McCarran-Ferguson antitrust exemption: what insurers may do jointly

Insurers can do some things together that companies in most industries cannot: pool years of claims data, develop shared policy forms and run joint programs for drivers no one will insure alone. They can do so because the McCarran-Ferguson Act of 1945 leaves "the business of insurance" outside the federal antitrust laws to the extent that state law regulates it. The shield has limits. It does not cover agreements to boycott, coerce or intimidate, it does not reach activities that are not the business of insurance, and it does not stop states from acting.

This article explains the statute's text, the three Supreme Court tests that decide what counts as "the business of insurance," the joint activities the exemption is generally understood to protect, the debate over narrowing it, and what it means for the price you pay for car insurance.

What the act says

The McCarran-Ferguson Act is short. Section 1 declares policy. In 15 U.S.C. section 1011, Congress declares "that the continued regulation and taxation by the several States of the business of insurance is in the public interest," and that its silence "shall not be construed to impose any barrier to the regulation or taxation of such business by the several States."

Section 2 does the practical work. Section 1012(a) makes the business of insurance "subject to the laws of the several States which relate to the regulation or taxation of such business." Subsection (b) says that no Act of Congress shall be construed to "invalidate, impair, or supersede" a state law enacted to regulate the business of insurance unless the federal act "specifically relates to the business of insurance." It adds a proviso: after June 30, 1948, the Sherman Act, the Clayton Act and the Federal Trade Commission Act apply to the business of insurance "to the extent that such business is not regulated by State Law."

That wording produces the exemption by inference, which is a point many summaries skip. The act does not say "insurers are exempt." It says federal antitrust law applies only to the extent the state does not regulate. So the shield depends on state regulation being in place.

Section 3, 15 U.S.C. section 1013, contains the limit. After a temporary moratorium that expired in 1948, subsection (b) says: "Nothing contained in this chapter shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation."

The Department of Justice summarized the result in a 2009 Senate statement: the exemption applies where three requirements are met. "(1) the challenged activity must be part of the 'business of insurance,' (2) that business must be regulated by state law, and (3) the activity must not constitute boycott, coercion, or intimidation."

Why Congress passed it

Before 1944 insurance was treated as outside federal commerce power, following the Supreme Court's 1869 decision in Paul v. Virginia. The NAIC's McCarran-Ferguson page tells the story: in United States v. South-Eastern Underwriters Association (1944) the Court held that insurance is interstate commerce and so subject to federal antitrust law, and Congress responded in 1945 with the act, sponsored by Senators Pat McCarran and Homer Ferguson. The Congressional Research Service describes the 1944 case as viewed "as a reversal of 75 years of precedent and practice" that "created significant apprehension about the continued viability of state insurance regulation and taxation of insurance premiums."

The 1944 case grew out of an antitrust action against an association of insurance companies, and the industry and state regulators worried that ordinary cooperative practices, particularly the joint compilation of loss statistics used to set rates, would become suspect overnight. The Supreme Court later described that worry directly. In Royal Drug it observed that, because of "the widespread view that it is very difficult to underwrite risks in an informed and responsible way without intra-industry cooperation, the primary concern of both representatives of the insurance industry and the Congress was that cooperative ratemaking efforts be exempt from the antitrust laws."

The "business of insurance" test

Three Supreme Court decisions define the scope. They matter because the statute does not define its own central phrase.

Group Life & Health Insurance Co. v. Royal Drug Co. (1979). Blue Shield of Texas had agreements with participating pharmacies under which policyholders paid only $2 per prescription. Other pharmacies challenged the arrangement as price fixing. The Court held the agreements were not "the business of insurance." In its words, section 2(b) exempts "the business of insurance," not "the business of insurers." The primary elements of an insurance contract, the Court said, are "the spreading and underwriting of a policyholder's risk," and the pharmacy agreements were arrangements for buying goods and services that happened to save the insurer money. The opinion added that cost savings "may well be sound business practice" but are not the business of insurance.

