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Regulatory Comments I. Introduction We appreciate the opportunity to comment on the proposed changes to the premerger notification rules recently published by the Federal Trade Commission (“FTC”), . . .
We appreciate the opportunity to comment on the proposed changes to the premerger notification rules recently published by the Federal Trade Commission (“FTC”), with the concurrence of the Assistant Attorney General of the Antitrust Division of the U.S. Department of Justice (“DOJ” or “Division”).
Merger law in the United States has largely tracked developing economic theory. This approach has tended to reject structural presumptions about a merger’s likely effects on competition and consumers (understanding, that is, that “big” is not necessarily “bad”). It encourages weighing the potential anticompetitive effects of a transaction against its potential procompetitive efficiencies.
That trend in enforcement and jurisprudence notwithstanding, current leadership at the agencies has signaled a more aggressive approach to enforcement, dismissing likely efficiencies and other merger benefits. For instance, the Chair of the FTC has argued that Section 7 of the Clayton Act:
is a broad mandate aimed at prohibiting mergers even when they do not constitute monopolization and even when their tendency to lessen competition is not certain. . . . [E]ven if a merger does create efficiencies, the statute provides no basis for permitting the merger if it nevertheless lessens competition.
The substantive changes to both the merger guidelines and the premerger notification form relate to this goal of more aggressive merger enforcement. As we explain below, while certain changes are required by statutory amendments to the Clayton Act, many of the proposed amendments would be both unnecessary and inappropriately burdensome and costly. Collectively, they would exceed the agencies’ statutory authority, under Section 7A of the Clayton Act, to require the production of “such documentary material and information relevant to a proposed acquisition as is necessary and appropriate … to determine whether such acquisition may, if consummated, violate the antitrust laws.”
While further research, enforcement experience, and legal precedent might develop such that certain additional information would reasonably be required of all filers, the agencies have not presented the requisite developments in the NPRM or, to the best of our knowledge, elsewhere. Such developments should, at least, precede the imposition of substantial new filing requirements. The HSR regulations and form are not supposed to be a substitute for, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.
The scope of the NPRM and the diversity of additional information that filers would be required to produce should the proposals be adopted together raise a fundamental question: how will the new requirements materially improve merger screening? Are the agencies often or systematically clearing anticompetitive mergers because of information not included in initial filings, and that staff cannot glean via, e.g., follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests? Would such mergers fail to clear under the proposed filing requirements? Answers to these and other questions, which nowhere appear in the NPRM, are needed to maintain that these changes are necessary and appropriate, given the other means by which the agencies can obtain information to inform premerger screening (such as through second requests).
Section I offers some background concerning the purpose of the HSR form and filing requirements, and on the changes that have been proposed. Section IV provides a brief discussion of the proposed changes that are necessary or otherwise reasonable. Section V discusses the changes that are problematic. These would increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers; they would impose additional burdens on agency staff; yet it is unlikely that they would provide countervailing benefits to competition and consumers.
At the outset, we note that the proposed changes to the premerger notification rules (“NPRM”) were closely followed by the agencies’ publication of new draft merger guidelines. That makes some sense, as the two are closely intertwined. Section 7 of the Clayton Act prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” In 1976, Congress enacted the Hart–Scott–Rodino Antitrust Improvements Act (“HSR Act”) to facilitate enforcement of Section 7. Specifically, the HSR Act created a premerger notification mandate, under which transactions exceeding certain market share or value thresholds must be reported to the DOJ and FTC at least 30 days prior to closing. The agencies use these 30 days to screen proposed large transactions and to determine whether further scrutiny is needed as to whether a transaction might violate the Clayton Act.
The premerger notification process is a congressionally created mechanism that requires parties to relatively large transactions to provide the agencies with notice of, and opportunity to go to court to enjoin, those transactions before they close. Initial filings are a critical basis on which agency staff can screen proposed mergers effectively, although, of course, the production required by the HSR form itself is far from the only source of information available to staff screening mergers prior to closing.
Reviewing staff can—and routinely do—ask merger-specific follow-up questions during that initial 30-day period, in addition to consulting third parties and other sources of information. The agencies can then issue a request for additional information, called a second request, to the parties to get further details about a transaction and to decide whether to seek to enjoin the merger from proceeding. With that second request, the reviewing agency may extend the screening period for an additional 30 days. In the interim—often prompted by additional staff questions—parties may elect to “pull and refile,” which restarts the initial 30-day clock and permits additional information gathering by the staff in advance of a decision regarding whether to issue a second request.
The HSR premerger notification requirements address a basic problem of antitrust law: you can’t “unscramble an egg.” Once a merger is finalized, businesses begin intermingling their operations, personnel, finances, business plans, trade secrets, and intellectual property in various ways. The larger the firms—or the more complex the integration or consolidation—the more difficult it becomes to undo (or “unwind”) a consummated merger. Premerger notification creates an opportunity for the antitrust agencies to identify and pause pending mergers, in order to allow for more thoroughgoing investigation of their potential competitive effects before any eggs have been scrambled.
When the HSR Act was adopted, it was expected that only 150 or so transactions each year would be large enough to trigger review. In time, that estimate proved to be off by more than an order of magnitude; in recent years, more than that many transactions are notified each month. The effect has largely been to transition merger law in the United States from an ex post enforcement-based regime to an ex ante regulatory regime.
Despite this change, the premerger notification regime is generally viewed as successful.  This is because the program has been designed and managed with the understanding that it is meant only to identify mergers that are likely problematic; and, conversely, that it is meant not to impede the vast majority of mergers that are unlikely to be problematic (but likely procompetitive or benign).  Combined with the merger guidelines—which have (in the past) provided clear guidance on how the agencies will review materials submitted as part of the premerger notification process—the HSR Act’s premerger notification process has created a robust and relatively low-burden system. This system enables business and antitrust agencies alike to identify problematic transactions, while allowing most deals to proceed with minimal cost or delay. The balance is captured in a December 2020 advance notice of proposed rulemaking that contemplated other premerger-filing amendments: “[t]he Agencies have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns, while at the same time not receiving filings related to acquisitions that are very unlikely to raise competition concerns.”
A very large majority of reported mergers are consummated without challenge or allegation of likely anticompetitive effects. For example, the agencies reported challenging only 32 of the 3,520 transactions reported in fiscal year 2021; that is, 0.009%. Across the 10-year period from fiscal years 2012-2021 (inclusive), in the vast majority of cases, neither agency even issued a second request. It is reported that DOJ issued second requests in frequencies ranging from 0.7% to a high of 2.1% in 2012, while FTC issued second requests in 1.4% to 1.9% of investigations.
The agencies’ multiple opportunities to receive and request information prior to the consummation of a transaction, along with the relative infrequency with which additional information is requested, or with which transactions are challenged, are the context in which to ask whether it is “necessary and appropriate” to require the production of certain information with the initial HSR filing. As a simple example, if roughly 2% of noticed transactions receive a second request, the compliance burden of requesting information of all firms as part of the premerger notification process is roughly 50 times greater than it would be if the information were requested only with a second request. And that burden is one imposed on both reviewing staff and filers.
From the outset, it is important to understand that the proposed amendments are anything but costless. Estimates suggest the new rules will lead to somewhere between $350 million and $2.23 billion in additional annual compliance costs. Not only will these additional costs deter firms, at the margin, from filing—and hence from merging—but they will also be passed on to consumers (at least in part) when firms do. The substantial costs that would be imposed by many of the proposed requirements raises the bar for deeming such amendments appropriate.
Even the FTC estimates a massive increase in compliance costs of approximately $350 million, to more than $470 million per year. But that estimate is likely a serious underestimate, as it is based on, among other things, an unscientific “estimate” of the time involved and a dated assumption about the average hourly costs imposed on filers’ senior executives and firms’ counsel.
The U.S. Chamber of Commerce conducted “a survey of 70 antitrust practitioners asking them questions about the proposed revisions to the HSR merger form and the new draft merger guides.” Based on average answers from the survey respondents, the new rules would increase compliance costs by $1.66 billion, almost five times the FTC’s $350 million estimate. For the current rules, the average survey response puts the cost of compliance at $79,569. Assuming there are 7,096 filings (as the FTC projects for FY 23), the total cost under the current rules would be $565 million. Under the new rules, the average survey response estimates the expected cost of compliance to be $313,828 per transaction, for a total cost of $2.23 billion. The relevant total costs for all filing are summarized in Table 1. Table 2 presents the numbers on a per-filing basis.
Even if we assume the U.S. Chamber of Commerce’s survey was biased toward practitioners who work on more complex and costly transactions, it is dramatically higher than the FTC’s estimate. The FTC estimates that 45% of filings have overlaps. For simplicity, assume survey respondents work only on overlaps and the remaining 55% of filings require no extra work. Even with these extreme assumptions, the amendments would increase the cost of filing by nearly $750 million—more than double the FTC’s estimate.
On any reasonable estimate, the amendments are likely to impose substantial new costs on all filers and may have significant effects on firms’ incentives to merge—and important consequences for consumers when they do. They may also have an outsize impact on relatively small filers. The merits of these amendments should thus be carefully considered against their substantial and widespread costs.
The HSR form has been amended many times since 1976. Some of the amendments have been minor or even ministerial, and many—not all—have been required by statutory amendments to the pertinent provisions of the Clayton Act. For example, revised reporting thresholds were noticed in January 2023, January 2022, and February 2021, and the commission published an advance notice of proposed rulemaking regarding various potential changes in December 2020.
Consistent with past practice, some of the amendments proposed in the NPRM implement 2022 amendments to pertinent provisions of the Clayton Act, while others appear to streamline or clarify reporting requirements. That is, some of the proposed changes are necessary and others appear at least appropriate.
First, as noted in the NPRM, certain proposed amendments implement 2022 statutory amendments imposed by the Merger Filing Fee Modernization Act of 2022. For example, the 2022 statutory amendments require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern” and correspondingly requires that the agencies collect such information with premerger filings, and that they promulgate regulations to that effect. The NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of 2022 congressional charge.
Second, the NPRM’s proposal to amend Part 803 to require electronic filing will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development. As observed in the NPRM, the agencies have been accepting electronic HSR filings since March 2020. Many filers have taken advantage of the electronic-filing option since then. Furthermore, premerger screening by staff can be carried out more efficiently with electronic documents. Given the increased digitization of pertinent documents across the economy, it is reasonable to assume that the formal routinization of electronic filing will streamline both premerger filing and the screening of filings by agency staff. The extent to which this will make premerger filing and screening more efficient depends on the successful implementation of an e-filing platform. If successful, the benefits should be substantial.
