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

United States General Accounting Office:

GAO:

September 2003:

Insurance Regulation:

Common Standards and Improved Coordination Needed to Strengthen Market 
Regulation:

Insurance Regulation:

GAO-03-433:

GAO Highlights:

Highlights of GAO-03-433, a report to the Chairman, Committee on 
Financial Services, House of Representatives

Why GAO Did This Study:

Consumers of insurance depend on state regulators to ensure that 
insurance companies are behaving fairly and in accordance with the 
law. This report evaluates the states’ use of market analysis 
(information gathering to determine issues and identify companies that 
may need attention) and on-site examinations in market regulation and 
the progress the National Association of Insurance Commissioners 
(NAIC) has made in creating more uniformity in the regulation of 
market conduct. 

What GAO Found:

Market conduct regulation—oversight of insurance company practices 
such as selling and underwriting policies—is the responsibility of the 
same state agencies that oversee insurance companies’ financial 
solvency. Unlike financial regulation, however, with its nationwide 
standards that allow for coordination among state regulators, no 
generally accepted standards exist for market conduct regulation. 
While all states do some kinds of market regulation, including issuing 
licenses and responding to consumer complaints, two key tools—market 
analysis and on-site examinations—are used inconsistently, if at all. 
The result is inconsistent and often spotty coverage from state to 
state and potential gaps in consumer protection. Formal and rigorous 
market analysis, which could be used to determine which companies to 
examine and how broad the examination should be, is in its infancy 
among state regulators, and states that do perform examinations vary 
widely in the way they choose companies to examine and 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 
impossible task of examining every company within its borders. And 
with each state conducting its own examinations, some insurance 
companies find themselves undergoing simultaneous examinations by 
several states, while other companies may not be examined at all. NAIC 
has been pursuing initiatives since the 1970s to improve uniformity in 
standards and procedures for a market analysis program and market 
conduct examinations, but progress has been limited. In 1975 NAIC 
first published guidance for market conduct examinations and since 
then has updated it regularly. NAIC has also developed and continues 
to improve a tracking system that allows states to share examination 
schedules. But states are not required to use the guidance, although 
many do, and may 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. 

What GAO Recommends:

GAO recommends that NAIC and the states give increased priority to 
identifying a common set of standards for a uniform market oversight 
program that includes all states. These standards should include 
procedures for conducting market analysis and coordinating market 
conduct examinations. Further, NAIC needs to establish a mechanism to 
encourage state legislatures and insurance departments to adopt and 
implement the standards.


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

To view the full statement, 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.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

States Vary in How They Conduct and How Often They Use Market Analysis 
and Market Conduct Examinations:

NAIC Has Identified Market Analysis and Examinations as Areas Needing 
Significant Improvement:

Conclusions:

Recommendation for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Market Conduct Exams Completed in 2001:

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

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

Appendix V: Comments from the National Association of Insurance 
Commissioners:

GAO Comments:

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Acknowledgments:

Table:

Table 1: Market Conduct Examinations and Licensed Insurers in 2001:

Figure:

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

Abbreviations:

ETS: Examination Tracking System: 

IRES: Insurance Regulatory Examiners Society: 

MAWG: Market Analysis Working Group: 

NAIC: National Association of Insurance Commissioners:

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.[Footnote 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.

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.[Footnote 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.[Footnote 3] To 
determine the 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.

Results in Brief:

Because no generally accepted standards exist for market analysis and 
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 
a handbook for market conduct examiners, which is updated 
regularly.[Footnote 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.

Background:

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

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.

States Vary in How They Conduct and How Often They Use Market Analysis 
and Market Conduct Examinations:

In the absence of generally accepted standards, individual states 
decide if and how they will do market analysis and perform market 
conduct examinations. All state insurance departments do some type of 
market analysis, gathering information about companies in the course of 
making regulatory decisions. But only a few of the states we visited 
had established formal market analysis programs designed to help 
identify problem companies earlier and more effectively. We found that 
those states attempting to do more formal market analysis had very 
different 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.[Footnote 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.

Few States We Visited Did Systematic and Routine Market Analysis:

According to NAIC, market analysis provides an important tool for 
monitoring the broader marketplace, allowing states to identify 
regulatory 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 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 Approaches to Market Conduct Examinations:

Because no generally accepted standards exist that stipulate how often 
or even how regulators should examine companies, market conduct 
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 efforts, most state regulators feel responsible for 
overseeing all the companies operating within their borders.[Footnote 
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 study[Footnote 8] 
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 report[Footnote 9] 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 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 Market Conduct Examinations:

In general, on-site market conduct examinations fall into two 
categories: 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.

Table 1: Market Conduct Examinations and Licensed Insurers in 2001:

State: Arkansas[B]; Market conduct examinations completed in 2001: 
Targeted: 2; Market conduct examinations completed in 2001: 
Comprehensive: 17; Market conduct examinations completed in 2001: 
Total: 19; Licensed domestic insurers[A]: 245; Licensed nondomestic 
insurers[A]: 1,423; Total licensed insurers: 1,688; Percentage of 
insurers examined in 2001: 1.10%.

State: California; Market conduct examinations completed in 2001: 
Targeted: 148; Market conduct examinations completed in 2001: 
Comprehensive: 0; Market conduct examinations completed in 2001: Total: 
148; Licensed domestic insurers[A]: 229; Licensed nondomestic 
insurers[A]: 1,171; Total licensed insurers: 1,400; Percentage of 
insurers examined in 2001: 10.57%.

State: Indiana[C]; Market conduct examinations completed in 2001: 
Targeted: 4; Market conduct examinations completed in 2001: 
Comprehensive: 0; Market conduct examinations completed in 2001: Total: 
4; Licensed domestic insurers[A]: 183; Licensed nondomestic 
insurers[A]: 1,588; Total licensed insurers: 1,771; Percentage of 
insurers examined in 2001: 0.22%.

State: Maryland; Market conduct examinations completed in 2001: 
Targeted: 15; Market conduct examinations completed in 2001: 
Comprehensive: 11; Market conduct examinations completed in 2001: 
Total: 26; Licensed domestic insurers[A]: 90; Licensed nondomestic 
insurers[A]: 1,393; Total licensed insurers: 1,483; Percentage of 
insurers examined in 2001: 1.750%.

State: Michigan[D]; Market conduct examinations completed in 2001: 
Targeted: 0; Market conduct examinations completed in 2001: 
Comprehensive: 0; Market conduct examinations completed in 2001: Total: 
0; Licensed domestic insurers[A]: 175; Licensed nondomestic 
insurers[A]: 1,325; Total licensed insurers: 1,500; Percentage of 
insurers examined in 2001: 0.00%.

