Insurance and Reciprocity

Abstract

In October of 1969 a U.S. District Court denied a motion by U.S. Department of Justice Antitrust Division for a preliminary injunction barring acquisition of Hartford Fire Insurance Company by International Telephone and Telegraph Corporation. One of major issues in case was extent to which proposed merger would promote reciprocity, i.e., mutual exchange of benefits, favors, or privileges in business transactions. With court decision as a framework, this article explores reciprocal possibilities created by ITT-Hartford merger and, more generally, by any conglomerate-insurance company combination. Both a priori economic reasoning and results of surveys of CPCU agents and corporate risk managers are used to demonstrate that conglomerate acquisitions of insurance companies do indeed create strong potentialities for reciprocity and are thus clearly anticompetitive. The authors conclude that ITT-Hartford ruling has set a precedent with serious economic consequences for insurance industry. has been defined as the use of one's purchasing power to obtain sales and practice of preferring one's customers in purchasing. Less formally, it is philosophy of you buy from me and I'll buy from you. In a word, it is a form of back-scratching. 1 Although usually defined in terms of reciprocal exchange between sellers and purchasers, it is not limited to this Herbert S. Denenberg, Ph.D., J.D., is Commissioner of Insurance of Commonwealth of Pennsylvania and is on leave of absence from his position of Lomnan Professor of Property and Liability Insurance at Wharton School of University of Pennsylvania. Dr. Denenberg is Past President of American Risk and Insurance Association and was formerly Book Review Editor of this Journal. J. David Cummins, B.A., is a Fellow in S. S. Huebner Foundation for Insurance Education and is Lecturer on Insurance at University of Pennsylvania. A member of Phi Beta Kappa and an Honorary Woodrow Wilson Fellow, Mr. Cummins is author of The Development of Life Insurance Surrender Values in United States, to be published in Huebner Foundation Occasional Papers Series. This paper was submitted in December, 1970. 1 For a more extended discussion of definitional aspects of reciprocity, see Bernard E. application. is a generic term describing a mutual exchange of benefits, favors or privileges-the transaction of business with another firm in order to obtain favors from it. It can include, therefore, not only mutual exchange of purchases, but other mutual exchangesfor example, an insurer granting a loan to a business, to get its order for insurance. In its simplest form, corner merchant practices reciprocity when he buys his insurance from agent who trades with him. Reciprocity, however, can be practiced on any scale in any degree of complexity and formality. Among giants that have practiced reciprocity are E. I. DuPont de Nemours and Company, General Motors, Armour and Company, Swift and Company, United States Steel, and Bethlehem Steel.2 Among more Harvith, Reciprocity and Federal AntiTrust Laws, Washington Law Review, Vol. 40, pp. 133-139. 2 See, for example, George W. Stocking and Willard F. Mueller, Reciprocity and Size of Firms, Journal of Business of University of Chicago, Vol. 30, (1957), p. 73.