The modern history of insurance company market conduct studies starts in the 1970s. Before this time, most examinations of insurance companies were financial and concerned solvency. This changed in the 1970s.

McKinsey & Company, the same consultant for many insurers regarding their business processes, was commissioned by the National Association of Insurance Commissioners (NAIC) to provide suggestions for market conduct studies. PriceWaterhouse Coopers made the following observation about McKinsey’s involvement:

We commence with an overview of the rationale and the historical evolution of insurance market conduct surveillance. This review begins in the early 1970s when the National Association of Insurance Commissioners (NAIC) commissioned McKinsey & Company to study financial and market conduct surveillance of insurance companies. Limited information is available related to state market conduct examination practices prior to the 1970s. While it appears that insurance departments were performing some market conduct regulatory functions before 1970, it appears that the scope was limited and usually conducted as part of the financial examinations. Other market conduct surveillance activities were primarily ‘rate examinations’, which meant that the examiners verified that the rates actually charged by insurers were the same rates filed with and approved by regulators.

During the 1970’s, the NAIC worked with an industry advisory committee to develop the first market conduct examiners handbook (Handbook). This Handbook has been revised several times over the years. In addition, a professional certification program for market conduct examiners was developed.  Information technology tools were also developed to support market conduct surveillance activities. Special problems, such as the abuses in the marketing of life insurance and annuity products, have also influenced regulatory thinking about market conduct examinations.

It is useful to review the rationale for and the historical evolution of insurance market conduct surveillance to evaluate current practices. Our historical review begins in the early 1970s when the NAIC undertook its first investigation of market conduct surveillance and developed the first handbook for examinations. Little information is available on state market conduct practices prior to the 1970s. It appears that the states were performing some market conduct regulatory functions before 1970, but the evidence suggests that these functions were of limited scope. These activities were largely confined to ‘rate examinations’, which verified that the rates actually charged by insurers were consistent with the rates filed and approved by regulators.

In 1971, the NAIC commissioned McKinsey & Company to study financial and market conduct surveillance of insurance companies. McKinsey’s findings in 1974 led to the development of enhanced NAIC and state systems in both areas. At that time, the NAIC worked with an advisory committee to develop the first market conduct examiners handbook. Since then, the handbook has been revised several times as the states have enhanced the scope and sophistication of their market conduct functions. This evolution has included the development of a professional certification program for examiners and information technology to support market conduct regulation. The emergence of special problems, such as problems in the marketing of life insurance and annuity products, also has influenced regulatory thinking about market conduct. Reviewing these key developments helps us understand the current system for market conduct regulation.


The idea of conducting market conduct examinations separate and apart from the financial examinations resulted from a comprehensive study of the surveillance system of the U.S. insurance industry completed by McKinsey & Co. in the early 1970’s completed on behalf of the National Association of Insurance Commissioners (NAIC). Because a review of marketplace practices was so unique, this study concluded that different examination personnel should perform distinct procedures as part of a market conduct examination. Since the time of this study, the individual state insurance departments have implemented that general recommendation in a variety of ways. While the National Association of Insurance Commissioners (NAIC) has sought to bring uniformity and coordination to market conduct examinations, no one has evaluated their success. The efficiency and effectiveness of market conduct regulation has not been evaluated to date. We are not aware of any comprehensive review of the market conduct surveillance system since the McKinsey & Co. study.

The PriceWaterhouse Coopers report was completed approximately 30 years after McKinsey finished its work in the 1970s. The report noted that McKinsey suggested that regulators focus on insurers that made repetitive wrongful actions which suggested a business practice rather than isolated wrongs:

In 1971, the NAIC engaged McKinsey & Company, Inc. to evaluate and make recommendations concerning both insurance financial and market conduct surveillance systems. Working closely with NAIC committees and task forces, as well as advisory committees, McKinsey developed and implemented a rigorous study plan. The study included extensive interviews of regulators, insurers and other experts to solicit their views and suggestions on financial and market conduct surveillance. McKinsey also surveyed state practices at that time.

