NAIC Group Hears Industry Exam Peeves

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 this week by the National Association of Insurance Commissioners' Examination White Paper Focus Group will likely lead to recommendations for needed changes, predicts an industry participant.

The Focus Group was formed after the major property-casualty and life insurance trade groups jointly issued a white paper last year calling on the NAIC to contain the costs of statutory financial examinations for monitoring the solvency of insurance companies.

The purpose of the interim meeting is to arrive at recommendations on issues raised in the white paper, explained Steve Broadie, vice president-financial legislation and regulation for the Des Plaines, Ill.-based National Association of Independent Insurers.

Mr. Broadie said the Focus Group is reviewing the comments it has received from industry as well as states that are members of the Focus Group.

He reported that although the initial meeting looked into only 15 of the 34 compilations of comments, the most complex and important issues were covered.

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

The states with representation on the Focus Group are Connecticut, Delaware, Iowa, Illinois, Maryland, Minnesota, New York, Pennsylvania and Virginia. The insurance industry and the American Institute of Certified Public Accountants also serve as members, Mr. Broadie said.

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

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

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

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

"There is a fairly strong sentiment among the industry to eliminate the zone exam system," Mr. Broadie reported, acknowledging that "the Focus Group will not endorse that." He said he believes it will endorse some steps that will bring a significant improvement in the process that can decrease abuses and reduce costs.

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

Mr. Broadie explained that the industry views this as "a major driver" in increased examination cost in the past 10 years. The industry maintains that outside consultants generally bill at significantly higher rates than the state regulators would bill for their own examiners, he said. (Generally insurers must pick up the entire cost of the statutory financial examinations.)

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

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

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

The Focus Group hopes to prepare a draft report by the end of May, which would be considered in June at the Summer National Meeting of the NAIC by the parent groups, the Examination Oversight Task Force and the Risk Assessment Working Group, Mr. Broadie said.