How a 1945 Law Let Insurers Do Whatever They Want

In 1944, the Supreme Court ruled, in United States v. South-Eastern Underwriters Association, that insurance was interstate commerce and therefore subject to federal antitrust laws. This was, to the insurance industry, roughly equivalent to a meteor strike. For decades, insurers had operated in a cozy arrangement where each state regulated -- and I'm using that word loosely -- its own insurance market. The idea that the federal government might actually enforce competition was, to put it mildly, unwelcome.

So the industry did what industries do when they're told to play fair: they called their senators.

What happened next was one of the most effective lobbying campaigns in American legislative history. Within a year -- a year -- Congress passed the McCarran-Ferguson Act, which declared that "the business of insurance, and every person engaged therein, shall be subject to the laws of the several States" and that federal antitrust laws would not apply to insurance "to the extent that such business is regulated by State law."

Read that again. Federal antitrust laws -- the ones that prevent companies from colluding on prices, carving up markets, and crushing competition -- do not apply to insurance, as long as the states are "regulating" it. And the definition of "regulating" has been, shall we say, flexible.

The Gentleman's Agreement

Here's what McCarran-Ferguson enabled in practice. Insurance companies could share pricing data through organizations called "rating bureaus" -- industry groups that collected loss data and published "advisory rates" that insurers were free to adopt. Were these advisory rates the result of illegal price-fixing? In any other industry, absolutely. In insurance, they were just the boys getting together to compare notes.

Senator Pat McCarran of Nevada, the bill's co-sponsor, argued that state regulation was more responsive to local conditions than federal oversight would be. This was not a stupid argument in 1945. It was, however, a spectacularly wrong prediction about what state regulation would actually look like.

Here's what state regulation looks like in practice: each state has an insurance commissioner, some of whom are elected (and therefore dependent on campaign contributions from the industry they regulate) and some of whom are appointed (often from the ranks of the industry they regulate). These commissioners oversee markets with billions of dollars in premiums using staffs that are routinely underfunded and outmatched by the legal and actuarial resources of the companies they're supposed to be policing.

A 2019 report by the Government Accountability Office found that state insurance departments had, on average, one examiner for every six billion dollars in premium volume. That's not regulation. That's a suggestion box.

Eighty-One Years and Counting

The McCarran-Ferguson Act was, by the explicit statements of its sponsors, intended as a temporary measure. It was meant to give states time to update their regulatory frameworks before federal oversight kicked in. "Temporary" apparently means something different in Washington than it does in the rest of the English-speaking world, because here we are, eighty-one years later, and the act is still on the books.

There have been attempts to repeal or narrow it. The most serious was the McCarran-Ferguson Reform Act of 2020, which would have removed the antitrust exemption for health insurance and medical malpractice insurance. It passed the House. It died in the Senate. The insurance industry spent forty-seven million dollars on lobbying that year. Coincidence, presumably.

The consequences of this regulatory structure are not abstract. They are the reason you cannot comparison-shop for insurance the way you can for airline tickets. They are the reason an insurer can deny your claim and your only recourse is a state regulator who may or may not return your call. They are the reason that, in the aftermath of every major natural disaster, homeowners discover that their policies don't cover what they thought they covered -- and that no federal agency has the authority to do anything about it.

What Would Change

If McCarran-Ferguson were repealed tomorrow, the sky would not fall. What would happen is this: the Federal Trade Commission and the Department of Justice would gain the authority to investigate anticompetitive practices in insurance markets. Insurers would no longer be permitted to share pricing data in ways that would be illegal in any other industry. And consumers would gain access to federal courts for antitrust claims, rather than being limited to the often-inadequate remedies available at the state level.

Would this solve every problem in American insurance? Of course not. But it would end the extraordinary legal fiction that an industry with two trillion dollars in annual revenue, operating across all fifty states and most of the developed world, is somehow a local business best handled by fifty separate regulators with fifty separate sets of rules and fifty separate levels of willingness to actually enforce them.

Pat McCarran died in 1954. His law is still protecting the people he wrote it for. They're just not the people you'd hope.