that relationship very much.
    Having said that, we do know that--I believe we do an 
excellent job at rate review and consumer protection when there 
are unfair claim practices. And so we are concerned that we 
would open the door too much. But as I have said before, I 
think we welcome the ability to work with you when we believe 
there are issues of bad faith and perhaps criminal activity in 
our own industry. And we do know that occurs.
    Senator Hatch. Well, thank you.
    Mr. Hunter?
    Mr. Hunter. State regulation is very weak. Half of the 
regulatory money and people are in four States. Those four 
States come close to perhaps meeting your standard. I would say 
no State meets the State action doctrine standard that would 
apply if--and, therefore, if they really wanted to oust 
antitrust--if you repealed this, they would have to upgrade.
    The problem is the courts oust the antitrust enforcement of 
the Federal Government on just the law on the books, no matter 
how weak or not even enforced. And you can look at the record 
on that. And so you have a lot of States with virtually no 
capacity to regulate.
    Senator Hatch. My time is up, Mr. Chairman.
    Chairman Leahy. I know all of you have traveled a long way 
to be here. Because of the joint meeting, I am going to leave 
the record open so people can submit questions. Also, if there 
is no objection, I am going to leave the record open so that 
both Senator Lott and Senator Landrieu can submit questions. I 
know that Senator Landrieu has talked to me about Mr. Homan's 
situation and has questions, and Senator Lott has, and without 
objection, we will leave the record open.
    I thank all of you for coming. Those who testify here on a 
regular basis know that sometimes these things get truncated, 
but it is appreciated and it is important.
    Mr. Homan, thank you for making the trip here. Commissioner 
Voss, make sure that the Senators from Iowa treat you well 
while you are here in town. Take care.
    [Whereupon, at 10:30 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
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