Union Labor Life Insurance Co. v. Pireno (1982). A New York chiropractic association's peer review committee advised an insurer on whether chiropractors' treatments and fees were reasonable. The Court held that the use of the committee was not the business of insurance. It restated Royal Drug as three criteria: "first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry." The Pireno opinion was decided June 28, 1982.

United States Department of the Treasury v. Fabe (1993). The question here was different: not antitrust, but whether the federal priority statute (which gives the United States priority among creditors in some insolvencies) overrides an Ohio liquidation statute ranking policyholder claims ahead of most government claims. The Court held in its opinion that the Ohio statute escapes federal preemption "to the extent that it protects policyholders," but not to the extent that it favors creditors other than policyholders. The Court reasoned that section 2(b) refers to laws "aimed at protecting or regulating, directly or indirectly, the relationship between the insurance company and its policyholders." Fabe shows that the act's "business of insurance" concept is broader in one respect than the antitrust cases suggest: the performance of insurance contracts, including after an insurer's liquidation, is part of it. See funds of last resort: assigned claims plans and judgment funds and the guaranty fund material in what happens if your car insurer goes insolvent for how liquidation works in practice.

What passes and what fails the test

What insurers may do together

With those tests in view, the activities usually described as covered by the exemption fall into four groups.

Pooling historical loss data

Companies compile their claims experience into statistical plans and combine them to estimate the cost of future claims. A 2007 Rough Notes article defending the exemption says it "allows insurers to pool historic loss information so they will be better able to project future losses" and charge "an actuarially based price." The NAIC likewise notes that "sharing loss data among insurers" could violate federal antitrust laws absent a state framework, and that organizations such as ISO and NCCI operate as they do because they work within state oversight.

This is the use case that matters most for car insurance. A small mutual with a few tens of thousands of policies cannot know the claim frequency for a particular model year and trim in rural counties. A pooled database can.

Advisory organizations and loss costs

Advisory organizations such as Verisk's Insurance Services Office (ISO) collect data from many insurers and publish "advisory" loss costs, the portion of a rate that covers expected claims and claim-adjustment expense, along with standard policy forms and classification systems. Each insurer then decides whether to use the advisory number, adjust it or ignore it, and adds its own expenses and profit before filing a rate with the state. How that works for auto is explained in Verisk (ISO) advisory loss costs: the data behind many insurers' rates. North Carolina is the outlier, with a rate bureau that files rates for the whole market; see North Carolina's rate bureau and Reinsurance Facility: a system apart.

Joint underwriting and residual-market programs

Some drivers are turned down by every insurer in the voluntary market. States respond by creating residual market mechanisms such as assigned risk plans, in which participating insurers share the business and its losses. Joint underwriting associations are the same idea organized as a single entity. State laws often address these programs explicitly: the Illinois Antitrust Act, as described in the CRS report, excepts activities "including, but not limited to, the making of or participating in joint underwriting or joint reinsurance arrangement" to the extent they are subject to regulation by the director of insurance (a 2009 description; check the current statute) in a CRS report. That is a state law, not a federal one, which is a reminder that state antitrust law remains a separate question. For the car insurance versions see assigned risk plans: insurance of last resort.

Standard forms and terminology

Insurers also adopt common policy forms and definitions. This reduces confusion and speeds regulatory approval. The 2021 amendment to the act (below) preserved this activity for health insurance by excepting the development or dissemination of standard forms, provided no one is required to adhere to them.

Where the exemption stops

Boycott, coercion and intimidation

Section 3(b) is the key limit. The Supreme Court has taken it up in two cases that matter.

In St. Paul Fire and Marine Insurance Co. v. Barry, doctors sued medical malpractice insurers after one company changed its policy terms unfavorably and the others refused to sell the doctors any policy. The Court held that the conduct fit "the common understanding of a boycott," according to the CRS report, and rejected the view that the exception only protects insurers from being blacklisted by each other.

In Hartford Fire Insurance Co. v. California (1993), nineteen states and private plaintiffs alleged that insurers and reinsurers had acted together to force other insurers to change the terms of their commercial general liability policies. The Court's opinion drew a line. Justice Scalia, writing for a five-justice majority on that part, defined a boycott as occurring "where, in order to coerce a target into certain terms on one transaction, parties refuse to engage in other, unrelated transactions with the target." By contrast, a "concerted agreement to terms," where parties just refuse to deal until the terms of that transaction are agreeable, is not a boycott. The decision also held that the domestic insurers did not lose their immunity by conspiring with foreign reinsurers, because the act "immunizes activities rather than entities."

