A Look at Market Conduct Examinations (MCE) and How To Stay Prepared

Insurance is a regulated entity, and companies operating under its umbrella are subjected to regulations that influence how they operate in the marketplace; called market conduct regulation, or sometimes just market regulation. Auditors determine whether or not insurers are operating with consumers' and policyholders' best interests in mind through what's called a market conduct examination, or MCE.

In this article, we're dissecting market conduct examinations to look at what they are exactly, why they're important and industry best practices to help your insurance practice stay prepared for this annual market analysis.

What Is a Market Conduct Examination?

In the insurance industry, a market conduct examination is a thorough review of an insurance company's business practices, policies and procedures to ensure adherence to market conduct regulations. These exams essentially ensure that an insurance provider is compliant with regulatory standards and operates with the best interests of both policyholders and consumers in mind.

Before looking at a handful of operational aspects that regulators assess during an examination, let's define market conduct regulation and financial solvency to drive home the purpose and importance of these exams.

Market Conduct Regulation and 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. Here are a few examples of how they're related:

• Purpose: Financial solvency focuses on the financial health of an insurance company to ensure it has the capital to meet its obligations to policyholders. Oppositely, market conduct helps protect consumers by ensuring their fair treatment — which includes fair product pricing and claims payouts.
• Relationship: 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.
• Detection of warning signs: Market conduct issues identified during an examination, like high complaint volumes or misleading sales tactics, might indicate potential financial problems down the line.

Both regulations work together to build public trust in the insurance market. When consumers believe the companies they choose to do business with are financially secure and will treat them fairly, the more business they can expect to receive.

What Regulators Look at During a Market Conduct Examination

During a market conduct examination conducted by a state insurance department, an insurance regulator will assess various aspects of your operations — from marketing to customer service and more:

• 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 ensure 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 ensure 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: Most importantly, an examiner will verify company compliance with all applicable laws, regulations and industry standards governing insurance operations, such as licensing requirements, rate filings and consumer protection laws.

The Role of the National Association of Insurance Commissioners (NAIC) In Regulating Market Conduct

The NAIC oversees and regulates market conduct within the insurance industry in many ways, 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 conduct thorough and consistent market conduct examinations of insurance companies.

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. 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.

How To Prepare for Market Conduct Examination

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:

1. Have a Solid Understanding of Regulatory Requirements

The landscape of regulatory compliance 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 that 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 (National Association of Insurance Commissioners) 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.

2. 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.

3. Conduct Internal Audits and Reviews

Regularly reviewing internal policies, practices and workflows can help ensure 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.

4. Provide Adequate Training to Staff

Training is critical to stay prepared for a market conduct exam to 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.

5. 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.

Stay Prepared for MCEs With Lewis & Ellis, LLC

At Lewis & Ellis, our dedicated consultants are well-versed in the complexities that a life insurance, health insurance or property & casualty insurance company can face in its work.

Our consultants take an analytical approach to conduct a thorough examination of your business, developing a comprehensive report that offers our actional, unbiased recommendations to help enhance your compliance. Interested? Contact us and learn more, or explore our related services, such as Financial Examinations.