While several of the NPRM’s proposed changes appear to be reasonable attempts to implement new statutory mandates or, as in the case of electronic filing, pragmatic initiatives to update and streamline the filing and review processes, others appear cumbersome, costly, and unnecessary or, at best, substantially unjustified by the NPRM or other available evidence.
For example, Parts 4(c) and 4(d) of the current premerger notification form require merging parties to provide copies of “all studies, surveys, analyses and reports which were prepared . . . for the purpose of evaluating or analyzing the acquisition” and “all Confidential Information Memoranda . . . that specifically relate to the sale.” The proposed changes would require an additional “narrative that would identify and explain each strategic rationale for the transaction.” That narrative would not have been created in the ordinary course of business, and likely not even in the context of contemplating a transaction. Creating it would come at a real cost, in terms of billable hours and executives’ time. This might imply a requirement that the parties prepare a reply brief to a potential future antitrust challenge to the transaction, without the benefit of knowing the specific arguments that the agencies would make against it.
In brief, the changes proposed in the NPRM would force parties to submit far more information than the HSR rules now require. Much of this information appears to be of, at best, peripheral value to screening mergers under the Clayton Act. The result is that the NPRM would greatly increase the burden placed on all merging parties, while apparently offering little countervailing value to competition and consumers, or even to the staff charged with premerger screening. Some have even suggested this may be the purpose of the changes: “killing deals softly” by making mergers more costly in an effort to deter at least some of them, including even some that ultimately would be cleared by agencies and courts.
The NPRM would require both filing entities to submit considerable additional material about supply and other non-horizontal relationships between the parties, including both formal agreements, such as supply, distribution, purchase, and franchise agreements, and a “supply relationships narrative section that would require each filing person to provide information about existing or potential vertical, or supply, relationships between the filing persons.” The latter type of information would not likely be documented in the ordinary course of business.
The NPRM acknowledges that “this will increase the burden on filers whose transaction involves existing supply relationships or who supply or purchase from companies that compete with the other filing party.” The NPRM also acknowledges that 2001 amendments to the HSR rules removed some additional vertical information that had been required “because the type of information collected did not prove useful enough to the Agencies as a screen for potential non-horizontal relationships to justify the burden of providing it at that time.” The extra burden is now supposed to be justified, however, as “it would allow them to quickly identify those transactions that raise concerns about non-horizontal competitive effects.”
The basis of the commission’s claim about a newfound utility for such required production is unclear. There remains the basic question of how the new requirements will materially improve merger screening. The agencies do not offer any evidence to suggest they often or systematically clear anticompetitive mergers because of information that is not included in initial filings, that staff cannot obtain via follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests, etc. In other words, there is little to suggest that many mergers would be challenged, but for the supposed lacunae in the HSR requirements.
It is worth recalling, in that regard, that a “second request” extends the initial 30-day screening period by an additional 30 days, and that Section 7A of the Clayton Act affords the agencies considerable discretion in determining “ all the information and documentary material required to be submitted pursuant to such a request.” That is, the agencies have ample opportunity to obtain necessary documents that are not included in the initial premerger notification.
When the draft merger guidelines were issued, an accompanying statement by FTC Commissioner Alvaro M. Bedoya, joined by Chair Lina Khan and Commissioner Rebecca Slaughter, also addressed the question of what is missing from the extant filing requirements—i.e., what missing information impedes merger screening, to the detriment of competition and consumers? Addressing “periods of high merger activity” generally, and mergers by large tech firms specifically, the statement argues that a:
lack of relevant information is especially problematic during periods of high merger activity . . . The Commission’s recent 6(b) inquiry into unreported acquisitions by Apple, Amazon, Facebook (now Meta), Google, and Microsoft during 2010-2019 also highlighted the importance of collecting more information on the firm’s history of acquisitions, including non-horizontal and small prior acquisitions. The study captured how these firms structured acquisitions, the sectors they had identified as strategically important for acquisitions, and how these acquisitions figured into the companies’ overall business strategies.
Of course, small or non-horizontal mergers might be competitively significant under particular facts and circumstances. But the study in question does not find, or even suggest, that such transactions have been typically, frequently, or in any instance anticompetitive, much less that the NPRM’s proposed changes would have allowed the staff to spot such anticompetitive mergers before they were consummated. Indeed, the study does not appear to address at all the question of whether any mergers of interest were anticompetitive. And the report expressly states that it “does not make recommendations or conclusions regarding the HSR thresholds.”
A recently published paper by Ginger Zhe Jin (former director of the FTC’s Bureau of Economics), Mario Leccese, and Liad Wagman (formerly a senior economic and technology advisor in the FTC’s Office of Policy Planning who, in that capacity, played a leading role in conducting the above 6(b) study) is at least somewhat in tension with the commissioner’s representation of the study. The paper finds, among other things, that “GAFAM acquisitions are less concentrated across tech categories than other top acquirer groups,” and that “[o]verall, we find that technology acquisitions do not shield GAFAM from competition, at least not from other GAFAM members or other firms that acquire in the same categories.”
To be sure, neither the FTC study nor the related—more thorough—investigation by Jin, Leccese, and Wagman, demonstrates that none of the mergers in question had anticompetitive consequences. They do, however, sharpen the question of the agencies’ basis—if any—for requiring considerable additional information. In brief, the NPRM presents no evidence to contradict or reverse the 2021 determination that the screening utility of such additional non-horizontal information did not justify the burden it imposed. And that is a burden on both filing parties and reviewing staff.
The NPRM proposes to require the production of material for “a new Labor Markets section” comprising considerable information on employees of the merging parties—information not previously identified under the HSR regulations. The likely utility of this information is unclear.
Both the acquiring party and the target would be required to gather information on their employees in each of five standard occupational classification (SOC) categories, with occupations defined by six-digit SOC codes. For each of the five largest such groups of employees, both filers would be required to identify any SOC codes in which they both employ workers, as well as any overlap in employees’ commuting zones and the total number of employees within each commuting zone.
The NPRM acknowledges that neither six-digit SOC codes (developed by the U.S. Bureau of Labor Statistics) nor commuting zones (as determined by the U.S. Agriculture Department’s Economic Research Service) were developed to facilitate competition analysis generally, or merger screening specifically. Thus, they do not determine the product/labor markets or geographic markets in which labor competition might be impeded. The NPRM nonetheless suggests that such information will serve as a useful “screen” or “initial proxy for labor issues while balancing the burden on filers by limiting the request to their five largest categories of workers.”
Given the systematic misfit between the proposed “Labor Markets” section and any actual labor markets, given the agencies lack of experience in analyzing the local labor-market effects of proposed mergers, and given the hard questions of when or under what conditions such labor-market effects might be both material and unlikely to covary with product-market effects, we suggest that the screening utility of the new information remains unclear.
In addition, the NPRM seeks comment on the question of whether such information would be costly to collect. In that regard, it is worth noting that firms are highly unlikely to collect or maintain this employee information in the manner proposed in the ordinary course of business. Hence, the gathering of such information might represent a substantial new burden on HSR filers. Compiling such information is not what is ordinarily understood to be “production” in the discovery context, and it would be a burden with unclear benefits to competition and consumers.
Of course, certain labor-market information may be pertinent to the analysis of certain mergers. But if it is unclear what new labor information would be useful, reasonable, and necessary to merger screening, then further research—as well as further enforcement experience—is warranted to determine the scope of such information before the imposition of costly regulations. As noted in the introduction to these comments, the HSR rules and form are not supposed to be substitutes for enforcement experience or, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.
In addition, both filing firms would be required to identify various “worker and workplace safety information.” Specifically, for the five years immediately preceding the filing:
…any penalties or findings issued against the filing person by the U.S. Department of Labor’s Wage and Hour Division (WHD), the National Labor Relations Board (NLRB), or the Occupational Safety and Health Administration (OSHA) in the last five years and/or any pending WHD, NLRB, or OSHA matters. For each identified penalty or finding, provide (1) the decision or issuance date, (2) the case number, (3) the JD number (for NLRB only), and (4) a description of the penalty and/or finding.
The purported rationale for this requirement appears strained. The NPRM suggests that “[i]f a firm has a history of labor law violations, it may be indicative of a concentrated labor market where workers do not have the ability to easily find another job.” That is not impossible, but it does not seem likely, and the agencies provide no basis on which to think that the signaling value of such information would be significant.
According to the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), these types of violations occur most often in the construction and general-industry sectors. Of the 10 most frequently cited OSHA violations, five are in the construction sector—not commonly a highly concentrated one—and five are in “general industry.” We are not aware of any literature showing a significant correlation between such violations and highly concentrated product markets (or even industries), or with highly concentrated labor markets, much less with anticompetitive mergers, and the NPRM does not cite any.
As described briefly in the background section of these comments above, certain aspects of the premerger notification process are specified in the statute, while others are left to agency implementation and discretion. Section 7A(a) of the Clayton Act specifies the transactions for which notice must be given. And Subsections (b)(1) and (e)(2) specify the duration of the initial waiting period, as well as that for second requests. But other aspects of the premerger notification process are delegated to the agencies to develop by rule, requiring that:
The Federal Trade Commission, with the concurrence of the [DOJ] and by rule in accordance with section 553 of title 5, consistent with the purposes of this section—shall require that the notification required under subsection (a) be in such form and contain such documentary material and information relevant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to determine whether such acquisition may, if consummated, violate the antitrust laws[.]
Implementation of premerger notification is subject to the rulemaking process outlined in Section 553 of the APA. This process requires, for instance, putting out a notice of proposed rulemaking, soliciting comments, and publishing final rules that explain their basis and respond to substantial comments. Rules adopted through this process carry the force of law and are binding on parties and the courts. A challenge to such rules would need to show that the agency had been arbitrary or capricious in adopting them, or that there were defects in the rulemaking process such as a failure to respond to significant comments or adoption of final rules that were not a “logical outgrowth” of those contained in the proposed changes to the rules.
As described above, the proposed changes to the premerger notification requirements are significant. Indeed, the FTC’s own estimate of the costs of the proposal exceeds the entire 2023 antitrust budget for the FTC and DOJ combined. More substantively, the proposed changes to the premerger notification form would impose significant costs on firms; and some would appear prejudicial.
