Insurance Reciprocity and Uniformity: NAIC and State Regulators Have Made Progress in Producer Licensing, Product Approval, and Market Conduct Regulation, but Challenges Remain
Published: 2009-04-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Because the insurance market is a vital part of the U.S. economy, Congress and others are concerned about limitations to reciprocity and uniformity, regulatory inefficiency, higher insurance costs, and uneven consumer protection. GAO was asked to review the areas of (1) producer licensing, (2) product approval, and (3) market conduct regulation in terms of progress by NAIC and state regulators to increase reciprocity and uniformity, the factors affecting this progress, and the potential impacts if greater progress is not made. GAO analyzed federal laws and regulatory documents, assessed NAIC efforts, and interviewed industry officials.
section_title: What GAO Found
paragraphs: Reciprocity of producer licensing among states has improved, but consumer protection and other issues present challenges to uniformity and full reciprocity. Congress' passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, NAIC's Producer Licensing Model Act (PLMA) of 2000, and uniform licensing standards (2002) have helped improve reciprocity and uniformity. However, NAIC officials noted that as of March 2009, only 17 states were performing full criminal history checks using fingerprinting, and some states that do such checks have been unwilling to reciprocate with states that do not. In addition, some insurance regulators in our sample noted that regulators do not have a systematic way to access disciplinary records of other financial regulators. Without full checks on applicants, states may less effectively protect consumers. Licensing standards, including how state regulators define lines of insurance, also vary across states, further hindering efforts to create reciprocity in agent licensing. These differences may result in inefficiencies that raise costs for insurers and consumers. State regulators' processes to approve insurance products have become more efficient, but barriers exist to greater reciprocity and uniformity. NAIC and state regulators have improved product approval filings by creating the System for Electronic Rate and Form Filing (SERFF) in 1998, which, according to some industry participants, has simplified filings and reduced filing errors. However, SERFF does not address differences in regulators' review and approval processes. In addition, an Interstate Compact was created in 2006 to facilitate approval of certain life, annuity, disability income, and long-term care products, which are accepted across participating states. As of March 2009, 34 states participated in the Compact. However, the Compact leaves some decisions on approval up to the individual states, and several key states have not joined because they feel their processes and protections are superior to the Compact's. Moreover, differences in state laws are likely to limit reciprocity in the approval of property/casualty insurance products. To the extent these areas lack reciprocity and uniformity, some industry participants noted that there may be inefficiencies that slow the introduction of new products and raise costs for insurers and consumers. NAIC and the states have taken steps to improve reciprocity and uniformity of market conduct regulation, but variation across states has limited progress. For example, NAIC noted that in 2006 it developed uniform guidance, and in 2008 created core competency standards, which are intended to be part of an accreditation process for market conduct regulation. NAIC noted that the accreditation plan has not been finalized, and the standards do not include adherence to all NAIC market conduct guidance. In addition, NAIC in 2002 developed the Market Conduct Annual Statement (MCAS) to promote uniform data collection and better target exams. However, industry participants have several concerns about the MCAS and NAIC noted that fewer than half of insurance regulators use it for data collection. NAIC has also created a working group to coordinate enforcement actions. While better communication and coordination appears to have resulted, according to some states in our sample, the effect on uniformity of market conduct regulation is uncertain. Lack of uniformity and reciprocity may lead to inefficiencies, higher insurance costs, and uneven consumer protection across states.

section_title: Letter
paragraphs: A smoothly functioning insurance market that helps businesses and  consumers manage their risks is a vital part of the U.S. economy.  According to the National Association of Insurance Commissioners  (NAIC), at the end of 2008, insurance industry premium volume totaled  approximately $1.6 trillion in the 50 states and in the territories. Though  state insurance regulation involves a number of critical functions,  including oversight of insurers’ financial solvency, some Members of  Congress and industry participants are concerned about limitations to  reciprocity and uniformity, higher insurance costs, regulatory inefficiency,  and uneven consumer protection. Reciprocity is the extent to which state  regulators accept other states’ regulatory actions, such as granting  insurance licenses or approving products for sale in the insurance market,  and do not require insurers to meet additional requirements in order to  conduct insurance business in their state. Uniformity is the extent to  which states have implemented either the same, or substantially similar,  regulatory standards and procedures. Though state insurance regulation  involves a number of critical functions, including oversight of insurers’  financial solvency, many of the questions about the extent of reciprocity  and uniformity of regulation across states have involved the areas of  licensing insurance agents (producer licensing), approving insurance  products, and regulating insurers’ conduct in the insurance market  (market conduct).
Questions concerning reciprocity and uniformity of state-based insurance  regulation have persisted for a number of years. In 1999, Congress passed  the Gramm-Leach-Bliley Act (GLBA), which encouraged states to enact  uniform laws and regulations for licensing insurers or reciprocity among  states when licensing insurers that operate across state lines. In response  to the act, NAIC developed a model law to streamline and standardize  producer licensing requirements and help states become more reciprocal.  In addition, over the past 10 years we have made a number of  recommendations in reports, listed in related GAO products, designed to  help state regulators implement a consistent set of insurance regulations.  Congress has also periodically considered the extent of insurance  regulatory progress and the role the federal government should play, if  any, in regulating insurance. For example, the National Insurance Act of  2007 would have established a national office of insurance, provided for  optional federal insurance charters, and proposed creation of a  comprehensive system of federal oversight. In 2008, Congress considered  establishing the National Association of Registered Agents and Brokers  (NARAB) to ease multistate licensing processes by setting uniform  licensing standards across states. However, neither of these proposals  became law. Additional questions about oversight of the insurance  industry arose in 2008 when one of our nation’s largest insurers, American  International Group, Inc. (AIG), experienced financial difficulties.  Securities lending activities undertaken by AIG’s domestic life insurance  subsidiaries placed pressure on the AIG parent company’s liquidity, and in  November 2008, the Federal Reserve Bank of New York authorized $22.5  billion for a credit facility to purchase residential mortgage-backed  securities from AIG that were part of the securities lending program.
In considering options to best ensure efficient and effective state-based  regulation of insurance, Congress has had a number of questions about the  success of recent efforts and the challenges that remain. To help  policymakers better address these questions, as requested this report  examines three key areas of the insurance industry: (1) producer licensing,  (2) product approval, and (3) market conduct regulation. In each area we  assess the progress NAIC and state regulators have made to increase  reciprocity and uniformity, the factors that have challenged efforts to  achieve greater reciprocity and uniformity, and the potential impact on the  insurance industry and consumers if greater progress is not made.
To assess insurance regulatory progress, challenges, and impacts, we  compared insurance regulatory goals set forth in federal legislation, NAIC  model acts and regulatory planning documents, and GAO reports.  Specifically, we reviewed the insurance provisions of GLBA and NAIC’s  Producer Licensing Model Act (PLMA). We assessed regulatory documents  such as NAIC’s 2003 Insurance Regulatory Modernization Action Plan  (Modernization Plan) and producer licensing, product approval, and  market conduct regulation guidelines. We also interviewed insurance  officials from a sample of nine state insurance departments, four  insurance companies, five insurance associations, and three consumer  advocacy organizations regarding reciprocity and uniformity progress and  challenges. We selected these states based on diversity of premium  volume size and geography. To assess regulatory progress and challenges,  we relied on descriptions and other documentation provided by NAIC,  states, insurers and associations, and consumer advocates.
We conducted this performance audit between February 2008 and April  2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Insurers, state insurance regulators, and NAIC all have roles that are  important to the continued functioning of the insurance sector and to U.S.  consumers and businesses.
Insurers provide services that allow individuals and businesses to manage  risk by providing compensation for certain losses or expenses, such as car  crashes, fires, medical services, or inability to work. Some insurers also  provide access to certain financial services, such as annuities and mutual  funds.
State insurance regulators are responsible for enforcing state insurance  laws and regulations, including through the licensing of agents, the  approval of insurance products and their rates, and the examination of  insurers’ financial solvency and market conduct. State regulators typically  conduct financial solvency examinations every 3 to 5 years, while market  conduct examinations are generally done in response to specific consumer  complaints or regulatory concerns. State regulators also monitor the  resolution of consumer complaints against insurers.
NAIC is a voluntary association of the heads of insurance departments  from the 50 states, the District of Columbia, and five U.S. territories. While  NAIC does not regulate insurers, it does provide services designed to make  certain interactions between insurers and regulators more efficient. These  services include providing detailed insurance data to help regulators  understand insurance sales and practices; maintaining a range of  databases useful to regulators; and coordinating regulatory efforts by  providing guidance, model laws and regulations, and information-sharing  tools.
subsections: section_title: States Oversee the Insurance Industry through Producer Licensing, Product Approval, and Market Conduct Regulation Functions, among Others
paragraphs: Insurance companies are regulated by the states, unlike the banking and  securities industries, which are regulated under a dual federal-state  oversight system. In addition to critical functions such as oversight of  insurers’ financial solvency, state insurance regulation involves key  regulatory processes, including: licensing insurance producers, including  insurance agents, brokers, and companies; reviewing and approving  insurance products and rates; and reviewing and examining insurers’  market conduct.
