Market Regulation: Where We Go From Here (All Lines)

1. Market Regulation: Where We Go From Here (All Lines) Caroline Brock Deputy Commissioner Office of Financial Solvency Ron Musser Assistant Commissioner Office of Financial Solvency Louisiana Department of Insurance James J. Donelon, Commissioner

2. Louisiana Department of Insurance James J. Donelon, Commissioner www.ldi.state.la.us

3. Louisiana Department of InsuranceOffice of Financial SolvencyMarket Conduct DivisionCaroline BrockDeputy Commissioner of Financial SolvencyRon MusserAssistant Commissioner of Financial SolvencyLarry HawkinsDirector, Market Conduct

4. Purpose of the Market Conduct Division To analyze and examine the activities of regulated insurance entities in Louisiana to: • Determine if any acts or practices by regulated entities are unfair and/or deceptive to the policyholders and/or claimants of this state. • Determine if activities of regulated entities are in violation of the statutes, rules and regulations of this state.

5. Purpose of the Market Conduct Division (continued) • Investigate unfair or illegal activities, assist persons harmed by those activities and take appropriate action against violators. • Assure that claims are paid equitably, promptly and in compliance with policy terms and provisions. • Recognize problems in the marketplace that need to be addressed by legislation, regulations or other means. • Develop a competent, well trained Market Conduct staff.

6. Market Conduct Division

7. Statutory Authority • Louisiana Statutes • Similar to those of other states in that basic NAIC model laws have been adopted— • Model Law on Examinations • Model law on Unfair Trade Practices • Model Law on Unfair Claims Settlement Practices • NAIC Market Regulation Handbook is used as a guideline for examination standards as applicable to Louisiana Law and as a guideline for analysis standards

8. Statutory Authority (continued) • Louisiana Insurance Code • Production of Books and Records, LRS 22:1309 • Books and Records out of state, LRS 22:39 • Commissioner May Examine, LRS 22:1301 et. seq. • Power of Commissioner, LRS 22:1215 • examine any person engaged in the business of insurance • Unfair Trade Practices, Part XXVI, LRS 22:1214 • Unfair Claims Settlement Practices, LRS 22:1214 (14)

9. Where WeWere • In past years, we conducted mostly routine, on-site, full scope Market Conduct examinations, usually in conjunction with regularly scheduled financial examinations. • We also conducted some target examinations, usually as a result of complaints. • Some of these target examinations were conducted on-site while others were desk audits.

10. The New Approach • For the past several years, the NAIC has • advocated a more streamlined approach • to Market Conduct examinations. • The idea behind this new approach is to move away from the routine, full scope, on-site examinations and to conduct examinations based on internal Market Analysis of regulated entities and analysis of marketplace issues. • Another emphasis is to participate in collaborative initiatives. • This streamlined approach is meant to provide a more cost effective and less duplicative method of conducting examinations. • We are approaching Market Regulation from this perspective.

11. Market Conduct Annual Statement • The NAIC Market Conduct Annual Statement pilot project was initiated in 2000. • In 2004, NAIC membership voted to make the MCAS a permanent project. • We joined this project in 2006 and began receiving 2007 data in 2008. • There are currently 23 states and the District of Columbia collecting this data. • 5 more states have announced the intent to participate in the 2008 data collection.

12. Market Conduct Annual Statement • To limit the impact on insurers, the NAIC decided to gradually add new states, which also enabled states to get the needed resources in place to handle the MCAS data. • At this time, the only lines of insurance in this project are Life & Annuity and limited Property & Casualty lines.

13. Market Conduct Annual Statement • The goal of this project is to provide a uniform system of collecting market related information to serve the needs of all participating states. • The MCAS provides regulators with information not otherwise available for their market analysis initiatives. • It promotes uniform analysis by applying consistent measurements and comparisons between companies, which allows all companies to be compared on an equal basis.

14. Market Conduct Annual Statement • What is required in the MCAS project: • 1. NAIC sends the call letters to all companies required to participate. • 2. We review the MCAS when received. • 3. We send a report card to all companies that submit a MCAS to show how they rank with their peers in Louisiana. • 4. This information will assist us in making a determination of which companies may need a closer look and possibly an examination. • 5. Participating in MCAS does not necessarily mean there will be no Market Conduct examinations of your company.

15. Market Conduct Annual Statement • We utilize our examination statutes to include MCAS filings that maintain these filings as confidential and not subject to subpoena just as any other examination workpapers. • We received approximately 135 MCAS from P&C companies writing business in Louisiana. • We have received over 329 MCAS from the Life & Annuity companies.