A particular area of substantial change discussed above has to do with the production of considerable employee or labor-regulation information, such as the parties’ history of OSHA complaints. This, again, would require compiling information firms are not likely to gather and maintain in the ordinary course of business. This concern is even more severe, because the agencies’ concern with the local labor-market implications of mergers—including mergers that may have national geographic markets from a product perspective—is of recent provenance. As we discussed above, the antitrust relevance of information such as OSHA complaints is dubious or, at least, unclear. It may be that the agencies will, in time, develop sufficient experience with these aspects of merger cases to justify labor-related changes to the HSR rules. At present, however, the information proposed to be required seems better suited to a research proposal—perhaps under the FTC’s study authority under Section 6(b) of the FTC Act—than it does to a regulatory requirement.
The changes to the premerger notification requirements would be significant. Perhaps the simplest metric to capture the scope of these changes is the FTC’s own estimate of compliance costs. With the current HSR premerger notification form, the FTC estimates that aggregate annual HSR compliance costs are approximately $120 million. Under the new requirements, the FTC estimates this would increase by approximately $350 million, to more than $470 million per year. This exceeds the entire 2023 antitrust budget for the FTC and DOJ combined.
As an initial matter, the proposed changes clearly run contrary to legislative intent. As Chair Khan has herself noted, Congress expected only the 150 largest mergers each year would require notification to the agencies, but the agencies today review several thousand reported transactions annually. Former U.S. Rep. Peter Rodino, one of the authors of the HSR Act, anticipated that premerger notification would not entail the creation of new information and that compliance should not routinely delay consummation of deals. Similarly, a “need to avoid burdensome notification requirements or fruitless delays” was noted in the Senate. At least arguably, many of the NPRM’s proposed changes fail on all of these fronts.
Changes to the premerger notification process would carry to the force of law. So long as they are not arbitrary or capricious—and, usually, a failure to abide by the legislative history would not, in and of itself, surmount this bar—such changes are binding on parties to a merger. The hallmarks of arbitrary or capricious agency action were explained by the Supreme Court in State Farm:
Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.
While the statute confers considerable discretion on the agencies’ implementation of the HSR Act’s amendments to the Clayton Act, that discretion is not unbounded. Indeed, there is good reason to believe that courts are likely to find many of the NPRM’s proposed changes to be arbitrary and capricious. The Act expressly limits the agencies to requiring production of information that is “relevant to a proposed acquisition as is necessary and appropriate . . . to determine whether such acquisition may, if consummated, violate the antitrust laws.” And this text must be read in conjunction with the statutory authority to make second requests that “require the submission of additional information or documentary material relevant to the proposed acquisition.” Moreover, any rules must be “consistent with the purposes of this section”—that is, to allow the antitrust agencies an opportunity to review significant mergers prior to their consummation to avoid the “unscrambling the egg” problem.
The statutory authority raises many textual questions. What constitutes “necessary” and “appropriate” information? And what does it mean for these words to be joined by the conjunction “and”? What is the extent of the limitation that information be “relevant to the proposed acquisition”? Is the “purpose of the section” limited to merger-related antitrust concerns, or more expansively related to the violation of any antitrust laws that might result from consummation of the transaction? Each of these specify factors that Congress did or did not intend the agencies to consider or that may or may not be important aspects of the problem that Congress empowered the agencies to address.
Consider, for instance, what it means for materials to be “relevant to a proposed acquisition.” A natural reading would limit this to the materials that firms gathered in evaluating the transaction; and the submission of such extant materials would meet the ordinary meaning of “production” in a litigation context. The NPRM would expand the universe of relevant materials, including potentially anything that might inform a determination of the transaction’s legality. Courts are likely to say that the limit must be narrower than anything the agencies think potentially relevant to request.
For example, the proposed rules would require disclosure of information about OSHA findings against the parties, on the theory that OSHA violations correlate with labor-market power. But as noted above, OSHA data suggest that the most common violations occur in industries that are minimally concentrated (e.g., construction). Similarly, the proposed rules would require parties to provide detailed information about the number of employees in broad categories working in overlapping commuting zones. Such information might be useful in evaluating the competitive effects of a transaction, but that utility is unclear. Furthermore, the information is not of a sort, or in a format, that parties to a merger are likely to compile in the ordinary course of business, or to aid themselves in deciding whether to pursue a merger. That is, from the parties’ perspective, this information would likely be irrelevant to a proposed acquisition, even if it might be relevant to the agencies’ evaluation of the effects of the proposed acquisition.
The point is underscored when considering the meaning of “necessary and appropriate.” As an initial matter—and echoing the concerns about information’s relevance to a proposed transaction— “appropriateness” could be determined with respect to purpose; that is, whether it is appropriate for the agencies to use the premerger notification process as a tool for developing novel theories of antitrust law or, in the alternative, whether it should be limited to screening for transactions that would violate established antitrust precedent under established methods.
“Necessary and appropriate” suggests an even more stringent constraint when read together. The availability of, and broad latitude afforded, second requests—among other tools, such as voluntary requests and “pull-and-refiles”—suggests that relatively little be required as part of the initial premerger notification. Indeed, without “and appropriate,” nothing would be required of a filing in the strict sense of “necessary,” as anything necessary might be gathered through a second request. Additional information is appropriate because it is both necessary to the process as a whole and appropriate to an initial filing by parties in general; that is, among other things, that it is not merger-specific information more efficiently gathered and screened with a proper subset of filers.
In addition, the burdens of required filing information (including those imposed by the HSR form) must be considered in light of the fact that the vast majority of mergers have not been deemed to raise competition concerns. Specifically, only 2% of all mergers subject to premerger notification receive second requests; and a second requests is not a complaint, much less a final decision that a proposed merger would be unlawful. That is, in considering the balance of what is reasonable and necessary, the agencies must be mindful of the fact that material required by HSR notification is a burden imposed on roughly 50 times the number of transactions as those deemed—in the agencies’ own judgment—to warrant a second request.
Were issues like these to be raised in a challenge to the premerger notification process, the outcome may be hard to predict, but a court could well decide against the agencies. Still, there is reason to worry, independent of the question of such a challenge in the courts. The costs of the premerger notification process act as a tax on transactions. And as a tax, it is a regressive one, most likely felt by firms considering transactions on the margin of the HSR-reporting thresholds. These may disproportionately affect firms that, while large enough to be subject to notification, are relatively small or relatively infrequent filers.
That points to a question about the relative burdens and benefits of the proposed changes, but it also suggests a question regarding when, or even whether, overly burdensome regulations are likely to be challenged in court. Because the burdens of the tax are spread across the thousands of firms engaged in HSR-reportable transactions each year, no single firm—or pair of firms—would have an incentive even remotely close to the economic cost of the rules; or to put it another way, because the costs of the rule would be spread over thousands of transactions, the incentives for any given firm (or pair of firms) to challenge the requirements would be a very small fraction of the economic burdens of the requirement as a whole.
While that might seem an advantage to the agencies—at least insofar as the agencies might be concerned about litigation risk—it is not an advantage to efficient rulemaking or, specifically, to rules that provide for effective premerger screening without placing undue burdens on procompetitive or benign transactions.
In brief, the tax imposed by the new process would be imposed across a very large number of lawful mergers, including (and, very largely, comprising) mergers that would benefit both competition and consumers. As a regressive tax, it would also likely have an outsized effect on transactions at the margin of the HSR-reporting thresholds; and these may be those transactions least likely to raise competition concerns or lead to an agency challenge.
Certain proposed changes to the HSR-reporting rules and form may be necessary. For example, the NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of the 2022 statutory amendments to the Clayton Act that require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern.”
In addition, as we have also discussed, the NPRM’s proposal to amend Part 803 to require electronic filing will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development. Electronic production and merger screening is in widespread use already, and more comprehensive adoption and standardization of electronic filing should help streamline premerger screening for both filers and the agency staff charged to review filings.
Many other proposals in the NPRM would greatly increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers. They would, not incidentally, also impose additional burdens on the agency staff who are charged to screen such mergers. Yet the screening value of much of the information is entirely unclear. For example, the NPRM proposes to require the production of considerable information about violations of labor regulations—such as OSHA regulations regarding worker safety—that have no evident connection (or even correlation) with highly concentrated product or labor markets, much less a demonstrated connection with harm to competition and consumers. Similarly, the utility of new information bundling industry “overlaps” based on six-digit occupational codes (not labor markets) and Department of Commerce “commuting zones” (not necessarily the geographic component of labor markets, either) is unclear.
Further enforcement experience with labor-market competition matters, and further empirical investigation, could develop such that the inclusion of additional labor information in the filing requirements would be reasonable and necessary. But such developments should precede, not follow, the formulation and imposition of such requirements. In the absence of such developments, it seems highly unlikely that the costs of the new requirements would be offset by countervailing benefits to competition and consumers.
By the NPRM’s own estimate, those costs are substantial. And the NPRM’s estimate seems extremely low, given the considerable time that senior executives and firm counsel would need to devote to compliance. Moreover, the costs of the new rules would work as a regressive tax, tending to chill mergers by smaller and less frequently transacting firms. Most of the mergers chilled by such costs would likely be—like the vast majority of mergers—either procompetitive or benign. Impeding them would thus be to the detriment—not the protection—of competition and consumers.
Finally, such costs would be imposed on all firms required to file HSR notifications, notwithstanding other means of gathering screening information, and notwithstanding that fewer than 2% of reported transactions lead even to a “second request.” Given the high and skewed costs of the proposals, and given the statutory charge to collect only information that is necessary and reasonable, many of the proposed changes seem not only unnecessary, cumbersome, and costly, but in excess of the rulemaking authority conferred by the HSR Act’s amendments to the Clayton Act.
For these reasons, we urge the commission to consider seriously the evidentiary bases of its proposed changes to the HSR rules and to scale back its proposal accordingly.
 Premerger Notification Rules, 88 Fed. Reg. 42178 (RIN 3084-AB46), proposed Jun. 29, 2023) (to be codified at 16 C.F.R. Parts 801 and 803) [hereinafter “NPRM”].
 See generally, e.g., William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. Econ. Persp. 43 (2000).
 Statement of Chair Lina M. Khan, Commissioner Rohit Chopra, and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Vertical Merger Guidelines, Fed. Trade Comm’n, Commission File No. P810034 (Sep. 15, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1596396/statement_of_chair_lina_m_khan_commissioner_rohit_chopra_and_commissioner_rebecca_kelly_slaughter_on.pdf (citing Open Markets Inst. et al., Comment Letter No. 31 on #798: Draft Vertical Merger Guidelines (“Draft VMGs”), Matter No. P810034 at 4 (Feb. 2020)).
