Insurance Market Conduct Surveillance

You asked for information on the National Conference of Insurance Legislators’ (NCOIL) market conduct surveillance proposal.

Market conduct regulation requires state insurance departments to oversee a wide range of company practices including sales, underwriting, and claims handling, to help protect consumers from unfair practices. Market analysis and market conduct examinations provide regulators with information on insurer behavior and practices.

In response to a review of market conduct regulation, the National Conference of Insurance Legislators (NCOIL) developed a Market Conduct Surveillance Model Law in 2003. According to NCOIL, the model act would provide states with guidance for creating a new market conduct system that places more emphasis on market analysis, examinations, and coordination among the states to maximize regulatory resources and reduce costly redundancies. A copy of the most recent draft, dated January 26, 2004, is enclosed.

The U. S. General Accounting Office (GAO) and NCOIL’s educational and research branch, Insurance Legislators Foundation (ILF) each studied state market conduct regulation and concluded that improvements were needed to ensure consumer protection.

GAO and ILF both noted that the National Association of Insurance Commissioners (NAIC) has undertaken numerous initiatives over the years aimed at increasing market conduct regulation effectiveness. However, they also reported that because states are not required to adopt and implement NAIC’s guidelines, regulatory improvements have been slow and inconsistent.

Most recently, NAIC has adopted a Market Conduct Uniform Examination Outline and released a Market Analysis Handbook (a copy of each is enclosed). NAIC hopes to have 40 states certify compliance with the uniform examination outline and all states implement a market analysis program that incorporates NAIC’s guidelines in 2004.

Connecticut statutes authorize the insurance commissioner to examine the affairs of any insurance company doing business in the state as often as she deems it necessary and of each domestic insurer at least once every five years. In scheduling and conducting such examinations, the commissioner is required to consider the criteria set forth in the examiners’ handbook adopted by NAIC and in effect at the time of the examination, as well as other criteria she deems appropriate (CGS § 38a-14).

With regard to market conduct examinations specifically, the commissioner is required to undertake a market conduct examination of the affairs of any insurance company, health care center, or fraternal benefit society doing business in the state as often as she deems it necessary (CGS § 38a-15).

NCOIL’s Market Conduct Surveillance Model law goes further than Connecticut’s current statutes. It requires the insurance department to perform market analysis, sets protocols for market conduct action, establishes standards for market conduct surveillance personnel, and requires coordination with other states through the NAIC.

Market regulation requires state insurance departments to oversee a wide range of company practices, including sales, underwriting, and claims handling, to help protect consumers from unfair practices. In addition to market analysis and market conduct examinations, oversight activities may include reviewing and approving rates and forms, processing consumer complaints, issuing licenses to insurance companies and producers, and providing consumer education. Market analysis and examinations provide information on the actual practices of insurers.

Insurance departments use market analysis to identify potential noncompliance by insurance companies. According to NAIC, a market analysis program is a system of data collection and analysis that enables a regulator to:

• Identify general market disruptions and important market conduct problems as early as possible and to eliminate or minimize the harm to consumers;

• Better prioritize and coordinate insurance regulation functions and establish an integrated system to respond to market problems; and

• Provide a framework for collaboration among the states and with federal regulators regarding the identification of market conduct issues and market regulations.

GAO reported that market analysis can provide information on insurance companies’ compliance with applicable laws and regulations, highlight practices that could have a negative effect on consumers, and help identify problem companies that should be targeted for examination.

According to NCOIL, market analysis is a process whereby insurance department market conduct personnel collect and analyze information from filed forms, surveys, required reports, and other publicly available sources in order to develop a baseline and to identify patterns or practices of insurers that deviate significantly from the norm and pose potential risk to insurance consumers.

Insurance departments use market conduct examinations to systematically assess insurance companies’ behaviors and practices. Insurance regulators perform two general types of market conduct examinations: comprehensive examinations and targeted examinations. A comprehensive examination allows regulators to examine all or most of a company’s operational areas using the company’s files and documents. For example, examiners can review types of products the company sells, producers’ sales and marketing practices, claims payment procedures, underwriting standards, complaint handling procedures, policy provisions, and internal controls. During a targeted examination, regulators examine just one or a few business areas.

Regulators may conduct examinations as desk examinations or on-site examinations. A regulator performs a desk examination at a location other than the insurer’s premises. Typically, a desk examination is conducted at the insurance department’s offices with the insurer providing requested documents to the examiner for review. A regulator performs an on-site examination at the insurer’s home office or the location where the records under review are stored.

Insurance departments initiate an examination by issuing a market conduct examination “call letter,” which describes the scope and timetable for the examination. The examiner requests and the insurer provides the records to be reviewed. After performing the examination, the examiner prepares a report of findings. The insurer is generally provided an opportunity to respond to the findings, whether during the examination or after the report is issued. If the examiner concludes that the insurer violated insurance laws or regulations, the insurance commissioner may take enforcement action, including the suspension or revocation of the company’s license to conduct business in the state, monetary fines, and restitution (e. g. , refunding premiums, paying additional amounts on claims).

The U. S. General Accounting Office (GAO) studied the use of market analysis and on-site examinations in market regulation and the progress of the National Association of Insurance Commissioners (NAIC) to improve and coordinate market regulation at the state level. In it’s September 2003 report (copy enclosed), “Insurance Regulation: Common Standards and Improved Coordination Needed to Strengthen Market Regulation,” GAO found that no generally accepted standards exist for market conduct regulation. According to GAO, while all states do some type of market regulation, market analysis and on-site examinations are used inconsistently, if at all, resulting in consumer protection concerns. GAO indicates that inconsistencies across states in performing market conduct examinations makes it difficult for the states to depend on each other. As a result, each state is left to examine each company within its borders – “a virtually impossible task. ” The result is that some insurers are examined multiple times and other insurers are left unexamined.

