Market Conduct Examinations

1. Market Conduct Examinations Navigating Single and Multi-State Market Conduct Examinations October 25, 2018 Chad Walker Greg Hahn Bryan Babb

2. Market Conduct Exams Are Serious Business! California Department of Insurance Says it Recovered $81.3M for Consumers in 20171 Connecticut Recovered $6M for Policyholders, Taxpayers in 20151 Pennsylvania Collects Over $4M in Penalties & Fines and Recovers $295M in Restitution (2014) 1 JP Morgan, Assurant Settle Force-Placed Insurance Claims for $300M2 Rhode Island Insurance Commissioner Finds Blue Cross & Blue Shield Parity Non-Compliant3 Kentucky DOI Returns Over $15M to Kentuckians in 20174 Zenefits Hit with $7 Million Fine by California Insurance Regulator5 Investigation into Sale of Short-Term Health Policies Leads to $5M Settlement6

3. What Is A Market Conduct Examination? Examination of insurance companies and other licensed entities to determine whether they are in compliance with contract provisions and state laws, rules and regulations. Proper market conduct requires Company and Person to conduct insurance business responsibly and fairly within the parameters of applicable laws, rules and regulations. NOT limited to companies and organizations. May include examination of individuals, agents, third party administrators. “Company” means any person engaging in or proposing or attempting to engage in any transaction or kind of insurance or surety business and any person or group of persons who may otherwise be subject to the administrative, regulatory or taxing authority of the commissioner. IC 27-1-3.1-2 “Person” means any individual, aggregation of individual, trust, association, partnership, limited liability company, or corporation, or any affiliate of these entities. IC 27-1-3.1-7

4. Market Conduct Examinations Impact Bottom Lines! • Fines • Restitution • Examination Costs • Costs of Implementing Corrective Actions • Stock Value • Goodwill

5. Commissioner Has Broad Authority The commissioner or any of the commissioner’s examiners may conduct an examination of any company as often as the commissioner, in the commissioner’s sole discretion, considers appropriate. IC 27-1-3.1-8(a)(1) The commissioner may examine or investigate any person, or the business of any person, in so far as such examination or investigation is, in the sole discretion of the commissioner, necessary or material to the examination of the company. IC 27-1-3.1-8(c) Every company or person from whom information is sought, and the officers, directors, and agents of the company or person, must provide to the examiners convenient, and free access to all books, records, accounts, papers, documents and any or all computer or other recordings relating to the property, assets, business, and affairs of the company being examined. The officers, directors, employees, and agents of the company or person must facilitate the examination and aid in the examination so far as it is in their power to do so. IC 27-1-3.1-9(b). Refusal of any company to make a good faith effort to require compliance with such a request is grounds for: (1) suspension; (2) refusal; or (3) nonrenewal; of any license or authority held by the company to engage in an insurance or other business subject to the commissioners jurisdiction. IC 27-1-3.1-9(b). The commissioner and the commissioner’s examiners may issue subpoenas, administer oaths, and examine under oath any person as to any matter pertinent to an examination conducted under this chapter. Upon the failure or refusal of any person to obey a subpoena, the commissioner may petition a court of competent jurisdiction, and upon proper showing, the court may enter any order compelling the witness to appear and testify or produce documentary evidence. Failure to obey the court is punishable as contempt of court. IC 27-1-3.1-9(c). Commissioner may order the company to take any action the commissioner considers necessary and appropriate to cure identified violations. IC 27-1-3.1-11(b)

6. Guidelines for Examinations Market Regulation Handbook (NAIC) • Provides examination guidance on: • Examination Procedures • Sampling • Examination Document Requests • Report Drafting Insurance Department Policies & Procedures NAIC Market Actions Working Group (MAWG)

7. What is MAWG Anyway? • Market Actions Working Group • NAIC Working Group of D Committee • 2018 NAIC Charge – Facilitate interstate communication and coordinate collaborative state regulatory actions • Confidential Closed-Door Meetings • Information-sharing regarding identified or potential issues • Identifies companies exhibiting current or potential market regulatory issues of national impact • Promotes targeted regulatory response • MAWG Actions • Jurisdiction submits referral to request multi-jurisdictional action. • Jurisdiction presents request to MAWG. • MAWG reviews, discusses and determines whether to take action.

