NAMIC Unveils Recommendations for Analytical Approach to Market Regulation

March 18, 2002

The National Association of Mutual Insurance Companies (NAMIC) will propose 12 market regulation recommendations that state insurance regulators should incorporate as they develop a more analytical approach to market regulation at the Spring National Meeting of the National Association of Insurance Commissioners (NAIC) in Reno, Nevada, March 16-19.

Accurate statewide market profiles, systemic approaches to identification and resolution of market problems using an insurer’s justified complaint data, coordinated information flow, and alternative approaches to certain functions of comprehensive market examinations, are among NAMIC’s dozen recommendations.

“The National Association of Insurance Commissioners has set a goal of creating a market analysis program in 2002, and our members wanted to offer some specific recommendations on how the program should be put together,” NAMIC Market Regulation Manager David Reddick said in explaining the recommendations.

Any market analysis program should focus on four primary functions:

Developing accurate profiles of statewide markets in each state, using existing data collected from insurers;

Creating systematic approaches using an insurer’s justified complaint data to identify and quickly resolve market problems;

Coordinating the dissemination of information on new laws and regulations and any subsequent compliance reviews that result; and

Seeking alternative approaches to certain functions now performed during comprehensive market conduct examinations.

Reddick said regulators currently collect a large amount of market data, including information on an insurer’s annual financial statement that could be compiled into annual, statewide market reports. These can tell regulators, for example, how many insurers write in particular lines of business, their market shares, and whether a “disruption” to one insurer would pose problems for its competitors.

“Collecting certain statewide market data provides regulators with a ‘proactive’ way of knowing about potential market disruptions before they occur,” Reddick said.

In addition to collecting market data, regulators should use “justified” insurer consumer complaints as the “cornerstone” to any procedures they develop for identifying and investigating potential market problems.

“Regulators need to create systematic measures that compare an insurer’s ‘justified’ complaints with other insurers to identify any who may be operating outside an acceptable ‘norm’ of behavior,” Reddick commented. “Once the problem is identified, regulators need to institute a series of proportional responses to quickly resolve the problem.”

Reddick said responses should include opening an “investigations” file, sending letters or holding meetings with insurer representatives, requesting responses to departmental interrogatories or even conducting an on-site market conduct examination.

“At each step in this proportional process, insurers should be given ample opportunity to explain themselves to the regulator’s satisfaction,” Reddick said.

Reddick said that any investigation that results in an administrative penalty should be reported to the NAIC Examination Tracking System. However, insurers should be given time to correct the market problem before the administrative penalty is assessed.

“In this way, insurers would be motivated by this remediation approach to fix market problems, and this ultimately will benefit consumers,” Reddick noted.

Reddick said a third function for a market analysis unit should be to coordinate the dissemination of information about new laws and regulations.

“Several insurance department divisions now communicate with insurers on compliance matters, but the market analysis unit should coordinate this function, and regulators should develop a set of best practices for how this should be handled,” Reddick said. “Any best practices should include provisions that give insurers ample time to react to new laws and regulations, and let insurers self-certify their compliance through a uniform survey process.”

Reddick remarked that NAMIC believes on-site market conduct examinations should not be eliminated, but many procedures now performed during these exams could be handled more efficiently by considering alternative approaches.

“We think audit desk software has evolved to the point where it no longer makes sense for regulators to sit in an insurer’s office poring over claims files when the software program can render a complete analysis in a matter of minutes,” Reddick said.

Reddick noted he hoped regulators would spend some time examining possible alternatives, but that their priorities this year should probably be focused on the other three functions that NAMIC recommends.

“We think the regulators have made tremendous strides in thinking about an analytical approach to market regulation. NAMIC believes that it represents the best way for regulators to deal with this regulatory function in the future.”

NAMIC’s recommendations for a market analysis approach to market regulation include:

Market analysts should develop accurate profiles of the markets in their states, using existing information (such as the Statutory Page 14 data) in the financial annual statements.

Analyzing an insurer’s “valid” consumer complaints should be the cornerstone of any market analysis investigations.

Market analysts should develop systematic measures to compare an insurer’s “justified” complaints with others to identify insurers operating outside a “norm” of behavior.

Market analysts should follow a prescribed set of proportional action steps to resolve potential market problems, including initiating “investigation” files, but analysts should let insurers first respond in writing before other measures, including on-site market conduct examinations, are considered.

Investigations that result in administrative penalties should be reported to the NAIC Examination Tracking System. However, insurers should have the chance to correct market problems to the regulator’s satisfaction before an administrative penalty is assessed. In this way, insurers are motivated by this remediation approach to fix market problems to the benefit of consumers.

Market analysts should coordinate the dissemination of information on new insurance laws or regulations, and the information should be mailed to insurers, posted on departmental Web sites, or sent by an e-mail service to insurer compliance officers.

Market analysts should develop uniform and consistent compliance standards that give insurers ample time to comply with new laws or regulations. At this time, NAMIC is not convinced an “annual statement” approach to market regulation is appropriate, believing consensus is not possible yet on what issues could be reviewed annually across all states.

Any compliance reviews should be handled through a survey process, where insurers certify their compliance. Where non-compliance is an issue, market analysts should follow up, but insurers should have the opportunity to explain themselves.

Market analysts should consider developing uniform “minimum standards” for claims or underwriting files and let companies certify compliance through regularly scheduled compliance reviews. The reviews should be considered as alternatives to functions now performed during routine market conduct examinations.

Regulators should develop an alternative approach for how insurers process consumer complaints.

Regulators should develop an alternative approach for checking an insurer’s active and terminated agents, building on the advances made to the National Insurance Producer Registry.

Regulators must determine if compliance reviews can be treated as “work papers” or if states should pursue self-evaluative privilege model legislation.

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