A US Senator who is suing an insurance company over a claim made after he lost his home during Hurricane Katrina is behind proposed legislation that would eradicate the insurance industry’s limited antitrust exemption.

State Farm refused to pay Senator Trent Lott’s claim for his destroyed home because the company argued the damage was caused by flooding — which is not covered under his policy — rather than by wind damage.

Now the Mississippi Republican has teamed up with Senators Patrick Leahy and Arlen Specter to introduce a bill that would repeal the insurance industry’s limited antitrust exemption under the 62-year-old McCarran-Ferguson Act. Identical legislation has also been introced in the US House of Representatives.

Yesterday, David Bradford, editor-in-chief of industry analysts and information provider Advisen Ltd., said the proposed legislation appeared to be “political grandstanding” in the midst of thousands of lawsuits against insurers like that of Sen. Lott.

But should the legislation be enacted, Mr. Bradford warned it could cause harm to insurance consumers and damage smaller insurance companies. The limited exemption to antitrust law was designed to allow insurers to share data, he said.

“The rationale for the sharing of loss data is that insurance premiums are based on the analysis of historical claims, and many smaller insurers do not have sufficient claims statistics for rate-making purposes,” Mr. Bradford wrote in an Advisen “QuickNote”.

“Unless insurers pool claims data, neither they nor regulators can know the cost of insurance products and whether rates are appropriate.”

While the aim of antitrust legislation is to promote competition, Mr. Bradford argued that the bill being proposed would actually achieve the opposite.

“Because insurers can pool claims information, small insurance companies are not disadvantaged as compared to the very largest companies, which may themselves have enough data for making rates,” Mr. Bradford said.

“Without access to pooled data, many small companies would be less able to compete effectively, and would be more prone to insolvency, since they could not actuarially price their products.” The Senators’ bill is entitled the Insurance Industry Competition Act 2007. According to Sen. Leahy, “federal oversight would provide confidence that the industry is not engaging in the most egregious forms of anti-competitive conduct — price fixing, agreements not to pay, and market allocations.”

Mr. Bradford argued that “these sorts of activities are not covered by the antitrust exemption of McCarran-Ferguson, and already are within the purview of federal regulators and the Justice Department”.

And he cited the results of recent probes by former New York Attorney General Eliot Spitzer as evidence that colluding on pricing was already illegal in the industry.

Even if the antitrust exemption was eradicated, another means of aggregating data would have to be found, Mr. Bradford said.

He added: “Many insurers have accepted, and some actively support, the idea of an increased regulatory role for the federal government, and seem willing to work with lawmakers on a solution that would combine a new approach to the antitrust exemption with federal regulation.”