May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Market Conduct Exams: A Deep Dive

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Road Map 1)What is a Market Conduct Exam (MCE)? 2)How is an MCE Chosen? 3)Historical Review of Market Conduct Exams 4)Deep Dive into PPA and HO Exams 5)Resources 6)Q & A

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC What is a Market Conduct Exam? A Market Conduct Exam (MCE) is one of many tools (Continuum of Regulatory Responses) available to regulators in addressing potential violations of insurance laws. An MCE is a formal investigation (examination) of a regulated entity performed under the authority of existing Commonwealth Statutes. (see 40 P.S. §§323.3 and 323.4)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Continuum of Regulatory Responses: Office-based information gathering Contact with the regulated entity Interview with the company Targeted information gathering Correspondence Policy and procedure review Interrogatories Desk audits Company self-audits Voluntary compliance programs Information sharing On-site reviews Investigation Targeted examination Comprehensive examination Multi-jurisdictional cooperative examination Enforcement actions Proposal of new statutes or regulations

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC What is a Market Conduct Exam? An MCE is a very formal process An Exam Warrant is issued by the PID outlining the rights and responsibilities of all parties An examination is conducted A draft report is generated Internal discussions/negotiations Final report is produced Regulated entity can accept the report (Consent order) Reject the report likely leading to a formal legal action called an “Order to Show Cause” Most are settled under a Consent Order Consent Orders are public documents

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC What is a Market Conduct Exam? Anatomy of an Exam Report I.Consent Order II.Introduction III.Scope of Examination IV.Company History/Licensing V.Underwriting Practices and Procedures VI.Underwriting VII.Rating VIII.Claims IX.Forms X.Advertising XI.Consumer Complaints XII.Licensing XIII.Data Integrity XIV.Recommendations XV.Company Response See Sample Report here

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Anatomy of a Consent Order I.Verification Statement II.General Order III.Consent Order IV.Findings of Fact V.Conclusions of Law VI.Order VII.Signatures What is a Market Conduct Exam? See Sample Order here

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC What is a Market Conduct Exam? Points to Ponder MCE’s are expensive (you pay the full cost) Fines and Penalties are typically levied (you pay the full cost and cannot be factored into future rate making) Cannot accrue the liability (Financial Exams) Consumes internal resources Consumes significant time Reputational risk Most violations result from lack of training & disciplined procedures

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? For PPA and HO Lines: Your Operations Financial Ratios Special Activities Database (SAD) Regulatory Actions (RIRS) Examinations (ETS)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? Operations: Major changes on D & O’s/Trustees in last 3 years Major changes in organization, management or operations Mergers or consolidations Revocations of C of A, licensees/registrations Change in Domiciliary State

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? Financial Ratios Major swings in RBC in last 5 years RBC regulatory triggers Defense Costs changes relative to premium volume and losses

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? IRIS Ratios Proprietary NAIC Tools using MCAS and Financial Annual Statement inputs P & C Specific Ratios Early Warning System Gross Premiums to Surplus Net Change to Surplus Change in Net Writings Liabilities to Liquid Assets + or – 33% change in premium in a single year Employees to premium growth (growing to fast?)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? Other Regulator Examinations ETS Review 3 exams in last year Substantive regulatory concerns Patterns Exam Triggers

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? RIRS Review Substantive regulatory actions Reasons for actions Patterns Penalties

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? SAD (Special Activities Database Review) Regulatory entries Market Activities Legal Actions

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? Other Indices Resisted or Unpaid Claims Compare to premium volume changes Defense and ALE/UALE Expenses Direct losses Industry Average (5 years) Consumer Complaints Major changes to confirmed Complaint Index (5 year) Major changes in complete Complaint Index ( 5 years)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? MCAS Report (PPA and HO Only) Prepared by the Company Uniform system to collect and analyze data Adds to information available Promotes uniform analysis of data

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? P & C Data Elements: Claims Opened at start of years Opened during year Closed with payment Closed w/o payment Claims paid in 30, 60, 90, etc. days Median days to Date of Claim Report Lawsuits: Open at Start of year Filed Closed Open year end

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? New Policies In Force Policies Number of Autos/Homes insured DWP Number of Cancellations Non-renewals

