Key States Affected by Insurance Fraud Subsequently Receive Reaccreditation

In September 2000, we reported on a $200 million fraud that resulted in insurance company failures in six states. Both Tennessee and Mississippi received their initial accreditation in 1994. NAIC officials, as well as the head of the NAIC accreditation review teams that conducted on-site accreditation reviews in Tennessee and Mississippi, knew of the investment fraud prior to the accreditation reviews. As a result, the existing weaknesses were ignored. Analysis Procedures Contain Many Weaknesses

NAIC’s descriptions of the accreditation program stress the importance to consumers of “effective solvency regulation.” NAIC’s guidance on the standards and the review process for the second round accreditation reviews requires review teams to evaluate the insurance department’s performance in addition to determining whether the departments has the appropriate procedures in place. The program’s inflexibility, which does not allow the review team to focus its limited capacity on material issues, seems counter to the goal of increasing public trust in the solvency regulation process. Conclusions

The accreditation program has been evolving since its inception more than 10 years ago. Recommendations for Executive Action

We recommend that the Executive Vice President of NAIC   Strengthen the accreditation program’s focus on chartering and change of ownership by   developing appropriate model laws, regulations, and procedures for chartering insurance companies; reviewing the current standards and guidelines related to change in ownership and make any necessary changes; including the new and improved model laws and regulations in the accreditation standards and developing companion compliance standards for regulatory practices and procedures; and   providing appropriate guidance to the review teams to assure better assessment of a state’s performance in these areas of solvency regulation. Among other weaknesses in state regulatory oversight it exposed, the theft uncovered weaknesses in chartering and change in ownership approvals, a key phase of oversight for preventing undesirable individuals from controlling insurance companies and insurer involvement in questionable business strategies. The National Association of Insurance Commissioners (NAIC), governors, and state legislatures realized that in order to preserve state regulatory authority, something had to be done to address the regulatory inconsistencies.
What GAO Found

The National Association of Insurance Commissioners' (NAIC) evaluates a state's program for regulating insurer solvency about once every five years to determine if it meets the association's minimum standards. The accreditation program has been in place for about 10 years. During that time, NAIC expanded the standards and modified the process for evaluating the adequacy of states' solvency regulation. Weaknesses in solvency regulation in Tennessee, Mississippi, and three other states allowed a $200 million insurance fraud to continue for eight years, resulting in the failure of seven insurance companies. During 2000, both Tennessee and Mississippi underwent accreditation reviews by NAIC and were reaccredited. NAIC has tried to strengthen its accreditation program by adding model laws and regulations to the required standards. It has also revised the way in which accreditation reviews are performed and scored and has improved training for members of review teams. Accreditation reviews done in Tennessee and Mississippi disclosed gaps and weaknesses in the accreditation program. In particular, the program does not cover a key area of solvency regulation--chartering and change in ownership of insurance companies. Oversight of chartering and change in ownership is key to preventing questionable individuals from gaining control of insurance companies. The insurance fraud exposed weaknesses in state regulation and oversight that are not addressed in NAIC's accreditation program. Moreover, GAO found weaknesses in on-site accreditation review procedures, including incomplete analyses of exam information, a questionable scoring methodology that can give misleading results, limited on-site compliance testing, and insufficient flexibility in tailoring reviews to address the most material issues.