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GAO questions NAIC's effectiveness.

GAO Questions NAIC's Effectiveness

In May the General Accounting Office submitted a report to the House Oversight and Investigations Subcommittee, chaired by Rep. John Dingell (D-MI), which addressed whether the National Association of Insurance Commissioners could establish a uniform insurance solvency regulatory system. The GAO submitted a second report to the House Subcommittee on Commerce, Consumer Protection and Competitiveness which examined the states' handling of financially troubled property/casualty insurers.

On May 22 Richard Fogel, assistant comptroller general of the GAO, presented the report concerning the NAIC's solvency reform efforts at a hearing before Rep. Dingell and his subcommittee. Mr. Fogel testified that the GAO concluded that the NAIC would not be able to create a uniform solvency regulatory system because it lacks the legal authority to either compel states to adopt its model solvency rules or enforce compliance by states which adopt the rules.

Mr. Fogel said the NAIC would be ineffective even if it was granted legal authority. If states legislatively ceded power to the NAIC, its authority would be undermined by the fact that the states could revoke the authority at any time. Authority stemming from the federal government would create a conflict of interest for the states insurance commissioners who make up the NAIC.

Mr. Fogel cited inadequacies in the NAIC's proposed solvency regulations as a basis for its inability to establish an effective uniform program. For example, he said the standards of the NAIC's proposed accreditation program only give the appearance of uniformity because they are vague and subject to widely varying interpretations.

Despite the current discussion among members of the subcommittee concerning the need for federal regulation of the insurance industry, the GAO neither recommended federal regulation nor proposed an alternative program for achieving stronger solvency guidelines.

Representatives of the NAIC challenged the GAO's criticism at the hearing. They pointed out that the NAIC has been successful in gaining state adoption of its programs in the past and thus has proven that it need not have legal authority to implement its programs. The NAIC also contended that it is already achieving success because many states adopted its solvency standards this year.

NAIC representatives also argued that the current system of state regulation should remain in place. They asserted that state regulation of the insurance industry has been more successful than the regulation of other financial institutions. A complete transfer of regulatory authority to the federal government would be disastrous in view of the budget deficits that have resulted from federal regulation of other financial institutions. A blend of federal and state regulation is undesirable in light of the problems this caused in the banking and thrift industry.

In the second GAO report, which examined state handling of financially troubled insurers, the GAO determined that state insurance regulators generally delayed taking formal action against financially weak property/casualty insurers.

The GAO compiled data regarding the insolvency dates of 140 of 215 property/casualty insurers that regulators reported taking over in the 1980s. That information was compared with the dates on which regulators reported taking action against 122 of the 140 companies. The GAO found that in 87 of the 122 cases, state insurance departments did not take formal action or seek rehabilitation orders until the insurers were insolvent. In 83 percent of those 87 cases, regulators took no action until one month after the insolvencies and in 39 percent of the cases took no action for more than six months after the insolvencies. According to the study, troubled companies were often allowed to continue writing business.

The GAO recommended several steps that could be taken to remedy the situation. These include more frequent submission of insurer financial data to regulators, a uniform system of determining when an insurer is financially troubled and a more detailed definition of insolvency

Editor's Note: RIMS continues to monitor the activities of Rep. Dingell's Oversight and Investigations Subcommittee. Spectrum will keep you apprised of any developments.
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Title Annotation:RM Spectrum; General Accounting Office, National Association of Insurance Commissioners
Author:Vaughan, Patricia C.
Publication:Risk Management
Article Type:column
Date:Jul 1, 1991
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