By: Tim Mullen, JD, MBA, CPCU, CIE, MCM
As we move into the fourth quarter and the end of the year, there are some key items to be considered by the Market Regulation and Consumer Affairs (D) Committee and the NAIC Executive/Plenary during the NAIC Fall National Meeting. In addition, there continues to be important activities under the Innovation, Cybersecurity, and Technology (H) Committee, which touch upon market conduct regulation. The items moving through the Market Regulation and Consumer Affairs (D) Committee include a new Voluntary Market Regulation Certification Program, a new Pet Insurance Market Conduct Annual Statement, revisions to the NAIC’s Unfair Trade Practices Act, new life and annuity examination standards, and revisions to the NAIC’s Public Adjuster Licensing Model Act. The items under the Innovation, Cybersecurity, and Technology (H) Committee include a new model bulletin on the use of artificial intelligence systems by insurers, a new Consumer Privacy Protections Model Law, and artificial intelligence/machine learning surveys.
Voluntary Market Regulation Certification Program
During the NAIC Summer National Meeting, the Market Regulation and Consumer Affairs (D) Committee adopted a Voluntary Market Regulation Certification Program Requirements, Checklist, and Guidelines. The draft certification program consists of eleven requirements an insurance department would be expected to achieve in the following areas: 1) department authority for market conduct analysis and examinations; 2) department ability to use the NAIC Market Regulation Handbook or other policies and procedures in place to conduct examinations; 3) department staffing – resources; 4) department staffing – qualifications; 5) confidentiality and information sharing; 6) collaboration with other jurisdictions; 7) collection of Market Conduct Annual Statement data; 8) data reporting to the NAIC; 9) participation in NAIC market analysis and market conduct working groups; 10) appointment of a Collaborative Action Designee; and 11) interdepartmental communications.
If adopted by the NAIC Executive Committee/Plenary during the NAIC Fall National Meeting, the Market Regulation Standards and Certification (D) Working Group will oversee and administer the program beginning in 2024. Under the implementation plan any jurisdiction may seek voluntary self-certification and any jurisdiction that submits a self-certification report will be provisionally certified.
Once a mechanism is in place for implementing the full Voluntary Market Regulation Certification Program jurisdictions will have the option to continue self-certifying or to apply for full certification.
For jurisdictions applying for full certification, the Market Regulation Standards and Certification (D) Working Group will verify the self-certification information reported by participating jurisdictions. As jurisdictions move toward full certification, it is anticipated an NAIC Review Team will be created to conduct interviews or on-site visits to assist the Working Group. Each fully certified jurisdiction would then be reviewed every five years to assess the jurisdiction’s ongoing compliance with the certification standards.
Pet Insurance Market Conduct Annual Statement
The Market Conduct Annual Statement Blanks (D) Working finalized a new Pet Insurance Data Call and Definitions. The pet insurance blank requests insurers provide data on their underwriting activities such as number of policies written, dollar amount of direct premium written, the number of policies cancelled/terminated by the insurer, and the number of policies cancelled/terminated by the policyholder. Like other market conduct annual statement blanks, the pet insurance blank requests data regarding number of claims, speed of payment or denial, and key metrics regarding denied claims (preexisting condition exclusion, waiting period, maximum benefit limit, inadequate documentation, hereditary disorder exclusion, congenital anomaly exclusion and chronic condition exclusion). Finally, the blank asks about lawsuits and compliant activity. If adopted by the NAIC’s Executive Committee/Plenary during the NAIC Fall National Meeting, companies writing pet insurance will be required to file 2024 pet insurance data in 2025.
Revisions to the NAIC Unfair Trade Practices Act
The NAIC Improper Marketing of Health Insurance Working Group, which reports to the Antifraud (D) Task Force, adopted revisions to the NAIC Unfair Trade Practices Act to provide state insurance departments the means to regulate lead generators and gain a level of consumer protection that is not currently in place. The model revisions include a new definition of Health Insurance Lead Generator and clarifies Health Insurance Lead Generators are prohibited from engaging in Unfair Trade Practices set forth in the model. The second important amendment is focused on making sure Health Insurance Lead Generators maintain marketing and performance records. The Antifraud (D) Task Force expects to consider the adoption of the revised model at the NAIC Fall National Meeting.
Revised Life and Annuity Examination Standards
The Suitability in Annuity Transactions Model Regulation (#275), which the NAIC membership adopted in 2020 requires producers to act in the best interest of consumers when making a sale or recommendation of an annuity and requires insurers to maintain a system of supervision. To support state insurance regulators assessment of compliance with these standards, the Market Conduct Examination Guidelines (D) Working Group is revising the life and annuity examination standards. As part of this work, a supplemental checklist for marketing and sales is being added to assist state insurance regulators in determining if an insurer has established a system of supervision and has advised its producers of applicable state statutes, rules and regulations regarding suitability of annuity products and the insurer’s product-specific standards regarding verification of suitability of annuity products. Some key requirements for state examination include the following insurer duties:
The insurer shall establish and maintain reasonable procedures to inform its producers of the requirements of the regulation and shall incorporate the requirements of the regulation into relevant producer training manuals.
The insurer shall provide product-specific training and training materials that explain all material features of its annuity products to its producers.
The insurer shall establish and maintain procedures for the review of each recommendation prior to the issuance of an annuity that is designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address a particular consumer’s financial situation, insurance needs and financial objectives.
