Is Market Conduct Reform Finally on the Horizon’

As baseball immortal Yogi Berra is often fond of saying, “It ain’t over until it’s over.”

This particular “Yogi-ism” somehow seems apropos when one considers recent discussions among the insurance industry, state legislators, insurance regulators and consumer representatives over how best to reform the market conduct regulatory process.

In February, it looked like this issue was being resolved when the National Conference of Insurance Legislators (NCOIL) adopted a market conduct surveillance model act. But when the National Association of Insurance Commissioners (NAIC) reviewed and then made several changes to it, support for the NCOIL model began to unravel. Most observers believe this is only a temporary setback and differences in the model will be worked out this summer. As a result, market conduct reform should become an important part of state legislative agendas next year.

For years, critics have complained about the lack of uniformity among states over how they approach this important regulatory function. Industry representatives, in particular, have testified innumerable times about how certain insurers have been singled out for more examinations than others, largely due to a lack of coordination among the states. These same industry representatives also have noted how the findings of market conduct exams are often slow in being reported, leaving insurers at a disadvantage in trying to address potential problems in a timely fashion.

To help put some of these criticisms to the test, consider what the southeastern states have self-reported to the NAIC (Insurance Department Resource Reports, 1998-2002) about how they handle market conduct regulation.

For instance, in looking at data available in the most current five-year period (1998-2002), one finds that five of the nine southeastern states—Alabama, Mississippi, South Carolina, Tennessee and West Virginia—reported initiating more domestic market conduct exams than exams of their alien insurers.

Additionally, only Tennessee conducted fewer domestic exams than the average number of domestic insurers that they reported operating in their state during the study period.

Using the NAIC data, another way to judge the effectiveness of a state’s market conduct efforts is to look at the number of exams initiated and compare that to the number of exams the states reported as being completed or filed.

When comparing initiated exams to completed exams, only Florida, Georgia, North Carolina and Tennessee reported more completed exams than initiated exams in the study period.

Does this make these states the most efficient at conducting market conduct exams? Not necessarily, because when one compares the number of completed exams to filed exams only Alabama filed more exam reports.

These findings illustrate the problem of relying too heavily on the aggregate NAIC data because, for one, it doesn’t account for exams begun in one year, but not completed or filed until a second year. Notwithstanding this shortcoming, the data do show that more exams were initiated than were either completed or filed in most of the southeastern states during the study period.

If this finding suggests that the current market conduct examination process is not very efficient, then the next logical question to ask is, does a solution exist?

Indeed, the solution may well be the new market conduct paradigm described in the NCOIL model. Instead of states continuing to perform random comprehensive market conduct exams the model encourages regulators to embrace a more analytical approach to overseeing their marketplace. Regulators would examine every insurer in the market by examining certain baseline facts, using data already available to them. Insurers who are found to fall outside a predetermined performance standard based on this analysis would then be subject to further inquiry, including the possibility of a targeted market conduct exam if the inquiries fail to resolve the problem.

The National Association of Mutual Insurance Companies (NAMIC), believes the NCOIL model represents a more common sense approach to market regulation than the current system if differences finally can be resolved. It more systematically reviews the entire marketplace, rooting out potential problems, than the “hit or miss” approach that some regulators employ today.

Whether current differences raised about the NCOIL model ultimately can be resolved is, of course, still to be determined, but the promise of a better market conduct regulatory process is certainly an objective worth pursuing.

David Reddick is a state affairs manager for the National Association of Mutual Insurance Companies (NAMIC) who covers the southeastern region of the country.