Making the Grade.

Insurers renewing their memberships in the Insurance Marketplace Standards Association must prove that they've upheld their market-conduct promises.

Compared with the century-old Good Housekeeping Seal or Underwriters Laboratories' "UL Listed" mark, the IMSA logo has a long way to go. But the logo's sponsoring organization, the Insurance Marketplace Standards Association, has achieved a lot since it was established in 1996, beginning with acceptance by the life insurance industry itself.

As IMSA's first members renew their initial three-year memberships, the organization gets credit for the breadth of compliance systems in place throughout much of the industry that are designed to ensure that life insurers and their distributors use ethical sales practices. While IMSA does not expect great growth in the number of member companies, it is expanding into new products and has much work to do in building consumer recognition.

As of July, 237 insurers were members of IMSA, representing 82% of the life industry's business, said Executive Director Paul Mason. Most of them joined three years ago, and every one of those is renewing, except those that were bought by other companies.

IMSA's creation in 1996 was the life industry trade association's response to highly publicized class-action lawsuits alleging unethical sales practices by some of the biggest and most recognizable companies in the industry, including Prudential Insurance Company of America, Metropolitan Life Insurance Co. and New York Life Insurance Co. Many of the problems concerned agents who encouraged clients to replace long-standing policies with newer "vanishing premium" policies, whose dividends were supposed to cover the premiums after a given amount of time. But some agents, who received high commissions for the new sales, didn't adequately represent the risk that if interest rates dropped--and they did--the policies wouldn't perform as expected and the premiums would not vanish.

Working closely with a task force of chief executive officers, the American Council of Life Insurers (then called the American Council of Life Insurance) created the framework for the fledgling organization, recruited its first executive director, Robert Googins, and provided the seed money and office space. They also created IMSA's Ethical Market Conduct Program.

Initially, the program focused on individual life insurance and annuities. IMSA added long-term-care products to the lineup for 2001. The program covers agent appointments and training; fair, honest and clear marketing material; supervision of a company's policies and procedures; and expeditious handling of customer complaints.

To become IMSA members, insurers undergo a self-assessment process that involves answering "yes" to 24 questions linked to IMSA's six principles of ethical market conduct and its code of life insurance ethical market conduct. An IMSA-approved independent assessor then must determine that there is a reasonable basis for each of the company's affirmative responses. The independent assessor seeks documentation and other proof that the company's remedies are working and that it is adhering to IMSA's principles and code.

As a result of becoming IMSA members, insurers nationwide have put into place systems to ensure that salespeople work ethically with clients. These systems include a person who has specific oversight for ethical market conduct throughout the company. "Now a compliance person has the power and authority to do the right thing and to deal with other people in the organization," said Donald Walters, IMSA's deputy director.

"IMSA is very important in the sense that it demonstrates a company's commitment to ethical market conduct," said Kenneth J. Kalis, an insurance industry consultant based in Gainesville, Fla. He helped develop the self-assessment process and serves as one of about 50 independent assessors. "If you're a major player, you have to be in."

Higher Standards on Renewals

This year's round of assessments, the first in which companies are renewing membership, differs from the original round in three ways:

* A company must demonstrate that it was in continuous compliance throughout its first three years of membership.

* A company must show it has a supervisory system in place, particularly when it uses independent producers. Previously, "companies had to monitor their independent producers, but IMSA didn't get into the issue of what a company could delegate," Kalis said. "This time, IMSA has put some teeth into it."

For example, Boston Mutual Life Insurance Co., Canton, Mass., was confident in how it trained and monitored its few captive agents, but it had no control over its independent agents, said Shirley Mills, the company's IMSA coordinator. Boston Mutual, which along with its New York-based sister company Life Insurance Company of Boston and N.Y., wrote $166.3 million in net premiums last year, created a booklet called The Navigator: Chart Your Course to Ethical Market Conduct. "We sent that to each licensed agent and required them to sign a response indicating that they had received it, read it and will abide by it," she said. "It was a matter of thinking it through, putting it into writing and making sure it was correct. It was time-consuming, but we did it."

* A company must demonstrate it has an ongoing monitoring system and tends to compliance matters on a regular basis. "This is the element that turns IMSA from a project into a process," Kalis said. "You have to build it into your business that you're watching these things every quarter, every month, not just every three years. I'm encouraging my companies to develop quantitative reports and exhibits so that it's obvious they are tracking these things."

Monitoring has been the biggest challenge for most companies, because most of the processes covered by IMSA are overseen by people in charge of those processes, Kalis said. "You want people managing those processes to keep ownership of them and responsibility for them, but you want them to feed the relevant information to the compliance people," he said.

With IMSA's new monitoring requirements, Kalis expects monitoring systems to be "very good" by 2004.

An Independent Yardstick

For some insurers, meeting the requirements of IMSA membership required little extra effort. But for others, especially larger companies with multiple distribution systems, the task has been more complex.

