Testimony of
Brian K. Atchinson
Executive Director
Insurance Marketplace Standards Association
Introduction
Thank you for the opportunity to speak to you this afternoon on regulatory reform efforts and market conduct surveillance and oversight.
I am Brian Atchinson, Executive Director of the Insurance Marketplace Standards Association (IMSA). IMSA is a nonprofit, independent standards-setting organization promoting ethical business practices in the life insurance marketplace. In an era when the practices of some financial services companies have come under regulatory and public scrutiny, IMSA’s Principles of Ethical Market Conduct, to which all IMSA-qualified companies must adhere, include requirements for the marketing, advertising, sales and customer service of annuities, long-term care and life insurance. (See Attachment I.) We believe that all consumers should receive clear and honest information when considering whether to purchase life insurance, annuities and long-term care insurance products. During this time of great concern regarding the suitability of some product sales to consumers, it is important to note that IMSA’s Principles contain a “needs-based” selling standard requiring that a company must have policies and procedures designed to provide the reasonable assurance that a consumer’s insurable needs or financial objectives are determined based on relevant information obtained from that consumer.
To become IMSA qualified, a company must demonstrate and document compliance with IMSA standards by undergoing an independent review of its market conduct and compliance practices. A recent study conducted by Georgia State University’s Center for Risk Management and Insurance Research found that IMSA-qualified companies have fewer justified and unjustified complaints, lower policy lapse rates, demonstrably higher A. M. Best Ratings, and higher return on assets and return on equity than non-IMSA companies. In short, well-run life insurance companies seek to become IMSA qualified because they know the value of sound market conduct and compliance practices. Insurers that qualify for IMSA devote considerable resources to maintaining IMSA’s standards. These companies also are well positioned to respond quickly and effectively to state market conduct inquiries and to comply swiftly with new federal or state requirements. We encourage you to visit our website (http://www.imsaethics.org/) to learn more about IMSA.
As a former regulator and company person, my views on the regulation of insurance and market conduct oversight are based upon a number of different vantage points. From 1992-1997, I served as Superintendent of the Maine Bureau of Insurance. From 1994-97, I represented U.S. regulators in the International Association of Insurance Supervisors and in1996, I served as President of the National Association of Insurance Commissioners (NAIC). Prior to joining IMSA, I served as an executive officer in the life insurance industry. These experiences allow me to recognize the NAIC's progress toward establishing meaningful regulatory reform while recognizing that many market conduct challenges lie ahead.
NAIC Regulatory Modernization Efforts
Insurance regulation is intended to ensure a healthy, competitive marketplace and to protect consumers. An integral component of insurance regulation is oversight of the ways that insurance companies’ products are marketed, advertised, sold and serviced, namely, market conduct regulation.
It was just two years ago that the U.S. General Accounting Office issued to Congress its report, “Insurance Regulation: Common Standards and Improved Coordination Needed to Strengthen Market Conduct Regulation,” on the significant inconsistencies within the states’ oversight of market conduct. It showed most consumers were getting very inconsistent and sometimes unnecessarily expensive consumer protections by the states.
In 2004, the NAIC provided the U.S. Congress with its “Framework for a National System of State-based Regulation.” This document held much promise for the future. However, to date the promise has only been partially fulfilled.
We commend state insurance regulators and NAIC leadership, particularly Commissioner Voss and Administrator Ario, for pursuing a new market analysis approach to regulation that has introduced several key initiatives that will hopefully reduce inefficiencies and better allocate resources to provide more comprehensive consumer protections. Foremost among these initiatives is a focus on more targeted market conduct examination activity.
Previously, market conduct examinations sometimes focused on technical instances of noncompliance rather than exploring whether a company has a comprehensive system of policies and procedures in place to address market conduct compliance issues. Now regulators use a wealth of informational resources including IMSA information to identify outliers within the marketplace to target regulatory activities. This allows for a more efficient use of regulatory resources and recognizes the efforts that some companies have undertaken to establish and maintain a meaningful internal infrastructure for market conduct and compliance practices.
