oversight

Insurance Regulation: Common Standards and Improved Coordination Needed to Strengthen Market Regulation

Published by the Government Accountability Office on 2003-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Financial Services, House of
                 Representatives


September 2003
                 INSURANCE
                 REGULATION
                 Common Standards
                 and Improved
                 Coordination Needed
                 to Strengthen Market
                 Regulation




GAO-03-433 

                                                  September 2003


                                                  INSURANCE REGULATION

                                                  Common Standards and Improved
Highlights of GAO-03-433, a report to the         Coordination Needed to Strengthen
Chairman, Committee on Financial
Services, House of Representatives                Market Regulation



Consumers of insurance depend on                  Market conduct regulation—oversight of insurance company practices such
state regulators to ensure that                   as selling and underwriting policies—is the responsibility of the same state
insurance companies are behaving                  agencies that oversee insurance companies’ financial solvency. Unlike
fairly and in accordance with the                 financial regulation, however, with its nationwide standards that allow for
law. This report evaluates the                    coordination among state regulators, no generally accepted standards exist
states’ use of market analysis
(information gathering to
                                                  for market conduct regulation. While all states do some kinds of market
determine issues and identify                     regulation, including issuing licenses and responding to consumer
companies that may need                           complaints, two key tools—market analysis and on-site examinations—are
attention) and on-site examinations               used inconsistently, if at all. The result is inconsistent and often spotty
in market regulation and the                      coverage from state to state and potential gaps in consumer protection.
progress the National Association                 Formal and rigorous market analysis, which could be used to determine
of Insurance Commissioners                        which companies to examine and how broad the examination should be, is
(NAIC) has made in creating more                  in its infancy among state regulators, and states that do perform
uniformity in the regulation of                   examinations vary widely in the way they choose companies to examine and
market conduct.                                   the scope of the examinations they conduct. These inconsistencies in
                                                  performing market conduct examinations make it difficult for the states to
                                                  depend on each other for regulation, leaving each state with the virtually
GAO recommends that NAIC and                      impossible task of examining every company within its borders. And with
the states give increased priority to             each state conducting its own examinations, some insurance companies find
identifying a common set of                       themselves undergoing simultaneous examinations by several states, while
standards for a uniform market                    other companies may not be examined at all.
oversight program that includes all
states. These standards should                    NAIC has been pursuing initiatives since the 1970s to improve uniformity in
include procedures for conducting                 standards and procedures for a market analysis program and market
market analysis and coordinating
                                                  conduct examinations, but progress has been limited. In 1975 NAIC first
market conduct examinations.
Further, NAIC needs to establish a                published guidance for market conduct examinations and since then has
mechanism to encourage state                      updated it regularly. NAIC has also developed and continues to improve a
legislatures and insurance                        tracking system that allows states to share examination schedules. But
departments to adopt and                          states are not required to use the guidance, although many do, and may
implement the standards.                          choose which parts they wish to apply. Similarly, states are not required to
                                                  use the tracking system, and most have not. The success of NAIC’s
                                                  initiatives will be determined in large part by regulators’ willingness to share
                                                  in these efforts and to rely on regulators in other states to assess an
                                                  insurance operation. Recently, NAIC set as one of its major goals improving
                                                  the way states use market analysis and market conduct examinations.
                                                  However, it remains uncertain whether NAIC and the states can agree on
                                                  and implement a program that will result in the standardization of market
                                                  conduct regulation. Much work remains to be done to promote the
                                                  coordination and cooperation that are needed for consistent market conduct
                                                  regulation to protect insurance consumers.


www.gao.gov/cgi-bin/getrpt?GAO-03-433.


To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact 

Richard J. Hillman at (202) 512-8678 or 

hillmanr@gao.gov.

Contents 



Letter                                                                                   1
                 Results in Brief 
                                                      3
                 Background
                                                             4
                 States Vary in How They Conduct and How Often They Use Market 

                   Analysis and Market Conduct Examinations                              7
                 NAIC Has Identified Market Analysis and Examinations as Areas
                   Needing Significant Improvement                                     19
                 Conclusions                                                           25
                 Recommendation for Executive Action                                   26
                 Agency Comments and Our Evaluation                                    26

Appendix I       Objectives, Scope, and Methodology                                    30



Appendix II      Market Conduct Exams Completed in 2001                                32



Appendix III 	   Number of Licensed Insurers and Total Market
                 Conduct Examinations in 2001                                          34



Appendix IV 	    Number of Market Conduct Examiners and Total
                 Licensed Insurers in 2001                                             36



Appendix V 	     Comments from the National Association of
                 Insurance Commissioners                                               38
                 GAO Comments                                                          46


Appendix VI      GAO Contacts and Staff Acknowledgments                                48
                 GAO Contacts                                                          48
                 Acknowledgments                                                       48




                 Page i                                    GAO-03-433 Insurance Regulation
Table
         Table 1: Market Conduct Examinations and Licensed Insurers in
                  2001                                                                             12


Figure
         Figure 1: Market Conduct Examinations Completed in 2001
                  Relative to the Size of the Insurance Market in Each State                       16




         Abbreviations

         ETS               Examination Tracking System

         IRES              Insurance Regulatory Examiners Society 

         MAWG              Market Analysis Working Group 

         NAIC              National Association of Insurance Commissioners 




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         Page ii                                                GAO-03-433 Insurance Regulation
United States General Accounting Office
Washington, DC 20548




                                   September 30, 2003 


                                   The Honorable Michael Oxley 

                                   Chairman, Committee on Financial Services 

                                   House of Representatives 


                                   Dear Mr. Chairman: 


                                   Millions of American consumers rely on property and casualty insurance 

                                   for protection from a wide range of perils and on life insurance to help 

                                   guarantee the payment of mortgages, the education of children, and the

                                   general welfare of families after the policyholders’ deaths. But choosing an 

                                   insurance company and evaluating a policy are difficult tasks for most 

                                   consumers, who generally do not have access to the information needed to 

                                   make such comparisons. For this reason, insurance regulators are 

                                   responsible for regulating not only the financial solvency of insurance 

                                   companies but also their interactions with customers, or market behavior. 

                                   Market regulation is designed to make sure that insurance companies are 

                                   fair and nondiscriminatory in their dealings with customers, do not renege 

                                   on the terms of their contracts, and write policies that offer what state 

                                   laws require.1


                                   Historically, state regulators have focused the majority of their time and 

                                   resources on financial regulation, which oversees accounting methods and 

                                   procedures and financial statements in order to verify that companies are 

                                   in good financial condition and able to pay policyholders’ claims. States 

                                   generally have the systems and tools in place to regulate financial 

                                   solvency, but market regulation is hindered by limited resources, a lack of 

                                   emphasis on important regulatory tools, and the framework of the system 

                                   itself, which requires individual states to oversee companies that operate 

                                   in many states or nationwide. As a result, market regulation is currently 

                                   based on overlapping and often inconsistent state policies and activities. 

                                   While it provides some oversight, it may also place an undue burden on 

                                   some insurance companies and, at times, may fail to adequately protect 

                                   consumers.





                                   1
                                    For the purposes of this report, we use market regulation to mean the set of regulatory
                                   processes and tools focused on an insurance company’s interactions with its customers.



                                   Page 1                                                  GAO-03-433 Insurance Regulation
The Congress has long been concerned with the need for the states to
improve the quality and uniformity of insurance regulation. As you
requested, this report provides information on state insurance regulators’
oversight of market activities in the insurance industry and emphasizes
how the states use market analysis and on-site examinations as regulatory
tools.2 Market analysis consists of gathering information on a company, an
agent, or a market and evaluating that information to identify issues,
problems, and trends. A market conduct examination is similar to a
financial solvency examination, with examiners visiting a company to
evaluate practices and procedures and check them against the company’s
files. Specifically, this report (1) evaluates the states’ use of market
analysis and on-site examinations in market regulation and (2) discusses
the progress of efforts by the National Association of Insurance
Commissioners (NAIC) to improve and coordinate market regulation at
the state level.

To address these objectives, we collected data and interviewed officials
from nine states’ insurance departments—Arkansas, California, Indiana,
Maryland, Michigan, Missouri, New Mexico, Ohio, and Oregon—and from
NAIC’s Kansas City headquarters. The states selected provide an array of
experience with different models of market regulation and different levels
of regulatory resources. Some of the states that we visited had market
conduct oversight operations that varied from independent organizational
units to units combined with financial oversight. The states we visited also
varied in the total number of examinations performed. We also reviewed
nationwide information on the market oversight activities of all states,
including data on the level of regulatory resources, the number of market
conduct examinations performed, and the number of licensed companies.
To meet our first objective, we reviewed states’ operating procedures for
market analysis and on-site examinations and interviewed state officials
responsible for these activities. We also asked a selected sample of 40
companies—20 each from among the largest 200 property and casualty
firms (based on direct written premiums) and the largest 200 life
companies (based on asset size)—questions about their experiences with
market conduct examinations from 1999 through 2001.3 To determine the



2
 We testified before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, House of Representatives. See U.S. General Accounting Office,
Insurance Regulation: Preliminary Views on States’ Oversight of Insurers’ Market
Behavior, GAO-03-738T (Washington, D.C.: May 6, 2003).
3
Because our sample was nonstatistical, our results cannot be projected to all insurers.




Page 2                                                  GAO-03-433 Insurance Regulation
                     effectiveness of NAIC’s efforts to improve its market regulation program,
                     we interviewed officials from NAIC, attended its national meetings to
                     identify current issues in market regulation, reviewed past market
                     regulation efforts, and reviewed past and current initiatives to improve the
                     market regulation program. We conducted our review from April 2002
                     through August 2003, in accordance with generally accepted government
                     auditing standards. Appendix I provides a more detailed description of our
                     scope and methodology.


                     Because no generally accepted standards exist for market analysis and
Results in Brief 
   market conduct examinations, each state decides how it will carry out
                     these activities. As a result, few states have formal programs for market
                     analysis, and examinations are used inconsistently and in some cases
                     infrequently. While all states perform some type of market analysis, only
                     three of the states that we visited had formal analysis programs. Further,
                     each of the three states’ programs was unique, and two of the programs
                     were still in the developmental stage. We also found that the states had no
                     generally accepted criteria for determining which companies to examine
                     or which type of examination to perform. The nine states we reviewed did
                     only a small number of on-site examinations relative to the number of
                     companies operating in each state, and while variations in the number of
                     exams often reflected differences in the levels of resources devoted to
                     performing these reviews, the variations were not closely related to
                     differences in the size of the insurance market. Information collected by
                     NAIC showed that the number of examinations among the insurance
                     departments in the remaining states were also low. Because states lacked
                     common standards for market analysis and applied guidelines for
                     examinations inconsistently, states did not coordinate examinations or
                     depend on each other for help in regulating the market conduct of
                     insurance companies and agents. These differences meant that some
                     companies underwent frequent and expensive examinations while others
                     were examined infrequently or not at all.

