1. Antitrust Issues in the Insurance Industry A Webinar presented by Edwards Angell Palmer & Dodge LLP Ruth T. Dowling October 2, 2007

2. 2 Today’s Program  Brief Statutory Background  McCarran-Ferguson: Will the exemption be repealed?  Recent Antitrust Concerns In the Insurance Industry  The Broker/Insurer Relationship: Beyond the Spitzer Investigation  Reinsurance Facilities: A CT AG Investigation

3. 3 Background The purpose of the antitrust laws is to maximize competition. The goal is to maximize benefits to consumers.

4. 4 Antitrust Laws  Sherman Act  Section One: Conspiracies  Section Two: Monopolization  Clayton Act  Section Seven: Mergers & Acquisitions that may substantially lessen competition  Hart Scott Rodino Antitrust Improvements Act  McCarran Ferguson Insurance “Exemption”

5. 5 Sherman Act, Section One: Agreements in Restraint of Trade Section One Prohibits  Agreements;  which unreasonably interfere;  with free and open competition.

6. 6 Sherman Act, Section One: Restraints of Trade or Commerce “Rule of Reason”  Evaluates the state of competition with, as compared to without, the relevant agreement in place.  Balancing procompetitive and anticompetitive effects.  Key Metrics  price  output  quality

7. 7 Sherman One Example Spitzer investigation and follow-on private litigation over contingent commission agreements and alleged bid- rigging.

8. 8 Sherman Act, Section Two: Monopolization Elements of a Section Two Claim  Intent to acquire, use or maintain monopoly power by unfair and exclusionary conduct  Relevant market determines existence of monopoly power  product/service market  geographic component

9. 9 Sherman Act, Section Two: Monopolization (continued) Elements of a Section Two Claim  Factors used in assessing monopoly power:  market share  ease or difficulty of entry into the market  relative size of competitors  pricing strategies  historical trends within the industry

10. 10 Business Conduct Typically Tested Under Section Two  refusals to deal/exclusive dealing arrangements  monopoly leveraging  predatory pricing

11. 11 Clayton Act  Essentially same application as Sherman Act  “Incipiency Standard”

12. 12 Hart Scott Rodino  HSR Act requires regulatory approval of acquisitions valued at $59.8 million or more if the parties are sufficiently large (one party with assets of $119.6 million and the other with at least $12 million) or any acquisition with valuation of at least $239.2 million.  Deal cannot close until regulatory clearance given.

13. 13 McCarran-Ferguson Act  Enacted in response to United States v. South-Eastern Underwriters Ass’n, a 1944 US Supreme Court decision which sustained a criminal antitrust indictment of a rating organization. The Supreme Court rejected the argument that insurance was not interstate commerce.  Primary concern of McCarran was to protect cooperative ratemaking efforts.

14. 14 McCarran-Ferguson Act (continued)  Insurers are exempted from federal antitrust laws under two conditions:  The challenged practice is part of the “business of insurance” and  The practice is “regulated by State law.”  Exemption does not reach acts or agreements of “boycott, coercion, or intimidation.”  Current movement to repeal the Act is gaining momentum.  State-level enforcement activity largely undeterred by the Act.

15. 15 McCarran-Ferguson Act (continued)  The “Business of Insurance”  Conduct-oriented test, not blanket exemption for activities of insurance companies.  Criteria courts will consider:  Whether the practice has the effect of transferring or spreading a policyholder’s risk;  Whether the practice is an integral part of the policy relationship between the insurer and the insured; and  Whether the practice is limited to entities within the insurance industry.

16. 16 What Will Happen to McCarran?  Bills in House/Senate to Repeal  Antitrust Modernization Commission concluded Congress should look carefully at all exemptions  On September 25 th, the EC issued the Final Report on its Competition Inquiry into the Business Insurance Sector.  Key Issues:  Concerns over coverage of large risks through co- and reinsurance “following markets”  Remuneration of intermediaries  Block Exemption – Serious concerns, will revisit in 2009

17. 17 Does McCarran Matter?  Only exemption from federal antitrust laws, not state regulation  Potential fall-out:  Increased number of private class action antitrust suits  Closer scrutiny of insurance merger and acquisition activity

18. 18 The Broker/Insurer Relationship  State Attorney General focus:  NY: Spitzer contingent commission/bid-rigging  CT: Reinsurance facility investigation  Concerns that brokers/insurers too cozy and acting to the detriment of the insured.

19. 19 Rule of Reason Analysis  Primarily analyzed as vertical arrangements (unless broker acting as a conduit for competitor insurers)  Will be analyzed under Rule of Reason analysis which weighs anticompetitive aspects against pro-competitive efficiencies.  Problematic: agreements that the broker will not seek competitive bids in return for higher commission; agreements that broker will direct business without considering competitive bids.

20. 20 Preferential Treatment of Brokers  Is an insurance company entitled to have special underwriting rules or special claims handling processes for only selected brokers?  Can an insurance company give certain brokers a dedicated service channel?  Can an insurance company give one broker an exclusive right to distribute special products for a period of years?

21. 21 Preferential Treatment of Brokers (continued)  Considered “vertical arrangements” under antitrust analysis.  Analyzed under “rule of reason.”  Balancing of pro-competitive benefits with any anticompetitive harms.

22. 22 Preferential Treatment of Brokers (continued)  Generally these vertical arrangements are permissible unless:  They control the only market for the product and therefore the non-favored distributors/brokers have no access to any comparable product.  They permit the use of monopoly power in one market to leverage into another.

23. 23 Banning Brokers  Can an insurance company refuse to deal with certain brokers? Can a broker refuse to deal with certain insurance companies?  In general, yes.  A company “has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently.” (Supreme Court, Monsanto Corp. v. Spray-Rite Service Corp.).  Potential problem areas:  Concerted refusal to deal.  Termination of ongoing relationship likely to cause fatal injury to rival (Aspen Skiing)

24. 24 Reinsurance Facility Investigation  The typical practice of reinsurance facilities is being evaluated by at least one State Attorney General for potential antitrust concerns.  Facilities will generally be considered “joint ventures” under US antitrust laws and will be evaluated under “Rule of Reason.”  Courts/Enforcers will evaluate whether an agreement on price & terms is “necessary” in order to create and market the insurance product.  Courts/Enforcers will evaluate the procompetitive benefits of the facility – does it add capacity that would not otherwise exist and/or does it permit the sharing or spreading of risk?

25. 25 Protecting Your Company  Documents  Eliminate Unnecessary Documents  Retention programs  Address corporate culture of “Over Documenting”  Emails  “Don’ts”:  War metaphors  Overemphasize adverse effects on competitors/inflate benefits of reducing competition  “Do”:  Stress positive benefits to consumers

26. 26 The Problem of Emails  Actual Email from In-House Counsel to Management:  “I’m sending you this information by email because I have been directed by outside counsel not to write any of this down...”

27. 27 Rules of Thumb  Meetings  Inventory who is attending which meetings  Educate “usual suspects”  Written agendas should be the norm  High risk meetings: Counsel should clear agenda or attend  Identify Key Person in Company Responsible For Fielding Competition Inquiries