John Christie October 6, 2005

1
All You Ever Wanted To Know About Rating
Bureaus Presentation To ALTA
John ChristieOctober 6, 2005
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Preface

• a complex subject
• serious antitrust and regulatory issues
• a significant history of both federal and state
  litigation/regulation, particularly in your
  industry
• must proceed with your eyes wide open, with a
  knowledgeable appreciation of both the burdens
  and the benefits involved

3
General Prevailing Antitrust Rule

• Collective ratemaking by competitors in a state
  licensed rating bureau context is per se illegal
  price-fixing absent an applicable immunity or
  exemption
• FTC v. Ticor (US Supreme Court)(1992) This
  case involves horizontal price fixing . . . . No
  antitrust offense is more pernicious than price
  fixing.
• In re Kentucky Household Goods Carriers
  Association (Federal Trade Commission)(2005) We
  conclude that the collective ratemaking at issue
  here is per se unlawful.

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Federal Antitrust Law Potentially Applicable
Exemptions

• McCarran Ferguson Act, 15 U.S.C. 1011-1015, a
  statutory exemption applicable in certain
  instances to insurance companies
• State Action Doctrine, a creature of the Supreme
  Courts interpretation of the scope of the
  Sherman Act applicable in certain instances to
  entities, including insurance companies, subject
  to state regulation
• One or both of these federal antitrust exemptions
  MAY apply to the activities of a state licensed
  rating bureau

5
McCarran-Ferguson Act

• Two relevant elements
• activity must embrace the business of
  insurance
• activity must be regulated by state law

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Business of Insurance

• A term of art for McCarran purposes, separate and
  apart from state law or industry usage
• Defined by the Supreme Court to extend only to
  activity involving the transferring or spreading
  of a policyholders risk and constituting an
  integral part of the policy relationship between
  the insurer and the insured

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Business of Insurance (contd)

• Two federal courts of appeal have told us what
  the business of insurance does NOT include
• Ticor v. FTC (Third Circuit Court of
  Appeals) (1993) The title search and
  examination does not itself spread or transfer
  risk. At most, title searches identify defects
  of title. But see, Commander Leasing Co. v.
  Transamerica Title Insurance Co. (Tenth Circuit
  Court of Appeals)(1973) Title search and
  examination was a condition precedent to the
  issuance of title insurance

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Business of Insurance (contd)

• US v. Title Ins. Rating Bureau of Arizona
  (Ninth Circuit Court of Appeals) (1983) We
  conclude that the escrow process itself does not
  spread or underwrite title insurance risk and
  buying escrow services is separate from buying
  title insurance.

9
Regulation by State Law

• When state legislation generally proscribes,
  permits or otherwise regulates the conduct in
  question Crawford v. American Title Insurance
  Company (Fifth Circuit Court of Appeals)(1975)
• The Insurance Unfair Methods of Competition Act,
  reaching as it does all unfair methods of
  competition, places antitrust price fixing
  claims within the ambit of activities over which
  the Insurance Commissioner has broad regulatory
  control
• This same Act is to be found in virtually all of
  the states

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McCarran Act Summary

• Rate filing activities of a title insurance
  rating bureau is of some uncertainty at least
  with respect to the filing of rates beyond those
  relating to the assumption of the risk
• Likely to be sufficient regulation by state law
  because of the Insurance Unfair Methods of
  Competition Act

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State Action Doctrine

• Based on principles of state sovereignty, allows
  the states to implement legitimate regulatory
  interests even if inconsistent with the goals of
  the federal antitrust laws
• Appropriately enacted and implemented, state
  regulation can operate to displace the federal
  antitrust laws otherwise applicable

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State Action Doctrine Two Requirements

• Conduct must be
• clearly articulated and affirmatively expressed
  as state policy
• and
• actively supervised by the state itself

13
State Action Doctrine State Policy

• Conduct in this context is clearly articulated
  and affirmatively expressed as state policy if
  the state, by statute, affirmatively approves the
  existence of title insurance rating bureaus US
  v. Southern Motor Carriers (US Supreme Court)
  (1985).
• Eg. Cooperation among rating organizations,
  and among rating organizations and insurers in
  rate making . . . is authorized Arizona Revised
  Stats. 20-365

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State Action Doctrine Active Supervision

• Conduct in this context is actively supervised
  if the state has exercised sufficient
  independent judgment and control so that the
  details of the rates or prices have been
  established as a product of deliberate state
  intervention. FTC v. Ticor (US Supreme Court)
  (1992).
• Characterized the factual record as suggesting
• that the states Montana and Wisconsin at
  most checked the rate filings for mathematical
  accuracy
• and that the bureaus there had not provided
  supporting evidence for filings sufficient to
  allow the regulators to do their job

15
State Action Doctrine Active Supervision

• Ticor itself and cases since have not been
  helpful in telling us exactly what constitutes
  sufficient independent intervention and control

• the states were either hyper-active, holding
  hearings, writing opinions, etc. typically
  public utility cases - or the states did little
  or nothing at all typically motor carriers

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State Action Doctrine Active Supervision

• However, the standard is clearly more than a
  basic level of activity

• The FTC It is essential that the states
  chosen procedures allow meaningful review of the
  merits of the conduct at issue to ensure that it
  comports with the states own normative
  standards Kentucky Household Goods Carriers
  Assoc. (2005)

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State Action Doctrine Summary

• Therefore, you have to assess whether a states
  policy is to permit rating bureaus and whether
  the state will be in compliance with the active
  supervision requirement and make this
  assessment in advance of rating bureau activity
• And you have to be prepared to provide the state
  with sufficient information to allow them to make
  informed regulatory judgments

18
State Antitrust Laws

• Generally speaking, they all have laws similar to
  the Sherman Act
• but they do NOT necessarily have similar
  exemptions potentially applicable to rating
  bureaus
• -- have to consider applicable state law in your
  state

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State Antitrust Laws

• Therefore
• Look to whether specific antitrust statutory
  exemptions applicable to rating bureau conduct
  exist
• E.g. The provisions of this state antitrust
  law shall apply to licensed insurers . . . to
  the extent not regulated by the provisions . . .
  of the insurance law Donnelly Act, Art. 22,
  340 (2) (New York)
• Or

20
State Antitrust Laws

• Whether, under state law, where there is a
  conflict between separate state statutes, the
  controlling principle of statutory construction
  is that the specific governs over the general
• E.g. Conduct which might normally be a
  violation of state antitrust statutes is,
  nevertheless, permissible if specifically
  authorized by other state statutes. Tucson
  Unified School District v. Chicago Title
  Insurance Company (Court of Appeals of Arizona)
  (1991)

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General Rules of Rating Bureau Conduct

• Evaluate in advance the potential applicability
  of both federal and state antitrust exemptions
• Evaluate in advance the state regulatory
  atmosphere
• Adhere to all state law requirements with respect
  to the organization and maintenance of a bureau,
  including who can be members and required audits
• Establish a prior approval procedure for rate
  reviews

22
General Rules of Rating Bureau Conduct (contd)

• Encourage the establishment of state created
  objective criteria for rate review
• Be prepared to adequately support rate filings
• Continuously monitor the workings of the bureau
  and of state regulators