For drivers, the boycott exception is one of the main federal backstops if insurers collectively refuse to sell to a group of drivers or to deal with repair shops in order to force a change in terms. How far it reaches is still shaped by cases like Hartford Fire.

Activities that are not the business of insurance

Anything that fails the Royal Drug and Pireno tests is outside the shield, even if only insurers are involved. The Congressional Research Service summarized the pattern: after 1969, the exemption "was generally limited to activities surrounding insurance companies' relationships with their policyholders." The same report notes that in 2003 the Supreme Court held the McCarran line of cases barring indirect application of federal laws would not control in areas where Congress has unquestionable authority, such as securities and civil rights.

Activities states do not regulate

Since the shield applies "to the extent" the business is regulated, an unregulated activity is exposed. Courts have, however, generally treated even light state regulation as enough. The Justice Department's 2009 statement quotes one antitrust treatise: "the presence of even minimal state regulation, even on an issue unrelated to the antitrust suit, is generally sufficient to preserve the immunity."

State law

The act is about federal law. The Rough Notes article, which sets out arguments for keeping the exemption, quotes the point that "the act does not exempt insurers from state antitrust laws." Some states, as the Illinois example shows, write their own exceptions for regulated insurance activity; others do not. State unfair-trade-practices laws and the department's own rate review also operate independently. See how car insurance rate approval works.

What changed in 2021

Congress narrowed the exemption once in recent years, for health insurance only. Public Law 116-327, enacted January 13, 2021 and reflected in the current section 1013(c), provides that nothing in the chapter modifies the application of the antitrust laws to "the business of health insurance (including the business of dental insurance and limited-scope dental benefits)." It preserves certain activities: collecting, compiling or disseminating historical loss data; determining a loss development factor; performing actuarial services that do not restrain trade; and developing standard policy forms, so long as no one must adhere to them.

The statute then says what health insurance does not include: life insurance and "the business of property or casualty insurance," which covers any line classified as property or casualty under state law. Car insurance is a property and casualty line, so the 2021 law left it where it was. The sentence also shows what Congress considered safe to keep even in the case it narrowed: shared historical loss data, loss development factors, actuarial services and non-binding forms.

The debate over narrowing it

Proposals to trim the exemption go back decades. In a 2009 statement to the Senate Judiciary Committee, the Justice Department's Antitrust Division recounted a series of reviews: a 1977 Justice Department study concluding that insurers "could function competitively without the protection of the McCarran-Ferguson Act"; a 1979 commission recommending a narrow replacement; and a 1989 American Bar Association report. The statement also described the work of the Antitrust Modernization Commission, which reviewed whether the act was needed to let insurers aggregate loss data and found it was not, saying that insurers "would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings." Data sharing, the commission said, would be judged under the antitrust "rule of reason," which asks whether a collaboration helps or harms competition overall.

The Justice Department also argued that the old rationale had weakened because of the "state action" doctrine, which immunizes private conduct that a state clearly authorizes and actively supervises. The CRS made a similar point, noting that two bipartisan bills in the 110th Congress, S. 618 and H.R. 1081, would have eliminated the exemption and restored the FTC's authority to investigate insurers, and that state action could cushion the effect of any repeal. The same report cautions that whether state insurance regulation meets the "active supervision" standard is not always clear.

The case for keeping the shield is that pooling data, sharing forms and cooperating on risk-spreading programs are legitimate and valuable, and that repeal would add litigation risk to practices that serve consumers. The NAIC also argues that "removing state regulation does not necessarily result in less regulation overall" because authority may shift to the federal government. Critics respond, as the Justice Department did, that "the most egregiously anticompetitive claims, such as naked agreements fixing price or reducing coverage, are virtually always found immune" under a broad reading, quoting an antitrust treatise.

I did not find a pending federal proposal specific to car insurance in the sources opened for this article. If you are following one, check congress.gov for current bills.

