Legislators Advised That Market Conduct Exams Need Fixing
Findings of a new survey, testimony of regulators and insurers, and a sprinkling of anecdotes hammered home the same point to legislators: market conduct examinations need fine-tuning.
A survey prepared by PricewaterhouseCoopers, Chicago, was presented and discussed at the recent summer meeting of the National Conference of Insurance Legislators, Albany, N.Y.
Legislators and regulators say they are trying to develop a new streamlining procedure to conserve both government and insurer resources.
The survey found that a difference in philosophy exists between market conduct examiners and insurers.
According to the survey, The Market Conduct Handbook, a regulatory guide for examiners, states that an examination is most effective if it focuses on general business practices rather than on random errors.
Approximately 18% of chief examiners and 15% of examiners-in-charge disagree with this statement, the survey found. Roughly 25% of insurers surveyed believe that state insurance departments do not conduct market conduct exams in the spirit of the handbook statement. (See sidebar on this for further findings.)
Scott Cipinko, executive director of the National Alliance of Life Companies in Rosemont, Ill., says the biggest threat to insurer solvency is overregulation and its cost. A targeted exam–one that looks into specific issues or problems–is an approach that makes sense, he adds.
In fact, the idea of targeted exams is one that insurers are keenly supporting in discussions with both legislators and regulators.
Cipinko says insurers bear the cost of a market conduct examination, but when a bank is examined by the Office of the Comptroller of the Currency, the bank does not foot the bill for the exam.
A spokesperson for the OCC explains that banks pay an assessment to the OCC, but that no separate fee is charged for an examination.
A targeted approach using an analytical model of looking at consumer complaint data that is already available to regulators is an approach that has “real potential,” says David Reddick, government affairs advocate with the National Association of Mutual Insurance Companies in Indianapolis.
For example, he adds, if a company increases its market share and complaints rise, that might suggest it does not have the proper claims procedures in place to handle the increased market share.
Reddick says a progressive approach should be taken, with regulators starting with notification such as a letter and taking additional steps leading to an on-site exam if corrective steps are not taken.
The criterion to distinguish whether or not a market conduct exam is warranted should not be inadvertent technical errors, Reddick says, but rather should address the question, “Does it impact consumers?”
The beauty of financial examinations is that the numbers allow them to be looked at in an objective way, says Michael Lovendusky, senior counsel with the American Council of Life Insurers in Washington. However, with a market conduct examination, there is a greater amount of subjectivity, he continues.
In the past, insurers competed among themselves so that market conduct exams did not create disadvantages, Lovendusky says, but today insurers are competing with banks and financial services companies. And financial services entities under federal regulation have “far fewer guidelines and standards than regulation by states,” he says.
The market conduct process needs to be streamlined in several areas, he says. A coordinated or zone approach can be taken to avoid duplication and the exams can be treated with more fairness so that companies do not bear unfair costs, Lovendusky adds.
He also says that to achieve a zone approach, legislators at some point might have to “surrender” authority with an as-yet-undetermined legislative mechanism such as an interstate compact.
Robert Zeman, vice president and assistant general counsel with the National Association of Independent Insurers in Des Plaines, Ill., says discussion at the NCOIL meeting “kept coming back to the cost issue.”
Uncorroborated anecdotal examples of abuses mentioned during the hearing, according to interviews, cite instances where a one-day meeting of eight examiners and a company was called at a tab of $17,000 to the insurer. Other unconfirmed instances cite a group of examiners who shared a taxi but individually billed the company, and an examiner who lived a short distance from a company being examined and dragged out an exam.
Zeman says such testimony may point to “extreme examples,” but also shows “clear symptoms of very real underlying problems.”
The need for market conduct reform goes not only to the heart of exams themselves but also speaks to sentiments expressed by federal lawmakers that if states do not undertake speed-to-market reforms, then Congress will, Zeman says.
During a recent Congressional hearing, Zeman says it was made clear states would have a three- to four-year time frame to put reforms in place.
The issue of state regulation came up during the NCOIL meeting when legislators adopted a resolution supporting state regulation prior to a session that was going to air issues relating to a functional regulation approach.
The ACLI, the American Insurance Association and Fireman’s Fund had argued that a vote on the resolution–titled a “Resolution in Opposition to the Federalization or Dual Regulation of the Business of Insurance”–be postponed until the issue could be discussed.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.