Mr. Cluff's proposal could become part of the legislation now being drafted by the House Financial Services Committee aimed at making state insurance regulation more uniform and efficient.

Mr. Cluff emphasized that his proposal represents his own views and are not necessarily those of GAO.

A complete system of market conduct oversight, he said, has three major elements. The first, he said, is market analysis. This can be done most effectively if centralized, Mr. Cluff said, as opposed to having each state try to do it on its own.

Data would be gathered from all relevant sources and from all states where a company does business, he said, and sent to a central facility, most likely at the NAIC.

The data would be analyzed and compared to other members of a company's peer group to identify outliers needing follow-up. The results would be sent to each state in which a company does business.

The second element involves investigation by the domiciliary state regulator of each company targeted by the market analysis as needing special attention, he said.

If necessary, Mr. Cluff said, this could include a targeted examination that would focus on those areas identified by the market analysis, but could be expanded should the finding warrant.

The third element, he said, is internal controls by insurance companies and routine examinations of those controls by the domiciliary state regulator.

All insurance companies, Mr. Cluff said, should have internal controls in place to assure that abuses cannot systematically occur and that when a problem does occur, the company can quickly identify it and correct it.

"It is the company's responsibility to establish and maintain the internal control system," Mr. Cluff said in his presentation. "It is the domiciliary regulator's responsibility to verify that the systems are in place, are appropriate for the size and complexity of the company's operations, and that they function as they are intended."

The appropriate system, he added, will vary from company to company.

The market conduct exams done by states, Mr. Cluff said, rather than focusing on reviews of files or compliance with specific state laws, as is the case today, should instead examine internal control structures.

Mr. Cluff added that any successful state-based system of market conduct oversight must have a set of commonly agreed and universally adopted standards.

Regulators working through the NAIC can best develop these standards, he said.

Mr. Cluff said that while the system he is outlining may seem too expensive when compared to the present system, it is important to remember several points.

First, he said, comparing his proposed system to the current system is inappropriate because the current system is widely recognized to be broken.

Second, Mr. Cluff said, the current system is inefficient both because there is no good way to identify those companies that are truly at risk and because each state feels responsible for every company that sells in the state.This inefficiency is expensive, he said.

Third, Mr. Cluff said, centralizing the market analysis function will be far less expensive than it would be if each state tried to do good market analysis on its own.

Fourth, he said, once an examiner force is trained, the examinations of internal controls may be relatively quick and low cost, since they will not be fishing expeditions.

Finally, Mr. Cluff said, as insurance companies realize their responsibilities to self-police and implement good internal controls, the number of targeted exams may well fall, offsetting some of the costs of routine internal control exams.