McCarran-Ferguson and Its Discontents
I-Fans,
I realize that a discussion of post-war state-based insurance regulation in the United States is, I dunno, maybe not for everyone. Please let me know if you want off this list. It only hurts (me) a minute.Today we begin a look at the 1945 law that underpins the U.S. insurance system. And while its relevance may seem obscure, I don’t think many thoughtful insurance people would argue that it directly relates to what people in Louisiana, Mississippi and Florida each are, separately, calling their current “insurance crisis.” That’s at a minimum. I have a feeling this law is also implicated in the current state of health and other forms of insurance nationally.
I got this thoughtful post from someone who forgot more about insurance than I will ever know and prefers to remain anonymous. At the WSJ, these folks are referred to as a “person familiar with the situation.” He was responding to a blog item, “Letter from an Irked Louisianan,” a cri de coeur by a Times-Picayune editor who complained that his homeowners’ premiums were tripling, despite the fact that his previous carrier didn’t pay his wind claim. The editor further noted that the carrier, Travelers, wouldn’t write a new policy and as a result he would be consigned to the state-run Louisiana Citizens, which has a few disadvantages, including higher costs.
The full reply is below, but I’ll break out a couple points and comment. The bold face is mine:
Person Familiar: “One might ask why
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets.
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets.
The answer is state-based regulation.”
ITP: Right. Without putting words in PF’s mouth, the answer is, there is no answer. The logic behind state-based regulation, a 19-century holdover, is that it makes no sense for suburban Chicagoans to subsidize coastal Mississippians. But if it makes no sense for Chicago to subsidize Pascagoula, why does it make sense for Jackson to subsidize Pascagoula? And why should middle-class people in Buffalo subsidize the Hamptons? Soon, tornadoes will hit Lake County in the northwest suburbs of Chicago, as they do every other year, so why should people along the lakefront, like my hometown of Evanston, which never gets hit, subsidize those in the outer suburbs?
Because it’s insurance, that’s why, and we’re spreading risk. If wide is good, wider is better. What do state boundaries have to do with anything? Now, if you want to charge people on the coast a higher premium, fine. But the wider the risk is spread, the more efficient — and cheaper — insurance becomes for all.
PF: “It’s all about the
McCarran-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks.”
McCarran-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks.”
ITP: Yup. Passed in 1945, with vigorous industry lobbying, I might add, McCarran-Ferguson forbids the federal government to regulate insurance. It essentially overturns a U.S. Supreme Court decision of the previous year that found insurance was in fact interstate commerce and subject to U.S. anti-trust laws.
PF: “This uniquely American regulatory
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. “
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. “
ITP: Thank you, Person Familar. There will be much more on McCarran-Ferguson and efforts in the current Congress to amend it. I want to hear from insurers and state regulators: What policy reason justifies chopping the U.S. into 50 small markets, particularly now that insurance is about as “local” as banking, which is to say, not local at all? And why should insurance be exempt from some aspects of U.S. anti-trust laws? These question are not rhetorical.
Full post is here:
“Without referring specifically to St. Paul
Travelers, it’s natural for any insurer to do whatever it must to
drastically reduce its exposure to a market where it just lost multiples of
the total aggregated profit it ever earned in that market.(1) One might ask why
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets. The
answer is state-based regulation. This uniquely American regulatory
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. Large national insurers in
both states have state-specific entities with their own capital and limited
access to parent-company assets to recapitalize in the event of a
catastrophe. Instead, an insurer in a devastated state has to replenish its
state-specific reserves with state-specific tactics — higher deductibles,
lower limits, more exclusions, greater use of state-specific reinsurance
programs, non-renewals, or leaving the market altogether. It’s all about the
McCarren-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks. It’s
actually a pretty good concept. After all, no one wants their premium to go
up because of something that happened a thousand miles away. As Katrina has
shown, we’re only slightly more willing to pay a higher premium because of
something that happened next door.”
Travelers, it’s natural for any insurer to do whatever it must to
drastically reduce its exposure to a market where it just lost multiples of
the total aggregated profit it ever earned in that market.(1) One might ask why
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets. The
answer is state-based regulation. This uniquely American regulatory
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. Large national insurers in
both states have state-specific entities with their own capital and limited
access to parent-company assets to recapitalize in the event of a
catastrophe. Instead, an insurer in a devastated state has to replenish its
state-specific reserves with state-specific tactics — higher deductibles,
lower limits, more exclusions, greater use of state-specific reinsurance
programs, non-renewals, or leaving the market altogether. It’s all about the
McCarren-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks. It’s
actually a pretty good concept. After all, no one wants their premium to go
up because of something that happened a thousand miles away. As Katrina has
shown, we’re only slightly more willing to pay a higher premium because of
something that happened next door.”
(1) ITP responds: Travelers reported after-tax charges of $1.5 billion for catastrophes in ‘05. I frankly don’t know how much it earned in premiums in the Katrina-affected markets over the years. For the sake of argument, let’s assume Katrina wiped out years’ worth of homeowners’ profits from the area. However, as I have pointed out, the well-run insurer says it posted net income of $1.622 billion overall in ‘05 and $162 million in the third, Katrina quarter, ended Sept. 30, 2005.Also, Travelers’ post-Katrina claims-handling performance has triggered a market-conduct investigation by the La. DOI.
Sorry, ITP always gets the last word. It’s my site!
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December 28th, 2006 at 9:37 am
[…] Listen, ITP doesn’t necessarily want insurance reform, surge claims to be paid, the industry to lose its anti-trust exemption, the repeal of McCarran-Ferguson or federal regulation. ITP doesn’t necessarily not want those things either. ITP doesn’t know enough. […]
January 4th, 2007 at 12:08 pm
[…] http://insurancetransparencyproject.com/2006/12/07/mccarran-ferguson-and-its-discontents/ […]