TESTIMONY OF
REPRESENTATIVE CRAIG EILAND
NCOIL IMMEDIATE PAST PRESIDENT &
NCOIL STATE-FEDERAL RELATIONS COMMITTEE CHAIR
AT A HEARING OF THE
NATIONAL CONFERENCE OF STATE LEGISLATURES (NCSL)
FINANCIAL SERVICES COMMITTEE ON
INSURANCE MARKET CONDUCT SURVEILLANCE
NCSL 2005 FALL FORUM
CHICAGO, ILLINOIS
DECEMBER 7, 2005
INTRODUCTION
Good morning. As you have heard, I am Representative Craig Eiland from the state of Texas. It is nice to be with you today in my capacity both as immediate past president of the National Conference of Insurance Legislators (NCOIL) and as current chair of the NCOIL State-Federal Relations Committee.
I’m here to talk about a very important regulatory modernization issue—insurance market conduct examinations—and what NCOIL is doing to bring about much-needed reform in this arena.
In September 2004, NCOIL and the National Association of Insurance Commissioners (NAIC) reached consensus on a joint Market Conduct Surveillance Model Law.
NCOIL and NAIC support of the model presents a united front in dialogues with Congress on this key aspect of financial regulatory modernization.
NCOIL developed the model to address some very real concerns with the present market conduct regulatory system, as identified in studies of NCOIL’s research and educational arm, the Insurance Legislators Foundation (ILF), and the General Accountability Office (GAO).
This model is not a knee-jerk reaction to Congressional posturing over preemption of insurance regulation, as witnessed by the proposed SMART Act. It is a result of years of study and deliberation. It benefits from the input of legislators, regulators, and consumer and industry representatives.
The model would create a new structure for insurance market conduct regulation based on market analysis and targeted exams.
Today I would like to tell you more about market conduct legislation and its goals, as well as the issues and findings that led to NCOIL to develop a model market conduct law.
BACKGROUND
THE PROCESS
On February 6, 2004, NCOIL adopted the nation’s first market conduct model law, after a four-year examination of market conduct regulation.
The model was a result of two major ILF studies between 1999 and 2003 and testimony received during more than a dozen public hearings, meetings and conference calls. The first study, titled Insurance Market Conduct Public Policy Review and released in July 2000, was an in-depth study of the current regulatory structure. The second study, The Path to Reform—The Evolution Of Market Conduct Surveillance Regulation, released in early 2003, identified the shortcomings of the current system and made recommendations for improvements.
The ILF referred the study reports in July 2003 to the NCOIL State-Federal Relations Committee for further action. A task force of the NCOIL State-Federal Relations Committee drafted the model with input from a broad coalition that included the NAIC and consumer and industry representatives.
A task force of the NAIC, after formal review of the NCOIL model adopted in February 2004, offered a series of suggested amendments that regulators felt would further clarify and strengthen the model’s intent.
Industry in general was not supportive of the NAIC proposed amendments, expressing concern that they moved away from the model’s original intent.
After much discussion and debate, the NCOIL Executive Committee in July 2004 considered and adopted a revised model containing many of the NAIC proposals, with the caveat that the NAIC adopt the amended model verbatim.
The NAIC Executive Committee in September 2004 adopted the NCOIL model, which then became a joint NCOIL-NAIC model.
THE STUDIES
Let me tell you a little more specifically about the studies.
The studies, prepared by PricewaterhouseCoopers and Georgia State University, found, among other things, a wide disagreement in the states as to the very purpose and scope of market conduct examinations—a disagreement on what market conduct was all about and whether it should focus on general business practices or only on specific violations.
The studies also found that there was little coordination of market conduct exams by the states and that the lack of coordination led to costly redundancies. They confirmed that market conduct studies could be disorganized, disruptive, and overly expensive. They found that there was little recognition of companies’ self-critical analysis or independent assessment activities.
They found an absence of statutory authority over market conduct regulation. The study findings convinced NCOIL that such authority is necessary.
Testimony received by the ILF and the NCOIL State-Federal Relations Committee reaffirmed the need for uniform processes to target problems in the marketplace and uniform examination procedures to provide insurers with regulatory certainty.
THE MODEL
ITS GOALS
The NCOIL-NAIC model’s goal is to establish a clear and focused purpose for market conduct regulation.
Its goal is to make market conduct more efficient and effective.
Its goal is to end well-documented redundancy, waste, and frustration in market conduct examination.
Its goal is to strengthen accountability and enhance real consumer protection.
ITS APPROACH
The proposed model addresses each of its goals as follows:
The model would establish that the purpose of market conduct regulation should be to prevent widespread abuses, and not focus on random and inadvertent errors.
It would provide a framework for commissioners to assess, prioritize, and remedy market conduct problems.
It would provide procedures to communicate and coordinate market conduct actions among the states.
It would foster the most efficient and effective use of state resources.
MODEL LANGUAGE
Once enacted in the states, the Market Conduct Surveillance Model Law would establish methods for collecting marketplace data.
It would set forth a continuum of market conduct actions to be considered prior to undertaking targeted market conduct exams.
It would require that states participate in an enhanced NAIC National Consumer Complaint Database. It would incorporate and encourage use of other NAIC work products, such as the NAIC Market Analysis Handbook, Examination Tracking System, Market Conduct Examiners Handbook, and Market Conduct Uniform Examination Procedures.
It would provide three alternative methods for states to address changes in NAIC work products.
It would set forth a structure for performing targeted market conduct examinations, including
examination announcement requirements, authorization to accept an examination conducted by other states, work plan and budget requirements, timelines for delivering market conduct examination reports, and examination cost assessment provisions.
It would require that regulators include a company’s response in an examination report.
It would address the use by insurance departments of contract examiners and the effect of insurer membership in best practice organizations.
The model also includes provisions regarding commissioner authority to access insurer books and records, confidentiality requirements regarding insurer documents, conflict-of-interest prohibitions, and immunity for market conduct surveillance personnel, enforcement authority, and provisions regarding receipt of whistleblower information.
CURRENT EFFORTS
NCOIL is unwavering in its commitment to market conduct reform as a key element of its financial modernization program.
A State-Federal Relations Subcommittee on Market Conduct Reform has been charged with looking at options to facilitate implementation of the joint model in the states. The Subcommittee has recommended, because of a lack of implication in the states, going back and looking at an earlier version of the market conduct model adopted by NCOIL in February 2004; amending the joint model; and legislation that has actually passed in the states.
At the NCOIL Annual Meeting last month in San Diego, NCOIL legislators met with key NAIC members to discuss ways to implement reform in the states and to encourage regulators to work with NCOIL in these efforts.
SUMMARY
NCOIL will continue to work toward market conduct surveillance reform in the states.
Real market conduct reform is a cornerstone of financial modernization. In an era of budget shortfalls and diminished cash flows, market conduct legislation, can achieve economies of scale that could yield incredible savings. It would achieve the appropriate focus for market conduct regulation, enhance interstate regulatory collaboration, and provide uniform analysis and disciplinary procedures.
Enactment of market conduct legislation, as embodied by the NCOIL/NAIC Market Conduct Model Law, along with the other components of NCOIL’s modernization package—addressing speed-to-market, agent and company licensing, and rate modernization—will prove that states are fully capable of addressing the shortcomings of state regulation and best equipped to modernize and streamline the state regulatory system.
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