                     Over the years NAIC has initiated a number of efforts aimed at finding
                     ways to facilitate uniformity in states’ market analysis programs and
                     promote interstate coordination in market conduct examinations.
                     However, despite NAIC’s long-standing efforts and some limited
                     successes, progress has been slow. For example, in 1975 NAIC developed




                     Page 3                                         GAO-03-433 Insurance Regulation
               a handbook for market conduct examiners, which is updated regularly.4
               The handbook provides useful guidance on conducting examinations and
               reporting the results, and most states use it to some extent. However, most
               states are not required to use it, and it does not contain standards such as
               when to hold examinations or how to choose companies to examine. NAIC
               also developed the Examination Tracking System (ETS), a computer-
               based system designed to help states coordinate examinations and thus
               reduce the regulatory burden on insurers. Using the ETS, state regulators
               should know when other states planned to hold examinations and which
               companies would be examined. However, because the states have not
               used the system widely, the hoped-for improvements in efficiency have not
               materialized as quickly as anticipated. NAIC continues its efforts to
               improve the ETS. Recently, NAIC leadership announced a major initiative
               to improve insurance regulators’ use of market analysis and market
               conduct examinations. However, because progress in the past has been
               slow, results from the new initiative are still uncertain.

               This report includes a recommendation that NAIC, working with the
               states, give priority to identifying a common set of standards for a uniform
               market oversight program that will include all states. These standards
               should include procedures for conducting market analysis and
               coordinating market conduct examinations. Further, we recommend that
               these standards be included in a program to encourage their adoption by
               states.

               We received combined comments on a draft of this report from NAIC and
               the state insurance departments that we visited. NAIC stated that,
               “Overall, the report confirmed several concerns that state regulators and
               the insurance industry share about market regulation and particularly,
               market analysis and market conduct examinations.” These comments are
               reprinted in appendix V, along with our comments. NAIC’s comments are
               also discussed in greater detail at the end of this letter. NAIC and several
               of the states also provided technical comments, which we incorporated as
               appropriate.

               Insurance in the United States is an industry that generates $735 billion a
Background 	   year in premiums, with about 900 to 2,000 insurance companies providing
               policies for businesses, governments, and consumers in each state. In



               4
               National Association of Insurance Commissioners, Market Conduct Examiners
               Handbook, vols.l and ll (Kansas City, Mo.: Spring 2001).




               Page 4                                             GAO-03-433 Insurance Regulation
     addition, 3.5 million individuals are licensed to sell insurance, including
     independent agents who sell and service insurance policies for at least two
     insurance companies, agents who sell and service insurance policies for
     specific companies, and brokers who represent buyers rather than
     companies by searching the marketplace for the best possible deals for
     their clients.5

     States have primary responsibility for regulating the insurance industry,
     and each state has its own insurance department. NAIC, which is made up
     of the heads of the insurance departments from the 50 states, the District
     of Columbia, and 4 U.S. territories, provides a forum for regulators to
     identify and share best practices and develop recommended laws and
     regulations. NAIC also develops and operates information-sharing tools
     such as the ETS.

     Market regulation requires state insurance regulators to oversee a wide
     range of company practices, including sales, underwriting, and claims
     processing and payment. Because of the scope of the market activities
     they must oversee, regulators perform a variety of oversight tasks that
     work together to help protect consumers from unfair practices. In addition
     to market analysis and market conduct examinations, these activities
     include

•	   approving the prices and contents of insurance policies in rate-and-form
     reviews,

•    processing consumer complaints,

•    issuing licenses to producers and companies, and

•    providing consumer education.

     According to the state regulators we spoke with, the rate-and-form review
     is a first step in protecting insurance consumers, allowing regulators to
     screen each product as it enters the market for price and coverage. During
     a rate-and-form review, state insurance regulators examine a policy’s
     price, terms, and conditions for adherence to state laws and regulations.
     Most states’ regulations stipulate that while prices for insurance products


     5
      In this report, we use the term agent to refer to all individuals who are involved in selling
     insurance to the public, thus including both agents and brokers. The insurance industry and
     regulators use the term insurance producers.




     Page 5                                                   GAO-03-433 Insurance Regulation
may ensure a return sufficient to meet a company’s expenses, pay its
claims, and make a reasonable profit, they must also be low enough to be
fair to consumers. Some states allow companies to begin selling policies
before receiving approval for price and policy terms. In other states,
regulators must approve policies and prices before policies can be sold.
Recent efforts by regulators to speed up the product approval process may
reduce the time and attention given to approving individual products.

States also generally have procedures for receiving and responding to
consumer complaints and inquiries. Most states consider written
grievances against a specific insurance entity, such as an insurance
company or agent, complaints; general questions about rates and coverage
are treated as inquiries. In 2001, states received nearly 470,000 complaints
and over 3 million inquiries. Complaints currently serve an important
function in the market regulation process, as they often offer regulators
the only opportunity to identify specific problems in the industry and to
establish patterns of behavior that help identify problems with companies
and agents. For consumers, the complaint process is generally the most
important—and often only—point of contact with an insurance company,
regulators, or both. Generally, the complaint process includes
acknowledging the complaint, screening it, and sending a query or
investigative letter to the company or agent in question. The company or
agent generally must respond within a certain period, after which the
regulator reviews the response for consistency with the provisions of the
contract and for violations of insurance laws and regulations of the state.

As another part of their market regulation responsibilities, state insurance
departments issue licenses to companies and agents. In 2001, 3.5 million
individuals were licensed to provide insurance services in the United
States. Licenses vary by state, with some states issuing one type that
covers all those who sell insurance and other states issuing separate agent
licenses and drawing distinctions between the services each can offer.
Most states have a prelicensing education requirement and an examination
or similar requirement for demonstrating competence in the insurance
field. Additionally, many states require agents and brokers to attend
continuing education courses in order to maintain their licenses. However,
state insurance departments generally do not routinely oversee the
ongoing activities of agents, although insurance regulators do investigate
and discipline agents identified through complaints. Insurance companies
also have some responsibility for overseeing the behavior of agents selling
their products.




Page 6                                         GAO-03-433 Insurance Regulation
                      Further, states provide consumer education that is intended to help
                      protect the interests of insurance customers. These efforts may include
                      informative brochures, rate comparison guides, and seminars, especially
                      for senior citizens. These efforts are not consistent across states, with
                      some states spending far more than others to help educate consumers.

                      Each of these oversight tasks helps protect consumers from unfair
                      practices. However, market analysis and on-site market conduct
                      examinations provide information on the actual practices of insurers.
                      Market analysis is an important way for states to identify potential
                      misbehavior by insurance companies, and on-site examinations provide
                      the most systematic assessment of insurers’ behavior and practices.


                      In the absence of generally accepted standards, individual states decide if
States Vary in How    and how they will do market analysis and perform market conduct
They Conduct and      examinations. All state insurance departments do some type of market
                      analysis, gathering information about companies in the course of making
How Often They Use    regulatory decisions. But only a few of the states we visited had
Market Analysis and   established formal market analysis programs designed to help identify
                      problem companies earlier and more effectively. We found that those
Market Conduct        states attempting to do more formal market analysis had very different
Examinations          approaches that were for the most part still in a developmental phase.
                      Similarly, we found that states had no generally accepted criteria for
                      market conduct examinations that would help in determining which
                      companies should be examined or how thorough an examination should
                      be performed.6 We found that states generally performed few
                      examinations relative to the size of the insurance industry and devoted
                      different levels of resources to their examination programs. The lack of
                      common standards for market analysis and inconsistency in applying the
                      guidelines for examinations made reciprocity among states and mutual
                      acceptance of examination results difficult. And because the selection
                      criteria and examination procedures differed across states, some
                      companies were being examined frequently and others not at all.



                      6
                       While the Market Conduct Examiner’s Handbook includes a list of factors that a state
                      could consider to prioritize companies for examinations, they do not constitute “generally
                      accepted criteria” for determining when a company should be examined for two reasons.
                      First, states are not required to follow the guidance in the handbook and may choose which
                      parts, if any, they wish to apply. Second, the factors listed in the handbook do not provide
                      clear and specific minimum standards for when and how these factors should be applied.
                      As a result, states are unlikely to respond consistently to a given market conduct problem.




                      Page 7                                                  GAO-03-433 Insurance Regulation
Few States We Visited Did        According to NAIC, market analysis provides an important tool for
Systematic and Routine           monitoring the broader marketplace, allowing states to identify regulatory
Market Analysis                  problems and better prioritize and coordinate market regulation functions,
                                 and establishing an integrated system for responding to market problems.
                                 Among other things, market analysis can provide information on insurance
                                 companies’ compliance with applicable laws and regulations, highlight
                                 practices that could have a negative effect on consumers, and help identify
                                 problem companies for examination. NAIC and some states recognize that
                                 market analysis can be a significant regulatory tool, and all of the states
                                 we visited performed some type of market analysis, but in most cases
                                 these efforts were fragmented and lacked a systematic organization and
                                 framework. We found that in many states market analysis consisted
                                 largely of monitoring complaints and complaint trends and reacting to
                                 significant market issues. Analyzing complaints and complaint trends does
                                 provide regulators with useful and important information and should be
                                 part of any market analysis program. However, other types of information
                                 can also help regulators identify and deal with market conduct issues,
                                 including data from financial reports, rate-and-form filings, other company
                                 filings, routine and special requests for company data, and information
                                 from other federal and state regulators. All this information, consistently
                                 and routinely evaluated by well-trained analysts, can help regulators
                                 identify companies that examiners need to look at more closely or that
                                 merit regulatory actions.

                                 Regulators in some states also performed desk audits, often classified as a
                                 type of examination. For these audits, regulators rely on documents and
                                 files the companies send for review. When done in the regulators’ offices,
                                 desk audits are actually a component of market analysis. When the review
                                 of company files is part of an examination that includes a visit to the
                                 offices of the insurance company, it becomes part of an on-site market
                                 conduct examination.

