Insurance Against Competition: How the McCarran-Ferguson Act Raises Prices and Profits in the Property-Casualty Insurance Industry

Abstract

The insurance crisis of the mid-1980s is over, and the insurance cycle has turned, just as it did in 1977 following the crisis of the mid-1970s. Why did insurer profitability bottom out in 1984-85, leading to the dramatic rate increases and the refusals to write insurance that comprised the insurance crisis of 1985-86? In their article, Sources of the Crisis in Liability Insurance: An Economic Analysis, Richard Clarke, Frederick Warren-Boulton, David Smith, and Marilyn Simon ("the authors") suggest that the expansion of tort law caused the crisis and reject the relevance of the immunity from antitrust prosecution granted to the insurance industry by the McCarran-Ferguson Act. The empirical evidence, however, demonstrates the opposite.