State: Missouri[E]; Market conduct examinations completed in 2001: 
Targeted: 2; Market conduct examinations completed in 2001: 
Comprehensive: 27; Market conduct examinations completed in 2001: 
Total: 29; Licensed domestic insurers[A]: 141; Licensed nondomestic 
insurers[A]: 1,500; Total licensed insurers: 1,641; Percentage of 
insurers examined in 2001: 1.77%.

State: New Mexico; Market conduct examinations completed in 2001: 
Targeted: 1; Market conduct examinations completed in 2001: 
Comprehensive: 7; Market conduct examinations completed in 2001: Total: 
8; Licensed domestic insurers[A]: 20; Licensed nondomestic insurers[A]: 
1,575; Total licensed insurers: 1,595; Percentage of insurers examined 
in 2001: 0.50%.

State: Ohio; Market conduct examinations completed in 2001: Targeted: 
42; Market conduct examinations completed in 2001: Comprehensive: 0; 
Market conduct examinations completed in 2001: Total: 42; Licensed 
domestic insurers[A]: 280; Licensed nondomestic insurers[A]: 1,505; 
Total licensed insurers: 1,785; Percentage of insurers examined in 
2001: 2.35%.

State: Oregon; Market conduct examinations completed in 2001: Targeted: 
15; Market conduct examinations completed in 2001: Comprehensive: 0; 
Market conduct examinations completed in 2001: Total: 15; Licensed 
domestic insurers[A]: 49; Licensed nondomestic insurers[A]: 1,404; 
Total licensed insurers: 1,453; Percentage of insurers examined in 
2001: 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.

[End of table]

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 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.[Footnote 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.[Footnote 11]

States Used Different Criteria to Select Companies to Examine:

Since there are from 900 to 2,000 insurance companies licensed to sell 
insurance in each state, regulators in the states we visited used a 
variety of 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.

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.

States Did Relatively Few Examinations and Varied in the Staff 
Resources They Devoted to the Examination Process:

As shown in table 1, each of the states we visited, with the exception 
of California and Ohio, did on-site examinations of less than 2 percent 
of the states' licensed companies in 2001. Based on the number of 
market conduct examinations reported by the states to NAIC, it would 
take many years for any of the states we visited to examine all of the 
companies 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.

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

[See PDF for image]

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.

[End of figure]

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.[Footnote 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 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 Oversight Burdened Some Companies and Left Others 
Unexamined:

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

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.[Footnote 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 Has Identified Market Analysis and Examinations as Areas Needing 
Significant Improvement:

NAIC identified the need for greater uniformity in market conduct 
regulation as early as 1971, when it commissioned McKinsey & Company, 
Inc. to review the financial and market conduct surveillance activities 
of insurance companies. Since then, NAIC has launched a number of 
initiatives intended to identify and address the issues and concerns 
caused by the lack of uniformity in states' market conduct examinations 
and, more recently, in their use of market analysis. For example, in 
March 2003 the NAIC president announced that improving market conduct 
examinations and market analysis would be one of the organization's 
major annual goals.[Footnote 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 consistent market regulation, significant 
improvement will likely be slow to arrive.

NAIC Has Long Recognized the Need to Improve Market Regulation but Has 
Made Slow Progress with Its Initiatives:

Before the early 1970s, state insurance regulators emphasized financial 
solvency. However, the McKinsey study recommended establishing a 
separate and distinct program of market conduct surveillance, including 
market conduct examinations that would be separate from financial 
examinations and administered by different examination 
personnel.[Footnote 16] The study also concluded, among other things, 
that some states had been 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.

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 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.

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.[Footnote 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 Model for Regulating Market Behavior:

For more than 12 years NAIC has had a program that successfully 
demonstrates how to encourage states to adopt voluntarily standards 
that 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 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.

Conclusions:

The Congress has been concerned that the current system of insurance 
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.[Footnote 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.[Footnote 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 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.

Recommendation for Executive Action:

We recommend that NAIC, working with the states, give increased 
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 a mechanism be 
established to encourage state legislatures and insurance departments 
to adopt and implement the identified minimum standards.

Agency Comments and Our Evaluation:

We provided a draft of this report to NAIC and the state insurance 
departments that we visited--Arkansas, California, Indiana, Maryland, 
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.

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 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 
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. 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.

Sincerely yours,

Richard J. Hillman 
Director, 
Financial Markets and Community Investment:

Signed by Richard J. Hillman: 

[End of section]

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 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.

[End of section]

Appendix II: Market Conduct Exams Completed in 2001:

State/territory: Alabama; Combined financial and market conduct exams: 
Routine: 10; Combined financial and market conduct exams: Targeted: 5; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 2; Total exams: 17.

State/territory: Alaska; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 0; Total exams: 0.

State/territory: American Samoa; Combined financial and market conduct 
exams: Routine: N/A; Combined financial and market conduct exams: 
Targeted: N/A;  Market conduct exams only: Routine: N/A; Market 
conduct exams only: Targeted: N/A; Total exams: N/A.

State/territory: Arizona; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 131; Total exams: 131.

State/territory: Arkansas; Combined financial and market conduct exams: 
Routine: 16; Combined financial and market conduct exams: Targeted: 2; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 0; Total exams: 18.

State/territory: California; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: N/A; Market 
conduct exams only: Targeted: N/A; Total exams: 148[A].

State/territory: Colorado; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 24; Total exams: 24.

State/territory: Connecticut; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 39; Market 
conduct exams only: Targeted: 2; Total exams: 41.

State/territory: Delaware; Combined financial and market conduct exams: 
Routine: 27; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 3; Total exams: 30.

State/territory: District of Columbia; Combined financial and market 
conduct exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 0; Total exams: 0.

State/territory: Florida; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 10; Market conduct exams 
only: Targeted: 86; Total exams: 96.

State/territory: Georgia; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 17; Market conduct exams 
only: Targeted: 8; Total exams: 25.

State/territory: Guam; Combined financial and market conduct exams: 
Routine: N/A; Combined financial and market conduct exams: Targeted: N/
A;  Market conduct exams only: Routine: N/A; Market conduct 
exams only: Targeted: N/A; Total exams: N/A.

State/territory: Hawaii; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 3; Market conduct exams 
only: Targeted: 0; Total exams: 3.

State/territory: Idaho; Combined financial and market conduct exams: 
Routine: 6; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 1; Total exams: 7.

State/territory: Illinois; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 8; Market conduct exams 
only: Targeted: 19; Total exams: 27.

State/territory: Indiana; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 3; Total exams: 3.

