Congress To Act On Conduct Exams If States Dont: Oxley

"We need to develop a systematic, comprehensive approach with clear standards that will target resources more efficiently," she said.

This does not mean that states should enact more regulations that would create more unnecessary burdens on the entire insurance industry, she said. "Put simply, we do not need to pursue more regulation, but more effective regulation."

Richard J. Hillman, director of financial markets and community investment for the United States General Accounting Office, said a GAO investigation reveals that while all states do some level of market analysis, few have established formal programs to maintain a systematic and rigorous overview of company behavior that would effectively identify problem companies for detailed review.

Moreover, Mr. Hillman said, the number of market conduct examiners differs widely among states and there are no generally accepted standards for training and certification of examiners.

Most states try to regulate the behavior of all companies selling insurance within their borders, he said, which is an overwhelming burden given that anywhere from 900 to 2,000 companies operate within each state. And because many states do not coordinate market conduct exams, some companies are examined frequently, while others not at all, he said.

The National Association of Insurance Commissioners in Kansas City, Mo., has taken steps to improve the consistency and quality of market conduct exams, he said; but progress has been slow.

"If NAIC cannot convince the various states to adopt and implement common standards for market analysis and examinations, current efforts to strengthen these consumer protection tools are unlikely to result in any fundamental improvement," Mr. Hillman said.

Terry Parke, a member of the Illinois State legislature and former president of the National Conference of Insurance Legislators, said that state legislators understand the problem.

Indeed, he said, NCOIL sponsored a study by PricewaterhouseCoopers and Georgia State University which identified wide disagreements regarding the purpose of market conduct examinations and little coordination among states, leading to widespread and wasteful redundancies.

He said the report, which will be considered at an upcoming NCOIL meeting, recommends a comprehensive self-policing market conduct program that includes standards for compliance program, including CEO certification of compliance, incentives for self-assessment activities, a comprehensive system for filing consumer complaint information, domiciliary state responsibility for surveillance with coordinated targeted multistate examinations, and the development of model legislation.

The concept of a self-policing system in not unique to the insurance industry, Mr. Parke said. He cited the recent anti-money laundering requirements promulgated by the Securities and Exchange Commission as an example of a self-policing program that allows companies to design systems tailored to their specific business environments.

"Insurers should be accountable for their own monitoring and compliance with uniform state standards," he said.

"Regulators should pursue abuses and take actions that will result in the mitigation of the greatest harm and restoration of the greatest benefit to consumers and the public," he said.

Joel Ario, the Oregon Insurance Administrator, cautioned against a "one-size-fits-all" approach to market conduct.

Insurance regulation, he said, is different from other kinds of financial regulation because products are more complicated and market conditions can vary across state lines. "The market behaviors of insurers can be quite different from one state to another because laws may be different and insurer compliance with the laws may vary by state."

He added that state regulators must enforce the laws of their own state and cannot delegate that responsibility to someone who may not appreciate the impact of a violation on local consumers.

"Regulatory efficiency for its own sake should not undermine the credibility and effectiveness of state regulators charged with protecting consumers," he said.

Lenore S. Marema, vice president for legal and regulatory affairs with the Downers Grove, Ill.-based Alliance of American Insurers, said that states should focus on-site market conduct exams on the biggest problems, not the biggest companies.

"Some large companies feel that they are examined more frequently not because they have more problems, but because they represent a large percentage of the market share that the state insurance department needs to examine," she said.

Moreover, Ms. Marema said, states should implement a more rational system for targeting companies, coordinate exams among themselves and develop more consistency in exam procedures.

In addition, she said, exams should focus on general company business practices and emphasize improving compliance rather than imposing penalties. "Insurers should be given an opportunity to correct problems before they are fined."

But J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America, said that the market conduct record by the industry is "abysmal."

He also said that consumers strongly oppose self-certification proposals developed by NCOIL and by some in the industry. In a post-Enron environment, reliance on self-certification is problematic, at best, he said.

Minimum standards for market conduct examinations would be good for consumers only if the standards are high and they are enforced, he said. "We agree that consistency in market standards is a good approach, but we are very concerned about weak uniform standards."

In addition, he said, a strong, consumer-oriented market conduct program must contain other elements, including private causes of action that provide restitution to consumers who have been harmed, consumer feedback and data collection. In particular, Mr. Hunter said, NAIC should be collecting data to determine whether redlining is taking place and how insurers use credit scores.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 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.