For the Knights of Columbus, a fraternal benefit society in New Haven, Conn., tending to matters of market conduct was part of the culture even before it joined IMSA, said Virgil Dechant, president and chief executive officer. The society has $38.2 billion of ordinary life insurance in force, according to A.M. Best Co. data. Both its agents and customers are members of the Knights of Columbus, and its ability to retain business is among the best in the industry, with a persistency rate of 95.7% in 1999.

The Knights of Columbus sells mostly whole-life insurance and controls about $8 billion in assets, Dechant said. It serves nearly 1.6 million members through 11,000 local councils in the United States and Canada.

Policyholders have come to expect more, and if they are displeased, "they have a very definite access to us," Dechant said. The captive agent force, meanwhile, must complete a rigorous training program and is strongly encouraged to participate in continuing-education programs and to earn industry credentials.

The society also has an in-house department whose mission it is to conserve business. "The agents know we have a very strict guideline," Dechant said. "For example, on replacement we don't pay commissions except for new money. We've had a department for years to review that a sale is in the best interests of the client. When we make a loan, our secretary sends out a letter advising the client of repayment options and the importance of rebuilding their equity."

To gain another monitoring tool, the society enrolled in the Customer Assurance Program (CAP) sponsored by Limra International, an industry research and marketing firm. Limra contacts purchasers within 30 days of a sale to be sure they understand their policies and that agents represented them fairly. The society gets a monthly report of the results. "Limra CAP is only 2 years old, but it gives us an independent yardstick," Dechant said.

Larger companies face tougher tasks. Massachusetts Mutual Life Insurance Co., for example, sells through career agents and independent brokers. Compliance Director Laura Perlotto said the company, based in Springfield, Mass., uses Limra CAP and has its own system of tracking complaints, replacement activity and persistency.

MassMutual uses third-party companies to ensure that independent producers are properly licensed, appointed, trained and monitored. Her office tracks those third parties by following up on complaints and using some established procedures, she said.

Another large insurer, Seattle-based Safeco Life Insurance Co., distributes its products through career agents, general agencies, property/casualty agents of its parent company and financial institutions. The company has set up a structured, formal program, the Agency Self-Audit Program, to educate its agents about market-conduct concerns and to track their activity, said Michele Kemper, vice president and compliance officer.

The IMSA Evolution

IMSA has experienced two major transformations since the end of 1998:

* In January 1999, Mason signed on as IMSA's first full-time executive director after 30 years as a lawyer in the life insurance business.

* In January 2000, ACLI ended its subsidies, thus making IMSA a fully independent organization.

IMSA is still a small organization. Former director Googins, who convinced the bulk of the industry of the need to join, worked part time, and Walters split his time between IMSA and ACLI. Now, Walters is a full-time employee of IMSA. As of July, IMSA was recruiting an attorney It also had two staff secretaries and uses the services of three or four consultants, including marketing consultant Valerie Feldman.

Mason initially contacted company representatives to gauge their interest in renewing memberships and to garner suggestions for how the process could be improved. This led to cutting 50 pages from the IMSA handbook and shortened the assessment questionnaire from 27 to 24 questions. By year's end, 30 more companies became members.

Based on input from members, Mason also decided to add long-termcare insurance to the assessment process. "It's a complex product that customers need to understand," Kalis said. "We need to be sure customers have it fully explained to them."

Mason also wanted to add disability income insurance, but IMSA limited the first expansion to long-term care, "because they could do it without changing the process much," Kalis said. With disability insurance, most questions would deal with underwriting and claims, two areas not covered by the IMSA process. IMSA probably will add disability income insurance to the assessment process in the future, Kalis said.

Mason also set out to convince state regulators, the National Association of Securities Dealers and the Securities and Exchange Commission that IMSA members deserve some special consideration for their efforts. "We wanted to impress on regulators that the industry is taking this seriously, that it's not just tokenism and that cognizance should be given to companies that are participating," he said. "I've been having ongoing meetings to impress upon them what this process engages in and that IMSA has an impact on their inspection and examination programs."

Mason said his experience as a lawyer in the life insurance and annuity business helped him form relationships with state regulators as he worked to register products and handle large acquisitions and mergers. Mason worked at the SEC before joining a law firm, and he often was in touch with the NASD when he was trying to register variable insurance products.

Mason also has contacted rating agencies, arguing that good market-conduct procedures have a positive impact on solvency.

Positive Reviews

IMSA has received good reviews from the industry on the job it has done so far. "I would rate it very highly," said Kemper of Safeco. "In a highly technical industry of financial products, it's so important to have self-monitoring and self-regulating programs. This was a first, a Herculean task."

Perhaps IMSA's biggest contribution is that it has provided a vehicle for a more standardized approach to monitoring. Regulators conducted periodic exams long before IMSA, but each state had its own way of gathering data. "There was a major cost in doing that," Kemper said, explaining that she's aware of 147 state and federal offices that want to see data. "What LMSA provides is the marvelous model for storing the information. It helps streamline the process for states. States call and ask whether we're an IMSA member, and they say, 'Marvelous, we'll look at your IMSA records and get back to you if we need more.'"

