Congress Turns Up The Heat On Market Conduct Reform
Congress may have to act unless the states take immediate steps to upgrade and rationalize oversight of market conduct, the chairman of the House Financial Services Committee says.
“We will be discussing a number of short-term legislative proposals to fix the state system later this year, and hope the states can act quickly and effectively in this case to protect consumers on their own before Congress needs to step in and provide additional impetus,” says Rep. Mike Oxley, R-Ohio.
Oxley delivered his comments at a hearing called by the Financial Services Subcommittee on Oversight and Investigations, chaired by Rep. Sue Kelly, R-N.Y.
Oxley says the current system lacks “both strategic design and uniformity, with the rules of the game too uncertain and limited state resources wasted on inefficient and often duplicative regulation.”
Kelly says consumers are harmed by the current “patchwork” of state systems that involve too much duplication, with too few standards and no systematic approach to detect patterns of improper conduct.
“We need to develop a systematic, comprehensive approach with clear standards that will target resources more efficiently,” she says.
Kelly adds, however, that this does not mean states should enact more regulations that would create more unnecessary burdens on the entire insurance industry.
“Put simply,” Kelly says, “we do not need to pursue more regulation, but more effective regulation.”
Richard J. Hillman, director of financial markets and community investment for the U.S. General Accounting Office, says a GAO investigation shows that while all states do some level of market analysis, few have established formal programs to maintain a systematic and rigorous overview of company behavior to effectively identify problem companies for detailed review.
Moreover, Hillman says, the number of market conduct examiners differs widely among states, and there are no generally accepted standards for training and certification of examiners.
As a result, most states try to regulate the behavior of all companies selling insurance within their borders, he says, which is an overwhelming burden given that anywhere from 900 to 2,000 companies operate within each state.
Also, Hillman says, because many states do not coordinate market conduct exams, some companies are examined frequently, while others not at all.
The National Association of Insurance Commissioners has taken steps to improve the consistency and quality of market conduct exams, but progress has been slow, he says.
“If NAIC cannot convince the various states to adopt and implement common standards for market analysis and examinations, current efforts to strengthen these consumer protection tools are unlikely to result in any fundamental improvement,” Hillman says.
Terry Parke, a member of the Illinois state legislature and former president of the National Conference of Insurance Legislators, says state legislators understand the problem. Indeed, he says, NCOIL sponsored a study by PricewaterhouseCoopers and Georgia State University which identified wide disagreements regarding the purpose of market conduct examinations and little coordination among states, leading to widespread and wasteful redundancies.
He says the report, which will be considered at an upcoming NCOIL meeting, recommends a comprehensive self-policing market conduct program that includes standards for a compliance program, including CEO certification of compliance, incentives for self-assessment activities, a comprehensive system for filing consumer complaint information, domiciliary state responsibility for surveillance with coordinated targeted multistate examinations and the development of model legislation.
The concept of a self-policing system in not unique to the insurance industry, Parke says. Indeed, he cites the recent anti-money-laundering requirements promulgated by the Securities and Exchange Commission as an example of a self-policing program that allows companies to design systems tailored to their specific business environments.
“Insurers should be accountable for their own monitoring and compliance with uniform state standards,” Parke says. “Regulators should pursue abuses and take actions that will result in the mitigation of the greatest harm and restoration of the greatest benefit to consumers and the public.”
Joel Ario, the Oregon Insurance Administrator, cautions against a “one size fits all” approach to market conduct.
Insurance regulation, he says, is different from other kinds of financial regulation because products are more complicated and market conditions can vary across state lines.
“The market behaviors of insurers can be quite different from one state to another because laws may be different and insurer compliance with the laws may vary by state,” Ario says.
He says state regulators must enforce the laws of their own state and cannot delegate that responsibility to someone who may not appreciate the impact of a violation on local consumers.
“Regulatory efficiency for its own sake should not undermine the credibility and effectiveness of state regulators charged with protecting consumers,” Ario says.
But Brian K. Atchinson, executive director of the Insurance Marketplace Standards Association, Washington, says the lack of uniformity places significant costs and human resource burdens on insurers that translate into higher costs for consumers.
While NAIC has been working on uniform regulation for some time, he says, the pace of change has been slow.
Many market conduct exams are conducted with an emphasis on “technical violations,” he says, without considering the ultimate impact of these infractions on consumers.
“State insurance departments should not view market conduct examination activity as a means to generate revenue for their operations, but rather they should be determining whether a company has a system in place to detect and remedy market conduct improprieties before they become widespread,” Atchinson says.
But J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America, says consumers strongly oppose self-certification programs that some in the industry have proposed and also oppose the NCOIL proposal.
He calls the market conduct record by the industry “abysmal.”
As examples, he cites race-based life insurance pricing, vanishing life insurance premiums that did not vanish, life insurance sold to unsuspecting nurses as a retirement plan and the replacement of good life insurance policies with less valuable ones in order to gain commission dollars.
Hunter says that in a post-Enron environment, reliance on self-certification is problematic, at best.
Self-certification could be one part of a states market conduct program under certain circumstances, he says. “If a state relies at all on such information, it must be made public and the tests made by the self-certification group, such as IMSA, must be transparent,” Hunter says.
“We must see when an insurer fails a test and not just be given a seal of approval with no information on what the tests are, how they are scored and the individual insurers scores,” he says.
Hunter adds that any state market conduct program must include other tools, such as private causes of action and suitability, particularly for investment-oriented and cash value life insurance policies.
Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 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.