Licensing producers consists of reviewing license applications to sell  insurance products, reviewing applicants’ criminal and regulatory  background, if any, and approving or denying applications and issuing  licenses.
During product approval processes, regulators review insurers’ products  and rates, in some cases, before they enter the market for sale to  consumers. Regulators review policy forms, which are legal contracts that  describe the characteristics of the products insurers intend to sell and the  rates or prices they intend to charge, and then grant or deny product  approval. Not all products are subject to prior approval.
Regulators’ market conduct oversight involves protecting consumers by  monitoring and examining the conduct of insurance producers. To fulfill  this role, state regulators analyze information that they periodically collect  on the marketing and sales behavior of insurers in order to identify any  problems. Regulators also conduct periodic market conduct examinations  to investigate insurers’ market behaviors in greater depth. Regulators may  issue findings and work with insurers on corrective actions identified as a  result of market analysis and market conduct examinations.
section_title: NAIC Assists State Regulators with a Variety of Oversight Functions
paragraphs: NAIC assists state regulators in their efforts to oversee the insurance  industry and serves regulators with a variety of functions. While NAIC  does not have regulatory authority over state insurance departments, it  collects, stores, and analyzes detailed insurance data to help regulators  understand insurance sales and practices. NAIC data and databases  provide information that regulators can use during their producer  licensing, product approval, and market conduct processes. NAIC also  helps states coordinate regulatory efforts by providing guidance, model  and recommended laws and regulations, and information-sharing tools.  State legislatures may implement NAIC’s model laws by passing model  laws or substantively similar legislation in the states.
NAIC generally operates through a system of working groups, task forces,  and committees made up of state regulators and NAIC officials that  identify issues, facilitate interstate communication, and propose  regulatory improvements. These entities meet periodically to discuss  issues, build consensus on reforms, and vote to adopt new standards,  model laws, and model regulations. These processes are cooperative but  often take months or years to complete because of the number of  participants and diversity of priorities involved. In addition to these  functions, NAIC also developed and implemented a financial accreditation  program in 1990 to periodically review state insurance departments for  baseline financial solvency oversight standards. Accreditation standards  require state insurance departments to have adequate statutory and  administrative authority to regulate insurers’ corporate and financial  affairs. NAIC is considering, but has not yet developed, an accreditation  program for regulation of insurers’ market conduct.
In 2003, NAIC created its Modernization Plan to highlight areas in which  NAIC and state regulators planned improvements for oversight of the  insurance industry. The plan reinforced the primary goals of protecting  consumers and creating a competitive and responsive insurance market.  For producer licensing, the plan sought to implement a uniform electronic  licensing system for individuals and business entities that sell insurance.  The Modernization Plan specifically called for implementation of a single,  uniform license application and full implementation of an electronic  fingerprint system as part of the licensing process. For product approval,  NAIC and state regulators planned to fully implement and use SERFF for  product filings. They also planned to develop an interstate compact to  provide a central point of filing for certain life and annuity products that  would be accepted across states and would feature uniform national  product standards. For market conduct regulation, the plan noted the need  for a common set of standards for uniform market regulatory oversight  that includes all states. In particular, it called for each state to adopt  uniform market analysis standards and procedures, improve interstate  collaboration, and integrate market analysis with other key regulatory  functions.
section_title: GAO Has Issued a Number of Reports on Insurance Regulation
paragraphs: Since 2000, we have issued a number of reports on state regulators’  oversight of the insurance industry, including reports on improving  regulatory efficiency, uniformity, and reciprocity in the areas of producer  licensing, product approval, and market conduct regulation. We have made  numerous recommendations to the NAIC and states concerning the lack of  full criminal background checks by insurance regulators during licensing  processes, the need for more uniform product approvals across states, and  the difficulties insurance regulators face for sharing information, including  with regulators from other parts of the financial services sector. NAIC  generally concurred with these recommendations, and stated that they  would take steps to address them. These reports have also recognized the  importance of establishing uniform minimum market conduct standards  that are consistently used across states. See Related GAO Products for a list  of relevant insurance reports that we issued between 2000 and 2008.
In a recent report looking at the broader financial regulatory system, we  developed a framework for assessing the strengths and weaknesses of  proposals for regulatory modernization that included a number of goals  relevant to a discussion of reciprocity and uniformity of insurance  regulation. Specifically, any financial regulatory system should for  example:    be flexible and able to readily adapt to innovations and changes;    be efficient and effective, eliminating overlap and minimizing regulatory  burden while effectively achieving regulatory goals;    provide consumers with consistent protections for similar financial  products and services, including sales practice standards; and    provide consistent financial oversight, with similar institutions, products,  risks, and services subject to consistent regulation, which would  harmonize oversight within the United States and internationally.
In addition, we reported that given the difficulties to harmonize insurance  regulation across states through the NAIC-based structure, Congress could  consider the advantages and disadvantages of providing a federal charter  option for insurance and creating a federal insurance regulatory entity.
section_title: Producer Licensing Reciprocity Has Improved, but Full Reciprocity and Uniformity Challenges Remain
paragraphs: NAIC and state regulators have taken steps to increase reciprocity in  producer licensing across states, but challenges remain. Increased  reciprocity and uniformity have been goals for Congress, NAIC, state  insurance regulators, and insurers for a number of years, especially since  passage of GLBA in 1999. Following passage of the act, NAIC and state  regulators worked to develop the PLMA and various NAIC and state  licensing standards. According to NAIC, since GLBA, most states have  passed and implemented the PLMA, which set licensing standards for  states to follow in order to meet reciprocity and uniformity requirements.  However, the small number of states performing full producer background  checks with fingerprinting remains a barrier to greater reciprocity and  uniformity. States that perform the checks may be unwilling to reciprocate  with those that do not for fear of compromising their consumer protection  laws. In addition, different licensing requirements and insurance line  definitions across states have also limited reciprocity and uniformity. A  lack of reciprocity and uniformity in producer licensing could lead to  regulatory inefficiencies, higher insurance costs, and uneven consumer  protections.
subsections: section_title: Increased Reciprocity and Uniformity Have Been Goals for at Least the Past Decade
paragraphs: GLBA’s passage in 1999 and the subsequent development of the PLMA by  NAIC and state regulators provided the framework and impetus for  reciprocity and uniformity in producer licensing processes among states. If  within three years of GLBA’s enactment, at least 29 states did not either  pass uniform or reciprocal laws and regulations governing the licensure of  individuals and entities authorized to sell insurance, GLBA called for the  preemption of certain state producer licensing laws and the potential  formation of a federal regulatory body for insurers. Following passage of  the act, NAIC and states elected to pursue the reciprocity option, with  uniformity as a longer-term goal for producer licensing.
To help states meet GLBA’s reciprocity requirements, NAIC developed  PLMA to help address differences among states in the areas of defining  insurance products and lines, agent licensing standards, and variations in  state licensing applications. The act was intended to streamline and  standardize producer licensing requirements across states and improve the  efficiency of insurance licensing processes. To respond to state  differences in defining types or lines of insurance and general inefficiency  in licensing processes, PLMA sought reciprocity and uniformity by  specifying standard definitions for six major types or lines of insurance for  use across states. The act also provided for reciprocal recognition across  states of continuing education requirements for producers, another area in  which state requirements had previously varied.
In addition, in 2002 NAIC developed the Uniform Resident Licensing  Standards (URLS) to help states implement the reciprocity requirements  of GLBA and PLMA. The URLS address some items that, according to  NAIC officials, were not included in PLMA, such as definitions for limited  lines of insurance. Further, the URLS provide the professional standards  for industry entry and continuation of licensure for insurers, as well as  administrative standards for regulators to achieve uniformity and  increased efficiencies. These professional standards are segmented into  broad categories:  integrity and personal background checks,    surplus lines.
The background checks, in particular, call for states to fingerprint their  new producers and conduct state and federal background checks on  applicants. NAIC also developed the Uniform Application for Individual  Insurance Producer License, which created a standardized application  form that state regulators could use for insurance licenses. Use of the form  helps ensure that regulators would have a single producer license  application for use across states rather than multiple forms and  documentation for individual states. In reports in 2002 and 2004 on  insurance regulation, we noted that despite efforts made by NAIC and  state regulators to implement GLBA and PLMA and create more uniform  standards and processes, remaining differences among the states may limit  full reciprocity and uniformity. For example, we previously found that  some states are not willing to lower producer licensing standards—such as  eliminating criminal background checks using fingerprint identification— to allow for uniform or reciprocal licensing, and few states have the ability  to access nationwide criminal history data necessary for full background  checks on applicants. In addition, we found that state insurance regulators  could improve consumer protection by sharing regulatory and complaint  information between financial services regulators.
