Making a match: insurers and consumers need consistent market-conduct standards among all 50 states.

After more than two years of data gathering and analysis, the U.S. General Accounting Office recently reinforced the view that many insurance experts already held: It's high time that a system is devised and implemented with consistent standards for market-conduct oversight of the insurance marketplace.

In its report, "Insurance Regulation: Common Standards and Improved Coordination Needed to Strengthen Market Conduct Regulation," the GAO offers a nonpartisan review and analysis of the current state of compliance and market-conduct oversight in the 50 states and the District of Columbia. The picture the GAO paints is of a system with market-conduct oversight criteria and procedures that vary widely among the states. The study reinforces the comparison of the state market-conduct exams to snowflakes--no two are alike.

Insurance regulation is intended to ensure a healthy, competitive marketplace and to protect consumers. Sound and appropriate regulation can create and maintain public trust and confidence in the insurance marketplace for the benefit of the public and the industry. Regulators have come a long way since the first market-conduct examinations in the early 1970s. By 2001, the states employed 353 market examiners and 103 contract examiners, 815 complaint analysts and 494 fraud investigators. In 2001, departments reported a total of 1,163 market-conduct exams and 439 combined financial/market-conduct exams.

Different Strokes

Despite the growing number of exams, the GAO's study found little coordination among the states. With no common standards and inconsistently applied guidelines, some companies were subject to frequent, simultaneous and expensive exams, while others had few or none at all. Out of the 25 insurance companies responding to a GAO survey, 19 had an in-office examination a total of 106 times between 1999 and 2001. Just over haft of the companies surveyed reported having between one and five exams during the three-year period. Three companies reported 15 exams; one company had 19.

Probing deeper, the GAO found that conditions for targeting a company are quite different among states. Some insurance departments use complaint data and trends to trigger examinations, while other states don't use these data as a sole indicator of a problem. Some states choose companies based on their market share, so that they can cover a greater percentage of consumers. The report found little relation between the number of examinations and the size of the insurance market in a state.

Once an exam has been initiated, it can be either comprehensive--covering all or most of a company's operating units--or targeted. Regulators interviewed by the GAO said they often chose targeted exams because "these exams take less time, allowing regulators to do more examinations with existing resources." Some acknowledged, however, that "the narrow scope of targeted examinations limited their ability to fully assess a company's compliance with insurance laws and regulations."

The result of the current market-conduct regulatory structure is a system that uses roughly 50 sets of divergent criteria to choose companies for examinations that could be either specific or comprehensive.

This hodgepodge of regulation and application creates excessive burdens for those companies examined by more than one insurance department. The GAO reported that the companies responding to its inquiries reported a price tag averaging $115,000 for a comprehensive exam and $94,000 for a targeted inquiry. The same companies said that the average length of time for an exam--from when the regulators told them they would be examined to the final report--ran 3.9 years. Of that time, the information gathering took, on average, a little more than two years. The strain on a company's human resources, coupled with the significant cost of multiple exams, ultimately is passed on to consumers in the form of higher product prices.

Inconsistencies

But apart from the additional costs created by a system without uniform standards, the inconsistencies in market-conduct regulation dilute consumer protections, one of the fundamental tenets of insurance regulation. Arkansas offers one example. Like many states, Arkansas conducts examinations only on domestic companies. According to the GAO, only 73 of Arkansas' 1,496 licensed companies were chartered in the state. That means that 95% of all companies that sold insurance to Arkansas consumers in 2001 were not examined by the state. These companies may or may not have been examined by their domestic regulators or by other states.

Uniformity Needed

The challenge for government officials is to create a uniform system of market-conduct oversight that creates greater efficiencies for insurance companies while maintaining appropriate consumer protections. The National Association of Insurance Commissioners has been working toward this goal for a considerable period of time, and awareness has increased among regulators. Things have come a long way since 1994, when NAIC President and Alaska Commissioner David Walsh invited all commissioners to attend a meeting to harmonize and modernize insurance regulation and only five regulators attended.

Late in 2003, the NAIC announced--yet again--that market-conduct modernization would be a high priority. In testimony before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Arkansas Insurance Commissioner and then-NAIC president Mike Pickens presented the NAIC's action plan, "A Reinforced Commitment: Insurance Regulatory Modernization Action Plan." Pickens aptly pointed out that, while state insurance regulation has protected consumers effectively and efficiently for 125 years, "there is a need to make the system more uniform, reciprocal, and efficient."

