John Christie October 6, 2005

1. All You Ever Wanted To Know About Rating Bureaus Presentation To ALTA John ChristieOctober 6, 2005

2. Preface • a complex subject • serious antitrust and regulatory issues • a significant history of both federal and state litigation/regulation, particularly in your industry • must proceed with your eyes wide open, with a knowledgeable appreciation of both the burdens and the benefits involved

3. General Prevailing Antitrust Rule Collective ratemaking by competitors in a state licensed rating bureau context is per se illegal price-fixing absent an applicable immunity or exemption: FTC v. Ticor (US Supreme Court)(1992): “This case involves horizontal price fixing . . . . No antitrust offense is more pernicious than price fixing.” In re Kentucky Household Goods Carriers Association (Federal Trade Commission)(2005): We conclude that the collective ratemaking at issue here is per se unlawful.”

4. Federal Antitrust Law – Potentially Applicable Exemptions McCarran Ferguson Act, 15 U.S.C. §§ 1011-1015, a statutory exemption applicable in certain instances to insurance companies State Action Doctrine, a creature of the Supreme Court’s interpretation of the scope of the Sherman Act applicable in certain instances to entities, including insurance companies, subject to state regulation One or both of these federal antitrust exemptions MAY apply to the activities of a state licensed rating bureau

5. McCarran-Ferguson Act Two relevant elements – activity must embrace the “business of insurance” activity must be “regulated by state law”

6. “Business of Insurance” • A term of art for McCarran purposes, separate and apart from state law or industry usage • Defined by the Supreme Court to extend only to activity involvingthe transferring or spreading of a policyholder’s risk and constituting an integral part of the policy relationship between the insurer and the insured

7. “Business of Insurance” (cont’d) • Twofederal courts of appeal have told us what the “business of insurance” does NOT include: • Ticor v. FTC (Third Circuit Court of Appeals) (1993): “{The title search and examination does not itself spread or transfer risk. At most, title searches identify defects of title.” But see, Commander Leasing Co. v. Transamerica Title Insurance Co. (Tenth Circuit Court of Appeals)(1973) “Title search and examination was a “condition precedent” to the issuance of title insurance

8. “Business of Insurance” (cont’d) • US v. Title Ins. Rating Bureau of Arizona (Ninth Circuit Court of Appeals) (1983): “We conclude that the escrow process itself does not spread or underwrite title insurance risk” and “buying escrow services is separate from buying title insurance.”

9. “Regulation by State Law” • “When state legislation generally proscribes, permits or otherwise regulates the conduct in question” Crawford v. American Title Insurance Company (Fifth Circuit Court of Appeals)(1975) • The Insurance Unfair Methods of Competition Act, “reaching as it does all unfair methods of competition, places [antitrust price fixing claims] within the ambit of activities over which the Insurance Commissioner has broad regulatory control” • This same Act is to be found in virtually all of the states

10. McCarran Act Summary • Rate filing activities of a title insurance rating bureau is of some uncertainty at least with respect to the filing of rates beyond those relating to the assumption of the risk • Likely to be sufficient “regulation by state law” because of the Insurance Unfair Methods of Competition Act

11. State Action Doctrine • Based on principles of state sovereignty, allows the states to implement legitimate regulatory interests even if inconsistent with the goals of the federal antitrust laws • Appropriately enacted and implemented, state regulation can operate to displace the federal antitrust laws otherwise applicable

12. State Action Doctrine – Two Requirements • Conduct must be: • “clearly articulated and affirmatively expressed as state policy” • and • “actively supervised” by the state itself

13. State Action Doctrine – State Policy • Conduct in this context is “clearly articulated and affirmatively expressed as state policy” if the state, by statute, affirmatively approves the existence of title insurance rating bureaus US v. Southern Motor Carriers (US Supreme Court) (1985). • Eg.: “Cooperation among rating organizations, and among rating organizations and insurers in rate making . . . is authorized” Arizona Revised Stats. § 20-365

14. State Action Doctrine – Active Supervision • Conduct in this context is “actively supervised” if the state “has exercised sufficient independent judgment and control so that the details of the rates or prices have been established as a product of deliberate state intervention.” FTCv. Ticor (US Supreme Court) (1992). • Characterized the factual record as suggesting: • that the states [Montana and Wisconsin] “at most” checked the rate filings for “mathematical accuracy” • and that the bureaus there had not provided supporting evidence for filings sufficient to allow the regulators to do their job

15. State Action Doctrine – Active Supervision • Ticor itself and cases since have not been helpful in telling us exactly what constitutes “sufficient independent intervention and control” • the states were either hyper-active, holding hearings, writing opinions, etc. – typically public utility cases - or the states did little or nothing at all – typically motor carriers

16. State Action Doctrine – Active Supervision • However, the standard is clearly more than a “basic level of activity” • The FTC: “It is essential that the state’s chosen procedures allow meaningful review of the merits of the conduct at issue to ensure that it comports with the state’s own normative standards” Kentucky Household Goods Carriers Assoc. (2005)

17. State Action Doctrine – Summary • Therefore, you have to assess whether a state’s policy is to permit rating bureaus and whether the state will be in compliance with the active supervision requirement – and make this assessment in advance of rating bureau activity • And you have to be prepared to provide the state with sufficient information to allow them to make informed regulatory judgments

18. State Antitrust Laws • Generally speaking, they all have laws similar to the Sherman Act • – but they do NOT necessarily have similar exemptions potentially applicable to rating bureaus • -- have to consider applicable state law in your state

19. State Antitrust Laws • Therefore – • Look to whether specific antitrust statutory exemptions applicable to rating bureau conduct exist • E.g.: “The provisions of this [state antitrust law] shall apply to licensed insurers . . . to the extent not regulated by the provisions . . . of the insurance law” Donnelly Act, Art. 22, § 340 (2) (New York) • Or

20. State Antitrust Laws • Whether, under state law, where there is a conflict between separate state statutes, the controlling principle of statutory construction is that the specific governs over the general • E.g.: “Conduct which might normally be a violation of [state] antitrust statutes is, nevertheless, permissible if specifically authorized by other [state] statutes.” Tucson Unified School District v. Chicago Title Insurance Company (Court of Appeals ofArizona) (1991)

21. General Rules of Rating Bureau Conduct • Evaluate in advance the potential applicability of both federal and state antitrust exemptions • Evaluate in advance the state regulatory atmosphere • Adhere to all state law requirements with respect to the organization and maintenance of a bureau, including who can be members and required audits • Establish a prior approval procedure for rate reviews

22. General Rules of Rating Bureau Conduct (cont’d) • Encourage the establishment of state created objective criteria for rate review • Be prepared to adequately support rate filings • Continuously monitor the workings of the bureau and of state regulators