The Collaborative Supervisory Approach to Market Conduct Regulation

IRES
5 hours ago
16 min read

What is Market Conduct?

“So, what do you do?”

This simple and age-old question is a staple of small talk conversations around the world. For some enviable individuals, the answer can be given in a few words that rely on common knowledge. Few among us would fail to have a basic idea of the type of labor performed by a construction worker, a teacher, a doctor, or a salesman. Tell someone you are a market conduct specialist, though, and watch their faces go slack as their eyes glaze over for a moment while they try to process the words and make connections to anything else in their experience – and fail to do so. Using such terms as analysis, continuum, and exam don’t help much. Even insurance industry experts – indeed, even other regulators – often have little understanding of the inner workings of market conduct divisions.

To some degree, this phenomenon is due to the confidential nature of market conduct work. Nearly every piece of information market conduct professionals work with is held close to the vest. Confidentiality in market conduct work is not only required by statute and ethical guidelines but must be the foundation of a market conduct division. When market conduct examiners ask entities for information, those entities must trust that the information will not be released or otherwise misused. A side-effect of this is that market conduct teams often operate shrouded in mystery. From the point of view of a regulated entity, information goes in and regulatory action comes out. Everything in between is a confusing jumble of statistics, interpretation, and statute application.

So, what do market conduct regulators do? How can they pierce that veil while maintaining the necessary guardrails of accuracy and confidentiality?

The answer to this question starts by understanding the role of market conduct activities in state regulation. In the simplest form, market conduct regulation can be considered the opposite (or maybe the mirror-image) of financial regulation. Both work, at their cores, to limit risk. Financial solvency teams mitigate the risk that an insurer will exhaust available funds and be unable to pay their ongoing financial obligations, including paying claims. Market conduct professionals ensure that, in achieving those financial goals, the entities do not behave in ways that violate insurance contracts, insurance statutes, or public policy. Where solvency is concerned with money, market conduct regulation is concerned with – as the very name states – conduct.

The purpose of market conduct regulation can be seen in the goals and mission statements of market conduct divisions around the country.

The National Association of Insurance Commissioners (NAIC) provides the following statement on its website explaining market regulation:

“The primary objective of market conduct regulation in U.S. insurance is to safeguard consumers and guarantee a fair, competitive marketplace. Consequently, it is a dynamic and indispensable element of the broader regulatory framework that is constantly evolving. This regulatory function is not limited to the initial approval of insurance products and producers; it also encompasses the actual conduct of insurers and agents in the marketplace and their adherence to state laws and regulations that are intended to guarantee fair treatment of policyholders.” [i]

The state of Louisiana similarly provides the following description of its Market Conduct Division, of which the author is a member:

“Market Conduct performs examinations and analyses of insurers and producers to assure that policyholders, claimants and beneficiaries are being treated fairly and in line with laws, rules and regulations.” [ii]

Other jurisdictions provide similar explanations and goals of market conduct divisions:

“The Mission of the Market Conduct Unit is to protect consumers in Rhode Island. The Unit combines analysis across many lines of insurance to identify outliers and in-depth reviews as it works to ensure compliance with state laws and regulations, and to promote the equitable treatment of consumers.” [iii] – RI

“The Market Conduct Unit performs examinations of insurance companies, healthcare centers, fraternal benefit societies and medical utilization review companies doing business in Connecticut to analyze how the insurance market and the individual companies meet and service the needs of Connecticut consumers. The examinations are conducted to ensure equitable treatment of policyholders and claimants, and compliance with statutes and regulations.” [iv] – CT

“State-based market regulation of the insurance industry helps consumers get reasonable prices, sound products and fair claims practices from their insurers.

Our market conduct regulators are broken up into two teams: market analysis and market conduct examination. These teams determine if companies are complying with non-financial laws in the way they do sales, advertising, underwriting and handle complaints and claims.” [v]- WA

Similar explanations of market conduct work are ubiquitous in textbooks, online courses, and industry publications. Two main themes are present in all these descriptions: statutory compliance and fairness.