In 2003, NAIC developed its Modernization Plan to provide a roadmap for  progress and centralize producer licensing and other regulatory goals, thus  promoting uniformity and reciprocity among the states. The plan  essentially incorporated the goals of the PLMA, the URLS, and the  Uniform Application. The plan also specifically sought to promote  producer licensing uniformity and reciprocity by calling for background  checks on insurance license applicants using electronic fingerprinting. Not  only would such checks provide uniform background reviews across  states, but they were intended to help state regulators ensure consistently  high levels of consumer protection. To achieve greater use of criminal  background checks with fingerprinting, the Modernization Plan also called  for efforts by NAIC and state insurance regulators to recognize the  important role of federal and state legislatures to pass legislation that  would provide state insurance regulators the appropriate statutory  authority necessary for conducting such checks.
section_title: NAIC and States Have Made Progress on Regulatory Modernization Goals for Producer Licensing
paragraphs: As of March 2009, NAIC has certified 47 states and jurisdictions as  reciprocal based on their adoption and implementation of PLMA, which is  integral to achieving the reciprocity and uniformity envisioned by the  Modernization Plan. Passage of PLMA and certification by NAIC suggest  that these 47 states and jurisdictions have similar producer licensing  processes and standards in place and are reciprocal in their treatment of  insurers who wish to sell insurance products across those states. Figure 1  provides a map of states and jurisdictions NAIC has certified as reciprocal.
To be considered reciprocal for producer licensing in states beyond the  home state where an initial license was granted, states must meet four  conditions. First, states must permit producers with a license in their  home state to sell insurance without satisfying any other additional  requirements other than submitting:    a request for licensure,  the application used for licensure in the home state,    proof of licensure and good standing in the home state, and    any requisite fee.
Second, states must accept the home state’s continuing education  requirements. Third, states must not impose any other requirements for  licensure that would limit insurance activities because of place of  residence. And fourth, each state that meets these criteria must grant  licensing reciprocity to insurers of all other states that also meet the  criteria. NAIC certifies states as reciprocal based on the criteria above.  Once certified as reciprocal, states have the continuing obligation to  remain compliant, and NAIC has a continuing obligation to certify states’  compliance.
According to NAIC officials, as of December 2008, all states were using the  Uniform Application for non-resident applicants. Use of this form,  according to NAIC and industry participants, has helped make licensing  more uniform across states. Insurance industry officials said that the form  has been of particular benefit to insurers with agents operating in multiple  states, as they no longer are required to fill out different forms for each  state.
section_title: Progress toward Reciprocity and Uniformity Has Been Limited and Some Barriers Exist to Further Progress
paragraphs: While passage of PLMA and certification of 47 states and jurisdictions as  reciprocal represent progress in the area of producer licensing, several key  states such as New York, California, and Florida have not been certified by  NAIC as reciprocal because they generally have not accepted the producer  licensing standards of other states—a condition of certification. An NAIC  official noted that reasons for a lack of full reciprocity and uniformity  among states include conflict among existing state laws and legislative and  industry opposition to full fingerprint-based criminal background checks.  In addition, the certification process does not include a review of whether  states are also complying with the URLS, which added some standards  that were not included in PLMA but which NAIC believed were important  for meaningful uniformity and reciprocity. According to NAIC officials,  they plan to incorporate these additional standards in future certification  efforts. Other limits on or barriers to complete reciprocity and uniformity  include the limited number of states performing fingerprint background  checks and differences in state licensing requirements and insurance line  definitions.
subsections: section_title: The Small Number of States Performing Full Background Checks on Producers Is a Barrier to Reciprocity and Uniformity
paragraphs: While criminal background checks are not required for reciprocal  licensing arrangements between states, state insurance regulators have a  responsibility to review insurance applications and prevent criminals from  being licensed. Though some state insurance regulators have sought  authority to conduct full background checks using fingerprinting, NAIC  officials noted that only 17 states as of March 2009 were performing full  nationwide criminal history checks using fingerprinting as part of their  licensing programs. With only 17 states performing such checks,  reciprocity and uniformity of producer licensing across states may be  limited when states that perform fingerprint checks do not accept licenses  granted by states that do not perform such checks. Figure 2 is a map of  states that conduct these background checks.
States unable to perform these checks generally cite lack of statutory  authority as a primary reason. Specifically, state insurance regulators and  other industry participants noted that regulators have had difficulty getting  state legislatures to grant the authority for insurance departments to  access the law enforcement databases needed to review applicants for  nationwide criminal records. Some states and industry officials reported  industry group opposition as a primary reason for lack of movement by  legislatures to grant full background check authority and noted that  further progress by the states without Congress granting such authority  was unlikely. NAIC also noted that Federal Bureau of Investigation  administrative standards related to fingerprinting have also been a barrier.  Other states noted the importance of criminal background checks and  mentioned that other entities like the Securities and Exchange  Commission have the authority under federal law to conduct full  background checks with fingerprinting as part of their process to license  those who wish to sell securities products.
Officials from some of the states in our sample also noted that many states  are unwilling to reciprocate with other states that do not conduct such  checks and expressed concern that doing so would diminish their  consumer protections. Without the ability to conduct full criminal  background checks, state regulators are less likely to detect applicants  with criminal background and deter them from obtaining licenses. State  regulators’ inability to thoroughly review applicants’ regulatory  background also hinders efforts to efficiently license applicants across  multiple states.
Some insurance regulators from our sample noted that they have the  ability to access NAIC databases such as the Regulatory Information  Retrieval System (RIRS) and the Special Activities Database (SAD) to  check applicants’ background, but they reported being unable to  systematically perform regulatory history checks by querying the  disciplinary records of separate systems used by banking and securities  regulators. Regulatory history checks by insurance regulators consist of  efforts to determine whether insurance applicants have a history of  consumer complaints or regulatory enforcement actions. Accessing this  history may be difficult because banking, securities, and insurance  regulators maintain regulatory background information in separate  information technology systems. Some insurance regulators noted that no  systematic query function or mechanism exists that would enable  insurance and other regulators to check enforcement and complaint  information in these separate systems in order to review information from  across the three financial services sectors. Without the ability to share  regulatory history data, insurance regulators may be less able to detect  applicants with prior regulatory issues or histories of consumer  complaints and prevent their entry into the insurance industry from other  states or other parts of the financial services sector. Table 1 provides  examples from the state of California of criminal convictions that were  identified through fingerprint-based criminal background checks but that  applicants for insurance licenses did not disclose on their insurance  license applications.
Despite progress to move reciprocity and uniformity forward through  GLBA, PLMA, and the URLS, a lack of uniform producer licensing  standards across states has limited reciprocity and uniformity. Some  industry groups suggested that even NAIC-certified reciprocal states have  additional or different requirements and processes for applicants. In some  states, definitions of insurance lines and the number of insurance lines  vary. For example, some states have followed the PLMA to define major  lines with variable life and variable annuity as one line, requiring only one  license to sell both types of products. Other states treat them separately as  individual lines, and may require separate licenses for each. In addition,  some states use limited lines definitions beyond the five categories defined  in the URLS, which could require agents to obtain additional licenses. For  example, some states have a line for luggage protection, which is not one  of the URLS categories. The effect is that insurers experience the time,  cost, and inefficiency that result from following different application  processes and standards to meet individual state requirements.
Some states also have additional requirements that may limit reciprocity  and uniformity. For example, some states require business entity  applicants to register with secretary of state offices before state insurance  departments issue producer licenses, but others do not. In addition, some  states have different license renewal periods for resident and non-resident  insurers. Without more uniform licensing standards, some insurers suggest  they will continue to experience greater time and administrative cost  burdens that may get passed on to consumers.
section_title: A Lack of Full Reciprocity and Uniformity in Producer Licensing Could Lead to Uneven Consumer Protection and Some Inefficiency
paragraphs: According to some industry participants in our sample, while reciprocity  and uniformity of producer licensing across states have grown, the  differences in background checks, licensing requirements, and insurance  line definitions across states prevent them from achieving full reciprocity  and uniformity, and may impact regulators and consumers. For example,  differences in state regulators’ review of applicants’ backgrounds could  lead to uneven consumer protection across states, and the resulting lack of  reciprocity among states could lead to less regulatory efficiency, as some  states do not recognize licenses obtained in other states. Insurers and  industry associations have suggested that the different licensing  requirements and insurance line definitions in some states could also  create inefficiencies as agents operating in multiple states would have to  meet different requirements in each state. These inefficiencies could result  in higher costs for insurers, which in turn could be passed on to  consumers.
section_title: Product Approval Has Become More Efficient, but Barriers Exist to Greater Reciprocity and Uniformity
paragraphs: According to NAIC officials, NAIC and state regulators have taken steps to  make product approval more efficient, but barriers to greater reciprocity  and uniformity exist in the areas of product review and states’ approval  processes. NAIC, working with state regulators, has set goals for  increasing reciprocity and uniformity in product approval that address  inefficiencies in product filing and review and encourage an open and  competitive insurance market. NAIC and state regulators have  standardized the initial filing process by creating an automated system that  states and insurance producers may use for filing submissions, which is  the first part of product approval. However, some states still have  individual filing review and follow-up practices that work against  uniformity. To improve the speed and efficiency of product approval,  NAIC and some states have developed an Interstate Compact with  standardized procedures for approval, but only for certain lines of  insurance and only for participating states. Without greater reciprocity and  uniformity of insurance product approval, regulatory inefficiencies may  raise costs for insurance producers and result in less product choice and  higher costs for consumers.
