Regulatory Initiatives of the National Association of Insurance
Commissioners (06-JUL-01, GAO-01-885R).
Efforts by the National Association of Insurance Commissioners
(NAIC) to promote sound and uniform regulatory processes across
the states are being put to the test as pressure builds from both
the 1999 Gramm-Leach-Bliley Act and competitive forces for more
efficient and streamlined insurance regulatory processes. One
factor affecting the ultimate success of these efforts is the
level of confidence state regulators will have in their
counterparts' willingness and ability to adequately obtain,
assess, and validate information provided by industry applicants
in making regulatory decisions. Each state will be required to
rely on the actions of regulators in other states to a greater
degree than ever before. Whether regulators ultimately achieve
uniformity in some areas or even attain reciprocity, continuing
weaknesses in some states' regulatory framework can undermine the
system. NAIC and state regulators believe that the development of
more uniform and streamlined methods for obtaining licensing
approval on individuals, products, and insurance companies in
multiple states can enhance the ability of insurers to compete
with other financial service entities while at the same time
maintaining or improving the quality of insurance regulation.
Both the timely completion and degree of success for many of
NAIC's financial modernization initiatives remain uncertain.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-885R
ACCNO: A01379
TITLE: Regulatory Initiatives of the National Association of
Insurance Commissioners
DATE: 07/06/2001
SUBJECT: Insurance regulation
Interagency relations
Internal controls
Insurance companies
******************************************************************
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GAO-01-885R
1 GAO- 01- 885R Regulatory Initiatives
July 6, 2001 The Honorable John D. Dingell Ranking Minority Member Committee
on Energy and Commerce House of Representatives
Subject: Regulatory Initiatives of the National Association of Insurance
Commissioners
Dear Mr. Dingell: As you requested, this report provides information on
selected initiatives undertaken by the National Association of Insurance
Commissioners (NAIC) to improve state insurance regulatory processes. NAIC
developed these initiatives in response to provisions in the 1999 Gramm-
Leach- Bliley Act (GLBA), Public Law 106- 102, which mandated changes in
insurance regulation, and to competitive pressures within the insurance
industry. Our study was prompted by your concern that some of the
initiatives may adversely affect regulators? ability to conduct proper
solvency oversight of insurers, particularly in light of the regulatory
weaknesses identified after the recent insurance investment scam allegedly
perpetrated by Martin Frankel. 1
The specific objective of this report is to describe the current status of
six NAIC initiatives intended to comply with provisions of GLBA and improve
competitiveness in the financial services sector. Additionally, we will
describe the status of actions that NAIC and some states have taken in
response to recommendations contained in our September 2000 report.
Throughout this report, we will also highlight challenges and areas that
merit continued attention in NAIC?s efforts to improve regulatory processes
in the insurance industry.
Results in Brief
NAIC has undertaken an ambitious agenda of initiatives intended to
streamline and promote uniformity at the state level. Under pressure from
GLBA and insurance industry participants that are faced with increasing
competition from firms in the banking and securities industries, NAIC and
state regulators are working to implement these initiatives. For example,
NAIC and the states are developing streamlined licensing systems that will
allow agents and brokers to conduct business in more than one state after
satisfying the licensing requirements administered by a single state.
Another streamlining initiative seeks to develop a more uniform and
efficient approach for
1 We recently issued a report to you on this matter that included proposed
corrective actions designed to shore up regulatory deficiencies revealed
during the scam. See Insurance Regulation: Scandal Highlights Need for
Strengthened Regulatory Oversight (GAO/ GGD- 00- 198, Sept. 19, 2000).
United States General Accounting Office Washington, DC 20548
2 GAO- 01- 885R Regulatory Initiatives
bringing new products to market. Success in implementing these initiatives
depends largely on the extent to which states ?buy in? to the concepts of
uniformity and reciprocity as these concepts apply to state insurance
regulation. If these initiatives are to succeed, states will need to be more
willing than they have been in the past to accept the regulatory due
diligence and licensing decisions of another state. The more uniform
regulatory processes and functions are across states, the easier it will be
to gain such acceptance. At the same time, insurance regulators are being
challenged to avoid
?watering down? regulatory standards in order to achieve uniformity, but,
rather, to follow best practices and the standards of ?leading? states to
enhance insurance regulation across all of the states. Once NAIC members
agree on recommendations that would create more uniform regulatory statutes,
two additional challenges remain. First, state legislatures must approve the
recommendations without significant changes. Second, each state insurance
department must successfully implement the recommendations. At present, both
the timely completion and ultimate success of NAIC?s initiatives remain
uncertain.
NAIC and several states have also initiated a series of corrective actions
that address recommendations made in our report on the recent scandal.
NAIC?s corrective actions, which are to be phased in over several years,
include improvements in the following areas: background checks on industry
applicants, investment analyses and asset verifications of insurers?
portfolios, regulatory coordination and communication among regulators, and
accreditation requirements for state insurance departments. For instance,
NAIC is working to implement a process for conducting routine criminal and
regulatory history checks on potential new entrants to the industry.
Collectively, these actions have the potential to improve oversight if NAIC
and the states sustain a high- level commitment to implementing them.
Background
Insurance companies are regulated by the states, unlike the banking and
securities industries, which are under a dual federal- state oversight
system, with federal regulators taking a leading role. NAIC is a voluntary
association made up of the heads of each insurance department from the 50
states, the District of Columbia, and 4 U. S. territories. NAIC assists the
states in their regulatory responsibilities with guidance, model and
recommended laws and regulations, and information- sharing tools. NAIC does
not have regulatory authority over the state insurance departments but
provides a national forum for addressing and resolving issues affecting the
insurance industry and, in certain instances, for promoting consistency in
regulatory policies. As part of its national accreditation program, NAIC
reviews the regulatory activities of state insurance departments that relate
to assessing the financial solvency of insurers.
Recent federal legislative changes and trends in financial modernization
within the industry have had a significant impact on insurance regulation,
particularly with the enactment of GLBA. GLBA requires state insurance
regulators to implement certain reforms or face losing their exclusive
authority over some regulatory functions. Specifically, the act calls for
the states to establish a uniform or reciprocal licensing system for agents
and brokers within 3 years of its enactment. If the majority of states do
not establish this system, a new regulatory board, the National Association
of Registered Agents and Brokers (NARAB), will be created. Any state
licensed insurance producer
3 GAO- 01- 885R Regulatory Initiatives
whose license has not been suspended or revoked would be eligible to join
NARAB. 2 Membership in the association would entitle the member to licensure
in each state where the member pays the requisite fees, including licensing
fees, and, where applicable, satisfies bonding requirements set by each
state. NAIC and the state insurance commissioners (or chief regulatory
officials) will determine whether the states have met GLBA?s requirements
for a reciprocal or uniform licensing system.
In an effort to avoid the establishment of NARAB, NAIC and the states are
working to meet GLBA?s requirements within the 3- year period. In March
2000, NAIC endorsed the
Statement of Intent: The Future of Insurance Regulation, which lays out its
vision of the regulatory improvements needed to implement the GLBA
provisions and respond to changes within the financial services sector. This
document describes NAIC?s goals- uniformity, efficiency, and modernization-
for regulation of the insurance industry. NAIC?s current financial
modernization initiatives can be traced back to this document.
Insurance industry participants have also advocated regulatory reforms, some
of which go beyond GLBA?s requirements. For instance, some industry
representatives have advocated creating a federal regulator for insurance
and giving companies the choice of either state or federal regulation. A
number of the initiatives prescribed in the Statement of Intent were
developed in part to counter industry pressures for an optional federal
charter.
A recent insurance scam also highlighted areas where insurance regulation
could be improved (see figure 1). GAO and the Tennessee State Auditor both
reported similar regulatory oversight weaknesses tied to an insurance
investment scam allegedly perpetrated by Martin Frankel. 3 The State Auditor
concluded that the Tennessee Department of Commerce and Insurance had failed
to detect the fraudulent nature of Frankel?s alleged activities before May
1999 because regulators failed to exercise sufficient professional
skepticism, used inadequate procedures, and misapplied review procedures.
The state auditors also cited a lack of communication between the Insurance
Division staff and other department officials (the state?s Securities
Division is part of the Department of Commerce and Insurance). Similarly, we
observed weaknesses in insurance oversight by several states where insurance
companies were victimized by the scam. Among these weaknesses were
inadequate regulatory tools, policies, and procedures; a lack of
communication between regulators within and outside of the insurance
industry; and inadequate professional skepticism about numerous ?red flags?
during nearly 8 years of the scam.
2 According to GLBA, the purpose of NARAB shall be to (1) provide a
mechanism through which uniform licensing, appointment, continuing
education, and other insurance producer sales qualification requirements and
conditions can be adopted and applied on a multistate basis, while
preserving the right of states to license, supervise, and discipline
insurance producers and (2) prescribe and enforce laws and regulations with
regard to insurance- related consumer protection and unfair trade practice.
3 Special Report: Review of Inaction on the Part of Insurance Division
Employees Involved in the
Regulation of Franklin American Life Insurance Company, Tennessee
Comptroller of the Treasury (July 7, 2000).
4 GAO- 01- 885R Regulatory Initiatives Figure 1: Recent Insurance Scam
Focuses on Insurer?s Investment Activities
The recent insurance investment scam allegedly perpetrated by Martin Frankel
was tied to the investment activities of a number of multistate insurers.
