January 2012

The Market Conduct Annual Statement Comes of Age

• Introduction

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 History

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 insurance companies.

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.

• New Efficiencies

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 jurisdiction.

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 companies.

• National Data

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 variation.

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.

• The 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 analysis.

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.

• Going Forward

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.[1]

• Conclusion

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.

[1] More information about MCAS webinars and training can be found on the NAIC Education and Training Department‘s Web page at http://education.naic.org.

Copyright © 2012 NAIC, All rights reserved.