subsections: section_title: NAIC Has Set Goals for Increasing Reciprocity and Uniformity for Product Approval
paragraphs: NAIC has made progress in its efforts to make product approval processes  more uniform and reciprocal by creating its 2003 Modernization Plan,  which outlined written goals for improving the speed and efficiency of  product approval across states. The plan gives insurance regulators a  guide for improving reciprocity and uniformity of insurance oversight  across states. Specifically, the plan calls for interstate collaboration and  reforms to make filing more efficient so that states can improve the  timeliness and quality of their reviews of insurance product filings. The  plan also sought to integrate multi-state regulatory procedures with  individual state regulatory requirements. For example, all states would use  regulatory tools, such as uniform filing transmittal documents and a  review standards checklist, which would allow insurance companies to  verify state requirements before making filings. The plan also called for  creating the Interstate Compact, which would develop uniform national  product standards and provide a central point of filing. The Compact  would use the standards to receive filings, review their contents, and  facilitate approvals that would be honored by all participating states.
section_title: NAIC Has Automated Some Product Approval Processes, but Many States Still Have Individual Requirements
paragraphs: NAIC, in conjunction with state regulators, developed SERFF to simplify,  automate, and standardize the way insurers develop and submit insurance  product rate and form filings. According to NAIC, SERFF provides a fast,  simplified, electronic process for filing and provides filing checklists for  those submitting filings. As of March 2009, SERFF was used by 52 states  and jurisdictions. Florida does not use SERFF but does require electronic  filing for product approval submissions. According to NAIC officials, the  frequency of SERFF filing use has also grown, with filings increasing from  around 7,000 in 2001 to around 550,000 at the end of 2008. Officials noted  that as of March 2009, approximately 85 percent of all product filings to  state insurance departments had occurred through the system. Since  SERFF implemented a standardized, electronic process and checklists for  required filing materials and processes, NAIC and some state regulators  and industry associations reported that filing submission errors had  decreased significantly and approvals of filings that did not require  revisions had increased dramatically.
While SERFF has resulted in product filing improvements, several  limitations to greater reciprocity and uniformity remain. First, while  SERFF provided a uniform way for insurers to submit product filings,  states’ processes for reviewing and following up on filings may involve  different procedures and approaches, and some states may require varying  levels of additional documentation on products. Second, state regulators  and their staffs may have varying levels of resources and expertise and  their own informal ways of conducting reviews that create different  approaches among states. Some states and one insurer in our sample  reported that these differences might work against product approval  reciprocity and uniformity. Specifically, the groups suggested that these  individual state approaches, or “desk drawer” practices, may be inefficient  because they represent fragmented ways of reviewing the same or very  similar products. Some industry participants reported that the effect of  desk drawer practices increases the time it takes insurers to get their  products approved for sale, raising costs for consumers. However, such  practices may also allow regulators to target efforts to protect consumers  based on state-specific concerns and issues.
section_title: States Have Created a Compact for Certain Lines of Insurance, but Limited Participation and Other Challenges Limit Its Effectiveness
paragraphs: According to NAIC, many state insurance regulators now participate in the  Interstate Compact for multistate insurance product approval. According  to NAIC and the Interstate Insurance Product Regulation Commission  (IIPRC), NAIC and state regulators created the framework for the  Compact in 2000 and developed a working group for the Compact and an  Interstate Insurance Compact Model Law in 2002. The Compact was  formally created when the first two states, Colorado and Utah, enacted  legislation required at the state level to allow each state to join the  Compact. NAIC noted that the IIPRC, an organization that manages the  operations of the Compact, was established in May 2006, and in December  2006 the IIPRC adopted its first uniform product standards. It operates as  a multistate public entity and serves as a single point for filing, review, and  approval of life insurance, annuity, disability income, and long-term care  insurance products. Once approved by the IIPRC, products may be sold in  all member states. The Compact was developed to make processes for  filing, reviewing, and approving certain insurance products more efficient  and effective, and it aimed to promote uniformity through national product  standards and processes. According to NAIC, as of March 2009, Compact  membership consisted of 34 states and insurance jurisdictions (fig. 3).
The IIPRC started receiving and reviewing product filings in 2007, and as  of March 2009, NAIC reported that the number of filings made through the  compact was relatively small but growing, with a mix of large and small  states participating.
While the Compact has provided more centralized and streamlined  processes, several key states have not joined. In particular, key regulatory  states like New York, Florida, and California have not joined. According to  some industry participants, states that have not joined the Compact  generally feel there might be a loss of consumer rights and remedies with  Compact-approved products. In addition, some industry participants noted  that states that have not joined the Compact may feel their current product  approval and consumer protection processes are superior to the  Compact’s processes. Some industry participants, however, say that  without fuller participation by states, full reciprocity and uniformity, even  for the limited number of insurance lines covered by the Compact, will be  difficult to achieve. Some states in our sample have formed their own  alternative for product approval. Officials from the states of California and  Texas noted that several states and jurisdictions, including California,  Florida, Texas, and the District of Columbia, formed the Multi-State  Review Program, which expedites product approval for annuity products  using standards agreed upon by the program’s participants. However, a  system comprised of compacting states, non-compacting states, and states  forming their own approval arrangements has raised some concerns that  multiple product approval systems may work against uniformity.
Other issues with the Compact may also limit reciprocity and uniformity.  According to some industry participants, some Compact processes allow  states to make their own decisions regarding the nature of the products  being approved. For example, under the Compact, states can decide  whether they will allow fraud exceptions to life insurance policy  incontestability clauses, or provisions in life insurance policies that  generally limit insurers to a period of 2 years to determine whether  policyholders misrepresented their health status and information. These  clauses generally protect insurers against misinformation that might be  provided by policyholders and consumers against insurers that might deny  policyholders coverage despite collecting years of premium payments.  According to some industry participants, uniformity will be difficult to  achieve if states have the ability to make individualized decisions that do  not apply across multiple states.
Further, two consumer groups expressed concern that the commission  lacks transparency and accountability. First, these groups pointed out that  product filings to the commission are not public, in contrast with some  states that require publicly available insurance product filings. With the  commission, product information does not become public until or unless  products are approved. As a result, consumer groups suggested that they  and others do not have an opportunity to review filings and help ensure  that harmful products do not get approved for market. However, one state  and one insurer offered a number of reasons for not having public filings,  including (1) protection of insurers’ proprietary information, (2) potential  misuse of competitors’ information in marketing or lawsuits, and (3) the  possibility that consumers will not understand the information or might be  misled by it. For example, one insurer noted that product filings can be  complicated and are written for regulatory review rather than to inform  consumers. However, consumer groups suggested that without greater  review of proposed products, it would be difficult for advocates to help  protect consumers and hard for the general public to be informed buyers  of insurance products. Second, consumer groups expressed concerns that  the lack of public filings would make it much harder for consumer groups  and the public to identify how suitable potential new products might be  for consumers before they are approved. These groups noted that the  commission’s standards provide uniformity for filing submission, review,  and approval, but do not address issues of consumer suitability. And third,  consumer groups questioned what recourse the commission offered  consumers in the event that an insurance product harmed the public. The  groups noted that it was unclear whether consumers could sue the  commission the same way they might sue a state if an insurance product  harmed them.
section_title: Full Reciprocity Is Unlikely for Approvals in Property/Casualty Insurance Lines
paragraphs: According to some industry participants, while the Compact has increased  reciprocity of approvals for some life, annuity, and long-term care  insurance products, similar reciprocity is unlikely for property/casualty  insurance products. According to some regulatory officials, the products  covered by the Compact lend themselves to more uniform approval  standards and processes because they are “mobile products,” such as life  insurance policies, that can move with consumers and are less subject to  local geographic characteristics such as weather, earthquakes, or urban  versus rural environments. In addition, property/casualty products must  conform to a number of relevant state laws, which often differ across  states. These include laws regarding responsibility for, and limits to,  damages, which differ across states. For example, some states allow joint  and several liability in the recovery of damages, while others might not.  Some states limit certain types of damages, such as pain and suffering,  while others do not. According to one state, to the extent that  property/casualty policies must be written to account for each state’s  specific laws, reciprocity across states for approval of these policies will  be limited.
section_title: A Lack of Reciprocity and Uniformity Could Lead to Inefficiencies That Impact Consumers
paragraphs: According to some industry participants, lack of reciprocity and  uniformity in product approval processes could lead to inefficiencies that  may have negative impacts across the insurance industry. First, when  different states conduct product approval in multiple ways, such as  through a voluntary compact that some states do not join or by striking  individual agreements with other states, regulators may have difficulty  achieving an efficient nationwide system of insurance oversight that  produces uniform processes and consistently high standards. Uneven  levels of protection across states may also mean that consumers may be  better protected in some states than others. Second, according to some  industry participants, when states have different approaches and practices  for product approval, it may be difficult for insurers to achieve product  approval in timely, cost-effective ways that enable them to bring new  products to market that could serve consumers. Some insurers said that  different state processes mean that insurers that file for approval in  multiple states will have to produce multiple applications or tailor them to  meet state requirements. And third, when regulators and insurers face  such challenges, producing an insurance regulatory structure that  consistently protects consumers across states becomes difficult to  achieve.
