McCarran-Ferguson Act reform: More competition or more regulation?

The antitrust exemptions provided by the McCarran-Ferguson Act are often identified as the cause of a variety of problems that have plagued the property-liability insurance industry in the last decade. In particular, proponents of repeal of the Act suggest that it has facilitated anticompetitive behavior by insurers, which in turn contributed to the liability and auto insurance crises of the 1980s. We examine industry structure, behavior, and performance and assess possible market imperfections that may justify price regulation and special antitrust treatment. We find that the major barrier to effective competition is state rate regulation rather than anticompetitive behavior. We examine evidence on the causes of the liability and auto insurance crises and conclude that they are readily explained by changes in market conditions and regulatory constraints rather than anticompetitive behavior. While there is no need for the broad antitrust exemptions contained in the Act, there is a danger that repeal will lead to more inefficient price regulation unless reform of the Act includes restrictions on state rate regulation. We propose reform legislation that both narrows the industry's antitrust exmption and promotes competition.