Dechant said that fraternal organizations that have the IMSA designation are "quite pleased" with the job IMSA has done. "What IMSA has given us is a benchmark whereby we can say to members that we're doing what seems to be right," he said.

Mills said IMSA has made a great contribution to the industry. "They did well at condensing big problems like ethics and making it specific to our industry." She was especially pleased with the way IMSA eliminated duplication and ambiguity in the handbook and assessment questionnaire.

To Kemper, IMSA has so far consistently exceeded expectations. "Its charge was pretty significant, and there was nothing before it," she said.

Future Growth

IMSA may be hard-pressed to add to its membership rolls. A.M. Best Co. provides data on 1,600 companies, but many would not be served by the IMSA process, Kalis said. Eliminating those that sell health, credit or group insurance would pare the number to about 1,000, and dropping those generating less than $2 million in annual premiums leaves about 360 that could become members. Of those, maybe 50 are considering membership," he said.

Insurers have several reasons for not joining: Many are very small, and they believe they can't afford to join. Others believe they're going to be acquired. Some are already owned by a larger company, and their distribution channel is to be absorbed by the parent. IMSA's highest membership potential is probably about 300, Kalis estimated.

Costs vs. Benefits

It is difficult to assess the cost-to-benefit ratio of IMSA membership. "The membership costs and internal costs are something worth going through," Perlotto said. In addition to paying dues to IMSA, a company the size of MassMutual can pay from $30,000 to $150,000 for an independent assessor. The price depends on what the assessor proposes to do, as well as that person's experience and expertise. Many assessors are from the Big Five accounting firms.

Dues are based on company size. Insurers with more distribution outlets spend more money on implementing the IMSA process, Mason said.

The real cost of IMSA membership is maintaining the daily monitoring process. "Once you have it installed, you need an internal staff to make sure you're doing it correctly," Kemper said. Safeco has hired five employees to handle monitoring, she said.

Where IMSA may have fallen short so far in the industry's opinion is in its outreach to the public. Both compliance officers and Kalis mentioned that the industry would like to see IMSA develop its brand. "They'd like to see IMSA do more advertising," Kalis said. "Companies had expectations that ACLI was going to do this branding. It didn't turn out that way."

Now on its own, IMSA has a budget of about $2 million, and about three quarters of it is for advertising and branding, Kalis said. Walters said IMSA had hired a marketing consultant and is placing advertisements in the Wall Street Journal, BusinessWeek magazine and in trade publications.

Member companies also can promote IMSA by using the logo in their own advertisements. "If all of the members use the logo in their advertising, that would help a lot, and that's starting to happen," Kalis said.

That, in fact, was the original idea. IMSA's founders were so sure that insurers would want to display the logo that they made a rule: The first batch of companies qualifying for membership during IMSA's first year could not use the logo in their marketing to prevent early members from gaining a marketing advantage over companies still working to become members. Insurers could use the IMSA logo in their advertisements beginning in IMSA's second year.

Research ACLI conducted before creating IMSA indicated that consumers would look with more favor on companies that have gone through a market-conduct examination, Mason said. IMSA was planning to conduct a new round of focus groups this summer to gauge the public perception of the insurance industry.

IMSA may have a long way to go before it is as recognizable as other seals of approval, but the industry it serves seems to believe it is on the right track.

IMSA Principles of Ethical Market Conduct

Each life insurance company subscribing to these principles commits itself in all matters affecting the sale of individually-sold life and annuity products:

1. To conduct business according to high standards of honesty and fairness and to render that service to its customers which, in the same circumstances, it would apply to or demand for itself.

2. To provide competent and customer-focused sales and service.

3. To engage in active and fair competition.

4. To provide advertising and sales materials that are clear as to purpose and honest and fair as to content.

5. To provide for fair and expeditious handling of customer complaints and disputes.

6. To maintain a system of supervision and review that is reasonably designed to achieve compliance with these Principles of Ethical Market Conduct.

Independent Assessors Come From Several Disciplines

When life insurers first qualified for IMSA membership three years ago, they could choose from an IMSA-approved list of about 150 independent assessors. Today, that list is down to about 50, but that's plenty, said Paul Mason, executive director of the Insurance Marketplace Standards Association.

Assessors come from many professional backgrounds, and insurers hire them through the process they use to select other professional consultants. For the first round of assessments, the Big Five accounting firms provided the bulk of independent assessor candidates. Of the group originally approved by IMSA, only 44 won assignments.

Competition for contracts these days is high, said Kenneth J. Kalis, founder of the Kenneth J. Kalis Co. in Gainesville, Fla., and one of the original independent assessors. He said assessors compete on price, expertise and experience.

Accountants have performed about one-third of assessments, Kalis said. Another third was done by management consultants such as Kalis. Law firms perform about one-sixth of the assessments, and actuarial or other professionals handle the remainder.

Attorneys approach their assessor jobs from "discoverability and legal issues," said Kalis, while management consultants are attentive to matters of process improvement. As a rule, assessors from the Big Five accounting firms charge more than those from smaller companies. In many instances, the larger companies provide teams of professionals, Kalis said.