                                 Three states that we visited—Missouri, Ohio, and Oregon—have
                                 established proactive and formal market analysis programs with processes
                                 for monitoring company behavior to identify market trends, firms that vary
                                 from the norm (outliers), and potential market conduct problems.
                                 Missouri has been doing market analysis for a number of years while the
                                 Ohio and Oregon programs are still in the developmental stages. The
                                 programs differed in their approaches.

                            •	   Missouri requires all insurance companies to submit supplemental market
                                 data reports along with their annual financial reports that include
                                 information on companies’ activities. Regulators used these data and


                                 Page 8                                        GAO-03-433 Insurance Regulation
                              numerous other sources to evaluate market trends and conditions and to
                              identify companies that merited extra attention.

                         •	   Ohio gathers extensive information from selected company files that it
                              requests and, using computerized audit tools, analyzes how companies’
                              operations compare with norms identified by peer analysis and with state
                              law. In most states, this activity, less formally done, is called a desk audit.
                              Ohio did 184 of these “desk audits” in 2001 using data requested from
                              companies doing business in the state. This process allows Ohio’s
                              regulators to identify companies meriting further regulatory attention that
                              might otherwise have escaped notice.

                         •	   Under Oregon’s newly established program, analysts collect, organize, and
                              maintain data on companies. This information is drawn from various
                              sources, such as complaints and Internet information, to facilitate a broad
                              and ongoing review of company behavior.

                              Although the other six states we visited did not have formal market
                              analysis programs, they all performed some type of market analysis. For
                              example, all the states looked at complaints and complaint trends to
                              identify potential problems.


States Varied in Their        Because no generally accepted standards exist that stipulate how often or
Approaches to Market          even how regulators should examine companies, market conduct
Conduct Examinations          examination policies and practices vary widely across the states. NAIC
                              statistics show that not all states perform market conduct examinations,
                              and among states that do, the criteria for choosing which companies to
                              examine and what type of examination to use differ widely. As we have
                              noted, in 1975 NAIC produced its handbook for market conduct
                              examiners, but most states are not required to use the handbook, and
                              those that use it voluntarily may decide which parts to apply. These
                              differences in the way regulators select companies to examine and carry
                              out the reviews make it difficult for regulators in one state to depend on
                              the examinations done by other states and hamper coordinated regulatory
                              oversight. Because states do not coordinate their market regulation




                              Page 9                                           GAO-03-433 Insurance Regulation
efforts, most state regulators feel responsible for overseeing all the
companies operating within their borders.7

Because of the nature of state-level insurance regulation, however,
coordinating market conduct examinations is important to efforts to
improve oversight—for example, to alleviate the burden on individual
states of examining every company within their purview. The importance
of cooperation and coordination in the market conduct examination
process has been widely recognized. The 1971 McKinsey study8 recognized
that insurance companies operations—and thus market regulation—
frequently extended across state borders. The study concluded that it was
critical for the states to share relevant market conduct information with
other states and to coordinate examinations.

A July 2000 report9 by PricewaterhouseCoopers, LLP also concluded that a
lack of cooperation, communication, and coordination were significant
issues in state regulation of the industry. The report found that insurers
believe there is duplication of effort and overlap by state insurance
departments performing market conduct examinations. The American
Council of Life Insurers has also pointed out that there is very little
coordination among states when conducting market conduct exams, even
though in the case of financial regulation, including financial
examinations, regulators have come to rely on the state in which a
company is chartered.

Among the nine states we reviewed, the practice of coordinating exams
with other states was not common and, when it did occur, varied
substantially across states. Some states coordinated their examination
plans with other states or reviewed other states’ examination reports
before exams. Some states have also started to perform joint
examinations. For example, Ohio officials told us that they had started to


7
 Not all licensed companies in a state are actively selling insurance. For example, some
companies with existing business may be going out of business, but still servicing existing
customers in liquidation. These companies may still have some active policies in the state
but are not selling any new policies.
8
 McKinsey & Company, Inc., Strengthening the Surveillance System, Final Report, a report
commissioned by National Association of Insurance Commissioners, April 1974. McKinsey
also issued preliminary reports in 1972 and 1973.
9
 PricewaterhouseCoopers, LLP, Insurance Market Conduct Examination Public Policy
Review, Final Report prepared for The Insurance Legislators Foundation (Burlington, Vt.:
July 6, 2000).




Page 10                                                  GAO-03-433 Insurance Regulation
                              conduct collaborative examinations with Illinois, Nebraska, and Oregon,
                              and officials from Oregon told us that they recognized the need for more
                              interstate collaboration and reliance on examination results from other
                              states. Indiana officials said that they had recently completed a joint
                              examination of a large insurer with Colorado.

States Limited the Scope of   In general, on-site market conduct examinations fall into two categories:
Market Conduct Examinations   comprehensive examinations and targeted examinations. A
                              comprehensive examination allows regulators to examine all or most of a
                              company’s operational areas, using files and documents from company
                              data banks. For example, examiners can review types of products the
                              company and its agents sell, agents’ sales practices, claims payment
                              mechanisms, underwriting standards, and policy provisions. Examiners
                              can also review a company’s internal controls—those processes designed
                              to ensure that the company, its employees, and its agents adhere to all
                              laws and company policies—and “test” them by checking them against the
                              company’s files. A targeted examination involves similar procedures but is
                              limited to one or a few business areas.

                              All the states we visited limited the scope of their market conduct
                              examinations. Most states limited the scope of their examinations by
                              performing mainly targeted examinations—for example, by focusing on
                              how a company processes claims, while largely ignoring underwriting,
                              sales practices, or other activities. However, some states still do
                              comprehensive market conduct examinations. Of the nine states we
                              visited, Arkansas, Missouri, and New Mexico continued to conduct
                              comprehensive as well as targeted examinations. Arkansas officials told us
                              that they saw comprehensive examinations as important for domestic
                              companies because they provide the most assurance that companies are
                              complying with insurance laws and regulations. However, the officials
                              indicated that they support the utilization of a targeted examination
                              approach when examining foreign licensed insurers unless circumstances
                              indicate a comprehensive examination is more appropriate. In every state
                              we visited, however, including those states that did comprehensive
                              examinations, the scope of examinations was further limited by restricting
                              the examination to a review of files of only those insurance consumers
                              living in the examining state.

                              Table 1 shows how many on-site market conduct examinations, both
                              targeted and comprehensive, were performed in the states we visited and
                              what percentage of insurers in each state the examinations covered.




                              Page 11                                      GAO-03-433 Insurance Regulation
Table 1: Market Conduct Examinations and Licensed Insurers in 2001

                         Market conduct examinations completed in
                                           2001
                                                                                 Licensed         Licensed             Total          Percentage of
                                                                                 domestic      nondomestic         licensed       insurers examined
 State                           Targeted    Comprehensive            Total      insurersa        insurersa        insurers                  in 2001
                    b
 Arkansas                                2                   17          19             245              1,423         1,688                      1.10%
 California                            148                    0        148              229              1,171         1,400                    10.57%
            c
 Indiana                                 4                    0           4             183              1,588         1,771                      0.22%
 Maryland                              15                    11          26              90              1,393         1,483                    1.750%
 Michigand                               0                    0           0             175              1,325         1,500                      0.00%
                e
 Missouri                                2                   27          29             141              1,500         1,641                      1.77%
 New Mexico                             1                     7           8              20              1,575         1,595                      0.50%
 Ohio                                   42                    0          42             280              1,505         1,785                      2.35%
 Oregon                                15                     0          15              49              1,404         1,453                      1.03%
Source: State insurance departments.

                                                  Note: Does not include follow-up exams or desk audits even though they are done under a state’s
                                                  audit authority. For example, Ohio did 184 desk audits during 2001 that did not result in an
                                                  examination report. While desk audits are an important component of market regulation for many
                                                  states, we have classified such off-site audits of company files as part of market analysis rather than
                                                  as market conduct examinations.
                                                  a
                                                   A domestic insurer is a company that is chartered under the laws of a particular state. For example,
                                                  the (hypothetical) Acme Insurance Company could be licensed to sell insurance in all 50 states, but it
                                                  is a Michigan domestic. A nondomestic insurer is a company that, while selling insurance in a
                                                  particular state, is chartered under the laws of some other state. These companies are often called
                                                  “foreign” companies to differentiate them from domestic companies. Thus, while in Michigan
                                                  regulators would consider the Acme Insurance Company to be a domestic company, in all other
                                                  states it would be a nondomestic or foreign company.
                                                  b
                                                      Arkansas also examined 65 funeral homes’ that sold prepaid funeral insurance.
                                                  c
                                                      Three of these were multistate exams.
                                                  d
                                                   We omitted 37 combined market conduct/financial examinations Michigan did in 2001 because of
                                                  their limited scope and focus when it came to market conduct issues.
                                                  e
                                                  Does not include Missouri’s 123 mutual domestic companies since, by statute, the Missouri
                                                  Department of Insurance cannot examine county mutuals.


                                                  According to NAIC, 49 states and the District of Columbia reported on
                                                  their market conduct activities in 2001. Of these, 15 did only targeted
                                                  examinations, 4 did only comprehensive examinations, and 22 did both.
                                                  The remaining 9 did no market conduct examinations in 2001. State
                                                  officials we interviewed indicated that they used targeted examinations
                                                  more often because these examinations take less time, allowing regulators
                                                  to do more examinations with existing resources. Some officials said,
                                                  however, that the narrow scope of targeted examinations limited their



                                                  Page 12                                                         GAO-03-433 Insurance Regulation
                                 ability to fully assess a company’s compliance with insurance laws and
                                 regulations.

