Model-Based Pricing in Hurricane Insurance: A Case Study for Judicial Reform of the McCarran-Freguson Act

The McCarran-Ferguson Act (MFA) exempts various aspects of state insurance operations from federal antitrust enforcement. This exemption is a source of longstanding controversy, due in part to its potentially harmful effect on consumers in product pricing. In hurricane insurance, there is a burgeoning debate concerning insurers’ use of predictive computer models rather than shared loss data to set premiums for the industry. By using these models in hurricane-prone states, insurers have increased the price of hurricane insurance dramatically. Where these new prediction methods are used, MFA exemption may facilitate supracompetitive pricing in ways its architects could not have foreseen. This Note analyzes MFA’s economic effects on model-based pricing in hurricane insurance to argue for judicial revision of the Act. Through an effects test, it proposes conditioning eligibility for antitrust exemption on the economic benefits of a challenged activity exceeding its costs.