Lack of reciprocity and uniformity and the inefficiencies that may result  from different product approval systems may impact both insurers and  consumers in additional ways. Some insurers in our sample specifically  suggested that these inefficiencies cost insurers and regulators time and  financial resources and may inhibit the introduction of new products that  could serve consumers as they seek protection against various risks. In  addition, some industry participants noted that lack of uniformity and  reciprocity in product approval processes may lead to higher costs for  insurers and, in turn, consumers.
section_title: NAIC Has Taken Steps Designed to Improve Market Conduct Regulation, but Differences among States Have Limited Progress toward Reciprocity and Uniformity
paragraphs: NAIC and the states have taken steps to improve market conduct  regulation, but variations in how states carry out market conduct oversight  and in state laws and resources have limited progress toward reciprocity  and uniformity. NAIC has established goals aimed at producing common  market analysis and examination standards that states can use as the basis  for a uniform market conduct program. In addition, NAIC has created  guidance to help state regulators better manage and more uniformly  approach market conduct oversight. While these efforts have encouraged  more standardized practices for market conduct analysis and examination,  states vary in how uniformly they use NAIC guidance and tools and in the  resources and staff they have available for market conduct regulation.  States’ varied use of the NAIC’s market conduct guidance, varying  individual state insurance laws, and different levels of resources and staff  expertise may also lead to market conduct inefficiencies and uneven  consumer protection across states.
subsections: section_title: NAIC Has Established Goals for Improving Market Conduct Regulation
paragraphs: NAIC has moved market conduct regulation forward by establishing goals  and guidance in its 2003 Insurance Regulatory Modernization Action Plan  (Modernization Plan), which aimed to improve uniformity of market conduct  oversight by state regulators and covered other areas such as producer  licensing and product approval. For market conduct oversight, the plan’s  goals called for formal and rigorous market analysis across states. NAIC  promotes analysis in order to help regulators identify market problems and  companies and better protect consumers. According to NAIC officials, data  collection and analysis were also intended to equip regulators with  information that could help them better target their efforts and resources  rather than relying on broader, more expensive exams to identify and respond  to issues. The plan also calls for each state to adopt uniform market analysis  standards and procedures and integrate market analysis into their overall  regulatory functions. NAIC goals were developed, in part, in response to a  2003 GAO report, which recommended that NAIC and the states identify a  common set of standards for a uniform market conduct program for use by all  states, including procedures for market analysis and coordinating market  conduct exams. We also recommended that NAIC and states establish a  mechanism to encourage state legislatures to adopt and implement the  minimum standards. While NAIC and state regulators have taken some steps  to improve market conduct regulation, variations among state standards still  exist.
section_title: NAIC Has Initiated a Number of Efforts to Improve Market Conduct Regulation, but Implementation among States Has Varied
paragraphs: NAIC has taken several steps to improve market conduct regulation that  include updating examination guidance and developing new data  collection and analysis tools to promote uniformity. In addition, NAIC  created a list of fundamental skills and resources state regulators should  have for oversight of the insurance industry. NAIC has also sought to  improve coordination of enforcement actions across states. However, use  and implementation of these tools and guidance have varied across states.
subsections: section_title: NAIC Has Developed Market Conduct Guidance and an Accreditation Program, but States’ Use of the Guidance Varies, and the Program Has Not Been Implemented
paragraphs: According to NAIC officials, NAIC has initiated a number of efforts to  improve market conduct regulation with tools and guidance for more  standardized examination approaches. NAIC developed market conduct  examination standards and procedures in its Market Regulation Handbook  (Handbook), published in 2006. For example, NAIC officials told us that  the Handbook updated NAIC’s market regulation guidance by combining  standards for market analysis and market conduct examinations into one  document. Revisions to the Handbook and the tools and guidance it  contains were designed to help states move from relying on broad  examinations for identifying market conduct issues to using market data  and analysis to identify problems and target regulatory responses.
In addition, NAIC officials told us that NAIC developed the Market Conduct  Uniform Examination Outline in 2002 to promote state uniformity in  examination scheduling, pre-examination planning, core examination  procedures, and examination reporting. The outline sought to help minimize  state variations in market conduct examinations. Among other things, the  Outline includes a list of reasons for examinations, such as:    extent of an insurer’s market share,  findings from other state regulators,    a shift in business practices,    past history of noncompliance,  information collected through regulatory surveys,  length of time since the last examination, and    new laws enacted since the last examination.
According to NAIC officials, states can use the Outline at their discretion  and self-certify with NAIC that they are using it, though NAIC does not  verify states’ reporting. Self-certification allows NAIC to gauge the extent  of compliance with the Outline.
To promote a set of strong, uniform standards for market oversight, NAIC  also developed guidance in the form of 99 core competency standards,  which it considers to be fundamental capabilities and resources that state  regulators should have in place for strong market conduct oversight. The  body of core competency standards consists of four principle elements.  First, departments of insurance should have the authority to analyze,  examine, or investigate any entity involved with insurance transactions.  Further, departments should have the staff training, resources, and types  of examiners needed for market conduct oversight. Second, departments  should have the ability to conduct market conduct data collection and  analysis and designate appropriate staff leaders responsible for an  effective market analysis program. Third, departments ought to have a  means of moving from market analysis to regulatory action by developing  a spectrum of regulatory tools that are available for use in response to  market conduct examinations, investigations, and consumer complaints.  The fourth principle element of the core competency standards aims to  promote interstate collaboration in regulatory action through participation  in NAIC working groups and databases and information sharing among  regulatory staff designated as contacts on multistate enforcement actions.
According to NAIC officials, in addition to the Handbook and  Examination Outline, NAIC has been working since 2005 to develop an  accreditation program for market conduct regulation. NAIC developed the  financial accreditation program in 1990 to help ensure uniformity of  financial solvency regulation by the states. Its proposed market regulation  accreditation program seeks to promote a market conduct accreditation  process so that states can objectively monitor and oversee the conduct of  insurers and protect consumers. Specifically, the program outlines six  market conduct accreditation categories, based on the 99 core  competency standards:    data collection and reporting, including use by states of key NAIC  databases such as the Regulatory Information Retrieval System (RIRS),  Complaints Database, Market Analysis Review System (MARS), Market  Conduct Examination Tracking System, Special Activities Database (SAD),  and Market Initiative Tracking System (MITS);    market analysis, which includes having appropriate regulatory staff with  specific responsibility for data analysis and developing a baseline  understanding of insurance markets and issues;    market conduct examinations, including having procedural guidelines and  standards in place to determine when examinations should be called, and  which adhere to the Scheduling, Coordinating, and Communicating  chapter of the Market Regulation Handbook;  interstate collaboration, including contacts designated by commissioners  of insurance for the purpose of interstate communication and  collaborative actions;    oversight of contractors hired by insurance departments that have the  expertise and professional qualifications to perform market conduct and  analysis and examinations; and  treatment of confidential information, meaning that insurance  departments should have the authority to analyze, examine, or investigate  entities involved with the business of insurance, as well as protect  consumers, enforce a continuum of regulatory responses when needed,  and keep records and insurance information confidential.
According to NAIC, while it encourages states to use its tools and  guidance when developing market conduct oversight programs, use of the  Market Regulation Handbook, including the Examination Outline is not  mandatory and states have discretion regarding the extent to which the  tools are implemented. Some of the state regulators in our sample noted  that they used the Handbook to the extent its provisions were consistent  with their state laws and market conduct priorities. For example, officials  from one state department of insurance told us that they had instructed  market conduct staff to use the Handbook as a foundation to develop its  current revisions to market conduct procedures, but only if the  Handbook’s guidelines did not conflict with the state’s statutes or  regulatory priorities. According to NAIC officials, as of March 2009, 41  states and the District of Columbia had self-certified compliance with the  Examination Outline; NAIC does not validate states’ certification and has  no immediate plans to do so.
While NAIC has fully developed core competency standards and drafted a  market regulation accreditation program, use of the standards has been  varied, and the accreditation program, as of March 2009, was still a  proposal that had not yet been implemented. For example, as of that date,  NAIC officials told us that 29 states and jurisdictions reported through an  NAIC survey that they met the general core competency standards. In  addition, according to NAIC, the accreditation program’s core competency  standards require state insurance regulators to follow the Scheduling,  Coordinating, and Communicating chapter of the Market Regulation  Handbook with respect to planning market conduct examinations, but not  other key market conduct guidance found in the Handbook. For example,  the market conduct accreditation program’s core competency standards  do not require adherence to guidance such as how to conduct  property/casualty, life and annuity, health, and multi-state examinations.  Without requirements to follow other key parts of the Handbook as part of  the market conduct accreditation program, it is unclear to what extent the  program will help ensure strong market conduct practices and encourage  uniform examination procedures across states.
section_title: NAIC Has Developed Data Collection and Analysis Tools, but Faces Challenges in Its Efforts to Collect Market Conduct Data from Insurers
paragraphs: NAIC has created market conduct data collection and analysis tools, but  efforts to collect market conduct data from insurers face challenges. To  improve data collection, NAIC developed the Market Conduct Annual  Statement (MCAS), which began first as a pilot project in 2002 and became  permanent in 2004. MCAS is a data collection instrument designed to help  state insurance regulators better understand insurers’ conduct in the  marketplace, identify problem areas, and use information to target market  conduct responses and examinations. The information collected includes,  for example, annual data on how long it takes insurance companies to  settle claims and the separate numbers of complaints insurers received  from state departments of insurance and directly from consumers.  Additional examples of MCAS data elements collected on different lines of  insurance can be found in appendix III. According to NAIC, once the data  are collected, state regulators use it to establish baseline measures for  targeting their market conduct efforts and prioritizing companies for  regulatory attention. State regulators may use deviation from the measures  as criteria for following up with an insurer on their conduct or undertaking  an examination.