Throughout the 1990s, Martin Frankel, with assistance from others, allegedly
obtained secret control of entities in both the insurance and securities
industries. He reportedly anonymously acquired and controlled insurance
companies in several states and, despite being barred from the securities
industry, secretly exercised control over a small securities firm. Using the
name of this securities firm, Frankel allegedly took custody of insurance
company assets and provided false documents on investment activities to
disguise his actual purpose. Instead of managing the assets prudently, he
purportedly diverted nearly $200 million to other accounts he controlled and
used the funds to support the ongoing scam (and his lifestyle). The scam was
finally exposed after insurance regulators in Mississippi took enforcement
action against three insurers connected to the scam, placing them under
regulatory supervision. Frankel currently faces criminal and civil actions
in connection with his alleged involvement in the scam.
In response to the regulatory weaknesses uncovered as a result of the
investment scam, NAIC and some states have initiated corrective actions to
help prevent such a fraud from occurring again. In April 2000, NAIC issued
its final report recommending both short- and long- term corrective actions
to address regulatory weaknesses associated with the scam. (The final report
and recommendations were included in our September 2000 report.)
Additionally, some of the states most affected by the scam have indicated
that they also plan to take, or have taken, corrective actions.
Scope and Methodology
To identify the status of NAIC initiatives, we reviewed NAIC?s
organizational structure and agenda. In particular, we obtained information
on NAIC?s efforts to assess and implement provisions of GLBA and promote
regulatory modernization. We focused on six initiatives:
* Producer Licensing Reciprocity and Uniformity: Provides for developing a
streamlined system and uniform standards for licensing agents and brokers in
more than one state, thereby avoiding the federal creation of NARAB, an
entity that could license agents and brokers on a multistate basis.
* Speed to Market: Facilitates the accelerated approval of products to be
marketed in more than one state.
* National Treatment of Companies: Develops a more efficient system of
licensing multistate insurers.
* Coordinating With Federal Regulators: Promotes coordination between state
insurance departments and federal financial regulators.
* Insurance Holding Company: Develops appropriate oversight procedures for
financial holding companies with insurance affiliates (formerly known as
Financial Services Holding Company Analysis/ Examination/ Review).
5 GAO- 01- 885R Regulatory Initiatives
* Market Conduct: Evaluates and harmonizes safeguards to protect insurance
consumers against inappropriate sales practices.
To summarize the status of each initiative, we provided available
information on the problem or issue that each initiative was designed to
address, information on what has happened to date, and future plans. In some
cases, this included NAIC?s summary of legislative actions taken by states,
because we did not perform an independent review of individual state laws.
NAIC and the states have identified a number of corrective actions needed to
address regulatory deficiencies highlighted by the investment scam allegedly
perpetrated by Mr. Frankel. To describe the progress made to date, we
obtained information from NAIC on their short- and long- term actions to
address issues related to the fraud. Additionally, we solicited information
on corrective actions undertaken in states victimized by the scam,
particularly in Tennessee and Mississippi. (Tennessee was home to the
headquarters of seven insurers connected with the fraud, three of which were
domiciled in Mississippi.)
We did our work between November 2000 and June 2001 in accordance with
generally accepted government auditing standards.
NAIC?s Financial Modernization Initiatives Aim to Produce More Streamlined
and Uniform State Regulatory Processes
Many of NAIC?s initiatives are interrelated, focusing on promoting faster
regulatory approvals for agents, brokers, products, and companies. Table 1
summarizes the status of each of these initiatives, while enclosures I
through VI describe them in greater detail. NAIC and the states are working
to develop a model licensing process that would permit insurance agents and
brokers to meet licensing requirements in all states by satisfying the
licensing requirements of any one state. A similar process would apply to
products being approved for marketing in more than one state. Other
initiatives include improving communication and coordination with other
financial services regulators and strengthening consumer protection
oversight. At present, both the timely completion and ultimate success of
these initiatives remain uncertain.
6 GAO- 01- 885R Regulatory Initiatives Table 1: Summary of Selected NAIC
Initiatives
NAIC initiative Purpose and description Status and timetable for completion
Producer Licensing Reciprocity and Uniformity
To develop a licensing system based on uniform state licensing laws and
reciprocity practices in order to promote greater efficiency in licensing
insurance agents and brokers.
Under GLBA, a majority of states (at least 29 separate jurisdictions) must
meet certain uniformity or reciprocity requirements in the 3- year period
ending in November 2002 to avoid the creation of NARAB. According to NAIC,
33 states have passed agent licensing laws, which NAIC is reviewing for
NARAB compliance. NAIC?s goal is for all states to become NARAB compliant by
November 2002 and, ultimately, achieve uniform producer licensing laws in
all states.
Speed to Market To develop a more uniform, streamlined approach to new
product filing and review processes.
A limited launch began in May 2001. A subgroup of this initiative- the
Coordinated Advertising, Rate, and Form Review Authority (CARFRA)- is
conducting the limited launch, which involves 4 types of life and health
products in 10 states. After testing in the launch states, NAIC expects the
new product approval process to be fully implemented within a year after the
launch for certain types of insurance products.
National Treatment of Companies To standardize the company licensing
review process for multistate insurers and to bring about greater
coordination and communication of regulatory filings associated with mergers
and acquisitions involving an insurance company.
Efforts to create a more centralized licensing and oversight review process
were abandoned by NAIC in favor of improvements to existing licensing
processes, including the use of a common, uniform licensing form, the
Uniform Certificate of Authority Application (UCAA). As of July 3, 2001, 46
states and the District of Columbia were using UCAA. By July 31, 2001, NAIC
expects all states will be using UCAA.
Coordinating With Federal Regulators To establish a more efficient state
regulatory system that fully implements GLBA, eliminates unnecessary
duplication, and takes advantage of new technologies to facilitate the
communication and coordination between state and federal regulators.
In March 2000, NAIC developed a model information sharing agreement with the
Office of Thrift Supervision (OTS). In December 2000, NAIC approved model
regulatory cooperation agreements with the Federal Reserve Board, the Office
of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance
Corporation (FDIC). In March 2001, NAIC reported that individual states were
in the process of signing agreements with federal bank regulatory agencies
and developing cross- training and educational sessions with insurance and
banking regulators. As of June 27, 2001, 45 states had signed bilateral
agreements with OTS, 13 with OCC, 14 with FDIC, and 4 with the Federal
Reserve.
Insurance Holding Company (formerly Financial Services Holding Company
Analysis/ Examination/ Review)
To assess the implications of GLBA on NAIC?s existing model laws and
regulations concerning holding companies in general, and to develop best
practices for reviewing holding companies.
The focus of this initiative has shifted from oversight of new financial
holding companies, as defined by GLBA, to improving the oversight of holding
companies in general. On November 10, 2000, NAIC introduced a draft
document, Framework for Insurance Holding Company Regulation, for review and
comment. Having undergone extensive review to date, a final report is
planned for issuance at the 2001 Winter National Meeting. Additionally,
recommended amendments to existing NAIC model laws are expected to be
adopted by NAIC at the 2001 Fall National Meeting.
Market Conduct To protect consumers from abuses in the insurance market,
including those related to the availability and affordability of insurance,
by reviewing the underwriting and marketing practices of insurers and
producers.
In 2001, a working group will collect and analyze data, prioritize key
issues for examination, and assess interstate cooperation in developing
guidelines for market conduct. A progress report and recommendations will be
presented at the 2001 Winter National Meeting.
Source: GAO summary of NAIC material.
7 GAO- 01- 885R Regulatory Initiatives
NAIC and the States Have Made Some Progress Toward Streamlining and Creating
Uniformity in Licensing and Approval Processes
Three of NAIC?s initiatives focus on streamlining licensing or approval
functions- Producer Licensing Reciprocity and Uniformity, Speed to Market,
and National Treatment of Companies. Success in implementing these
initiatives hinges largely on regulators? willingness to accept more
regulatory uniformity, reciprocity, or both. As discussed in figure 2, the
notion of reciprocity, which requires states to accept the regulatory
standards of other states when making licensing decisions, is linked to
uniformity. The greater the degree of uniformity that exists among the
states, the easier it will be to achieve reciprocity.
Figure 2: Uniformity and Reciprocity Under GLBA
GLBA set out criteria that a majority of the states must meet in order to
avoid the creation of NARAB. These criteria can be satisfied in either of
two ways- that is, through uniformity or reciprocity.
* To satisfy the uniformity criterion, the states must agree to modify their
individual laws, regulations, and processes so that the requirements for
licensing agents are uniform across states. Agents and brokers would still
need to apply for a license in each state where they intend to do business.
With uniform requirements, however, getting a nonresident license would be
nearly automatic.
* To satisfy only the reciprocity criterion, the states would not need
uniform laws. Instead, each state would have to agree to issue a nonresident
license to agents licensed in another state without additional requirements
in order to be in compliance with GLBA?s NARAB reciprocity requirements. In
this case, a reciprocity- compliant state issuing a nonresident license
would be accepting the licensing requirements of that agent?s state-
irrespective of their differences.
Meeting either of these standards presents its own set of difficulties. To
achieve uniformity, it may be difficult for state regulators to agree on the
appropriate set of uniform rules and then convince a majority of the state
legislatures to adopt them without changes. With reciprocity, states would
not have to change their laws, regulations, and processes but might have
difficulty convincing a particular state insurance department to give
nonresidents from states with fewer requirements the same rights as its own
resident agents to sell insurance in the state.