 15 U.S.C. § 18a(d)-(e).
 Id. at (d)(1).
 15 U.S.C. § 46(b).
 Draft Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n, Document No. FTC-2023-0043-0001 (Jul. 19, 2023), https://www.regulations.gov/document/FTC-2023-0043-0001. For comments on the draft merger guidelines see, e.g., Comment from International Center for Law & Economics, FTC-2023-0043-1555 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1555; Comments of Economists and Lawyers on the Draft Merger Guidelines, FTC-2023-0043-1406 (Sep. 15, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1406; Comment from Gregory J. Werden, FTC-2023-0043-0624 (Aug. 12, 2023), https://www.regulations.gov/comment/FTC-2023-0043-0624; Comment from Professor Carl Shapiro, FTC-2023-0043-1393 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1393; Comment from Global Antitrust Institute, FTC-2023-0043-1397 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1397; Comment from Compass Lexecon, FTC-2023-0043-1518 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1518; Comment from Herbert Hovenkamp, FTC-2023-0043-1280 (Sep. 8, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1280.
 Or 15 days, in the case of tender offers. 15 U.S.C. § 18(b)(1)(B), (e)(1)(A).
 See, e.g., Lina Khan, Chair, FTC and Jonathan Kanter, Asst. Atty. Gen., Antitrust Div., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, 4 (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.
 15 USC § 18a(e)(1)(A); Cf., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, Appendix A, U.S. Dep’t Justice & Fed. Trade Comm’n (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf (summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).
 15 USC § 18a(e)(2).
 See, e.g., Statement of Representative Rodino, Merger Oversight and H.R. 13131, Providing Premerger Notification and Stay Requirements, Subcomm. on Monopolies and Commercial Law of the Comm. on the Judiciary (Mar. 10, May 6 and 13, 1976) (“Both agencies can, and will, tell us what we have known for years—you can’t unscramble an egg.”).
 See Statement of Federal Trade Commission Chair Khan, Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya, Regarding Proposed Amendments to the Premerger Notification Form and the Hart-Scott-Rodino Rules, at 2 (Jun. 27, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/statement_of_chair_khan_joined_by_commrs_slaughter_and_bedoya_on_the_hsr_form_and_rules_-_final_130p_1.pdf.
 Id.; see also Annual Reports to Congress Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Fed. Trade Comm’n (2021), https://www.ftc.gov/policy/reports/annual-competition-reports.
 E.g., Joe Simms, The Effect of Twenty Years of Hart-Scott-Rodino on Merger Practice: A Case Study in the Law of Unintended Consequences Applied to Antitrust Legislation, 65 Antitrust L.J. 865 (1997).
 The FTC’s introductory guide to the premerger process, for instance, says of the process that: “The Program has been a success.” What is the Premerger Notification Program? An Overview, Fed. Trade Comm’n (Mar. 2009), available at https://www.ftc.gov/sites/default/files/attachments/premerger-introductory-guides/guide1.pdf. This is not to say that the program is without critics or criticism. The initial implementation, for instance, did not index reporting thresholds to inflation. By the year 2000, nearly 5,000 transactions were noticed each year. The HSR Act was subsequently amended to index thresholds to inflation. Today, roughly 2,000 transactions are noticed each year (allowing for some variation during the pandemic). See Fed. Trade Comm’n, supra note 22, available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf. See also Report of the Antitrust Modernization Committee, 158 (“the existing pre-merger review system under the HSR Act is achieving its intended objectives of providing a more effective means for challenging mergers raising competitive concerns before their consummation and protecting consumers from anticompetitive effects.”), available at https://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.
 Andrew G. Howell, Why Premerger Review Needed Reform-and Still Does, 43 Wm. & Mary L. Rev. 1703, 1716 (2002) (“There are several key points to draw from this legislative history. First, the premerger title of the Act was meant only to make the procedural change of requiring notification—it was not meant to change substantive law. Second, the provision was intended to encompass only the very largest of mergers. Finally, there was concern in Congress about not allowing pursuit of merger enforcement goals to place too much of a burden on commerce.”)
 Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042, 77055 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803)
 Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note at 1-2.
 Id. at Appendix (A summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).
 The difference may, of course, be greater still, given the nature of a second request. Based on the initial filing and follow-up information, the agencies have very broad discretion in seeking additional production via a second request; at the same time, we understand that staff tend not to request additional information by rote, but according to merger-specific concerns and queries.
 Antitrust Experts Reject FTC/DOJ Changes to Merger Process, U.S. Chamber of Commerce (Sep. 19, 2023), https://www.uschamber.com/finance/antitrust/antitrust-experts-reject-ftc-doj-changes-to-merger-process. The surveyed group was made up seasoned antitrust veterans from across a variety of backgrounds: 80% had been involved in more than 50 mergers and 59% in more than 100.
 Id. at 2.
 Id. at 3.
 NPRM at 42208.
 We note, however, that both the NPRM and the draft merger guidelines suggest a greatly expanded notion of “overlaps,” adding to the likely costs to filers and, not incidentally, burden to reviewing staff.
 See, e.g., HSR Statements of Basis and Purpose, FTC Legal Library, https://www.ftc.gov/legal-library/browse/hsr-statements-basis-purpose (last checked Sep. 23, 2023).
 For example, year 2000 amendments to the HSR Act required annual publication of adjustments to the Act’s jurisdictional and filing-fee thresholds in the Federal Register for each fiscal year, beginning Sept. 30, 2004, based on change in the gross national product, in accordance with Section 8(a)(5) of the Clayton Act.
 Revised Jurisdictional Thresholds, 88 Fed. Reg. 5004 (Jan. 26, 2023).
 Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 87 Fed. Reg. 3541 (Jan. 24, 2022).
 Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 86 Fed. Reg. 7870 (Feb. 2, 2021).
 Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803).
 NPRM at 42180-81 (discussing provisions of the Merger Filing Fee Modernization Act of 2022, Pub. L. 117-328, 136 Stat. 4459 (2022), Div. GG.).
 NPRM at 42181.
 Id. at 42180.
 Id. at 42181.
 Antitrust Improvements Act Notification and Report Form for Certain Mergers and Acquisitions: Instructions, available at https://www.ftc.gov/system/files/ftc_gov/pdf/HSRFormInstructions02.27.23.pdf.
 NPRM at 42191.
 David C. Kully, et al., Killing Deals Softly: FTC Proposes 107-Hour Increase in Hart-Scott-Rodino Burden, Holland & Knight Alert (Jun. 28, 2023), https://www.hklaw.com/en/insights/publications/2023/06/killing-deals-softly-ftc-proposes-107-hour-increase.
 NPRM at 42193
 Id. at 42196.
 Id. at 42197.
 Id. at 42196-42197.
 Id. at 42197.
 15 U.S.C. § 18a(e)(1)-(2).
 Statement of Commissioner Alvaro M. Bedoya, Joined by Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter Regarding the Proposed Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n (Jul. 19, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p234000_merger_guidelines_statement_bedoya_final.pdf (internal citations omitted, but including a reference to FTC, Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019 (Sept. 15, 2021), https://www.ftc.gov/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study.)
 Id. at 3.
 Ginger Zhe Jin, Mario Leccese, & Liad Wagman, How Do Top Acquirers Compare in Technology Mergers? New Evidence from an S&P Taxonomy, 89 J. Indus. Org. (2023), https://www.sciencedirect.com/science/article/abs/pii/ S0167718722000662.
 NPRM at 42197.
 Id. at 42197-98.
 Id. at 42198.
 NPRM at 42198, 42215.
 Top 10 Most-cited Standards for Fiscal Year 2022, U.S. Dep’t Labor, Occupational Safety & Health Admin., https://www.osha.gov/top10citedstandards. The source page includes a link to a searchable database of Frequently Cited OSHA Standards by industry.
 15 U.S.C. § 18a.
 15 U.S.V. § 18a(d).
 5 U.S.C. § 553.
 Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).
 See A Guide to the Rulemaking Process, Office of the Federal Register (Jan. 2011), available at https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf. In addition, regulations may be constitutionally infirm.
 The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fiscal Year 2023 Congressional Budget Justification, Fed. Trade Comm’n (Mar. 28, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023, Dep’t of Just., Antitrust Div (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.
 Id. at 42198.
 To demonstrate the need for information about labor market conditions in evaluating mergers, the NPRM identifies only two recent (2021 and 2022) decisions by the agencies to bring actions against firms that include labor-market concerns. Id. at 42197.
 NPRM at 42208 (“the total estimated additional hours burden is 759,272. . . . Applying the revised estimated hours, 759,272, to the previous assumed hourly wage of $460 for executive and attorney compensation, yields approximately $350,000,000 in labor costs.”).
 The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fed. Trade Comm’n, Fiscal Year 2023 Congressional Budget Justification, https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Dep’t of Just., Antitrust Div., Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023 (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.
 See Statement of Federal Trade Commission Chair Khan, supra note 15, at 2.
 See Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note 11, at 1 (noting 3,520 transactions for fiscal year 2021).
 Rep. Rodino himself indicated: “Government requests for additional information must be reasonable. [. . .] the Government will be requesting the very data that is already available to the merging parties, and has already been assembled and analyzed by them. If the merging parties are prepared to rely on it, all of it should be available to the Government. But lengthy delays and extended searches should consequently be rare.”
 S. Rep. No. 94-803, pt. 1, at 65, 67 (1976) (“A proper balance should exist between the needs of effective enforcement of the law and the need to avoid burdensome notification requirements or fruitless delays.”)
 463 U.S. at 43.
 15 U.S.C. § 18a(d).
 Id. at § 18a(e)(1).
 Strictly merger-related concerns would be limited to those that violate Section 7 of the Clayton Act (that is, consummation of transactions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”) Other concerns that might result from the transaction, such as an interlocking directorate prohibited by Section 8 of the Clayton Act, might therefore be excluded.
 See, e.g., AT&T Corp. v. Iowa Utils Bd, 525 U.S. 1133 (1999) (“the Act requires the FCC to apply some limiting standard, rationally related to the goals of the Act, which it has simply failed to do.”)
 NPRM at 42198.
 Given the coarseness of the data requested, it is doubtful whether it would be analytically useful for such purposes.
 NPRM at 42180-81.
 Id. at 42181.
 Id. at 42180.
Popular Media In July 2001, a dozen Google techies pondered their mission mantra. In essence, they aimed “to organize the world’s information and make it universally accessible and . . .
In July 2001, a dozen Google techies pondered their mission mantra. In essence, they aimed “to organize the world’s information and make it universally accessible and useful.” However, their ambition was celestial. They grasped for a moniker.
