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Insurance Regulation: The NAIC Accreditation Program Can Be Improved

GAO-01-948 Published: Aug 31, 2001. Publicly Released: Oct 02, 2001.
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Highlights

The National Association of Insurance Commissioners' (NAIC) evaluates a state's program for regulating insurer solvency about once every five years to determine if it meets the association's minimum standards. The accreditation program has been in place for about 10 years. During that time, NAIC expanded the standards and modified the process for evaluating the adequacy of states' solvency regulation. Weaknesses in solvency regulation in Tennessee, Mississippi, and three other states allowed a $200 million insurance fraud to continue for eight years, resulting in the failure of seven insurance companies. During 2000, both Tennessee and Mississippi underwent accreditation reviews by NAIC and were reaccredited. NAIC has tried to strengthen its accreditation program by adding model laws and regulations to the required standards. It has also revised the way in which accreditation reviews are performed and scored and has improved training for members of review teams. Accreditation reviews done in Tennessee and Mississippi disclosed gaps and weaknesses in the accreditation program. In particular, the program does not cover a key area of solvency regulation--chartering and change in ownership of insurance companies. Oversight of chartering and change in ownership is key to preventing questionable individuals from gaining control of insurance companies. The insurance fraud exposed weaknesses in state regulation and oversight that are not addressed in NAIC's accreditation program. Moreover, GAO found weaknesses in on-site accreditation review procedures, including incomplete analyses of exam information, a questionable scoring methodology that can give misleading results, limited on-site compliance testing, and insufficient flexibility in tailoring reviews to address the most material issues.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Other The Executive Vice President of NAIC should strengthen the accreditation program's focus on chartering and change of ownership by developing appropriate model laws, regulations, and procedures for chartering insurance companies.
Closed – Implemented
The NAIC has strengthened its accreditation program's focus on chartering and change in ownership by developing procedures, tools, and a model law/regulation related to chartering activities of insurance companies. Specifically, NAIC has developed new procedures related to company licensing/chartering through the newly adopted "Best Practices Company Licensing Handbook." This handbook describes procedures and best practices for considering a company licensing application, including the use of a newly developed electronic company application tool--the Uniform Certificate of Authority Application (UCAA). With the development of these procedures, NAIC has also begun developing the Company Licensing Model Act, a new model law/regulation that is expected to be considered for inclusion as an accreditation standard in 2006.
Other The Executive Vice President of NAIC should strengthen the accreditation program's focus on chartering and change of ownership by reviewing the current standards and guidelines related to change in ownership and make any necessary changes.
Closed – Implemented
NAIC has strengthened its accreditation program's focus on chartering and change in ownership by reviewing and revising current standards and guidelines related to change in ownership. Specifically, NAIC has reviewed current standards and guidelines and has developed new guidelines/procedures related to company licensing/chartering through the newly adopted "Best Practices Company Licensing Handbook." These guidelines/procedures also incorporate the use of an electronic company application tool known as the Uniform Certificate of Authority Application (UCAA). Other improvements include the development of the Form A database that will facilitate the coordination and review of company change in ownership applications (Form As) among states (allowing different states to review related Form A applications in other states). The Form A database is now part of planned updates/amendments to current accreditation standards related to change in ownership oversight activities.
Other The Executive Vice President of NAIC should strengthen the accreditation program's focus on chartering and change of ownership by including the new and improved model laws and regulations in the accreditation standards and developing companion compliance standards for regulatory practices and procedures.
Closed – Not Implemented
NAIC did not adopt new model laws or regulations in the Accreditation Program related to one of their initiatives to promote National Treatment of Companies in a revised Company Licensing Model Act.
Other The Executive Vice President of NAIC should strengthen the accreditation program's focus on chartering and change of ownership by providing appropriate guidance to the review teams to assure better assessment of a state's performance in these areas of solvency regulation.
Closed – Implemented
NAIC has strengthened its accreditation program's focus on chartering and change in ownership by enhancing guidance for the accreditation review team. With the recently developed and adopted "Best Practices Company Licensing Handbook," accreditation review teams now have enhanced guidance to assess regulatory oversight related to company licensing. Other improvements of such guidance include increasing the scope of examinations to include activities that occurred prior to the most recent twelve month period tied to such reviews. Another relevant improvement is a new accreditation review scoring methodology that requires a minimum score for each subpart of oversight reviewed. Accordingly, a review team must ensure a state's oversight activities related to company licensing and change in ownership meet certain performance standards before the state can be accredited.
Other The Executive Vice President of NAIC should implement new on-site review team procedures by requiring the inclusion of all relevant exam information since the last accreditation review.
Closed – Implemented
NAIC has expanded the scope of its accreditation reviews to include analyses and examinations from time periods beyond the most recent 12-month period when an accreditation review is initiated. This expanded review is intended to provide better assurances to the review team that the state performed consistently throughout the period between reviews (typically a five-year period).
Other The Executive Vice President of NAIC should implement new on-site review team procedures by developing a scoring methodology that places more emphasis on standards that directly affect insurance company solvency.
Closed – Implemented
NAIC has changed its scoring methodology for accreditation reviews by requiring that each subpart of the examination meet certain performance requirements and achieve a minimum score before NAIC will accredit the state. The overall requirements and score to achieve a passing evaluation on the review were also increased.
Other The Executive Vice President of NAIC should ensure that the accreditation program provides the review team with the flexibility to adjust the time and scope of on-site visits as necessary to conduct the level of testing required to address known material issues.
Closed – Implemented
NAIC has revised its accreditation review guidance to enhance flexibility for the review team to spend additional time on the review as needed. This guidance was revised through the adoption of a policy entitled "Policy on the Flexibility of Review Teams."

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FraudInstitution accreditationInsuranceInsurance companiesInsurance regulationFinancial analysisLarcenySecuritiesFinancial market regulationPersonnel practices