The Market Conduct Annual Statement Comes of Age
Market regulation is constantly evolving to respond to
changes in the insurance marketplace and technology. One of the more recent
innovations is the development of the Market Conduct Annual Statement (MCAS).
The purpose of this article is to provide some background about the MCAS and to
discuss recent changes adding measures of uniformity and some operational efficiencies to the MCAS process.
The MCAS provides regulators with market conduct information
not otherwise available for their market analysis initiatives. The MCAS
data-collection system is used to collect claims and underwriting data on the
private passenger auto, homeowners, life and annuity
lines of business. The MCAS collection system project began in 2002 and
gradually grew from eight to 45 participating jurisdictions. The goal of the
MCAS project is to provide a uniform system of collecting market-related
information to help the states monitor the market conduct of companies.
On April 15, 2011, the NAIC launched a newly redesigned
collection system to simplify the MCAS process. The new automated tool was
designed to help improve state regulation by allowing all participating states
to analyze the industry on a national and state level. About 1,800 companies
are anticipated to file the MCAS for one or more jurisdictions this year,
resulting in nearly 30,000 individual filings. The NAIC Market Analysis
Procedures (D) Working Group is responsible for the content of the MCAS,
defining the data that is collected, and promoting uniform analysis by applying
consistent measurements and comparisons of MCAS data provided by companies.
The path toward the collection of effective, efficient and
uniform market conduct data began almost 10 years ago and resulted in the
development of the MCAS. The MCAS was a collaboration among regulators, the
industry and consumers who recognized the benefits of monitoring, benchmarking,
analyzing and regulating the market conduct of insurance companies. MCAS
participation increased from eight states collecting limited information to
nearly all of the states collecting life, annuity, auto, and homeowners insurance information.
The very nature of market conduct data makes its collection
difficult. For example, claim reserving methods can vary between companies, and
this affects the count of claims closed without payment. Some companies track
claims by claimant, while others track claims by occurrence. Regulators created
the MCAS with the flexibility to allow companies to report data based on their
business practices. To compensate for this flexibility, ratios were developed
to provide more meaningful comparisons between companies than the raw data
allowed. To prevent different data definitions from one state to the next, the
participating states agreed upon and published a set of common definitions
organized by line of business. The definitions were broad enough to allow the
flexibility necessary in the early years of the MCAS.
In 2003, the U.S. General Accounting Office (GAO) reinforced
the need for the MCAS when it issued a report titled, “Insurance Regulation:
Common Standards and Improved Coordination Needed to Strengthen Market
Regulation.” The GAO report prompted the NAIC to work toward developing
processes and systems to identify, assess and prioritize market conduct issues.
While the MCAS met many of the GAO recommendations, it still needed to be
national in scope, uniform in the collection of data and consistent in the
interpretation of the definitions, while not placing an undue burden on
Initially, MCAS data was collected and compiled by the Ohio
Insurance Department for the first eight jurisdictions. Resource limitations
and concerns voiced by the insurance industry regarding multiple platforms and
data sets led to discussions about centralizing the collection of MCAS data.
After much due diligence to address the protection of sensitive information, in
2008, the NAIC members adopted the position that all of the states should use
MCAS, and the data should be collected and stored in a centralized national
database at the NAIC. The April 15, 2011, release of the new MCAS system
accomplished this goal.
The new MCAS collection tool is a Web-based tool that is
easier to use than its predecessor and requires fewer company resources. All
filings are transactions between the insurer and its regulator; however, the
transactions are now managed through an online tool accessible from any
computer via the NAIC website. Even refilings are
simpler, as the company only needs to make the relevant change to the submitted
data if there is a reporting error. In addition, if the company needs to file
an extension or waiver, it is automated without the need to contact each
The new MCAS system also frees regulators from the burdensome
task of loading company data into state databases; validating the accuracy of
the data; reviewing, approving and manually tracking waiver and extension
requests; and preparing scorecards. With these tasks performed automatically by
the new MCAS tool, regulators can focus on the most important part of their
job: analyzing the data. Even analysis was enhanced by the new MCAS system
through new, dynamic regulator reports generated as MCAS data is submitted from
In 2011, 45 jurisdictions collected MCAS data for the 2010
calendar year. These participating jurisdictions are bound by a global
information-sharing agreement that allows them to share company-specific
information with each other, while maintaining the confidentiality of the data.