What it means for car insurance buyers

A worked example makes the line concrete. The numbers are hypothetical.

Say five insurers each contribute five years of claims to a shared statistical plan. The pooled data show that claims on a given vehicle category in one territory average $2,400 a year per car, with higher frequency than the state average. An advisory organization turns this into a loss cost. One insurer uses it unchanged, another trims it because it has better data, and a third ignores it. Each files its own rate with the department, and the department reviews it. That is pooling plus independent pricing plus regulation, which is the kind of conduct the act was meant to protect and which, in the Antitrust Modernization Commission's view, would be assessed under the rule of reason even without the exemption.

Now say the same five insurers agree to raise rates by the same percentage on the same day and refuse to write drivers in a particular city until the state approves their terms. The first half is a price agreement that an unregulated industry could not lawfully make; whether it is protected depends on the three tests and on state regulation. The second half, refusing unrelated business to coerce a regulator or competitors, is the kind of act that section 3(b) leaves open to challenge. Which part is protected and which is not is a legal question for a licensed antitrust attorney and, in practice, for the state attorney general and the insurance department.

For a buyer, the practical effects of the exemption are mostly indirect:

• Rates across companies often share common ingredients, because many use the same loss data, classifications and forms. That is one reason quotes for similar drivers can look alike.
• Competition still occurs on expenses, risk selection, underwriting, discounts and service. See how concentrated the auto insurance market is, nationally and by state for what concentration data show.
• State rate review, not federal antitrust law, is the primary check on excessive rates in most states.

How to raise a concern

1. Describe the conduct specifically. Names, dates, what was agreed, and who was affected.
2. Start with the department of insurance. It regulates the activity, and under McCarran-Ferguson its supervision is what keeps the activity within the exemption. how to file a complaint against a car insurance company explains the process.
3. Consider the state attorney general, who enforces state antitrust and consumer protection laws.
4. Consult a licensed attorney for any private claim; antitrust cases involve technical questions about the three-part test and the boycott exception.
5. Review the filings. For a rate you think is out of line, read the rate filing on your state's site; see how car insurance rate approval works.

Common questions

Are insurers exempt from all antitrust law?

No. They are exempt from federal antitrust law only for activity that is the business of insurance, regulated by state law and not a boycott, coercion or intimidation. State antitrust laws are a separate matter and differ by state.

Does the exemption let insurers fix car insurance prices?

Not in any simple sense. The act's history shows Congress wanted cooperative ratemaking protected, and commentary quoted by the Justice Department says naked price agreements are often found immune. But the protection depends on state regulation, the boycott exception and state law, and every state also reviews rates directly. A lawyer is the right person to ask about a specific arrangement.

Is the exemption still in force for health insurance?

Largely not. A 2021 law, Public Law 116-327, made the antitrust laws apply to the business of health insurance, with exceptions for activities such as historical loss data and standard forms. Property and casualty insurance, including auto, is expressly excluded from that change.

Does McCarran-Ferguson stop the federal government from regulating insurance?

Not entirely. Section 1012(b) says federal law does not override a state insurance law unless the federal act "specifically relates to the business of insurance." Federal laws that specifically address insurance, and laws outside the business of insurance, can apply. See Why insurance is regulated by states, not Washington.

Who decides what counts as the business of insurance?

Courts do, applying the Royal Drug and Pireno criteria to each practice case by case.

Key takeaways

• The McCarran-Ferguson Act makes federal antitrust law apply to insurance only "to the extent" the business is not regulated by state law, which in practice shields much joint activity that states regulate.
• The Supreme Court tests the "business of insurance" by whether a practice spreads risk, is integral to the policy relationship and is limited to the insurance industry; deals with outside vendors and peer review committees failed.
• Pooling historical loss data, advisory loss costs, standard forms and joint residual-market programs are the classic protected activities; boycott, coercion and intimidation are not.
• Congress narrowed the exemption for health insurance in January 2021 but left property and casualty lines, including auto, unchanged.
• State rate review, state antitrust law and the insurance department, not federal courts, are usually the first line of defense for car insurance buyers.