                                 Recently, phase 2 of the PricewaterhouseCoopers study reported that
                                 examinations as typically done by state insurance departments tended to
                                 focus too little on reviewing internal controls and systems for maintaining
                                 companywide compliance with laws, regulations, and ethical practices.
                                 Instead, market conduct examiners sometimes tend to look for isolated
                                 mistakes and errors by focusing on reviews of transactions files rather
                                 than looking for broad patterns or practices of error or illegality.10 As a
                                 result, some insurance companies report their perception of
                                 comprehensive market conduct examinations as “fishing expeditions” that
                                 provide opportunities for insurance departments to levy fines rather than
                                 as regulatory tools designed to ensure the quality of insurer performance
                                 and service.11

States Used Different Criteria   Since there are from 900 to 2,000 insurance companies licensed to sell
to Select Companies to           insurance in each state, regulators in the states we visited used a variety of
Examine                          criteria to choose which companies should be examined. The most
                                 commonly used factors for choosing from among the eligible companies
                                 were the state in which the company was chartered and the number and
                                 severity of complaints about the company. Regulators generally have the
                                 authority to do a market conduct examination on any company that sells
                                 insurance in their state. However, some states look only at domestic
                                 companies (those chartered in their states), even though the majority of
                                 the insurers selling in the state may be chartered elsewhere. For example,
                                 of the states we visited, Arkansas and Michigan focused primarily on
                                 domestic companies. In 2001, however, only 73 of Arkansas’s 1,496
                                 licensed companies were chartered in the state. As a consequence, 1,423
                                 nondomestic companies, or 95 percent of all the companies that sold
                                 insurance to Arkansas’s citizens in 2001, were not examined in Arkansas
                                 and might or might not have been examined in another state.




                                 10
                                   The Market Conduct Examiners Handbook encourages examiners to focus on the
                                 “general business practices” of the examinee. The handbook also provides guidance on
                                 sampling techniques and recommended error rates that could, if consistently used, reduce
                                 the focus on isolated or inadvertent errors.
                                 11
                                   PricewaterhouseCoopers, LLP and Georgia State University, The Path to Reform—The
                                 Evolution of Market Conduct Surveillance Regulation, preliminary report prepared for the
                                 Insurance Legislators Foundation, May 1, 2003.




                                 Page 13                                                GAO-03-433 Insurance Regulation
Other states do not discriminate between domestic and nondomestic
companies when it comes to deciding which companies to examine. Of the
states we visited, California, Indiana, Maryland, Missouri, New Mexico,
Ohio, and Oregon fell into this group. These states used a variety of other
factors to select specific companies to examine. For example, all the
states we visited considered complaints and complaint trends as a factor
in targeting companies to examine. Indiana officials told us that while
other factors could influence the selection process, they primarily used
complaint data to identify potential problems and determine which
companies should be examined. A company with several similar
complaints, a rising trend of complaints, or even one particularly
egregious complaint (for example, mishandling of customer premium
payments) would be a legitimate examination target.

However, the use of complaint data has its limitations. One state regulator
told us that his state does not rely on consumer complaints as the sole
indicator of problems in the market because some kinds of problems and
violations may not be visible to consumers, who may then be unaware that
they have been subjected to unfair or deceptive practices, such as
violations of disclosure laws and sales tax reimbursement requirements,
rating errors, and unfair marketing strategies. The usefulness of
complaints as an indicator of a serious problem may also vary with a
company’s primary line of business. Consumers are likely to have more
frequent interactions with their automobile or health insurers than with
their life insurance companies. As a result, an insurance department may
receive more complaints about a property or health insurer than about a
life insurance company, irrespective of how serious the potential
infraction might be.

Most states also used other ways of selecting companies for examination,
such as time since the last examination and market share, and the states
we visited generally used some combination of factors to determine when
to examine a company. For example, in Arkansas, California, Missouri,
and New Mexico regulators must examine certain companies every 3–5
years, although other factors may also influence when an examination is
performed. Some states may also choose companies for examination
based on the companies’ market share, in an effort to use limited state
resources to cover the largest percentage of the state’s insurance
consumers. New Mexico officials also told us that they might not examine
a company that they knew had recently been examined by another state.




Page 14                                       GAO-03-433 Insurance Regulation
States Did Relatively Few   As shown in table 1, each of the states we visited, with the exception of
Examinations and Varied     California and Ohio, did on-site examinations of less than 2 percent of the
in the Staff Resources      states’ licensed companies in 2001. Based on the number of market
                            conduct examinations reported by the states to NAIC, it would take many
They Devoted to the         years for any of the states we visited to examine all of the companies
Examination Process         licensed in the state—in some cases, more than 100 years. While 2001 may
                            not have been a typical year for each state, information reported by the
                            states to NAIC suggests that, overall, 2001 was similar to 2000. Appendix
                            III provides state-by-state information on the number of insurers and the
                            number of market conduct examinations completed in 2001.

                            As figure 1 shows, the number of examinations completed bore little
                            relationship to the size of the insurance market in each state. This
                            comparison should not necessarily be taken as an indicator of the relative
                            regulatory performance of the nine states we visited because during
                            another year the ratios could differ. However, together with the variations
                            in the way states select companies for and conduct the examinations, this
                            added variability helps to further explain why states may be reluctant to
                            depend on other states’ regulatory efforts.




                            Page 15                                       GAO-03-433 Insurance Regulation
Figure 1: Market Conduct Examinations Completed in 2001 Relative to the Size of the Insurance Market in Each State
                                             a
                Premium volume in 2001                                                              Estimated state population           Market conduct
                (dollars in millions)                        Total producers in 2001                in 2001 (in thousands)               examinations completed in 2001

New Mexico         6,045                                             28,910                            1,831                                  8

                                                                                                                                                       b
  Arkansas          6,919                                              41,268                          2,695                                      19

     Oregon          10,750                                             46,573                          3,473                                     15

                                                                                                                                              c
     Indiana             19,208                                                83,277                      6,127                          4

   Maryland              20,517                                               72,039                      5,386                                    26


   Missouri              20,656                                                  91,695                   5,637                                        29

                                                                                                                                           d
   Michigan                       37,840                                        86,739                          10,006                    0


        Ohio                      39,663                                                  154,100                 11,390                                    42

  California                                  95,368                                      220,506                           34,600                                 148

Sources: State insurance departments, NAIC, and the U.S. Census Bureau.

                                                                Note: Does not include follow-up exams or desk audits. NAIC information taken from 2001 Insurance
                                                                Department Resource Report.
                                                                a
                                                                    Total premium volume for life, health, and property/casualty insurance.
                                                                b
                                                                    Arkansas also examined 65 funeral homes that sold prepaid funeral insurance.
                                                                c
                                                                    Three of these were multistate examinations.
                                                                d
                                                                    Michigan did a limited review of market conduct issues as part of its 37 financial examinations.


                                                                The level of staff resources states dedicated to market analysis and market
                                                                conduct examinations also varied widely. In fact, NAIC’s 2001 Insurance
                                                                Department Resources Report does not even break out those insurance
                                                                department staff assigned to market analysis, although financial analysts
                                                                are separately identified.12 This report does give the number of market
                                                                conduct examiners reported by each state. Fourteen states, or 27 percent,
                                                                did not report having any market conduct examiners on staff, although 4
                                                                of the 14 did report using full-time contract examiners (see app. IV). Even
                                                                subtracting these 4, 10 states, or about 20 percent, reported having no
                                                                market conduct examiners at all. California had the most market conduct
                                                                examiners of the states we visited (44), while Michigan had none. The
                                                                number of licensed companies per examiner ranged from a low of 32 to a


                                                                12
                                                                 National Association of Insurance Commissioners, 2001 Insurance Department
                                                                Resources Report (Kansas City, Mo.: 2002).




                                                                Page 16                                                              GAO-03-433 Insurance Regulation
                            high of 430 (excluding Michigan and Indiana). Ordinarily a team of two or
                            more trained examiners would perform an examination.

                            Even though Michigan had no market conduct examiners, it did report
                            doing 37 combined financial and market conduct examinations. Michigan
                            regulators told us that in these examinations, examiners doing routine
                            financial examinations on Michigan domestic companies also looked at
                            market conduct issues. These financial examiners receive little if any
                            training in market conduct examinations and focus primarily on financial
                            solvency issues. One official in another state told us that he believed it was
                            difficult for a financial examiner to do a good job in a market conduct
                            examination because the focus of the two examination types is so
                            different. Financial examiners are trained to verify that income and capital
                            are at least high enough to ensure the company’s solvency—that is, that
                            expenses are relatively low and income and profits relatively high. Market
                            conduct examiners, however, attempt to ensure that the company is
                            treating its customers fairly. They may find that a company must pay more,
                            pay faster, or insure people that it might rather not insure—actions that
                            may increase costs and reduce profits. An examiner may have difficulty
                            focusing on such diametrically opposite objectives simultaneously.

                            Further, no generally accepted qualifications for market conduct
                            examiners exist. We found that states with market conduct examiners had
                            very different requirements for qualifications and training. Although
                            financial examiners in all states are required to have a recognized and
                            independently certified level of expertise, only two of the states we
                            visited—New Mexico and Oregon—required that their examiners become
                            certified through the Insurance Regulatory Examiners Society (IRES).
                            Despite the fact that the society offers several levels of certification for
                            market conduct examiners, these certifications are not prerequisites to
                            any examiner classification. In fact, NAIC’s market conduct examiners
                            handbook—which recommends the specific IRES designations examiners
                            should obtain before they have earned one of the five examiners
                            classifications—does not require specific training requirements or
                            certification for the respective examiner classification.


Lack of Coordinated         Many insurance companies, particularly the largest ones, have publicly
Oversight Burdened Some     stated that they were subject to frequent and sometimes simultaneous
Companies and Left Others   market conduct examinations. We asked 40 of the largest national
                            insurance companies—20 life insurers and 20 property-casualty insurers—
Unexamined                  to provide information about their on-site market conduct examination
                            experience for the years 1999–2001. (See app. I for detailed information on


                            Page 17                                        GAO-03-433 Insurance Regulation
our questionnaire.) Twenty-five companies responded. Of these, 19 had
been examined at their offices a total of 106 times during the 3-year period.
Six had been examined one or two times over the 3-year period, and 7
others had undergone 3 to 5 examinations. Thus, just over one-half of the
25 responding companies had been examined 1 to 5 times in 3 years.
However, 3 companies (2 property-casualty companies and 1 life
insurance company) each reported having had 15 examinations or more
during the 3 years, with 1 company receiving 19 examinations—an average
of over 6 a year.13

To some extent, these results appear to support companies’ concerns
about multiple, possibly duplicative, examinations. One of the most
common complaints received from the 25 insurers that responded to our
survey was that states did not coordinate their examinations with other
states. According to the responding companies, examinations can strain
company resources and result in considerable expense. 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).”

