Thoughts about McCarran-Ferguson

Senate Minority Whip Trent Lott, angry with the whole insurance industry over the situation in his home state of Mississippi, has announced that he wants to do away with the 1945 McCarran-Ferguson law. Friends on the Hill tell me he’s quietly gathering support. It won’t move forward for now, but I could see things changing.

Right now, the McCarran-Ferguson Act grants insurance companies a limited antitrust exemption. The law lets insurance companies share risk and rating data in a way that other private companies typically couldn’t. (The law also implicitly mandates state insurance regulation.) I’m skeptical of most antitrust law and, in the insurance industry in particular, there are real consumer benefits to allowing companies to share data on price and risk.

So how does this impact Mississippi and Trent Lott? Best as I can tell, it doesn’t. As I discuss in The Weekly Standard, Mississippi faces a complicated and thorny situation that leaves almost all players with a variety of bad short-term choices. There are, I think, long term solutions but ultimately, I can’t see how what Lott is proposing will help Mississippi in the short term.

Already, larger insurers have either cut back or, in at least one case, withdrawn from the state altogether. While these larger companies tend to want to keep McCarran-Ferguson in place, they don’t really rely on the law to operate. All the big companies could stay in business without it. Many smaller ones coudn’t and, if people in Mississippi want private insurance, they’ll have to turn to “domestic” carriers that operate only in Mississippi. These small companies exist mostly by virtue of McCarran-Ferguson — unlike the big boys, they couldn’t gather all their own risk data and still turn a profit. Without McCarran-Ferguson, a lot of risks in the state would simply have to go uninsured.

In the longer term, I’m not nearly as sure that the law will remain important. If we allowed true broad competition in all insurance markets, I expect we’d end up with a system that looks a lot more like the market for commercial insurance. Traditional insurance would be just one type of product among many that individuals would use to manage risk: Lloyd’s arrangements, various bonding measures, and even micro-Lloyd’s-type markets similar to the group lending site would become much more common. Many traditional insurance companies would also use sophisticated, almost certainly proprietary, risk modeling systems. I’d imagine that a lot of data would become trade secrets in this type of environment and nobody would want to share.

This doesn’t mean we should repeal McCarren-Ferguson — I’m against that — but it does mean that the law may eventually become obsolete.