United States General Accounting Office 

GAO Report to the Chairman, Committee on 

Financial Services, House of 

Representatives 

September 2003 INSURANCE 

REGULATION 

Common Standards 

and Improved 

Coordination Needed 

to Strengthen Market 

Regulation 

GAO-03-433 

Highlights of GAO-03-433, a report to the 

Chairman, Committee on Financial 

Services, House of Representatives 

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. 

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 product, 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.


September 2003 

INSURANCE REGULATION 

Common Standards and Improved 

Coordination Needed to Strengthen 

Market Regulation 

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. 
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 

1 

3 

4 

7 

19 

25 

26 

26 

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 38 

GAO Comments 46 

Appendix VI GAO Contacts and Staff Acknowledgments 48 

GAO Contacts 48 

Acknowledgments 48 

Page i GAO-03-433 Insurance Regulation 

30 

32 

34 

36 
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 


This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

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Page ii GAO-03-433 Insurance Regulation 

12 

16 
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.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.


1

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. 

Page 1 GAO-03-433 Insurance Regulation 
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.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 2001.3

 To determine the 

2

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). 

3

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

Page 2 GAO-03-433 Insurance Regulation 
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 

Page 3 GAO-03-433 Insurance Regulation 
a handbook for market conduct examiners, which is updated regularly.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 computerbased 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 

4

National Association of Insurance Commissioners, Market Conduct Examiners 

Handbook, vols.l and ll (Kansas City, Mo.: Spring 2001). 

Page 4 GAO-03-433 Insurance Regulation 
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.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 

5

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. 

Page 5 GAO-03-433 Insurance Regulation 
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. 

Page 6 GAO-03-433 Insurance Regulation 
States Vary in How 

They Conduct and 

How Often They Use 

Market Analysis and 

Market Conduct 

Examinations 

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. 

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.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. 

6

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. 

Page 7 GAO-03-433 Insurance Regulation 
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 

Page 8 GAO-03-433 Insurance Regulation 
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 

Page 9 GAO-03-433 Insurance Regulation 
efforts, most state regulators feel responsible for overseeing all the 

companies operating within their borders.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 study8

 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 report9

 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 

7

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. 

8

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. 

9

PricewaterhouseCoopers, LLP, Insurance Market Conduct Examination Public Policy 

Review, Final Report prepared for The Insurance Legislators Foundation (Burlington, Vt.: 

July 6, 2000). 

Page 10 GAO-03-433 Insurance Regulation 
States Limited the Scope of 

Market Conduct Examinations 

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. 

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. 

Page 11 GAO-03-433 Insurance Regulation 
Table 1: Market Conduct Examinations and Licensed Insurers in 2001 

Market conduct examinations completed in 

2001 

Licensed Licensed Total Percentage of 

domestic nondomestic licensed insurers examined 

State Targeted Comprehensive Total insurersa insurersa insurers in 2001 

Arkansasb 2 17 19 245 1,423 1,688 1.10% 

California 148 0 148 229 1,171 1,400 10.57% 

c

Indiana 4 0 4 183 1,588 1,771 0.22% 

Maryland 15 11 26 90 1,393 1,483 1.750% 

Michigand 0 0 0 175 1,325 1,500 0.00% 

Missourie 2 27 29 141 1,500 1,641 1.77% 

New Mexico 1 7 8 20 1,575 1,595 0.50% 

Ohio 42 0 42 280 1,505 1,785 2.35% 

Oregon 15 0 15 49 1,404 1,453 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. 

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 

Page 12 GAO-03-433 Insurance Regulation 
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.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.11 

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. 

States Used Different Criteria 

to Select Companies to 

Examine 

10The 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. 

11PricewaterhouseCoopers, 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. 

Page 13 GAO-03-433 Insurance Regulation 
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. 

Page 14 GAO-03-433 Insurance Regulation 
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. 