8. Examination Types • Single Jurisdiction Targeted Examination • Initiated and managed by single jurisdiction insurance department • Subject to single jurisdiction’s laws, rules and regulations • Multi-State Market Conduct Examination • Generally a result of MAWG discussions and referrals • Managing Lead State usually determines examiner and manages based on Managing Lead State’s department guidelines and statutory requirements. • Lead States act on behalf of all participating jurisdictions. • Coordinated and targeted analysis • Potential resolution with multiple jurisdictions

9. How a Regulator Decides to Commence an Examination • Statutory requirements • Complaints • Significant increases/decreases in premium volume • Significant changes in Company business • Significant changes in Company operations and use of third-parties (TPAs, etc.) • Data breaches • MAWG discussions • Media • Referrals

10. Common Concerns Prompting Examinations • Claims processing • Timely communications, processing and pay/deny • Maintaining appropriate documentation • Underwriting • Discriminatory practices • Complete underwriting files • Appropriate and compliant disclosures • Complaints • Maintaining compliant complaint logs and documentation • Compliant communications • Sales • Unfair Trade Practices • Deceptive Advertising • Use of compliant and approved advertising • Use of compliant forms • Use of approved rates

11. What’s the Process? • Preliminary determination(s) by Department(s) of Insurance to commence examination. • Call Letter/Examination Warrant • Identifies basis and scope of examination. • Identifies Examiner in Charge (EIC) • Preliminary EIC Work • Consultation with DOI and background research • Entrance Meeting • Data Gathering • Data Calls • Sampling • Written requests/interrogatories

12. Examination Process (Cont’d) • Data Analysis • Interviews • Preliminary Findings • Settlement Negotiations • Draft Report • Company Response/Rebuttal • Delivery of Final Report • Acceptance or Rejection by DOI

13. Is Resolution Appropriate? • Advantages to Resolution Prior to Issuance of Examination Report: • Eliminate Uncertainty of Proceedings • Confidentiality • Contain Economic and Goodwill Impact • Resolution Terms Generally Include: • Confidentiality • Financial Considerations • Corrective Actions • Future Compliance Obligations • Potential Monitoring

14. Examination Reports7 • Fact-Based • Conclusions & Recommendations of EIC • Within determined time period (60 days in Indiana) following completion of Exam • EIC shall file written and verified report with DOI • Company shall have determined time period (30 days in Indiana)to make a written submission or rebuttal • Confidentiality • Report remains confidential for a period of time (30 days in Indiana), thereafter the report may become open for public inspection.

15. Post-Report Process • Following the filing of a report by EIC and response/rebuttal by Company8: • Commissioner shall fully review the report and any rebuttals within defined period following final submission (30 days in Indiana). • Commissioner may: • Adopt report as filed or with modifications/corrections • Reject report and instruct examiners to reopen examination • Call for an investigatory hearing • Order Company to take any action the commissioner considers necessary and appropriate to cure violations.

16. Post-Report Process (Cont’d) • Investigatory Hearings9 • Non-Adversarial • Confidential • Intended to resolve inconsistencies, discrepancies or disputed issues apparent upon the face of the report or as a result of commissioner’s review of relevant workpapers. • Company may conduct limited discovery of examiner’s workpapers. • Appeals10 • Orders issued as a result of the Examination Report are considered final administrative decisions that may be appealed under IC 4-1-21.5-5.

17. Examination Do’s and Don’ts • BE PROACTIVE! • Compliance Policies & Procedures • Whistleblower Policies • Self-Examinations • Self-Reporting

18. Examination Do’s and Don’ts (Cont’d) • During The Examination… • Prepare • Ask Questions! • Be Proactive with Information • Responsiveness • Honesty • Organization & Detail • Consistency • Point(s) of Contact • Regular Status Calls • Negotiate Preliminary Findings, Settlement or Final Examination Report

19. Market Conduct Examinations Questions & Answers Greg Hahn, Bose McKinney & Evans Bryan Babb, Bose McKinney & Evans Chad Walker, Bose McKinney & Evans Email thoughts and questions to: cwalker@boselaw.com

20. Market Conduct Examinations News, https://www.insurancejournal.com/topics/market-conduct-examinations/ (last visited October 14, 2018). • JP Morgan, Assurant Settle Force-Placed Insurance Claims for $300M, Insurance Journal (https://www.insurancejournal.com/news/national/2013/09/10/304637.htm (last visited October 14, 2018). • Rhode Island Insurance Commissioner Finds Blue Cross & Blue Shield Parity Non-Compliant, Open Minds (September 30, 2018) https://www.openminds.com/market-intelligence/news/rhode-island-behavioral-health-parity-market-conduct-examination-finds-blue-cross... (last visited October 14, 2018). • Kentucky DOI returns over $15 million to Kentuckians in 2017, Lanereport (December 21, 2017) https://www.lanereport.com/85022/2017/12/kentuck-doi-returns-over-15-million-to-kentucians-in-2017/ (last visited October 14, 2018). • Rolfe Winkler, Zenefits Hit with $7 Million Fine by California Insurance Regulator, Wall Street Journal (November 28, 2016), https:www.wsj.com/articles/zenefits-hit-with-7-million-fine-by-california-insurance-regulator-1480371875. • Investigation into sale of short-term health policies leads to $5 million settlement with HCC Life Insurance Company , California Department of Insurance (April 10, 2018) http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release036-18.cfm (last visited October 14, 2018). • IC 27-1-3.1-10; IC 27-1-3.1-14 • IC 27-1-3.1-11 • IC 27-1-3.1-12; 27-1-3.1-13; IC 27-1-3.1-14 1