State/territory: Iowa; Combined financial and market conduct exams: 
Routine: 9; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 24; Market conduct exams 
only: Targeted: 0; Total exams: 33.

State/territory: Kansas; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 1; Market conduct exams 
only: Targeted: 0; Total exams: 1.

State/territory: Kentucky; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 8; Market conduct exams 
only: Targeted: 2; Total exams: 10.

State/territory: Louisiana; Combined financial and market conduct 
exams: Routine: 30; Combined financial and market conduct exams: 
Targeted: 1;  Market conduct exams only: Routine: 2; Market 
conduct exams only: Targeted: 30; Total exams: 63.

State/territory: Maine; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 2; Total exams: 2.

State/territory: Maryland; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 10; Market conduct exams 
only: Targeted: 42; Total exams: 52.

State/territory: Massachusetts; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 61; Total exams: 61.

State/territory: Michigan; Combined financial and market conduct exams: 
Routine: 34; Combined financial and market conduct exams: Targeted: 2; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 0; Total exams: 36.

State/territory: Minnesota; Combined financial and market conduct 
exams: Routine: 4; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 0; Total exams: 4.

State/territory: Mississippi; Combined financial and market conduct 
exams: Routine: 13; Combined financial and market conduct exams: 
Targeted: 1;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 4; Total exams: 18.

State/territory: Missouri; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 41; Market conduct exams 
only: Targeted: 7; Total exams: 48.

State/territory: Montana; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 0; Total exams: 0.

State/territory: Nebraska; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 10; Market conduct exams 
only: Targeted: 23; Total exams: 33.

State/territory: Nevada; Combined financial and market conduct exams: 
Routine: 2; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 9; Market conduct exams 
only: Targeted: 8; Total exams: 19.

State/territory: New Hampshire; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 12; Total exams: 12.

State/territory: New Jersey; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 10; Market 
conduct exams only: Targeted: 1; Total exams: 11.

State/territory: New Mexico; Combined financial and market conduct 
exams: Routine: 6; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 2; Total exams: 8.

State/territory: New York; Combined financial and market conduct exams: 
Routine: 62; Combined financial and market conduct exams: Targeted: 1; 
 Market conduct exams only: Routine: 4; Market conduct exams 
only: Targeted: 92; Total exams: 159.

State/territory: North Carolina; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 22; Market 
conduct exams only: Targeted: 17; Total exams: 39.

State/territory: North Dakota; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 1; Market 
conduct exams only: Targeted: 1; Total exams: 2.

State/territory: Ohio; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 38; Total exams: 38.

State/territory: Oklahoma; Combined financial and market conduct exams: 
Routine: 17; Combined financial and market conduct exams: Targeted: 2; 
 Market conduct exams only: Routine: 9; Market conduct exams 
only: Targeted: 9; Total exams: 37.

State/territory: Oregon; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 11; Market conduct exams 
only: Targeted: 4; Total exams: 15.

State/territory: Pennsylvania; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 21; Market 
conduct exams only: Targeted: 1; Total exams: 22.

State/territory: Puerto Rico; Combined financial and market conduct 
exams: Routine: N/A; Combined financial and market conduct exams: 
Targeted: N/A;  Market conduct exams only: Routine: N/A; Market 
conduct exams only: Targeted: N/A; Total exams: N/A.

State/territory: Rhode Island; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 6; Market 
conduct exams only: Targeted: 0; Total exams: 6.

State/territory: South Carolina; Combined financial and market conduct 
exams: Routine: 7; Combined financial and market conduct exams: 
Targeted: 1;  Market conduct exams only: Routine: 1; Market 
conduct exams only: Targeted: 8; Total exams: 17.

State/territory: South Dakota; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 3; Total exams: 3.

State/territory: Tennessee; Combined financial and market conduct 
exams: Routine: 26; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 0; Total exams: 26.

State/territory: Texas; Combined financial and market conduct exams: 
Routine: 142; Combined financial and market conduct exams: Targeted: 2; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 5; Total exams: 149.

State/territory: U.S. Virgin Islands; Combined financial and market 
conduct exams: Routine: N/A; Combined financial and market conduct 
exams: Targeted: N/A;  Market conduct exams only: Routine: N/A; 
Market conduct exams only: Targeted: N/A; Total exams: N/A.

State/territory: Utah; Combined financial and market conduct exams: 
Routine: 5; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 2; Market conduct exams 
only: Targeted: 5; Total exams: 12.

State/territory: Vermont; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 3; Market conduct exams 
only: Targeted: 1; Total exams: 4.

State/territory: Virginia; Combined financial and market conduct exams: 
Routine: 0; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 19; Market conduct exams 
only: Targeted: 39; Total exams: 58.

State/territory: Washington; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 5; Market 
conduct exams only: Targeted: 9; Total exams: 14.

State/territory: West Virginia; Combined financial and market conduct 
exams: Routine: 3; Combined financial and market conduct exams: 
Targeted: 0;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 0; Total exams: 3.

State/territory: Wisconsin; Combined financial and market conduct 
exams: Routine: 0; Combined financial and market conduct exams: 
Targeted: 2;  Market conduct exams only: Routine: 0; Market 
conduct exams only: Targeted: 14; Total exams: 16.

State/territory: Wyoming; Combined financial and market conduct exams: 
Routine: 1; Combined financial and market conduct exams: Targeted: 0; 
 Market conduct exams only: Routine: 0; Market conduct exams 
only: Targeted: 0; Total exams: 1.

State/territory: Total; Combined financial and market conduct exams: 
Routine: 420; Combined financial and market conduct exams: Targeted: 
19;  Market conduct exams only: Routine: 296; Market conduct 
exams only: Targeted: 719; Total exams: 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.

[End of table]

[End of section]

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

State/territory: Alabama; Licensed domestic insurers: 53; Licensed 
foreign insurers: 1,277; Total licensed insurers: 1,330; Total market 
conduct examinations: 17.

State/territory: Alaska; Licensed domestic insurers: 8; Licensed 
foreign insurers: 1,063; Total licensed insurers: 1,071; Total market 
conduct examinations: 0.

State/territory: American Samoa; Licensed domestic insurers: 0; 
Licensed foreign insurers: 22; Total licensed insurers: 22; Total 
market conduct examinations: N/A.

State/territory: Arizona; Licensed domestic insurers: 398; Licensed 
foreign insurers: 1,525; Total licensed insurers: 1,923; Total market 
conduct examinations: 131.

State/territory: Arkansas; Licensed domestic insurers: 74; Licensed 
foreign insurers: 1,464; Total licensed insurers: 1,538; Total market 
conduct examinations: 18.