Problematic Dichotomy

Statutory compliance is generally straightforward. Where the law states a claim must be paid within 15 days, an examiner may simply compare the submission date to the payment date and determine whether payment was timely. Are there limits on certain fees that an applicant may be charged? Again, payment amounts can be compared to those limits and a determination can be made regarding statutory compliance. While statutes can sometimes cause reasonable disagreements of interpretation, much of the body of standardized insurance law enjoys widespread agreement on meaning or has been litigated or otherwise clarified.

The situation is completely different when discussing fairness (or equitability). While commonly cited as a major concern for market conduct divisions, fairness is rarely, if ever, spelled out in statute. Some attempts have been made to do so. Sometimes with specificity, other times left overly broad, most jurisdictions have some type of law on the books preventing “unfair discrimination.” Such laws may require that equal insureds receive equal treatment, identify protected classes of people, or prohibit specific actions deemed to be unfair. While effective for the purposes for which they were written, the application of such laws remains limited to their niche situations. In real life, insurance is a huge, messy industry. Two insureds are never exactly equal in terms of risk profile, coverage needs, and demographic characteristics, leading insurers to make many individualized decisions in their underwriting and claims functions. Adding to the difficulty is that fairness, like beauty, is in the eye of the beholder. In a world where anything given to one party usually means something taken away from another party, “fairness” can seem an ethereal and unreachable ideal.

Due to this dichotomy, market conduct regulators tend to pursue action against statutory violations almost exclusively. Good reasons for this approach are numerous. Even in the case of clear statutory violations, administrative actions in the form of orders, fines, and license actions are nearly always appealed by regulated entities. These entities have their own good reasons for these appeals. The end result, though, is a long and expensive process of argument, evidence, and follow-up for each action. In the case where actions attempt to enforce “fairness” tangential to the written insurance code, obtaining favorable court decisions is almost impossible. Still, fairness remains a driving goal behind market conduct work, as important to the insurance environment of a jurisdiction as any law or regulation.

Adversarial Relationships

Talk to industry personnel and you will quickly find that market conduct teams have come to be seen as the police of the insurance world, and not in the most positive or flattering of ways. Time and again, those who work for regulated entities express frustration. Market conduct personnel, they say, don’t understand the realities of day-to-day insurance work. They knit-pick files and turn human error and one-off situations into major violation findings. Don’t get caught or they will issue a “ticket” in the form of a fine or other regulatory action. They create so much extra work, ask for data that requires manual review, and we don’t even understand why they need all this data anyway!

Regulators, on the other hand, have our own complaints. Regulated entity data and documentation, we say, are so often missing or incomplete. How can we rebuild their decision-making? How do we know that the differences in the way they treat insureds are legal, much less equitable? Why do they claim everything is secret and proprietary? Why won’t they just cooperate?

Hence, regulatory action is born. Market conduct personnel feel the pressure to stop “bad” actions of regulated entities but have historically had few tools to do so. Let’s review some of the most common types of “tickets” given to insurance companies and other regulated entities in the hope of forcing a change of conduct.

Cease-and-desist orders are often the first lever used by regulatory personnel. Though they can be complicated in execution, they are simple in concept – a regulated entity is ordered to stop taking some action that the market conduct personnel find problematic.

Consent agreements (also called consent orders) are similar to cease-and-desist orders. The major difference is that the regulated entity usually has input into the content of the order, including what actions must be taken or stopped due to the order. Consent orders can also require action rather than cessation of action.

Fines. Ahh, fines. The most recognized and accepted form of regulatory action. A fine is purely punitive and is designed to provide measurable action by regulatory personnel and immediate behavior change by the regulated entity to avoid further loss of money. Insurance departments are often judged by legislators and the public on the volume of fines issued to regulated entities, and a good portion of assessed fines come from market conduct work.

Restitution is often ordered by insurance departments when allowed by law. This regulatory action involves the return of certain monies to aggrieved parties. Restitution is often extremely effective, as the burden on the regulated entity in terms of time, labor, and monetary output far outstrips those required by other regulatory actions. Restitution is also a very positive outcome for the affected insurance consumer.

License actions are usually the most extreme actions taken by insurance departments. Whether the license action is a probation, suspension, or revocation, actions against licenses cause immediate and extreme disruption to the business of the regulated entity, often putting them out of business altogether.

