NAIC Group Hears Industry Exam Peeves

By E.E. Mazier

NU Online News Service, May 10, 12:40 p.m.EST?The interim telephone conference held earlier thisweek by the National Association of Insurance Commissioners'Examination White Paper Focus Group will likely lead torecommendations for needed changes, predicts an industryparticipant.

The Focus Group was formed after the major property-casualty andlife insurance trade groups jointly issued a white paper last yearcalling on the NAIC to contain the costs of statutory financialexaminations for monitoring the solvency of insurancecompanies.

The purpose of the interim meeting is to arrive atrecommendations on issues raised in the white paper, explainedSteve Broadie, vice president-financial legislation and regulationfor the Des Plaines, Ill.-based National Association of IndependentInsurers.

Mr. Broadie said the Focus Group is reviewing the comments ithas received from industry as well as states that are members ofthe Focus Group.

He reported that although the initial meeting looked into only15 of the 34 compilations of comments, the most complex andimportant issues were covered.

Another conference call was scheduled for yesterday, with thepossibility of a third interim meeting later in the month if allthe remaining issues are not covered, Mr. Broadie said.

The states with representation on the Focus Group areConnecticut, Delaware, Iowa, Illinois, Maryland, Minnesota, NewYork, Pennsylvania and Virginia. The insurance industry and theAmerican Institute of Certified Public Accountants also serve asmembers, Mr. Broadie said.

Chief among the "hard issues" addressed, he said, were:

? Placing controls on zone examinations. A zone examinationarises when an insurer writes a sufficient amount of premium in oneof the four NAIC geographic zones that is not the zone of domicile.When the home state calls for an exam of the company, the otherstate has the right to be represented in that exam, Mr. Broadiesaid.

"I think it was a good idea that's gone wrong in a lot ofcircumstances," he suggested. "The idea was to try to coordinatestate resources and save everybody's time and money, ?the rationalebeing that it doesn't make sense for all 50 states to be doingtheir own exam of insurance companies," he noted.

But in the view of NAII members and throughout the industry, inpractice there has been much waste and insufficiency and situationswhere the zone examination system "is just not working well," Mr.Broadie stated.

"There is a fairly strong sentiment among the industry toeliminate the zone exam system," Mr. Broadie reported,acknowledging that "the Focus Group will not endorse that." He saidhe believes it will endorse some steps that will bring asignificant improvement in the process that can decrease abuses andreduce costs.

? The use by state insurance departments of outside consultantsor third-party contractors to perform exams, such as certifiedpublic accountant and actuarial firms.

Mr. Broadie explained that the industry views this as "a majordriver" in increased examination cost in the past 10 years. Theindustry maintains that outside consultants generally bill atsignificantly higher rates than the state regulators would bill fortheir own examiners, he said. (Generally insurers must pick up theentire cost of the statutory financial examinations.)

The states in the Focus Group have indicated that they need touse third-party examiners when they cannot hire staff with thenecessary expertise, he said.

He added that the Focus Group will likely recommend ways thatoutside consultants can be used more efficiently without"blindsiding" insurance companies with the costs.

"I believe there will be a recommendation that states maximizethe use of their own staff when they can," Mr. stated. He alsoexpects the Focus Group to recommend that where consultants must beused, time and cost budgets "that everyone gets a chance to lookat" must be drawn up before the exam.

The Focus Group hopes to prepare a draft report by the end ofMay, which would be considered in June at the Summer NationalMeeting of the NAIC by the parent groups, the Examination OversightTask Force and the Risk Assessment Working Group, Mr. Broadiesaid.