Many have been encouraged to note the expeditious and inclusive approach regulators are taking to bring about greater consistency among the states and the NAIC Market Regulation Handbook represents significant progress within the past two years to modernize these functions. We have been pleased to note that regulators are encouraged to use information from “best practices” organizations and are assimilating qualification in such organizations into their regulatory toolkits. A growing number of states have formally recognized the benefit of IMSA as a best practices organization. We applaud these efforts and would like to see more state insurance departments using IMSA information to create greater efficiencies in the market conduct regulatory process. We would encourage the NAIC to more meaningfully implement its 2004 “Framework” to encourage all states to better leverage limited resources by working collaboratively with best practices organizations, such as IMSA, to formally incorporate the information from these organizations into the market analysis process.
From IMSA’s perspective, we are pleased to see that the NAIC Market Conduct Surveillance Model Law encourages insurers to self-report market conduct violations as a means to mitigate potential fines and penalties by state insurance departments. However, like all NAIC models, this represents a consensus document. The challenge ahead for the states is whether this model law can be accepted and adopted by all states or whether the past experience of inconsistent adoption of models with many variations will continue to undermine the long-term viability of state insurance regulation.
In recent history, one of the only instances where NAIC models were adopted intact and quickly by most states was in the early 1990s when the financial solvency accreditation program was created. In order to accomplish the enactment in all states of the necessary models and the enhancement of regulatory infrastructure, it required the enthusiastic support in state houses and the contributions of legislators, regulators, the industry and consumers all working toward the same goal – to bring about strong and consistent but less costly regulation.
Other Areas for Possible Regulatory Reforms
Enactment of a model law by itself will not accomplish the goal of better, more effective and efficient regulation. Without consistent application among the states, model laws are of limited value. The NAIC, NCSL, NCOIL and other groups should provide or support more educational opportunities for market conduct analysts from all the states to learn more about the new tools available, including but not limited to the work of best practices organizations such as IMSA.
Second, the NAIC must recognize the challenges faced by insurers attempting to comply with a multitude of state and federal regulators by developing and enforcing a single compliance standard to regulate marketplace behavior, when appropriate. The NAIC should work collaboratively with the NASD, SEC and other federal regulators as well as industry best practices organizations such as IMSA to identify marketplace challenges and explore common solutions.
Third, regulators should work collaboratively with all interested parties to address the increased use of independent agents and alternative distribution partners such as banks and broker-dealers to ensure greater compliance with high standards at the point-of-sale.
Fourth, the NAIC should explore how more companies can be encouraged to conduct self-evaluative activities to provide early detection and resolution of potential market conduct problems without depending on state or federal regulators to discover them. IMSA continually strives to meet the needs of consumers, companies, regulators, and the marketplace by requiring its qualified companies to maintain an infrastructure of policies and procedures designed, not just to detect, but to resolve questionable marketing, sales, and distribution practices before they become widespread.
Consumers should be able to expect honesty, fairness and integrity in their insurance transactions. Neither regulators nor companies alone can ensure that the marketplace is always operating in a fair and appropriate manner at all times. Organizations like IMSA, working collaboratively with regulators, can offer invaluable support for a healthy competitive marketplace and to enhance market conduct regulation.
Toward that end, IMSA continues to incorporate recommendations and suggestions provided by stakeholders, including regulators, as part of its ongoing process to review and update IMSA standards. We are about to embark on a comprehensive review of our existing standards and we will be seeking input from a variety of different constituencies including regulators, financial rating agencies, distributors, consumers and other stakeholders in the marketplace. Our goal is to achieve a continuous improvement of the marketplace practices that serve as the cornerstone for IMSA standards.
Conclusion
IMSA will be celebrating its 10th anniversary next year. During that period of time IMSA has been a leader in promoting excellence and high ethical standards in the life insurance marketplace. We look forward to building on our accomplishments as we begin our next decade of growth and look forward to working collaboratively with state and federal regulators to develop standards that provide state-of-the-art market conduct practices for the benefit of consumers, regulators, insurers and insurance professionals alike.
Attachment I
IMSA PRINCIPLES AND CODE OF ETHICAL MARKET CONDUCT
Each company subscribing to these Principles and Code of Ethical Market Conduct commits itself in all matters affecting the sale of covered products:
1. To conduct business according to high standards of honesty and fairness and to render that service to its customers which, in the same circumstances it would apply to or demand for itself.
2. To provide competent and customer-focused sales and service.
3. To engage in active and fair competition.
4. To provide advertising and sales materials that are clear as to purpose and honest and fair as to content.
5. To provide for fair and expeditious handling of customer complaints and disputes.
6. To maintain a system of supervision and review that is reasonably designed to achieve compliance with these Principles and Code of Ethical Market Conduct.
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