Reading through the above, one can understand why many regulated entities view market conduct work as similar to police work. These regulatory actions have potential downsides as well.

First and foremost, the imposition of regulatory action must be preceded by extensive investigation and evidence gathering. Remember, these actions are often appealed to some version of a court system, and they will not be upheld without acceptable proof of the violations. Appeals add an extra stratum of labor, time, and other resource needs as they may include discovery, depositions, status conferences, negotiations, hearings, and further appeals.

In fact, the system incentivizes appeals. States require that licensees operating in their state report regulatory actions in other states. For larger entities, this could mean filing reports with over 50 jurisdictions, leading those jurisdictions to complete their own reviews and ask further questions of penalized parties.

Regulated entities often have concerns that go beyond the specifics of statutory compliance. The insurance industry is, in many ways, a uniquely competitive environment. Insurance companies operate in an atmosphere where much of the public has an especially negative – or at least guarded – view of the industry. Customers are told daily by lawyers, contractors, vendors, and politicians that insurers are taking advantage of them, making too much money, or trying to avoid payouts at every turn. Adding a regulatory action into this environment, no matter how technical or minor, can cause severe harm to an insurer’s reputation and, therefore, new sales and renewals. Regulatory actions may also expose insurers to litigation, which can require significant resources to defend and cause further reputational damage. An insurer, therefore, is highly incented to take all paths possible to fight regulatory action before the action becomes public.

Insurance regulators and regulated entities both have long memories that can persist even through personnel changes. Taken together, the myriad elements involved in investigating possible statutory violations and working through regulatory actions can easily degrade relationships between the regulated entity and regulatory personnel. This may affect not only the current action, but any future interactions between the parties, exacerbating difficulties in an already cumbersome and unpleasant process.

Most importantly, regulatory actions can be ineffective in changing behavior and outcomes. This can manifest in many different ways depending on the issue at hand. A regulated entity that resents regulatory actions may make only limited changes to comply with the letter of the regulatory actions without making a sincere effort to change the behavior that led to the action. Whether intentional or not, this type of malicious compliance limits the effect of regulatory action to its technical elements without changing the spirit of the regulated entity’s conduct. This can lead to similar issues in the future and a cycle of action and reaction.

Paradigm Shift

Despite the potential downsides of regulatory actions, they are sometimes necessary. However, they should not be considered the first – or only – option in most cases. In fact, the primary market conduct concerns of statutory compliance and fairness can often be achieved more quickly and easily if regulators shift to using these actions as a last resort. Even where disagreements occur, opportunities exist for a small shift in the rudder to turn the entire ship. In today’s insurance environment, market conduct personnel are uniquely situated to drive fast and effective change; build stronger relationships with regulated entities and customers; save enormous amounts of time, money, and other resources; and lead their jurisdictions with the trust of both the industry and purchasing public. And this can all be done despite the continued need for confidentiality.

That may sound like a grand ideal, but it is readily achievable in real-world situations. It all starts with taking the current regulation of statutory provisions and injecting a shot of the second ingredient – fairness. It starts with understanding that fairness is not only for insurance customers, but for insurers, agents, vendors, third-party contractors, and anyone else involved in the insurance process. It starts with bringing every stakeholder to the table.

Remember, insurance professionals are people, too. From every small, regional insurer to every large, international carrier, insurers are operated by people – the same people who live next door to us, who shop where we shop, and who need insurance just like any member of the public, any legislator, and any regulator. Generally, these people also want the same things the rest of the stakeholders want – to go to work, to do a good job, to make their employer successful, and to achieve something positive and meaningful.

That is not to say that regulators should stop making the insurance customer their primary and overriding concern. It does, though, require a broader outlook. To continue with the policing analogy, imagine that once a year you had to upload all your car’s computer data to your nearest sheriff’s office. Then imagine that the sheriff sent you back a bill for every time you went a little over the speed limit, didn’t quite stop at the white line, and changed lanes a little too abruptly. Today, this is how many regulated entities feel when submitting annual reports, data calls, and responses to market conduct inquiries.

