What the Public Needs Is Collusion Insurance

If Ben and Jerry get together with Dreyer and Breyer and agree to double the price of their ice creams, they can go to jail for three years and pay $1 million in fines. Their agreement would violate antitrust laws, which prohibit businesses from conspiring to raise prices or otherwise restrain competition. But if executives at Allstate and Aetna agree to double the price of their insurance, they can’t be jailed or fined, since under the McCarron-Ferguson Act insurance companies are essentially exempt from antitrust prosecution. During the 1985-86 insurance crisis, therefore, insurers collectively were able, with impunity, to raise the rates they charged municipalities, small businesses and others.

But according to a complaint filed last month in San Francisco against four leading American insurance companies and other insurance-industry defendants by eight state attorneys general, several insurers went one step too far during the insurance crisis: They agreed not to sell certain types of insurance at any price. Such agreements, called boycotts, are illegal even in the insurance industry.

Like Humphrey Bogart’s police-officer friend, played by Claude Rains, in the movie “Casablanca,” insurance companies say they are shocked-- shocked --at the boycott charges. After all, in April, 1986, a Justice Department official (and future Supreme Court nominee), Douglas H. Ginsberg, refused to investigate evidence of an insurance-industry boycott. But while Ginsberg shut his eyes, state attorneys general were taking testimony from insurance executives and subpoenaing insurance-company records.

The investigators found written evidence that major insurers and reinsurers--companies that insure insurance companies--conspired to force the entire industry to reduce the coverage offered businesses, municipalities and nonprofit organizations--and to stop selling pollution coverage entirely.

The state officials discovered such “smoking guns” as a letter from the reinsurers trade association to the insurers trade association announcing that no American reinsurance company would reinsure insurers who sold the old, broader coverage; and a document entitled “Non-Marine London Market Agreement,” signed by 43 major international reinsurers, in which the signatories agree not to reinsure pollution coverage.

Several factors made the insurers conspiracy unusually effective:

The importance of reinsurance. Just as individuals and businesses pay insurers a premium in exchange for coverage of a policyholder’s loss, insurers pay reinsurers a premium in exchange for the agreement to pay a portion of what the insurer pays. Because states generally prohibit an insurer from insuring any one policyholder for more than 10% of the insurer’s net worth, a $100-million insurance company can insure a policyholder for a maximum of $10 million; to write a $15-million policy, the firm would have to buy reinsurance to cover the extra $5 million. Reinsurance for pollution coverage is particularly essential, because federal law requires many potential polluters to carry at least $6 million in insurance, which is greater than 10% of the net worth of all but the very largest insurance companies. Thus by refusing to reinsure pollution coverage, the reinsurers made it both practically and legally impossible for insurers to write such coverage.

The power of the Insurance Services Office. ISO is the insurance industry’s trade association. Among other things, it collects and compiles industry-wide past pay-out data; the more such data companies can analyze, the more accurate their estimates of future pay-outs--and therefore future rates--can be. It also writes the policy language that insurance companies use. As part of the conspiracy, ISO both agreed to write new, narrow language that excluded pollution coverage and to stop collecting data on past pay-outs for pollution and other broader coverage. Any company wishing to write such coverage therefore could analyze only its own past pay-outs in trying to determinate how much to charge in the future; since no single insurer has sufficient past pay-outs to enable it to make that determination accurately, as a practical matter no company could write the broader coverage.

The premium-to-surplus ratio. State insurance regulators typically prohibit insurers from writing more than $3 in premiums for each $1 dollar they hold in surplus--in other words, an insurer can collect in premium no more than three times the value of the company. Allowing an insurer to collect more than that, regulators believe, will jeopardize its ability to pay future claims. Some conspiracies fail because the conspirators begin “cheating” on their co-conspirators--that is, by lowering their prices or increasing the quality of their product to increase their market share and thus their profits. But during the insurance crisis most insurers were already writing all the insurance the premium-to-surplus ratio permitted. Therefore, by lowering their prices or increasing the quality of their product--expanding their coverage--they could only lose money.

The evidence the attorneys general have uncovered has important political implications. First, it demonstrates that whatever problems may exist in our legal system, the insurance industry’s campaign to blame the insurance crisis on the legal system was a fraud.

Second, the evidence should make it increasingly difficult for the industry to defend its current federal antitrust immunity. Insurers have argued that they don’t collude, and therefore the public need not worry about their exemption; they have also argued that their exemption immunizes only necessary data-collection by the industry, and therefore the exemption would not prevent the prosecution of collusion among insurers, in any event. But the evidence in the complaint shows that the industry did collude; and when the defendants respond to the complaint, they will surely argue that their exemption does immunize their collusion.

Finally, the conspiracy case should motivate Californians to approve a ballot initiative in November that would repeal the exemption for insurance from state antitrust laws, and to reject an initiative supported by the industry. The insurers’ initiative, which they disingenuously call a “no fault” initiative, would actually expand their antitrust exemption, prohibit consumers from challenging insurance rate increases and make it more difficult for policyholders to force insurers to pay claims.

The conspiracy case and the efforts to repeal the antitrust exemptions for insurance have the same goal: To require insurance companies to play by the same rules other American businesses must play by. Between 1984 and 1986, general-liability insurers tripled their premiums while dramatically reducing the coverage they offered; as a result, in each of the last two years insurer profitability reached a new all-time high.

No one begrudges an industry that does well in the free market; but many begrudge an industry that has earned record profits, and has hurt so many people and businesses, as a result of collusion. Whether such collusion is ended by a judge, by Congress or by a vote of the people, it must be ended.