Congress Turns Up The Heat On Market Conduct Reform

The concept of a self-policing system in not unique to the insurance industry, Parke says. Indeed, he cites the recent anti-money-laundering requirements promulgated by the Securities and Exchange Commission as an example of a self-policing program that allows companies to design systems tailored to their specific business environments.

"Insurers should be accountable for their own monitoring and compliance with uniform state standards," Parke says. "Regulators should pursue abuses and take actions that will result in the mitigation of the greatest harm and restoration of the greatest benefit to consumers and the public."

Joel Ario, the Oregon Insurance Administrator, cautions against a "one size fits all" approach to market conduct.

Insurance regulation, he says, is different from other kinds of financial regulation because products are more complicated and market conditions can vary across state lines.

"The market behaviors of insurers can be quite different from one state to another because laws may be different and insurer compliance with the laws may vary by state," Ario says.

He says state regulators must enforce the laws of their own state and cannot delegate that responsibility to someone who may not appreciate the impact of a violation on local consumers.

"Regulatory efficiency for its own sake should not undermine the credibility and effectiveness of state regulators charged with protecting consumers," Ario says.

But Brian K. Atchinson, executive director of the Insurance Marketplace Standards Association, Washington, says the lack of uniformity places significant costs and human resource burdens on insurers that translate into higher costs for consumers.

While NAIC has been working on uniform regulation for some time, he says, the pace of change has been slow.

Many market conduct exams are conducted with an emphasis on "technical violations," he says, without considering the ultimate impact of these infractions on consumers.

"State insurance departments should not view market conduct examination activity as a means to generate revenue for their operations, but rather they should be determining whether a company has a system in place to detect and remedy market conduct improprieties before they become widespread," Atchinson says.

But J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America, says consumers strongly oppose self-certification programs that some in the industry have proposed and also oppose the NCOIL proposal.

He calls the market conduct record by the industry "abysmal."

As examples, he cites race-based life insurance pricing, vanishing life insurance premiums that did not vanish, life insurance sold to unsuspecting nurses as a retirement plan and the replacement of good life insurance policies with less valuable ones in order to gain commission dollars.

Hunter says that in a post-Enron environment, reliance on self-certification is problematic, at best.

Self-certification could be one part of a states market conduct program under certain circumstances, he says. "If a state relies at all on such information, it must be made public and the tests made by the self-certification group, such as IMSA, must be transparent," Hunter says.

"We must see when an insurer fails a test and not just be given a seal of approval with no information on what the tests are, how they are scored and the individual insurers scores," he says.

Hunter adds that any state market conduct program must include other tools, such as private causes of action and suitability, particularly for investment-oriented and cash value life insurance policies.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 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.