Page 15 GAO-03-433 Insurance Regulation 
Figure 1: Market Conduct Examinations Completed in 2001 Relative to the Size of the Insurance Market in Each State 

Arkansas 

California 

Indiana 

Maryland 

Michigan 

Ohio 

Oregon 

New Mexico 

Missouri 

Premium volume in 2001a 

(dollars in millions) Total producers in 2001 

Estimated state population 

in 2001 (in thousands) 

Market conduct 

examinations completed in 2001 

95,368 220,506 34,600 148 

39,663 154,100 11,390 42 

37,840 86,739 10,006 0

d 

20,656 91,695 5,637 29 

20,517 72,039 5,386 26 

19,208 83,277 6,127 4

c 

10,750 46,573 3,473 15 

6,919 41,268 2,695 19b 

6,045 28,910 1,831 8 

Sources: State insurance departments, NAIC, and the U.S. Census Bureau. 

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. 

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.

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 

12National Association of Insurance Commissioners, 2001 Insurance Department 

Resources Report (Kansas City, Mo.: 2002). 

Page 16 GAO-03-433 Insurance Regulation 
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 Many insurance companies, particularly the largest ones, have publicly 

Oversight Burdened Some stated that they were subject to frequent and sometimes simultaneous 

Companies and Left Others market conduct examinations. We asked 40 of the largest national 

Unexamined 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 

Page 17 GAO-03-433 Insurance Regulation 
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.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. 

13We 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. 

Page 18 GAO-03-433 Insurance Regulation 
NAIC Has Identified 

Market Analysis and 

Examinations as 

Areas Needing 

Significant 

Improvement 

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.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 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.

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 

14In 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. 

15NAIC’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. 

Page 19 GAO-03-433 Insurance Regulation 
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.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. 

16McKinsey & Company, Inc., Strengthening the Surveillance System, Final Report, a 

report commissioned by the National Association of Insurance Commissioners, April 1974. 

Page 20 GAO-03-433 Insurance Regulation 
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 

Page 21 GAO-03-433 Insurance Regulation 
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. 

Page 22 GAO-03-433 Insurance Regulation 
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.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. 

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 

Financial Regulation May Be a 

Model for Regulating Market 

Behavior 

17Statement 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. 

Page 23 GAO-03-433 Insurance Regulation 
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. 

Page 24 GAO-03-433 Insurance Regulation 
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.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.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 

18The 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. 

19Officials 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. 

Page 25 GAO-03-433 Insurance Regulation 
Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 

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. 

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. 

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. 

Page 26 GAO-03-433 Insurance Regulation 
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 

Page 27 GAO-03-433 Insurance Regulation 
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 

Page 28 GAO-03-433 Insurance Regulation 
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 and other interested 

congressional committees. 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. 

If you or your staff have any questions on this report, please contact me on 

(202) 512-8678. An additional contact and other contributors are listed in 

appendix VI. 

Sincerely yours, 

Richard J. Hillman 

Director, Financial Markets and 

Community Investment 

Page 29 GAO-03-433 Insurance Regulation 
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 

Page 30 GAO-03-433 Insurance Regulation 
Appendix I: Objectives, Scope, and 

Methodology 

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. 

