Legislators Advised That Market Conduct Exams Need Fixing

Reddick says a progressive approach should be taken, with regulators starting with notification such as a letter and taking additional steps leading to an on-site exam if corrective steps are not taken.

The criterion to distinguish whether or not a market conduct exam is warranted should not be inadvertent technical errors, Reddick says, but rather should address the question, "Does it impact consumers?"

The beauty of financial examinations is that the numbers allow them to be looked at in an objective way, says Michael Lovendusky, senior counsel with the American Council of Life Insurers in Washington. However, with a market conduct examination, there is a greater amount of subjectivity, he continues.

In the past, insurers competed among themselves so that market conduct exams did not create disadvantages, Lovendusky says, but today insurers are competing with banks and financial services companies. And financial services entities under federal regulation have "far fewer guidelines and standards than regulation by states," he says.

The market conduct process needs to be streamlined in several areas, he says. A coordinated or zone approach can be taken to avoid duplication and the exams can be treated with more fairness so that companies do not bear unfair costs, Lovendusky adds.

He also says that to achieve a zone approach, legislators at some point might have to "surrender" authority with an as-yet-undetermined legislative mechanism such as an interstate compact.

Robert Zeman, vice president and assistant general counsel with the National Association of Independent Insurers in Des Plaines, Ill., says discussion at the NCOIL meeting "kept coming back to the cost issue."

Uncorroborated anecdotal examples of abuses mentioned during the hearing, according to interviews, cite instances where a one-day meeting of eight examiners and a company was called at a tab of $17,000 to the insurer. Other unconfirmed instances cite a group of examiners who shared a taxi but individually billed the company, and an examiner who lived a short distance from a company being examined and dragged out an exam.

Zeman says such testimony may point to "extreme examples," but also shows "clear symptoms of very real underlying problems."

The need for market conduct reform goes not only to the heart of exams themselves but also speaks to sentiments expressed by federal lawmakers that if states do not undertake speed-to-market reforms, then Congress will, Zeman says.

During a recent Congressional hearing, Zeman says it was made clear states would have a three- to four-year time frame to put reforms in place.

The issue of state regulation came up during the NCOIL meeting when legislators adopted a resolution supporting state regulation prior to a session that was going to air issues relating to a functional regulation approach.

The ACLI, the American Insurance Association and Fireman's Fund had argued that a vote on the resolution–titled a "Resolution in Opposition to the Federalization or Dual Regulation of the Business of Insurance"–be postponed until the issue could be discussed.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 6, 2001. Copyright 2001 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.

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