	Lack of General Agreement on Standards for Market Analysis and Market Conduct Examinations Results in Wide Variations Among States

In the absence of generally accepted standards, individual states decide  how they will do market analysis and perform market conduct  examinations. While all states do market analysis in some form, few have  established formal programs that look at companies in a consistent and  routine manner. States also have no generally agreed upon standards for  how many examinations to perform, which companies to examine and  how often, and what the scope of the examination should be. As a result of  the lack of common standards for market analysis and the lack of  consistency in the application of the guidelines for examinations, states  find it difficult to depend on other states’ oversight of companies’ market  behavior. Few States Do Systematic and Routine Market Analysis

NAIC and some states have a growing awareness that better market  analysis can be a significant tool for monitoring the marketplace behavior  of insurance companies and deciding which insurers to examine. Each of the three states with an analysis process that we visited  approached market analysis in a different way. Ohio’s program consisted  of special data calls to obtain extensive information from selected  company files, and using computerized audit tools to analyze specific  aspects of companies’ operations relative to norms identified by peer  analysis and to state law. We Found Variations in the Way States We Visited Performed Examinations

Each state has between 900 and 2,000 licensed insurance companies. The states we visited used a  variety of factors to choose companies for a market conduct examination. The requirements for and level of training for examiners also varied widely  among the states. We asked 40 of the largest  national insurance companies to provide information about their market  conduct examination experience for the years 1999 to 2001. One of the most common complaints from  the 25 insurers that responded to our questionnaire was that states did not  coordinate their examinations with other states. The companies told us that such examinations create  difficulties for them and limited the resources they had available to assist  the examiners. For example, one insurer wrote, “It takes an insurer a  tremendous amount of effort to prepare for and deal with individual state  insurance department’s exams (every one is different, plus states generally  do not accept others exams in place of another similar exam being done). NAIC’s survey of states’ use of the  Examination Tracking System concluded that no more than 66 percent of  the states, or 36 states, consistently reported their market conduct or  combined market conduct/financial examination schedules to NAIC. Since then NAIC has launched a number of market  conduct efforts intended to identify and address the issues and concerns  caused by the lack of uniformity in states’ market conduct examination  processes, and more recently in the market analysis area. Although  progress has been slow in establishing more uniformity in market conduct  regulation, NAIC has had some successes. Moreover, the handbook in not intended to cover some aspects  of examinations, including examination frequency and company selection  criteria. While the process used by state insurance regulators to oversee solvency  could provide a model for oversight of market conduct as well, there are  structural differences in market regulation that will undoubtedly affect the  ultimate design of an improved market conduct oversight system. Finally, even to the extent that properly designed and competently  performed market conduct oversight can effectively monitor and regulate  insurance company practices, it will extend to the sales practices of  insurance agents only to the extent that the company takes responsibility  for and exercises control of the behavior of the agents that sell its  products. Preliminary Observations

In the current environment of market regulation, most insurance  regulators believe they need to oversee the market behavior of all  companies selling insurance in their state because they cannot depend on  the oversight of the other states. Formal and rigorous  market analysis is in its infancy among state regulators, and whether,  when, and how states do market conduct examinations vary widely. We support the goal of increasing the effectiveness of market conduct  regulation through the development and implementation of consistent,  nationwide standards for market analysis and market conduct  examinations across the states in order to better protect insurance  consumers. The emphasis placed on these issues by NAIC has increased  substantially over the last 3 years.
Why GAO Did This Study

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.

What GAO Found

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.