Statement of the American Council of Life Insurers
At the Public Hearing On Insurance Market Conduct
Before the
National Conference of State Legislatures
Financial Services Committee
Wednesday, December 7, 2005
Testimony Presented by:
Linda L. Lanam, Vice President, Annuities & Market Regulation
STATE MARKET CONDUCT REGULATION: CURRENT CONCERNS
TESTIMONY SUBMITTED BY THE AMERICAN COUNCIL OF LIFE INSURERS
Background
Market conduct regulation is the general term that encompasses the authority of states insurance regulators to oversee and monitor the practices of insurers in the marketplace. Little information is available about how market conduct was defined and regulated prior to the 1970s when the NAIC retained McKinsey & Company, a consulting firm, to study how insurance departments oversaw the financial and market practices of insurers. However, initial regulatory efforts in response to that study concentrated primarily on financial oversight and examinations, putting in place a comprehensive structure for that program. Much of the early work of market conduct regulation was done as part of financial oversight. However, regulators and an industry advisory committee did work together to develop what became the Market Conduct Examiners Handbook. That handbook and the examination process in which it was utilized have served as the central focus of market regulatory oversight for more than 20 years. Regulators and insurers recognize that the time for change has come. Exactly what should be changed and how change should be implemented are the subjects of much ongoing discussion and debate.
In 1999, the American Council of Life Insurers (ACLI) entered in to a study of the regulation of life insurance companies at the request of its Board of Directors. The report of the results of that study, including an analysis of options for improvement, was released at the end of that year. The report included market conduct regulation among the key elements of regulation and identified it as one of the top three areas in need of reform. For purposes of the report, the term market conduct regulation included the regulation of advertising, complaint handling, policy disclosure, and unfair trade practices as well as market conduct examinations. However, it was the examination process, its lack of uniformity, cost (in both money, time and other company resources) and a lack of sensitivity to the impact of the process on the business operations of the insurers on which the primary focus on improvement was placed.
Current Status
ACLI and its more than 350 member companies recognize that there is a legitimate need for regulators to periodically examine the way insurance companies operate in the marketplace as a means of assessing compliance with statues and regulations and protecting consumers from unscrupulous activities. However, there is little evidence that the state market conduct examination process, as it currently operates, achieves this goal. In fact, the traditional market conduct examination, conducted by insurance department staff on the insurer’s premises and requiring extensive document production and review, generally looking backward in time, is almost never an effective means of evaluating and dealing with current insurance marketplace practices. ACLI believes that steps need to be taken to reduce the number of such examinations conducted without evidence of actual or potential violations of laws or regulations. Instead, regulators should concentrate efforts on better understanding the insurance marketplace and implementing regulatory actions that are targeted to the issues identified as of concern. While steps are being taken to move in this direction, we strongly believe that more states need to become committed to moving away from examinations as the means of regulating market conduct.
Worthwhile efforts have been made by insurance regulators, lead by the NAIC’s Market Regulation and Consumer Affairs Committee, to improve the methods of conducting examinations to make them more uniform as well as to encourage better communication among state regulators. Yet, it remains the time-consuming and resource-intensive examination process which serves as the primary regulatory tool. Regulators and insurers alike recognize that change is needed. One part of this change will be improving the ability of regulators to use information already available to them from such sources as financial reports and examinations as well as consumer complaints.
Effective regulatory intervention requires information and the ability to act on it appropriately. The development of a market analysis program to better use information already available to regulators as the basis evaluating a number of aspects of the insurance market is underway and shows promise. However, the fact is that states differ significantly in the amount and expertise of the staff involved in the analysis of the data. This has the potential to lead to a wide variation in the results and the conclusions to be drawn from them. Uniform standards for collecting and analyzing data are being developed but they must be finalized and communicated broadly to both regulators and industry. A consensus on how to use those results is in the early stages of development. And, perhaps most important from the perspective of insurers, the means by which this market analysis will be used to reduce the number of market conduct examinations to which any individual company would be subject has yet to be considered. It remains our hope that market analysis will result in moving market conduct regulation toward a process that is designed to target regulatory action to the scope and depth of the matters at issue, utilizing examinations only when evidence indicates that they are warranted.
Conclusion
Anecdotal evidence would suggest that market conduct examinations remain the primary regulatory tool for a significant number of states and that an insurer’s market share continues to be a major component in the examination scheduling determination. This can have a disproportionate impact on the operations of larger companies, without regard to whether there is any evidence of inappropriate conduct. We encourage regulators to look at domestic deference as a means to assure that the basic oversight of insurers is accomplished. ACLI also remains hopeful that the further development of market analysis will play an important role in accomplishing this sort of change, but even more we hope that the debate will then turn to other means to impact conduct in the marketplace. Our members believe that the appropriate focus of regulators should be on learning and understanding what is happening in the insurance market in their states and across the country. Identifying less intrusive methods for gaining and acting on this insight and using them in place of, not in addition to, market conduct examinations needs to be the focus of attention going forward.
ACLI acknowledges that developing a nationwide market conduct regulatory system that is both efficient and effective for all parties is not going to be simple or swift. We understand and share the desire for consumers to be protected from inappropriate treatment, whether they are applicants, policy owners or claimants. Insurers, insurance regulators and legislators will all have to articulate and agree on common goals for how to achieve this end and commit to working toward them. We stand ready to participate in that process.
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