According to NAIC officials, as of March 2009, 29 states were collecting  data using MCAS. Other states used their own processes for tracking  market conduct and identifying issues that required regulatory attention.  For example, several state regulators reported using the information  collected through MCAS to perform baseline analysis on insurance  companies writing business in their states, identify insurer conduct that  might require their attention or an examination, or monitor individual  company and industry trends. One state regulator noted that since it had  begun participating in MCAS, its market conduct staff no longer depended  exclusively on premium volume or basic complaint activity to monitor an  insurance company’s market conduct. Further, according to the regulator,  MCAS helps the department to identify potential problems and their  sources, thereby allowing department staff to target their responses rather  than perform a comprehensive review.
According to NAIC, while MCAS provides NAIC and insurance regulators  with detailed market conduct data, greater uniformity and participation  have been limited by disagreement among insurers and consumer groups  over the types of data that MCAS collects and the extent to which the data  should be made public. According to several insurers and industry  officials, public access to MCAS is problematic because they (1) consider  MCAS data to be proprietary and fear their competitive position might be  compromised if other insurers had access to it, (2) believe MCAS data  could be misunderstood by the general public and used to make poor  insurance decisions, and (3) feel MCAS data could be misused by trial  attorneys to try to initiate class action suits against insurance companies.  However, some consumer groups mentioned that MCAS data would better  serve consumers if it contained more detailed insurer information than the  summary level data currently collected. In their view, more detailed data  would help consumers better compare insurance companies and their  products and would help regulators better protect consumers by using  data to identify and react to market conduct issues. These disagreements  about the data types, uses, and access have slowed consensus and  cooperation on the use of uniform data to improve market conduct and  have limited progress toward strong, uniform oversight.
While the data access issues had not been resolved as of March 2009, NAIC  officials noted that they will begin aggregating market conduct data in  2009 for eventual use by participating states during their oversight  activities. NAIC also plans to continually refine data collection,  aggregation, and analysis processes, and it plans to work with states and  the insurance industry on existing and future MCAS concerns. In addition,  some industry participants in our sample noted that it was difficult to  achieve greater market conduct uniformity when not all states participate  in standardized improvement efforts like the MCAS. NAIC has suggested  that without greater state participation in this tool, some regulators will  have to rely more on exams, which can be costly and duplicative across  states, than on market analysis to monitor the marketplace and protect  consumers.
In addition to MCAS, NAIC created Level 1 Analysis in 2005, which is an  automated set of questions regulators can use to help evaluate individual  companies. NAIC then built on Level 1 Analysis by developing Level 2  Analysis that offers regulators additional sources of possible information  on insurers’ market conduct. Further, NAIC developed MARS in 2005,  which stores Level 1 Analysis questions and insurers’ answers. The MARS  database can be accessed by states and helps regulators identify and  respond to market conduct issues by seeing analysis performed by other  states. NAIC sees these developments as standardized, uniform tools that  state regulators can use to improve access to key regulatory information,  identify insurance issues, and respond with targeted actions.
section_title: NAIC Has Taken Steps to Improve Coordination of Enforcement Actions
paragraphs: NAIC has also taken steps to improve coordination of enforcement actions  across states, but uniformity here is uncertain. NAIC formed the Market  Analysis Working Group (MAWG) in 2003 to help states coordinate  insurance regulatory actions. Specifically, the group functions to facilitate  interstate communication on identified or potential market conduct issues,  share information of common concern regarding insurers’ activity, and  promote a targeted regulatory response from a spectrum of possible  actions. Some states in our sample said that through MAWG, several  multistate collaborative actions had been initiated in both market conduct  examinations and settlements. In addition, one state insurance department  noted that MAWG’s quarterly meetings and the open lines of  communication among states enabled it and other states to bring problem  companies to the attention of the group for possible coordinated  regulatory action. According to NAIC officials, because state regulators  have a forum to discuss regulatory issues and actions, MAWG has also  facilitated a more consistent range of regulatory responses to similar  multistate concerns.
In addition to MAWG, NAIC developed MITS in 2006, which enables states  to track and share regulatory actions by entering these actions into an  electronic database. For example, several states told us that they log their  market conduct activities into MITS so that other states can learn about  their issues and actions. Further, NAIC developed RIRS, a database that  dates back to the 1980s but was automated in 1995, specifically allows  states to see the adjudicated regulatory actions of other states. NAIC  officials noted that the RIRS system helps them monitor the insurance  market, hone in on issues they consider significant, and more efficiently  respond to those issues.
section_title: Variation in State Laws and Resources Have Limited Progress toward Uniformity
paragraphs: Individual laws passed by state legislatures and implemented by state  insurance departments govern market conduct regulation and consumer  protection activities. While such differences allow for the regulatory  flexibility needed in a diverse national marketplace for insurance, different  laws, regulations, and practices may make greater uniformity among states  difficult to achieve. To help increase the uniformity of state laws regarding  market conduct activities, in 2004 NAIC and NCOIL worked to jointly  develop a market conduct model law that created market conduct  standards to promote uniformity across states. However, according to  NAIC, differences among states played a significant role in limiting  support for the model law, and ultimately only one state adopted it.
Market analysis and examination uniformity are also limited by variations  among states regarding their respective resources. According to NAIC,  states that have greater budgetary and staff resources may be able to  undertake more detailed data collection and analysis and respond using  NAIC’s market conduct tools and guidance to a greater degree than states  that have fewer resources. In addition to budgetary and resource  differences, states may also vary in the levels of expertise their staff  possess for conducting the data collection and analysis state regulators  may use to identify and respond to market conduct issues. States with  fewer resources and less expertise may be less able to analyze and use  market conduct information as part of their regulatory oversight.  However, some states in our sample noted that state regulators may  contract with outside experts to fulfill functions or areas of expertise they  lack in-house, and although it may be costly, insurers generally bear these  expenses.
section_title: Limited Reciprocity and Uniformity Can Create Inefficiencies and Uneven Consumer Protection across States
paragraphs: Limited uniformity in the use of NAIC’s market conduct tools and in state  laws and resources—and the resulting limits on reciprocity among  states—may create inefficiencies for insurers and regulators and lead to  uneven levels of consumer protection across states. For example, in the  absence of uniform examination procedures and criteria for selecting  insurance companies to examine, states implement their respective  market conduct processes based on state laws, insurance department  priorities, and established practices. Varying examination processes  across states may mean that insurers may be subjected to multiple and  sometimes simultaneous exams by regulators in the states where they  operate. An insurer’s compliance with examinations by different state  regulators may lead to increased costs to the company, which in turn may  be passed on to the consumer in the form of higher insurance rates. When  state regulators do not rely on other states’ market conduct oversight, they  may have to conduct more regulatory activities on their own.
In addition, state regulators’ varying use of the NAIC’s market conduct  data collection instruments, examination tools, and guidance may lead to  varying regulatory efforts in overseeing insurance companies in respective  states. According to some insurers and consumer groups, insurance  companies located in states that have stronger market conduct  surveillance standards may be subjected to more scrutiny than those in  states with less stringent market conduct standards. Varying levels of  market conduct oversight may lead to uneven levels of consumer  protection so that consumers may have stronger protections in some  states than others.
section_title: Conclusions
paragraphs: Reciprocity and uniformity in the insurance areas of producer licensing,  product approval, and market conduct regulation can result in benefits to  regulators, insurers, and consumers. For regulators, reciprocity and  uniformity can mean standardized processes and standards that can lead  to efficient and effective ways of working with insurers to license agents  and brokers, review and approve products for sale in the marketplace, and  protect consumers from harmful actors and products. Reciprocity for  insurers means faster, more efficient ways of introducing and gaining  approval for new insurance products and assurance that regulatory  processes will be similar across states, potentially helping insurers keep  their overall insurance product costs lower. An insurance system with  greater reciprocity and uniformity may also limit inefficiencies that could  contribute to higher product costs for insurers and consumers and may  provide for more coordinated, even consumer protection across states. To  the extent that reciprocity and uniformity are limited across states,  benefits to regulators, insurers, and consumers may also be limited.
NAIC has made progress on reciprocity and uniformity in key areas of  producer licensing, product approval, and market conduct, but this  progress has not come quickly and in some cases has been limited.
