NAIC and State Insurance Regulators Have Accelerated Their Oversight of the Industry’s Year 2000 Readiness

Since March 1999, NAIC has stepped up its Year 2000 efforts by (1) issuing expanded guidance to state regulators on how to examine companies’ preparedness and (2) encouraging state regulators to do on-site validation reviews of companies with the greatest potential public impact. Recognizing their industry’s high level of date sensitivity, the nation’s banking regulators have completed multiple rounds of on-site examinations for all financial institutions under their jurisdiction.Although 6 of the 17 states we reviewed indicated that their overall goal was to conduct 1 round of targeted examinations for all of their domiciled insurance companies, the remaining 11 states had established varying goals regarding which and how many companies would be subject to targeted Year 2000 examinations. For the most part, these goals attempted to cover the states’ nationally significant companies. Uncertainties about the status of the remaining 5 percent were largely unresolved at the time of our survey. NAIC and State Regulators Remain Confident About the Insurance Industry’s Readiness for Year 2000

In an October 1999 press release, NAIC’s Year 2000 task force reported that information obtained from its initiative focusing on nationally significant insurers indicates that the insurance industry is expected to experience little disruption when 2000 begins. Our survey indicated that state regulators had considerable confidence about the adequacy of the insurance industry’s preparation for the Year 2000 date change. The remaining 22 percent of the states’ domiciled insurance companies represented companies that were (1) not Year 2000 ready by September 30, but that were projected to be ready by December 31; (2) not subject to categorization due to the lack of adequate information to determine their readiness status; or (3) considered at risk of not being ready. The states indicated that as of September 30 they lacked sufficient information to determine the Year 2000 readiness of 4 percent of their domiciled insurance companies. In contrast, 72 to 80 percent of insurers in the property/casualty, life/health, and other insurer categories were considered Year 2000 ready. According to a task force official, health insurers represent one area that remains vulnerable because such insurers depend on hospitals and doctors’ offices becoming Year 2000 ready. Other Sources Are Generally Positive About Insurers’ Year 2000 Preparedness Efforts but Are Uncertain About Liability Exposure Impacts

The industry observers we contacted generally maintained a favorable view of the insurance industry’s Year 2000 preparedness efforts, but they continued to express uncertainty over potential costs associated with Year 2000-related liability exposures. The rating companies we contacted in October indicated that it was still too early to tell how liability exposures might affect insurance companies. For this reason, the rating companies had not factored liability exposures into their ratings. Legal debates over insurance coverage for Year 2000-related mishaps, as well as for costs to avoid such mishaps, have yet to be fully resolved. We also found that, partly in response to this emphasis, some states have increased their efforts to conduct on-site examinations of their domiciled insurance companies’ Year 2000 preparations.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the readiness of the insurance industry to meet the year 2000 date change, focusing on: (1) an updated assessment, as of September 30, 1999, of state regulatory oversight of the insurance industry's year 2000 preparations; and (2) the status of the industry's year 2000 readiness.

What GAO Found

GAO noted that: (1) since GAO's last report, the National Association of Insurance Commissioners (NAIC) stepped up its efforts to assess the insurance industry's year 2000 readiness by: (a) issuing expanded guidance to state insurance regulators on how to examine companies' preparedness; and (b) encouraging state regulators to conduct on-site examinations of insurers with the greatest potential public impact; (2) some of the nation's state regulators increased their use of examinations aimed at verifying the year 2000 readiness of their insurers, particularly for their nationally significant life/health and property/casualty insurers; (3) six of the 17 states reviewed indicated that their goal was to conduct year 2000 readiness examinations for all of the insurance companies domiciled in their states; (4) the remaining 11 states had set varying goals regarding which companies were to be subject to year 2000 examinations, but most of these states attempted to cover their nationally significant insurers; (5) in October 1999, NAIC's Year 2000 Industry Preparedness Task Force reported the insurance industry expected to experience little disruption when 2000 begins; (6) state responses to a nationwide survey GAO conducted indicated considerable confidence in the insurance industry's preparation for the year 2000 date change; (7) uncertainties about the ability of the remaining 5 percent of the companies to be year 2000 ready were largely unresolved at time of survey; (8) regulators indicated they did not have adequate information to determine the readiness status for 4 percent of the companies and considered 1 percent to be at risk of not being ready by December; (9) states appeared to have a slightly lower level of confidence in the readiness of health maintenance organizations and managed care organizations than those in other insurance segments; (10) according to a task force official, health insurers represent one part of the industry that remains vulnerable because they depend on hospitals and doctors' offices becoming year 2000 ready; (11) industry observers continued to express uncertainty over potential costs associated with year 2000-related liability exposures; (12) legal debates had yet to be resolved over insurance coverage for year 2000-related mishaps as well as liability for costs that policyholders incur to avoid such mishaps; and (13) rating companies indicated that it was still too early to tell how liability exposures might affect insurance companies, and for this reason, the rating companies had not factored these exposures into their ratings.