GAO Official Puts Forth Market Conduct Proposal
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, according to an official with the United States General Accounting Office.
Lawrence D. Cluff, assistant director in GAOs Office of Financial Markets and Community Investments, outlined a 3-part proposal for improving market conduct oversight during a Capitol Hill briefing for Congressional staffers last week. A copy of his presentation was obtained by National Underwriter.
Cluffs proposal could become part of the legislation now being drafted by the House Financial Services Committee aimed at making state insurance regulation more uniform and efficient.
Cluff emphasizes that his proposal represents his own views and are not necessarily those of GAO.
A complete system of market conduct oversight, he says, has 3 major elements. The first, he says, is market analysis. This can be done most effectively if centralized, Cluff says, as opposed to having each state try to do it on its own.
Data would be gathered from all relevant sources and from all states where a company does business, he says, and sent to a central facility, most likely at the NAIC.
The data would be analyzed and compared to other members of a companys peer group to identify outliers needing follow-up. The results would be sent to each state in which a company does business.
The second element involves investigation by the domiciliary state regulator of each company targeted by the market analysis as needing special attention, he says.
If necessary, Cluff says, this could include a targeted examination that would focus on those areas identified by the market analysis but could be expanded should the finding warrant.
The third element, he says, is internal controls by insurance companies and routine examinations of those controls by the domiciliary state regulator.
All insurance companies, Cluff says, should have internal controls in place to assure that abuses cannot systematically occur and that when a problem does occur, the company can quickly identify it and correct it.
“It is the companys responsibility to establish and maintain the internal control system,” Cluff says in his presentation. “It is the domiciliary regulators responsibility to verify that the systems are in place, are appropriate for the size and complexity of the companys 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, Cluff says, 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 adds that any successful state-based system of market conduct oversight must have a set of commonly agreed 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 the market analysis function will be far less expensive than it would be if each state tried 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 routine internal control exams.
Reproduced from National Underwriter Edition, June 4, 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.