Efforts to achieve greater reciprocity in producer licensing began  following passage of GLBA in 1999, and as of March 2009, 47 states had  been certified as reciprocal. However, several key states, including  California, Florida, and New York, were still not considered reciprocal for  non-resident producer license applicants, and it appears that many states  still impose separate or additional requirements on resident producers. In  addition, as of March 2009, only 17 states were conducting criminal  background checks on applicants, resulting in uneven consumer  protections across states. Finally, we recommended in 2000 that NAIC and  state insurance regulators develop mechanisms for routinely obtaining  regulatory data from financial services regulators. Limited progress has  been made in this area, and we continue to believe that the development  of such a system is an important element of effective consumer protection  efforts.
NAIC furthered efforts to improve reciprocity and uniformity in the  approval of insurance products when it implemented SERFF in 1998, a  system that has automated the process of applying for the approval of  insurance products. As of March 2009, SERFF was used in 52 states and  jurisdictions, and approximately 85 percent of all filings were achieved  through the system. NAIC and the states also advanced product approval  reciprocity and uniformity with the creation of its Modernization Plan in  2003. In addition, NAIC and the states created the Interstate Insurance  Product Regulation Commission, a single product approval entity that  approves products that are recognized among the compacting states.  Nonetheless, it appears that many states are still imposing their own  approval practices and requirements on insurers, which limit both  reciprocity and uniformity. In addition, the compact is limited to 34 states  and jurisdictions and only certain types of insurance products.
NAIC and the states have also made efforts to improve market conduct  regulation, which were items noted in NAIC’s 2003 Modernization Plan and  addressed in a 2003 GAO report. Our report recommended that NAIC and  states take steps to adopt and implement minimum standards for market  conduct oversight that would include all states. We still believe  improvements are needed to address remaining market conduct regulatory  differences among states. Such actions could include ensuring that all  appropriate guidance—for example, from the Market Regulation  Handbook—be included as part of the accreditation process, and ensuring  that states meet uniform minimum standards in a timely manner. NAIC and  state insurance regulators have completed some improvements, such as  revising market conduct guidance and creating a market conduct working  group that has helped increase uniformity across states. However, other  important efforts, such as the collection and use of standardized market  conduct data and implementation of the core market conduct competency  standards, were still incomplete as of March 2009. As a result, uniformity  across states may be limited, and consumer protections may vary.
Regulators have faced, and will continue to face, a number of challenges  to increasing reciprocity and uniformity in these areas. For example,  insurance regulatory improvement may require increasing uniformity of  state laws that govern licensing requirements and product approval, which  in turn requires cooperation from state legislatures. NAIC and state  insurance regulators’ work with state legislatures has occurred over a  number of years, and some regulators told us that cooperation had been  difficult to achieve in some areas. In particular, according to NAIC, despite  efforts in many more states, regulators in only 17 states have obtained  statutory authority to conduct full criminal background checks with  fingerprinting. Another challenge is the differing levels of resources and  expertise among state insurance departments, which means that some  states may have the resources and staff for certain efforts, while others  may not. Further, NAIC’s operations generally require consensus among a  large number of regulators, and NAIC seeks to obtain and consider the  input of industry participants and consumer advocates. Obtaining a wide  range of views may create a more thoughtful, balanced regulatory  approach, but working through the different goals and priorities of all of  these entities can result in lengthy processes and long implementation  periods for regulatory improvements. Continued progress in a timely  manner, however, is critical to improving the efficiency and effectiveness  of the insurance regulatory system.
We also recognize that the costs and benefits of further increases in  reciprocity and uniformity must be considered. Regulators, insurers, and  consumers may not benefit if achieving uniformity occurred by simply  lowering standards across states. At the same time, it may not be feasible  to achieve reciprocity and uniformity across states by meeting the highest  standard achieved by any one state. In addition, it is not clear that full  reciprocity in some areas would be realistically achievable. For example,  as we have said, uniformity and reciprocity for the approval of  property/casualty products would require significant changes in state laws,  including a wide body of tort law. States have tailored those laws to best  protect their residents, and since many are not exclusive to insurance,  such large-scale changes may be unlikely.
As the insurance regulatory system is part of the broader financial  regulatory system, it should support the goals that the federal government  has for the entire financial regulatory system and should be part of  discussions for potential regulatory reforms. In a recent report, we  suggested a number of goals for the U.S. financial regulatory system.  Reciprocity and uniformity within the regulation of insurance could  support at least four of these goals. First, a regulatory system where  changes can be made uniformly across states may be able to more readily  adapt to innovations and changes in the insurance market. Second, greater  reciprocity and uniformity could lead to a more efficient system for  regulators through the reduction of overlapping activities, as well as for  insurers by reducing the number of different requirements they must meet  across states. Third, greater uniformity across states could provide more  consistent protection for consumers purchasing similar products and  services. Fourth, greater uniformity could also provide more consistent  financial oversight for similar institutions, products, and services. In that  report we also noted that, given the difficulties to harmonize insurance  regulation across states, Congress could explore the advantages and  disadvantages of providing a federal charter option for insurance and  creating a federal insurance regulatory entity. The establishment of a  federal insurance charter could help alleviate some of these challenges,  but such an approach could also have unintended consequences for state  regulatory bodies and for insurance firms as well. However, any  consideration of a change to the current insurance regulatory structure,  including a possible federal insurance charter, should involve appropriate  cost-benefit analysis.
section_title: Matter for Congressional Consideration
paragraphs: In order to improve how state insurance regulators identify insurance  license applicants with criminal backgrounds and protect consumers,  Congress, as it explores the advantages and disadvantages of a change to  the federal role in the regulation of insurance, should explore ways to  ensure that all state insurance regulators can conduct nationwide criminal  background checks as part of their producer licensing and consumer  protection functions.
section_title: Recommendation to NAIC and State Insurance Regulators
paragraphs: To continue progress achieved through NAIC’s electronic and automated  product filing processes, we also recommend that NAIC and state  regulators work with the insurance industry to further identify differences  in the ways state regulators review and approve filings received through  SERFF, and take any necessary steps, where appropriate, to improve  consistency in their product approval processes.
section_title: NAIC Comments and Our Evaluation
paragraphs: We provided a draft of this report to NAIC. The Chief Operating Officer  and Chief Legal Officer of NAIC provided written comments, which are  reprinted in appendix II. In commenting on a draft of this report, NAIC’s  Chief Operating Officer and Chief Legal Officer agreed with our  recommendation. NAIC also made some general comments about the  benefits of state-based regulation.
In the area of producer licensing, NAIC noted that while we acknowledged  that 47 states had been certified as reciprocal, we also described  reciprocity as limited. As we discuss in the report, while NAIC has made  progress in some areas, we continue to view overall progress on  uniformity and reciprocity as limited. NAIC and the states have made  progress with reciprocity, but the certification process does not include a  review of whether states are also complying with the URLS, which added  some standards that were not included in PLMA but which NAIC believed  were important for meaningful uniformity and reciprocity as noted in the  report. For example, the certification process does not require criminal  background checks. Also related to this issue, NAIC noted that one  procedural issue has been a significant impediment, FBI administrative  standards related to fingerprinting. We have added this new information to  the report. NAIC also noted a number of other efforts that they have taken  in the area of producer licensing including the State Producer Licensing  Database.
In the product approval area, NAIC commented on a variety of issues and  provided some updated data on the Interstate Compact and activities of  Interstate Insurance Product Regulation Commission (IIPRC), both of  which are discussed in the report. Moreover, they noted that they have  continued to make progress in adopting uniform standards in certain  property lines and that more companies are registering. The letter also  provides NAIC’s views on the flexibility and improvements afforded states  regarding product approval, an issue raised during the course of our work  and discussed in the report. NAIC also discusses the Compact approval  process and transparency. As we noted in the report, consumer groups we  spoke with expressed concern that the product approval process was not  more transparent. NAIC commented about suitability and consumer  protection issues associated with the Compact by noting that state  insurance regulators retain the authority to protect consumers and the  Compact preserves consumers’ rights to pursue legal remedies not  specifically directed to the content of the product.
Finally, with respect to market conduct regulation, NAIC highlighted its  efforts in this area and noted that it continues to pursue standardized data  collection practices, the development of a Market Regulation  Accreditation Program, and participation by all states in MCAS data  collection by 2010.
In addition, NAIC provided technical comments on the report, which we  incorporated, as appropriate.
As agreed with your offices, unless you publicly release its contents  earlier, we plan no further distribution of this report until 30 days from its  date of issue. At that time we will send copies of this report to interested  congressional committees, the Chief Executive Officer of the National  Association of Insurance Commissioners, and others. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-8678 or williamso@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: As Congress has considered options to help ensure efficient and effective  regulation of the insurance market, policymakers have had a number of  questions about the success of recent efforts and the challenges that  remain. To address these questions, in each of the regulatory areas of  producer licensing, product approval, and market conduct regulation, we  have been asked to assess (1) the progress NAIC and state regulators have  made to increase reciprocity and uniformity, (2) the factors that have  challenged efforts to achieve greater reciprocity and uniformity, and (3)  the potential effects on the insurance industry and consumers if greater  progress is not made.
