Mr. Chairman, I want to thank you for holding this hearing on improving insurance regulation for consumers. Consumers should be our uppermost concern, because in most cases, consumers pay the biggest price when regulators fail to do their job.

We will hear important testimony today about how regulators failed to protect consumers in the insurance fraud case of Martin Frankel. Taxpayers, and policyholders whose losses are not covered by state guarantee funds, will bear much of the burden attributable to Mr. Frankel’s embezzlement of insurance assets in excess of $200 million. Today’s General Accounting Office’s report, which I requested, demonstrates that state insurance regulators were either too blind to see, or too unwilling to acknowledge, the scam Mr. Frankel perpetrated, openly and fearlessly, over a period of eight years. The simple fact is that Mr. Frankel succeeded, not because he was so clever, but because state insurance regulators lacked the skill, authority, access to basic information, resources, and "healthy skepticism" needed to protect consumers.

Perhaps most alarming is the fact that even when Tennessee’s insurance regulators finally figured out what Mr. Frankel was doing, they did not warn the public or regulators in other states. Instead, they gave him 60 days to redeposit the assets of Franklin American Life Insurance Company in an account in Tennessee. That’s like saying, "I know you have been stealing from me, but I’m giving you 60 days to steal from someone else so you can pay me back."

And that appears to be what happened. During that 60-day period, Mr. Frankel bought another insurance company and entered into a fraudulent reinsurance scheme, producing additional insurance company losses of $5 million in Arkansas and $45 million in Virginia. With these two additional frauds, Mr. Frankel was able to accumulate $50 million of the $57 million Tennessee demanded he put in an account in that state.

Even if state regulators had been more alert, even if they had the resources, authority, access to basic information, and all other things they currently lack, the actions of regulators in Tennessee raise an important question. Does the present system of 50 independent, state insurance regulators encourage each regulator to put too high a priority on taking care of policyholders in his or her own state, instead of exposing a fraud that also affects policyholders in other states? Unless what happened in Tennessee can be explained as an isolated and abnormal occurrence, one could conclude that, under the present system, no one is protecting all insurance consumers against fraud.

Certainly, this case also points out things the states can and should do to strengthen their anti-fraud efforts. For example, had state insurance regulators bothered even to check with their own state securities regulators, the more than $200 million in losses attributable to Mr. Frankel’s alleged thievery may have been avoided. And, had employees of the Mississippi State Insurance Department bothered even to talk with each other, the Mississippi department would never have approved redomestication of a Frankel-controlled company with assets of more than $100 million at the very moment Mississippi examiners were close to uncovering Frankel’s fraudulent activities.

I understand that, in response to this case, the National Association of Insurance Commissioners (NAIC) has proposed both short- and long-term actions that state insurance departments should take. Some of these recommendations will require action by state legislatures. Others will take development by NAIC committees, as well as legislative implementation by the states, and could take several years to implement.

A far more timely response is needed, especially now that the Gramm-Leach-Bliley Act lets banks, insurance companies, and securities firms engage in each other’s businesses. No longer will the fraudulent schemes of rogues like Martin Frankel harm only insurance policyholders. Instead, investors, banks, and the American taxpayer who underwrites bank solvency, may be threatened as well.

Mr. Chairman, if state regulators cannot do the job insurance consumers deserve and require, new regulatory mechanisms must be put in place that will.