The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.
The insurer shall annually provide a written report to senior management, including to the senior manager responsible for audit functions. The report must provide details on testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended if any.
Revisions to the NAIC Public Adjuster Licensing Model Act
The Producer Licensing (D) Task Force charges were amended during the NAIC Summer National Meeting to include a new charge to “review and amend, as needed, the Public Adjuster Licensing Model Act (#228) to enhance consumer protections in the property and casualty claims process.” The proposed amendments are intended to strengthen regulatory standards governing the conduct of public adjusters for the following four issues: 1) individuals acting as unlicensed public adjusters; 2) contractors who are also acting as public adjusters on the same claim; 3) inappropriate assignment of benefit rights; and 4) excessive fees charged by public adjusters.
The new provisions addressing assignment of benefit rights are based on Delaware law. Revisions that are sure to receive additional discussion address placing caps on public adjuster fees. The proposed revisions set forth a 10% cap for a catastrophic insurance claim settlement, and no more than 15% for any insurance claim settlement. In addition, no public adjuster shall require, demand, or accept any fee, retainer, compensation, deposit, or other thing of value, prior to the settlement of a claim.
An initial draft of the revisions was circulated on Oct. 20 with a comment deadline of Nov. 20, 2023. The Task Force anticipates holding a call prior to the end of the year to discuss the comments received. Moving into 2024, a new Public Adjuster Licensing (D) Working Group will be appointed to complete this work in 2024.
Model Bulletin on Use of Artificial Intelligence Systems by Insurers
The Innovation, Cybersecurity, and Technology (H) Committee released a second exposure draft of the NAIC bulletin regarding the use of artificial intelligence systems by insurers. The purpose of the bulletin is to remind insurers that decisions or actions impacting consumers, which are made or supported by advanced analytical and computational technologies, including artificial intelligence, must comply with all applicable insurance laws and regulations. This includes those laws that address unfair trade practices and unfair discrimination. The bulletin sets forth expectations as to how Insurers will govern the development/acquisition and use of AI technologies. The bulletin then advises insurers about the type of information and documentation a department of insurance may request during an investigation or examination regarding an insurer’s use of advanced analytical and computational technologies, including artificial intelligence systems.
Consumer Privacy Protections Model Law Development
The Privacy Protections (H) Working Group is drafting a new NAIC Insurance Consumer Privacy Protection Model Law to replace the NAIC’s Insurance Information and Privacy Protection Model Act and Privacy of Consumer Financial and Health Information Regulation.
The Working Group continues to discuss consumer notices and authorizations, oversight of third-party service provider agreements, and consumer rights, including a consumer’s ability to access personal information. Due to the complexity and extent of public comments on the proposed model, a revised draft of the model will not be issued until early in 2024.
Data Calls on Artificial Intelligence/Machine Learning
The AI/ML survey work continues to move forward under the Big Data and Artificial Intelligence (H) Working Group. The surveys are being conducted to accomplish three goals: 1) gain a better understanding of the insurance industry’s use and governance of big data and AI/ML; 2) seek information that could aid in the development of guidance or potential regulatory framework to support the insurance industry’s use of big data and AI/ML; and 3) inform state insurance regulators as to the current and planned business practices of companies.
The public report for the Homeowners Survey was released at the NAIC Summer National Meeting. Out of the 194 companies completing the survey, 136 companies (or about 70%) use, plan to use, or plan to explore using AI in their operations. Among insurer operational areas, the percentage of companies using AI models in homeowners insurance was: 1) claims, 54%; 2) underwriting and marketing, both at 47%; 3) fraud detection, 42%; 4) rating, 35%; and 5) loss prevention, 14%. The main reasons companies reported for not using, not planning to use, and not exploring the use of AI for homeowners insurance were: “no compelling business reason”; “waiting for regulatory guidance”; and “lack of resources and expertise.” In the claims function, the home insurers reported using AI mostly for subrogation, claims triage, and evaluating images of loss. The full public reports for the Homeowners survey and the Private Passenger Automobile survey, which was released in 2022, may be found under the “Documents” tab at Revised Life and Annuity Examination Standards
Finally, the public report of the AI/ML Life Insurance survey is scheduled to be released at the NAIC Fall National Meeting. The AI/ML Life Insurance survey was issued to 192 companies and was conducted under the examination authority of 14 Requesting States (Colorado, Connecticut, Illinois, Iowa, Louisiana, Minnesota, Nebraska, North Dakota, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Wisconsin).
For anyone wanting additional information about the activities of the Market Regulation and Consumer Affairs (D) Committee, its Task Forces, and Working Groups, please visit the following Weblink on the NAIC Website: https://content.naic.org/cmte_d.htm.
About the Author
Tim Mullen, JD, MBA, CPCU, CIE, MCM is the Director of Market Regulation at the National Association of Insurance Commissioners. He oversees a wide range of activities supporting NAIC committees, task forces and working groups addressing antifraud, consumer services, market analysis, market conduct examinations, and producer licensing. He joined the NAIC in 1997 and was with the Missouri Department of Insurance prior to joining the NAIC.
In addition to his work in state government, he worked for Aetna Insurance and was a practicing attorney before joining Aetna. He is a member of the Missouri Bar and the Kansas Bar, the 2009 recipient of the Paul L. DeAngelo Memorial Teaching Award from the IRES Foundation, and past president of the Kansas City CPCU Chapter.
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