NU Online News Service, June 3, 2004, 5:59 p.m. EDT, Washington – The market analysis component of state market conduct oversight should be centralized and probably placed in the hands of the National Association of Insurance Commissioners.[@@]
Lawrence D. Cluff, an assistant director in the Office of Financial Markets and Community Investments at the U.S. General Accounting Office, made those recommendations last week during a Capitol Hill briefing for congressional staffers. A printed version of his presentation was obtained by National Underwriter.
Cluff’s proposal could become part of the legislation now being drafted by the House Financial Services Committee that is aimed at making state insurance regulation more uniform and more efficient.
Cluff emphasizes that his proposal represents his own views and that his views are not necessarily those of the GAO.
He says a complete system of market conduct oversight has 3 major elements. The 3 elements are market analysis, domiciliary state scrutiny and insurers’ own internal controls.
Centralizing market analysis will be more effective than having each state try to handle market analysis on its own, Cluff says.
Data would be gathered from all relevant sources and from all states where a company does business, then sent to a central facility, most likely at the NAIC, Cluff says.
The data would be analyzed and compared to data from other members of a company’s peer group to identify outliers needing follow-up. The results would be sent to each state in which a company does business.
When market analysis identified companies needing more attention, the regulators in the companies’ home states would investigate, Cluff says.
Finally, Cluff says, insurers need internal controls than can prevent systematic abuses and help managers identify and correct any abuses that do occur.
“It is the company’s responsibility to establish and maintain the internal control system,” Cluff says. “It is the domiciliary regulator’s responsibility to verify that the systems are in place, are appropriate for the size and complexity of the company’s operations, and that they function as they are intended.”
The appropriate system, he adds, will vary from company to company.
The market conduct exams done by states should not focus on reviews of files or compliance with specific state laws, as is the case today, but instead on internal control structures, Cluff says.
Cluff adds that any successful state-based system of market conduct oversight must have a set of commonly agreed upon and universally adopted standards.
Regulators working through the NAIC can best develop these standards, he says.
Cluff says that while the system he is outlining may seem too expensive when compared to the present system, it is important to remember several points.
First, he says, comparing his proposed system to the current system is inappropriate because the current system is widely recognized to be broken.
Second, Cluff says, the current system is inefficient both because there is no good way to identify those companies that are truly at risk and because each state feels responsible for every company that sells in the state.
This inefficiency is expensive, he says.
Third, Cluff says, centralizing market analysis would be far less expensive than asking each state to do good market analysis on its own.
Fourth, he says, once an examiner force is trained, the examinations of internal controls may be relatively quick and low cost, since they will not be fishing expeditions.
Finally, Cluff says, as insurance companies realize their responsibilities to self-police and implement good internal controls, the number of targeted exams may well fall, offsetting some of the costs of conducting routine internal control exams.