Insurance Regulation:

Preliminary Views on States' Oversight of Insurers' Market Behavior

GAO-03-738T: Published: May 6, 2003. Publicly Released: May 6, 2003.

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This testimony provides information on two important tools state insurance regulators use to oversee the market activities of insurance companies--market analysis and market conduct examinations. Market analysis is generallly done in the state insurance departments. It consists of gathering and integrating information about insurance companies' operations in order to monitor market behavior and identify potential problems at an early stage. Market conduct examinations, which are generally done on site, are a review of an insurer's marketplace practices. The examination is an opportunity to verify data provided to the department by the insurer and to confirm that companies' internal controls and operational processes result in compliance with state laws and regulations. Specifically, this testimony focuses on (1) the states' use of market analysis and examinations in market regulation, and (2) the effectiveness of the National Association of Insurance Commissioners' (NAIC) efforts to improve these oversight tools and encourage the states to use them.

We found that while all states do some level of market analysis, few states have established formal market analysis programs to maintain a systematic and rigorous overview of companies' market behavior and to more effectively identify problem companies for more detailed review. The way state insurance regulators approach and perform market conduct examinations also varied widely across the states. While NAIC has developed a handbook for market conduct examiners, states are not required to use it, and we found that it is not consistently applied across states. Moreover, the handbook is not intended to provide guidance for some important aspects of market conduct examinations--for example, how often examinations should be performed or what criteria states should use to select companies to examine. We also found that the number of market conduct examiners differed widely among states and that there were no generally accepted standards for training and certifying examiners. These differences make it difficult for states to depend on other states' oversight of market activities. Most of the states that we visited told us that they felt responsible for regulating the behavior of all companies that sold insurance in their state. With anywhere from 900 to 2,000 companies operating within each state, the pool of companies is simply too large for any one insurance department to handle. Attempts to do so are neither efficient nor effective. Moreover, since many states do not coordinate their examinations with other states, some large multistate insurance companies reported being examined by multiple states, while other companies were examined infrequently or never. We also found that since the mid 1970s, NAIC has taken a variety of steps to improve the consistency and quality of market conduct examinations. However, despite the NAIC's long-standing efforts and some limited successes, progress toward a more effective process has been slow. Recently, NAIC has increased the emphasis it places on market analysis and market conduct examinations as regulatory tools that could improve states' ability to oversee market conduct. With more consistent implementation of routine market analysis, states should be better able to use the resources they already have available to target companies requiring immediate attention. Also, by consistently applying common standards for market conduct examinations, states should be able to rely on regulators in other states for assessments of an insurance company's operations. These improvements should in turn increase the efficiency of the examination process and improve consumer protection by reducing existing overlaps and gaps in regulatory oversight. However, if NAIC cannot convince the various states to adopt and implement common standards for market analysis and examinations, current efforts to strengthen these consumer protection tools are unlikely to result in any fundamental improvement. While we focus on the states' use of market analysis and market conduct examinations, market regulation includes several other important regulatory tools, including complaint handling and investigation, policy rate and form review, agent and company licensing, and consumer education. Most states have functioning programs addressing each of these four regulatory areas. Ideally, all regulatory tools, including market analysis and market conduct examinations, should work together in an integrated and interrelated way.

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