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Regulation and Compliance > State Regulation

NCOIL Weighs In On Market Conduct

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The spotlight on effective market conduct procedures is intensifying as details of a new report issued by legislators become available.

The report by the National Conference of Insurance Legislators, Albany, N.Y., offers suggestions on an issue state insurance regulators have been tackling for over a year. It will be followed by a public hearing in Chicago on June 6.

Issued in time for a Congressional hearing in early May (see NU, May 12), the preliminary report, titled “The Path to Reform-The Evolution of Market Conduct Surveillance Regulation,” makes a number of recommendations. These include the development of a model market conduct law that could be brought before state legislatures; reliance on self-regulatory bodies such as the Insurance Marketplace Standards Association; mandatory dialogue between insurers compliance officers and market conduct regulators; and triggers for a market conduct examination.

Other recommendations made in the report include vesting a domiciliary state with primary responsibility for performing market conduct surveillance and enhancing the National Association of Insurance Commissioners national complaint database. (For a full text of the report, visit

Among the items that the NCOIL report recommends be included in a market conduct examination law are trigger points for a market conduct exam.

The report says a commissioner should be authorized to conduct an exam whenever necessary but “the statute should enumerate what should cause or conditions that would trigger an examination.”

Those triggers would encompass single insurer issues such as information from financial exams; complaint levels reflected in the national complaint database; or lack of participation in self-regulatory organizations or lack of independent assessment of compliance programs. It would also encompass industrywide issues such as indication of a common industry practice that violates state regulation or requires state regulatory attention.

NCOIL is seeking “uniformity and lack of duplication” in market conduct efforts, according to Susan Nolan, NCOIL deputy executive director.

Through self-policing and a required dialogue between compliance officers and regulators, problems can be averted before they become serious, says Tim Tucker, NCOILs director of state-federal affairs in Washington.

Birny Birnbaum, executive director for the Center for Economic Justice, Austin, Texas, and a funded consumer representative with the NAIC, had a different take, calling the report an “industry wish list.”

Birnbaum notes, for instance, the reports call for self-auditing and self-regulatory oversight. Other recommendations such as making the state of domicile the lead state for market conduct regulation are not backed up by minimum resource standards, he adds. The report also does not mention market conduct accreditation standards, according to Birnbaum.

Although he supports elements in the report that recommend, among other things, “identifying, assessing and prioritizing market conduct problems,” Birnbaum says details are not provided to explain how those elements would be achieved.

In fact, he says, the “gaping hole in the report,” is the lack of empirical evidence to support its recommendations. For example, he says the report does not suggest collecting zip code data or underwriting guidelines to make evaluations.

In order to prevent market conduct problems in the future, the report should have examined why regulators failed to detect problems such as vanishing premiums, race-based sales and claims settlement practices, Birnbaum says.

He says it is his conclusion that regulators missed some of these “glaring issues” because “they dont want to know about these market conduct problems.”

When specific suggestions are made such as gathering zip code data and underwriting practices, regulators have declined to do that, he continues. “Market conduct is the reason for state regulation. Time after time regulators have punted.”

However, Birnbaum has praise for market conduct examiners whom he describes as “some of the most talented and dedicated insurance regulators I have met. They know what is going on in the marketplace. But their hands are tied by their leaders who are not providing them with the tools [to do their job.]“

Mike Pickens, NAIC president and Arkansas insurance commissioner says Birnbaums “off-the-cuff opinion” bears “little resemblance to the facts.

“The NAIC has worked hard, and our market conduct efforts have been successful in protecting consumers in the Bankers Life case, the race-based premium issue, and others,” Pickens says. “We are working to coordinate our efforts on the UnumProvident issue as we speak. In addition, the D Committee [of the NAIC] is focusing much of its time and effort on market conduct reform this year.”

Pickens notes that “we were making this issue a priority for 2003 long before the NCOIL report was published.”

Joel Ario, Administrator with the Oregon insurance department and NAIC secretary-treasurer, says he disagrees that insurance regulators have punted on market conduct regulation. Issues such as race-based premium sales are being addressed, he says.

“There is always something that can be done better and that is what we are trying to do,” Ario continues.

Discussing the progress of market conduct projects at the NAIC, Ario says that over 40 states have certified compliance in two of four areas on examination uniformity and the goal for this year is over 40 in all four areas identified by regulators.

Additionally, a market analysis handbook, similar to the concept of an examiners handbook, should be ready by the end of the year, he says.

The data collection project that would be used to help develop a market conduct annual statement is currently under way, with no final decisions reached, Ario says.

On the NCOIL report, Ario says there are some good points, such as emphasis on a companys own compliance operations. However, he adds, that approach cannot be given “too much stock.” Rather, he says, there should be an approach of “trust but verify” so that self-assessment is a complement and not a substitute for regulatory oversight.

While Ario says that a model market conduct law proposed in the NCOIL paper could be helpful in laying out surveillance criteria, he maintains that statutes in states such as Orgeon give insurance regulators the same authority as in financial oversight.

Addressing the issue of what would trigger an examination, any list would need to have an element of discretion that would allow a commissioner to call an examination, Ario says. If it was a list without that discretion, “it would probably not be workable,” he notes.

Ario says that giving a domiciliary state primary responsibility for a market conduct exam could create a difficult political situation for that state because a company could behave differently in the state of domicile than in others. Additionally, states could be pressured when making decisions that would affect other states and could be faced with a company that threatens to redomicile if it does not like a market conduct opinion, Ario adds.

Creating a market conduct accreditation program is more difficult than a financial accreditation program because laws and behavior of companies can differ from state to state, Ario says.

Reproduced from National Underwriter Edition, May 19, 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.


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