Federal Threat Looms Over Market Conduct DebateState regulators hope to head off intervention fromCongress via SMART bill

Will Congress mark the 60th anniversary of granting states theright to oversee insurer market conduct by taking that authorityback? Not if state insurance regulators have anything to say aboutit.

To preserve their individual autonomy, insurance commissionershave worked together with state legislators to cobble together anew model market conduct oversight system. However, it remains tobe seen whether they will prevail against members of Congress whobelieve federal action is required to shore up the patchwork meansdevised over the years to protect consumers.

Everyone agrees that the market conduct system is broken, saidScott Cipinko, executive director of the Atlanta-based LifeInsurers Council. If the industry, regulators and legislators cantagree on a remedy, we may have one imposed on us.

Fixing the market conduct oversight system remains an enormouslycomplex task, with Congress threatening to upend decades oftraditional practices by state insurance departments in favor ofnew, federally-imposed standards.

However, unlike with rate and form regulation, where thedividing lines seem pretty clear cut, both consumer and industryofficials agree that by adopting a market analysis approach toidentify potentially troubled carriers, as states are trying to do,regulatory efficiency and effectiveness need not be mutuallyexclusive.

Indeed, a leading consumer advocate, Birny Birnbaum, executivedirector of the Austin, Texas-based Center for Economic Justice,said one thing the National Association of Insurance Commissionershas done right is to focus on the need to develop the data tools tocreate a better analytical system for market conductregulation.

The NAIC has made a commitment to market analysis as thefoundation for market regulationreview and analysis of actualinsurer market performance as the basis for investigation andenforcement, he said.

Don Cleasby, assistant general counsel for the Des Plaines,Ill.-based Property Casualty Insurers Association of America,agrees. This allows regulators to devote market conduct resourcesto those areas that most benefit consumers, while bringingcompanies efficiencies through more targeted exams and uniformprocesses.

But turning around a process from one in which multistateinsurers could face 50 periodic comprehensive exams to one wherethey undergo such tests only when problems are detected is no smallfeat, as evidenced by the disparate quilt of NAIC task forces,working groups and committees that have spent the past three yearstrying to make this vision a reality.

Earlier this year, the Market Regulation and Consumer Affairs(D) Committee approved a Market Analysis Handbook to assist statesin developing a uniform program to collect data to identify problemcompanies. So-called baselineor minimaldata elements includecomplaints, a breakdown of a companys premium by state, and marketshare figures. Two years ago, the panel approved Uniform MarketConduct Exam guidelines.

At the NAICs spring meeting in Salt Lake City last month, thepanel adopted the Collaborative Actions Guide to help states decidewhen they can most effectively collaborate with each other to avoidduplication that is costly for all parties.

Oregon Administrator Joel Ario, who chaired the D committee forthe past three years up until January, feels the groundwork hasbeen laid for a new market conduct regimen. The key building blockswe have in place now in terms of market analysis are a handbook andanalysis coordinators in every state, he said.

If someone were to think all these steps make so much sense thatthere ought to be a law about it, there isand its success in thestates will be one guidepost federal authorities will be looking atto see if the states are serious about fixing market conductproblems themselves.

The Market Conduct Surveillance Model Act, approved by both theNAIC and the National Conference of Insurance Legislators lastyear, enjoys its joint status thanks to the perseverance of the twowho headed their respective organizations at the timethe NAICsErnie Csiszar and NCOILs Steve Gellerwho were determined to put ona unified face.

At the time, both preached the value of holding their tongues tomaintain their place at the table in Washington, where members ofCongress and their staffs would hash out the details of what wouldbecome the State Modernization and Regulatory Transparency Actknownas SMART.

NCOIL took the lead in excusing itself from the table with ablast last November at SMART as the beginning of the end of stateregulation. The NAIC followed suit in an exchange of letters lastmonth with the House Financial Services Committee.

The SMART Act would remove the ability for independent judgmentand action by state regulators to protect consumers under statelaws and regulations in such important areas as supervising ratesand conducting market exams, Mr. Csiszars successor as NAICpresident, Diane Koken, wrote to the committee. (Mr. Csiszar lefthis NAIC post and gave up his job as South Carolinas insurancecommissioner last year to head PCI, which is opposed to adoption ofthe market conduct model law in its current form.)

Mr. Ario played a key role in cajoling both legislators andregulators to give a little for the sake of a joint NAIC/NCOILmodel act. I think what was important in that bill was to put downin a piece of legislation the framework for a modernized marketregulation program, he said.

At the time, Wisconsin Insurance Commissioner Jorge Gomezemerged as the chief spokesman of those regulators reluctant togive up their prerogatives in the name of uniformity andefficiency, and the 31-20 NAIC vote indicated he was not alone inhis concerns.

There were attempts to curtail our use of discretion in avariety of ways, not least of which was by limiting the types ofexaminations we could conduct and making everything for cause, andby requiring us to do full open disclosure with companies before weconducted the examinations, said Mr. Gomez. As an example, in thecase of fraud, informing the company committing fraud is notnecessarily the best use of discretion in that there is thepotential that evidence could disappear, he added.

