According to the theory of industry collusion, insurers have conspired to raise their prices and, to justify these price hikes, have manipulated their books to create a false appearance of financial distress.

This theory cannot be irrefutably disproved, but it is both factually and theoretically improbable. First, it contemplates what would surely be the broadest conspiracy in American anti-trust history. Over 3500 insurance companies are licensed to underwrite property and casualty insurance in the United States. It seems highly unlikely that so many companies have in some way conspired to control prices. The more plausible fallback position of the conspiracy theorists is that such a broad conspiracy is unnecessary. They claim that a handful of large insurers dominate the market and effectively control prices. A pending lawsuit, joined by the Attorneys General of nineteen states, alleges that 31 defendant insurers and co-conspirators have conspired to narrow coverage and in some way prevent their 3500 competitors from offering broader coverage. [7]

Even if we accept that this more limited conspiracy could be pieced together, many factors suggest that it has not. For one, the ease with which one can enter the insurance market (little fixed investment is required) would make it very difficult to protect such a monopoly. Second, conspiracies to raise prices are normally successful only where the sellers have a homogenous product. When the product differs in quality and/or design and manufacture, price fixing is more difficult, as it is both harder to agree on a price and easier for cartel members to cheat on that price by varying design or selling different quality goods.

It is hard to imagine a less standardized product than products liability insurance, the line of coverage in which the crisis has been most acute. Because the liability for a pharmaceutical company manufacturing vaccines differs so radically from that of a hardware manufacturer producing claw hammers, products liability policies tend to be tailored to specific customers. If insurers wished to conspire to raise prices and profits, why not do so in more uniform lines, such as fire insurance, in which a standard policy is used nationwide, or workers’ compensation or auto insurance, in which state laws require standardized coverage? Price fixing would also be difficult in products liability because insurers could cheat through premium dividends and discretionary credits against filed rates.

The collusion theory is also inadequate to explain why some insurers are withdrawing from the market completely, or refusing to underwrite certain types of insurance at all. The purpose of a price conspiracy is to raise the price at which goods are sold – not to stop selling goods.

Even more baffling, for conspiracy theorists, must be the fact that the crisis has also affected self-insured municipalities, manufacturers, and non-profits. If the only problem were an insurance industry conspiracy, one would expect self-insureds to be insulated. Instead, they have been among the hardest hit.

Furthermore, the collusion theory fails on the facts. Its proponents argue that insurers have doctored their books to create the appearance of financial hardship where none exists. Insurers, they claim, have made unnecessarily large upward adjustments in the reserves they maintain to make future payouts on liabilities already incurred but not yet settled. These reserves are carried on the books as a liability (the money being earmarked to pay claims), thus making the insurers books look worse than they are even as the insurers collect interest income on the money set aside to cover the reserves. In fact, however, the available data strongly suggest the opposite conclusion – that insurers have, in recent years, underestimated their needed reserves. For example, by the end of 1984, insurers had already paid out more than 100% of the funds reserved for claims occurring prior to 1976 – yet claims continue to be paid on these old policies. The numbers show the same pattern almost regardless of where one chooses to begin – reserves set aside ten years ago, for all claims prior to 1979, were also all paid out by the end of 1984, though claims on those policies continue to roll in. [8]

The doctored books argument again fails to explain why insurers have manipulated reserves only in certain commercial casualty lines and not in others. And it still fails to account for the refusal to sell at any price. [9]

The collusion theory has been dismissed by both the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice. [10] An independent advisory commission appointed by New York Governor Mario Cuomo also rejected an insurance industry conspiracy as an explanation for the problem. [11]

Like all conspiracy theories, the idea of insurance industry collusion to set prices can never be firmly disproved – its proponents can always argue that the smoking gun simply has yet to be found. However, given the factual evidence and theoretical arguments against it, this theory seems inadequate as a basis for public policy.