NAIC and state insurance departments have made progress in developing more
streamlined and uniform agent and broker licensing processes. Although the
exact timetable for completing the minimum requirement for this initiative-
that is, for having a majority of states certified by NAIC as being ?NARAB
compliant?- is still uncertain, NAIC believes that a majority of states have
likely adopted the necessary changes already. NAIC and state regulators have
a stated goal of achieving uniformity in this initiative and moving toward
uniformity in other areas of regulation. Nevertheless, as a matter of
practical strategy, state insurance regulators have decided to focus on
satisfying the GLBA provisions for reciprocity rather than attempting to
achieve uniformity within the time constraints imposed by the law. State
regulators feel it will be easier to get states to
8 GAO- 01- 885R Regulatory Initiatives
agree to accept another state?s rules as a basis for approving a nonresident
license than to agree to and adopt a set of uniform laws, regulations, and
procedures by November 2002. However, some challenges still exist. For
example, one issue is how to handle differences in state requirements
concerning the nature and extent of background checks conducted on agents
applying for a license. Discussions at recent NAIC national meetings have
focused on whether states could comply with GLBA reciprocity requirements
while still requiring nonresident agents to comply with some additional
requirements.
At its 2001 Spring National Meeting in March, NAIC reported that nine states
had enacted producer licensing laws to satisfy NARAB reciprocity
requirements. NAIC had previously developed the Producer Licensing Model Act
4 to help states formulate new agent licensing legislation. From March
through June, another 24 states also passed laws related to agent licensing.
NAIC, however, still has to review these laws (including those in the
original nine states) to ensure that the new laws comply with the GLBA
requirements.
Other NAIC initiatives are also aimed at streamlining regulatory processes.
For instance, some life insurance companies maintain that they cannot
compete effectively with other noninsurance financial institutions because
of the inefficient product approval process in the current state insurance
regulatory environment. NAIC is trying to respond to these concerns by
streamlining regulatory processes in order to bring products into the
marketplace more quickly. The Speed to Market initiative aims to expedite
approval of some types of new insurance products by using a centralized
point of filing, the Coordinated Advertising, Rate, and Form Review
Authority (CARFRA). With this process, CARFRA would first review products
against a set of criteria agreed to by all the states and then against any
additional criteria set by individual states. Once CARFRA has completed its
review, it would issue state- by- state recommendations for approving the
product. State regulators would retain their authority to grant approval for
the product in their own states. If they agree to participate in CARFRA,
however, they would generally be expected to follow the review team?s
recommendations. NAIC officials told us that a test launch of the CARFRA
process is currently underway.
The National Treatment of Companies initiative is also aimed at streamlining
regulatory approval processes, this time for insurers conducting business in
more than one state. Initially, a ?national treatment system? was being
considered under this initiative that would have created a unified national
system operated by state insurance regulators for the licensing, solvency
oversight, and market conduct regulation of large, multistate companies.
NAIC and the states have since abandoned this approach, choosing instead to
focus their efforts on state- by- state practices to increase efficiency and
consistency in licensing, corporate governance, and the regulation and
review process for chartering or change- in- ownership applications. NAIC
and state insurance regulators are also working to develop an automated
uniform application, the Uniform Certificate of Authority Application
(UCAA), which would facilitate the licensing approval process by requiring
companies to fill out only one application form. Insurers would still need
to be licensed in each state where they intended to do business, but UCAA
would eliminate the need to file multiple applications with different
information. NAIC expects that all states will be using UCAA by July 31,
2001.
4 This model act creates standards for key areas of producer licensing, such
as standards for license denials, and exempts licensed producers who apply
for a nonresident license from completing prelicensing requirements and
examinations. The model act also establishes a system of producer licensing
reciprocity among the states.
9 GAO- 01- 885R Regulatory Initiatives
Other Initiatives Stress Coordination and Consumer Protection Two other NAIC
initiatives- Coordinating with Federal Regulators and Insurance Holding
Company- emphasize the need for uniformity and coordination among
regulators, including those overseeing the banking and securities
industries, as the financial landscape changes as a result of GLBA. NAIC is
seeking to expand communication among regulators by helping state
authorities establish bilateral agreements with federal regulatory agencies,
including the Federal Reserve Board, the Office of Thrift Supervision (OTS),
the Office of the Comptroller of the Currency (OCC), and the Federal Deposit
Insurance Corporation (FDIC). While many of these treaties or agreements
have been adopted, the process is still in its early stages. Meanwhile,
unresolved issues remain. For instance, federal and state regulators will
have to develop procedures for dividing assets among affiliated entities of
a failed financial holding company. NAIC believes the agreements being
reached will create a framework for communicating and resolving issues of
common concern to state and federal regulators.
The Insurance Holding Company initiative also grew out of GLBA. 5 However,
this initiative has evolved to focus more broadly on traditional insurance
holding companies as well. Regulators working on the renamed Insurance
Holding Company initiative are developing a document entitled Framework for
Insurance Holding Company Regulation. This document is intended to provide
guidance and best practices for state insurance regulators in supervising
insurance holding companies and their affiliates. NAIC believes that this
focus on improving regulatory practices for existing insurance holding
companies will be applicable to insurance affiliates of holding companies in
general, including newly formed financial holding companies, as defined by
GLBA.
Finally, the Market Conduct initiative is intended to promote best practices
and uniform regulatory standards in order to enhance consumer protection.
This initiative addresses oversight issues related to the conduct of agents,
brokers, and companies in the marketplace. Currently, NAIC?s accreditation
program does not review state mechanisms for overseeing market conduct. The
initiative is still at the data- gathering stage where information is being
collected to assess abuses of market conduct and problem areas for
consumers.
Market conduct includes all issues related to the sale of insurance products
to consumers, including sales practices and ?suitability?- that is, the
agent?s responsibility to ensure that a product meets a customer?s needs,
particularly products marketed to elderly citizens. Market conduct is not an
initiative that comes directly out of either GLBA or insurance industry
pressures to relieve the regulatory burden on the insurance industry.
However, this initiative is related to efforts to streamline and accelerate
the process for getting new products to market. In many states the extensive
and time consuming product approval process, together with a mechanism for
resolving consumer complaints, have served as tools for protecting consumers
of insurance. Many industry
5 GLBA created a new entity known as the financial holding company (FHC).
GLBA permits consolidation among banks, securities firms, and insurance
companies. FHCs may engage in a list of financial activities, including
banking, securities, insurance underwriting, merchant banking, and other
activities the Federal Reserve Board determines to be financial in nature.
Although the Federal Reserve Board provides umbrella oversight of FHCs, GLBA
establishes functional regulation, with state insurance regulators
supervising insurance activities; the Securities and Exchange Commission
(SEC) regulating securities activities; and federal and state banking
agencies continuing to oversee banking activities.
10 GAO- 01- 885R Regulatory Initiatives
participants, consumer advocates, and regulators believe that improved
market conduct oversight, while important in its own right, becomes even
more crucial if NAIC succeeds in its efforts to streamline and abbreviate
product approval processes.
State regulators? efforts to modernize and streamline insurance regulation
rests on two pillars- strengthening the internal processes within each state
and developing uniformity across states, particularly in areas of regulation
that deal with multistate insurers. This process faces many challenges. Of
particular importance is the challenge of raising the overall quality of
insurance regulation by adopting uniform expectations, standards, and models
that represent ?best practices? for each aspect of insurance regulation. The
alternative- negotiating a uniform standard that represents something less
than the best practice- would weaken the quality of insurance regulation,
with potentially serious consequences for both solvency and consumer
protection.
Numerous Corrective Actions Related to Frankel?s Alleged Scam Have Been
Initiated In the aftermath of a scam allegedly carried out by Martin Frankel
involving several insurers during the 1990s, NAIC proposed numerous
corrective actions to address regulatory weaknesses highlighted by the scam.
These corrective actions are in various stages of completion, though most
have yet to be fully implemented. In addition, some affected states have
initiated their own corrective actions to improve regulatory oversight as a
result of the scam.
In April 2000, NAIC?s Ad Hoc Task Force on Solvency and Anti- Fraud proposed
a list of near- and long- term corrective actions to insurance regulatory
processes. These actions included improvements to NAIC?s Financial Analysis
Handbook and Financial Condition Examiners Handbook, most focusing on
assessing an insurer?s investment activities. Additionally, this task force
identified needed improvements to NAIC?s accreditation program. These
accreditation program improvements included identifying the appropriate
custodial requirements for insurer assets, using investment specialists on
certain examinations, implementing more proactive communications between
states, and establishing a ?Form A Database? to help states track the status
of change- in- ownership applications being submitted to other state
regulators. To date, NAIC reports that considerable activity has occurred
regarding the near- term (Level I) corrective actions. While some activity
has occurred in the areas of longer term corrective actions (Levels II and
III), most of those actions have yet to be completed. Further details on the
reported status of NAIC corrective actions can be found in enclosure VII.
In addition to the corrective actions undertaken by NAIC as a result of the
investment scam allegedly perpetrated by Mr. Frankel, some states have also
initiated corrective actions. In particular, regulators in Tennessee,
Mississippi, and Missouri have identified corrective actions they are taking
to prevent a similar investment scam from occurring again.
