State regulation of the insurance market is inconsistent and erratic, according to a report from the General Account Office (GAO). Congress is looking at market conduct supervision because the current system has created a situation that does not provide adequate consumer protection and at the same time creates onerous supervision of some companies.

With the exception of two states, California and Ohio, states the GAO looked at conducted examinations of fewer than 2% of 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," the report concluded. Furthermore, the states’ criteria for selecting companies and the number of staff used to conduct examinations varied, creating a situation where states are reluctant to rely on each other’s examinations.

The National Association of Insurance Commissioners (NAIC) has recognized this problem and identified areas that need improvement following a 1971 analysis conducted by McKinsey & Co. The NAIC has remained impotent in its efforts to improve this area.

"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," the report said. The financial regulation standards for solvency established in the 1990s serve as a model of effective consistent regulation, and the NAIC should turn to these in reevaluating market conduct examinations.

The Insurance Marketplace Standards Association (IMSA) has come out in support of the GAO report, adding that IMSA is positioned well to assume the role over general oversight of market conduct standards. "We believe the American public would be better served by an independent, standards-setting organization that looks after the needs of consumers by requiring insurers to adhere to strict ethical codes of conduct," said Brian Atchinson, executive director of IMSA.

The GAO report recognizes that the NAIC has attempted to address the issue but concludes that the NAIC has much work to do in order to reach consensus. "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.

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