State/territory: California; Licensed domestic insurers: 219; Licensed 
foreign insurers: 1,210; Total licensed insurers: 1,429; Total market 
conduct examinations: 148.

State/territory: Colorado; Licensed domestic insurers: 74; Licensed 
foreign insurers: 1,410; Total licensed insurers: 1,484; Total market 
conduct examinations: 24.

State/territory: Connecticut; Licensed domestic insurers: 132; 
Licensed foreign insurers: 1,055; Total licensed insurers: 1,187; Total 
market conduct examinations: 41.

State/territory: Delaware; Licensed domestic insurers: 144; Licensed 
foreign insurers: 1,426; Total licensed insurers: 1,570; Total market 
conduct examinations: 30.

State/territory: District of Columbia; Licensed domestic insurers: 23; 
Licensed foreign insurers: 1,347; Total licensed insurers: 1,370; Total 
market conduct examinations: 0.

State/territory: Florida; Licensed domestic insurers: 201; Licensed 
foreign insurers: 1,612; Total licensed insurers: 1,813; Total market 
conduct examinations: 96.

State/territory: Georgia; Licensed domestic insurers: 106; Licensed 
foreign insurers: 1,473; Total licensed insurers: 1,579; Total market 
conduct examinations: 25.

State/territory: Guam; Licensed domestic insurers: 5; Licensed foreign 
insurers: 151; Total licensed insurers: 156; Total market conduct 
examinations: N/A.

State/territory: Hawaii; Licensed domestic insurers: 117; Licensed 
foreign insurers: 926; Total licensed insurers: 1,043; Total market 
conduct examinations: 3.

State/territory: Idaho; Licensed domestic insurers: 23; Licensed 
foreign insurers: 1,426; Total licensed insurers: 1,449; Total market 
conduct examinations: 1.

State/territory: Illinois; Licensed domestic insurers: 446; Licensed 
foreign insurers: 1,469; Total licensed insurers: 1,915; Total market 
conduct examinations: 27.

State/territory: Indiana; Licensed domestic insurers: 183; Licensed 
foreign insurers: 1,598; Total licensed insurers: 1,781; Total market 
conduct examinations: 3.

State/territory: Iowa; Licensed domestic insurers: 220; Licensed 
foreign insurers: 1,403; Total licensed insurers: 1,623; Total market 
conduct examinations: 33.

State/territory: Kansas; Licensed domestic insurers: 57; Licensed 
foreign insurers: 1,642; Total licensed insurers: 1,699; Total market 
conduct examinations: 1.

State/territory: Kentucky; Licensed domestic insurers: 52; Licensed 
foreign insurers: 1,504; Total licensed insurers: 1,556; Total market 
conduct examinations: 10.

State/territory: Louisiana; Licensed domestic insurers: 147; Licensed 
foreign insurers: 1,485; Total licensed insurers: 1,632; Total market 
conduct examinations: 64.

State/territory: Maine; Licensed domestic insurers: 33; Licensed 
foreign insurers: 925; Total licensed insurers: 958; Total market 
conduct examinations: 2.

State/territory: Maryland; Licensed domestic insurers: 96; Licensed 
foreign insurers: 1,392; Total licensed insurers: 1,488; Total market 
conduct examinations: 52.

State/territory: Massachusetts; Licensed domestic insurers: 94; 
Licensed foreign insurers: 1,273; Total licensed insurers: 1,367; Total 
market conduct examinations: 61.

State/territory: Michigan; Licensed domestic insurers: 142; Licensed 
foreign insurers: 1,383; Total licensed insurers: 1,525; Total market 
conduct examinations: 36.

State/territory: Minnesota; Licensed domestic insurers: 94; Licensed 
foreign insurers: 1,438; Total licensed insurers: 1,532; Total market 
conduct examinations: 4.

State/territory: Mississippi; Licensed domestic insurers: 70; Licensed 
foreign insurers: 1,428; Total licensed insurers: 1,498; Total market 
conduct examinations: 18.

State/territory: Missouri; Licensed domestic insurers: 247; Licensed 
foreign insurers: 1,411; Total licensed insurers: 1,658; Total market 
conduct examinations: 48.

State/territory: Montana; Licensed domestic insurers: 28; Licensed 
foreign insurers: 1,407; Total licensed insurers: 1,435; Total market 
conduct examinations: 0.

State/territory: Nebraska; Licensed domestic insurers: 113; Licensed 
foreign insurers: 1,440; Total licensed insurers: 1,553; Total market 
conduct examinations: 33.

State/territory: Nevada; Licensed domestic insurers: 39; Licensed 
foreign insurers: 1,704; Total licensed insurers: 1,743; Total market 
conduct examinations: 19.

State/territory: New Hampshire; Licensed domestic insurers: 49; 
Licensed foreign insurers: 859; Total licensed insurers: 908; Total 
market conduct examinations: 12.

State/territory: New Jersey; Licensed domestic insurers: 101; Licensed 
foreign insurers: 1,165; Total licensed insurers: 1,266; Total market 
conduct examinations: 11.

State/territory: New Mexico; Licensed domestic insurers: 19; Licensed 
foreign insurers: 1,476; Total licensed insurers: 1,495; Total market 
conduct examinations: 8.

State/territory: New York; Licensed domestic insurers: 505; Licensed 
foreign insurers: 927; Total licensed insurers: 1,432; Total market 
conduct examinations: 159.

State/territory: North Carolina; Licensed domestic insurers: 97; 
Licensed foreign insurers: 1,243; Total licensed insurers: 1,340; Total 
market conduct examinations: 39.

State/territory: North Dakota; Licensed domestic insurers: 42; Licensed 
foreign insurers: 1,378; Total licensed insurers: 1,420; Total market 
conduct examinations: 2.

State/territory: Ohio; Licensed domestic insurers: 275; Licensed 
foreign insurers: 1,505; Total licensed insurers: 1,780; Total market 
conduct examinations: 38.

State/territory: Oklahoma; Licensed domestic insurers: 104; Licensed 
foreign insurers: 1,480; Total licensed insurers: 1,584; Total market 
conduct examinations: 37.

State/territory: Oregon; Licensed domestic insurers: 139; Licensed 
foreign insurers: 1,486; Total licensed insurers: 1,625; Total market 
conduct examinations: 15.

State/territory: Pennsylvania; Licensed domestic insurers: 313; 
Licensed foreign insurers: 1,404; Total licensed insurers: 1,717; Total 
market conduct examinations: 22.

State/territory: Puerto Rico; Licensed domestic insurers: 38; Licensed 
foreign insurers: 275; Total licensed insurers: 313; Total market 
conduct examinations: N/A.

