II. EVOLUTION OF RATE REGULATION IN THE PROPERTY-LIABILITY FIELD A. Pricing of Insurance Prior to South- The explanation for the emergence of rate regulation in the P-L field is found in the early history of fire insurance. Fire insurance rates were originally determined by competition between insurers. However, competition was for the service of the independent agent rather than for the business of the ultimate consumer. 38/ The insurers were completely dependent upon the agents for the marketing of their product, and, as a result, the agents often unilaterally determined the level of rates and commissions, and the amount of coverage extended to the insured. The leverage of the agents over the insurers, as well as the failure to pool statistical data for classifying risks or projecting loss experience, resulted in an arbitrary rate structure which left the insurers vulnerable in the event of a major conflagration. 39/ While it is not clear whether competition ever resulted in rate wars, the 38/ Wandel, The Control of Competition in Fire Insurance (1935), at 11. 39/ NAIC, supra, n. 25 at 9-10, 16, 18. "specter" of predatory pricing provided a justification for concerted ratemaking. 40/ During the latter part of the nineteenth century, insurance companies entered into agreements (or compacts) to fix the level of rates and commissions in order to exercise control over the agents. Their efforts failed, principally because the participating companies would not adhere to the schedule of rates. Moreover, some states adopted anticompact laws which prohibited such concerted activity, reflecting the public sentiment against excessive rates. 41/ However, by 1911 some state legislators appeared to be more sympathetic to the problem of inadequate (below cost) rates and viewed such to be a major cause of insurance company insolvency. In that year, the Merritt Committee of the New York Legislature recommended state-supervised joint ratemaking as a means of preventing inadequate and discriminatory rates, 42/ and three years later the Supreme Court recognized the power of a state commissioner to regulate 40/ Day, "Economic Regulation of Insurance in the United States" (1970), prepared for the Department of Transportation (hereinafter "DOT on Regulation") n. 54, at 18. 41/ Id., at 18. 42/ Id., at 20. insurance rates. 43/ Despite these developments, by 1944 the widespread practice of price fixing by private rate bureaus was largely uncontrolled by the states 44/ and was thought to be totally insulated from the federal antitrust laws as a result of a series of Supreme Court decisions holding that the business of insurance was not interstate commerce. 45/ In 1944, in United States v. South-Eastern Underwriters Ass'n., 46/ the Supreme Court, to the surprise of many and the consternation of the insurance industry, held that transactions in insurance stretching across state lines constituted interstate commerce and were subject to the federal antitrust laws. The Court rejected the notion that the sales contract was the only relevant part of the insurance transaction. Rather, it held that there were innumerable transactions in the negotiation, execution and performance of the contract which were interstate in character, including 43 German Alliance Insurance Co. v. Lewis, 233 U.S. 389 (1914). 44 NAIC, supra, n. 25 fn. 43 at 21-22. The landmark case is Paul v. Virginia, 8 Wall 168 (1869). 46 322 U.S. 533 (1944). the collection and investment of premiums and the payment of policy obligations. 47/ The government had obtained an indictment against nearly 200 private stock fire insurance companies for allegedly conspiring to fix premium rates and agents' commissions and to coerce and intimidate insurance companies into the conspiracies. The lower court had sustained the defendants' demurrer to the indictment. reversing, the Court held that a conspiracy to fix and maintain insurance rates and monopolize trade and commerce in insurance would violate Sections 1 and 2 of the Sherman Act. In The Court also rejected the argument that the application of the Sherman Act would invalidate the large body of state laws regulating the insurance business. In its brief in the Supreme Court, the government had reviewed various types of state laws regulating concerted ratemaking by insurance companies, and had argued that some state regulatory schemes might be considered "state action" immunizing con certed ratemaking from antitrust prosecution under the doctrine established in Parker v. Brown. 48/ Defendants had criticized the government's argument as equivocal. Citing 47/ 322 U.S. at 537, 541, 547. 48/ 317 U.S. 341 (1943). Parker, the Court viewed the defendants' argument that applying the antitrust law to their activities was inconsistent with state regulatory policies as "exaggerated" 49/ and noted that "[f]ew states go so far as to permit private insurance companies, without state supervision, to agree upon and fix uniform insurance rates." 50/ However, the Court went no further in analyzing the effect of particular types of rate regulation on the applicability of the Parker principle. Despite the clear implication of the Court's statement, that some forms of state regulation could insulate private ratemaking activities from the Sherman Act, the industry and its regulators sought federal legislation that would protect certain concerted ratemaking activities from the federal antitrust laws. The legislative proposal of the National Association of Insurance Commissioners (NAIC), for example, would have expressly exempted from the Sherman Act the pooling of statistical data, as well as the ratemaking activities of insurance companies whose rates were approved or "subject to disapproval by a state official. 51/ The latter provision was designed to "remove any doubt as to the validity of 49 322 U.S. at 562. 50/ Ibid. (Emphasis added.) 51/ Proceedings of NAIC, 76th Sess. (1945), at 33. |