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GAO Report Focuses On Market Conduct

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A market conduct report released by the General Accounting Office earlier this month recommended that a mechanism be created for state legislatures and insurance departments to adopt and implement minimum market conduct standards.

The National Conference of Insurance Legislators, Albany, N.Y., supports the findings in the GAO study and is seeking to meet that goal with a Market Conduct Surveillance Model Law, says Tim Tucker, NCOIL director of state-federal affairs.

The latest draft of that NCOIL model was released on Oct. 3, the same day as the GAO report.

The GAO report also recommends that the National Association of Insurance Commissioners, Kansas City, Mo., and states “give increased priority to identifying a common set of standards for a uniform market oversight program that will include all states.”

The NAIC for its part, has been working on streamlining market conduct procedures for over two years.

Shortly after the reports release, Joel Ario, the Oregon insurance administrator who is spearheading market conduct efforts at the NAIC, told National Underwriter, “This confirms we are headed in the right direction.”

The report mentions greater use of market conduct analysis and more collaboration among states, which regulators at the NAIC are undertaking, he said.

The GAO report cited the broad array of market conduct exam approaches now current. For instance, it cited NAIC data indicating that in 2001, 15 states did targeted exams; four did comprehensive exams; and 22 did both.

The GAO report also found that of the nine states participating in a NAIC market conduct pilot, with the exception of California and Ohio, on-site examinations were performed on less than 2% of the states licensed companies in 2001.

The report found that market conduct examinations differed widely. For example, of 25 companies, 19 had been examined at their offices a total of 106 times during a three-year period. Six had been examined one or two times over the three-year period, and seven others had undergone three to five examinations.

But two companies of those responding to a GAO question had not been examined since 1997, and four others had not been examined at all.

GAO also said the lack of a consistent approach was slowing more effective market conduct oversight.

NCOILs Tucker says a model law will help create more uniformity.

The new draft addresses points that include use of an association reviewer, a term that had caused insurers concern because it was undefined and created the possibility of another layer of regulation.

The use of such a reviewer is now limited to when a commissioner believes a companys practices “creates a substantial threat” to the public.

Additionally, the new draft states that an insurance department must actively manage costs including costs associated with qualified contract examiners.

It also states that the department has responsibility to protect the confidentiality of books and records used during market conduct examinations.

The GAO report bears out the need for improvement of state market conduct oversight, says Bruce Ferguson, senior vice president-state relations with the American Council of Life Insurers, Washington. When asked if “meaningful” market conduct changes have been produced to date, Ferguson says the answer is “no.”

And, he adds, the fact that the GAO report does not reference federal oversight does not mean that there is no interest. In fact, according to Ferguson, it could be quite the opposite. The documents purpose was to understand market conduct regulation today, a base that could be used to decide if federal oversight is needed in the future, he continues.

The NCOIL draft is a step toward a market conduct system that would also include best practices implemented by regulators, according to Ferguson.

Of the latest draft, he says the part that addresses what triggers a market conduct exam should also reflect what mitigates the need for such an exam, such as participation in a self-regulatory system.

The issue of accountability for costs is positive but should be taken a step further, he says, and should require regular itemized billing for costs.

And, he says, the draft should include a due process provision that would allow an insurer to question a market conduct finding before it was publicly released.

The issue of due process was also raised by Don Cleasby, assistant general counsel and assistant vice president with the National Association of Independent Insurers, Des Plaines, Ill.

It is important that insurers be able to establish their own compliance systems rather than have a system mandated, Cleasby adds.

The mandate that departments oversee costs related to an examination is also an improvement, he says.

Scott Cipinko, executive director of the Life Insurers Council, Atlanta, says the model still doesnt resolve the issue of cost and accountability. He says the model should also include a binding arbitration clause that would give insurers redress if they disagreed with a departments actions.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 10, 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.