NCOIL Market Conduct Feedback Offered

By Jim Connolly

NU Onlines News Service, Sept. 15, 4 :30 p.m. EDT,Chicago?At a hearing here on Friday, legislators listenedto reasons why current market conduct oversight does not work andwere offered suggestions for fixing the system.

The fixes called for include coordinating market conduct examsmore efficiently, making the system effective, reining in contractexaminers, and using existing information to create a marketconduct picture of a company.

Life, property-casualty and health trade groups, as well asconsumer advocates and regulators, offered input to legislatorsrepresenting the Albany, N.Y.-based National Conference ofInsurance Legislators during a public hearing. The hearing precededthe start of the fall meeting of the National Association ofInsurance Commissioners here.

The discussion offered some candid assessments of the currentstate of market conduct oversight of insurers as well as theindustry itself. Speakers also urged legislators to work withregulators at the NAIC to create a strong state market conductsystem as the Market Conduct Surveillance model law takesshape.

Indeed, even as the NAIC readied to continue its multi-facetedinitiative, criticism was leveled at regulators. The NAICinitiative includes a data call project, development of a "how-toguide that would enable regulators to make better market conductchoices, and a program of collaboration among states.

At one point, Rep. Brian Kennedy, Rhode Island, an NCOIL panelmember, questioned Joel Ario, NAIC secretary treasurer and Oregonadministrator. Mr. Ario is overseeing the NAIC market conductwork.

Mr. Kennedy wanted to know if regulators' efforts were beingdriven by a fear that their market conduct responsibilities wouldbe taken over by the federal government.

"The reason why more resources are being put into this today isbecause of the threat of federal regulation," Mr. Ario agreed. TheNAIC is like any other institution and is impacted by outsideimpetuses, he said. "To be honest, I don't think we'd be doing theright thing unless we had our feet held to the fire," Mr. Arioadded.

However, that impetus has produced a lot of good initiatives, hesaid. For instance, he said that the better use of data is thestarting point that is being used by regulators to create a goodmarket conduct analysis program. And, he continued, advances arebeing made in collaboration among states.

He cautioned against "enshrining" too much in law because ofdifferences among state concerns. For example, Mr. Ario said thatterrorism exclusions would be treated differently in New York thanin a Midwestern state.

Cost was an issue that came up several times duringtestimony.

The difficult year that the life insurers have had makes it allthe more necessary for legislators to develop efficient, low-cost,market conduct practices, Donald Walters, deputy director of theWashington-based Insurance Marketplace Standards Association, toldlegislators. "Our member companies are under severe pressure. Ithas been one of the weakest years in the history of the lifeinsurance industry," he said.

Yet, Mr. Walters continued, "very few practical results were putin place to improve market conduct exams." One company, hecontinued, faced over 200 exams in the past year, at "significantcost" to the company.

"An entrenched bureaucracy that doesn't want to change," was areason he cited for what he said was a lack of change.

"The system is broken," according to Scott Cipinko, executivedirector of the Life Insurers Council in Atlanta. Mr. Cipinko saidthat there are no statutory requirements or statutory rates forexamination work. There should also be an absolute right to appeal,he said. And regulators should have the right to adjust billssubmitted by outside examination contractors, he says.

Contractors present their bills directly to companies, and itwould be helpful if state insurance departments had to sign thebill, according to Lenore Marema, vice president-legal andregulatory affairs with the Alliance of American Insurers ofDowners Grove, Ill. In many cases, these bills are not detailed andthere is no appeal process, she added.

Dave Reddick, market regulation manager with the NationalAssociation of Mutual Insurance Companies in Indianapolis, saidthat specialized contracted services, such as legal advice, cancost a company hundreds of dollars an hour in billing.

In one case, he said, when a company questioned why they hadbeen selected for a market conduct exam, it was told by a regulatorthat "it is your time in the barrel."

Market conduct examinations are one regulatory tool and notnecessarily the primary form of analysis, he adds.

A properly crafted NCOIL model law could be another effectivetool, according to Don Cleasby, assistant general counsel andassistant vice president with the Des Plaines, Ill.-based NationalAssociation of Independent Insurers. In a statute, changes would bemore solid and more uniform, he said.

The property-casualty trade groups stressed the need to remove asection regarding insurers' compliance systems and procedures aswell as references to an association reviewer--a program thatraised concerns over creating another layer of regulation.

While industry members were concerned about efficiency, BirnyBirnbaum, executive director with the Austin, Texas-based Centerfor Economic Justice voiced concerns over effective consumerprotection. He said that regulators' response to the vanishingpremium, and redlining issues, among others, necessitate a look atwhy the system is not more effective. More market conduct data isneeded and more public access to that information is also needed inorder to make the system more effective, he said.

A national system of data analysis is needed rather than astate-by-state approach, said Kevin Hennosy, publisher ofSpreadtheRisk.org in Kansas City, Mo. A strong conflict of intereststatement in the the model law is also needed to prevent contractsthat create a regulatory conflict of interest, he continued.

Jim Connolly is a Senior Editor for National Underwriter's Life& Health/Financial Services Edition.