Through 1972 and 1973, McKinsey submitted several preliminary reports and solicited feedback in refining their analysis and findings. In April 1974, McKinsey submitted a final report that guided subsequent NAIC and state activities in implementing the report’s recommendations. The NAIC established a Market Conduct Surveillance Handbook Task Force, which with the assistance of an advisory committee, developed the first market conduct examination handbook in 1975.

Recognition of the Importance of Market Conduct Surveillance

While the McKinsey study focused primarily on financial surveillance, its attention to market conduct reflected the increasing recognition of the importance of this function. It also reflected a philosophy that insurers’ financial condition and market conduct were intertwined, and that problems in one area might indicate problems in the other. Additionally, there was a desire that, as state market conduct activities expanded, these activities would be conducted in an effective, efficient and consistent manner.

The McKinsey report is somewhat remarkable in its farsighted and progressive ideas. Almost thirty years later, some of these ideas continue to be endorsed, yet still have not been fully realized. This will become apparent as we compare the evolution of actual regulatory market conduct practices with the vision presented in the McKinsey report and related NAIC documents.

Philosophy, Purpose and Scope of Market Conduct Surveillance

Section 4 of the final McKinsey report (1974) focuses on market conduct surveillance. The report states that the purpose of market conduct surveillance is to ‘protect policyholders and claimants against unfair market practices.’ It observed that, although some states had been dealing with selected market conduct problems for many years, few had developed comprehensive, organized systems for this purpose. State market conduct activities consisted primarily of ‘rate examinations’ which verified that insurers’ were charging the rates that had been approved by regulators and the premium calculations were correct.

McKinsey addressed the following five areas in its analysis:

❑ Identification of market conduct problems

❑ Approach to market conduct surveillance

❑ Need for market conduct specialists

❑ Key elements of the market conduct surveillance system

❑ Approach for ensuring interstate cooperation

Market conduct problems were found to occur most frequently in the areas of: 1) sales and advertising; 2) underwriting; 3) rating; and 4) claims handling. …. Unfair claims practices included misrepresenting claimants’ rights, underwriting at the time of the claim, failing to answer correspondence, forcing legitimate claims to litigation, and pressuring claimants to accept unreasonably low settlements. McKinsey noted that the nature and frequency of market conduct problems cross many different areas of company operations and may vary considerably by line, marketing approach and geographic region. At the same time, it is interesting to note that the basic types of market conduct problems encountered in the early 1970s appear to be similar to the types of problems that consumers and regulators encounter today.

The McKinsey report espoused a philosophy in approaching market conduct surveillance that is still reflected somewhat in the current market conduct examiners handbook. The philosophy is that market conduct surveillance should be focused on companies that are engaging in unfair business practices, rather than those insurers that infrequently and unintentionally treat policyholders unfairly. In other words, regulators should focus on a pattern of unfair practices or actions, rather than inadvertent and occasional mistakes. Such patterns are to be identified either by a high frequency of improper actions or their origin in a company policy or procedure. McKinsey recommended that unfair practices be detected through complaints, the review of company materials, examination of specific transactions, and interviews of agents and company personnel.

I want to thank Merlin Law Group law librarian Jennifer Dabbs and insurance archivist Kim Dvorak for obtaining this PriceWaterhouse Coopers report.1 Jennifer tracked down this information from semi-retired Georgia State insurance professor Bob Klein, who may be the only person to have retained portions of this report.

The three points that are relevant for policyholders, public adjusters, and contractors about this history are that McKinsey & Company was deeply involved with making this process, the emphasis shifted to business practice wrongs versus isolated cases of wrongful behavior, and that complaints are a trigger for initiating a market conduct study.

This post follows my initial discussion of this topic in “What Is a Market Conduct Study?” I will follow up tomorrow with more about this important topic and what insurance consumers should do to participate in this process.

Thought For The Day 

A people without the knowledge of their past history, origin and culture is like a tree without roots.

—Marcus Garvey

1 PricewaterhouseCoopers, Insurance Market Conduct Examination Public Policy Review, (Feb. 21, 2000, draft prepared on behalf of the Insurance Legislators Foundation).