Life, property-casualty and health trade groups, as well as consumer advocates and regulators, offered input to legislators representing the Albany, N.Y.-based National Conference of Insurance Legislators during a public hearing. The hearing preceded the start of the fall meeting of the National Association of Insurance Commissioners here.

The discussion offered some candid assessments of the current state of market conduct oversight of insurers as well as the industry itself. Speakers also urged legislators to work with regulators at the NAIC to create a strong state market conduct system as the Market Conduct Surveillance model law takes shape.

Indeed, even as the NAIC readied to continue its multi-faceted initiative, criticism was leveled at regulators. The NAIC initiative includes a data call project, development of a "how-to guide that would enable regulators to make better market conduct choices, and a program of collaboration among states.

At one point, Rep. Brian Kennedy, Rhode Island, an NCOIL panel member, questioned Joel Ario, NAIC secretary treasurer and Oregon administrator. Mr. Ario is overseeing the NAIC market conduct work.

Mr. Kennedy wanted to know if regulators' efforts were being driven by a fear that their market conduct responsibilities would be taken over by the federal government.

"The reason why more resources are being put into this today is because of the threat of federal regulation," Mr. Ario agreed. The NAIC is like any other institution and is impacted by outside impetuses, he said. "To be honest, I don't think we'd be doing the right thing unless we had our feet held to the fire," Mr. Ario added.

However, that impetus has produced a lot of good initiatives, he said. For instance, he said that the better use of data is the starting point that is being used by regulators to create a good market conduct analysis program. And, he continued, advances are being made in collaboration among states.

He cautioned against "enshrining" too much in law because of differences among state concerns. For example, Mr. Ario said that terrorism exclusions would be treated differently in New York than in a Midwestern state.

Cost was an issue that came up several times during testimony.

The difficult year that the life insurers have had makes it all the more necessary for legislators to develop efficient, low-cost, market conduct practices, Donald Walters, deputy director of the Washington-based Insurance Marketplace Standards Association, told legislators. "Our member companies are under severe pressure. It has been one of the weakest years in the history of the life insurance industry," he said.

Yet, Mr. Walters continued, "very few practical results were put in place to improve market conduct exams." One company, he continued, faced over 200 exams in the past year, at "significant cost" to the company.

"An entrenched bureaucracy that doesn't want to change," was a reason he cited for what he said was a lack of change.

"The system is broken," according to Scott Cipinko, executive director of the Life Insurers Council in Atlanta. Mr. Cipinko said that there are no statutory requirements or statutory rates for examination work. There should also be an absolute right to appeal, he said. And regulators should have the right to adjust bills submitted by outside examination contractors, he says.

Contractors present their bills directly to companies, and it would be helpful if state insurance departments had to sign the bill, according to Lenore Marema, vice president-legal and regulatory affairs with the Alliance of American Insurers of Downers Grove, Ill. In many cases, these bills are not detailed and there is no appeal process, she added.

Dave Reddick, market regulation manager with the National Association of Mutual Insurance Companies in Indianapolis, said that specialized contracted services, such as legal advice, can cost a company hundreds of dollars an hour in billing.

In one case, he said, when a company questioned why they had been selected for a market conduct exam, it was told by a regulator that "it is your time in the barrel."

Market conduct examinations are one regulatory tool and not necessarily the primary form of analysis, he adds.

A properly crafted NCOIL model law could be another effective tool, according to Don Cleasby, assistant general counsel and assistant vice president with the Des Plaines, Ill.-based National Association of Independent Insurers. In a statute, changes would be more solid and more uniform, he said.

The property-casualty trade groups stressed the need to remove a section regarding insurers' compliance systems and procedures as well as references to an association reviewer--a program that raised concerns over creating another layer of regulation.

While industry members were concerned about efficiency, Birny Birnbaum, executive director with the Austin, Texas-based Center for Economic Justice voiced concerns over effective consumer protection. He said that regulators' response to the vanishing premium, and redlining issues, among others, necessitate a look at why the system is not more effective. More market conduct data is needed and more public access to that information is also needed in order to make the system more effective, he said.

A national system of data analysis is needed rather than a state-by-state approach, said Kevin Hennosy, publisher of SpreadtheRisk.org in Kansas City, Mo. A strong conflict of interest statement in the the model law is also needed to prevent contracts that create a regulatory conflict of interest, he continued.

Jim Connolly is a Senior Editor for National Underwriter's Life & Health/Financial Services Edition.