The network of networks was expanding exponentially in every direction, with websites stacking up data everywhere. The informational jumble was messier than a teenager’s bedroom floor.
Read the full piece here.
TOTM The FTC—joined (unfortunately) by 17 state attorneys general—on Sept. 26 filed its much-anticipated antitrust complaint against Amazon in the U.S. District Court for the Western . . .
The FTC—joined (unfortunately) by 17 state attorneys general—on Sept. 26 filed its much-anticipated antitrust complaint against Amazon in the U.S. District Court for the Western District of Washington. Lacking all sense of irony, Deputy Director Newman, quoted above, bragged about the case’s potential to do greater good than almost all previous antitrust lawsuits.
ICLE White Paper Executive Summary California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product . . .
California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product innovations. The problems with the regulatory regime Prop 103 created most recently came to a head with the Sept. 21 announcement by Gov. Gavin Newsom that he had issued an emergency executive order to stabilize the state’s rapidly deteriorating market for property insurance.
As other states consider the adoption of reforms inspired by Prop 103, it is necessary to revisit the law’s genesis and recent history, as well as to examine the problems that it has fostered.
This paper outlines how the Prop 103 rating system is slow, imprecise, and inflexible relative to other jurisdictions; examines the ways in which the ratemaking system has been rendered unpredictable; and details the form, function, and questionable value proposition of the rate-intervenor system. In so doing, the paper demonstrates that Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress.
The paper concludes with a series of policy recommendations designed to inform both the ongoing implementation of Prop 103 by the California Department of Insurance, as well as other jurisdictions considering elements of a Prop 103 approach.
The 1980s were a period of chaotic dislocation in the California automobile-insurance market. The California Supreme Court’s 1979 decision in Royal Globe Insurance created precedent that third parties could bring action against a tortfeasor’s insurer, even if they were not party to the insurance contract in question. What followed was an explosion in insurance-related litigation, as the number of auto-liability claim filings in California Superior Court rose by 82% between 1980 and 1987, and the severity of claims rose by a factor of four. As would be expected, the state’s auto-insurance premiums likewise followed suit, rising 69.8% from $4.3 billion in 1984 to $7.3 billion in 1987.
This crisis in auto-insurance affordability came to a head in 1988, when among the 29 ballot initiatives California voters were presented in that November’s election were five separate questions dealing specifically with insurance issues. Two of these were broadly supported by the insurance industry: Proposition 104, which would establish a no-fault system for auto insurance and limit damage awards against insurers, and Proposition 106, which would set percentage-based caps on attorneys’ contingency fees. Proposition 100, backed by the California Trial Lawyers Association, was proposed as a counter to Props 104 and 106; if it received more votes that those initiatives, it would have canceled the limits on both damage awards and contingency fees, as well as the proposed no-fault system. Proposition 101 would cap insureds’ ability to recover bodily injury damages, paired with a promised 50% reduction in the bodily injury portion of insurance premiums.
In the end, however, only one of the insurance measures was approved in the Nov. 8 election: Proposition 103, also known as the “Insurance Rate Reduction and Reform Act.” Authored by Harvey Rosenfield of the Santa Monica-based Foundation for Taxpayer and Consumer Rights (now known as Consumer Watchdog) and sponsored by Rosenfield’s organization Voter Revolt, Prop 103 carried narrowly with 51.1% yes votes to 48.9% against.
Prop 103’s stated purpose was “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.” Proponents of the measure claim they have achieved that, touting $154 billion of consumer savings over the first 30 years it was in effect.
Among the specific changes mandated by the law were:
Because the law was subject to immediate and ongoing litigation, some provisions were only fully implemented years after the proposition’s passage. But notable among the law’s other provisions was Section 8(b), which rendered Prop 103’s text extraordinarily difficult to amend:
The provisions of this act shall not be amended by the Legislature except to further its purposes by a statute passed in each house by roll call vote entered in the journal, two-thirds of the membership concurring, or by a statute that becomes effective only when approved by the electorate.
Much has changed in the world, and in California’s insurance industry, since the passage of Prop 103, but the lion’s share of the law remains as it was in 1988.
The recent story of California’s property & casualty insurance market has been one of uncertainty and induced dysfunction.
Prior to the COVID-19 pandemic, California’s market was saddled by availability issues stemming from a series of historically costly wildfires. California homeowners insurers posted a combined underwriting loss of $20 billion for the massive wildfire years of 2017 and 2018 alone, more than double the total combined underwriting profit of $10 billion that the state’s homeowners insurers had generated from 1991 to 2016. Partly in response to those losses, as well as the inability to adjust rates expeditiously, the number of nonrenewals of California residential-property policies grew by 36% in 2019, and new policies written by the state’s residual-market FAIR Plan surged 225% that same year.
To stanch the bleeding of admitted market policies into the FAIR Plan and the surplus-lines market, CDI in December 2019 invoked recently enacted statutory authority to issue moratoria barring insurers from nonrenewing roughly 800,000 policies in ZIP codes adjacent to specified major wildfires. As of November 2022, nearly 2.4 million policies statewide were in ZIP codes under nonrenewal moratoria, many of them added following additional catastrophic wildfires in 2020.
During the COVID-19 pandemic, CDI instituted a rate freeze in auto insurance and accused the industry of profiteering. In June 2020, California Insurance Commissioner Ricardo Lara took credit for ordering $1.03 billion of premium refunds, dividends, or credits for auto-insurance policyholders, as well as “an additional $180 million in future rate increases that insurance companies reduced in response to the Commissioner’s orders.”
In fact, most of the early rebates were voluntary, in line with similar voluntary rebates that insurers issued across the country. CDI would not publish its methodology for mandatory rebates until March 2021, at which point it declared that, rather than the 9% of premium that California auto insurers returned to policyholders from March through September 2020, they should have returned 17%. In October 2021, the California Court of Appeal ruled in State Farm General Insurance Co. v. Lara that Prop 103 did not actually give the commissioner authority to order the retroactive rate refunds.
CDI was also slow to lift its rate freeze, even as the COVID-19 pandemic abated, and many employers ended work-from-home policies. From May 2020 until October 2022, CDI did not approve a single auto-insurance rate filing, even though more than 75% of the state’s auto insurers filed for an increase during that period. In the meantime, the “motor vehicle repair” component of the Consumer Price Index (CPI) jumped by 19.2% between July 2022 and July 2023, far outstripping the 3.2% hike in overall CPI.
With limited options on the pricing front, insurers have been forced to limit exposure in other ways. While California is a “guaranteed issue” state, firms are attempting to limit the policies they take on by, for example, limiting advertising. Insurance rating agency A.M. Best Co. reported that auto insurers cut their advertising budgets nearly 18% in the first half of 2022, compared with the same period in 2021. In other cases, insurers have taken to asking for more premium upfront, instead of allowing consumers to pay via monthly or other periodic installment plans.
Meanwhile, as detailed more extensively in the sections below, the wildfire-driven homeowners-insurance crisis that began before the COVID-19 pandemic has itself grown to epidemic levels, highlighted by State Farm’s 2023 decision to exit the market. That led the environmental news service ClimateWire to observe:
Experts say State Farm’s decision highlights a flaw in California policies that effectively blocks insurers from considering climate change in setting premiums and discourages them from seeking rate increases sufficient to cover the state’s growing wildfire risk. In addition, the policies have created insurance premiums that are far too low and are forcing insurers to pull back their coverage in California to remain profitable.
California’s political leaders have also acknowledged the crisis. On Sept. 21, Gov. Gavin Newsom issued an executive order noting that insurance carriers representing 63% of the state’s homeowners insurance market had in recent months announced plans to either cease or limit writing new policies. He further announced that he was authorizing Insurance Commissioner Ricardo Lara to:
take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance and commercial property insurance, and to consider whether the recent sudden deterioration of the private insurance market presents facts that support emergency regulatory action.
For his part, Lara announced an emergency response plan that included:
[T]ransition[ing] homeowners and businesses from the FAIR Plan back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities. … ;
Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market, thus enhancing the state’s overall wildfire safety efforts;
Expediting the Department’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels; …
Holding public meetings exploring incorporating California-only reinsurance costs into rate filings;
Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process …
[T]ransition[ing] homeowners and businesses from the FAIR Plan back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities. … ;
Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market, thus enhancing the state’s overall wildfire safety efforts;
Expediting the Department’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels; …
Holding public meetings exploring incorporating California-only reinsurance costs into rate filings;
Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process …
Prop 103 charges California’s insurance commissioner with applying requirements articulated in the California Insurance Code and the California Code of Regulations to determine whether an insurer’s requested rate change is “excessive, inadequate or unfairly discriminatory.” If the commissioner determines that a request is not “most actuarially sound,” he or she can require a rate reduction or reject a rate filing completely.
The most obvious problem with rate regulation is that it restricts the availability of insurance. As the German economist Karl Henrik Borch put it in a landmark article on capital markets in insurance:
If premiums are low, the profitability of the insurance company will also be low, and investors may not be inclined to risk their capital as reserves for an insurance company. If the government imposes too low premiums, the whole system may break down, and high standard insurance may become impossible in a free economy.
Insurers naturally respond to rate regulation by tightening their underwriting criteria, forcing some consumers to have to turn to the higher-priced residual market for coverage. In extreme cases, rate suppression can lead some insurers to exit the market altogether.
The empirical evidence of this effect is manifest. After California ordered mandatory 20% rate rollbacks following the passage of Prop 103 in 1988 (the effects of which were initially somewhat blunted by the courts), the number of insurers writing auto coverage in the state fell from 265 in 1988 to 208 in 1993.
More recently, Prop 103’s deleterious effects on the availability of coverage have manifested most obviously in decisions by major homeowners insurers to exit the market. In 2019, following the deadliest wildfire season in California history, the state’s homeowners insurers responded by nonrenewing 235,520 policies, a 31% increase from the prior year. In May 2023, California’s largest writer of homeowners insurance, State Farm, announced it would halt the sale of new homeowners policies in the state. This was followed shortly after by the exit of Allstate, California’s fourth-largest personal lines writer, which likewise announced it would cease writing new policies, while Farmers, the second-largest writer, said it would limit its writing of new policies.
While Prop 103 calls for property & casualty insurers to earn a “fair profit” rate of return of 10%, the industry has long reported that it finds it difficult to meet the California Department of Insurance’s requirements to justify rate increases, even when such increases would allow premiums to better reflect true risk. In fact, even after the state’s extreme wildfires in 2017 and 2018, and despite trailing only Hawaii in median home prices, Californians in 2020 paid an annual average of $1,285 in homeowners insurance premiums across all policy types—less than the national average of $1,319.