State/territory: Rhode Island; Licensed domestic insurers: 33; Licensed 
foreign insurers: 1,210; Total licensed insurers: 1,243; Total market 
conduct examinations: 6.

State/territory: South Carolina; Licensed domestic insurers: 50; 
Licensed foreign insurers: 1,424; Total licensed insurers: 1,474; Total 
market conduct examinations: 17.

State/territory: South Dakota; Licensed domestic insurers: 52; Licensed 
foreign insurers: 1,403; Total licensed insurers: 1,455; Total market 
conduct examinations: 3.

State/territory: Tennessee; Licensed domestic insurers: 111; Licensed 
foreign insurers: 1,559; Total licensed insurers: 1,670; Total market 
conduct examinations: 26.

State/territory: Texas; Licensed domestic insurers: 512; Licensed 
foreign insurers: 1,529; Total licensed insurers: 2,041; Total market 
conduct examinations: 149.

State/territory: U.S. Virgin Islands; Licensed domestic insurers: 2; 
Licensed foreign insurers: 195; Total licensed insurers: 197; Total 
market conduct examinations: N/A.

State/territory: Utah; Licensed domestic insurers: 45; Licensed foreign 
insurers: 1,423; Total licensed insurers: 1,468; Total market conduct 
examinations: 12.

State/territory: Vermont; Licensed domestic insurers: 410; Licensed 
foreign insurers: 937; Total licensed insurers: 1,345; Total market 
conduct examinations: 4.

State/territory: Virginia; Licensed domestic insurers: 82; Licensed 
foreign insurers: 1,407; Total licensed insurers: 1,489; Total market 
conduct examinations: 58.

State/territory: Washington; Licensed domestic insurers: 69; Licensed 
foreign insurers: 1,336; Total licensed insurers: 1,405; Total market 
conduct examinations: 14.

State/territory: West Virginia; Licensed domestic insurers: 20; 
Licensed foreign insurers: 1,304; Total licensed insurers: 1,324; Total 
market conduct examinations: 3.

State/territory: Wisconsin; Licensed domestic insurers: 355; Licensed 
foreign insurers: 1,536; Total licensed insurers: 1,891; Total market 
conduct examinations: 16.

State/territory: Wyoming; Licensed domestic insurers: 4; Licensed 
foreign insurers: 1,304; Total licensed insurers: 1,308; Total market 
conduct examinations: 1.

State/territory: Total; Licensed domestic insurers: 7,065; Licensed 
foreign insurers: -; Total licensed insurers: -; Total market conduct 
examinations: 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.

[End of table]

[End of section]

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

State/territory: Alabama; Total number of market conduct examiners: 2; 
Total number of licensed insurers: 1,330.

State/territory: Alaska; Total number of market conduct examiners: 3; 
Total number of licensed insurers: 1,071.

State/territory: American Samoa; Total number of market conduct 
examiners: N/A; Total number of licensed insurers: 22.

State/territory: Arizona; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,923.

State/territory: Arkansas; Total number of market conduct examiners: 2; 
Total number of licensed insurers: 1,538.

State/territory: California; Total number of market conduct examiners: 
29; Total number of licensed insurers: 1,429.

State/territory: Colorado; Total number of market conduct examiners: 8; 
Total number of licensed insurers: 1,484.

State/territory: Connecticut; Total number of market conduct examiners: 
7; Total number of licensed insurers: 1,187.

State/territory: Delaware; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,570.

State/territory: District of Columbia; Total number of market conduct 
examiners: 3; Total number of licensed insurers: 1,370.

State/territory: Florida; Total number of market conduct examiners: 14; 
Total number of licensed insurers: 1,813.

State/territory: Georgia; Total number of market conduct examiners: 1; 
Total number of licensed insurers: 1,579.

State/territory: Guam; Total number of market conduct examiners: N/A; 
Total number of licensed insurers: 156.

State/territory: Hawaii; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,043.

State/territory: Idaho; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,449.

State/territory: Illinois; Total number of market conduct examiners: 
19; Total number of licensed insurers: 1,915.

State/territory: Indiana; Total number of market conduct examiners: 1; 
Total number of licensed insurers: 1,781.

State/territory: Iowa; Total number of market conduct examiners: 4; 
Total number of licensed insurers: 1,623.

State/territory: Kansas; Total number of market conduct examiners: 2; 
Total number of licensed insurers: 1,699.

State/territory: Kentucky; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,556.

State/territory: Louisiana; Total number of market conduct examiners: 
3; Total number of licensed insurers: 1,632.

State/territory: Maine; Total number of market conduct examiners: 2; 
Total number of licensed insurers: 958.

State/territory: Maryland; Total number of market conduct examiners: 
10; Total number of licensed insurers: 1,488.

State/territory: Massachusetts; Total number of market conduct 
examiners: 4; Total number of licensed insurers: 1,367.

State/territory: Michigan; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,525.

State/territory: Minnesota; Total number of market conduct examiners: 
0; Total number of licensed insurers: 1,532.

State/territory: Mississippi; Total number of market conduct examiners: 
0; Total number of licensed insurers: 1,498.

State/territory: Missouri; Total number of market conduct examiners: 
33; Total number of licensed insurers: 1,658.

State/territory: Montana; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,435.

State/territory: Nebraska; Total number of market conduct examiners: 5; 
Total number of licensed insurers: 1,553.

State/territory: Nevada; Total number of market conduct examiners: 1; 
Total number of licensed insurers: 1,743.

State/territory: New Hampshire; Total number of market conduct 
examiners: 3; Total number of licensed insurers: 908.

State/territory: New Jersey; Total number of market conduct examiners: 
15; Total number of licensed insurers: 1,266.

State/territory: New Mexico; Total number of market conduct examiners: 
0; Total number of licensed insurers: 1,495.

State/territory: New York; Total number of market conduct examiners: 
92; Total number of licensed insurers: 1,432.

State/territory: North Carolina; Total number of market conduct 
examiners: 11; Total number of licensed insurers: 1,340.

State/territory: North Dakota; Total number of market conduct 
examiners: 1; Total number of licensed insurers: 1,420.

State/territory: Ohio; Total number of market conduct examiners: 12; 
Total number of licensed insurers: 1,780.

State/territory: Oklahoma; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,584.

State/territory: Oregon; Total number of market conduct examiners: 3; 
Total number of licensed insurers: 1,625.

State/territory: Pennsylvania; Total number of market conduct 
examiners: 11; Total number of licensed insurers: 1,717.

State/territory: Puerto Rico; Total number of market conduct examiners: 
N/A; Total number of licensed insurers: 313.