The Tennessee Department of Commerce and Insurance has implemented several
improvements to strengthen its oversight of insurance companies. According
to the Tennessee Insurance Division, it has made several improvements in the
areas of investment confirmation, documentation and communication, analysis,
and fraud detection. These improvements include obtaining written
confirmation of assets from independent third- party sources, maintaining
more complete records of communications with insurance companies,
intensifying scrutiny of annual and quarterly financial reviews
11 GAO- 01- 885R Regulatory Initiatives
by an analyst?s supervisor, and training staff to recognize fraud
indicators. Tennessee has also reorganized certain state- level activities
to help promote better communications between insurance and securities
regulators.
Officials in the Mississippi Insurance Department told us that they have
instituted a number of corrective actions emanating from lessons they
learned from the scam as well as NAIC suggestions and our recommendations.
These actions involve enhancing financial examination procedures as well as
increasing the insurance department?s staffing levels. Mississippi also
indicated it had adopted NAIC?s updated Financial Analysis Handbook as the
standard for use by its financial analysts.
In September 2000, the Missouri Department of Insurance reported several
regulatory corrective actions as a result of this investment scam. These
corrective actions included adopting legislation to better safeguard and
verify assets of an insurer held by custodians, expanding efforts to share
with and retrieve information from other regulatory authorities, and
increasing staff training and tools to analyze securities and investment
strategies.
Conclusions
NAIC?s efforts to promote sound and uniform regulatory processes across the
states are being put to the test as pressure builds from both GLBA and
competitive forces for more efficient and streamlined insurance regulatory
processes. One factor affecting the ultimate success of these efforts is the
level of confidence state regulators will have in their counterparts?
willingness and ability to adequately obtain, assess, and validate
information provided by industry applicants in making regulatory decisions.
Each state will be required to rely on the actions of regulators in other
states to a greater degree than ever before. Whether regulators ultimately
achieve uniformity in some areas or even attain reciprocity, continuing
weakness in some states? regulatory framework can undermine the system.
NAIC and state regulators believe that the development of more uniform and
streamlined methods for obtaining licensing approval on individuals,
products, and insurance companies in multiple states can enhance the ability
of insurers to compete with other financial services entities while at the
same time maintaining or improving the quality of insurance regulation. At
present, both the timely completion and degree of success for many of NAIC?s
financial modernization initiatives remain uncertain.
NAIC is making progress toward implementing corrective actions for
weaknesses identified by the scam allegedly perpetrated by Mr. Frankel,
although much remains to be done. As NAIC and state regulators work to
complete both financial modernization initiatives and actions to correct
known regulatory deficiencies, recognition of the importance of consistency
between the two efforts becomes increasingly apparent. Since many of NAIC?s
initiatives and corrective actions are interrelated, the states and NAIC
have the opportunity to ?raise the bar? for insurance regulation across the
states generally by incorporating corrective actions and best regulatory
practices into more streamlined, uniform processes for all states.
12 GAO- 01- 885R Regulatory Initiatives Agency Comments
We requested comments on a draft of this correspondence from NAIC. We
received general comments and technical suggestions on the draft
correspondence from the Executive Vice President of NAIC. NAIC responded
that they generally concurred with our results and conclusions. Where
appropriate, we also incorporated technical suggestions made by NAIC on the
draft correspondence. In its response NAIC emphasized its desire to enhance
communications and information sharing with all functional regulators,
especially in the area of access to criminal background information. NAIC
officials also noted that regulatory information sharing could be
facilitated with federal legislation allowing for and protecting the
confidentiality of information shared between federal agencies, state
regulators and NAIC.
As agreed with your office, unless you publicly release its contents
earlier, we plan no further distribution of this correspondence until 30
days from its issuance date. At that time, we will send copies of this
report to the Chairman of the Committee on Energy and Commerce as well as
the Chairman and Ranking Minority Member of the Committee on Financial
Services and the Senate Committee on Banking, Housing, and Urban Affairs. We
will also send copies to the President and other officials of the NAIC. At
that time, we will also make copies available to other interested parties.
Please contact me or Lawrence D. Cluff at (202) 512- 8678 if you or your
staff have any questions about this report. Major contributors to this
report were Jim Black, Thomas Givens, Shirley Jones, Barry Kirby, and
LaSonya Roberts.
Sincerely, Richard J. Hillman Director, Financial Markets and
Community Investment
Enclosure I 13 GAO- 01- 885R Regulatory Initiatives
Producer Licensing Reciprocity and Uniformity Initiative
One of the most important functions of state insurance regulators is the
licensing of agents and brokers. These individuals provide the link between
the insurance company covering the risk and the customer buying the
insurance. Traditionally, each state has set its own licensing requirements,
so that agents and brokers operating in more than one state must apply for a
number of licenses. Generally, this procedure has meant submitting the same
information each time- or worse, different information, depending on the
state?s requirements. This inefficient system led the Congress to include a
provision in the Gramm- Leach- Bliley Act (GLBA) requiring state insurance
regulators to either create a system that would eliminate the costs and
inefficiencies associated with multistate licensing or face the federal
creation of the National Association of Registered Agents and Brokers
(NARAB) to facilitate such licensing. GLBA sets a 3- year time frame for
establishing the state- based system and the adoption of it by a majority of
states. 6
GLBA encourages the states to establish a uniform system that makes
licensing requirements for agents and brokers the same across all of the
states. But GLBA also offers states the option of creating reciprocal
agreements under which states would grant nonresident licenses to agents
licensed in other states. In other words, the reciprocity conditions of GLBA
would be satisfied if a majority of the states agreed to accept the
licensing requirements of other states, even if those requirements differed
from their own.
The National Association of Insurance Commissioners (NAIC) and state
insurance regulators have chosen to work toward satisfying the reciprocity
requirement first, although they have said that their ultimate goal is
uniformity. In January 2000, NAIC adopted the Producer Licensing Model Act,
which is designed to create uniformity in state licensing procedures,
simplify the licensing process, promote the use of NAIC licensing- related
databases, eliminate retaliatory fees, define allowable exceptions to the
rules, and mandate reciprocity across states.
To help implement a more uniform, streamlined licensing process, NAIC has
also formed an organization known as the National Insurance Producer
Registry (NIPR), a public- private partnership of NAIC and industry
representatives. 7 NIPR has developed and implemented the Producer Database
(PDB) and the Producer Information Network (PIN). (A more detailed
description of these information systems resources is shown in table 2.)
6 According to NAIC officials, 29 states would satisfy the NARAB provisions
of GLBA that refer to a
?majority of the States,? because sec. 336( 4) of GLBA defines the term
?State? to include ?any State, the District of Columbia, any territory of
the U. S., Puerto Rico, Guam, American Samoa, the Trust Territory of the
Pacific Islands, the Virgin Islands, and the Northern Mariana Islands.? NAIC
officials identified 57 jurisdictions counted for reciprocity or uniformity
purposes with the simple majority being 29.
7 NIPR was incorporated in October 1996 and is a nonprofit affiliate of
NAIC. NIPR is governed by a board of directors, on which five members
represent NAIC and four a cross section of the insurance industry.
Enclosure I 14 GAO- 01- 885R Regulatory Initiatives
Table 2: NAIC Information System Resources Supporting Uniform Licensing
Type of information system Description of system
Producer Database (PDB) Producer Information Network (PIN)
PDB is an electronic database of information relating to insurance agents
and brokers. Designed to assist insurers and regulators in monitoring for
fraud, PDB is linked to participating state licensing systems and provides
them with data on 2.6 million of the nation?s 3 million agents and brokers.
PDB also includes data from the Regulatory Information Retrieval System
(RIRS), a nationwide database of insurance regulatory actions.
PIN is an electronic communication network that links state insurance
regulators with the entities they regulate. PIN facilitates the electronic
exchange of producer appointments, terminations, fees, and applications.
According to NAIC, 35 states are currently using PIN, which generated 1.2
million transactions in 2000. NIPR plans to use PIN to facilitate the
electronic processing of nonresident license applications.
In March 2001, NAIC announced that nine states had passed producer licensing
laws attempting to satisfy GLBA?s NARAB reciprocity requirements. As of
June, NAIC reported that 24 additional states had also passed producer
licensing legislation. However, NAIC officials acknowledged that they still
needed to conduct a review of these laws (including those in the original
nine states) to assess whether they comply with the GLBA requirements.
Furthermore, NAIC acknowledges that there is still ongoing discussion over
the interpretation of GLBA?s reciprocity provisions. In order to meet the
deadline set in GLBA, at least 29 states must satisfy the requirements by
November 12, 2002. NAIC?s goal is to have at least a majority of the states
achieve reciprocity by November 12, 2002. At the same time, NAIC plans to
have all 50 states using the PIN and contributing to the PDB in 2001.
