NAII Encouraged, Concerned by NCOIL Regulatory Modernization Report

June 4, 2003

The National Association of Independent Insurers (NAII) said it is
encouraged by a preliminary NCOIL report calling for significant changes in market conduct regulation. However, some proposals contained in the report have insurers concerned.

The report entitled, “The Path to Reform-The Evolution of Market Conduct Surveillance Regulation,” will be the subject of a June 6 hearing in Chicago. NAII submitted comments to NCOIL prior to the hearing.

“We are encouraged that NCOIL is considering a market conduct model, particularly since the organization has such a strong history of support for the state insurance regulatory system,” said Don Cleasby, NAII assistant general counsel and assistant vice president. “NAII believes that the real test of market conduct examination procedure and analysis reforms will be dependent on states adopting those regulations and laws that make these reforms work and a clearly focused model will help states do just that.”

NAII also commended legislators for tackling the issue of re-thinking the philosophy and approach of state regulators toward market conduct regulation and surveillance.

“NAII members agree that the purpose of market conduct regulation is to prevent and remedy unfair trade practices that have a substantial adverse impact on consumers, policyholders and claimants. Regulators should not act as quality control auditors dishing out violation notices and fines and many regulators already agree with that position,” continued Cleasby.

Areas of concern in NCOIL’s report included a recommendation to develop guidelines for standards for an insurance company’s compliance program. NAII said that its members do not believe a compliance program should be mandatory.

“The burdens imposed by inconsistencies in a multi-state market conduct regulation are nonexistent or minor for small companies and it may not benefit for the smaller company at all,” explained Cleasby. “Of course if an insurer decides not to adopt a compliance program that meets state-established guidelines that company should not reap any benefits the state offers to companies that do adopt its guidelines. The choice, however, should be left up to the individual insurance company.”

Another reported concern is a call in NCOIL’s preliminary report for a National Market Conduct Oversight Committee and an “association reviewer” for market conduct examinations.

“It is unclear in the report whether the Oversight Committee and/or an association reviewer would have substantive regulatory oversight over insurance companies,” said Cleasby. “If so, the NAII has a concern that these recommendations would create another level of regulatory bureaucracy and therefore compound the burden rather create greater regulatory efficiencies.”

Cleasby said it is also unclear where the Oversight Committee or association reviewer would be housed and to whom these entities would be accountable? If the entities answer to the NAIC, it raises the concerns over the accountability of the NAIC to state legislators, the industry and consumers, he said.

Another point of concern was over the growing use and cost of contract market conduct examiners which the NCOIL preliminary report indicated “does not reflect a fundamental weakness in the current system.”

“NAII disagrees with the report’s assumption and believes that the cost of market conduct exams involving contract examiners has grown into a significant pervasive problem in the last few years and that it could get worse with tighter insurance department budgets. We recommend that some systems be put in place for cost oversight and control of these contract examiners when utilized,” added Cleasby.

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