October 2, 2001
Commissioner Kathleen Sebelius Dear Commissioner Sebelius: At my request, the General Accounting Office (GAO) has prepared a report which I am releasing today, entitled "INSURANCE REGULATION, The NAIC Accreditation Program Can Be Improved" (GAO-01-948, dated August 2001). It is my understanding that you have reviewed the report and generally agree with its conclusions and recommendations. I am writing to find out what specific actions the National Association of Insurance Commissioners (NAIC) plans to take to address the problems GAO has identified. As you know, Tennessee’s insurance department was de-accredited following the insurance fraud scandal perpetrated by Martin Frankel. On two different occasions, Tennessee’s regulators audited an insurance company controlled by Mr. Frankel, and on both occasions Tennessee’s regulators failed to discover that the companies had no assets. GAO’s report points out that NAIC’s own instructions require states, in order to be accredited, "To satisfy the standards set forth in this section [i.e. NAIC’s standards for Regulatory Practices and Procedures], the Department [i.e. the state insurance department] should demonstrate to the review team they timely identify potentially troubled insurers and institute appropriate courses of action...." (page 23). GAO went on to say, "This did not occur in Tennessee or Mississippi. As a result, while Tennessee’s accreditation was suspended for a short time, the accreditation reviews did not identify many of the regulatory weaknesses that had allowed the affected companies in both states to evade detection and operate for several years not only with adequate capital but also without assets." (pages 23 and 24) In its report, GAO calls on the NAIC to improve the state accreditation program by strengthening the focus on chartering and change of ownership and by implementing new on-site review team procedures, such as requiring the inclusion of all relevant exam information since the last accreditation review, developing a scoring methodology that puts more emphasis on solvency standards, and ensuring the on-site team has the flexibility to spend more time on reviews where it discovers material issues that need to be addressed. "Without these improvements, the accreditation program may not succeed in clearly differentiating between the state insurance departments that can be expected, on the basis of past performance, to effectively regulate the solvency of insurance companies and those departments that may not."(page 24) I am, therefore, very interested to learn about the NAIC’s action plan to address the issues raised in the GAO report. Please provide me a written explanation of how and when the NAIC will respond to each of the recommendations GAO made in its report, no later than Monday, October 29, 2001. Should there be any questions about these matters, please contact Bruce Gwinn, Committee on Energy and Commerce Democratic staff, at (202) 226-3400. Thank you for your cooperation.
Sincerely,
Enclosure cc: The Honorable W. J. "Billy" Tauzin, Chairman The Honorable Michael G. Oxley, Chairman The Honorable John J. LaFalce, Ranking Member
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