To assess the progress, challenges, and potential effects on the insurance  industry and consumers related to reciprocity and uniformity in producer  licensing, product approval, and market conduct, we interviewed officials  from state insurance departments, the National Association of Insurance  Commissioners (NAIC), the National Conference of Insurance Legislators  (NCOIL), primary insurance companies, insurance associations, and  consumer advocacy groups. We met with insurance regulators from nine  states—Alabama, California, Florida, Georgia, Illinois, New York, Texas,  Pennsylvania, and Ohio. We selected this sample of states due to the  states’ geographic diversity and respective premium volumes, which  ranged from small to large. The four insurers we met with provided  property and casualty insurance coverage and life and health insurance to  consumers. We also met with several industry associations representing  insurance companies covering property and casualty and life and health  insurance lines across states. The consumer advocacy groups with whom  we met represented both individual state consumers and consumers  nationwide. We also reviewed congressional testimony from  knowledgeable industry participants, several of whom we interviewed for  this study. Further, we examined regulatory documents such as NAIC’s  Insurance Regulatory Modernization Action Plan (Modernization Plan) and  NAIC’s standards and guidelines concerning producer licensing, product  approval, and market conduct regulation. Finally, we reviewed our  previous reports and testimonies and Congressional Research Service  reviews.
To examine the progress, challenges, and potential effects on the  insurance industry and consumers related to producer licensing  reciprocity and uniformity, we spoke with NAIC officials, NCOIL officials,  state insurance regulators, insurance companies, insurance associations,  and consumer advocacy groups. To obtain information on the producer  licensing goals that NAIC established, we reviewed NAIC’s 2003  Modernization Plan and other NAIC documents. We also reviewed our  previous reports and testimonies that called for improvements to producer  licensing. To document the states that NAIC has certified as reciprocal for  producer licensing, and those states that have statutory authority to  perform criminal background checks with fingerprinting, we relied on  NAIC data.
To examine progress in making product approval more efficient, the  barriers to further reciprocity and uniformity and the potential effects if  more progress is not made, we spoke with NAIC, NCOIL, states, industry  representatives, and consumer advocacy groups. We reviewed NAIC’s  Modernization Plan and other NAIC documentation to determine NAIC’s  product approval goals. Previous GAO studies provided recommendations  geared toward improvement of product approval regulation. To gather  information on the states that have joined the Interstate Compact, we  relied on NAIC and Interstate Insurance Product Regulation Commission  (IIPRC) data.
To examine the steps NAIC has taken to improve market conduct  reciprocity and uniformity, and the potential impact on the insurance  industry if greater progress does not occur, we spoke with NAIC, state  insurance regulators, insurance companies, insurance industry  associations, and consumer advocates. Documentation from NAIC such as  the Modernization Plan and the Market Regulation Handbook provided us  with NAIC’s market conduct goals and guidance to promote uniform  market conduct standards. To obtain information on the specific data  elements collected through the MCAS, we relied on NAIC documentation  on elements collected for individual and group life, fixed and variable  annuities, private passenger auto, and homeowners insurance products.
We conducted our work from February 2008 through April 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the National Association of Insurance Commissioners
section_title: Appendix III: Examples of Market Conduct Annual Statement Data Elements
paragraphs: Appendix III: Examples of Market Conduct  Annual Statement Data Elements Private Passenger Auto Insurance Data Elements  Number Of Claims Open At The Beginning Of The Period  Number Of Claims Opened During The Period  Number Of Claims Closed During The Period, With Payment  Number Of Claims Closed During The Period, Without Payment  Median Days To Final Payment  Number Of Claims Settled Within 0-30 Days  Number Of Claims Settled Within 31-60 Days  Number Of Claims Settled Within 61-90 Days  Number Of Claims Settled Within 91-180 Days  Number Of Claims Settled Within 181-365 Days  Number Of Claims Settled Beyond 365 Days  Median Days To Date Of Report  Number Of Suits Open At Beginning Of The Period  Number Of Autos Which Have Policies In-Force At The End Of The Period  Number Of Policies In-Force At The End Of The Period  Number Of New Business Policies Written During The Period  Dollar Amount Of Direct Premium Written During The Period  Number Of Non-Renewals During The Period  Number Of Cancellations That Occur 60 Days Or More After Effective Date, Excluding  Those For Either Non-Pay Or At The Insured’s Request  Number Of Cancellations That Occur In The First 59 Days After Effective Date,  Excluding Those For Either Non-Pay Or At The Insured’s Request  Number Of Claims Open At The Beginning Of The Period  Number Of Claims Opened During The Period  Number Of Claims Closed During The Period, With Payment  Number Of Claims Closed During The Period, Without Payment  Median Days To Final Payment  Number Of Claims Settled Within 0-30 Days  Number Of Claims Settled Within 31-60 Days  Number Of Claims Settled Within 61-90 Days  Number Of Claims Settled Within 91-180 Days  Number Of Claims Settled Within 181-365 Days  Number Of Claims Settled Beyond 365 Days  Median Days To Date Of Report  Number Of Suits Open At Beginning Of The Period  Private Passenger Auto Insurance Data Elements  Number Of Suits Closed During The Period  Number Of Suits Open At End Of Period  Number Of Dwellings Which Have Policies In-Force At The End Of The Period  Number Of Policies In-Force At The End Of The Period  Number Of New Business Policies Written During The Period  Dollar Amount Of Direct Premium Written During The Period  Number Of Non-Renewals During The Period  Number Of Cancellations That Occur 60 Days Or More After Effective Date, Excluding  Those For Either Non-Pay Or At The Insured’s Request  Number Of Cancellations That Occur In The First 59 Days After Effective Date,  Excluding Those For Either Non-Pay Or At The Insured’s Request  Fixed and Variable Annuities Data Elements  Number Of New Replacement Contracts Applied For During The Period  Number Of New Replacement Contracts Issued During The Period  Internal Replacement Indicator (Yes/No)
Loan Purchase Indicator (Yes/No)  1035 Rollover Indicator (Yes/No)
Replacement Register Indicator (Yes/No)
Number Of Contracts Surrendered During The Period  Number Of New 1035 Exchanges Coming Into The Company During The Period  Number Of New Contracts Issued During The Period  Number Of Contracts In Force At The End Of The Period  Dollar Amount Of Annuity Considerations During The Period  Number Of Complaints Received Directly From Consumers  Number Of Complaints Received Directly From The Corresponding Department Of  Insurance  Complaint Register Indicator (Yes/No)
Individual and Group Life Product Data Elements  Number Of New Replacement Policies Applied For During The Period  Number Of New Replacement Policies Issued During The Period  Internal Replacement Indicator (Yes/No)
Surrender Indicator (Yes/No)
Loan Purchase Indicator (Yes/No)  1035 Rollover Indicator (Yes/No)
Replacement Register Indicator (Yes/No)
Number Of In Force Policies Containing Policy Loans With An Outstanding Balance Over  25 Percent Of The Maximum Loan Value As Of December 31, 20XX  Partial Surrenders Indicator (Yes/No)
Private Passenger Auto Insurance Data Elements  Number Of New 1035 Exchanges Coming Into The Company During The Period  Number Of New Policies Issued During The Period  Number Of Policies In Force At The End Of The Period  Dollar Amount Of Direct Premium During The Period  Dollar Amount Of Insurance Issued During The Period (Face Amount)
Dollar Amount Of Insurance In Force At The End Of The Period (Face Amount)
Number Of Complaints Received Directly From Consumers  Number Of Complaints Received Directly From The Corresponding Department Of  Insurance  Complaint Register Indicator (Yes/No)
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Patrick Ward (Assistant Director),  Farah Angersola, Emily Chalmers, Barry Kirby, Marc Molino, Steve  Ruszczyk, and Jennifer Schwartz made key contributions to this report.
section_title: Related GAO Products
paragraphs: Better Information Sharing Among Financial Services Regulators Could  Improve Protections for Consumers. GAO-04-882R. Washington, D.C.:  June 29, 2004.
Insurance Regulation: Common Standards and Improved Coordination  Needed to Strengthen Market Regulation. GAO-03-433. Washington, D.C.:  September 30, 2003.
Preliminary Views on States’ Oversight of Insurers’ Market Behavior.  GAO-03-738T. Washington, D.C.: May 6, 2003.
State Insurance Regulation: Efforts to Streamline Key Licensing and  Approval Processes Face Challenges. GAO-02-842T. Washington, D.C.:  June 18, 2002.
Regulatory Initiatives of the National Association of Insurance  Commissioners. GAO-01-885R. Washington, D.C.: July 6, 2001.
Financial Services Regulators: Better Information Sharing Could Reduce  Fraud. GAO-01-478T. Washington, D.C.: March 6, 2001.
Insurance Regulation: Scandal Highlights Need for Strengthened  Regulatory Oversight. GGD-00-198. Washington, D.C.: September 19, 2000.
Insurance Regulation: Scandal Highlights Need for Strengthened  Regulatory Oversight. T-GGD-00-209. Washington, D.C.: September 19,  2000.