Because the data for each state resides in a separate state database at the
NAIC, this long-standing information-sharing agreement makes it possible to
perform analysis on a national basis, where appropriate. In the two years
preceding the centralization of the MCAS process, participating states
voluntarily forwarded their data to the NAIC for testing and analysis. This
pilot project allowed NAIC staff to work with state regulators to develop a
national perspective of the data.
Regulators can now determine the median industry ratios by
state or by region or nationally. Knowing the median scores for the past two
years, regulators have begun to trend the results from one year to the next. In
addition, working with a greater number of companies allows analysis by
categories too small to be credible on a state-by-state basis, such as by
premium size or by type of organizational structure (i.e., mutual vs. stock).
Knowledge gained in working with the data translated into
specialized reports for regulators. The company-specific reports provide the
data elements and ratios for each company over a range of geographical choices.
Another report includes side-by-side comparisons of all of the data elements
collected in the MCAS for all of the companies, as well as company rankings
based on how their MCAS ratios compare to each other. Quick identification of
outliers allows in-depth analysis to begin sooner.
Summary reports aggregate all data from all companies on a
national, regional and state basis. These reports help identify industry trends
and norms. Individual companies can be compared to these trends and norms. The
industry trends yield information about the effects of regional variations on
market conduct. For example, the effects of a hurricane on homeowners insurance
in the Southeast or an earthquake in the West might show up as a regional
With the large amount of data now available in one location
for the first time, it is anticipated that regulators will conceive of many
creative ways to analyze it. The state databases will allow authorized
regulators in an MCAS participating jurisdiction to run ad-hoc queries against
the centralized data collection. This ad-hoc querying ability alone makes the
new MCAS system a powerful analytical tool.
Imperative for Uniformity
To fully realize the analytical potential of the MCAS
system, it is critical that data is uniform and consistent—not just from
company to company, but from state to state and year to year—for aggregation
and analysis. With the new MCAS system, no longer is the data just provided to
one state for the state to use for its own purposes; now the data of one state
is aggregated with the data of other participating states and shared for
The primary oversight for ensuring uniformity is the NAIC
Market Analysis Procedures (D) Working Group. In the summer of 2010, this
Working Group met with company representatives to discuss changes to the data
elements and definitions. All parties agreed that the definitions need to be
tightened and the flexibility in data reporting should diminish. An example of
this is the Working Group’s decision that all companies must report claims
information only on a “claimant” basis beginning with the 2011 reporting year .
The new MCAS tool performs standardized data validation and
data-quality testing as each company’s data funnels through the centralized
application into the state databases. Any submission with clear errors (e.g.,
more claims closed than pending and received during the period) is returned to
the company and not submitted. Submissions with unusual data (e.g., more claims
closed without payment than with payment) are submitted, but noted with a
warning to the company and regulators that there might be an error.
Regulators and regulated entities should expect many changes
as the MCAS process moves forward. The new centralized MCAS system will be as
powerful an analytical tool for market conduct regulators as the financial
annual statement is for financial regulators. As regulators collect more data
elements over more lines of business in more jurisdictions, new techniques will
be developed to analyze the data that will allow regulators to focus their
resources on companies needing closer attention. Rather than reacting,
regulators can be increasingly proactive minimizing the cost of regulatory
compliance for well-run companies.
To help with the transition to the new MCAS system, the NAIC
offers online training opportunities for regulators and the insurance industry.
For companies, further opportunities for additional training, through webinars
with live interaction, will be made available in March, April and May 2012.
These webinars cover use of the new MCAS tool, data element descriptions and
what is expected in a submission. For regulators, a series of webinars will be
made available this year. NAIC staff and regulators from each NAIC zone will
provide training on how to manage and analyze MCAS data.
Insurance regulators are constantly challenged to keep pace
with a rapidly evolving insurance marketplace. The MCAS and the centralization
of MCAS data have given insurance regulators another tool in the toolkit to
protect insurance policyholders and claimants. Compliant companies should realize
savings in the cost of regulatory compliance with the uniformity and efficiency
added by the MCAS system. The MCAS data will allow regulators to target the
noncompliant companies more promptly and efficiently. The collective
information about the marketplace will provide regulators with a broader
understanding of market dynamics. The new and improved MCAS will provide
regulators with uniform state and national data, as well as provide companies
with a more efficient way to submit information to regulators. Through the
cooperation of insurance regulators and the insurance industry, the MCAS will
continue to grow and promises to be the primary source of market conduct data
for use in effective market analysis.
 More information about MCAS webinars and training can
be found on the NAIC Education and Training Department’s Web page at