Manipulation

INSURANCE

The question: Is insurance commerce? is now of prime importance to the $5.8 billion fire insurance industry. After 75 years of freedom from Federal regulation, the fire underwriters face an antitrust action, now before the U.S. Supreme Court, against which virtually their sole defense is that insurance is not interstate commerce.

Justice Attacks. The Justice Department's action is against the South Eastern Underwriters Association (196 stock companies, representing 80% of the fire insurance written in the U.S.). It charges that S.E.U.A. members: 1) fix standard, noncompetitive rates and contracts; 2) ban from reinsurance pools any companies that do not meet their "standards" --a severe penalty in fire insurance, where a large fire can wipe out a single company; 3) boycott nonconforming agents.

This tight framework lends itself to all kinds of manipulation, because fire risk varies from city to city and because supervision of fire insurance varies just as widely from state to state. Sample case cited by Attorney General Francis Biddle: the fire insurance rate on a farmhouse in Virginia, where state regulation is relatively tight, is about half the cost of the same coverage just over the border in North Carolina.

Moreover, said the Justice Department, a small-time state insurance official will think twice before he tackles such a formidable opponent as a big insurance company operating on a national scale.

Most startling proof of this came from Missouri--and incidentally led to the jailing of famed Boss Tom Pendergast for income-tax evasion. The criminal aspects of that case are more typical of the low state of Missouri politics than of the manner in which fire underwriters normally win friends and influence legislatures. Pendergast & Co. were convicted of collecting large slush funds for supporting the fire companies in a rate fight. The more pertinent facts: 1) since 1922, Missouri has been trying to enforce a 10% reduction in rates; 2) since 1930 it has been trying to collect (for Missouri policyholders) a 16 2/3% rate increase the industry put through in that year despite a flat no from the state authorities; 3) both issues are still bogged in the Missouri courts.

The industry insists that the Missouri story is not typical. But it also insists that combination to fix rates is not only typical but a necessary part of the business. The whole elaborate rating-board setup was established precisely because, in the old days, all-out competition involved cutting rates to the point where everyone --including the policyholder--went broke when a big fire came along. In other words, say the fire underwriters, they are not guilty of violating the Sherman Act, because the Act was never designed to apply to them, anyway.

Congress Defends. Last week, one month after the U.S. Supreme Court agreed to review the S.E.U.A. case (dismissed last year by the Atlanta District Court), the House Judiciary Committee voted out, 16-to-5, a bill that would flatly affirm the industry's We-Are-Not-Commerce defense: ". . . Nothing contained in the , . . Sherman Act, or the . . . Clayton Act, shall be construed to apply to the business of insurance." The Senate Judiciary Committee is getting ready to report out an identical bill, introduced by Indiana's bespectacled, hard-shelled Frederick Van Nuys and North Carolina's implacable Old Democrat Josiah Bailey. At first blush, the two bills look like a bold-faced --and well-lobbied--attempt to anticipate a pending decision of the highest court in the land. But the Congressmen had an issue far loftier than lobbies. They were in full cry over States' rights.

In 1868--22 years before the Sherman Act became law--the Supreme Court upheld the right of the State of Virginia to enforce its fire insurance laws against an agent acting for out-of-state companies. Ever since, insurance regulation has been a jealously guarded state prerogative; and insurance fees (including those from life insurance) now pay the states more than $100,000,000 in revenue yearly. That kind of money talked loudly to Congress: anti-Justice letters from state officials fattened their mailbags along with bleats from well-propagandized agents and policyholders frightened by Cassandra propaganda from the fire underwriters.

Facts v. Shibboleths. The Justice Department insisted that Federal policing of the antitrust laws does not imply any subtraction from the states' right to police the rest of the insurance business. And in its fight to separate shibboleths from facts it had a potent--though silent--partner: the $36 billion life insurance industry, which has quietly dissociated itself from the Bailey-Van Nuys bill and privately sees no reason why insurance should not be called commerce.

The race is now between Congress and the highest Court--which may rule early in the new year.

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