State/territory: Rhode Island; Total number of market conduct 
examiners: 4; Total number of licensed insurers: 1,243.

State/territory: South Carolina; Total number of market conduct 
examiners: 3; Total number of licensed insurers: 1,474.

State/territory: South Dakota; Total number of market conduct 
examiners: 0; Total number of licensed insurers: 1,455.

State/territory: Tennessee; Total number of market conduct examiners: 
0; Total number of licensed insurers: 1,670.

State/territory: Texas; Total number of market conduct examiners: 5; 
Total number of licensed insurers: 2,041.

State/territory: U.S. Virgin Islands; Total number of market conduct 
examiners: N/A; Total number of licensed insurers: 197.

State/territory: Utah; Total number of market conduct examiners: 7; 
Total number of licensed insurers: 1,468.

State/territory: Vermont; Total number of market conduct examiners: 1; 
Total number of licensed insurers: 1,347.

State/territory: Virginia; Total number of market conduct examiners: 
18; Total number of licensed insurers: 1,489.

State/territory: Washington; Total number of market conduct examiners: 
5; Total number of licensed insurers: 1,405.

State/territory: West Virginia; Total number of market conduct 
examiners: 2; Total number of licensed insurers: 1,324.

State/territory: Wisconsin; Total number of market conduct examiners: 
7; Total number of licensed insurers: 1,891.

State/territory: Wyoming; Total number of market conduct examiners: 0; 
Total number of licensed insurers: 1,308.

State/territory: Total; Total number of market conduct examiners: 353; 
Total number of licensed insurers: -.

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.

[End of table]

[End of section]

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.

NAIC:

making progress ... together:

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS:

EXECUTIVE HEADQUARTERS:

September 9, 2003:

2301 MCGEE STREET SUITE 800 KANSAS CITY MO 64108-2662 VOICE 816-842-
3600 FAx 816-783-8175:

Richard J. Hillman:

Director, Financial Markets and Community Investment United States 
General Accounting Office:

Washington, D.C. 20548:

Dear Mr. Hillman:

FEDERAL AND INTERNATIONAL RELATIONS:

HALL OF THE STATES 444 NORTH CAPITOL ST NW SUITE 701 WASHINGTON DC 
20001-1509 VOICE 202-624-7790:

FAx 202-624-8579:

Thank you for the opportunity to comment on the proposed report, 
Insurance Regulation: Common Standards and Improved Coordination Needed 
to Strengthen Market Regulation. 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.

The NAIC would like to offer several comments and suggestions to 
clarify certain statements in the report and update the GAO on the 
current NAIC's market regulatory reforms.

SECURITIES VALUATION OFFICE:

If you have any questions regarding the suggestions to the report or 
should you need additional information please do not hesitate to 
contact us or, in our absence, Tim Mullen at 816-783-8260.

1411 BROADWAY 9T" FLOOR NEw YORK NY 10018-3402 VOICE 212-398-9000 FAx 
212-382-4207:

Sincerely,

Signed by: 

Joel Ario:

Oregon Administrator of Insurance:

Chair of the NAIC's Market Regulation & Consumer Affairs (D) Committee:

Signed by: 

Catherine J. WeaThErford:

NAIC Executive Vice President & CEO:

SEPTEMBER 9, 2003:

NAIC COMMENTS ON THE GAG'S PROPOSED REPORT:

INSURANCE REGULATION: COMMON STANDARDS AND IMPROVED COORDINATION NEEDED 
TO STRENGTHEN MARKET REGULATION:

Overall, the report confirms several concerns that state regulators and 
the insurance industry share about market regulation and, particularly, 
market analysis and market conduct examinations. While the NAIC 
recognizes the report focuses on market analysis and market conduct 
examinations, the NAIC reminds the GAO that market regulation extends 
beyond these two functions.

The NAIC also reminds the GAO that market regulation is different than 
financial solvency regulation and is more difficult to harmonize than 
financial regulation. 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.

To parallel the broad concepts addressed in the report, the NAIC's 
comments primarily focus on the following three areas and the NAIC's 
efforts to address these areas: (1) market analysis, (2) uniform 
examination procedures and (3) collaborative regulatory efforts. In the 
relatively short period of time since this study was initiated, the 
states have made tremendous progress in their efforts to develop common 
standards for market analysis, more uniformity in market conduct 
examinations and greater collaboration in examination efforts.

Finally, the comments provide additional detail on the NAIC's 
perspective regarding specific statements in the report.

Market Regulation:

While the NAIC recognizes the report focuses on market analysis and 
market conduct examinations, it is important to recognize that market 
regulation consists of all of the following components even if they are 
not always defined and organized as separate activities: (1) consumer 
complaint handling, (2) producer licensing, (3) rate and form review, 
(4) market analysis, (5) market conduct examinations, (6) 
investigations and (7) enforcement. In addition, state insurance 
departments typically include various other ancillary activities, such 
as consumer education and outreach, especially to vulnerable 
populations, oversight of residual markets and antifraud programs. 
Because of this broader scope, one must consider the effectiveness and 
efficiencies of all of these activities to fully understand how 
insurance regulators monitor companies' market behaviors.

Market Analysis:

The GAO report indicates that few states conduct routine and systematic 
market analysis. The NAIC is aware of the varying approaches to market 
analysis and has made the creation of a more systematic and structured 
market analysis system among the states a top priority. As part of the 
NAIC's efforts, the NAIC is developing a market analysis handbook and 
implementing a market conduct annual statement pilot program to 
determine if such an annual statement could be used by all states.

The purpose of the market analysis handbook is to identify data and 
other information that is available to regulators and provide guidance 
on how that data can be used to target the most significant market 
problems. In addition to helping identify potential problems, the 
handbook will help states develop a more detailed understanding of the 
marketplace and target their regulatory resources more efficiently. If 
used consistently and uniformly by the states, the handbook also should 
facilitate interstate collaboration by giving states a common baseline 
of knowledge from which to pursue collaborative actions.

In 2002, the NAIC completed Phase I of the market analysis handbook, 
compiling a broad range of potential data resources that might be used 
for market analysis. During 2003, the NAIC is completing Phase II of 
the market analysis guide, which focuses on how states can use three 
key data sources to target the most significant market problems: (1) 
complaint data, (2) relevant financial data and (3) market share 
information.