As noted above, the homeowners-insurance availability crisis has become particularly acute in the wake of those devastating 2017 and 2018 wildfires. Under Prop 103, an insurer must justify its requested statewide premium for future wildfire losses based upon its average annual wildfire losses over the last 20 years. But as demonstrated in Figure I, a look at the data from California’s homeowners-insurance market illustrates why such long-run averages are wholly inadequate to project future losses.
Insurers have access to tools like advanced wildfire catastrophe models that would allow them to project future wildfire losses in ways that consider both changing climactic factors and a given property’s proximity to fuel load. Such considerations are not currently permitted under California’s Prop 103 system, but nor are they explicitly barred, as such models largely did not yet exist in 1988. Indeed, the California Earthquake Authority uses catastrophe models to develop rates and mitigation discounts; determine the amount of claims-paying capacity the authority needs; and to estimate CEA losses after an event. Moreover, California has begun to take steps in the direction of permitting their use in certain limited contexts, including recent regulations requiring insurers to disclose to consumers their “wildfire risk score.” In July 2023, Insurance Commissioner Ricardo Lara hosted a workshop on catastrophe modeling and insurance, noting in a public invitation that:
For the past 30 years, the use of actual historical catastrophe losses has been the method used for estimating catastrophe adjustments in the California rate-approval process. However, historical losses do not fully account for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments. Catastrophe estimates based on historical losses only reflect losses after they occur. As a result of climate-intensified wildfire risk and continued development in the wildland urban interface areas, and recent increased efforts to mitigate wildfire risks, past experience may no longer reflect the current wildfire exposure for property owners and insurance companies.
Prop 103 also probits insurers from using the cost of reinsurance as justification for rate filings. After a long period of “soft” pricing from 2006 to 2016, reinsurance rates for North American property-catastrophe risks more than doubled from 2017 to 2023, including a 35% year-over-year hike in 2023, according to reinsurance broker Guy Carpenter. When combined with prohibitions on the use of catastrophe models, this has essentially meant that California—a state that has long prided itself as being on the leading edge when it comes to its response to climate change—is effectively telling insurers to ignore the science.
Thus, unsurprisingly, denied the ability to charge rates that reflect the future risk of wildfire, admitted-market insurers have pulled back from the most at-risk areas. Ironically, this has meant a migration of policies to surplus lines insurers and to the California Fair Access to Insurance Requirements (FAIR) Plan, both of which are allowed to use catastrophe models in setting their premiums.
From 2015 to 2021, the number of FAIR Plan policies grew by 89.7%, in the process rising from 1.7% of the California homeowners insurance market to 3.0%. With just $1.4 billion in aggregate loss retention and facing the prospect of claims-paying shortfalls in the event of another major wildfire, the FAIR Plan recently filed a request for an average 48.8% increase in its dwelling fire rates.
Prop 103 is also remarkably inflexible, particularly given provisions that make it exceedingly difficult to amend by legislative enactment. Any changes must not only pass by a two-thirds vote in both chambers of the California Legislature, but they must also be found to “further the purposes” of the proposition. As the 2nd District Court of Appeal wrote in the 1998 decision Proposition 103 Enforcement v. Quackenbush:
Any doubts should be resolved in favor of the initiative and referendum power, and amendments which may conflict with the subject matter of initiative measures must be accomplished by popular vote, as opposed to legislatively enacted ordinances, where the original initiative does not provide otherwise.
But with the bar to amendment set that high, it has proven to be effectively impossible for the law to respond to the enormous political, technological, and business practice changes that the insurance industry has undergone over the past 35 years.
In addition to the emergence of catastrophe models, discussed above, another significant tool that insurers have taken increasing advantage of in the years since 1988 is the use of credit-based insurance scores, particularly in auto insurance underwriting and ratemaking. Today, according to the Fair Isaac Corp. (FICO), 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is legally allowed as an underwriting or risk-classification factor.
But California is one of four states (along with Massachusetts, Hawaii, and Michigan) that does not permit their use, because CDI has not adopted regulations acknowledging credit history as a rating factor with “a substantial relationship to the risk of loss.” This is despite the Federal Trade Commission’s (FTC) finding that, in the context of auto insurance, credit-based insurance scores “are predictive of the number of claims consumers file and the total cost of those claims.”
A similar disjunction between the inflexibility of Prop 103 and the emergence of new technologies can be seen in the development of “telematic” technologies that allow insurers to measure a range of factors directly relevant to auto-insurance risk, including not only the number of miles driven (a required rating factor under Prop 103) but also how frequently the driver engages in sudden stops or rapid acceleration, as well as how often he or she drives after dark or in high-congestion situations.
In July 2009, CDI adopted an amendment to the state insurance code that permitted the use of telematics devices to verify mileage for the purpose of advertise “pay per-mile” rates. But other regulations in the California code limit the ability to use telematics to offer “pay-how-you-drive” products that have become popular in other jurisdictions. For example, insurers are currently prohibited from collecting vehicle-location information, which rules out rating on the basis of driving in congested areas. Moreover, because the regulations do permit rating on the basis of the severity and frequency of accidents in the ZIP code where a vehicle is garaged, identical drivers who spend equivalent time driving in congested areas may be charged different rates, with a suburban commuter earning a discount relative to an urban commuter.
Research by Jason E. Bordoff & Pascal J. Noel finds the status quo is that low-mileage drivers cross-subsidize high-mileage drivers, and that about 64% of Californians would save money if they switched to a per-mile plan. The president of the California Black Chamber of Commerce has also argued that telematics offers a potential solution to problems of bias in underwriting, given evidence that drivers from predominantly African-American communities are quoted premiums that are 70% higher than similarly situated drivers in predominantly white communities.
By voluntarily downloading an app to their smartphone, a driver agrees to allow an insurer to measure data about (and only about) their driving habits. This includes behaviors like hard braking and distracted driving. Based on that data an insurance company can assess how much of a risk the driver poses and offer fair insurance, free of bias and inflation, that the driver may choose to purchase.
Dynamic aspects of insurance loss events and claim costs impose expenses on insurers if they cannot respond nimbly in matching rate to risk. Prop 103 and similar approaches to price regulation restrain insurers’ ability to adjust to new information, thereby causing an increase in price, a decrease in availability, or both. Rate suppression occurs when regulators deny rate filings that request adequate and non-excessive rates. Examples of extreme rate suppression have rarely lasted very long. Insurers exit suppressed markets, leaving consumers with fewer choices and higher prices.
While the last section examined some of the high-level issues created by the Prop 103 system, in this section, we draw from empirical data and recent legal precedent to demonstrate how the Prop 103 process, as applied by the CDI, has in practice amplified these dislocations in ways that have proven extraordinarily counterproductive.
Filing for rates under Prop 103 is a complex and costly enterprise. The discretion that CDI maintains and the ever-present risk of intervention by a third parties means that swift and predictable resolution is the exception, not the rule.
Further complicating ratemaking in California is the intrinsically political nature of the relationship between the insurance commissioner and regulated entities. California’s commissioner is one of 11 state insurance regulators in the United States to face direct election. Thus, particularly in times of market strain or when policyholders are confronted with availability challenges or rate increases, the commissioner faces political incentives to pressure insurers to acquiesce to popular—if not market-based—demands. As a result, the ratemaking process can be misused as a proxy venue for larger ongoing disputes between the commissioner and insurers. Two recent cases highlight this phenomenon.
State Farm Group (SFG)—a California entity separate from the larger State Farm Mutual, which was established to cover non-automobile lines—sought a rate increase of 6.4% in 2015. CDI rejected the proposed increase, Consumer Watchdog intervened, and the matter went to a hearing before a CDI administrative-law judge. The department’s hearing officer subsequently issued a far-reaching opinion, which was adopted by the commissioner, ordering SFG to retroactively reduce its rates and issue refunds, based on a novel reading of Prop 103 that erased the difference between the balance sheets of a particular insurer and the larger group of which it is a part for purposes of ratemaking.
Faced with a foundational reinterpretation of insurance law created in the process of seeking a rate, SFG appealed to California courts, where it ultimately prevailed, after a years-long protracted lawsuit and subsequent CDI appeal.
While resolving open questions about a state’s ratemaking process is appropriate fodder for any department to undertake, the broader context in which then-Insurance Commissioner Dave Jones—who launched what would ultimately be a failed bid to be elected California’s attorney general in 2018—pursued the action against SFG speaks to a different motivation. Indeed, SFG had just one year prior sought and received a rate increase using the same formula subsequently rejected by CDI. To wit, the basis of CDI’s resistance was not the degree of the rate increase in question, but was instead premised upon a broader question of law.
CDI has broad rulemaking authority and, when necessary, can seek legislative amendment to ensure that the laws governing ratemaking protect California consumers. But the department also retains substantial leverage to secure acquiescence from insurers when it pursues novel ratemaking interpretations in the context of a particular rate application. This approach may be effective, but it frustrates well-established norms for creating rules of general applicability and deprives the industry as a whole of due process. Worse still, when it engages in facial abuses of its already broad discretion, the CDI undermines the Prop 103 ratemaking system’s ability to prevent dislocation between price and risk.
The ratemaking process under Prop 103 is likewise susceptible to being used to direct the behavior of firms beyond the scope of ratemaking itself. Predictably, delays in the ratemaking proceeding on account of nonprice factors trigger the same market-skewing dynamics and due-process issues discussed above. Intervenors like Consumer Watchdog have sought, e.g., to prevent Allstate from receiving a mere 4% rate increase in its homeowners book on the basis of the firm’s decision to limit its exposure to the California market more broadly. In that case, the long-time intervenor alleged that ceasing to sell insurance—an underwriting determination—has an impact on rates and that as a result, the decision to cease offering coverage is itself a ratemaking action demanding review by California Department of Insurance.
To its credit, the department maintained that inactivity by a business does not constitute the use of an unapproved rate. But Consumer Watchdog’s broad reading of the acceptable scope of matters judicable in a ratemaking proceeding is no doubt borne directly of previous experiences in which insurers were made to acquiesce to demands related to business practices more broadly.
Rate-approval delays have become a hallmark of the Prop 103 system, as well as the resulting asymmetry between rate and risk. But as originally presented to California voters, the law envisioned that rates would be deemed accepted if no action were taken by the CDI for 60 or 180 days. Indeed, Prop 103 included this “deemer” provision because a reasonable speed-to-market for insurance products also protects consumers.