Other responses to the questionnaire, however, presented another side of
the picture. Six companies, or nearly one-quarter of those responding, had
not been examined by any state during the period. Of these six companies,
two were last examined in 1997, and the other four reported that they had
no record of market conduct examinations. These companies, like all
others that reported, are large, multistate insurance companies. Several of
the states we visited told us that company size, or market share, was an
important factor in determining which companies to examine for market
conduct. This information, taken together with the relatively low numbers
of market conduct examinations that states have done, suggests the
possibility that many small and medium-size companies may not have been
examined recently, if at all.




13
  We did not verify the companies’ responses with state regulators. Moreover, we could not
evaluate the basis on which the states selected specific companies to examine. That is,
multiple exams may or may not be duplicative. For example, several states may examine
the same company for different reasons. Alternatively, multiple state examinations of the
same company may be necessitated by an insurance company’s failure to take corrective
action in all jurisdictions that are affected by an inappropriate activity.




Page 18                                                GAO-03-433 Insurance Regulation
                      The insurers responding to our survey reported that they paid an average
                      of $115,000 for comprehensive exams and $94,000 for targeted exams.
                      According to survey responses, the average length of time the states took
                      to complete all on-site exams, from the date regulators first told the
                      company that it would be examined to issuance of the final report, was 3.9
                      years. That is, for the insurers responding to our questions, it took an
                      average of just over 2 years to do the fieldwork for a market conduct
                      examination and an additional 1.8 years to finalize the report.14 These
                      numbers are self-reported and may not be reflective of the industry as a
                      whole. Moreover, the time needed to complete an examination depends on
                      many factors, such as the complexity of the issues being examined, state
                      resources, the level of company cooperation, and the company’s right to a
                      formal administrative process. Nevertheless, some insurers responding to
                      our questionnaire suggested that with the high cost of the examinations,
                      the states should make greater efforts to reduce duplication.

                      NAIC identified the need for greater uniformity in market conduct
NAIC Has Identified   regulation as early as 1971, when it commissioned McKinsey & Company,
Market Analysis and   Inc. to review the financial and market conduct surveillance activities of
                      insurance companies. Since then, NAIC has launched a number of
Examinations as       initiatives intended to identify and address the issues and concerns caused
Areas Needing         by the lack of uniformity in states’ market conduct examinations and,
                      more recently, in their use of market analysis. For example, in March 2003
Significant           the NAIC president announced that improving market conduct
Improvement           examinations and market analysis would be one of the organization’s
                      major annual goals.15 However, despite NAIC’s long-standing efforts and
                      some successes, progress has been slow, and it remains unclear whether
                      the quality and consistency of market conduct regulation will improve
                      fundamentally, particularly in these two key areas. Until NAIC and the
                      states can identify and agree on what constitutes appropriate and




                      14
                        In congressional testimony, J. Robert Hunter, of the Consumer Federation of America,
                      presented data showing that, on average, it took 10 years for the average state to complete
                      any market conduct examination on a domestic insurer and longer for a nondomestic
                      insurer. Statement of J. Robert Hunter, “Increasing The Effectiveness of State Consumer
                      Protections,” before the Subcommittee on Oversight and Investigations, Committee on
                      Financial Services, House of Representatives, May 6, 2003.
                      15
                        NAIC’s current emphasis on issues related to market conduct are in large part a response
                      to provisions in the Gramm-Leach-Bliley Act, Pub. L. No. 06-102, November 12, 1999, which
                      addressed insurance regulation, and to competitive pressures within the insurance
                      industry.




                      Page 19                                                 GAO-03-433 Insurance Regulation
                          consistent market regulation, significant improvement will likely be slow
                          to arrive.


NAIC Has Long             Before the early 1970s, state insurance regulators emphasized financial
Recognized the Need to    solvency. However, the McKinsey study recommended establishing a
Improve Market            separate and distinct program of market conduct surveillance, including
                          market conduct examinations that would be separate from financial
Regulation but Has Made   examinations and administered by different examination personnel.16 The
Slow Progress with Its    study also concluded, among other things, that some states had been
Initiatives               dealing with market conduct regulatory problems for many years, but that
                          few states had developed comprehensive, organized oversight systems
                          that might respond to these issues. In 1974, NAIC’s Market Conduct
                          Surveillance Handbook Task Force issued a report, which recognized not
                          only that market regulation included issues distinct from those related to
                          financial solvency but also that market conduct examinations should be
                          based on uniform policies and procedures. In the years since, effective
                          progress toward this goal has been slow.

                          Pursuit of this goal has been primarily focused on the development of the
                          NAIC handbook for market conduct examiners, originally adopted in 1975.
                          As we have noted, in general, most states use the handbook as an
                          examination guide, although they have the option of following or
                          modifying the guidance for specific examinations. According to NAIC, the
                          policy reason behind this voluntary use is best summarized in the
                          following statement from the introduction to the handbook.

                          The Handbook was designed as a model reflecting established practices and to assist each
                          jurisdiction in developing its own market conduct examination procedures. The NAIC
                          model statutes and regulations were selected as the basis for the handbook because
                          insurance statutes in many jurisdictions have evolved from NAIC model laws. For this
                          reason, this handbook is only a guide and should be used by each jurisdiction as a tool for
                          developing jurisdiction specific procedures and guidelines. To effectively use this
                          handbook, it is recommended that each jurisdiction closely review the handbook to
                          determine those standards that reflect the statutes and regulations of the given jurisdiction
                          and those that do not. It is recommended that each jurisdiction develop its own manual of
                          procedures reflecting audit procedures based on the standards and methodology set forth
                          herein and modified to meet the specific requirements of the laws of that jurisdiction.



                          16
                           McKinsey & Company, Inc., Strengthening the Surveillance System, Final Report, a
                          report commissioned by the National Association of Insurance Commissioners, April 1974.




                          Page 20                                                  GAO-03-433 Insurance Regulation
For example, although the handbook lays out the steps for conducting an
exam, such as notifying the company, using sampling techniques, and
preparing an examination report, each state can go about those steps
differently. Moreover, the handbook does not cover some aspects of
examinations, including how often examinations should be done.

NAIC has also encouraged every state to set up a market regulation
program with established minimum standards in place for necessary
resources, staff, and statutes. In 1995, as part of this initiative, NAIC
adopted the Market Conduct Regulatory Guidelines, which suggested
procedures and services for state insurance departments to provide as part
of their market regulation programs. NAIC noted that model laws and
regulations, such as the Unfair Trade Practices Act and the Unfair Claims
Settlement Practices Act, constitute “essential elements” of these
programs, as they provide the necessary authorities for market conduct
examinations. NAIC also sees adoption of these models in all states as a
vital step in achieving uniform market regulation. Nearly 8 years have
passed since NAIC adopted the guidelines, yet the states have been unable
to reach agreement on the minimum resources and national regulatory
standards necessary to achieve effective market conduct examination
programs and have made even less progress in establishing those
necessary for effective market analysis. However, NAIC has recently
established market analysis and the creation of a market analysis
handbook as a main priority.

NAIC has also created the ETS to assist in scheduling both financial and
market conduct examinations. NAIC designed the system to allow
examiners to communicate examination schedules and results among
themselves. ETS enables states to voluntarily report all upcoming
examinations so that other states can see them. Then, if another insurance
department intends to examine a company that is listed on ETS, it can
either wait and use the first state’s results, ask to participate in the
scheduled examination, or at least schedule around the first state to avoid
holding a simultaneous examination at a listed company. Similarly, ETS
allows regulators to post examination results so that states can use other
states’ results to plan their own examinations or to avoid having to do
another examination at all.

While the system has been successful for financial examinations, it has not
worked as well for market conduct examinations. We were told that ETS,
which was originally tailored to financial examinations, was inconvenient
and difficult to use for market conduct examinations. As a result, not all
states have used the system, rendering it inaccurate and incomplete. NAIC


Page 21                                       GAO-03-433 Insurance Regulation
surveyed states to find out how many used the ETS and concluded that
about two-thirds of the states consistently reported to NAIC on their
market conduct or combined market conduct/financial examination
schedules. However, we were told that few states reviewed others’
planned schedules or used the information in their own planning.
Moreover, only 31 percent of the states reported back to the ETS when
they completed the examination process.

NAIC is currently modifying ETS to make it more user-friendly and
increase the value it adds to the examination process in order to
encourage more states to use it. In December 2002, the system was divided
into two separate programs—financial and market conduct—to account
for the differences in the examination requirements in the two areas. It is
too early to determine whether these changes and others that have been
proposed to make the system easier to use will increase the number of
states using the ETS. According to NAIC officials, if states used the
tracking system, it could help reduce duplicative exams and potentially
reduce the number of unexamined companies.

In the spring of 2000, NAIC published a statement of intent that included a
directive to review the current focus, structure, and implementation of
market regulation programs across states and identify issues and concerns
in this area. One purpose of this review was to determine the merits of
voluntary uniform national standards as a basis for market conduct
examinations and enforcement actions. However, NAIC officials told us
that other issues in the statement of intent took priority over market
conduct. As a result, from 2000 through 2002 NAIC did not focus a great
deal of its attention on market regulatory reforms. Since 2002, NAIC’s
Market Analysis Working Group (MAWG) has been developing a draft of
the Market Analysis Handbook. The guide is intended to provide
regulators with information on how to obtain and use up-to-date data and
may include a “market conduct annual statement” to help regulators
identify priority issues and collect data. This market conduct annual
statement could be used to provide regulators with market information
analogous to the annual financial statement. NAIC believes that MAWG
can become a national forum for states using the guide to share and
coordinate their results. NAIC also believes that as states begin to use the
annual statement, market analysis will become a more useful tool, leading
to more effective market regulation. At the time of our review,
development continued on the Market Analysis Handbook and the market
conduct annual statement was being evaluated in a pilot program in nine
states.



Page 22                                       GAO-03-433 Insurance Regulation
                                In March 2003, NAIC announced that one of its major objectives for the
                                year was to improve market analysis and market conduct examinations.
                                NAIC’s president stated that one of the organization’s primary goals was to
                                improve the efficiency and effectiveness of market conduct efforts by
                                making market analysis more consistent across states and expanding the
                                number of joint examinations. Since this announcement, the attention and
                                resources devoted to market regulation by NAIC committees and work
                                groups have increased significantly. In testimony earlier this year, NAIC
                                also noted that it was pursuing what it called a “central reform” that would
                                increase awareness of the importance of market analysis as the most
                                effective regulatory tool for targeting the most serious consumer
                                problems.17 NAIC stated that in spite of industry criticism that focuses on
                                market conduct examinations, the complete package of state oversight
                                activities must include ongoing information gathering and analysis to spot
                                problems as early as possible and correct them:

                                Market conduct exams are a useful tool, but even if sufficient resources were available to
                                conduct more of them, such exams must be complemented by other regulatory strategies
                                for addressing problems before they become the kind of business practice that exams
                                typically seek to uncover.

