I have read with interest the comments submitted by the National Association of Insurance Commissioners (NAIC) in response to our testimony before the Subcommittee, "Insurance Regulation: Assessment of the National Association of Insurance Commissioners" (GAO/T-GGD-91-37, May 22, 1991). After our review of the NAIC's comments, we do not believe that there is anything in the comments that would cause us to make any changes in our testimony, including our conclusions. We understand that this letter and the enclosed copy of our letter to Chairwoman Collins will be inserted into the record of the May 22 hearing. Should you or your staff have any further questions about our testimony or our analysis of NAIC's comments, please contact Craig Simmons at (202) 275-8678. Sincerely yours, Richard L. Fogel Assistant Comptroller General Enclosure I have read with interest the comments submitted by the After our review of the NAIC's comments, we do not believe Should you or your staff have any further questions about the report or our analysis of NAIC's comments, please contact Craig Simmons at (282) 275-8678. Sincerely yours, Riber Richard L. Fogel Assistant Comptroller General Enclosure RESPONSE TO NAIC LETTER ON GAO'S REPORT INSURANCE REGULATION: STATE HANDLING OF FINANCIALLY TROUBLED PROPERTY/CASUALTY INSURERS (GAO/GGD-91-92, MAY 1991) 1. From page 1 of the letter: "The GAO survey was also poorly designed and unlikely to obtain convincing and meaningful responses. The NAIC pointed out problems with the survey to the GAO prior to its distribution but the GAO, after soliciting NAIC comments, chose to ignore them and did not correct the survey." On March 1, 1990, we spoke with Jean Olson of the NAIC staff about the concerns raised in the NAIC's letter of February 28. First, the NAIC felt that the two parts of our questionnaire should be combined or that their order should be changed. We did not feel we could do this because of the diverse types of information we were seeking. Second, the NAIC believed that terms such as supervision, conservation, rehabilitation, and liquidation should be avoided because they may mean different things in the various states, and that general descriptions should be used instead. Our terminology was based on a complete review of state insurance statutes, and we believed we could best avoid confusion by using the terms in the questionnaire and providing a detailed definition within the questionnaire itself (see page 38 of the report). At the conclusion of the conversation Ms. Olson expressed her general satisfaction with our approach. In developing the survey, we worked closely with our Technical/Methodological Assistance Group. We also pretested the questionnaires with three state insurance departments. The three departments provided useful suggestions which were incorporated in the questionnaire, and none had major concerns with the questionnaire. We called each insurance department after sending the questionnaire to see if there were any problems, and all departments understood our usage of the terms in the context of the questionnaire. We also talked to some departments at a later time in order to verify certain responses. Following dur conversation with Ms. Olson the NAIC prepared a letter endorsing the questionnaire and encouraging insurance departments to fill it out. That letter was dated March 2, 1998 and was included with the questionnaire when it was distributed to the insurance departments in April 1998. NAIC did not express any further reservations about the content of our questionnaire at that time, nor did it do so at any subsequent time until after the publication of our report. 2. From page 2: "In relying on the survey, the GAO assumed that a regulatory failure occurred if the date when a company was deemed to have become insolvent preceded the date of formal regulatory action against the company. However ... there are many legitimate reasons why formal regulatory action would not Occur before the date an insurer was deemed to have become insolvent. It is virtually impossible to determine through a survey whether regulatory actions with respect to a particular insurer were timely or untimely." The basic premise of our survey was that the point of insolvency or later is too late to initiate formal action designed to correct problems or stem financial deterioration. Nowhere in the report do we suggest that such an action was a "regulatory failure". We realize that there are many reasons why some regulatory actions are not taken until insolvency and describe them on page 32 in the report. These reasons, however, do not obviate the need to take other available formal actions to stem financial deterioration in a timely fashion. Using insolvency as a measure for timeliness is actually a conservative approach. We chose it because several insurance experts assert that it is very difficult, if not impossible, to correct the problems of an insolvent company. Also, according to state law, formal actions other than liquidation can generally be used without having to prove insolvency. Moreover, the NAIC itself acknowledges in its Troubled Companies Handbook that prompt action is essential because the opportunity to save troubled companies generally diminishes the longer they are permitted to operate in an unsound financial condition. company that has been insolvent for a period of time most likely has been in an unsound condition for an even longer period of time. Thus, a more "accurate" approach would have been to use an earlier point in time where companies were designated, or thought to be, troubled. We asked the NAIC to provide us this information based on its Insurance Regulatory Information System (IRIS) or its statistical analysis of insurers, but it refused. A ... 3. From pages 6 and 7: The GAO study only focused on formal regulatory actions; but the fact is, that informal actions are an important part of a regulator's arsenal ...A 1989 NAIC survey of state insurance departments indicated that informal actions were successful in 40 percent of the cases in which they were utilized ... ... "The GAO report states that state regulators did not allow it to examine files of cases in which only informal actions were successful. However, two of the five departments visited by the GAO indicate that the GAO was given full access to department files. Aggregate data on successful informal actions may not be available if an insurance department does not maintain these type of statistics. If the GAO had a sincere interest in evaluating informal actions, it is not clear why it did not approach the NAIC for assistance in gaining access to information concerning such informal actions. Far from ignoring informal actions, we considered them to the extent possible. It is important to keep in mind that the only files we were permitted to access were those dealing with our case studies, all of which involved failed companies. We asked for, but were not provided with, specific examples of ongoing companies where informal actions had been successful. Further, it is our understanding that state regulators do not keep aggregate data on informal actions. Thus, we were precluded from assessing the timeliness of informal actions both from an example and from an aggregated perspective. Further, we were unable to evaluate the validity of data from NAIC's own survey since we were denied access to the survey results. We did not ask NAIC for assistance in obtaining other data on informal actions because we were aware that NAIC's data base covers only formal actions. As NAIC notes, we submitted a draft of our questionnaire to NAIC for its comments. Neither in its February 1990 letter to GAO nor in our conversations following receipt of the letter did NAIC raise the issue of obtaining data on informal actions. 49-616 (384) |