1. Identification of Antitrust Issues Associated with Insurer Ratemaking and Rate-Related Issues Michael L. McCluggage (312) 201-2548 mccluggage@wildmanharrold.com

2. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP The Property-Casualty and Workers’ Compensation Industries Are Among the Few Sectors of Economy Where Competitors Are Permitted – Through the Medium of Rating or Rate Advisory Organizations – to Cooperate in Price-Related Activities Federal law proscribes agreements among competitors to fix, maintain or stabilize prices In general, the McCarran-Ferguson Act exempts the business of insurance from liability under the Sherman Act for price- fixing conduct The Supreme Court in Securities Exchange Commission v. National Securities, Inc. made the point very clearly in discussing the McCarran-Ferguson exemption: Certainly the fixing of rates is part of this business... 393 U.S. 453, 460 (1969)

3. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Application of State Antitrust Laws to Insurers’ Price-Related Conduct Most state antitrust statutes mimic the Sherman Act McCarran-Ferguson offers no protection from liability under state antitrust laws In some states, joint rate-making activities in some lines of insurance are protected from application of some state antitrust laws by state insurance codes »For example, New York’s Donnelly Act applies to insurance except to the extent there is regulation under Article 23 of the Insurance Code

4. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Application of State Antitrust Laws to Insurers’ Price-Related Conduct State insurance statutes contain regulation addressing rates »Nature and extent of regulation varies by lines of insurance »Open competition »File and use rating regimes »Use and file rating regimes »Prior approval rating regimes Most state insurance statutes allow joint insurer participation in rate-related activities; usually through industry rating organizations

5. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Application of State Antitrust Laws to Insurers’ Price-Related Conduct Variations on permitted rate-related cooperation »Promulgation of “end rates,” inclusive of: »Prospective loss costs »Expense components »Profit components »Advisory rates »Adherence agreements disallowed »Prospective loss costs only

6. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Application of State Antitrust Laws to Insurers’ Price-Related Conduct 15 states provide limited and varied antitrust exemptions for some insurer activities »Less expansive than McCarran-Ferguson exemption »Representative states: »Florida »New Jersey »New York »Michigan »Illinois

7. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Competitor Communications Outside the Framework of State Rating Laws Concerning Prices, Rates or Rate-Related Information Every insurer needs competitive intelligence Benchmarking competitors’ prices may serve procompetitive purposes, but... (e)xchange of current information concerning prices may constitute a per se unlawful price-fixing agreement. United States v. Container Corp. of America, 392 U.S. 333 (1969); United States v. U.S. Gypsum Co., 438 U.S. 422 (1978)

8. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Antitrust Compliance Programs Should Specifically Address Contacts with Competitors Concerning Marketplace Activities, Including Prices Avoid direct contact with competitors on price- related issues Perhaps innocuous but often difficult to explain Cf. In re Workers’ Compensation Antitrust Litigation, 867 F.2d 1552 (8th Cir. 1989) To establish safe harbors for price or cost surveys »Limit the inquiry to historical data »Limit to aggregate data; no collection or disclosure of information on specific companies or customers »No attribution of data to specific contributing companies »At least 5 parties should report data; none of them should represent more than 25% of the data

9. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Antitrust Compliance Programs Should Specifically Address Contacts with Competitors Concerning Marketplace Activities, Including Prices To establish safe harbors for price or cost surveys »Use a third-party to conduct the survey »Survey should not contain analysis or recommendations »Survey participants must not discuss the survey results »Participation should be voluntary See, e.g., U.S. Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care, 4 Trade Reg. Rep. (CCH) ¶13,153 (1998); Maple Flooring Mfrs. v. United States, 268 U.S. 563 (1925)

10. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Obtain Price Information from Other Sources Other Than Competitors Filings Insureds Agents

11. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Other Defenses to Price or Rate-Related Antitrust Claims State action doctrine »Sandy River Nursing Care Ctr. v. Aetna Casualty & Sur. Co., 985 F.2d 1138 (1st Cir. 1993) Filed rate doctrine »Defense to damages claims »Allen v. State Farm Fire & Cas. Co., 59 F.Supp.2d 1217 (S.D. Ala. 1999) »N.C. Steel, Inc. v. Nat’l Council on Comp. Ins., 496 S.E.2d 369 (N.C. 1998)

12. W I L D M A N H A R R O L D | A T T O R N E Y S A N D C O U N S E L O R S © 2006 Wildman, Harrold, Allen & Dixon LLP Circumstances that Tend to Create Exposure to Antitrust Risks Market Crises »Rate inadequacy »Catastrophic losses Regulatory change »Optional federal chartering »Prior approval rating to open competition Prolonged failure to examine business practices or provide antitrust compliance guidance