Actuarial Notes

State Market Conduct Regulation

Study guide: Exam DISC-IA

State Market Conduct Regulation is the U.S. states' supervision of how insurers and producers deal with consumers: how they advertise and sell, whom they insure and on what terms, how they handle complaints and how they settle claims. Its main statutes are the state versions of the NAIC Unfair Trade Practices Act and Unfair Claims Settlement Practices Act, and its tools are market analysis, consumer complaints and market conduct examinations, backed by cease and desist orders, fines and license action. The Canadian counterpart is Market Conduct Regulation.

P = \min\big(1{,}000\,n,\ 100{,}000\big)

P_{\text{flagrant}} = \min\big(25{,}000\,n,\ 250{,}000\big)

  • Symbols: Under the NAIC Unfair Trade Practices Act, P is the most the commissioner may fine for n violations: $1,000 each, up to $100,000 in all. If the violations were committed flagrantly in conscious disregard of the Act, the limits rise to $25,000 each and $250,000 in all. The commissioner may also suspend or revoke the insurer's license if it knew or reasonably should have known it was violating the Act. States set their own amounts.
  • Purpose and enforcement: The Act regulates trade practices in the business of insurance, as the McCarran-Ferguson Act contemplates, by defining unfair methods of competition and unfair or deceptive acts and practices and prohibiting them. The commissioner may examine and investigate the affairs of any insurer or person, and after a hearing issue written findings and an order to cease and desist. The Act creates no private right to sue.
  • Misrepresentation and false advertising: Any illustration, sales presentation, omission or comparison that misrepresents a policy's benefits, terms or dividends, misrepresents an insurer's financial condition, or misrepresents in order to induce someone to buy, lapse, forfeit, exchange, convert or surrender a policy is prohibited. So is any advertisement or statement about insurance that is untrue, deceptive or misleading.
  • Unfair discrimination: An insurer may not discriminate unfairly between people of the same class and the same expectation of life in life insurance, or of essentially the same hazard in health insurance. It may not refuse, cancel, non-renew or limit property and casualty coverage solely because of a risk's geographic location, unless sound underwriting and actuarial principles related to loss experience support it, or solely because of a home's age. Nor may it refuse or limit coverage because of a person's sex, marital status, race, religion or national origin.
  • Rebates and inducements: Offering any rebate of premium, or anything of value not specified in the policy, as an inducement to buy is prohibited, except as state law expressly allows.
  • Other prohibited practices: Defaming an insurer's financial condition; any agreement or concerted act of boycott, coercion or intimidation; knowingly false statements about an insurer's finances or false entries in its records; and false statements on an application to obtain a commission or other benefit.
  • Complaints and records: Insurers must keep their records so that data on complaints, claims, rating, underwriting and marketing can be retrieved for examination. They must also keep a complete register of complaints since the last examination, showing the number, the line, the nature, the disposition and the time to process each. A complaint is any written communication primarily expressing a grievance.
  • Claims: Unfair claims practices, such as refusing to pay without a reasonable investigation, are defined separately in the Unfair Claims Settlement Practices Act, on Unfair Claims Settlement Practices.
  • Market analysis and examinations: Regulators gather and analyze information on companies, producers and markets to spot problems and trends, and they use consumer complaints, often their only window on a pattern of problems, to choose which companies to examine. A comprehensive market conduct examination covers all or most of a company's operations, and a targeted one covers one or a few areas, such as sales practices, underwriting, policy provisions or claims payment. Most states rely mainly on targeted examinations, which take less time. The NAIC's market conduct examiners handbook, first issued in 1975, is a voluntary model.

Fining a Pattern of Violations A market conduct examination finds that an insurer's sales illustrations misrepresented policy dividends in 40 sales. Under a state law that follows the NAIC model's penalty limits, what is the most the commissioner may fine (a) if the violations were not flagrant and (b) if they were committed flagrantly in conscious disregard of the law?

Answer

\begin{align*}
P &= \min(1{,}000 \times 40,\ 100{,}000) \\
&= 40{,}000 \\
P_{\text{flagrant}} &= \min(25{,}000 \times 40,\ 250{,}000) \\
&= 250{,}000
\end{align*}

In the flagrant case the aggregate cap binds well before the per-violation amount, which would have reached $1,000,000. Either way the commissioner can also order the insurer to cease and desist, and could suspend or revoke its license if it knew or should have known it was breaking the law.

Naming the Practice Which unfair trade practice, if any, does each describe?

  1. A producer tells a client her existing policy will lapse worthless unless she replaces it, which is false, to earn a new commission.

  2. An insurer stops renewing homeowners policies in one ZIP code with no loss or underwriting data supporting it.

  3. An insurer declines to cover homes over 50 years old, whatever their condition.

  4. An insurer charges smokers more for life insurance than nonsmokers of the same age.

Answer

  1. Misrepresentation to induce the lapse, exchange or surrender of a policy.
  2. Unfair discrimination by geographic location, since sound underwriting and actuarial principles don't support it.
  3. Unfair discrimination solely because of the age of the residential property.
  4. None. Smokers and nonsmokers are not of the same class and equal expectation of life, so a rate difference reflecting that is not unfair discrimination.

How it appears on the exam

  • DISC-IA: The Insurance Regulation section's objective on market conduct and consumer protection asks what unfair trade practices are, how regulators find them through complaints, market analysis and examinations, and what they can do about them.
  • Applied questions: A question describes a sales, underwriting or claims practice and asks which prohibited practice it is, whether it is prohibited at all, or what penalty the commissioner can impose.
  • Neighbours: Market conduct sits beside Insurance Licensing, State Rating Laws and Policy Form Regulation among the regulator's tools, and its reasons are on Reasons for Insurance Regulation.

Exam traps

  • Unfair discrimination needs the same class: Charging different rates to risks with different expected losses is not unfair discrimination. The Act forbids treating people of the same class and hazard differently.
  • Geography is allowed with support: Refusing a location is prohibited only when done solely because of the location without sound underwriting and actuarial support.
  • No private lawsuit under the Act: The commissioner enforces it. A consumer's own remedy lies elsewhere, such as in contract or tort.
  • Claims practices are a separate act: Unfair claim settlement is defined in its own model law, which reaches only flagrant violations or a general business practice.
  • Complaints select, examinations prove: A complaint ratio points regulators to a company; the examination establishes whether there is a violation.