Scope and Methodology

To determine what regulators were doing to oversee the Year 2000 readiness of the insurance industry, we interviewed officials of NAIC and reviewed available information on the organization’s efforts to facilitate states’ Year 2000 activities and summarize information in the area. To determine the status of the insurance industry’s Year 2000 readiness, we interviewed regulatory officials who were responsible for Year 2000 oversight in the 17 states and reviewed available documentation on the readiness of the industry. Regulatory Approaches Varied Widely by State, Creating Year 2000 Oversight Challenges

Regulatory approaches and the level of oversight activity directed to the insurance industry’s Year 2000 readiness varied widely in the states we visited. The 17 states also differed in how they assessed and prioritized companies for regulatory attention in terms of Year 2000 readiness. Such variations raise a question about the extent to which states can rely on one another’s judgments regarding the preparedness of nondomiciled companies doing business in their states. This would be especially problematic when relying on states where the level of Year 2000 oversight activity is relatively limited or the criteria for assessing readiness may be considered too lax. State regulators’ efforts to validate the Year 2000 readiness of insurance companies began later than those of the banking and securities regulators. Information on the Year 2000 Readiness of the Insurance Industry Has Limitations, but the Industry Is Viewed as Generally on Track

Regulatory information on the Year 2000 readiness of the nation’s insurance industry does not provide the necessary information to judge whether the industry will be ready for 2000. Some Insurers Face Potentially Large Year 2000 Liability Costs; Effects of Related Mitigation Efforts Are Uncertain

Within the insurance industry, major concerns and preparations related to the Year 2000 date change are not limited to readiness issues, but also include liability exposure issues. Year 2000-Related Liability Exposures and Legal Costs Are Not Yet Estimable but May Be Significant for Some Insurers

Industry professionals and observers acknowledge that the magnitude of Year 2000-related exposures cannot be estimated at this time. State regulators and industry observers report that the insurance industry is in reasonably good condition with respect to Year 2000 readiness. Although many insurers have taken actions to reduce their potential liability exposures, the effectiveness of these mitigation efforts remains uncertain. Ultimately, insurers’ Year 2000-related liability exposures will depend on decisions made to resolve key legal questions and numerous pending legislative initiatives. Specifically, the state insurance regulators we visited were less active in their efforts to promote Year 2000 readiness and efforts to validate information on the status of companies’ readiness. They were also less active in planning for and pursuing formal enforcement actions against companies identified as inadequately preparing for Year 2000 and at a high risk of not being ready for the millenium change. Moreover, variations in oversight approaches among state regulators also made it difficult to ascertain the overall status of the insurance industry’s Year 2000 preparedness.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the readiness of the insurance industry to meet the year 2000 date change, focusing on: (1) what state regulators were doing to oversee the year 2000 readiness of the insurance industry; (2) how the regulatory oversight of the insurance industry's year 2000 readiness compared with the oversight of the banking and securities industries; (3) the status of the insurance industry's year 2000 readiness; and (4) the nature and extent of year 2000 liability exposures that insurers face and the mitigation efforts taken to address such exposures.

What GAO Found

GAO noted that: (1) the 17 state insurance regulators GAO visited differed in their approach and level of oversight activity directed to the insurance industry's year 2000 readiness; (2) these state regulators also differed in how they assessed and ranked insurance companies in terms of year 2000 readiness; (3) such variations raise a question about the extent to which states can rely on one another's judgments regarding the preparedness of nondomiciled insurance companies doing business in their states; (4) this question is especially applicable to those states where the level of year 2000 oversight is relatively limited or the criteria for assessing readiness may be considered lax; (5) variations in oversight approaches among state regulators also made it difficult to ascertain the overall status of the insurance industry's year 2000 readiness; (6) regulatory oversight of the insurance industry's year 2000 readiness began later than the oversight of the banking and securities industries; (7) the state insurance regulators GAO visited were less active in their efforts to promote year 2000 readiness and efforts to validate information on the status of companies' readiness; (8) they were also less active in planning for and pursuing formal enforcement actions against companies identified as inadequately preparing for 2000 and at a high risk of not being ready for the millenium change; (9) regulatory information on the year 2000 readiness of the nation's insurance industry, consisting primarily of self-reported information obtained through surveys, does not provide the necessary information to judge whether the industry will be ready for 2000; (10) insurance regulators and other observers GAO contacted generally have a favorable view of the industry's year 2000 readiness; (11) these regulators and industry observers expressed confidence that companies were actively preparing for the year 2000 date change because of competitive pressures and the business need to process date-sensitive information before 2000; (12) the magnitude of insurers' year 2000-related liability exposures cannot be estimated at this time, and the effectiveness of efforts to mitigate these exposures remains uncertain; (13) costs associated with year 2000-related exposures could be substantial for some property-casualty insurers, due to potential claims and legal defense costs; and (14) despite efforts to mitigate potential exposures, the year 2000-related costs that may be incurred by insurers will remain uncertain until key legal issues and actions on pending legislative initiatives are resolved.