But as the industry has learned over the years, it's one thing for commissioners and NMC leadership to issue a plan and give speeches; it's quite another to bring about meaningful change throughout a divergent 50-state system with more than 10,000 regulatory staff when there is near-continuous turnover at the commissioner level.

The NMC's efforts and commitment today and over the years to implement reform are laudable. Progress, however, has been far too slow.

A national framework of insurance regulation balanced by the state-level attention to local market needs and conditions is critical.

Culture of Compliance

Regulators could improve the current system of market conduct by taking a comprehensive look at whether or not a company has a broad system of policies and procedures in place to address market-conduct compliance issues. This would put the emphasis not simply on identifying specific technical violations, but on the larger view of a company's corporate culture of compliance. This broader vision, in the long run, would help detect and correct market-conduct improprieties before they become widespread.

Since 1996, the Insurance Marketplace Standards Association has provided companies selling life insurance, annuities and long-term-care insurance with a consistent template of market-conduct standards to define and measure an organization's compliance infrastructure. IMSA's primary mission is to strengthen trust and confidence in the life insurance industry through a commitment to high ethical market-conduct standards.

IMSA standards include six key principles that require a qualified company to satisfy a minimum of 144 separate criteria. To become an IMSA-qualified company, an insurer voluntarily conducts an internal assessment of its existing policies and procedures to determine whether it complies with IMSA standards. In many instances during this self-assessment, companies discover there is work to be done to improve their compliance infrastructure. Once a company makes the necessary improvements, it must then successfully undergo a thorough review by an IMSA-qualified independent assessor to ensure that it has in place a comprehensive system of compliance throughout the organization. The essence of IMSA's policies and procedures is that a sound market-conduct infrastructure is based on a company's commitment to continuously collect data and monitor it so that outliers or problems are identified early before they become large or rampant problems.

Make no mistake about it--IMSA membership is not for every company. The bar is set high and requires a company's ongoing commitment to rigorous standards.

One of IMSA's goals has been to encourage regulators to use IMSA qualification as a tool or resource as they oversee the marketplace. A growing number of state insurance departments are looking to IMSA membership as a valuable tool in their analysis and market-conduct oversight. IMSA's high standards offer an objective tool to measure a company's market-conduct compliance programs. These standards also mean companies are well positioned to respond quickly and effectively to state market-conduct inquiries and to comply swiftly with new legislative and regulatory requirements.

New York has recognized the value of IMSA member companies' procedures. In 2003, the insurance department issued a Circular Letter to life insurers notifying them that "examiners may consider IMSA documentation in determining the scope of their own review of the marketing and sales practices of a company including such areas as: agent training and licensing; replacements; and advertising." The letter went on to say that "examiners also may make use of the IMSA documentation in certain other areas such as consumer complaint handling."

In the struggle to devise a system with effective, efficient consumer protections, there is a growing awareness that companies that have committed themselves to the uniform IMSA qualification process are committed to treating customers the right way in all 50 states, not just those states that have an effective marketplace oversight, which, as the GAO report indicates, is not many.

Finding a Way

The life industry has made significant strides over the past decade toward improving compliance efforts and re-establishing the public's confidence in the industry. To continue this progress, government officials must find an efficient, effective way to ensure that all consumers in all states have the same protections. Making sure the marketplace is operating in a fair and appropriate manner at all times is a job requiring vigilance from both companies and regulators. Organizations like IMSA, working with regulators, offer support for insurance departments and even provide a framework for reform.

State regulators have called for uniform procedures in market-conduct exams for 30 years now. IMSA agrees with the GAO recommendation that the NAIC and the states make identifying a common set of standards for market-conduct oversight a higher priority. It's what regulators and insurers need and what the millions of consumers who rely on industry products deserve.

No organization--public or private--is perfect. Having a commitment to continuous improvement requires ongoing self-analysis, fair consideration of outside input and a recognition that, while change can be difficult, it often results in better, more responsive policies and systems. Companies that qualify for IMSA make that kind of commitment. Most successful organizations do.

Brian K. Atchinson is executive director of the Insurance Marketplace Standards Association.