The market conduct annual statement is a pilot project designed to 
determine whether a market conduct annual statement could serve as a 
market analysis tool that all states could use to review market 
activity of the entire insurance marketplace in a consistent manner and 
to identify companies whose practices are outside normal ranges. If the 
pilot is a success, this will be a tool to help states more effectively 
target market regulatory efforts. By using common data and analysis, 
states would have a uniform method of comparing companies' performance 
not only within their respective states but also across the various 
states, providing enhanced opportunities for coordinating market 
regulatory efforts. This increased analysis, targeting and coordination 
should result in fewer duplicative regulatory efforts. As the statement 
develops, states should be able to reduce the number of state-specific 
data calls and collect data about claims, non-renewals and 
cancellations, replacement-related activity and complaints on an 
industry-wide basis.

In the pilot, information is being collected for personal lines, life 
and annuity products. If a company's performance appears to be unusual 
as compared to the industry, states will undertake further review of 
that company. The additional review may range from calling the company 
for further information to pursuing further analysis or conducting an 
examination.

In 2002, the nine pilot states (CA, IL, MD, MO, NE, OH, OR, PA and WI) 
began collecting data from life insurers. The life data has now been 
received and analyzed. Based upon this analysis, specific companies 
have been identified for additional scrutiny and an appropriate 
regulatory response.

The pilot states also are working with P&C insurers. P&C insurers are 
required to submit data for the period of January 1, 2003 through June 
30, 2003 by Sept. 1, 2003. Assuming there are no data quality issues, 
the pilot states will complete their analysis of the data by November 
1, 2003. During the NAIC 2003 Winter National Meeting, the pilot states 
will discuss their results for the property and casualty industry, 
identify common companies of concern and propose coordinated responses 
where appropriate.

Uniform Examination Procedures:

The GAO report indicates that states vary in their approach to market 
conduct exams. To help minimize variations in market conduct 
examinations so that states can rely more on each other's findings, the 
NAIC adopted the Market Conduct Uniform Examination Outline. This 
outline, which was developed in 2002, focuses on the following four 
areas: (1) exam scheduling, (2) pre-exam planning, (3) core examination 
procedures and (4) exam reports. Greater uniformity in exam scheduling 
will enhance the states' ability to coordinate their exam scheduling in 
ways that minimize duplication and encourage states to cooperate more. 
Greater uniformity in pre-exam planning will enhance the states' 
ability to better target problem areas and provide companies with a 
clearer understanding of what is expected of them. The development of 
uniform examination procedures will make the exam process more 
predictable and improve exam consistency across states. Finally, 
greater uniformity in exam reports will allow all audiences, from 
examiners to consumers, to better understand and compare exam results.

Forty of the fifty-five jurisdictions self-certified compliance with 
two of the four uniform examination areas in 2002. The goal for 2003 is 
to have at least 40 states certify compliance with all four areas of 
exam uniformity and develop a process for resolving complaints about 
certifications. This project also includes implementation of more 
detailed uniformity standards in key areas, such as use of the Exam 
Tracking System (ETS) and standardized data calls.

Collaborative Regulatory Efforts:

The GAO report indicates the lack of coordinated oversight burdened 
some companies and left others unexamined. The NAIC agrees that more 
collaborative efforts should be initiated to eliminate the potential 
duplication of regulatory efforts. At the same time, the NAIC questions 
whether the states' scopes of examination were similar. There would be 
no duplication of effort if the states were examining the same company 
for different reasons. Another common issue that hinders the states' 
ability to eliminate duplicative efforts is the insurance companies' 
failure to take corrective action in all jurisdictions that are 
impacted by an inappropriate activity.

To help facilitate the coordination of regulatory efforts, the NAIC's 
Exam Tracking System (ETS) was enhanced in 2002 to make the reporting 
and sharing of market conduct examination information easier. As of 
March of 2003, 26 states had entered examination information on over 
400 companies into ETS. The NAIC has been analyzing this 
information to identify multiple exam notifications for the same 
companies. At the 2003 NAIC Summer National Meeting, the NAIL staff 
shared the list of companies with multiple examinations scheduled and 
the states shared their respective exam plans and concerns about the 
identified companies. Where overlap was noted, a lead state was 
designated to coordinate efforts. Since then, regulators have continued 
to discuss common concerns and to coordinate their efforts. With the 
increased use of ETS and regular opportunities for states to share 
information, improved coordination of exam efforts is well underway.

Forty states are currently participating or have participated in at 
least one new collaborative market conduct examination during 2003. 
Based upon these collaborative efforts, the NAIC's Market Analysis 
Working Group is now developing formalized guidelines and protocols for 
the collaboration of regulatory efforts.

As noted above, the NAIC has been looking carefully at the extent to 
which one state can rely on the findings of another state when it comes 
to making regulatory decisions about examinations, investigations and 
enforcement actions. The NAIC is looking at collaborative models for 
relying on the domestic state (or some combination of states) for 
baseline monitoring of companies and has several specific collaborative 
projects underway. But, ultimately, the NAIC cannot escape the fact 
that regulatory violations can affect consumers in different states 
quite differently. Since regulators are government officials who must 
enforce the laws of their state, they cannot delegate that 
responsibility to someone who may not understand or appreciate the 
nature of a particular violation and its impact on local consumers.

The NAIC, therefore, believes it is critical to first recognize the 
primacy of state consumer protection laws when attempting to increase 
regulatory coordination. For example, an important complement to states 
relying on each other for baseline monitoring of companies is the 
flexibility for states to conduct targeted examinations, 
investigations, and enforcement actions when there is a specific 
consumer problem requiring attention. If the NAIC does not build in 
adequate flexibility for a state to protect its citizens under the laws 
of that state, the NAIC would be asking state regulators to ignore 
their oath of office. In effect, the NAIC would be creating a system 
that would not work and would not have the confidence of the consumers 
and government officials it is intended to serve.

For example, New York faces unique market problems regarding the price, 
availability, and administration of terrorism insurance. The 
Superintendent of Insurance in New York has devoted much effort to 
making the terrorism insurance market work for consumers in his state. 
Would New York feel comfortable being forced to accept the findings of 
another state dealing in a generic way with terrorism exclusions when 
the problems in New York are unique to the terrorism risks confronting 
the New York market? Would another state regulator where the insurer is 
domiciled really understand the vagaries of the New York market or the 
nuances of New York law?

Likewise, regulators in Florida and other coastal states will have a 
special interest in underwriting practices and policy terms for 
insurance covering hurricane damages. State regulators also will have 
different views of health underwriting practices based on the dynamics 
in their local markets. Congress recognized this when it imposed 
minimum portability requirements on the states, but allowed states to 
preserve current laws or develop new ones that were tailored to local 
conditions, as long as the minimum standards were met.

