What Is a Market Conduct Exam? Steps, Findings, and Prep

Insurance is a regulated entity, and companies operating under its umbrella are subject to regulations that influence how they operate. A market conduct exam is the method auditors use to determine whether insurers operate with consumers' and policyholders' best interests in mind. The insurance market conduct exam looks at claims handling, underwriting practice, policy administration, and more to verify compliance with regulations.

This article discusses what examinations are, what triggers them, and how they help your insurance practice stay prepared.

What Is a Market Conduct Examination?

An insurance market exam is a thorough review of a company's business practices, policies, and procedures to ensure adherence to market conduct regulations. These exams help make sure an insurance provider is compliant with regulatory standards and protects consumers. Unlike financial audits, these examinations look at day-to-day business behavior.

Scope of a Market Conduct Exam

A thorough examination of insurance practices gives teams a clear picture of how they're following conduct expectations. A state insurance department conducts these exams, including either a comprehensive or targeted review.

• A comprehensive exam is a full-scope review of all the insurer's business practices.
• A targeted exam is a focused scope initiative to dive deeper into specific red flags, like a line of business or localized issue.

An insurance regulator assesses various aspects of operations, including:

Sales and Marketing Practices

Here, an examiner will look at how insurance products are sold to consumers, including marketing materials, sales presentations, and agent interactions, to verify fairness, accuracy, and compliance with regulatory requirements.

Policy Administration

This involves examining how insurance policies are issued, administered, and serviced to ensure policyholders receive the coverage they were promised and that policy terms and conditions are upheld.

Underwriting Practices

Regulators will evaluate the criteria and processes used to assess risks and determine eligibility for coverage, ensuring that underwriting decisions are based on sound principles and are not discriminatory.

Claims Handling

An insurance regulator will often assess procedures for processing and paying claims, including the timeliness, accuracy, and fairness of claim settlements, to assure that policyholders receive the benefits they are entitled to under their policies.

Complaint Handling

During a market conduct exam, regulators will review how the insurer handles consumer complaints and inquiries, including the responsiveness, adequacy, and effectiveness of the complaint resolution process.

Compliance With Laws and Regulations

An examiner verifies company compliance with all applicable laws, regulations, and industry standards governing insurance operations, such as licensing requirements, rate filings, and consumer protection laws.

Market Conduct Regulations vs. Financial Solvency

The role and importance of market conduct regulation, as outlined by the National Association of Insurance Commissioners (NAIC), is to ensure that "insurance companies remain solvent and treat consumers fairly by paying claims when there is a covered loss."

This is because insurance products directly impact public welfare, and without consumer trust and confidence, the insurance market would remain stagnant.

Financial solvency regulation, on the other hand, is distinct from market conduct regulation but still connected. Financial solvency focuses on an insurance company's financial health to verify it has the capital to meet its obligations to policyholders. On the other hand, market conduct helps protect consumers by ensuring their fair treatment, which includes fair product pricing and claims payouts.

Strong, ethical market conduct practices can actually contribute to financial solvency. If an insurer treats customers unfairly, they might face more claims or lose customers, ultimately impacting their financial stability. Market conduct issues identified during an examination, like high complaint volumes or misleading sales tactics, might indicate potential financial problems down the line.

Together, market conduct and financial solvency regulations protect consumers and guarantee companies have enough funds to pay covered instances, keeping users happy and cash flowing.

What Triggers a Market Conduct Exam?

The Department of Insurance (DOI) or other regulatory bodies initiate a market exam when they get word that an insurance company isn't adhering to regulations regarding customer protection and treatment. Some examples of triggers include:

• Consumer complaints.
• Market Conduct Annual Statement data anomalies.
• Regulatory cycles and routine check-ins.
• Mergers or acquisitions.
• Prior compliance issues.
• Drastic market changes.

Market Conduct Exam Process: Step-by-Step

Staying one step ahead involves knowing what to expect if your insurance company receives notice that it will be examined. Here's a quick breakdown of the exam process:

• Step 1 – Exam initiation: Your company is selected for an exam and receives a call letter, announcing that the DOI intends to conduct the review.
• Step 2 – Data request and document submission: Your team sends the requested documents and information to the DOI before the exam and explains the office accommodations for an on-site visit, if need be.
• Step 3 – Transaction testing: The examiners pull a random sample of actual policy, claim, and underwriting files to make certain daily operations and record-keeping align with expectations.
• Step 4 – On-site or virtual review: The review begins, involving looking into claim and policyholder files, company systems, and billing, underwriting, and claim data.
• Step 5 – Issue identification: Upon reviewing your documents and systems, the examiner notes any findings that may not be in accordance with the laws and regulations.
• Step 6 – Draft report: Examiners compile their preliminary findings into a report, outlining any potential violations, operational gaps, and areas of non-compliance. Your company is typically given the chance to review this document and provide additional insights.
• Step 7 – Final report and outcomes: After considering your response, the examiners issue a final report that details confirmed findings and recommended fixes. In some cases, it may also include fines, penalties, or mandated process changes.
• Step 8 – Remediation and follow-up: Your organization develops and implements a corrective action plan to address all findings within the required timeframe. After that, regulators may conduct a follow-up review or request additional evidence that remediation efforts are completed.

Planning and ensuring everything is in order before the market conduct exam begins can help this process go as smoothly as possible and keep your team from unnecessary surprises.

Market Conduct Annual Statement Explained

The Market Conduct Annual Statement (MCAS) is a required reporting tool that insurance regulators use to collect and analyze claims and underwriting information from insurance companies. It helps states monitor behavior with a uniform lens to protect policyholders and identify unfair practices.

