compatible with regulatory objectives for a reliable insurance mechanism. It is the opinion of this Study that all of the major lines of property-liability insurance should have the option of operating in a fully competitive environment under a dual system of regulation. Other lines, including life insurance, are probable candidates, subject only to state regulation designed to limit compensation to intermediaries and thus counter the phenomenon of reverse competition. Further study appears necessary to reach definitive conclusions in health insurance and medical malpractice. As one industry-sponsored study recently concluded, "this may be the time for the insurance industry to surrender the cloak and face the antitrust elements ungarbed because only then can it be treated equally with other segments of interstate commerce." INTRODUCTION The California Insurance Department, which has admin istered an "open competition" system of rate regulation for over twenty-five years, reached the following conclusions in 1974: 1/ The California market for private [0]verall California market competition in the has been effective and . . . beneficial to consumers. The statement of the California Insurance Department is significant because it indicates that in the largest 1/California Department of Insurance, "Competition Under the California Rating Law and Its Effect on Private Passenger Automobile and Homeowners Insurance" (1974) (referred to herein as "California Report"), at 250, 255. "Open competition" of this Report. is described on page 24 insurance state in the country, 2/ allowing property liability ("P-L") insurance rates to be established by the forces of competition has not resulted in excessive rates, price wars or mass bankruptcies. It was the fear that competitive rates would have such results that constituted the historic rationale for the broad immunity from the federal antitrust laws granted the "business of insurance" by the McCarran-Ferguson Act of 1945. 3/ The basic question examined here is whether the present scheme of state regulation and federal antitrust immunity is functioning in a manner consistent with the public interest. Thirty years after passage of that Act it is appropriate to inquire as to whether state regulation has provided the public with the benefits normally attributed to competition, i.e., reasonable prices based on the cost of rendering 2/ Best's Review, Property-Liability Ed., July 1976, at 12. 31 P.L. 15 (79th Cong., 1st Sess.), 15 U.S.C. $1011-15, 59 Stat. 33 [See Attachment A]. Certain joint activities of ocean marine underwriters are exempt from the federal antitru laws in section 29 of the Merchant Marine Act of 1920, 46 U.S.C. $885. the services; efficiency in which the services are rendered at the lowest possible cost; and innovation in which new or improved products or services and methods of distribution are utilized. If regulation has not provided these benefits, or it now appears that the application of the federal antitrust laws would not interfere with the basic policy objectives of insurance regulation, then alternative approaches should be considered. We conclude that state regulation of insurance rates has not provided the benefits of a fully competitive system, and that while there has been an increasing reliance on competition as a means of rate regulation, the full application of competitive principles, as embodied in the federal antitrust laws, to the business of insurance would be consistent with the public interest. We believe that the antitrust laws are both compatible with, and a necessary complement to, the public policy objectives underlying state insurance regulation. 3 This Report will focus on the P-L segment of the insurance industry, particularly private passenger automobile / which is characterized to a much greater degree than other insurance lines by major impediments to effective competition: heavy state involvement in the ratemaking process, state-sanctioned cartel price fixing, restrictions on marketing and distribution, and, to a lesser extent, lack of consumer knowledge. Moreover, the P-L insurance business in most lines is favorably structured for price competition, with a large number of firms selling essentially identical services, moderate levels of concentration relative to other industries, ease of entry, the absence of significant economies of scale, and a relatively simple and short-term contract. 5 4 Private passenger automobile liability and physical damage insurance alone accounts for approximately 35 percent of total premium volume in the P-L industry. See Attachment B of this Report. 5/ Joskow, "Cartels, Competition and Regulation in the Property-Liability Insurance Industry," The Bell Journal of Economics and Management Science, Autumn 1973, [hereinafter "Joskow"] at 391; SEC Institutional Investor Study Report, [hereinafter "IIS"] 1971, Vol. 2, at 786. some indication that the levels of concentration have been There is |