Leader's Edge logo Under the Dome by Joel Wood Tell the Editor
Under the Dome by Joel WoodThe Antitrust

To hear politicians talk, you’d think the McCarran Ferguson Act was giving consumers hell. Beware the political saviors of insurance. Could a socialized market be next?

A day after the Senate Judiciary Committee conflated the insurance industry’s response to Hurricane Katrina into a conspiracy created by the antitrust protection of the McCarran-Ferguson Act, I was slated to speak to a conference of shopping mall magnates and developers on coastal property insurance issues in Biloxi, Miss. Feeling a little disoriented and very defensive from weeks of political invective on the subject, I surveyed the crowd closely. 

This audience of the International Council of Shopping Centers (ICSC) was gracious. The ICSC, it turns out, is leading a fledgling policyholder coalition on coastal issues, trying to identify public policy solutions that can be achieved in today’s poisoned political environment. On one side, much of the industry points to the marketplace, saying if people want lower insurance costs they should build better buildings in less vulnerable areas. On another side, personal lines players who feel overexposed want a government backstop. Then there are the trial lawyers, doing what trial lawyers do, and politicians who feel the industry should be punished. Amid this debate, the ICSC is striving to build a consensus on responsible public policy responses that smooth the edges of the hard coastal market.

The McCarran-Ferguson Act debate is Exhibit A as to why it is difficult to act constructively on these complex marketplace issues. McCarran does two, and only two, things. First, it says that to the extent the Feds don’t regulate insurance, the states do, period. Second, it provides a very limited antitrust immunity for certain actuarial activities so that insurers can move into and out of markets in a way that protects policyholders and insurers.

Did McCarran allow insurers post-Katrina to conspire to deny policyholders their due wind claims under a bizarre reading of water exclusions? Would repealing McCarran help lure smaller insurers to the coast? The answers are self-evident.

The Senate Judiciary Committee chairman and ranking member, respectively, Patrick Leahy of Vermont (D) and Arlen Specter of Pennsylvania (R), both support Mississippi Sen. Trent Lott (R) on McCarran repeal but for entirely different reasons. For Leahy, McCarran repeal is second nature as he is a leading trial bar advocate in the Senate; plus, he’s had a long-term beef with the industry on medical malpractice. Specter turned on the industry last year after he felt p-c carriers torpedoed his proposed asbestos resolution fund.

Responding to the McCarran bomb throwing, industry spokespersons ramped up the rhetoric on building codes and land use. Those are valid issues, of course, but when you’re a shopping center policyholder in a coastal zone, and your premiums are skyrocketing, you really don’t like to be lectured about zoning.

So compartmentalizing the rhetoric and seeking reasonable solutions isn’t easy—to wit:

Federal backstop for state cat plans?  It’s a coastal-versus-non-coastal political equation, so whatever the merits of such a backstop, it isn’t flying in the current political lineup.

Ditto an all-perils policy issued by the National Flood Insurance Program.  Nobody believes an actuarially sound all-perils policy issued by an arm of FEMA will fly. 

Catastrophic tax reserving for insurers? Makes all the sense in the world, but it isn’t a quick fix to the current problem. Plus, it will cost the Treasury a lot of money, and nobody’s much interested in throwing the industry a tax break. On the contrary, Lott is looking for ways to stick it to the industry on the tax side. 

Better local land use laws? Congress won’t touch it in the absence of another massive event.

The real answers aren’t sexy—nor should they be when the choice is populist governmental intervention versus encouragement of the private marketplace. The incremental solutions include broad NFIP reform, targeted incentives for expanded reinsurance capacity in coastal zones, and perhaps allowing self-insured risk retention groups to underwrite property as a pressure-relief valve on pricing.  If the ICSC and the saner minds put together an effective coalition on these and other incremental reforms, some good things can be accomplished. 

Hunkering down and waiting for the political storm could work, especially if 2007 is another catastrophe-free year. Things will get better then, but no one knows by how much. Stopping bad things from happening in Congress can be done, but Sen. Lott and others may likewise have the ability to inhibit our agenda of good, unrelated issues, such as extension of the terrorism backstop. The other risk is that by hunkering down the industry risks losing more battles like that in Florida. It’s less likely that Congress will socialize the marketplace, but other states remain vulnerable to such populist reforms at the expense of the greedy insurance industry. Given the potential consequences of the nothing-versus-socialization debate, it’s worth doing everything possible to work with responsible policyholders in the search for a middle ground.

Wood is The Council’s senior vice president of government affairs.
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