GAO reported on NAIC initiatives since the 1970s designed to improve uniformity in standards and procedures for market analysis and market conduct examinations. These initiatives are described further below. GAO believes NAIC’s guidance is helpful. But, because states are not required to follow the guidance, NAIC is limited in its ability to achieve its goal of uniformity. According to GAO, the success of NAIC’s initiatives will be determined by regulators’ willingness to share in its efforts.

GAO recommends that NAIC, working with the states, give priority to developing a common set of standards for a uniform market oversight program that will include all states. According to GAO, the standards should include procedures for conducting market analysis and coordinating market conduct examinations. GAO further recommends that a mechanism be established to encourage state legislatures and insurance departments to adopt and implement the identified minimum standards. GAO believes that a formal market analysis program in each state and effective coordination of market conduct examinations would provide the needed basis for effective market regulation nationwide.

NCOIL’s educational and research branch, Insurance Legislators Foundation (ILF), commissioned PricewaterhouseCoopers, LLP to conduct a four-year review of state market conduct regulation from 1999 to 2003. According to ILF, the study revealed considerable duplication and lack of coordination in market conduct examinations by state insurance departments, and a wide absence of statutory authority for market conduct regulation. ILF identified a need for the following:

• Giving the insurer’s domiciliary state the primary responsibility for market conduct surveillance,

• Self-certification of compliance by insurance companies,

• Mandatory periodic meetings between insurers’ compliance officers and state market conduct regulators to discuss relevant new laws and regulations,

• Embedding market conduct surveillance into other regulatory functions,

• Creating a National Market Conduct Committee to maximize interstate communications, cooperation, and coordination,

• Enhancing the NAIC National Complaint Database,

• Protecting the confidentiality and privileged status of self-evaluation audits and independent assessment programs undertaken by insurers, and

• Adopting a model law governing market conduct regulation.

In 1975, NAIC published the Market Conduct Examiners Handbook, which it has regularly updated. The handbook provides guidance on conducting examinations and reporting results. According to GAO, most states use the handbook to some extent. However, GAO reports that the handbook lacks standards such as when to hold examinations or how to choose companies to examine.

NAIC also developed the Examination Tracking System (ETS), a computer-based system designed to help states coordinate examinations in order to reduce the regulatory burden on insurers. According to GAO, by using ETS, state regulators should know when other states plan to hold examinations and which companies will be examined. However, GAO found that ETS is not widely used so regulatory efficiencies have not been realized.

In 1995, NAIC adopted Market Conduct Regulatory Guidelines, which suggested procedures and services for state insurance departments to provide as part of their market regulation programs. According to GAO, the states have been unable to reach agreement on the minimum resources and national regulatory standards necessary to achieve effective market conduct examination programs.

In 2002, NAIC adopted the Market Conduct Uniform Examination Outline (copy enclosed) to help minimize variations in market conduct examinations so that states could more readily rely on each other’s examination findings. The outline focuses on four areas of the examination process: (1) exam scheduling, (2) pre-exam planning, (3) core examination procedures, and (4) examination reports. NAIC’s goal is to have at least 40 states certify compliance with all four areas of examination uniformity. However, NAIC points out that with a state-based regulatory scheme in which different laws exist in each state, the extent to which states can rely on another’s market conduct examinations is inherently limited.

The Market Conduct Uniform Examination Outline includes a list of reasons for examinations. The NAIC examiners handbook was recently revised to include the same information. The suggested reasons for examinations include such things as complaints, market share, financial examination findings, findings from other state regulators, a shift in business practices, past history of noncompliance, information collected through regulatory surveys, length of time since the last examination, and new laws enacted since the last examination.

GAO reports that the reasons for examination listed by NAIC do not constitute “generally accepted criteria” for determining when to examine a company for two reasons: (1) states are not required to follow the guidance in the handbook and (2) the factors listed do not provide clear and specific minimum standards for when and how the factors should be applied. As a result, GAO believes that states are unlikely to respond consistently to a given market conduct problem.

Recently, NAIC announced a major initiative to improve regulators’ use of market analysis and market conduct examinations. In 2003, NAIC developed a market analysis handbook and seeks to have a market analysis program that incorporates the handbook’s procedures in place in every state in 2004.

GAO indicates that NAIC’s goals are worthwhile. However, GAO notes that NAIC’s actions are just a first step and its models must then be adopted and implemented by the states, either by regulation or by legislation when needed.

According to NCOIL, the purpose of its Market Conduct Surveillance Model Law is to establish a framework for insurance department market surveillance activities, including:

• Processes and systems for identifying, assessing, and prioritizing market conduct problems that may have a substantial adverse impact on consumers, policyholders, and claimants;

• Actions available to the insurance commissioner to substantiate market conduct problems and the means to resolve those problems; and

• Procedures to communicate and coordinate market conduct actions among states to foster the most efficient and effective use of resources.

If market analysis suggests a market conduct problem with an insurer, the actions available to the insurance commissioner under NCOIL’s model law include, but are not limited to:

• Correspondence with the insurer,

• Insurer interviews,

• Information gathering,

• Policy and procedure reviews,

• Interrogatories,

• Review of insurer self-evaluation and compliance programs,

• Desk examinations, and

• Targeted on-site examinations.

The model law also requires the commissioner to share information and coordinate market analysis and examination efforts with other states through NAIC. This includes reporting data to NAIC systems, such as the Complaint Database System, the Examination Tracking System, and the Regulatory Informational Retrieval system, so that other states can review the data and avoid duplicative examinations.


February 11, 2004		2004-R-0172
INSURANCE MARKET CONDUCT SURVEILLANCE

By: Janet Brierton, Associate Legislative Attorney