Page 31 GAO-03-433 Insurance Regulation 
Appendix II: Market Conduct Exams 

Completed in 2001 

Combined financial and market 

conduct exams Market conduct exams only 

State/territory Routine Targeted Routine Targeted Total exams 

Alabama 10 5 0 2 

Alaska 0 0 0 0 

American Samoa N/A N/A N/A N/A N/A 

Arizona 0 0 0 131 

Arkansas 16 2 0 0 

California 0 0 N/A N/A 148a 

Colorado 0 0 0 24 

Connecticut 0 0 39 2 

Delaware 27 0 0 3 

District of Columbia 0 0 0 0 

Florida 0 0 10 86 

Georgia 0 0 17 8 

Guam N/A N/A N/A N/A N/A 

Hawaii 0 0 3 0 

Idaho 6 0 0 1 

Illinois 0 0 8 19 

Indiana 0 0 0 3 3 

Iowa 9 0 24 0 33 

Kansas 0 0 1 0 1 

Kentucky 0 0 8 2 10 

Louisiana 30 1 2 30 63 

Maine 0 0 0 2 2 

Maryland 0 0 10 42 52 

Massachusetts 0 0 0 61 61 

Michigan 34 2 0 0 36 

Minnesota 4 0 0 0 4 

Mississippi 13 1 0 4 18 

Missouri 0 0 41 7 48 

Montana 0 0 0 0 0 

Nebraska 0 0 10 23 33 

Nevada 2 0 9 8 19 

New Hampshire 0 0 0 12 12 

New Jersey 0 0 10 1 11 

New Mexico 6 0 0 2 8 

Page 32 GAO-03-433 Insurance Regulation 

17 

0 

131 

18 

24 

41 

30 

0 

96 

25 

3 

7 

27 
Appendix II: Market Conduct Exams 

Completed in 2001 

Combined financial and market 

conduct exams Market conduct exams only 

State/territory Routine Targeted Routine Targeted Total exams 

New York 62 1 4 92 

North Carolina 0 0 22 17 

North Dakota 0 0 1 1 

Ohio 0 0 0 38 

Oklahoma 17 2 9 9 

Oregon 0 0 11 4 

Pennsylvania 0 0 21 1 

Puerto Rico N/A N/A N/A N/A N/A 

Rhode Island 0 0 6 0 

South Carolina 7 1 1 8 

South Dakota 0 0 0 3 

Tennessee 26 0 0 0 

Texas 142 2 0 5 

U.S. Virgin Islands N/A N/A N/A N/A N/A 

Utah 5 0 2 5 

Vermont 0 0 3 1 

Virginia 0 0 19 39 58 

Washington 0 0 5 9 14 

West Virginia 3 0 0 0 3 

Wisconsin 0 2 0 14 16 

Wyoming 1 0 0 0 1 

Total 420 19 296 719 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. 