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? MCAS Statewide averages are reviewed Company rations compared to State averages Company report cards are developed and provided to companies Points to Ponder: Accuracy of your data Not explaining obvious data anomalies Not explaining major changes that impacted MCAS results

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC How is an MCE Chosen? PID uses a disciplined approach to Market Analysis: MCAS NAIC Data Systems (RIRS, SAD, ETS, Financial) Base Line Level 1 Level 2 Internal Communication (Rate & Form Bureaus, Financial Exam) Referrals from other regulators (AG, other States, Banking, Feds) PID Changes in Regulatory Policy PID Market Regulation Committee

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Historical Review of Market Conduct Exams (based un PID Published Exams)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Historical Review of Market Conduct Exams 69 Exams are posted (not archived) on PID Website 4 Exams had missing/broken links No exams posted for 2007, 2010, 2011 The 69 Exams represent 64 Unique companies Many exams included multiple subsidiaries Only PPA & HP Exams Analyzed 218 unique exam violations cited for PPA Exams 17 unique exam violations cited for HO Exams Actual costs of Exams are not posted by PID During this same time period over 850 financial exams completed

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Historical Review of Market Conduct Exams

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Exams by Company Type YearLifeHealthP&C

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Historical Review of Market Conduct Exams

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Historical Review of Market Conduct Exams

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC YearLifeHealth Life Settlem entsPPALTCMCASHOTotals

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Deep Dive into PPA and HO Exams

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Top 5 Citations – HO Exams CitationExplanationsCount Section 4 of Act 205 (40 P.S. § ) prohibits any person to engage in this state in any trade practice which is defined or determined to be an unfair methods' d of competition or an unfair or deceptive act or practice in the business of insurance pursuant to this act;6 Title 31, Pennsylvania Code, Section 146.7(a)(1) requires within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer; and5 Section 5(a)(9) of Act 205 (40 P.S. § ) prohibits cancellation of any policy of insurance covering owner-occupied private residential4 Section 1798(a) of Act , Title 75, Pa.C.S. §1798(a) states an attorney's fee for representing a claimant in connection with a claim for first party benefits provided under Subchapter B or a claim for catastrophic loss benefits under Subchapter F shall be calculated, determined or paid on3 Section 5(a)(10)(i) and (vi) of Act 205 (40 P.S. § ) states any of the following acts, if committed or performed with such frequency as to indicate a business practice, shall constitute unfair claim settlement or compromise practices: misrepresenting pertinent facts or policy or contract provisions relating to coverages at issue, and not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in3 Complete Listing Here

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Top 5 Citations – PPA Exams CitationExplanationCount Section 2006(2) of Act 68 of 1998 (40 P.S. § ) prohibits a cancellation or refusal to renew from being effective unless the insurer delivers or mails a written notice of the cancellation or refusal to renew7 Section 2002(c)(3) of Act 68 of 1998 (40 P.S. § ) requires that an insurer supply the insured with a written statement of the reason for cancellation;6 Act , Section 8, Title 75, Pa. C.S. § 1705(a)(1)&(4) requires every insurer, prior to the issuance of a private passenger motor vehicle liability insurance policy to provide each applicant an opportunity to elect a tort option. A policy may not be issued unless the applicant has been provided an opportunity to elect a tort option;4 Section 4 of Act 205 (40 P.S. § ) prohibits any person to engage in this state in any trade practice which is defined or determined to be an unfair method of competition or an unfair or deceptive act or practice in the business of insurance pursuant to this act;4 Section 4 of the Casualty and Surety Rate Regulatory Act, No. 246 (40 P.S. § 1184) requires every insurer to file with the Insurance Commissioner every manual of classifications, rules and rates, every rating plan and every modification of any rating plan which it proposes to use in this Commonwealth and prohibits an insurer from making or issuing a contract or policy with rates other than those approved;4 Complete Listing Here

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Resources NAIC Market Regulation Examination Standards Summary Insurance Department Regulatory Actions NAIC MCAS Information Association of Insurance Compliance Professionals Insurance Regulatory Examiners Society NAIC Market Regulation Handbook ($490)

May 2016 Market Regulation Seminar Presented by: Ron Gallagher, President, PAMIC Questions, Commentary, or Complete!