16. Market Conduct Annual Statement Requirements • Life & Annuity---reporting at least $50,000 of Individual plus Group Life Insurance premiums (excluding Credit Life); or at least $50,000 of Individual Annuity considerations for the data collection year. • Life & Annuity Lines to report on MCAS---- • Individual Life (Cash & Non-Cash) Value Products • Group Life Products (Cash & Non-Cash Value) • Individual Fixed Annuities • Individual Variable Annuities

17. Market Conduct Annual Statement Requirements • Property & Casualty---reporting at least $50,000 of Homeowners premiums or $50,000 of Private Passenger Auto premiums for the data collection year. • Property & Casualty Lines to report on MCAS--- • Private Passenger Automobile • Homeowners

18. Market Conduct Annual Statement Requirements • Each company in a holding company system must file separately. Data for several companies cannot be combined into a single filing. • If your company did not receive a call letter, and you think you should file, it may be due to your previous year financial statement filing in which your company didn’t meet the threshold. If the premium meets the threshold for filing the MCAS, then you need to contact that state’s contact person.

19. Market Conduct Annual Statement Requirements • Companies exempt from filing in previous years are not automatically exempt from filing each year. • To request an exemption, you must submit a letter signed by an officer of the company to the contact person of each state that sent a call letter advising them of the reason you are requesting an exemption, along with a list of all states where you are requesting the exemption. • DO NOT wait until the due date to request an exemption.

20. Market Conduct Annual Statement Requirements • If two or more companies merged during the reporting period, the companies should report under the corporate structure that is in effect as of the last day of the reporting period. • If the merger was effective before or during the review period, then the surviving company should do the combined reporting. • Any of the non-surviving companies that received a call letter should contact the state that sent the letter and inform them of the change. • If the merger will become effective after the reporting period, the companies involved should file separate data submissions.

21. Market Conduct Annual Statement Requirements • Rehabilitation: The company is not required to submit a filing, but must contact the participating state that sent the letter to request an exemption. • Order of Supervision: The company may request an exemption from each participating state that the company received a letter from. Exemptions will be based on an individual state basis and may consider items such as whether the company is continuing to write new business and its premium volume. When the company requests an exemption, it should provide the name of the state that issued the order and include a list of all states where an exemption is being requested.

22. Market Conduct Annual Statement Requirements • If your company needs an extension of time to file, DO NOT wait until the due date to request that extension. • You will need a valid explanation as to why an extension is needed. • Extensions will be reviewed on an case by case basis.

23. Problems Encountered with MCAS Filings • Companies not carefully reading and following the instructions for filing the MCAS data and Certificate of Compliance. • MCAS filings on diskette. • MCAS in WinZip files. • MCAS filed electronically with no subject line, no NAIC CoCode, no Company name. • Incomplete filings.

24. Problems Encountered with MCAS Filings • MCAS data filed without the Certificate of Compliance • When refiling MCAS, companies mistakenly re-filed the original Certificate of Compliance. • Certificates of Compliance were not filed on Company letterhead. • 1 Certificate of Compliance was submitted for a group of companies. • Some Certificates were not signed.

25. Problems Encountered with MCAS Filings • Certificates were sent in separate e-mails from the MCAS data files. • Some Certificates indicated the wrong data year (2008 instead of 2007). • Certificates were sent in as Word documents and Watermark documents instead of the required PDF file. • Two company names were on Certificates showing 1 company was filing for the other.

26. Problems Encountered with MCAS Filings • Errors in data submitted. • Data filed for the wrong state. • Data filed for the wrong company. • Late filings. • Filings were submitted with Secure Messaging Systems or data encryptions. • Companies filing MCAS data where the premium did not meet the threshold.

27. Market Analysis • We are participating in the Market Analysis process developed by the NAIC Market Analysis Working Group. The Market Analysis process is overseen by our designated Market Analysis Chief (MAC). • MAC duties include: • Receiving and coordinating information with LDI staff which may be indicators of unusual activity or potential market regulation problems • Coordinating information sharing with other Departments of Insurance

28. Market Analysis • Limited market analysis has been done since the beginning of the Market Conduct Division. • Since 2004, we have performed analysis of our domestic insurers, focusing mainly on our nationally significant and multi-state companies. • In 2008, our goal is to perform Baseline Analysis on all of our domestic insurers and some selected foreign insurers based on premium volume written or complaints received in our state.

29. Market Analysis • Steps In Market Analysis • MCAS -- All companies that are required to submit MCAS • Baseline Analysis – All companies writing business in Louisiana are subject to this level of review • Level 1 Analysis -- Those companies that we have some concerns after the Baseline Analysis has been completed

30. Market Analysis • Level 2 Analysis -- Level 2 analysis is performed on those companies that Level 1 analysis has indicated that further analysis is needed to determine if the perceived problems have a valid explanation or are actual problems that need to be addressed. • Referral to Market Analysis Chief to determine which, if any, regulatory response is appropriate – If after a Level 2 analysis has been performed, it appears that there are still concerns, the file is referred to the Market Analysis Chief to determine other possible regulatory responses from the Continuum of Regulatory responses developed by the NAIC that may be appropriate.

31. Market Analysis Some things that we look at: • Results of review of MCAS data • Change in officers, directors or trustees • Changes in company management or organization • Premium volume written • IRIS Ratios • Complaint Index • Market Share • Changes in capital and surplus

32. Market Analysis • We are following NAIC Guidelines with Baseline Analysis and the Level 1 Market Analysis Checklist. • A Level 2 Market Analysis Checklist is being developed at the NAIC. • Level 1 Market Analysis is performed prior to current and future examinations.

