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NAIC Pursues Comprehensive Market Conduct Assessment and Perhaps, Consolidation

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The NAIC is addressing the possibility of a central repository of state market conduct data in its main systems under a 2012 large-scale effort to beef up its market conduct and consumer protection profile, and make sure states are doing the same.

The initiative is seen as defensive, an effort to ensure that a major consumer protection scandal generates momentum for placing oversight for consumer compliance in the hands of the Consumer Financial Protection Bureau (CFPB). It was established under the Dodd-Frank Act.

The CFPB still has no director because Republicans, acting at the request of the banking industry, are seeking to rein in the power of the CFPB by making it come to the Congress for its budget. The insurance industry was able to escape oversight of its consumer protection activities by citing “strong” state consumer protections.

However, potential problems loom. For example, a provision of the DFA mandates that states impose the NAIC model law originally designed to protect seniors when they purchase or exchange annuity products. Under this provision of Dodd-Frank, states must adopt annuity suitability standards similar to those in in the NAIC model or lose its right to regulate products such as indexed annuities by 2013 unless a company adopts and implements practices on a nationwide basis that meets or exceeds the model suitability law requirements within five years of the model’s adoption by the NAIC. The model was originally adopted by the NAIC in 2003.

But legislation passed by the Florida House last week is running into problems in the state Senate. It would make Florida only the 20th state that would be in compliance with the DFA provision.

The provision in Dodd-Frank under the Harkin Amendment states that in order for annuities to remain exempt from securities law (not that the states lose their right to regulate), one of the following three must be met:

The annuity policy or contract is issued:

a. in a state that adopts the model suitability law by June 16, 2013.

b. by a company domiciled in a state that adopts the model suitability law by June 16, 2013; or,

c. by a company that adopts and implements practices on a nationwide basis that meets or exceeds the model suitability law requirements within five years of the Model’s adoption by the NAIC.

State regulators were said to be out in force to make sure insurance market conduct was not under the umbrella of any Bureau during the crafting of Dodd-Frank. Many consumer financial protection authorities, such as mortgage disclosures, were transferred to the CFPB on July 21, 2011.  

The NAIC said that, in December, its Market Regulation and Consumer Affairs Committee sent a survey to state insurance departments to obtain additional information and create discussion around a number of market conduct topics, including “reporting of state market conduct data to NAIC systems,” and the most cost efficient way to evaluate the marketplace with the growing role of market analysis. 

The scattered state enforcement data could then possibly come under the purview of the NAIC’s data collection efforts.

The Committee will also be tackling the subject of examination expenses and mandatory coordination of state examinations, according to a preliminary list of potential topics it identified.

Currently, of course, states conduct their own exams, unless their is a multistate sweep; they fine companies and share actions, suspensions or fines and other enforcement and rebating information via press releases, and/or their websites — but only if they wish. It is difficult to amass all the enforcement information, as reporters have tried.

Federal regulators of securities such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission keep a comprehensive database of enforcement actions on their website for public perusal. 

Some insurers may welcome a central filing point that relieves them of 50 state filings, if that were even part of the proposal. Many state budgets are stretched, so the NAIC, with its budget, might be poised to pick up the slack, as it has been doing with cash-strapped states’ travel needs for insurance commissioners. One lawyer noted that to have a central system could raise “confidentiality issues that could be a huge concern to the companies. Also, they might object to NAIC aggrandizing its power and money,” which is always a sore spot for the industry.

Still, the NAIC may have no choice but to move ahead and strengthen a compliance reporting system that is hard to navigate and hard to retrieve information from on a comprehensive basis at the moment. 

“While there have been positive strides made in the area of market regulation over the last decade, we believe there is room for further improvement,” said Sharon P. Clark, Kentucky Insurance Commissioner and Chair of the Market Regulation and Consumer Affairs Committee, in a statement by the NAIC. “A primary goal of this assessment is to better measure our progress in eliminating unnecessary duplication of effort and lack of consistency.”

“We’re glad to see there is a renewed effort at the NAIC to improve uniformity and multi-state coordination in market regulation,” said Whit Cornman, a spokesman for the Washington-based American Council of Life Insurers. 

“A recent ACLI member company survey showed that a lack of uniform implementation of the laws and regulations governing life insurers remains a high priority issue…We would support efforts to make the insurance regulatory system more uniform and efficient,” Cornman added.

The NAIC is being both proactive and reactive, some in the industry note, responding to Dodd-Frank and what it can become, or morph into, should there be a colossal failure to protect consumers. 

The Dodd-Frank Act advocated that states enact annuity legislation as a consumer protection similar to that outlined in the NAIC’s “Suitability in Annuity Transactions” model. California, for example, signed a bill,  A.B. 689, in late September that was backed by the California Department of Insurance and unanimously passed both the State Senate and Assembly this spring and summer. The bill was patterned on the one approved by the NAIC. The Dodd-Frank Wall Street Reform and Consumer Protection Act advocated that states enact annuity legislation similar to that outlined in the NAIC’s “Suitability in Annuity Transactions” model.

So far, according to an NAIC chart updated early this month, about 18 states have enacted legislation mostly consistent with the NAIC model regulation, others have legislation pending and a couple of states had legislation waiting to die, while 31 states show no action whatsoever. Some of those states have legislatures that only meet every other year, or in 2013. Many of the protections are not yet effective or will be at the beginning of the year. 

In addition, living benefits annuities are becoming an important issue, specifically questions about the “guarantees” associated with these instruments, as well as disclosure issues being raised by the SEC. Insurance fraud is a perennial concern among states and for insurers.

However, the largest market conduct issue that states are responding to now is the unclaimed property and use of the Social Security Administration’s Death Master File (DMF). NAIC representatives, including NAIC President Susan Voss, Iowa, discussed the DMF with Treasury Department official and Federal Insurance Office (FIO) Director Michael T. McRaith at a recent visit, among other regulatory issues. In fact, market conduct regulation, exams, reporting, and market analysis, all in the name of consumer protection, was the key topic of the discussions on Dec. 7, according to to the summary on the NAIC website. 

California has been investigating the unclaimed property life insurance issue since 2008, and the NAIC established a task force in July composed of 10 states that are investigating the issue. There have been inconsistent approaches by the states in dealing with the mammoth issue. 

Some big insurers are being caught between state insurance regulators and treasurers and attorneys general, as is happening in New York and Minnesota.  

A group of state legislators also crafted a model law that some complained was inconsistent with unclaimed property laws and unfair claims practices law; some adopted the methodology for doing DMF matches required by the New York Department of Financial Services, while software by Verus is being used in 38 states to examine the files of insurers after being armed with state police powers by insurance regulators in those states. At its fall meeting in early November in suburban Washington, the NAIC heard a report on the issue from the Center for Insurance Research that recommended certain actions, but it took no concrete steps at that time to deal with the issue.

States are in the process of reviewing the survey sent to them by the NAIC Committee. The Kansas Insurance Department completed the survey and submitted it today, it reported.

An NAIC spokeswoman said the organization will know more about the plan for the market conduct review after the first of the year when the committee assignments are made and the 2012 charges are finalized.