People make mistakes. “Delay, deny, defend,” is a statement commonly made to suggest that insurers have standing policies to avoid paying valid claims. With nearly two decades of insurance experience split between the private and public sectors, the author can assure you that the vast majority of insurance professionals work every day to walk the fine balance of taking the best possible care of their customers while maintaining the integrity and viability of the organizations for which they work.

The data backs this up as well. For the calendar year 2024, data from all states show less than one-third of private passenger automobile claims go unpaid, with that number being less than one-fourth of claims in most states. When reviewing the percentage of those claims paid beyond 60 days from the date of receipt, most states report numbers from 15% to 25%, with no state reporting a rate over 31%. The data for homeowners policies is similar, while the data for life claims show over 80% of claims paid and over 90% of those claims paid within the first 60 days. [vi]

Whether more claims should be paid, or paid more quickly, is outside the scope of this discussion. However, the data indicate that even the most contested part of the insurance process is properly handled most of the time.

Again, this is not to say bad actors don’t exist, or that segments of the industry don’t require adjustment, change, and, yes, even punishment. The above data from the Market Conduct Annual Statement applies only to admitted carriers that also meet certain other qualifications, and doesn’t include data on commercial insurance, surplus lines policies, and others. As much of the country faces insurance crises in various forms, customers continue to reach for new and different options for coverage. As such, market conduct divisions must also find innovative ways to monitor the industry and course-correct when needed.

So, if market conduct personnel are not the police of the insurance world, what are they?

Market Conduct as Collaborative Supervision

It’s time for a new analogy. Instead of thinking about market conduct personnel as police, think of them as the supervisors of insurance work. More than that, they should be good supervisors. While it is an imperfect analogy, this mindset allows for flexibility in discussing a different approach to market conduct work.

First, rule out what kinds of supervisors market conduct personnel should not be. To do this, consider the types of supervisors generally considered to be bad. Characteristics of bad supervisors might include:

A domineering nature.
Micromanagement.
Lack of empathy and support.
Inconsistent decisions.
Unrealistic expectations.

Anyone who has had the unfortunate experience of working for a bad supervisor understands how these types of actions lead to employees’ reduced effectiveness, unhappiness, mistake concealment, and even their desire to leave the organization. Similarly, a regulator who embodies these characteristics might induce regulated entities to hide mistakes, service fewer customers, or even withdraw from the state.

Now, consider some of the characteristics of a good supervisor, and consider how a regulator’s tools can match up.

Good Boss	Regulator
Sets clear expectations and processes	Provides statutes, regulations, advisory letters, etc.
Regularly reviews results	Performs market analysis
Asks for feedback	Utilizes inquiries, investigations, etc.
Collaborates on needed improvements	Discusses possible violations/fixes with regulated entity
Utilizes performance improvement plans	Negotiates corrective action plans
Takes punitive action when necessary	Takes regulatory action when necessary

Note that there is no suggestion that regulatory actions should not be utilized. Just as an employee’s behavior may not improve over time or may be egregious enough to trigger immediate termination, if a regulated entity is behaving in such a way that causes severe harm to the insurance public and refuses to change, regulatory action may be the only way to mitigate that harm.

As stated above, the suggestion is not that regulatory action should go away, merely that another action may be a better first choice. To accomplish this, continue considering the analogy of market conduct personnel as a supervisor. One widespread standard of employee management is the use of S.M.A.R.T. goals. For those unfamiliar with this system, the acronym provides guidance for setting an employee’s work standards. It states that any goal set for an employee should have five characteristics. First, the goal must be specific. Expectations must be clear in order to be followed. Second, the goal must be measurable. The supervisor should be able to quantify the employee’s results to draw a clear line that defines success. The goal must also be attainable, as an unrealistic goal only sets the employee on a road to failure. Fourth, the goal should be relevant to keep the employee’s focus on successfully completing their job’s objectives. Finally, the goal should be time-bound, motivating the employee to take prompt action toward success.

Market conduct regulators can use a similar approach when working with regulated entities.

Specific: Regulators should be clear about what a regulated entity’s behavior should look like. Statutes, regulations, directives, and advisory letters should be utilized to clear any ambiguity regarding acceptable and unacceptable conduct.