The NAIC and its members have the expertise to handle the tensions 
between promoting uniform market conduct oversight across the United 
States while preserving local control over matters that directly affect 
consumers and policyholders within each state. The NAIC believes much 
progress can be made to achieve the goals of efficiency sought by 
industry representatives. However, the NAIC does not overlook the fact 
that insurance must be regulated to protect local consumers. Regulatory 
efficiency for its own sake should not undermine the credibility and 
effectiveness of the state regulators charged with enforcing consumer 
protection laws.

NAIC's Perspective Regarding Specific Statements in the Report:

Having addressed the three broad issues of market analysis, uniform 
examination procedures and collaborative regulatory efforts, the NAIC 
would like to provide additional comments on specific statements in the 
report.

NAIC's Information Sharing Tools:

While the report addresses the ETS, the report does not recognize the 
following NAIC market information systems: (1) the Complaint Database 
System (CDS), (2) the Regulatory Information Retrieval System (RIRS), 
(3) the State Licensing Producer Database (SLPDB) and (4) the Special 
Activities Database (SAD). The NAIC recommends that these systems be 
mentioned and defined in the report.

* Complaints Database System (CDS): CDS has been operational since 1991 
and is only available to regulators. Complaint information is recorded 
to identify the type, reason, and ultimate disposition of complaints. 
Reports readily provide the number of complaints and are useful for 
analyzing trends related to complaints for an individual or company. As 
a compliment to the regulator only CDS, the NAIC developed the Consumer 
Information Source (CIS). The CIS provides aggregate complaint data to 
the public in a consumer friendly format.

* Regulatory Information Retrieval System (RIBS): RIBS has been 
operational as an electronic database since 1985 with information 
available to both regulators and the public. This system tracks 
adjudicated regulatory actions for companies, producers, and agencies.	
The origin, reason, and disposition of the regulatory action are 
recorded.

* State Licensing Producer Database (SLPDB): SLPDB contains license 
information relating to insurance producers and brokers. Data 
concerning disciplinary history, administrative actions, licensure 
status (resident and non resident), and appointments are maintained. 
This database also features automatic alerts to regulators when a 
producer's license is suspended or revoked.

* Special Activities Database (SAD): SAD is available to regulators only 
and has been operational since 1989. This system records information 
regarding suspicious or investigative activities related to individuals 
and companies in the insurance industry.

Exam Criteria:

While the report states there are no generally accepted criteria for 
determining which companies to examine, the NAIC's Market Conduct 
Examiners Handbook and the NAIC's Market Conduct Uniform Examination 
Outline set forth specific criteria for calling a market conduct 
examination. These criteria include the following: (1) statutory 
examination requirements, (2) internal complaint analysis, (3) 
compliance with statutes and regulations, including producer licensing, 
(4) rate and form review, (5) market share analysis, (6) exam findings 
from previous market conduct exams, (7) information from the 
commissioner of another jurisdiction, (8) reports and analysis from the 
NAIC's market information systems, (9) financial analysis and IRIS 
ratios, (10) information from other external sources, (11) changes in 
control environment, (12) pre-admission, (13) market conduct annual 
statement and (14) findings from previous financial examinations. In 
addition to these criteria, states communicate about market regulatory 
issues and identify companies for potential examinations through chief 
examiners forums, which are held during each NAIC national meeting.

Findings of PricewaterhouseCoopers:

The NAIC takes exception to the findings of the PricewaterhouseCoopers 
study that concluded comprehensive examinations tend to look for 
isolated mistakes and errors. The NAIC's Market Conduct Examiners 
Handbook provides the following guidance regarding examinations: "The 
examination can be most effective if it focuses on general business 
patterns or practices of an examinee. While not ignoring random errors, 
the market conduct examinations should concentrate on an insurer's 
general practices.":

As reflected in the NAIC's handbook, insurance regulators are looking 
for business practices that are in violation of the insurance laws and 
not isolated errors. A random sample of files is reviewed for 
compliance with the insurance laws. Although individual errors within 
the sample are noted, errors on individual files are not held against 
the company unless they occur with such frequency as to be considered a 
business practice. The NAIC's handbook provides guidance on sampling 
techniques and recommended error rates. For example, on non-claim 
files, the desired compliance rate is 90%, meaning that 10 out of 100 
files might contain errors and the company would pass the test. The 
company would fail the test only if the error occurred in more than 10% 
of the:

files, i.e. with such frequency that it could be considered a business 
practice and not an isolated or inadvertent error. The NAIL recommends 
the report be changed to reflect the sampling techniques used in market 
conduct exams and the focus on business practices.

Table 1: Market Conduct Examinations and Licensed Insurers in 2001:

[See PDF for image]

[End of table]

While Table 1 is footnoted that it does not include desk audits and 
follow up examinations, the NAIC believes this table skews the 
effectiveness of state market regulation. If this table is used, the 
NAIC believes it would be more accurate to clarify that state efforts 
to monitor the marketplace fall within a broad continuum of regulatory 
options and that states initiate on-site examinations only when less 
intrusive means of regulatory intervention will not work.

Time Frame to Complete Examinations:

The NAIC questions the findings of the company survey and the report of 
J. Robert Hunter. While the report notes the findings are based upon 
company responses to a survey, the report does not reference the 
potential of company response bias, which may create inaccurate 
results. In addition, the NAIC questions the resources relied upon by 
J. Robert Hunter and the validity of his analysis in reaching his 
conclusion. If such figures are retained in the report, the report 
should recognize that the time needed to complete an examination is 
dependent upon 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.

Voluntary Use of the NAIC's Market Conduct Examiners Handbook:

Because the reference to the voluntary use of the handbook in the 
report reflects a negative connotation and does not recognize how the 
handbook was developed or varying state laws, the NAIC believes the 
policy reason behind this voluntary use should be included in the 
report. 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 in the 
handbook and modified to meet the specific requirements of the laws of 
the jurisdiction.

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

GAO Comments:

1. We recognize NAIC's role in providing data services to the states 
and we have acknowledged and discussed the databases mentioned by NAIC 
in previous reports.1 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.

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

[End of section]

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Richard J. Hillman, (202) 512-8678:

Lawrence D. Cluff, (202) 512-8678:

Acknowledgments:

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

FOOTNOTES

[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).

[2] 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. 

[3] 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). 

[4] Because our sample was nonstatistical, our results cannot be 
projected to all insurers.

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

[6] 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.

[7] 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.

[8] 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.

[9] 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.

[10] PricewaterhouseCoopers, LLP, Insurance Market Conduct Examination 
Public Policy Review, Final Report prepared for The Insurance 
Legislators Foundation (Burlington, Vt.: July 6, 2000).

[11] 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. 

[12] 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.

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

[14] 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.

[15] 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.

[16] 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. 

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

[18] 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.

[19] 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. 

[20] 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.

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