Enclosure II 15 GAO- 01- 885R Regulatory Initiatives
Speed to Market Initiative
Traditionally, insurers obtain approval from the state regulatory authority
before introducing a new or modified product to the market. Since most
insurance products are sold in a number of states, insurers have been faced
with applying for approval numerous times. For consumer products, approval
has nearly always included a review of the policy?s language- that is, the
explanation of what the policy does and does not cover- and the rate, or
price, of the product. Insurers have said that this process can take several
months, during which time they cannot market the new product. In spite of
the delays and inefficiencies, insurers have said that they did not
generally view the problem as significant as long as their primary
competitors- other insurance companies- all faced similar costs. However,
with the increasing convergence of financial industries, insurers,
particularly life insurers, now also compete with securities firms and banks
for the savings dollars of consumers. Neither securities firms nor banks
have a regulatory process for product approval that is comparable to that
faced by life insurers. As a result, some insurers believe they are at a
competitive disadvantage in bringing new products to market, and they are
interested in the possibility of creating a ?federal charter? or license
that could give one- stop regulatory approval to new products that could
then be marketed in any state.
In order to forestall pressures from the industry to create a federal
insurance regulator, state regulators, working through NAIC, have committed
themselves to streamlining the product approval process. This effort, called
?Speed to Market,? is intended to reduce the time and expense of having a
new product approved in more than one state by creating more efficient,
uniform standards for reviewing and approving new insurance products at both
the state and national levels. 8 Specifically, the initiative aims to
* create a system that will allow for complete reviews of product rates,
contracts, and advertising within 30 days;
* develop a one- stop system of submitting information for products issued
in more than one state, with deference to the state where the insurer is
located; and
* evaluate the feasibility of developing an electronic repository for filing
and tracking data. State insurance regulators acknowledge that national
standards may not be appropriate for all insurance products. In addition,
since the system will be voluntary, some insurers may elect not to submit
their products for national review. For these reasons, the initiative
focuses on both national- and state- level standards. The new standards will
integrate procedures for licensing a product in more than one state with the
regulatory requirements of individual states.
Licensing a Product in More Than One State NAIC?s Coordinated Advertising,
Rate, and Form Review Authority (CARFRA) is developing the one- stop filing
proposal and intends to make recommendations to the member regulators that
will make the final decision on the new system. CARFRA membership is open to
the chief insurance regulators of every state and territory and the District
of Columbia. The CARFRA board- elected by the members- would be responsible
for determining which products are eligible for review and which standards
should be applied, subject to ratification by members. The board would also
set up an appeals committee to hear objections to a decision on a product.
Under the proposal, insurers with new products that are intended for sale in
more than one state
8 States typically require insurance companies to submit information on new
products, including how much the products will cost, how the contracts will
be written, and what kind of advertising will be used.
Enclosure II 16 GAO- 01- 885R Regulatory Initiatives
could opt to enter the CARFRA review process. A team would then review the
product, using standards developed by CARFRA and approved by members. After
a CARFRA review and recommendation, each participating state would be
expected to approve the product for sale in its state.
NAIC expects that CARFRA review standards for eligible products will be
accepted by all participating states. However, some states may still have
certain requirements that are not generally agreed to by other states. These
differences or ?variances? are to be included in the CARFRA process.
However, all variances are to be identified and published before a state
begins participating in CARFRA. Then, after a CARFRA team reviews a newly
submitted product for conformance with the general standards, the product
would be reviewed against the variances for those states in which it is
expected to be sold. Both reviews are to be completed within 30 days. The
CARFRA team would then make a recommendation to each applicable state for or
against approval. While each state has the option to either accept or reject
the recommendation or, indeed, to review the product independently, NAIC
expects that a participating state will generally accept a CARFRA team?s
recommendations.
A limited launch of the CARFRA system, involving 4 types of life and health
insurance products, began on May 1, 2001, in 10 states (together, these
states account for 35 percent of total national premiums). 9 The limited
launch is expected to last only 8 to 12 months. Another 5 to 10 states and
additional products will be added later in 2001, and NAIC projects the
CARFRA approval process to be fully implemented within a year after the
launch.
Improving State- Based Review and Approval Systems NAIC does not expect all
insurance products to be appropriate for CARFRA review. Moreover, insurers
have the option not to use the national review system for product approval,
even for included products. Nevertheless, NAIC believes that the state-
based review and approval process for these products can also be improved.
The initiative to improve state- based review and approval systems addresses
internal state processes for product approval. The initiative aims to
enhance state rate (price), form (policy language), and advertising review
units by reforming and standardizing their approval processes. An important
reform component is the implementation of the System for Electronic Rate and
Form Filing (SERFF) in all states. SERFF, a centralized electronic filing
repository, also provides many of the functions needed to support the CARFRA
initiative. Thus, it is an integral part of efforts to create a uniform,
streamlined product review system at both the national and state levels.
Under the state- based initiative, states are urged to review standards
checklists to provide clear guidance on state requirements, establish a 30-
day review and compliance time frame, implement SERFF in all jurisdictions,
move to a regulatory framework that recognizes market competition, and
provide consumers with access to information on pricing and market conduct.
In addition, the recommendations encourage states to eliminate unnecessary
regulations and add those that are necessary to establish the greatest
degree of uniformity by December 2001.
9 These products include individual term life policies, individual flexible
premium deferred annuity contracts, and individual and group Medicare
supplement policies.
Enclosure II 17 GAO- 01- 885R Regulatory Initiatives
Both the state- based system and the limited CARFRA launch are tied to the
progress states make in implementing SERFF. Insurers participating in the
launch are to file for product approvals using this system. CARFRA review
teams will use the SERFF system to review filings. Moreover, a filing using
the SERFF system during the launch will be considered a filing with each
participating state, and regulators from the launch states will have access
to the SERFF files. NAIC expects 41 states to be using SERFF for either
CARFRA or state filings by December 2001.
Enclosure III 18 GAO- 01- 885R Regulatory Initiatives
National Treatment of Companies Initiative
As with the procedures for licensing agents and approving new products, the
process for licensing insurers that operate in more than one state has
traditionally been costly and timeconsuming. States often require different
types of information and have different filing requirements. Companies
planning to buy or merge with another insurer find that they are subject to
review in each state where either company operated. These reviews cause
delays and raise costs, creating a burden that some insurers believe could
be alleviated by establishing a single federal insurance regulator.
State insurance regulators, working through NAIC, have begun to look for
ways to reduce this burden on large multistate insurers, without the
establishment of a new federal authority- that is, through greater
regulatory uniformity at the state level. According to the insurance
commissioners who co- chaired NAIC?s National Treatment of Companies Working
Group, state regulators traditionally have not coordinated their procedures
for company licensing, acquisitions, mergers, and solvency monitoring to any
significant degree. Thus, NAIC has begun to focus on creating a state- based
uniform regulatory process that could provide some of the same efficiencies
as a single federal charter.
The primary result of these efforts to date is a streamlined insurer
licensing procedure, the Accelerated Licensure Evaluation and Review
Techniques (ALERT) program. The program uses the Uniform Certification of
Authority Application (UCAA), a standard company licensing application that
insurers can use to apply for admission in many states. Although states
review each application independently, insurers need to fill out only one
form. According to NAIC, 46 states and the District of Columbia were using
UCAA as of July 3, 2001. NAIC expects that the four remaining states will
join by July 31, 2001.
NAIC had planned to supplement the UCAA licensing process with a ?national
treatment? program that would include streamlined regulations and unified
processes for not only licensing but also solvency monitoring, reporting of
holding company transactions, and market conduct oversight. However, the
effort to move to a single, unified process for supervising large multistate
insurers now appears to have been abandoned or, at least, delayed
indefinitely.
Currently, NAIC plans to work on coordinating efforts by state insurance
commissioners and working groups to develop best practices for state
regulatory processes to improve efficiency and consistency in licensing and
corporate governance. NAIC also hopes to bring more coordination to the
process for chartering or change- in- ownership applications (Form A
filings). An NAIC committee anticipates describing its recommendations
concerning new review procedures for standard holding company filings by
September 2001. NAIC is also planning to create a Form A Database- a
repository of state regulatory data designed to facilitate information-
sharing between state insurance departments on acquisition and merger
filings. This database was originally recommended by NAIC as a corrective
action stemming from the insurance investment scam that was allegedly
perpetrated by Martin Frankel.
Enclosure IV 19 GAO- 01- 885R Regulatory Initiatives
Coordinating With Federal Regulators Initiative
The consolidation of financial services industries allowed by GLBA heightens
the importance of consultation and information sharing between federal and
state financial services regulators. Prior to the passage of GLBA, federal
financial regulators and state insurance regulators did not routinely share
regulatory information with each other. But as the distinctions and
separations in financial markets continue to blur, both federal and state
regulators have acknowledged the need to improve cooperation and
information- sharing across financial industries in order to carry out their
oversight responsibilities.
Recognizing this fact, NAIC has contacted federal financial regulatory
agencies on behalf of state insurance regulators to facilitate information
sharing, primarily through the use of bilateral information- sharing
agreements. According to NAIC, the purpose of these agreements is to
establish a relationship between state and federal regulators to facilitate
communication and coordination. In September 2000, we reported that NAIC and
some states had established information- sharing agreements with officials
at the Federal Reserve Board, OCC, and OTS. Similarly, NAIC and state
insurance regulators have also met with officials from FDIC to discuss
information- sharing issues and areas of common interest. In our prior
report 10 , we also observed that similar information- sharing arrangements
had not yet materialized between insurance and securities regulators.
Additionally, we noted that NAIC, state insurance regulators, and the
Department of Justice needed to explore ways for insurance regulators to
conduct criminal history checks using Federal Bureau of Investigation (FBI)
information.