The law’s deemer provision has been effectively rendered moot in practice because, as a matter of course, the CDI requests that firms waive the deemer. If the deemer is not waived, the CDI has two options: approve the rate or issue a formal notice of hearing on the rate proposal. Because the CDI is unable to complete timely review of filings within the deemer period, it always elects to move to a rate hearing. In effect, CDI turns every rate filing without a deemer waiver into an “extraordinary circumstance.”
In practice, it has proven exceedingly challenging for petitioners to navigate the manner in which rate hearings—the nominal guarantors of due process—are conducted. The administrative law judges (ALJs) that oversee these proceedings are housed within the CDI. The hearings themselves take a broad view of relevance that drive up the cost of participation. Upon ALJ resolution, the commissioner can accept, reject, or modify the ALJ’s finding. There is little practical upside for an insurer to move to a hearing against the CDI.
Wawanesa General Insurance Co. offers a case study in the differences between how Prop 103 was drafted and the way it is currently enforced. After initially waiving the law’s deemer, Wawanesa reactivated the deemer in a 2021 private-passenger auto filing. In so doing, Wawanesa elected to move to a hearing by the CDI. Ultimately, from start to finish, its December 2021 rate filing was not approved until March 2023—15 months after it was brought forward. Ultimately, unable to get the rate it needed in a timely manner, Wawanesa’s U.S. subsidiary was acquired by the Automobile Club of Southern California.
Thus, in practice, insurers are faced with a starkly practical choice. One option is to waive their right to timely review of rates, and hope that they gain approval in, on average, six months. The alternative is to move to a formal hearing and reconcile themselves with the fact that approval, if forthcoming, will take at least a year. The system of due process originally contemplated by Prop 103 simply bears no relationship with the system as it operates today.
Figure II shows the average number of days between submission and resolution of rate filings in each state (including the District of Columbia as a state, for these purposes). With a five-year average filing delay of 236 days for homeowners insurance and 226 days for auto insurance, California ranks 50th in each category, responding more slowly than all states except Colorado. Although the average delay is affected somewhat by extreme-outlier observations, California’s rank is unchanged if we instead use the median delay.
Another troubling aspect of California’s sluggish regulatory system is that it appears to be getting slower over time. Obviously, California has been relatively slow to resolve rate filings since Prop 103 took effect. In recent years, however, the average delay has increased, as wildfire losses and market conditions (e.g., inflation and the cost of capital) have increased the cost of providing insurance. Figure III shows the annual average number of days between filing and resolution of rate changes for homeowners insurance in California. The average delay from 2013 to 2019 was 157 days. For the last three years, the average delay has increased to 293 days.
CDI’s ability to review rate filings in a timely manner is further constrained by Prop 103’s intervenor process. Intervenors may, by right, intercede in rate filings that propose increases of more than 6.9%. Naturally, many insurers opt to file below that threshold, even if they actually require rate increases substantially in excess of 6.9%, simply to avoid dealing with intervenors.
The intervenor process has proven both costly and time-consuming. According to CDI data, since 2003, intervenors have been paid $23,267,698.72, or just over $1 million annually, for successfully challenging 177 filings. While the process results in CDI receiving more filings to review than it otherwise would, the total number of filings it must review is significantly less than other jurisdictions (see Figure IV).
Intuitively, we can assume that states cannot change rates as frequently when rate filings take longer to resolve. Figure IV confirms this assumption, demonstrating the average number of rate filings made per-company in each state for homeowners and automobile insurance from 2018 to 2022. Over the last five years, California ranks 49th in the number of homeowners-insurance rates filed, and 50th in the number of auto-insurance rates filed.
While a slow regulatory system limits the efficiency of insurance markets, a system that suppresses rates will also inhibit deployment of capital, ultimately reducing the number of insurers who choose to participate.
For example, if an insurer’s rate analysis indicates that a 40% increase is required for rates to be adequate, and the regulator instead approves only a 15% increase, the effect of rate suppression is (40%–15%=) 25%. In this category, California again ranks 50th, approving rates that are, on average, 29% (homeowners) and 14% (auto) less than the actuarially indicated rate supported by the analysis in the filing.
Figure V, which measures the difference between the actuarially indicated rate and the rate approved by regulators, demonstrates that California’s regulatory system under Prop 103 is suppressive. Although it is common for insurers to request rate changes below the indicated rates for strategic reasons, the measure would not differ consistently across states in the absence of suppressive rate regulation.
Similar to the growing chasm of filing delays observed in Figure III, Figure 7 shows that rate suppression in California homeowners insurance has risen in response to the unprecedented wildfire losses incurred in 2017 and 2018. Although the level of rate suppression moderated somewhat in 2022, the average level of regulatory rate suppression for 2013 through 2018 was 18%, while the average for 2019 through 2022 is 30%. Moreover, at 14.5% in 2022, California is more than one standard deviation (3.6%) above the mean (9.8%) and ranks 45th among the 50 jurisdictions reporting data.
In summary, the rate-filing data clearly show that California’s regulatory system under Prop 103 is expensive and slow, and that it is currently causing unsustainable rate suppression, especially in the homeowners line.
Some of Prop 103’s effects have spilled over to other jurisdictions, either directly—via states adopting similar regulatory regimes—or indirectly. Recent research by Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva finds a significant indirect effect in the form of rate suppression in California and other “high-friction” states leading to cross-subsidies among policyholders of multi-state insurers and, ultimately, “distortions in risk sharing across states.”
First, rates have not adequately adjusted in response to the growth in losses in states we classify as “high friction”, i.e. states where regulation is most restrictive. Second, in low friction states rates increase both in response to local losses as well as to losses from high friction states. Importantly, these spillovers are asymmetric: they occur only from high to low friction states, consistent with insurers cross-subsidizing in response to rate regulation. Our results point to distortions in risk sharing across states, i.e. households in low friction states are in-part bearing the risks of households in high friction states.
In other cases, the impact of Prop 103 has largely taken the form of political influence. As demonstrated in the previous section, states like Colorado, Maryland, and Hawaii have followed California’s model of extended rate-review processes that significantly slow product approvals.
Among the first states to respond to Prop 103 with its own similar regulatory system was New Jersey, which in 1990 passed the Fair Automobile Insurance Reform Act. Under terms of the law, effective April 1992, every admitted writer of automobile insurance in the state would be required to offer coverage for all eligible persons, with only a select group of motorists—including those convicted of driving under the influence or other automobile-related crimes, those whose licenses had been suspended, those convicted of insurance fraud, and those whose coverage had been canceled for nonpayment of premium—deemed ineligible.
While the law nominally permitted insurers to earn an “adequate return on capital” of 13%, several companies would sue the state on grounds that the New Jersey Department of Banking and Insurance did not approve rate requests sufficient to meet that threshold. In addition, the state assessed surcharged on insurers to close a $1.3 billion funding gap for the state’s Joint Underwriting Authority.
As in California, New Jersey saw the exit of 20 insurers the state’s auto-insurance market in the decade after the Fair Automobile Insurance Reform Act’s passage. When the state later liberalized its regulatory system with passage of the Auto Insurance Reform Act in June 2003, the number of auto writers more than doubled from 17 to 39 and thousands of previously uninsured drivers entered the system.
A similar effect was seen in South Carolina, where a restrictive rating system in the 1990s had forced 43% of drivers into residual market policies undergirded by a state-run reinsurance facility. After adopting a liberalized flex-band rating law in 1999, as in New Jersey, the number of insurers offering coverage in South Carolina doubled, the residual market shrank (it is, today, only 0.007% of the market), and overall rates actually fell.
Even in Massachusetts, which retains a fairly restrictive rate-approval process, reforms passed in April 2008 to allow insurers to submit competitive rates (they were previously set by the commissioner for all carriers) had a notable impact. Within two years of the reforms, rates had fallen by 12.7% and a dozen new carriers began offering coverage in the state. Because it is still a very regulated state, Massachusetts still has a relatively large residual market. According to data from the Automobile Insurance Plan Service Office (AIPSO), in 2022, 3.38% of Massachusetts auto-insurance customers had to resort to the residual market, the second-highest rate in the nation. But before 2008, Massachusetts’ residual-market share was routinely in the double digits.
While those states that have opted to copy the California model have largely lived to regret it, others continue to explore the imposition of Prop 103-like regimes. Oregon lawmakers, for example, have repeatedly put forward legislation that would place the insurance industry under the state’s Unlawful Trade Practices Act, granting customers the right to sue for damages beyond even the face value of their policies, and third parties to bring private rights of action against insurers with whom they have no contractual relationship.
But perhaps the most notable recent proposal to shift to a Prop 103-like system is Illinois’ H.B. 2203, which would effectively transform the state from the most open and competitive insurance market in the country to one of the most restrictive. If approved, the legislation would require every insurer seeking to offer private passenger motor-vehicle liability insurance in the state to file a complete rate application with the Department of Insurance, which once again would be empowered to approve or disapprove rates on a prior-approval basis. The bill also would prohibit insurers from setting rates based on any “nondriving” factors, including credit history, occupation, education, and gender.
As in California, the measure would also create a new system for public intervenors in the ratemaking process, stipulating that “any person may initiate or intervene in any proceeding permitted or established under the provisions and challenge any action of the Director under the provisions.”
Illinois is currently somewhat of an outlier in effectively having no formal rate-approval process at all. In 1971, the Illinois General Assembly neglected to extend legislation enacted a year earlier to create “file-and-use” system, and the state has continued on without any insurance rating law for more than half a century.
It is difficult, but not impossible, to amend Prop 103. Indeed, many reforms may be enacted by updating administrative interpretation alone. What follows is, first, a list of reforms that CDI could champion (some of which are included, in varying forms, in Commissioner Lara’s emergency plan) to improve speed-to-market, procedural predictability, and rate accuracy. Second is a list of structural reforms that would require legislative approval.
As discussed above, Prop 103 grants CDI discretion on whether to convene public hearings on rate changes of less than 7% for personal lines or 15% for commercial lines. When the commissioner grants such hearings, it adds expense, administrative burden, and delays to very modest changes in product offerings. Not only is this problematic as a matter of substance, we have shown that the data on delays in rate-filing approvals demonstrate that CDI is routinely violating the explicit text of Prop 103, which requires that “a rate change application shall be deemed approved 180 days after the rate application is received by the commissioner” unless the commissioner either rejects the filing or there are “extraordinary circumstances.” CDI not only can, but must act to uphold this provision of the law.
