The National Association of Insurance Commissioners is promoting a new process called market analysis that is completely changing the way regulators monitor market conduct.
Although all state insurance regulators oversee the market conduct of insurers doing business in their state, there is very little uniformity in how this process is conducted. Many states perform intensive reviews while others conduct very limited examinations. This inconsistent regulatory approach has created an adversarial environment between companies and regulators, generated mistrust among the states and increased potential harm to consumers.
Working with regulators, insurance companies, consumer groups, the federal government and trade associations, the NAIC in 2004 created uniformity standards and established basic requirements for a basic market analysis program. This change in the way regulators monitor and evaluate market conduct is being driven at the national level with increased state participation throughout 2006-2007.
The market analysis approach calls for an annual review and analysis of an insurer’s data to facilitate regulators’ understanding of the current marketplace and emphasize those areas where further intervention may be needed. A number of other options—including a more in-depth review of company data, a market conduct examination or participation in a multistate examination effort—remain available, thereby guaranteeing that state insurance departments retain a fully-loaded regulatory arsenal.
The market analysis paradigm permits regulators to take a longer view of the insurance marketplace. In doing so, regulators generally focus on nationally significant domestic companies and look for (potential) problem trends that may be extrapolated to the marketplace as a whole. This is in contrast to the market conduct examination paradigm of the past, which looked at companies individually and resulted in less sharing of information and less interstate collaboration.
Market analysis promotes the view that the marketplace usually does the best job of “regulating” insurance activity, but in practice this is not always the case. States must accordingly have a supplemental formal program in place that provides consistent and routine reports on general market problems and companies that may be operating outside general industry norms.
By attempting to impose this uniform—albeit imperfect—way of regulating market conduct, the NAIC may unintentionally be laying the groundwork for confusion and uncertainty. A case in point is the new market conduct oversight legislation that Washington Gov. Chris Gregoire signed into law on April 18. Heralded as an exercise in the art of compromise, S.B. 5717 contains elements of the NAIC’s Market Conduct Surveillance Model Law, the revised model adopted by the National Conference of Insurance Legislators in 2006 and an industry model that is adopted in Texas. Washington lawmakers’ enactment of this patchwork piece of legislation is even more problematic when one considers that Washington Insurance Commissioner Mike Kriedler chairs the NAIC’s Market Analysis Working Group.
Alabama, Calfornia, Montana and Rhode Island have joined Washington on the growing list of states that require companies to file Market Conduct Annual Statement data. The total number of states collecting state-specific data will reach 30 for the 2008 calendar year. In addition, the NAIC on Oct. 2 adopted core competency standards for state market analysis staff.
Market analysis is serious—and expensive—business. MEGA Life and Health Insurance Company, a subsidiary of HealthMarkets, announced on Oct. 10 that it had reached an agreement to resolve issues raised by a market conduct examination conducted by the Delaware Department of Insurance. The settlement includes a $100,000 fine and the potential for payment of an additional $400,000 if MEGA fails to meet certain agreed-upon criteria.
How are your clients reacting to market analysis? Is the NAIC’s new approach something that might work, or will it be business as usual?