Analysis of Proposed Consent Order
The Federal Trade Commission ("Commission") has accepted subject to final approval an agreement containing a proposed Consent Order from Provident Companies, Inc. ("Provident") and UNUM Corporation ("UNUM"), under which Provident and UNUM will be required to submit data relating to disability insurance sold to individuals to an independent entity responsible for soliciting, aggregating, and publishing industry-wide actuarial tables, studies and reports.
The proposed Consent Order has been placed on the public record for sixty (60) days for reception of comments from interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the proposed Consent Order and the comments received, and will decide whether it should withdraw from the proposed Consent Order or make final the proposed Order.
On November 22, 1998, Provident and UNUM entered into an Agreement and Plan of Merger whereby the companies will form a new entity, UNUMProvident Corporation, with a combined stock value of $11.43 billion. The proposed Complaint alleges that the merger, if consummated, would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, in the market for disability insurance sold to individuals.
Provident and UNUM are two of the leading providers of disability insurance sold to individuals. Total premiums from individual disability insurance policies were over $4 billion last year. Disability insurance protects against loss of income due to disability from sickness, accident or injury. Unlike group disability insurance, which is made available to consumers by a third party,e.g ., an employer or other organization, individual disability insurance is purchased by consumers themselves, who individually hold policies. Individual disability insurance policies are sold primarily to people who do not have group disability insurance coverage available through their employers or other organizations, or who desire to supplement group disability insurance. Each such individual disability insurance policy is individually underwritten, based on the applicant's medical background, financial portfolio and income projection, and occupation.
The proposed merger of Provident and UNUM raises antitrust concerns in the market for disability insurance sold to individuals. If Provident and UNUM merge, they will control a significant percentage of all data relating to individual disability claims. Such data is used by insurance providers to make actuarial predictions about the type, occurrence and duration of disability claims used to design and price individual disability insurance policies. In order to assist insurance providers that only have a limited amount of proprietary claims data, independent entities such as the Society of Actuaries solicit, aggregate, and publish industry-wide actuarial tables, studies and reports. Because of the amount of all industry data it will control, UNUMProvident's participation in industry-wide solicitations for data made by the Society of Actuaries and other industry groups designated to conduct industry-wide solicitations by the National Association of Insurance Commissioners ("NAIC") is essential in order to ensure that resulting actuarial projects are credible.
Further, timely entry in the market for disability insurance sold to individuals on the scale necessary to offset the competitive harm resulting from the combination of Provident and UNUM is highly unlikely because of significant impediments to new entry. In addition to requiring data on past claims in order to price and design its individual disability insurance products, a new entrant would need expertise to predict morbidity -- the likelihood that an individual or a class of individuals will become disabled, and the length of the disability. This expertise is different from the expertise used to predict mortality, which is used to develop life insurance products. Making predictions about morbidity includes assessing the most likely disabilities, trends relating to new types of disabilities, the likely duration of various disabilities, and economic variables that may influence whether an individual is likely to make a claim. In addition, an entrant must contract with and train a large network of brokers to distribute its product. Finally, in order to evaluate claims, an entrant would have to develop a highly-skilled network of medical personnel and claims adjudicators. Because of difficulties in pricing products profitably, a number of large insurance carriers have exited the individual disability insurance market over the last several years.
The proposed Consent Order lowers barriers to expansion for existing providers of individual disability insurance. Because access to credible data on disability claims is required to design and price disability insurance policies for individuals, an existing provider of individual disability insurance without its own credible base of such data or the ability to access a credible public data base is unlikely to expand successfully. After the merger, UNUMProvident will possess a substantial percentage of available data, which will need to be contributed to a publicly available data base in order for industry-wide data to remain credible for use by smaller individual disability insurance providers. However, as a result of the merger, UNUMProvident may have an economic incentive not to contribute its data in response to industry-wide solicitations.
The proposed Consent Order requires that for a period of twenty (20) years, Provident and UNUM continue contributing individual disability claims data to an independent entity -- the Society of Actuaries, the NAIC, or the NAIC's designee -- that will publish actuarial tables, studies and reports. In addition, the proposed Consent Order contains terms and conditions that are intended to protect the confidentiality of UNUMProvident's data before and after it is aggregated with the data of other industry participants. For example, if Respondents' data represents 60% or more of the contributed data for any particular specification in the request for data, Respondents may require that the Society of Actuaries, the NAIC or NAIC's designee certify that Respondents' data was weighted for that specification in order to mask Respondents' identity. The Society of Actuaries and the NAIC both indicated that they are willing and able to provide any certifications set forth in the proposed Consent Order. The Consent Order also requires UNUM and Provident to provide the Commission a report of compliance with the provisions of the Consent Order within ninety (90) days following the date the Consent Order becomes final, and within ninety (90) days of each request for submission of data. The proposed Consent Order is not intended to have any effect on the NAIC's requirements for data pursuant to the statutes and regulations of state insurance commissions.
The purpose of this analysis is to facilitate the public comment on the proposed Consent Order, and it is not intended to constitute an official interpretation of the agreement and proposed Consent Order or to modify their terms in any way.