Please find enclosed two letters which we understand will be included in the record of the Subcommittee's May 22 hearing on the NAIC's solvency accreditation program. The first letter is the response of the National Association of Insurance Commissioners (NAIC) to the May 21, 1991 report of the General Accounting Office (GAO) on troubled insurance companies; the second is the NAIC response to the GAO testimony presented to your Subcommittee on May 22, 1991. In addition to these responses, you asked for the total number of auditors -in-house and field - in the North Carolina Insurance Department. The Department currently has 15 in-house financial examiners, or "auditors," including two supervisory positions, and 25 field auditors, including the Chief Examiner. It should be noted that these auditors are only financial auditors, and are not market conduct examiners. Also during the May 22 hearing, Representative Wyden asked that we comment upon differences between the number of insurer insolvencies reported by CMN and the number reported by the NAIC. We have reviewed the CNN report which Representative Wyden's office provided to us and compared it with NAIC reports. There appear to be several reasons why NAIC and CNN reports differ, which ultimately relate to the different purposes and natures of the two reports. It appears that Cm sought to compile a comprehensive list of insolvencies or failures of all insurers and insurance-related entities. In contrast, the NAIC report focuses on authorised insurance companies operating in more than one state that have been subject to formal regulatory action because of insolvency or financial impairment. Ca apparently obtained its information from the NAIC report and a phone survey of insurance departments. Chairman John D. Dingell August 9, 1991 Page 2 The objective of the NAIC report has been to inform the states and others of solvency actions against multi-state companies and not to be a comprehensive listing of all insolvencies. In presenting statistics from this report, the NAIC has been careful to point out that they refer to multi-state insolvencies only. Obviously, multi-state insolvencies tend to be much more significant in size and scope than single-state insolvencies. CNN indicated that the MAIC listed 83 insolvencies for 1987-1989 compared to its list of 224 insolvencies. However, the NAIC multi-state report actually shows 99 companies for 1987-1989, resulting in a difference of 125 companies. Below is a breakout of these 125 companies. Only four of the 125 companies were multi-state companies that should have been included in the NAIC report given the criteria that the NAIC uses for including companies. We have since investigated and added these companies to our report. Although historically the NAIC has focused on multi-state insolvencies, we recognize the growing interest in more comprehensive statistics on insurer failures. To that end, we are compiling and maintaining such information using a variety of sources. Chairman John D. Dingell August 9, 1991 Thank you for the opportunity to add these materials to the record of your Subcommittee's' inquiry into insurance solvency regulation. We look forward to continuing to work with you and other members of your Subcommittee. We thank you for the opportunity to testify at the May 22 hearing of the In the past, the GAO's reports have been relatively objective and generally founded on fact, even though we have not always agreed with its conclusions. Our general impression has been that the evaluators have been informed and have attempted to support their opinions and conclusions with objective findings. The written testimony furnished to your subcommittee, however, is woefully lacking in this respect and, therefore, represents an unusual departure from the generally good work product of the GAO staff. The GAO testimony is not supported by footnotes referencing specific findings with supporting documentation; therefore, we frequently are forced respond to opinions, not factual, objective conclusions. The GAO testimony is flawed in five fundamental ways which seriously impair its usefulness in a public policy debate: (1) it is rife with opinion which is unsupported by fact; (2) the testimony contains numerous and important errors of fact and displays a fundamental lack of understanding of the business of insurance; (3) it often presents facts in an unbalanced manner or omits significant facts which are necessary to a fair understanding of a regulatory issue; (4) facts are presented without necessary assessments of the materiality of the facts, and (5) a strong bias in favor of a federal system of regulation permeates the testimony. Letter to Chairman John D. Dingell August 9, 1991 1. Gho's testimony is rife with opinion which is unsupported by fact. The GAO's assertion that federal delegation of authority to the NAIC is undesirable is typical of its proclivity to statements of opinion unsupported by fact or authority. The GAO's alleged "irreconcilable conflict of interest" is not explained, but would preclude any consideration of an insurance regulatory system other than a purely state system as exists today or a pure federal bureaucracy. On this point, Mr. Fogel's oral response to Congressman Lent is irreconcilable with his written testimony. Similarly, the GAO's constitutional arguments on this point are not supported. In response to Congressman McMillan's inquiry, brief reference was made to Article 1 and Article 2 of the Constitution and cases interpreting those Articles. Obviously there are limitations to any delegation of authority Congress may make; however, a thorough review of the cases does not reveal any insurmountable impediment to federal delegation drafted to come within these limitations. Indeed, such delegation is quite commonplace and, in fact, there are numerous references to the NAIC throughout the federal statutes and regulations.' 'see, e.g., 12 U.S.C.A. $ 1749bbb-8 (Director of Federal Emergency Management Agency may adjust premiums for reinsurance coverage against property losses resulting from riots or civil disorders after consultation with the NAIC]; 15 U.S.C.A. S 781 (g)(2)(G) (NAIC filing requirements exempts insurers from registering with SEC); 26 U.S.C.A. $ 801, note P.L. 98 369, § 217(g) (treatment of dividends to policyholders will be treated as dividends to reinsurers if under a reinsurance agreement pursuant to the direction of the NAIC and entered into before June 30, 1955); 26 U.S.C.A. $ 806, note P.L. 98-369, S 217(1) (Annual statement techniques approved by the NAIC are used to determine whether an insurance company is a "qualified life insurance company" as defined in this section for taxable year beginning before 1988]; 26 U.S.C.A. S 807(d) [adopts NAIC reserve valuation methods for certain contracts); 26 U.S.C.A. $ 809 (g) [defines annual statement as "the annual statement for life insurance companies approved by the NAIC" in the context of deductions for mutual life insurance companies]; 26 U.S.C.A. S 811 [requires that all computations in the determination of taxes be consistent with the computations required for the annual statement as approved by the NAIC to the extent not inconsistent with this section]; 26 U.S.C.A. 831, P.L. 100647, S 6076 [fund must not be subject to filing as required by NAIC regulations to be considered a qualified group self-insurers' fund); 26 U.S.C.A. $ 832 [computations for gross income and expenses incurred are based upon the annual statement approved by the NAIC]; 26 U.S.C.A. S 846 [adopts annual statement approved by NAIC); 26 U.S.C.A. § 7702, note P.L. 98-369, $ 221 [adopted the NAIC's 1958 standard ordinary mortality and morbidity tables to determine net single premium]; 42 U.S.C.A. S 1395b, note P.L. 99-272, $ 9601 [Secretary of H.H.S. authorized to establish a |