The Role of the NAIC in Market Conduct Regulations

The NAIC oversees and regulates market conduct within the insurance industry, from setting standards and best practices to supporting state regulators. Examples include:

• Developing model laws and regulations that states can adopt to ensure uniformity in market conduct oversight across different jurisdictions.
• Creating examination guidelines to help state regulators carry out thorough and consistent market conduct examinations.

The NAIC also produces a Market Regulation Handbook that serves as a compilation of examination standards and a good reference point for both regulators and insurance companies.

Beyond those core functions, the NAIC also promotes consumer education and protection initiatives and serves as a forum for policymakers to address emerging market conduct challenges. By creating resources for insurance companies, the NAIC helps teams better align with regulatory bodies.

However, it's important to remember that insurance regulation primarily happens at the state level and that NAIC standards are adopted and enforced by individual states. That means regulations might fluctuate and change depending on where your organization operates.

Why Market Conduct Exams Matter

Market regulations give insurance companies a bar to meet, and exams help those companies learn about and fix potential gaps. Using examinations to monitor compliance promotes consumer protection by ensuring users receive payment for covered services. It also lowers regulatory compliance risks by making companies aware of where gaps lie.

Market conduct exams enhance brand reputation, helping individuals feel more confident in their chosen insurance partners. Additionally, it lowers the financial impact of non-compliance and promotes more cash flow.

How To Prepare for a Market Conduct Exam

The key to getting and staying prepared for a market conduct exam is to operate ethically, remain compliant, and put your customers first.

Here are a few tips for staying prepared:

Have a Solid Understanding of Regulatory Requirements

The regulatory compliance landscape can be complex; however, it's imperative to have a solid understanding of the laws and regulations that govern your insurance business. Without this knowledge, there's a chance something may slip by unnoticed that breaks compliance, resulting in fines or legal issues.

Here are a few ways to stay prepared in terms of regulatory requirements:

• Regularly review updates from regulatory bodies such as the NAIC and state insurance departments.
• Subscribe to industry newsletters and attend relevant seminars and workshops.
• Maintain a dedicated compliance team or consult with an actuary for help monitoring and interpreting regulations.

Establish Compliance Policies and Procedures

Developing and communicating clear guidelines for employees to follow can help reduce the risk of non-compliance and can demonstrate to regulators that you're taking a proactive approach to remain aligned with laws and regulations. When establishing policies and procedures, consider:

• Comprehensive policies that cover all areas of operation, from underwriting to claims processing.
• Involving legal and compliance experts, like actuaries, in drafting these policies.
• Regularly update policies to reflect changes in regulations and business practices.

Conduct Internal Audits and Reviews

Regularly reviewing internal policies, practices, and workflows can help verify that everything is running as it should and that best practices are being followed as recommended by the NAIC. When conducting internal reviews, consider:

• Scheduling regular audits that focus on different areas of the business each time to ensure comprehensive coverage of your practices.
• Using both internal staff and external consultants for audits to get objective assessments.
• Implementing corrective actions promptly based on audit findings and tracking their effectiveness.

Provide Adequate Training to Staff

Training is critical to stay prepared for a market conduct exam and keep staff informed about expectations and requirements — especially since regulations can change. When providing training, consider:

• Developing a robust training program that covers all relevant regulatory requirements and company policies.
• Making training mandatory and ongoing to keep up with shifting requirements.
• Using a variety of training methods, such as online courses, workshops, and scenario analyses, to cater to different learning styles.

Maintain Accurate and Organized Records

Organized, accurate, and accessible records allow you to quickly and easily reference or pull information when requested. It also shows a commitment to quality service and care for customer data. In terms of record-keeping, consider:

• Implementing a reliable record-keeping system to store all documents and data systematically.
• Ensuring that records are backed up regularly and securely.
• Conducting periodic reviews of record-keeping practices to ensure they remain effective and compliant with regulatory requirements.

Common Findings in Market Conduct Exams

While each organization is unique, some of the most common issues that examiners find include:

• Inconsistent claims handling.
• Inadequate documentation.
• Unfair underwriting practices.
• Complaint resolution gaps.

FAQs About Market Conduct Exams

What does market conduct include?
Market conduct refers to how an insurance company interacts with consumers throughout the policy lifecycle. It includes:

• Sales and marketing practices.
• Underwriting.
• Policy administration.
• Claims handling.
• Complaint resolution.
• Compliance with state and federal regulations.

What is a market conduct exam in insurance?

A market conduct exam is a regulatory review conducted by the DOI to evaluate whether an insurance company is complying with applicable laws, regulations, and consumer protection standards.

What is a market conduct survey?

A market conduct survey is a less intensive regulatory review that allows regulators to gather information about an insurer's practices without conducting a full examination.

What is MCAS?

MCAS stands for Market Conduct Annual Statement, a standardized reporting tool that requires insurers to submit data related to claims handling, complaints, underwriting, policyholder services, and other operational activities.

How long does a market conduct exam take?

The length of a market conduct exam depends on the size of the insurer, the scope of the review, and the complexity of the issues being examined. A targeted exam may take several weeks to a few months, while a comprehensive exam can last several months or longer.

What happens after a market conduct exam?

After the examination concludes, regulators issue a final report detailing any findings, recommendations, and required corrective actions. If violations are identified, the insurer may need to implement remediation plans, update procedures, provide additional training, or pay fines and penalties.

Stay Prepared for Market Conduct Exams With Lewis & Ellis

Lewis & Ellis, LLC provides end-to-end market conduct exam support, providing a comprehensive report that offers our actionable, unbiased recommendations for improved compliance. Our dedicated consultants are well-versed in the complexities of life insurance, health insurance, and property & casualty insurance companies, delivering valuable insights to keep you one step ahead.

Contact us and learn more, or explore our related services, such as Financial Examinations.