Since we reported on this topic in September 2000, the number of
information- sharing agreements between state insurance departments and
federal banking regulators has continued to grow. In December 2000, NAIC
approved model regulatory cooperation agreements with the Federal Reserve
Board, OCC, and FDIC. (NAIC had already approved a model informationsharing
agreement with OTS in March 2000.) In March 2001, NAIC reported that
individual states were in the process of signing agreements with banking
regulatory agencies and that crosstraining and educational sessions for
insurance and banking regulators were being developed. By June 27, 2001, the
number of states that had signed bilateral agreements stood at 45 with OTS,
13 with OCC, 14 with FDIC, and 4 with the Federal Reserve Board.
Progress in establishing information- sharing agreements between insurance
and securities regulators has proceeded at a slower pace, although both NAIC
and the Securities and Exchange Commission (SEC) appear to recognize the
importance of this issue. In March 2001, SEC developed suggested legislative
changes that would allow securities regulators to consider regulatory
history data from insurance and banking regulators when making licensing
decisions on individuals entering the securities industry. NAIC maintains
that an ongoing dialogue with SEC has yielded significant progress to
address common issues and concerns. However, as of May 2001, NAIC and SEC
officials had not yet completed a model information- sharing agreement.
NAIC supports the concept of automated information sharing of regulatory
data and criminal histories. In testimony provided in March 2001, NAIC said
that it supported providing financial regulators with the means to access
each other?s data in order to help prevent the migration of rogues from one
financial services industry to another. In particular, NAIC emphasized
regulators? need to obtain criminal history data through the FBI in order to
conduct nationwide criminal background checks on applicants desiring to
enter the insurance industry. Though
10 Insurance Regulation: Scandal Highlights Need for Strengthened Regulatory
Oversight (GAO/ GGD- 00198, Sept. 19, 2000).
Enclosure IV 20 GAO- 01- 885R Regulatory Initiatives
legislative initiatives are currently being considered, insurance regulators
do not yet have the same access to these data as banking and securities
regulators.
Enclosure V 21 GAO- 01- 885R Regulatory Initiatives
Insurance Holding Company Initiative
As the consolidation of financial services industries continues, a
fundamental regulatory question concerns how the different financial
regulators will carry out their oversight duties under the financial holding
company structure allowed by GLBA. Under the act, financial holding
companies could be formed that included either or both insurance companies
and securities firms together with banks. Prior to GLBA, this was not
permitted. GLBA provides for functional regulation, that is, each of the
regulated functions- banking, securities, and insurance- by the appropriate
regulator, with the Federal Reserve Board as the umbrella regulator of the
financial holding company. As a result, insurance regulators recognized that
policies and procedures for conducting financial analyses, examinations, and
other reviews on insurers belonging to holding companies would need to be
reassessed given the new affiliations allowed under a financial holding
company structure. As such, changes would necessitate increased coordination
and cooperation between state and federal regulators. Insurance regulators
also recognized the importance of reviewing how communication would take
place between a state insurance department and other functional regulators
of a financial holding company.
The Insurance Holding Company initiative grew out of the passage of GLBA.
Recognizing the importance of regulating insurance activities within a
financial holding company that could have multiple affiliates from different
financial industries, NAIC formed the Financial Services Holding Company
Analysis/ Review/ Examination Working Group in 2000. This working group was
charged to
* assess the implications of GLBA on the regulatory authority, focus, and
procedures provided in NAIC?s existing Insurance Holding Company System
Model Act and accompanying Model Regulation;
* evaluate the manner in which insurance groups should be reviewed by
insurance departments, considering the use of consolidated financial
statements and a special regulatory group report;
* determine the nature and type of information insurance regulators need
from other functional regulators of noninsurance financial holding company
affiliates in order to enhance the analysis and examination procedures for
insurance companies;
* develop and document standard review procedures for acquisition or change-
of- control statements (Form A), annual registration statements (Form B),
transactions subject to prior notice (Form D), extraordinary dividends, and
other significant filings; and
* make recommendations regarding mechanisms to enhance communication and
coordination among all functional regulators, including the role of NAIC
resources in supporting such communications and coordination.
In September 2000, NAIC reported that the Financial Services Holding Company
Analysis/ Examination/ Review Working Group had received progress reports
from its subgroups on each of the areas the working group was assigned, as
previously cited. Highlights of the ongoing work included a review of GLBA
in conjunction with the Insurance Holding Company Model Act, preparation of
a draft discussion paper regarding group solvency monitoring, and the
adoption of a proposed list of data elements for a Form A Database. NAIC
officials also
Enclosure V 22 GAO- 01- 885R Regulatory Initiatives
emphasized the relevance of this working group to related efforts for
enhancing communication and coordination among all functional regulators.
At its national meeting in December 2000, NAIC?s Financial Services Holding
Company Analysis/ Examination/ Review Working Group introduced a draft of
Framework for Insurance Holding Company Regulation, dated November 10, 2000,
for review and comment. The stated intent of this draft document was to (1)
serve as a framework for state insurance regulators in supervising insurance
holding companies and insurance subsidiaries of financial holding companies;
(2) encourage initiative and cooperation among state insurance regulators
for more effective and efficient state regulation; (3) provide a basis for
discussion with the appropriate primary supervisors of a financial holding
company?s banking, insurance, or securities subsidiary; (4) provide standard
review processes and procedures for holding company filings; and (5) address
the report and recommendations of the Ad Hoc Task Force on Solvency and
Anti- Fraud, dated April 13, 2000 (see enclosure VII). At the time, NAIC
officials noted that the draft did not yet include detailed guidance for
coordinating financial examinations among different functional regulators.
The working group also proposed changes and amendments at the 2000 Winter
National Meeting designed to make two model laws more consistent with GLBA.
Proposed changes to the Insurance Holding Company System Regulatory Act
included establishing a 60- day period for regulators to review proposed
affiliations or acquisitions involving holding companies and to clarify the
level of assets that may be invested in an affiliated entity. Similarly, the
working group proposed changes to the Investment of Insurers Model Act to
modify an asset diversification requirement for consistency with GLBA. 11
At NAIC?s national meeting in March 2001, additional guidance was
disseminated on the scheduling of examinations and examination procedures
related to the treatment of transactions between affiliated corporate
entities. This guidance, detailed in a NAIC memorandum dated February 12,
2001, supplemented the November 10, 2000, draft document (previously
described). In a status memorandum dated March 25, 2001, NAIC agreed to
prepare a second draft of the
Framework for Insurance Holding Company Regulation that addressed the latest
additions and comments to date. NAIC officials emphasized that the working
group?s efforts apply to holding company structures in general, both
traditional insurance and financial holding companies. To make this broader
focus more explicit, the name of the working group was changed to the
Insurance Holding Company Working Group.
The working group also proposed other changes to its original charge at the
March 2001 National Meeting to recognize the expanded focus. The proposed
changes to the charge included the elimination of the task to determine the
nature and type of information insurance regulators need from other
functional regulators, a task that overlapped with the Coordinating with
Federal Regulators initiative. The proposed changes also included a task to
consider several recommendations on corrective actions that were identified
as a result of the insurance company failures tied to the scam allegedly
masterminded by Mr. Frankel as well as a task to monitor the development and
implementation of a Form A Database. Finally, the working group extended its
deadlines for completing final reports and recommendations to NAIC?s 2001
Winter National Meeting, rather than in the fall.
11 Section 306 of GLBA provides that the state of domicile of the insurer
may limit the investment in the voting securities of a depository
institution or its affiliates to an amount that is not less than 5 percent
of the insurer?s admitted assets.
Enclosure VI 23 GAO- 01- 885R Regulatory Initiatives
Market Conduct Initiative
Market conduct includes all issues related to the sale of insurance products
to consumers of insurance. Many of the important issues are similar to those
associated with the selling of securities products. They involve sales
practices of companies and agents as well as such things as suitability--
that is, the agent?s responsibility to match the appropriateness of the
product sold to the needs of the customer, particularly those marketed to
elderly citizens. Insurance policies are contracts that set out the
insurer?s promise to pay a fixed amount under stipulated conditions at some
future date. Consumers are often limited in their ability to compare the
prices and features of insurance policies and thus may rely on the insurance
seller or agent for information about the product. Given this situation,
consumers rely heavily on insurance regulators for protection against
deceptive and fraudulent sales practices.
Traditionally, the length of time previously needed for product approval
resulted primarily from the time taken by multiple states to review the
policy form (what the policy says) and to assure themselves that the price
to be charged was appropriate for the product- i. e., high enough so the
company would be able to pay all expenses and claims plus a reasonable
profit, but low enough to be fair to consumers. This process, in many
states, together with a mechanism for resolving consumer complaints, has
been the backbone of consumer protection for insurance consumers.
While market conduct is not an issue that comes directly out of either GLBA
or insurance industry pressures to ?level the [competitive] playing field?
with banks and securities firms, it is relevant to recent financial
modernization efforts. With the streamlining of the product approval
process, many state regulators have recognized a need for a more proactive,
better- coordinated effort to oversee and examine the market conduct of
insurers- somewhat analogously to the process used to oversee financial
solvency. Currently, financial solvency regulation is encompassed in NAIC?s
accreditation program, while requirements for a state insurance department?s
market conduct program are not. Key elements of the Market Conduct
initiative include:
* reviewing and making recommendations on underwriting and market practices
that affect consumers,
* examining state programs and practices relating to market conduct,
* identifying issues and concerns caused by a lack of uniformity among
states in regulating market conduct, and
* evaluating the merits of establishing voluntary uniform national standards
for regulating market conduct.
