Congress Puts Big Insurers in the Doghouse

Angry lawmakers are determined to take a firmer hand with the insurance industry -- and there's not much insurers can do about it.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

March 20, 2007

Congress has insurers in its sights, a direct result of complaints about the way claims were handled in the aftermath of Hurricanes Katrina and Rita in 2005. Thousands of storm victims have complained to lawmakers, alleging that their claims were unfairly denied. What's worse for the insurers, two of the victims who lost their homes are members of Congress: Sen. Trent Lott (R) and Rep. Gene Taylor (D), both from Mississippi.

Legislation revoking the industry's antitrust exemption is likely to pass. The primary effect would be to give the Federal Trade Commission the power to investigate allegations of wrongdoing by insurers, instead of leaving it all in state hands.

Some lawmakers think the antitrust exemption allowed insurers to collude in denying claims on the grounds that water, rather than wind, was responsible for damage to many homes and businesses. Water claims are covered only if owners had federal flood insurance. Blaming water for the damage let private insurers such as State Farm and Allstate off the hook for millions of dollars in damages. And it also left taxpayers footing the bill.

Insurers were granted their limited exemption from antitrust laws as part of the 1945 McCarran-Ferguson Act. The aim was to clarify that states, not the federal government, would regulate insurers. The law also allowed the industry to share historical claims data so they could better assess risks and set premiums. Price fixing, coercion and other illegal activities weren't affected by the exemption.

Lott, the No. 2 GOP Senate leader, is leading the effort to repeal the exemption. He has also secured $3 million in Homeland Security Department spending to investigate the industry and has sponsored a bill requiring insurers to state clearly on the front page of their contracts what they don't cover.

While Lott and Taylor were part of a group settlement in January, the issue is still very raw and personal for both. Taylor, for example, is backing a bill that would expand the flood program to include hurricane-related wind damage. The two, along with supporters on both sides of the aisle, say revoking the industry's antitrust protection is the only way to cut out backroom dealings and is central to any real reform efforts.

The insurers are lobbying heavily to block the bill. They'll probably fall short, but they may well win a provision that still allows them to share claims data. Still, they won't escape a lot more oversight from lawmakers and regulators in Washington.

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