Measurable: What data will be used to verify success? What metrics are available for the regulated entity to provide to the regulator to demonstrate proper conduct? When regulators are working with regulated entities to adjust their behavior, these questions should be kept in mind and used in the regulatory process.

Attainable: The goals for the regulated entity should be based in reality. For example, requiring a 10% ratio of unpaid claims to received claims may be impossible to achieve without violating other requirements, such as properly following the insurance contract. Determining achievability can be difficult, but industry-wide current and historical results can help to guide goal achievability.

Relevant: When requesting a change of action for a regulated entity, the regulator should ensure that the actions being requested are relevant to the entity’s business and their segment of the wider insurance market. A regulator should always compare apples to apples and not require an orange to look like or behave like an apple.

Time-Bound: Any corrective action plan should have scheduled status updates and a realistic completion date. The objective here is the same as it is with an employee – it should incent prompt action to mitigate the damage being done by the error and prevent future occurrences.

Regardless of whether the S.M.A.R.T. model or any other model is used, a regulator should involve the regulated entity when determining proper corrective action for an issue. Unilateral decisions by regulators can cause future problems as they may not be relevant or attainable, which can make compliance nearly impossible and escalate some of the downsides to regulatory actions previously discussed. Additionally, following a well-considered model for corrective action will make any needed regulatory punishment more effective and defendable, just as documenting assistance and goals given to an employee, and compared against actual results, serves to provide a clear justification for demotion or termination.

Benefits of a Collaborative Supervisory Approach

When regulators utilize a collaborative approach to market supervision, the benefits can be tremendous. Remember, insurance professionals are people, too. Whether with an employee or a regulated entity, buy-in is always more effective than forced action.

One of the largest benefits of a collaborative supervisory approach is the decreased rate of appeals. As previously discussed, a fine or other administrative punishment is likely to be appealed and will be slow to create a behavioral change, if it ever does. When the regulated entity is included in the crafting of the corrective action, the need for an appeal evaporates. If the entity feels the requested change in behavior is reasonable and achievable, they are likely to make the changes more quickly and without friction.

Additionally, when a market conduct division develops a reputation for collaboration, self-reports increase. Most statutory violations arise from mistakes made by people – not from malice. When regulated entities believe they will be able to correct mistakes without the fear of huge fines, negative press, and cumbersome reporting requirements, they are incented to proactively approach regulators when issues arise. This dynamic can lead to faster changes, create more flexibility when attempted correction does not work, and allow the regulatory experts to assist in the corrective actions, heading off many problems that may arise when the regulated entity is forced to take unilateral action.

Finally, a collaborative regulatory environment can have one other rather unexpected consequence – the regulators can reach agreements for behavioral changes that may not be strictly within their statutory authority to require. For example, regulators may obtain an agreement with an insurance company to not only correct the violation of statute, but to provide specific training to agents and adjusters, designate a specific point of contact for customers affected by the issue, or pay certain restitution in amounts or using methods that may not be strictly required.

Overall, such collaboration between regulators and regulated entities can pay huge dividends to the insurance-purchasing public, embodied in better insurance products, quicker and better resolution of problems, increased transparency, and clarity as all parties move forward.

Conclusion

Whether a collaborative supervisory approach is appropriate for use by market conduct personnel, either as standing procedure or for use in specific situations, is a decision to be carefully considered by a jurisdiction’s regulatory personnel. Regardless, keeping a few basics in mind when working through conduct issues is a good practice.

First and foremost, focus on the “conduct” part of market conduct. Concentrate on behaviors, what outcome those behaviors cause, and whether different behaviors can cause better outcomes.

Additionally, regulators should always be open to education, whether that education comes from other regulatory experts, regulated entities, or any other stakeholders in the insurance environment. Much friction in insurance regulation is generated because one stakeholder does not clearly understand the realities faced by another stakeholder.

Recognize the complexity of the U.S. insurance industry, which is composed of 56 jurisdictions, millions of customers, and complex corporate and government systems. A regulated entity is often mistaken rather than malicious, and regulation should not equal retaliation.

Keeping all of this in mind, regulators should not be hesitant to use punitive action when necessary. However, they should be careful that such actions: