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Market Conduct Exams - Are You Prepared?

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September/October 2002 - Volume 81, Number 5

by Alan J. Schmitz

The market conduct examination process is one of the biggest sticks in the regulatory bag of tools and has become an increasingly common method for state insurance regulators to monitor the business activities of regulated entities across the country. A market conduct examination is a systematic, comprehensive, and in-depth review of all the facets of a title insurer’s operations, transactions, and business dealings. The intended purpose behind the market conduct examination process is to allow regulators a method to monitor compliance with state insurance laws and regulations, to create a process to ensure the fair and consistent treatment of consumers, to provide for the consistent application and interpretation of law, to educate insurers about new laws, and to deter bad practices.

In 1998 the National Association of Insurance Commissioners (NAIC) put the finishing touches on a new chapter to be incorporated into the Market Conduct Examiner’s Handbook. The result was a comprehensive guide for state insurance regulators entitled Conducting the Title Insurance Company and Title Insurance Agent Examination. Since 1998 some title insurance operations have proved to be easy marks for fines, penalties, and costly state-mandated remedial self-audits of past transactions, often stretching back years. Aside from the resulting monetary fines and penalties, failing to make the grade in a market conduct examination erodes public confidence, invites future regulatory scrutiny, and may impact an ability to compete effectively.

A comprehensive market conduct examination by a state insurance regulator involves the arrival of a team of examiners who literally move in-house for a period of three to six months. The examination team requires physical access and office space as well as access to both paper and electronic records for three to five prior years of operation. The examinee insurer must devote substantial resources to the examination process, including the assignment of staff to respond to regulator requests and a dedicated examination coordinator to ensure the timely flow of information and materials from the insurance company to the examination team. Additionally, regulators demand quick responses to ongoing document and report generation inquiries, including company responses for commentary on the application of insurance laws and regulations to specific transactions. The failure to supply information or respond to inquiries during a market conduct examination, often within five business days, can result in adverse “cooperation” findings in a published examination report and additional penalties even if the examinee’s business practices are otherwise without fault!

Preparing for the Exam

To mitigate the costs and expenses associated with the market conduct examination process, two separate and distinct processes are necessary. The first is creating and fostering a culture of compliance before state insurance regulators arrive, and the second is effectively managing a market conduct examination after the examiners arrive. Both processes have similar short-term and long-term goals, including:

  • Obtaining a clean examination report and avoiding monetary fines;
  • Avoiding costly mandated self-audits of past transactions;
  • Eliminating potential third-party or class-action litigation that may arise from publication of examination reports;
  • Maintaining competitive advantages in the marketplace;
  • Keeping consumer confidence;
  • Avoiding bad publicity;
  • Creating a process to self-police future corporate behavior;
  • Reducing the likelihood of future regulatory scrutiny; and
  • Positioning the company to compete successfully moving forward.

What Triggers an Exam?

One of the first measures a company can undertake is to understand the circumstances or events that pique regulatory curiosity and may trigger an inquiry to the company or a full-blown market conduct examination. An excellent source of information, and a way to identify business practices that raise the regulatory ire, is to review publicly posted market conduct examination reports of competitors. Many state insurance departments routinely post complete examination reports on their Web sites along with press releases and copies of administrative orders directing the examinee in question to pay fines and engage in remedial activity. Most examination reports describe, in detail, the business practices found to be in violation of statute or regulation, how the violations were identified (e.g. sampling methodology), and specific recommendations to remedy the problem. Identifying errant business practices and rectifying problems common in the industry in a given jurisdiction before regulators unearth the same problems and practices in an examination make sense and save the examinee time and money.

Moreover, there are a number of circumstances, events, and factors regularly reviewed by state insurance regulators that could trigger a regulatory inquiry or give rise to a full-blown market conduct examination of a specific insurer’s operations. Understanding what these trigger events are allows a title insurer to manage affairs to avoid becoming a target for insurance regulators. These triggers are often referred to as market analysis data sources. Among the common trigger sources are:

  • Frequent and persistent consumer complaints (sometimes expressed in a ratio of complaints to premium volume) referred to as complaint trending;
  • Spikes or other significant increases in the frequency of consumer complaints related to a specific company;
  • Dramatic changes in a given insurer’s premium volume;
  • Noticeable shifts in a given insurer’s market share;
  • Company cutbacks in recessionary market cycles that may decrease compliance efforts;
  • Material shifts in a given insurer’s marketing practices;
  • Inquiries from other jurisdictions’ insurance departments;
  • Spikes in title agent complaints or inquiries related to a company’s operation;
  • Publicized litigation;
  • Complaints from consumer watchdog or advocacy groups;
  • Media coverage of insurance-related problems (including trade publications); and
  • Changes in senior management.

Another proactive measure that reduces the likelihood of being targeted for a market conduct examination involves establishing effective communication with state insurance regulators on an ongoing and informal basis. This may entail simply meeting regularly with insurance department representatives. Periodic meetings with regulators may be useful in discussing topics such as recent complaint activity and how to address the issues raised, application of new or potentially ambiguous laws or regulations, and changes in business plans. Periodic informal communication serves to raise regulatory comfort levels and bolster an insurer’s credibility with regulators while serving to raise and resolve problems informally.

Identifying Standards of Conduct

Understanding the standards that market conduct examiners use to measure company compliance with insurance laws and regulations provides additional insight into how to structure business practices to avoid future problems. The NAIC’s Market Conduct Examiner’s Handbook and chapter 12 of the handbook dealing with the examination of title insurance companies and title insurance agents is, by necessity, a guideline that is not based on any given state’s laws and regulations. Rather it is based on model insurance laws and regulations that may or may not be reflected in a company’s domiciliary state law. The essential nature of title insurance is to provide a mechanism to assist in the efficient acquisition and transfer of real property interests. While this is true nationwide, the methodologies, laws, regulations, and governing authorities may vary from state to state. Accordingly, to understand the standards tested by market conduct examiners in any given jurisdiction, a title insurer should obtain and review the NAIC’s handbook, the state-tailored version of the NAIC handbook, if any, and copies of the cited regulatory authorities that give rise to the standards described in the handbooks. Generally, the examination of the business affairs of title insurance may include a review of the following areas of business operations with not all areas applicable in all states:

  • Company operations, management, and oversight;
  • Administration and handling of complaints;
  • Escrow compliance;
  • Handling of settlement, closing, or security funds;
  • Marketing and sales activity;
  • Referrals, “controlled business” relationships, antirebate provisions;
  • Illegal inducement issues associated with the referral of business;
  • Illegal rebating;
    Management, oversight, and relationships with title insurance agents;
  • Provision of services to policyholder;
  • Underwriting and rating compliance, reporting and consistency; and
  • Claims administration.

While it may seem abundantly clear that a regulated title insurance company needs to identify and understand the laws and regulations under which it operates, it often surprises company management to learn the differences between the law as they perceive it to be and the law as applied by insurance market conduct examiners. In the complex world of commercial transactions and the buying and selling of interests in real property, there will always be arcane rules or highly technical provisions with which a title insurer may not be in compliance, but these are not the stock in trade of market conduct examiners who are trained to test the general business practices of a regulated entity. Accordingly, a great deal of regulatory pain can be avoided by understanding the basic standards of conduct used by examiners.

Educating the Examiner

Finally, title insurance, perhaps next to directors and officers liability insurance, may be one of the most universally misunderstood types of insurance. In no other type of insurance are potential defects identified and excluded from coverage, insured over, or corrected before a commitment is issued and a policy issued to indemnify against losses (to title of real property) under a policy without expiration. Insurance departments with limited budgets and personnel may use in-house market conduct examiners to examine the affairs of property and casualty insurers, life insurers, health insurers, HMOs, surplus lines brokers, and even pre-need funeral insurance sellers. Some insurance departments may hire outside independent contract examiners to perform examinations. In any of these cases, it may be necessary for the title insurance company to educate the examiner about the unique and sometimes confusing title business with jargon entirely unique to the insurance industry. Title insurance companies should not shy away from assisting a market conduct examiner in learning more about the industry. It is considerably easier to help an examiner understand the title industry during the course of an examination, than it is to amend the written findings of a completed examination.

The market conduct examination process is here to stay. There are some very simple ways to prepare companies to be ready for the examiners and to avoid the limelight altogether. Failure to manage the market conduct examination process can have a severe detrimental, impact on a title insurer’s operations and adversely impact the bottom line.

Alan J. Schmitz is a practicing attorney specializing in insurance regulatory and transactional matters. He is a shareholder in the Denver office of Shughart, Thomson & Kilroy. Alan is the author of The Market Conduct Examination Guide - Principles in Managing Market Conduct Examinations. He can be reached at or 303-572-9300.

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