                                Clearly NAIC recognizes that a combined system of market analysis and
                                market conduct examinations is the best way to oversee the behavior of
                                insurance companies in the marketplace. However, the development and
                                implementation of such a combined system by NAIC and the states is still
                                in its infancy.

Financial Regulation May Be a   For more than 12 years NAIC has had a program that successfully
Model for Regulating Market     demonstrates how to encourage states to adopt voluntarily standards that
Behavior                        are consistent and binding across the states. The financial accreditation
                                program has existed since the early 1990s, and nearly all the states now
                                participate. During this time, the program has demonstrated its value by
                                defining a common set of basic regulatory requirements for solvency
                                regulation and successfully engineering their adoption by nearly all the
                                states. Because of this program, nearly every state has increased the
                                quantity and quality of the resources it has available for financial
                                regulation; improved its regulatory processes; and adopted, where


                                17
                                 Statement given by Joel Ario, Insurance Administrator for the State of Oregon and
                                Chairman of NAIC Market Regulation and Consumer Affairs Committee, before the
                                Subcommittee on Oversight and Investigations, Committee on Financial Services, House of
                                Representatives, May 6, 2003.




                                Page 23                                                 GAO-03-433 Insurance Regulation
necessary, a consistent set of laws and regulations that are widely agreed
to be necessary for effective financial regulation. Because of these
improvements, most states are able to use their resources primarily for
overseeing the solvency of their domiciled companies while depending on
the regulation of other states for all other companies selling insurance in
their states. While the quality of regulation is still not entirely consistent,
the program has improved financial regulation across the states. State
insurance commissioners have discussed a similar solution for problems
of market regulation, perhaps adding market conduct accreditation
standards to the financial accreditation program or creating a parallel
program. However, to date the commissioners have not decided to pursue
the issue.

While the process state insurance regulators use to oversee solvency could
provide a model for overseeing market conduct as well, structural
differences between financial and market regulation would undoubtedly
affect the ultimate design of an improved market conduct oversight
system. First, market conduct oversight involves many more and different
activities and operations than financial regulation, a fact that has broad
implications for regulatory consistency and mutual dependence, including
requirements for training examiners and analysts. Second, regulators told
us that life insurers tend to use companywide business plans and
organizational structures, so that company operations tend to be relatively
consistent across an entire firm. Property-casualty insurers, however, tend
to use a regional business model and organizational structure, so their
operations could differ across geographic areas. Clearly the life insurer
model would be more directly amenable to oversight by the state in which
a company is chartered than the property-casualty model, as any regional
or state-by-state variances in a company’s operations would reduce the
effectiveness of oversight by the domiciliary state.

Third, some aspects of market conduct oversight are likely to remain state
specific because of the differences among the laws and requirements of
individual states. As a result, even when regulatory oversight becomes
more uniform, states will probably need to continue devoting some
attention to the activities of nondomestic insurers. However, knowing that
other states were doing consistent market oversight on domestic
companies could substantially reduce the level of attention states need to
give these companies. Finally, even to the extent that properly designed
and competently performed market analysis and examinations can
effectively monitor and regulate insurance company practices, these tools
may not be effective in identifying sales practice abuses by agents.



Page 24                                          GAO-03-433 Insurance Regulation
              The Congress has been concerned that the current system of insurance
Conclusions   regulation does not provide consistent consumer protection across all
              states and may be imposing an excessive regulatory burden on some
              insurers. In the absence of uniform national standards for market analysis
              and market conduct examinations, a patchwork of practices exists across
              the states. The resulting inability of state insurance regulators to depend
              on the oversight of other states has prevented regulatory cooperation in
              overseeing the market behavior of multistate insurance companies. Faced
              with the necessity of overseeing the market behavior of all companies
              selling insurance in its state, whether domiciled there or not, each
              insurance department has focused its scarce regulatory resources in the
              way that seemed most appropriate to it. As a result, regulators may
              examine some insurers too frequently and others infrequently or not at
              all.18

              We believe that a formal market analysis program in each state and
              effective coordination of market conduct examinations would provide the
              needed basis for truly effective market regulation nationwide. Careful,
              thorough market analysis would provide the information needed to
              understand the market, monitor company behavior, and identify those
              companies that most need regulatory attention. Examinations coordinated
              among states would allow regulators to follow up on problems and issues
              identified through market analysis and ensure better regulatory coverage
              of insurance companies.19 In addition, existing computerized audit tools
              could allow regulators to substantially change the way examinations are
              done by shifting the focus from a file review to a review of controls,
              systems, and processes and possibly by shortening the time needed for the
              examination.

              But states will not have the resources to make these changes unless they
              are able to accept the results of regulatory actions in other states and to
              coordinate some activities. NAIC has been working since the 1970s to
              improve and increase uniformity in market regulation, but progress has
              been slow. We support NAIC’s current goal of increasing the effectiveness
              of market regulation through a nationwide market analysis program. But



              18
                The scope of our work did not include an analysis of whether the “right” companies were
              being examined or not, but no one else, including insurance regulators, knows this for sure.
              19
                Officials in Missouri, which has an active formal market analysis program, emphasized
              this point, telling us that market analysis was not a substitute for market conduct
              examinations but should interact with and be integrated into the examination process.




              Page 25                                                 GAO-03-433 Insurance Regulation
                     we feel that NAIC, although recognizing market analysis as an important
                     component of market oversight, has taken only the first tentative steps
                     toward establishing such a program. Much work remains to be done, both
                     on market analysis and market conduct examinations, including
                     establishing appropriate laws, regulations, best practices, and resource
                     requirements to support the goal of creating an effective nationwide
                     program of market conduct regulation. However, at present it remains
                     uncertain when—and even whether—NAIC and the states can agree on
                     and implement a program that will accomplish this goal.


                     We recommend that NAIC, working with the states, give increased priority
Recommendation for   to identifying a common set of standards for a uniform market oversight
Executive Action     program that will include all states. These standards should include
                     procedures for conducting market analysis and coordinating market
                     conduct examinations. Further, we recommend that a mechanism be
                     established to encourage state legislatures and insurance departments to
                     adopt and implement the identified minimum standards.


                     We provided a draft of this report to NAIC and the state insurance
Agency Comments      departments that we visited— Arkansas, California, Indiana, Maryland,
and Our Evaluation   Michigan, Missouri, New Mexico, Ohio, and Oregon. NAIC and six of the
                     states provided us with technical corrections to the report, which have
                     been included as appropriate. We asked the states to forward any
                     comments they had regarding the report message or policy issues to NAIC
                     for inclusion in NAIC’s response. NAIC’s comment letter is reproduced in
                     appendix V.

                     NAIC told us that, overall, the report confirmed several concerns that state
                     regulators and the insurance industry share about market regulation and,
                     particularly, about market analysis and market conduct examinations.
                     While NAIC recognized that our report focused on market analysis and
                     market conduct examinations, it reiterated that market regulation extends
                     beyond these two functions and is different than financial solvency
                     regulation. Moreover, it is more difficult to harmonize than financial
                     regulation. For example, the market behaviors of insurers can be quite
                     different from one state to another, both because the laws may be
                     different and because insurer compliance with the laws may vary by state.
                     NAIC’s detailed comments on our report primarily focus on the following
                     three areas and its efforts to address these areas: (1) market analysis,
                     (2) uniform examination procedures, and (3) collaborative regulatory
                     efforts.


                     Page 26                                       GAO-03-433 Insurance Regulation
NAIC stated that it is aware of the varying approaches to market analysis
across the states and that it has made the creation of a more systematic
and structured market analysis system among the states a top priority.
NAIC identified two avenues through which it is pursuing improved and
more consistent market analysis—the development of a market analysis
handbook and the implementation of a market conduct annual statement
pilot program. We support NAIC’s current goal of increasing the
effectiveness of market regulation through a nationwide market analysis
program. However, we feel that NAIC, although it recognizes market
analysis as an important component of market oversight, has taken only
the first tentative steps toward establishing such a program. Much work
remains to be done, both on market analysis and market conduct
examinations, including establishing appropriate laws, regulations, best
practices, and resource requirements to support the goal of creating an
effective nationwide program of market conduct regulation.

NAIC noted that in 2002 it adopted the Market Conduct Uniform
Examination Outline to help minimize variations in market conduct
examinations so that states can rely more on each other’s examination
findings. This outline focuses on four areas of the examination process—
(1) exam scheduling, (2) pre-exam planning, (3) core examination
procedures, and (4) examination reports. NAIC’s goal is to have at least 40
states certify compliance with all four areas of examination uniformity and
to develop a process for resolving complaints about certifications. We
support NAIC’s efforts to increase uniformity in the examination process.
However, while useful, the elements of the Market Conduct Uniform
Examination Outline address only some of the issues keeping states from
relying on other states’ examinations. For example, as we discuss in the
report, states that do market conduct examinations tend to severely limit
the scope of their examinations. Moreover, one state may not have known
whether another state would commit sufficient resources to a market
conduct examination or require appropriate examiner expertise since
there are no generally accepted standards. The lack of common standards
for market analysis and for some areas of examinations and inconsistency
in applying the guidelines that do exist for examinations make reciprocity
among states difficult and reduce willingness to accept other states’
examination results.

NAIC agreed with our report that more collaborative efforts should be
initiated to eliminate the potential duplication of regulatory efforts. At the
same time, NAIC pointed out that not every case of multiple examinations
is duplicative. NAIC noted that multiple examinations would not be
duplicative if the states were examining the same company for different


Page 27                                         GAO-03-433 Insurance Regulation
reasons. Moreover, the states’ ability to eliminate duplicative efforts is
sometimes hindered by the insurance companies’ failure to take corrective
action in all jurisdictions that are affected by an inappropriate activity. We
recognize in the report that all cases of multiple examinations reported in
response to our questionnaire may not have been duplicative because we
could not evaluate the basis on which the states selected specific
companies to examine. Among other efforts to reduce inappropriate
duplication of examinations, NAIC specifically mentions the
enhancements to the ETS that we discuss in the report and stated that as
of March 2003, 26 states had entered information on examination
schedules for 400 companies. As our report indicates, however, to be truly
useful, all states need to be using the ETS for entering information on their
scheduled and completed examinations and for checking other states’
entered information.