33. Market Analysis • Based on the results of Level 1 analysis, we performed Level 2 analysis of 6 insurers for data year 2004, 15 insurers for data year 2005 and 6 insurers for data year 2006. • If the analysis process determines that we may have an issue with a multi-state entity or a nationally significant insurer, ( i.e., when there are significant issues at a regional level or with an impact on one or more specific states), we will pass the information on to the NAIC Market Analysis Working Group for further communication of those issues among the states.

34. Market Analysis In addition to our internal Market Conduct analysis process, we also receive internal referrals from other divisions within the Department, such as the Financial Solvency Division or one of the complaint or policy form sections for Property and Casualty, Life and Annuity or Office of Health Insurance. These referrals could be based on complaint volume, trends of recent complaints or issue driven reasons. It is possible that one complaint could trigger an examination if the issue is deemed serious enough to warrant further investigation (e.g., antitrust, whistleblower information). Information received from other Departmental Divisions is routed to the Market Analysis Chief (MAC), who in turn, coordinates information sharing with other Departments of Insurance.

35. The Continuum of Regulatory Responses • We utilize various methods to investigate and resolve issues that arise through the analysis and information gathering process. In lieu of conducting an on-site examination of a regulated entity, we may utilize one or more methods of regulatory response depending on available resources and potential amount of consumer harm:

36. The Continuum of Regulatory Responses • Office-based information gathering; • Applied regulatory responses; • Interview with the Company; • Targeted information gathering; • Correspondence; • Policy & procedure reviews; • Interrogatories; • Desk audits; • Company self-audits;

37. The Continuum of Regulatory Responses • Voluntary compliance program; • Information sharing; • On-site audits; • Investigation; • Targeted examination; • Comprehensive examination; • Multi-jurisdictional cooperative examination; • Enforcement actions; and • Proposal of new statutes or regulations.

38. Examination Standards • We utilize the NAIC Market Conduct Examiners Handbook for examination standards. Since we now conduct mostly targeted examinations, we will only perform tests for a few published handbook standards for any given aspect of the company’s operations.

39. Collaborative Actions • We have been participating in collaborative or “multi-state” examinations since the mid-1990’s. We continue to participate both actively and passively in current collaborative efforts. • We actively participate with the NAIC Market Analysis Working Group (MAWG) and make appropriate referrals to the Working Group through our appointed Collaborative Actions Designee (CAD) when appropriate and when material issues are discovered that may impact other jurisdictions.

40. Collaborative Actions • We also participate in collaborative activities with other affected states when there are common areas of concern among a few states, but where a referral to MAWG would not be necessary.

41. Enforcement Actions We have entered into a wide variety of regulatory enforcement actions which include: • Agreement from regulated entity to cease specified unlawful practices • Institution of a corrective action plan • Restitution, with or without interest • Monetary penalties • Suspension or revocation of license or Certificate of Authority • Voluntary settlement agreements

42. Regulatory Penalties • When considering regulatory penalties, LDI considers various factors before making a final determination as to the type and severity of the penalty: • The seriousness or egregiousness of the violation • Whether the violation is found to be a general business practice • Whether the violation is identified by statute as an Unfair Trade Practice

43. Regulatory Penalties • Whether the violations were intentional or committed in “good faith” • Whether the regulated entity has a history of past violations • Whether the company cooperated with regulators • The financial condition of the company • The extent of consumer harm incurred as a result of the violations

44. Regulatory Penalties • In general, it is the philosophy of the Department that if a company detects a violation on its own initiative, such as a compliance audit, and the company advises us of its findings, takes corrective action and leaves no consumers harmed, we will not seek regulatory action or penalties against that regulated entity.

45. Re-examination • In many instances, especially when violations resulted in some form of harm to the consumers, we will re-examine the regulated entity to assure that it has taken proper steps to cease the practice in question and that it has made restitution to consumers. The re-examination is limited to only those areas where a previous violation was detected during an examination.

46. RIRS • All regulatory actions taken as a result of Market Conduct examinations of any regulated entity are reported to the NAIC RIRS (Regulatory Information Retrieval System) database.

47. Entities Examined • All types of insurers • HMOs • Self Insurance Funds • Guaranty Associations • Third Party Administrators • Managing General Agents • Surplus Lines Brokers • Producers (usually bail bonds, title or credit) • Unauthorized entities • MEWAs

48. Triggers for Market Conduct Examinations • Market Conduct Annual Statements (MCAS) • Market Analysis • Complaints / Complaint Ratios & Indices • Lack of appointed or licensed producers • Policy Forms • Current Issues • Internet Web-sites • Referrals • Significant findings in last examination

49. Focus of Examinations • Our examinations focus on the general business practices of a regulated entity and not random or inadvertent errors. • While we do ask the regulated entity to correct the random errors we may find during the examination process, we do not generally reference these types of errors in the examination report.

50. LDI’s Web Page • www.ldi.state.la.us Louisiana Department of Insurance 1702 North 3rd Street – Baton Rouge, Louisiana 70802 P.O. Box 94214 - 70804-9214