To do so, the CDI should entertain adopting a rate-approval “fastlane” premised on firms submitting filings that use actuarial judgments that embrace consumer-friendly assumptions. That is, if a filing is made on the basis of the least-inflationary or least-aggressive loss-development assumptions, CDI should undertake a light-touch review focused on rate sufficiency to expedite the approval process. This approach has the benefit of increasing both the predictability and speed of the ratemaking process.
If CDI were to adopt a narrower reading of the universe of rate-related issues appropriate for adjudication in a ratemaking proceeding, it would have the important benefit of limiting the universe of issues susceptible to controversy. In so doing, insurers and the department will better be able to focus on the resolution of rate applications in a timely manner that allows price to reflect risk. Relatedly, the department should continue to constrain intervenors from conflating rate-related and non-rate-related issues in the service of broader policy objectives.
There is no single cause for California’s substantial delay in approving rates, but it is clear that the state’s unique intervenor system shapes both insurer and CDI behavior in ways that were not immediately cognizable when the law was adopted. One way to ensure that speed-to-market improves over the long term is to better understand the value that intervenors offer, and to ensure that intervenor engagement is both efficient and effective.
At the moment, CDI publishes quantitative data concerning intervenor compensation and rate differentiation in intervenor proceedings. But while this is helpful in conveying the scope of intervenor efforts, the data fail to capture the value actually provided by intervenors in the ratemaking process. The qualitative contribution made by intervenors is obscured by the fact that none of their filings appear publicly on SERFF. Not only is this an aberration relative to other proceedings before the CDI, but there could be significant value in getting greater transparency from the intervenor process, given the delays and direct costs related to intervention.
For one, allowing the Legislature and the public to assess the substantive value of intervenor contributions would ensure not only substantial due-process protections for filing entities, but would also ensure that consumers are afforded a high level of representation in proceedings. For instance, such transparency would function as a guarantor that intervenor filings are not otherwise duplicative of CDI efforts. It would therefore allow the public to assess whether intervenors are diligent in their efforts on their behalf.
Therefore, CDI should consider requiring intervenors to have their filings reflected on SERFF. Doing so would cost virtually nothing and would redound to the benefit of all parties.
Another reform that may be possible to enact via regulatory action is allowing the use of wildfire catastrophe models to rate and underwrite risk on a prospective basis. As mentioned above, there is precedent for such interpretation, as the FAIR Plan and the California Earthquake Authority already use catastrophe models for similar purposes. The Legislature could contribute to this process by appropriating funds for a commission to formally review the output of wildfire models, much as the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) does for hurricane models. A formal review process could also provide insurers with the certainty they would need to justify investing in refined pricing strategies without fear that regulators will later reject the underlying methodology.
The following proposals would require one of the exceptional legislative processes outlined above. Under the most common, a bill would have to clear both chambers of the Legislature by a two-thirds majority, and courts would ultimately be called on to rule in any challenges (and there will be challenges) whether the measure “furthers the purpose” of Prop 103.
But there is another option. The Legislature could also, by simple majority vote, opt to pass a statute that becomes effective only when approved by the electorate. This path has largely been eschewed by past would-be reformers, who have considered the odds long that the voting public would choose to make changes to Prop 103.
That may once have been obviously true, but as the California market continues to struggle, and as banks and property owners find it impossible to secure coverage at any price, it is difficult to say with certainty what voters would do. Prop 103 itself passed narrowly, against the backdrop of an insurance market crisis. As we find ourselves in yet another such crisis, anything may be possible.
One option to address availability concerns and shrink the bloated FAIR Plan would be for the Legislature to revive the Insurance Market Action Plan (IMAP) proposal that the Assembly passed by a 61-3 margin in June 2020.
Similar to the “takeout” program used successfully to depopulate Florida’s Citizens Property Insurance Corp., under IMAP, insurers that committed to write a significant number of properties in counties with large proportions of FAIR Plan policies would be allowed to submit rate requests that considered the output of catastrophe models and the market cost of reinsurance. IMAP filings would also receive expedited review by the insurance commissioner, which could alleviate the speed-to-market issues highlighted in Section III.
There has also been some legislative interest in broadening the availability of telematics. In 2020, Assemblymember Evan Low (D-Campbell) and then- Assemblymember Autumn Burke (D-Marina Del Rey) co-authored an op-ed in which they called telematics “a sensible and fair approach” and encouraged CDI to continue to explore the issue with stakeholders.
Prop. 103 was passed in an age before cell phones, GPS Navigation and many other technological advancements. Its interpretation does not allow companies to rate customers on their driving behavior. Prop. 103 relies heavily on demographic factors, rather than basing your rate on how you drive.
As demonstrated in this paper, claims about Prop 103’s savings to consumers must be taken with an enormous grain of salt. Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations. This displacement into what are intended to be mechanisms of last resort also deprives consumers of the protections ordinarily offered in the admitted market.
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 Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880 (Cal. 1979), 153 Cal. Rptr. 842, 592 P.2d 329.
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 State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.
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 Prior Approval Rate Filing Instructions, California Department of Insurance (Jun. 5, 2023), available at https://www.insurance.ca.gov/0250-insurers/0800-rate-filings/0200-prior-approval-factors/upload/PriorAppRateFilingInstr_Ed06-05-2023.pdf.
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 Median Home Price by State, World Population Review, https://worldpopulationreview.com/state-rankings/median-home-price-by-state (last updated May 2022).
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 Cal. Code Regs. Tit. 10, § 2644.5.
 Xu et al., supra note 15.
 Robert Zolla & Melanie McFaul, Wildfire Catastrophe Models and Their Use in California for Ratemaking, Milliman (Jul. 21, 2023),
 Glenn Pomeroy, Use of Catastrophe Models by California Earthquake Authority, California Earthquake Authority (Dec. 17, 2017), available at https://ains.assembly.ca.gov/sites/ains.assembly.ca.gov/files/CEA%20Use%20of%20Catastrophe%20Models%20-%20GP%20Statement.pdf.
 Press Release, Commissioner Lara Announces New Regulations to Improve Wildfire Safety and Drive Down Cost of Insurance, California Department of Insurance (Feb. 25, 2022), https://www.insurance.ca.gov/0400-news/0100-press-releases/2022/release019-2022.cfm.
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 Cal. Ins. Code §623.
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 Proposition 103 Enforcement Project v. Charles Quackenbush, 64 Cal. App.4th 1473 (Cal. Ct. App. 1998), 76 Cal. Rptr. 2d 342.
 Clint Proctor, Do Insurance Companies Use Credit Data?, MyFICO (Oct. 21, 2020), https://www.myfico.com/credit-education/blog/insurance-and-credit-scores.
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 10 CCR § 2632.5.
 10 CCR § 2632.5(c)(2).F.5.B.
 10 CCR § 2632.5(d)(15-16)
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 State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.
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 CIC 1861.065(d).
 SERFF WAWA-133081408.
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 The median delay for homeowners rate filings in California is 198 days. For auto insurance rate filings, it is 185.5 days.
 Data are drawn from Informational Report on the CDI Intervenor Program, California Department of Insurance, available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 15, 2023).
 Data from Florida are not available for this measure; therefore, California ranks 50th out of 50 jurisdictions.
 Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva, Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies, SSRN (Dec. 22, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3762235.
 Id. at 1.
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 Motor Vehicle Insurance Fairness Act, H.B. 2203, Illinois 103rd General Assembly.
 Jon S. Hanson, The Interplay of the Regimes of Antitrust, Competition, and State Insurance Regulation on the Business of Insurance, 4 Drake LR 767 (1978-1979), available at https://lawreviewdrake.files.wordpress.com/2016/09/hanson1.pdf.
 Consumer Watchdog, supra note 11.
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 A.B. 2167, California Legislature 2019-2020 Regular Session.
 Evan Low & Autumn Burke, Modernize the Way We Price Auto Insurance – Telematics Is a Sensible Approach, CalMatters (Aug. 19, 2020), https://calmatters.org/commentary/2020/08/modernize-the-way-we-price-auto-insurance-telematics-is-a-sensible-approach.
 Consumer Federation of America, supra note 12.
Presentations & Interviews ICLE Director of Law & Economics Programs Gus Hurwitz was a guest on The Cyberlaw Podcast, where he discussed the U.S. Justice Department’s recently initiated . . .
ICLE Director of Law & Economics Programs Gus Hurwitz was a guest on The Cyberlaw Podcast, where he discussed the U.S. Justice Department’s recently initiated trial against Google and a pair of cases brought by the Federal Trade Commission against Amazon. Audio of the full episode is embedded below.
Regulatory Comments As alumni of the Federal Trade Commission, we are responding to the Agency’s proposed amendments to the premerger notification rules. We have devoted significant portions . . .
As alumni of the Federal Trade Commission, we are responding to the Agency’s proposed amendments to the premerger notification rules. We have devoted significant portions of our careers to protecting consumers and competition and we continue to care deeply about the Agency and its mission. Moreover, we agree that the notification rules are due for revisions given the passage of time and statutory changes, particularly the Merger Filing Fee Modernization Act of 2022, and that development of an e-filing system would streamline the process. We applaud the FTC for tackling these issues.
We write to suggest several ways in which the FTC might strengthen the evidentiary and legal foundations for the proposed amendments. Because the proposed reporting form requests vast amounts of new information as compared to the existing form, a stronger foundation would help to insulate the proposal from legal challenge and to build congressional support:
Again, we applaud the Agency for revising the form. Nevertheless, given the NPRM’s legal and evidentiary shortcomings, we encourage the FTC to adopt only those changes that are required legally, and to table other changes until the Agency lays a stronger foundation.
Read the full letter here.
Popular Media The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime . . .
The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime service — which would be bad news for its 167 million American members.
Popular Media With Congress facing a Sept. 30 deadline to pass both its appropriations and farm bills, and the threat of a government shutdown looming, the options . . .
With Congress facing a Sept. 30 deadline to pass both its appropriations and farm bills, and the threat of a government shutdown looming, the options to find a moving vehicle to which Congress could attach an extension of the $14 Affordable Connectivity Program (ACP) are running short.
TOTM There is much in the Federal Trade Commission’s (FTC) record over the past two years that could be categorized as abnormal. There is, for instance, . . .
There is much in the Federal Trade Commission’s (FTC) record over the past two years that could be categorized as abnormal. There is, for instance, nothing “normal” about using the threat of excessive force to cower businesses into submission. Introducing sky high costs for the filing of mergers isn’t normal, as it will scare away merging parties. These are attempts at regulation by intimidation.