NAIC also reports on other efforts it is pursuing to increase the number of
collaborative examinations being held. Finally, NAIC suggests that in a
state-based system, in which different laws exist in each state to protect
consumers, the extent to which a state can rely on another state’s market
conduct examinations is inherently limited. It points out that, as
government officials, state regulators cannot delegate to someone else,
even another state, the responsibility of enforcing their states’ laws. This
statement is, true, however, we were told both by state regulators and
industry representatives that there are significant areas of market
regulation that are similar across the states. Moreover, state regulators and
state legislators should be working together to increase the consistency of
state consumer protections and other laws and regulations related to
market conduct of insurance companies. Thus duplication of effort can be
avoided if market analysis and examination standards and processes are
improved, adopted, and implemented across the states. We also note that
in addition to apparent duplication of market conduct examinations for
some companies, other responses to our questionnaire indicated that
other companies had infrequent market conduct examinations or none at
all. Improved consistency of laws, regulations, analysis, and examination
processes accompanied by better coordination among the states could
also allow those companies to receive better oversight.

Finally, as shown both in NAIC’s comments and in our report, NAIC is
undertaking a number of initiatives intended to improve both market
analysis and market conduct examinations. The goal is worthwhile.
However, it should be noted that NAIC’s activity is only the first of the
steps needed to make real improvements in market analysis and market
conduct examinations. The models developed by NAIC must then be


Page 28                                         GAO-03-433 Insurance Regulation
adopted and implemented by the states, either by regulation or by
legislation when needed.


We will send copies of this report to the Ranking Minority Member of the
House Committee on Financial Services and other interested
congressional committees. We will also send copies of this report to the
Executive Vice President of NAIC and to the 55 state and other
governmental entities that are members of NAIC and will also make copies
available to other interested parties upon request. This report will also be
available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions on this report, please contact me on
(202) 512-8678. An additional contact and other contributors are listed in
appendix VI.

Sincerely yours,




Richard J. Hillman
Director, Financial Markets and
 Community Investment




Page 29                                       GAO-03-433 Insurance Regulation
Appendix I: Objectives, Scope, and
Methodology

              Our objectives were to (1) evaluate the use of market analysis and on-site
              examinations in market regulation and (2) discuss the progress of the
              National Association of Insurance Commissioners (NAIC) to improve and
              coordinate market regulation at the state level.

              To address our first objective, we visited and interviewed officials from
              nine states’ insurance departments—Arkansas, California, Indiana,
              Maryland, Michigan, Ohio, Oregon, Missouri, and New Mexico—and from
              NAIC’s Kansas City headquarters. We also reviewed these states’ operating
              procedures for market regulation and interviewed staff from each of the
              states’ units responsible for the types of market regulation conducted by
              the state.

              To determine the use of market analysis and on-site examinations in
              market regulation, we interviewed state officials responsible for these
              activities. We also collected and analyzed data relating to the number of
              licensed companies in each state, the number and types of examinations
              conducted, and the resources allocated to these activities.

              We designed and administered a questionnaire to obtain the perspectives
              of life and property/casualty insurance companies on the extent and cost
              of market conduct examinations. The questionnaire sought information
              about the frequency and type of market conduct examinations that were
              completed from January 1, 1999, through December 31, 2001. For each
              exam reported, companies were asked to provide specific information
              about the exam, including the state that performed the exam; exam costs
              and location; and notification, fieldwork, and final report dates. The
              questionnaires administered to the life and property/casualty companies
              were identical with the exception of a set of items related to securities
              industry examinations of life insurance companies.

              We obtained the 2002 lists of the top 200 life and property/casualty
              insurers from NAIC. For the purpose of this work, NAIC was deemed the
              most accurate data source since insurers are required to regularly report
              to it updated financial and other company-related information. Using the
              NAIC rankings, a judgmental sample of 40 companies was selected. We
              selected a random group of life and property/casualty companies that are
              licensed and do business in all 50 states within several groups defined by
              size and region. Size was measured according to total assets for life
              companies and total premiums for property/casualty firms. Ten of the
              larger and 10 of the smaller companies from our list of the 200 largest
              companies were selected. To determine region, the companies were



              Page 30                                       GAO-03-433 Insurance Regulation
Appendix I: Objectives, Scope, and
Methodology




allocated across four geographical categories defined by the U.S. Census
Bureau.

The small, nonprobability sample prevents inferences to the population of
life and property/casualty insurers but still allows some documentation of
the extent of duplication among the selected firms. Because this
judgmental sample was not intended to be statistically representative of
the population of insurers, our results were not weighted to adjust for the
different probabilities of selection of each insurer we selected.

The selected insurers submitted their completed surveys through
electronic mail or facsimile. Responses were received from 25 (62 percent)
of the companies. The collection of insurer survey data began in October
2002 and was completed in January 2003.

As a part of the survey design process, we also conducted survey pretests.
The companies selected to participate reflected the kinds of companies we
were interested in surveying, specifically in terms of company size and the
number of states in which a firm were licensed and did business. Each
pretest participant was sent a copy of the instrument and given several
days to return its completed survey to us. We instructed each participant
to route the survey to the best contact—the person most knowledgeable
about market conduct exams at the company. We also scheduled time to
discuss with each company contact the basis of the company’s response to
each survey item.

To determine the effectiveness of NAIC’s efforts to improve the market
regulation program, we interviewed officials from NAIC, attended its
national meetings to identify current market regulation issues, reviewed its
past market regulation issues, and reviewed its past and current initiatives
to improve the market regulation program.




Page 31                                       GAO-03-433 Insurance Regulation
Appendix II: Market Conduct Exams
Completed in 2001


                       Combined financial and market
                             conduct exams                 Market conduct exams only
State/territory                Routine        Targeted         Routine        Targeted        Total exams
Alabama                              10                5             0                  2               17
Alaska                                   0             0             0                  0                0
American Samoa                      N/A            N/A             N/A             N/A                N/A
Arizona                                  0             0             0             131                131
Arkansas                             16                2             0                  0               18
California                               0             0           N/A             N/A                148a
Colorado                                 0             0             0                 24               24
Connecticut                              0             0            39                  2               41
Delaware                             27                0             0                  3               30
District of Columbia                     0             0             0                  0                0
Florida                                  0             0            10                 86               96
Georgia                                  0             0            17                  8               25
Guam                                N/A            N/A             N/A             N/A                N/A
Hawaii                                   0             0             3                  0                3
Idaho                                    6             0             0                  1                7
Illinois                                 0             0             8                 19               27
Indiana                                  0             0             0                  3                3
Iowa                                     9             0            24                  0               33
Kansas                                   0             0             1                  0                1
Kentucky                                 0             0             8                  2               10
Louisiana                            30                1             2                 30               63
Maine                                    0             0             0                  2                2
Maryland                                 0             0            10                 42               52
Massachusetts                            0             0             0                 61               61
Michigan                             34                2             0                 0                36
Minnesota                                4             0             0                 0                 4
Mississippi                          13                1             0                  4               18
Missouri                                 0             0            41                  7               48
Montana                                  0             0             0                 0                 0
Nebraska                                 0             0            10                 23               33
Nevada                                   2             0             9                  8               19
New Hampshire                            0             0             0                 12               12
New Jersey                               0             0            10                  1               11
New Mexico                               6             0             0                  2                8




                               Page 32                                     GAO-03-433 Insurance Regulation
                                                              Appendix II: Market Conduct Exams
                                                              Completed in 2001




                                                 Combined financial and market
                                                       conduct exams                                 Market conduct exams only
 State/territory                                                  Routine        Targeted                  Routine             Targeted            Total exams
 New York                                                               62                  1                      4                   92                    159
 North Carolina                                                              0              0                    22                    17                        39
 North Dakota                                                                0              0                      1                    1                        2
 Ohio                                                                        0              0                      0                   38                        38
 Oklahoma                                                               17                  2                      9                    9                        37
 Oregon                                                                      0              0                    11                     4                        15
 Pennsylvania                                                                0              0                    21                     1                        22
 Puerto Rico                                                          N/A               N/A                     N/A                  N/A                     N/A
 Rhode Island                                                                0              0                      6                    0                        6
 South Carolina                                                              7              1                      1                    8                        17
 South Dakota                                                                0              0                      0                    3                        3
 Tennessee                                                              26                  0                      0                    0                        26
 Texas                                                                142                   2                      0                    5                    149
 U.S. Virgin Islands                                                  N/A               N/A                     N/A                  N/A                     N/A
 Utah                                                                        5              0                      2                    5                        12
 Vermont                                                                     0              0                      3                    1                        4
 Virginia                                                                    0              0                    19                    39                        58
 Washington                                                                  0              0                      5                    9                        14
 West Virginia                                                               3              0                      0                    0                        3
 Wisconsin                                                                   0              2                      0                   14                        16
 Wyoming                                                                     1              0                      0                    0                        1
 Total                                                                420                19                     296                  719                   1,454
Source: NAIC 2001 Insurance Department Resources Report, tables 22 and 23.

                                                              Legend: N/A – Not available

                                                              Note: The number of exams may not equal the totals in table 1. The data in table 1 were obtained
                                                              directly from the states and have not been reconciled with data reported by the states to NAIC.
                                                              a
                                                              NAIC reported that the breakout of the 148 market conduct exams completed in California in 2001
                                                              was not available.