To meet these goals, NAIC has developed plans involving a number of specific
steps. First, it will scrutinize the existing information systems to
identify ways they can be enhanced and to provide data for monitoring market
conduct. As part of this effort, NAIC is also considering the need to
develop both an annual report, to enable states to collect key information
on market conduct, and a centralized database. Second, NAIC will continue to
monitor insurance market conditions, including both underwriting and
marketing practices, to identify key market conduct issues. NAIC will also
provide a forum for discussing such issues, including at least one public
hearing annually, and encourage states to provide information to help update
an NAIC guide known as the Handbook of Available Options. 12 Along the same
lines, NAIC will monitor the effectiveness
12 In 1997, NAIC released a final report of its Insurance Availability and
Affordability Task Force. This report included a section called Improving
Urban Insurance Markets: A Handbook of Available Options.
Enclosure VI 24 GAO- 01- 885R Regulatory Initiatives
of voluntary industry compliance programs, particularly the self-
examination program of the Insurance Marketplace Standards Association.
Third, NAIC has created a number of working groups to tackle issues such as
model legislation and consumer problems tied to the sale of credit
insurance. Fourth, it has begun formulating recommendations on allowing
access to NAIC Complaints Database for companies and consumers. Finally,
NAIC has been working on recommended changes to the NAIC Market Conduct
Examiners Handbook and to encourage its use by the states. One of NAIC?s
goals is to develop a national approach to market conduct examinations,
promoting more efficient and timely examinations and better enforcement of
rules governing market conduct. Discussion has already taken place on the
idea of developing a ?zone
approach? to market conduct examinations that is similar to the approach
used for financial examinations. As of June 2001, NAIC has not yet set firm
time frames for completing these efforts.
Enclosure VII 25 GAO- 01- 885R Regulatory Initiatives
Status of NAIC Corrective Actions Recommended by the Ad Hoc Task Force on
Solvency and Anti- Fraud, April 13, 2000
NAIC?s Executive Committee established the Ad Hoc Task Force on Solvency and
Anti- Fraud to gather input on possible improvements to regulatory programs
and practices as a result of the scam allegedly perpetrated by Martin
Frankel on a number of insurance companies in several states. These
corrective actions were listed in our September 2000 report. The status of
each corrective action recommended by the task force is outlined in table 3.
Table 3: Corrective Actions Recommended by NAIC?s Ad Hoc Task Force on
Solvency and Anti- Fraud
Types of corrective actions recommended Complete In
progress Planned
Level 1: Corrective actions generally considered by NAIC to be the highest-
priority items that can be accomplished relatively quickly and that should
not involve significant NAIC or state resources.
A. Improvements to Accreditation Standards and Guidelines B. Improvements to
Financial Analysis and Examinations Procedures C. Updates to Annual
Statement Blanks and Instructions D. Establishment of a Form A Database E.
Access to Antifraud Tools and Databases F. Improvements to Model Laws and
Regulations
X X
X X X X Level 2: Corrective actions considered by NAIC to overlap current
projects of other working groups, primarily those related to implementing
the GLBA and other NAIC national regulatory priorities.
G. Development of a Process for Coordinated Financial Examinations H.
Improvements to Financial Analysis of Consolidated Entities I. Development
of Review Procedures for Holding Company Filings J. Improvements to Model
Laws and Regulations
X X
X X Level 3: Corrective actions that NAIC believes may require lengthy
discussions and development or that involve significant additional NAIC or
state resources.
K. Improvements to Accreditation Standards and Guidance L. Improvements to
Financial Analysis and Examinations M. Improvements in Antifraud Efforts N.
Improvements to Model Laws and Regulations O. Improvements to the NAIC
Troubled Companies Handbook
X X
X X
X Source: GAO summary of NAIC material.
Enclosure VII 26 GAO- 01- 885R Regulatory Initiatives
Level I Corrective actions generally considered by NAIC to the highest-
priority items that can be accomplished relatively quickly and that should
not involve significant NAIC or state resources.
A. Accreditation Standards and Guidelines 1. The Financial Regulation
Standards and Accreditation Committee was tasked to consider
adding a model law and regulation that identifies requirements for asset
custodians into NAIC?s accreditation standards. As of April 30, 2001, the
model law was adopted by the Financial Condition Committee at the NAIC 2001
Summer National Meeting. It will be considered by the Plenary and Executive
Committee at the Fall National Meetings.
2. The Financial Regulation Standards and Accreditation Committee was tasked
to consider adding a review team guideline to its ?Use of Specialists?
standard, requiring states to maintain the appropriate investment expertise.
This review team guideline relating to investment specialists was adopted at
the NAIC 2001 Spring National Meeting and provides examples of when an
investment specialist may be necessary. This guideline will become effective
January 1, 2002.
3. The Financial Regulation Standards and Accreditation Committee will
consider adding a review team guideline to the ?Procedures for Troubled
Companies? standard, requiring proactive communication by the domestic state
to other states that have a regulatory interest in a troubled insurer. This
guideline was adopted at the NAIC 2001 Spring National Meeting, to be
effective January 1, 2002.
4. The Financial Regulation Standards and Accreditation Committee was tasked
to consider adopting a review team guideline requiring the use of an NAIC
?Form A Database.? This committee is awaiting the development and
implementation of the Form A Database prior to developing a review team
guideline requiring the use of such a database.
B. Financial Analysis and Examinations Procedures 1. The Financial Analysis
Handbook Working Group adopted procedures to include an
evaluation of investment management practices during the NAIC 2000 Fall
National Meeting. These procedures were added to the Financial Analysis
Handbook, effective December 31, 2000, to be used by analysts reviewing the
2000 annual statements.
2. The Financial Examiners Handbook Technical Group has developed additional
examination procedures to evaluate the risk factors recommended by the Ad
Hoc Task Force on Solvency and Anti- Fraud and to coordinate the use of
investment specialists. These procedures were exposed to the Chief Examiners
of all the states in late September 2000 and adopted by the technical group
at the NAIC 2000 Winter National Meeting. These procedures were added to the
investment analysis sections of the
Financial Condition Examiners Handbook, effective January 1, 2001. C. Annual
Statement Blanks and Instructions
1. In October 2000, the Blanks Task Force was tasked to consider an
interrogatory affirming whether an insurer?s investments were in the custody
of a qualified bank or were on deposit with the insurance commissioner. At
the NAIC 2000 Winter National Meeting, the
Enclosure VII 27 GAO- 01- 885R Regulatory Initiatives
Blanks Task Force adopted Interrogatory No. 22, that required the insurer to
disclose the amount of investments (1) held physically at the insurer?s
offices, (2) held as deposits by states or other regulatory authorities, and
(3) held by a custodian. If held by a custodian, the interrogatory requires
the insurer to disclose the name and address of the custodian or brokers
with authority to make investments on behalf of the insurer as well as any
changes in the custodian during the year. These interrogatory questions will
be added to the Annual Statement Instructions in 2002, effective for all
quarterly and annual filings beginning January 1, 2002.
2. In October 2000, the Blanks Task Force was tasked to consider an
interrogatory affirming whether there had been a change in the bank that had
custody of the insurer?s investments. As noted above, the Blanks Task Force
adopted Interrogatory No. 22, which addressed this issue at the NAIC 2000
Winter National Meeting. A description of the interrogatory and its
implementation date are described above.
D. Form A Database The Financial Condition Committee adopted specifications
for the Form A Database at the NAIC 2000 Fall National Meeting. The Form A
specifications were also reviewed by the Financial Services Holding Company
Analysis/ Examination/ Review Working Group in 2000. The adopted
specifications were referred to NAIC?s Information Systems Division and a
prototype was presented at the NAIC 2001 Summer National Meeting.
E. Anti- Fraud Tools and Analysis 1. NAIC has engaged in discussions with
the National Association of Securities Dealers
(NASD) to identify methods for shared database access between insurance and
securities regulators. NAIC?s legal staff are working on negotiations with
NASD. NAIC anticipates an agreement will be reached sometime in 2001.
2. The Database Working Group of the Anti- Fraud Task Force was tasked to
(1) compile detailed information on antifraud databases maintained by
antifraud organizations, financial regulators, and law enforcement agencies
and (2) identify criteria for access to such databases. The working group is
developing a report detailing the most useful databases (e. g., related to
insurance fraud, financial regulation, and law enforcement) and criteria for
access. In addition, this working group continues to pursue obtaining access
to the FBI criminal history data along with maintaining active membership in
several organizations having antifraud- related databases. A final report is
anticipated for the NAIC 2001 Fall National Meeting.
3. Where NAIC members can meet current criteria for access to antifraud
databases of other organizations, the Database Working Group of the Anti-
Fraud Task Force was charged with negotiating agreements with the
appropriate organizations and encouraging state regulators to use available
sources of antifraud data. NAIC?s efforts to obtain access to the FBI
information and the timetable for the task force?s final report are
described above.
