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Changing The Market Conduct Model: How Much Is Too Much?

By Jim Connolly

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Changing The Market Conduct Model:

How Much Is Too Much?

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The debate on the overhaul of a market conduct model law is centering on how much change is too much.

Advocates of a market conduct model developed by state legislators and currently being adjusted by state insurance regulators are saying that change needs to be substantial.

But other parties to discussions currently being held by the National Association of Insurance Commissioners, Kansas City, Mo., are saying that insurance commissioners should not be asked to give up tools they already have to make sure good market conduct practices are followed.

The debate centers on changes to the Market Conduct Surveillance Model Law adopted by the National Conference of Insurance Legislators, Albany, N.Y., on Feb. 27.

The discussions raised the issue of whether requirements under the new model would be in conflict with existing statutory requirements. For instance, a question was raised that the definition of targeted examinations in the model does not encompass statutory requirements.

In response, Joel Ario, NAIC secretary-treasurer and administrator of the Oregon insurance department, responded that the definition would not encompass such requirements if the exam was not a part of the market analysis.

Another issue was raised over what a regulator would do if a state required examinations every 3-5 years and the new model took a targeted exam approach.

Ario explained that the new law would supplant existing laws regarding market conduct oversight.

But, Joel Laucher, a California regulator, said he thought the wording in the current draft did not preclude examinations other than targeted examinations tied to market conduct analysis being conducted.

Laucher noted that John Garamendi, California insurance commissioner, would not support “any law that would tie his hands and have him do less than he does now.”

Texas Commissioner Jose Montemayor, however, said he did not believe the model would diminish his authority to act and said he supports the current draft.

Laucher explained that problems do not necessarily show up in consumer complaints and that a commissioner needs all remedies available to prevent abuses.

For instance, he cited the case of a fraternal insurance society in which tens of thousands of dollars in interest was not paid in life insurance benefits. “There had never been a complaint filed, and we do not want to be restricted by a market analysis framework.”

Michael Hessler, an Illinois regulator, agreed. “There are certain companies that have to be looked at time and time again because there are problems over and over again.”

But Birny Birnbaum, executive director with the Center for Economic Justice, Austin, Texas, argued that in such a case that pattern would establish a market analysis reason to examine the company.

Not using market analysis to target exams might find situations such as the fraternal society in California but might result in efforts not being devoted to larger abuses, he explained.

The due process right that an insurer would have to question examinations that it considered excessive or unfair was also raised. Regulators had concerns expressed that the language would require use of the least intrusive, appropriate means for examining market conduct issues.

Linda Lanam, vice president-annuities, with the American Council of Life Insurers, Washington, told regulators the language would simply protect insurers against excessive examinations. She cited one company examination that continued for so long that the companys ongoing solvency became a concern.

Fred Nepple, a Wisconsin regulator, noted that any best practices organization involved with self-assessments of companies market conduct practices must be operated by standards adopted by commissioners.

But, Lanam added, in the case of organizations such as the Insurance Marketplace Standards Association, Washington, “were not taking a pass” that would absolve companies from responsibility. Rather, she continued, companies just want recognition that if they undertake work to meet standards, that regulators would recognize that effort.

After the discussion, Lanam said it is a positive that regulators are trying to modernize and improve market conduct oversight. However, she expressed concern that some states are perceiving efforts to standardize a market conduct structure and create due process as something that could be used by companies to act inappropriately.

Market analysis could be used to look at problems such as the calculation of interest on death claims to stop any problems, she said. And, the process of communication with regulators embodied in the NCOIL model, would give companies direction about what regulators wanted, Lanam said. Such direction, she added, would help companies set up their compliance programs and prevent repeated technical violations that would arise if what regulators wanted had been misunderstood.

Lenore Marema, vice president-regulatory affairs with the Property Casualty Insurance Association of America, Des Plaines, Ill., said “states need to know that this is about change” and that they really cannot continue to “accommodate each others variances.”

The possible incorporation of changes to NAIC models into law by reference in the model law draft continues to concern PCI members, she added.

She said she doubted that with the changes being discussed, PCI members would support the NAICs draft model. It would leave no remedy if regulators acted outside of the normal boundaries of market conduct authority, Marema said. The NCOIL model is “best left as is.”

Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.