So far, according to NCOIL Executive Director Susan Nolan, themodel act has been introduced in only three states, but that doesnot discourage Mr. Ario. In most states, the analysis is turningout to be that we can do most of this with the current law on thebooks in that state, he said, noting that is the case inOregon.

All this plays out against a backdrop of educated guesses aboutthe fate of SMART in Congress. Longtime NAIC observer KevinHennosy, founder of the Kansas City, Mo.-based Spread The Riskpublic policy organization, doesnt give the SMART bill much chanceof passage. With all of the headlines of the past six months, Idont think you will see Congress doing anything that smacks ofderegulation, he said.

However, Mr. Cipinko of the Life Insurers Council believes theunsettled atmosphere could provoke action. In a conference callwith our members, there was a great deal of concern that Congressmay step in, in some form, if this is not settled, he said. It maynot be SMART necessarily, or it could be just its market conductcomponent that is enacted.

Opinions differ on what kind of regimen SMART would impose onmarket conduct enforcement. We believe that SMART would hamstringthe intent of the NCOIL-NAIC bill by returning to a system thatincludes periodic exams, rather than focusing on market analysisand targeted exams as needed, NCOILs Ms. Nolan said.

Mr. Birnbaum is equally critical, but from a differentperspective. The SMART Act provisions on market regulation areprofoundly anti-consumer, he said. They place impediments in frontof regulators on market regulation issues and do not provide thenecessary tools for market analysis and enforcement.

In the end, no matter what law governs an analysis-based marketconduct system, its ultimate success will depend on the quantityand quality of just what is being analyzeddataand this is whereregulators and industry officials sometimes part company.

Iowa Commissioner Susan Voss, who took over the D chair earlierthis year, said a lack of uniform data from the states has been oneof the biggest frustrations in getting the market analysis programup and running. I think we have some states that have been verygood at sending their information, but we have not gotten everyoneto that point, she said.

PCIs Mr. Cleasby feels regulators have to make a better casethat the data they have called for has a useful regulatory purpose,with the recently instituted market conduct annual statement a casein point. For the states that participated in the initial datacall, did they determine not to examine certain carriers becausethe data collected did not indicate a need to do so? he asked.

Mr. Birnbaum, however, feels states can go a lot further. Thedata and tools to date are baby steps, he said. The baseline marketanalysis focuses only on complaints and statewide premium and lossdata by major line. While useful, these are not even close toadequate for rigorous market analysis.

One reason Mr. Ario prefers the approach taken by the NCOIL-NAICmodel over that of the SMART market conduct provision is thegreater freedom in the former to collect the data needed for aneffective program. If you look at the definition of market analysisin the model, it gives us the broad authority to collectinformation we need to collect to discover problems in the market,he said. The market analysis in the SMART Act is a narrowdefinition that would restrict a regulator to ask for certain kindsof information.

Thus, Mr. Ario sees a tradeoff in that if regulators are givenbroad authority to collect data and fail to find any basis for anexamination, then you should probably not do the examination.

In addition to data, all those seeking to turn the marketconduct ship around must in the end win the hearts and minds ofindividual state regulators and their staffs, keeping in mind CzarNicholass famous lament: It is not I, but 10,000 clerks who ruleRussia.

We have been disappointed from time to time on how manyregulators are reluctant to embrace new regulatory philosophies onmarket analysis and market conduct, PCIs Mr. Cleasby said.

A case in point, he said, was a survey of his member companieson how well they thought departments were adopting uniform examprocedures that found a wide variation from specific procedures. Wewould be interested in learning what the NAIC will do to bring morecompliance with these procedures, he said.

Iowas Ms. Voss does not see all that much ideological resistancein the state insurance departments. There are a lot of thingstrying to be done at once, she said.

The trails the NAIC blazed in financial regulation over a decadeago with its initial accreditation program have served as informalguideposts in this more recent market conduct reform effort.

Last year, the NAIC made a commitment to establishing minimumcompetencies for market regulation and codifying them into anaccreditation program, Mr. Birnbaum said. This year, accreditationseems to have been dropped.

Ms. Voss takes issue with that. The discussion that I have heardfrom the commissioners in January is that we all see this as theultimate goal, she said. But lets not kid ourselves. We have to getall these things in line before we say we can have an accreditationprogram.

Mr. Ario sees the accreditation program as the beginning of aprocess of trust among the states that will at first lead to morecollaboration and then ultimately to the domestic deference that isthe hallmark of both financial solvency regulation and the SMARTvision.

Nonetheless, Mr. Ario said a domicile states market conduct examwill never hold the same weight as one for solvency. Illinois willalways be able to judge financial solvency, for example, but theycould never adequately test how the company is following Oregonscredit scoring laws, he said.

The market conduct function actually grew out of the financialsolvency process, and Wisconsins Mr. Gomez, for one, does not seeany distinction between the two as artificial. When you have acompany that is not managing its financial affairs well, they arethe ones that are having greater difficulties in managing theirmarkets, he said. And all the problems in the market emerge whentheir financial situation is in turmoil or their leadership is inturmoil.

Reproduced from National Underwriter Edition, April 8, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.