                                                              Page 33                                                      GAO-03-433 Insurance Regulation
Appendix III: Number of Licensed Insurers
and Total Market Conduct Examinations in
2001

                       Licensed domestic    Licensed foreign   Total licensed     Total market conduct
State/territory                  insurers           insurers         insurers            examinations
Alabama                               53               1,277           1,330                         17
Alaska                                 8               1,063           1,071                          0
American Samoa                         0                 22               22                       N/A
Arizona                              398               1,525           1,923                       131
Arkansas                              74               1,464           1,538                         18
California                           219               1,210           1,429                       148
Colorado                              74               1,410           1,484                         24
Connecticut                          132               1,055           1,187                         41
Delaware                             144               1,426           1,570                         30
District of Columbia                  23               1,347           1,370                          0
Florida                              201               1,612           1,813                         96
Georgia                              106               1,473           1,579                         25
Guam                                   5                151              156                       N/A
Hawaii                               117                926            1,043                          3
Idaho                                 23               1,426           1,449                          1
Illinois                             446               1,469           1,915                         27
Indiana                              183               1,598           1,781                          3
Iowa                                 220               1,403           1,623                         33
Kansas                                57               1,642           1,699                          1
Kentucky                              52               1,504           1,556                         10
Louisiana                            147               1,485           1,632                         64
Maine                                 33                925              958                          2
Maryland                              96               1,392           1,488                         52
Massachusetts                         94               1,273           1,367                         61
Michigan                             142               1,383           1,525                         36
Minnesota                             94               1,438           1,532                          4
Mississippi                           70               1,428           1,498                         18
Missouri                             247               1,411           1,658                         48
Montana                               28               1,407           1,435                          0
Nebraska                             113               1,440           1,553                         33
Nevada                                39               1,704           1,743                         19
New Hampshire                         49                859              908                         12
New Jersey                           101               1,165           1,266                         11
New Mexico                            19               1,476           1,495                          8
New York                             505                927            1,432                       159




                                  Page 34                               GAO-03-433 Insurance Regulation
                                                               Appendix III: Number of Licensed Insurers
                                                               and Total Market Conduct Examinations in
                                                               2001




                                             Licensed domestic                    Licensed foreign                Total licensed          Total market conduct
 State/territory                                       insurers                           insurers                      insurers                 examinations
 North Carolina                                                       97                        1,243                       1,340                                39
 North Dakota                                                         42                        1,378                       1,420                                 2
 Ohio                                                               275                         1,505                       1,780                                38
 Oklahoma                                                           104                         1,480                       1,584                                37
 Oregon                                                             139                         1,486                       1,625                                15
 Pennsylvania                                                       313                         1,404                       1,717                                22
 Puerto Rico                                                          38                          275                         313                              N/A
 Rhode Island                                                         33                        1,210                       1,243                                 6
 South Carolina                                                       50                        1,424                       1,474                                17
 South Dakota                                                         52                        1,403                       1,455                                 3
 Tennessee                                                          111                         1,559                       1,670                                26
 Texas                                                              512                         1,529                       2,041                              149
 U.S. Virgin Islands                                                    2                         195                         197                              N/A
 Utah                                                                 45                        1,423                       1,468                                12
 Vermont                                                            410                           937                       1,345                                 4
 Virginia                                                             82                        1,407                       1,489                                58
 Washington                                                           69                        1,336                       1,405                                14
 West Virginia                                                        20                        1,304                       1,324                                 3
 Wisconsin                                                          355                         1,536                       1,891                                16
 Wyoming                                                                4                       1,304                       1,308                                 1
 Total                                                           7,065                               -                            -                          1,454
Source: NAIC 2001 Insurance Department Resources Report, tables 17, 22, and 23.

                                                               Legend: N/A – Not available

                                                               Notes: Includes combination financial/market conduct exams and market conduct exams only (see
                                                               app. II). The number of exams and insurers may not equal the totals in table 1. The data in table 1
                                                               were obtained directly from the states and have not been reconciled with data reported by the states
                                                               to NAIC.




                                                               Page 35                                                       GAO-03-433 Insurance Regulation
Appendix IV: Number of Market Conduct
Examiners and Total Licensed Insurers in
2001

                                      Total number of market    Total number of licensed
               State/territory            conduct examiners                     insurers
               Alabama                                    2                         1,330
               Alaska                                     3                         1,071
               American Samoa                           N/A                            22
               Arizona                                    0                         1,923
               Arkansas                                   2                         1,538
               California                                29                         1,429
               Colorado                                   8                         1,484
               Connecticut                                7                         1,187
               Delaware                                   0                         1,570
               District of Columbia                       3                         1,370
               Florida                                   14                         1,813
               Georgia                                    1                         1,579
               Guam                                     N/A                          156
               Hawaii                                     0                         1,043
               Idaho                                      0                         1,449
               Illinois                                  19                         1,915
               Indiana                                    1                         1,781
               Iowa                                       4                         1,623
               Kansas                                     2                         1,699
               Kentucky                                   0                         1,556
               Louisiana                                  3                         1,632
               Maine                                      2                          958
               Maryland                                  10                         1,488
               Massachusetts                              4                         1,367
               Michigan                                   0                         1,525
               Minnesota                                  0                         1,532
               Mississippi                                0                         1,498
               Missouri                                  33                         1,658
               Montana                                    0                         1,435
               Nebraska                                   5                         1,553
               Nevada                                     1                         1,743
               New Hampshire                              3                          908
               New Jersey                                15                         1,266
               New Mexico                                 0                         1,495
               New York                                  92                         1,432




              Page 36                                     GAO-03-433 Insurance Regulation
Appendix IV: Number of Market Conduct
Examiners and Total Licensed Insurers in
2001




                                            Total number of market                 Total number of licensed
 State/territory                                conduct examiners                                  insurers
 North Carolina                                                              11                        1,340
 North Dakota                                                                 1                        1,420
 Ohio                                                                        12                        1,780
 Oklahoma                                                                     0                        1,584
 Oregon                                                                       3                        1,625
 Pennsylvania                                                                11                        1,717
 Puerto Rico                                                                N/A                         313
 Rhode Island                                                                 4                        1,243
 South Carolina                                                               3                        1,474
 South Dakota                                                                0                         1,455
 Tennessee                                                                    0                        1,670
 Texas                                                                       5                         2,041
 U.S. Virgin Islands                                                        N/A                         197
 Utah                                                                         7                        1,468
 Vermont                                                                     1                         1,347
 Virginia                                                                    18                        1,489
 Washington                                                                   5                        1,405
 West Virginia                                                                2                        1,324
 Wisconsin                                                                    7                        1,891
 Wyoming                                                                      0                        1,308
 Total                                                                      353                            -
Source: NAIC 2001 Insurance Department Resources Report, tables 3 and 17.

Legend: N/A – Not available

Notes: Full-time equivalent staffing. Includes domestic and foreign insurers. The number of market
conduct examiners and insurers may not equal the totals in table 1. The data in table 1 were obtained
from the states and have not been reconciled with data reported by the states to NAIC.




Page 37                                                                      GAO-03-433 Insurance Regulation
Appendix V: Comments from the National 

Association of Insurance Commissioners 


Note: GAO comments
supplementing those in
the report text appear at
the end of this appendix.




                            Page 38   GAO-03-433 Insurance Regulation
Appendix V: Comments from the National
Association of Insurance Commissioners




Page 39                                  GAO-03-433 Insurance Regulation
Appendix V: Comments from the National
Association of Insurance Commissioners




Page 40                                  GAO-03-433 Insurance Regulation
Appendix V: Comments from the National
Association of Insurance Commissioners




Page 41                                  GAO-03-433 Insurance Regulation
Appendix V: Comments from the National
Association of Insurance Commissioners




Page 42                                  GAO-03-433 Insurance Regulation
                 Appendix V: Comments from the National
                 Association of Insurance Commissioners




See comment 1.




                 Page 43                                  GAO-03-433 Insurance Regulation
                 Appendix V: Comments from the National
                 Association of Insurance Commissioners




See comment 2.




See comment 3.




                 Page 44                                  GAO-03-433 Insurance Regulation
                 Appendix V: Comments from the National
                 Association of Insurance Commissioners




See comment 4.




See comment 5.




See comment 6.




                 Page 45                                  GAO-03-433 Insurance Regulation
               Appendix V: Comments from the National
               Association of Insurance Commissioners




               The following are GAO’s comments on NAIC’s letter dated September 9,
               2003.


               1. 	 We recognize NAIC’s role in providing data services to the states and
GAO Comments        we have acknowledged and discussed the databases mentioned by
                                             1
                    NAIC in previous reports. However, a discussion of all the databases
                    mentioned by NAIC would have been outside the scope of this report,
                    which was directly concerned with the existing market conduct
                    analysis and examination practices of the states.

               2. 	 The report states, “there are no generally accepted criteria for
                    determining which companies to examine”(page 3). We believe this to
                    be a true statement. Each of the state insurance departments that we
                    visited had its own criteria for determining when to do an examination
                    and they often varied substantially from state to state. While NAIC
                    provided a list of 14 factors from the Market Conduct Examiners
                    Handbook that states may consider when prioritizing companies for
                    examinations, these factors do not, in our opinion, constitute
                    “generally accepted criteria.” A criterion that was generally accepted
                    would be always or usually applied consistently and predictably. We
                    did not find this to be true in our review of states’ practices.

               3. 	 We modified the report to more clearly state PricewaterhouseCoopers’
                    finding that “market conduct examiners sometimes tend to look for
                    isolated mistakes and errors…” (Emphasis added) (page 13). We also
                    added a footnote noting the guidance provided in the Market Conduct
                    Examiners Handbook on looking for general business practices when
                    conducting an examination.

               4. 	 A note was added to table 1 which more clearly explaining that we
                    have classified desk audits and other off-site reviews of company files
                    as part of market analysis rather than as market conduct examinations,
                    even though we recognize their importance to many states, including
                    Ohio.

               5. On page 18 we added to the report the language suggested by NAIC.



               1
                U.S. General Accounting Office, Insurance Regulation: Scandal Highlights Need for
               Strengthened Regulatory Oversight, GAO/GGD-00-198 (Washington D.C.: Sept 19, 2000),
               Financial Services Regulators: Better Information Sharing Could Reduce Fraud,
               GAO-01-478T (Washington D.C.: Mar. 6, 2001), and Regulatory Initiatives of the National
               Association of Insurance Commissioners, GAO-01-885R (Washington D.C.: July 6, 2001).




               Page 46                                                GAO-03-433 Insurance Regulation
Appendix V: Comments from the National
Association of Insurance Commissioners




6. 	 We added NAIC’s reference from the introduction of the Market
     Conduct Examiners Handbook to the report in its entirety (see page
     20).




Page 47                                       GAO-03-433 Insurance Regulation
Appendix VI: GAO Contacts and Staff
Acknowledgments

                  Richard J. Hillman, (202) 512-8678
GAO Contacts      Lawrence D. Cluff, (202) 512-8678

                  In addition to the persons named above, contributors to this report were
Acknowledgments   Monty Kincaid, Thomas H. Givens, Carl Ramirez, Kevin Jackson, Bonita
                  Vines, and Emily R. Chalmers.




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                  Page 48                                       GAO-03-433 Insurance Regulation
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