A New Playbook for Market Conduct

The National Association of Insurance Commissioners (NAIC) is considering what changes are needed to the market conduct examinations playbook and tasked the Market Conduct Regulation Modernization (D) Working Group to:

1. Assess, with input from NAIC members and interested stakeholders, the current state of the market conduct regulatory framework and the need for changes in response to changing markets, business models, and consumer expectations; and
2. Provide recommendations for the improvement and modernization of the market conduct regulatory framework to the Market Regulation and Consumer Affairs (D) Committee by the Fall National Meeting.

From May through July, the working group began its game film study by holding four stakeholder listening sessions based on its May 8 industry discussion questions. The working group then held regulator-only play design sessions ahead of its August 13 meeting during the NAIC Summer National Meeting.

The May 8 industry discussion questions organized the working group’s scouting around six core game-plan topics. Notable scouting reports on the six topics from the listening sessions and comment letters, and a playback of the working group's discussion during the Summer National Meeting, are summarized below.

Standardization — Market Conduct Data (Collection and Analysis) and Interstate Collaboration

Commenters broadly sought standardization of data requests and an understanding of why specific data elements are requested and how they will be used. Standardization would also include uniformity in regulator questions, consistent terminology and definitions used by all regulators, and standardized file layouts, such as Excel templates. Several comments also noted that requested information should be limited to that which is necessary, relevant, and reasonably available.

Standardization also promotes a “one-ask” framework for multistate examinations with a lead state coordinating the requests, templates and checklists, timelines for responses and extensions, and a central portal or location for information.

Examination Handbook and Processes

Insurers noted a breakdown in the consistent use of the Market Regulation Handbook and called for a review of how the handbook is used. If the handbook is inconsistently used, any edits or improvements to it will not yield the intended uniformity and efficiency. Insurers discussed the lack of adherence to the handbook’s error benchmark of what constitutes a “business practice” or a “pattern and practice” warranting a finding of noncompliance.

Several commented that the handbook should focus examinations on conduct that poses risk to consumers. This would include a process that identifies risk that is the subject of the exam, and a phased exam process, like that used in financial exams. This would avoid examinations of operational anomalies caused by low-volume populations, closed blocks, legacy systems, or unique product structures. Resources spent on low-risk reviews are resources that would be better spent where oversight is more needed.

Several also noted that the examination process should address the qualifications of, oversight and coordination over, and cost of, contract examiners. In addition, contract examiners should not be a barrier to direct communication between insurers and examiners. One comment noted that the cost of the contract examiners can exceed the fines at issue.

Other Entity/Third-Party Oversight

Commenters urged the working group to coordinate with the NAIC’s Third-Party Data and Models (H) Working Group to avoid running the same play twice. Some also urged that insurers should not be compelled to disclose
vendors' proprietary models, source code, or trade secrets.

During the Summer National Meeting, the working group further discussed the expanding roster of third parties and multiple layers of subcontracts in performing regulated insurance functions. States questioned the bench depth of the subcontractors. The working group emphasized that passing the ball to a vendor does not take the insurer off the field: the insurer remains responsible for compliance and for providing meaningful access to information during examinations.

The emerging playbook calls for carriers to maintain vendor-governance controls — including due diligence, contractual rights to information, oversight of subcontracts, periodic auditing or testing, and remediation processes. The working group also recognized the need to give examiners sufficient access to test vendorsupported models and systems while protecting legitimate proprietary information. Before drawing up a new play, the working group may first scout existing state licensing, examination access, and insurer oversight requirements — including the third-party administrator model — to determine whether the next move should be a revised model, clearer examination authority, or stronger accountability expectations.

Corrective Actions, Communications, and Enforcement

Commenters advocated a framework that encourages self-reporting and recognizes proactive remediation, corrective action, and cooperation as mitigating factors in any subsequent regulatory action. Commenters spoke of self-reporting situations that have resulted in overly punitive or inconsistent regulatory responses.

Publishing anonymized summaries of common exam findings would also help companies proactively benchmark and adjust their game plans.

Consumer Complaints

Insurers pointed out that states use different terms and codes to describe complaint outcomes. Words like “confirmed,” “justified,” or “resolved” can mean different things depending on the state, making it difficult for companies to compare results, spot recurring patterns, and identify the root cause of problems. Insurers also noted that the level of detail states require when handling complaints varies widely.