4. The Unauthorized Entities Working Group of the Anti- Fraud Task Force was
tasked at the NAIC 2000 Winter National Meeting to establish guidelines on
the investigative and prosecutorial resources necessary to investigate
insurance fraud. The working group has distributed a survey to all NAIC
members soliciting information on antifraud resources,
Enclosure VII 28 GAO- 01- 885R Regulatory Initiatives
personnel, and accomplishments. Results of the survey will be used to help
establish guidelines for insider fraud investigation; to establish general
antifraud baselines and best practices; and to guide insurance department
planning, budgeting, and staffing. The working group is developing a draft
white paper on the investigation of insurance fraud by the NAIC 2001 Fall
National Meeting.
5. The Federal/ State Coordinating Working Group of the Anti- Fraud Task
Force was charged to consider modifications to the Insurance Fraud
Prevention Model Act at the NAIC 2000 Winter National Meeting. Specific
issues to be considered include authority to investigate insider insurance
industry fraud, law enforcement status of investigators, provisions granting
prosecution authority, and other alternative means for obtaining prosecution
resources. The working group adopted modifications to the Insurance Fraud
Prevention Model Act at the NAIC 2001 Spring National Meeting. These
modifications were approved by NAIC?s Executive and Plenary Committees at
the 2001 Summer National Meeting.
F. Improvements to Model Laws and Regulations 1. The Financial Examiners
Handbook Technical Group was tasked to modify NAIC?s model
law and regulation that identifies requirements for asset custodians,
namely, the Model Law and Regulation to Permit the Use of Clearing
Corporations and Federal Reserve Book- Entry System by Insurance Companies.
The technical group adopted amendments to the model law and regulation at
the NAIC 2000 Winter National Meeting to require the custodian to provide
independent notification to a state insurance department when a custodial
agreement has been terminated or when the insurer withdraws 100 percent of
the account balance in any one custody account. The model was exposed for
public comment until May 23, 2001, and was adopted by the Examinations
Oversight Task Force and the Financial Condition Committee at the NAIC
Summer National Meeting. It will be considered by the Plenary and Executive
Committee at the Fall National Meetings.
2. The NAIC/ AICPA Working Group was charged with reviewing the Model
Regulation Requiring Annual Audited Financial Reports and to consider
modifications regarding notice to insurance departments when an insurer
changes auditors. Upon this review, the working group determined that the
current language does require notice to insurance departments when an
insurer changes auditors, similar to SEC requirements. Consequently, the
working group concluded that no modifications to the model regulation were
necessary.
Level II Corrective actions considered by NAIC to overlap current projects
of other working groups, primarily those related to implementing the GLBA
and other NAIC national regulatory priorities.
G. Coordinated Financial Examinations 1. The Insurance Holding Company
Working Group has been tasked to consider developing
a process for coordinating financial examinations of insurer groups. This
working group is expected to present a final report to the Financial
Condition Committee at the NAIC 2001 Winter National Meeting.
Enclosure VII 29 GAO- 01- 885R Regulatory Initiatives
2. The Insurance Holding Company Working Group has been tasked with
developing statutory accounting guidance that will support consolidated
accounting and reporting for groups of insurers. As noted above, the working
group should issue a final report at NAIC?s 2001 Winter National Meeting.
H. Financial Analysis of Consolidated Entities 1. The Insurance Holding
Company Working Group has been tasked to develop a process
for financial analysis of consolidated insurance groups. This working group
is expected to present a final report to the Financial Condition Committee
at the NAIC 2001 Winter National Meeting. The proposal contemplates a two-
tier process:
a. NAIC?s Financial Analysis Division will analyze Generally Accepted
Accounting Principles (GAAP) financial statements, information from the
Federal Reserve Board, and other available information on financial holding
companies. Reports will be provided to states with a regulatory interest.
b. The states will analyze consolidated financial information on
consolidated groups comprised solely of insurance companies and insurance-
related entities.
2. The Insurance Holding Company Working Group has been tasked to develop
annual and quarterly statement reporting requirements that will support
consolidated financial statement filings. This working group is expected to
present a final report to the Financial Condition Committee at the NAIC 2001
Winter National Meeting.
I. Procedures for Holding Company Filings The Insurance Holding Company
Working Group has been tasked to develop standard review processes and
procedures for holding company filings. These procedures should include
input of data to the Form A Database (previously discussed). This working
group is expected to present a final report to the Financial Condition
Committee at the NAIC 2001 Winter National Meeting.
J. Improvements to Model Laws and Regulations The Insurance Holding Company
Working Group has been considering whether to modify the model regulation
that currently requires annual audited financial statements to also include
consolidated audit reports. These audit reports would be used to support
financial analysis of financial holding companies and the analysis of
insurance company groups. This working group is expected to present a final
report to the Financial Condition Committee at the NAIC 2001 Winter National
Meeting.
Level III Corrective actions that NAIC believes may require lengthy
discussions and development or that involve significant additional NAIC or
state resources.
K. Accreditation Standards and Guidelines 1. The Financial Regulation
Standards and Accreditation Committee was tasked to consider
adopting a Review Team Guideline requiring that significant elements of the
Part A
Enclosure VII 30 GAO- 01- 885R Regulatory Initiatives
Accreditation Standards be reviewed during the financial analysis and
examination processes. The committee added this requirement to the review
team guidelines, which will require the accreditation teams to specifically
consider this requirement in their scoring process. The committee exposed
this change at the NAIC 2001 Spring National Meeting. It is expected to be
adopted at the NAIC 2001 Fall National Meeting. NAIC expects the guideline
to become effective January 1, 2002.
2. The Financial Regulation Standards and Accreditation Committee was tasked
to consider revising the accreditation scoring system to include weighting
of standards and individual review team guidelines. Upon consideration of
this issue, the Committee concluded that all of the standards were equally
important to an overall financial solvency program and thus believed each
should be weighted equally. No revisions were considered necessary.
3. The Financial Regulation Standards and Accreditation Committee was tasked
to consider revising the review team guidelines to add a requirement that
troubled insurers be examined for frequently that once every 5 years. A
requirement in the review team guidelines for more frequent examinations of
troubled, or potentially troubled, insurers was adopted at the NAIC 2001
Spring National Meeting, to become effective January 1, 2002.
4. The Financial Regulation Standards and Accreditation Committee was tasked
to consider adding review team guidelines requiring better communications
with other state insurance regulators and state and federal banking
regulators. The committee will address this task further upon the completion
of work being performed by the Coordinating with Federal Regulators Working
Group.
L. Financial Analysis and Examinations 1. The Financial Analysis Handbook
Working Group was tasked to consider adding
guidance in the Level One Checklist of the NAIC Financial Analysis Handbook
requiring that significant elements of Part A Accreditation standards be
reviewed during the financial analysis process. Such procedures are expected
to be added to the Financial Analysis Handbook so that they can be
incorporated into reviews of the 2001 Annual Statements.
2. The Financial Reporting Working Group was tasked to consider developing
more specific guidance for the NAIC Financial Condition Examiners Handbook
regarding the scheduling of examinations. Among the items being considered
is that the timing of financial examinations should be more closely related
to risk of insolvency and more use of limited scope, or targeted,
examinations should be encouraged. This working group intends to prepare a
final report by the NAIC 2001 Winter National Meeting.
3. The Financial Reporting Working Group was tasked to consider developing
guidelines for the NAIC Financial Condition Examiners Handbook that would
emphasize the risk assessment and management practices of insurers,
including more emphasis assessing insurers operational controls. This
working group intends to prepare a final report by the NAIC 2001 Winter
National Meeting.
M. Improvements in Antifraud Efforts
Enclosure VII 31 GAO- 01- 885R Regulatory Initiatives
1. The Unauthorized Entities Working Group of the Anti- Fraud Task Force
will recommend alternatives to provide expert assistance to state insurance
departments investigating fraud, including the exchange of assistance,
grant- funded programs from public and private sources, and increased
capabilities at NAIC. In addition to developing detailed contact information
on each state?s insurance fraud director (or designated contact), the
working group has researched grant programs and will determine applicability
and eligibility requirements to begin the application process.
2. The Database Working Group of the Anti- Fraud Task Force will establish a
goal to obtain access to criminal history data maintained by the FBI for
state insurance regulatory licensing and investigative purposes. The working
group will pursue this goal through either federal legislation or Executive
Order.
3. The Anti- Fraud Task Force?s Federal/ State Coordinating Working Group
was tasked to recommend a structure to facilitate the exchange of
confidential information between insurance fraud authorities. The working
group has gained access to the FBI?s Law Enforcement On- Line (LEO) system,
which offers a secure environment for electronic communications among state
insurance departments, at no cost. The task force plans to present a report
at the NAIC 2001 Winter National Meeting.
N. Improvements to Model Laws and Regulations The Reinsurance Task Force was
tasked to study the Assumption Reinsurance Model Act and the Disclosure of
Material Transactions Model Act to determine whether significant reinsurance
transactions should require prior notification or approval. The task force
adopted amendments to the Disclosure of Material Transactions Model Act to
require enhanced disclosure of new material reinsurance agreements. While
the task force has not yet agreed that prior approval of such transactions
is necessary, it will continue to assess the need for prior approvals.
O. Improvements to the NAIC Troubled Companies Handbook
The Financial Analysis Working Group was tasked to review and consider
improvements to the NAIC Troubled Companies Handbook, particularly on the
causes of potentially troubled companies. The working group adopted a
workplan to address this charge at the NAIC 2000 Fall National Meeting. The
workplan requires the Financial Analysis Working Group to adopt revisions to
the handbook by the NAIC 2001 Winter National Meeting.
(250006)
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