Federal Threat Looms Over Market Conduct Debate State regulators hope to head off intervention from Congress via SMART bill

Will Congress mark the 60th anniversary of granting states the right to oversee insurer market conduct by taking that authority back? Not if state insurance regulators have anything to say about it.

To preserve their individual autonomy, insurance commissioners have worked together with state legislators to cobble together a new model market conduct oversight system. However, it remains to be seen whether they will prevail against members of Congress who believe federal action is required to shore up the patchwork means devised over the years to protect consumers.

Everyone agrees that the market conduct system is broken, said Scott Cipinko, executive director of the Atlanta-based Life Insurers Council. If the industry, regulators and legislators cant agree on a remedy, we may have one imposed on us.

Fixing the market conduct oversight system remains an enormously complex task, with Congress threatening to upend decades of traditional practices by state insurance departments in favor of new, federally-imposed standards.

However, unlike with rate and form regulation, where the dividing lines seem pretty clear cut, both consumer and industry officials agree that by adopting a market analysis approach to identify potentially troubled carriers, as states are trying to do, regulatory efficiency and effectiveness need not be mutually exclusive.

Indeed, a leading consumer advocate, Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice, said one thing the National Association of Insurance Commissioners has done right is to focus on the need to develop the data tools to create a better analytical system for market conduct regulation.

The NAIC has made a commitment to market analysis as the foundation for market regulationreview and analysis of actual insurer market performance as the basis for investigation and enforcement, 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 resources to those areas that most benefit consumers, while bringing companies efficiencies through more targeted exams and uniform processes.

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

Earlier this year, the Market Regulation and Consumer Affairs (D) Committee approved a Market Analysis Handbook to assist states in developing a uniform program to collect data to identify problem companies. So-called baselineor minimaldata elements include complaints, a breakdown of a companys premium by state, and market share figures. Two years ago, the panel approved Uniform Market Conduct Exam guidelines.

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

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

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

The Market Conduct Surveillance Model Act, approved by both the NAIC and the National Conference of Insurance Legislators last year, enjoys its joint status thanks to the perseverance of the two who headed their respective organizations at the timethe NAICs Ernie Csiszar and NCOILs Steve Gellerwho were determined to put on a unified face.

At the time, both preached the value of holding their tongues to maintain their place at the table in Washington, where members of Congress and their staffs would hash out the details of what would become the State Modernization and Regulatory Transparency Actknown as SMART.

NCOIL took the lead in excusing itself from the table with a blast last November at SMART as the beginning of the end of state regulation. The NAIC followed suit in an exchange of letters last month with the House Financial Services Committee.

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

Mr. Ario played a key role in cajoling both legislators and regulators to give a little for the sake of a joint NAIC/NCOIL model act. I think what was important in that bill was to put down in a piece of legislation the framework for a modernized market regulation program, he said.

At the time, Wisconsin Insurance Commissioner Jorge Gomez emerged as the chief spokesman of those regulators reluctant to give up their prerogatives in the name of uniformity and efficiency, and the 31-20 NAIC vote indicated he was not alone in his concerns.

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

So far, according to NCOIL Executive Director Susan Nolan, the model act has been introduced in only three states, but that does not discourage Mr. Ario. In most states, the analysis is turning out to be that we can do most of this with the current law on the books in that state, he said, noting that is the case in Oregon.

All this plays out against a backdrop of educated guesses about the fate of SMART in Congress. Longtime NAIC observer Kevin Hennosy, founder of the Kansas City, Mo.-based Spread The Risk public policy organization, doesnt give the SMART bill much chance of passage. With all of the headlines of the past six months, I dont think you will see Congress doing anything that smacks of deregulation, he said.

However, Mr. Cipinko of the Life Insurers Council believes the unsettled atmosphere could provoke action. In a conference call with our members, there was a great deal of concern that Congress may step in, in some form, if this is not settled, he said. It may not be SMART necessarily, or it could be just its market conduct component that is enacted.

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

Mr. Birnbaum is equally critical, but from a different perspective. The SMART Act provisions on market regulation are profoundly anti-consumer, he said. They place impediments in front of regulators on market regulation issues and do not provide the necessary tools for market analysis and enforcement.

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

Iowa Commissioner Susan Voss, who took over the D chair earlier this year, said a lack of uniform data from the states has been one of the biggest frustrations in getting the market analysis program up and running. I think we have some states that have been very good at sending their information, but we have not gotten everyone to that point, she said.

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

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

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

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

In addition to data, all those seeking to turn the market conduct ship around must in the end win the hearts and minds of individual state regulators and their staffs, keeping in mind Czar Nicholass famous lament: It is not I, but 10,000 clerks who rule Russia.

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

A case in point, he said, was a survey of his member companies on how well they thought departments were adopting uniform exam procedures that found a wide variation from specific procedures. We would be interested in learning what the NAIC will do to bring more compliance with these procedures, he said.

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

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

Last year, the NAIC made a commitment to establishing minimum competencies for market regulation and codifying them into an accreditation program, Mr. Birnbaum said. This year, accreditation seems to have been dropped.

Ms. Voss takes issue with that. The discussion that I have heard from the commissioners in January is that we all see this as the ultimate goal, she said. But lets not kid ourselves. We have to get all these things in line before we say we can have an accreditation program.

Mr. Ario sees the accreditation program as the beginning of a process of trust among the states that will at first lead to more collaboration and then ultimately to the domestic deference that is the hallmark of both financial solvency regulation and the SMART vision.

Nonetheless, Mr. Ario said a domicile states market conduct exam will never hold the same weight as one for solvency. Illinois will always be able to judge financial solvency, for example, but they could never adequately test how the company is following Oregons credit scoring laws, he said.

The market conduct function actually grew out of the financial solvency process, and Wisconsins Mr. Gomez, for one, does not see any distinction between the two as artificial. When you have a company that is not managing its financial affairs well, they are the ones that are having greater difficulties in managing their markets, he said. And all the problems in the market emerge when their financial situation is in turmoil or their leadership is in turmoil.

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

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Federal Threat Looms Over Market Conduct Debate

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