Page 33 GAO-03-433 Insurance Regulation 

159 

39 

2 

38 

37 

15 

22 

6 

17 

3 

26 

149 

12 

4 
Appendix III: Number of Licensed Insurers 

and Total Market Conduct Examinations in 

2001 

Licensed domestic Licensed foreign Total licensed Total market conduct 

State/territory insurers insurers insurers examinations 

Alabama 53 1,277 1,330 

Alaska 8 1,063 1,071 

American Samoa 0 22 22 N/A 

Arizona 398 1,525 1,923 

Arkansas 74 1,464 1,538 

California 219 1,210 1,429 

Colorado 74 1,410 1,484 

Connecticut 132 1,055 1,187 

Delaware 144 1,426 1,570 

District of Columbia 23 1,347 1,370 

Florida 201 1,612 1,813 

Georgia 106 1,473 1,579 

Guam 5 151 156 N/A 

Hawaii 117 926 1,043 

Idaho 23 1,426 1,449 

Illinois 446 1,469 1,915 

Indiana 183 1,598 1,781 

Iowa 220 1,403 1,623 33 

Kansas 57 1,642 1,699 1 

Kentucky 52 1,504 1,556 10 

Louisiana 147 1,485 1,632 64 

Maine 33 925 958 2 

Maryland 96 1,392 1,488 52 

Massachusetts 94 1,273 1,367 61 

Michigan 142 1,383 1,525 36 

Minnesota 94 1,438 1,532 4 

Mississippi 70 1,428 1,498 18 

Missouri 247 1,411 1,658 48 

Montana 28 1,407 1,435 0 

Nebraska 113 1,440 1,553 33 

Nevada 39 1,704 1,743 19 

New Hampshire 49 859 908 12 

New Jersey 101 1,165 1,266 11 

New Mexico 19 1,476 1,495 8 

New York 505 927 1,432 159 

Page 34 GAO-03-433 Insurance Regulation 

17 

0 

131 

18 

148 

24 

41 

30 

0 

96 

25 

3 

1 

27 

3 
Appendix III: Number of Licensed Insurers 

and Total Market Conduct Examinations in 

2001 

Licensed domestic Licensed foreign Total licensed Total market conduct 

State/territory insurers insurers insurers examinations 

North Carolina 97 1,243 1,340 39 

North Dakota 42 1,378 1,420 

Ohio 275 1,505 1,780 

Oklahoma 104 1,480 1,584 

Oregon 139 1,486 1,625 

Pennsylvania 313 1,404 1,717 

Puerto Rico 38 275 313 N/A 

Rhode Island 33 1,210 1,243 

South Carolina 50 1,424 1,474 

South Dakota 52 1,403 1,455 

Tennessee 111 1,559 1,670 

Texas 512 1,529 2,041 

U.S. Virgin Islands 2 195 197 N/A 

Utah 45 1,423 1,468 

Vermont 410 937 1,345 

Virginia 82 1,407 1,489 

Washington 69 1,336 1,405 

West Virginia 20 1,304 1,324 3 

Wisconsin 355 1,536 1,891 16 

Wyoming 4 1,304 1,308 1 

Total 7,065 - - 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. 

Page 35 GAO-03-433 Insurance Regulation 

2 

38 

37 

15 

22 

6 

17 

3 

26 

149 

12 

4 

58 

14 
Appendix IV: Number of Market Conduct 

Examiners and Total Licensed Insurers in 

2001 

Total number of market Total number of licensed 

State/territory conduct examiners insurers 

Alabama 2 1,330 

Alaska 3 1,071 

American Samoa N/A 

Arizona 0 1,923 

Arkansas 2 1,538 

California 29 1,429 

Colorado 8 1,484 

Connecticut 7 1,187 

Delaware 0 1,570 

District of Columbia 3 1,370 

Florida 14 1,813 

Georgia 1 1,579 

Guam N/A 

Hawaii 0 1,043 

Idaho 0 1,449 

Illinois 19 1,915 

Indiana 1 1,781 

Iowa 4 1,623 

Kansas 2 1,699 

Kentucky 0 1,556 

Louisiana 3 1,632 

Maine 2 958 

Maryland 10 1,488 

Massachusetts 4 1,367 

Michigan 0 1,525 

Minnesota 0 1,532 

Mississippi 0 1,498 

Missouri 33 1,658 

Montana 0 1,435 

Nebraska 5 1,553 

Nevada 1 1,743 

New Hampshire 3 908 

New Jersey 15 1,266 

New Mexico 0 1,495 

New York 92 1,432 

Page 36 GAO-03-433 Insurance Regulation 

22 

156 
Appendix IV: Number of Market Conduct 

Examiners and Total Licensed Insurers in 

2001 

Total number of market Total number of licensed 

State/territory conduct examiners insurers 

North Carolina 11 1,340 

North Dakota 1 1,420 

Ohio 12 1,780 

Oklahoma 0 1,584 

Oregon 3 1,625 

Pennsylvania 11 1,717 

Puerto Rico N/A 313 

Rhode Island 4 1,243 

South Carolina 3 1,474 

South Dakota 0 1,455 

Tennessee 0 1,670 

Texas 5 2,041 

U.S. Virgin Islands N/A 197 

Utah 7 1,468 

Vermont 1 1,347 

Virginia 18 1,489 

Washington 5 1,405 

West Virginia 2 1,324 

Wisconsin 7 1,891 

Wyoming 0 1,308 

Total 353 -

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. 

Page 37 GAO-03-433 Insurance Regulation 
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. 

Page 38 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

Page 39 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

Page 40 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

Page 41 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

Page 42 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

See comment 1. 

Page 43 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

See comment 2. 

See comment 3. 

Page 44 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

See comment 4. 

See comment 5. 

See comment 6. 

Page 45 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

GAO Comments 

The following are GAO’s comments on NAIC’s letter dated September 9, 

2003. 

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. 

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). 

Page 46 GAO-03-433 Insurance Regulation 
Appendix V: Comments from the National 

Association of Insurance Commissioners 

6. 	 We added NAIC’s reference from the introduction of the Market 

Conduct Examiners Handbook to the report in its entirety (see page 

20). 

Page 47 GAO-03-433 Insurance Regulation 
Appendix VI: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Acknowledgments 

(250050) 

Richard J. Hillman, (202) 512-8678 

Lawrence D. Cluff, (202) 512-8678 

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. 

Page 48 GAO-03-433 Insurance Regulation 
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