Insurance Regulation: The NAIC Accreditation Program Can Be Improved
Released: 2001-10-02T00:00:00

Letter

Background

Insurance companies are regulated principally by the states and are chartered under the laws of a single state, known as the state of domicile. Companies may conduct business in multiple states, but the state of domicile remains the primary regulator. States in which an insurer is licensed to operate but is not chartered typically rely heavily on the company’s primary regulator in its state of domicile to oversee the insurer.

NAIC is a voluntary association of the heads of insurance departments from each state, the District of Columbia, and four U.S. territories. State insurance commissioners created NAIC in part to help address the problems that arise when state insurance regulators try to oversee insurers that operate in a number of states, each with its own regulatory authority and laws. NAIC provides a national forum for addressing and resolving major insurance issues and for promoting the development of consistent policies among the states. It also serves as an information clearinghouse and provides a structure for interstate cooperation in examining multistate insurers. In addition, NAIC develops and distributes model insurance laws and regulations for consideration by member states and reviews the regulatory activities of state insurance departments as part of its national accreditation program.

The need for a national accreditation program was recognized during the 1980s to early 1990s when many insurance companies became insolvent (between 1986 and 1992, there were 276 insurance company insolvencies). The severity of the problem focused attention not only on state regulators’ ability to address solvency issues, but also on the lack of uniformity in solvency regulation at the state level. In June 1990, NAIC established its voluntary accreditation program to improve state oversight of insurers’ solvency. The program’s overall goal is to achieve a consistent, state- based system of solvency regulation throughout the country. The specific objectives of the accreditation program are to identify the basic authorities needed for solvency regulation at the state level and thereby to provide baseline requirements for effectively regulating the solvency of multistate insurers.

NAIC’s accreditation program emphasizes adequate solvency laws and regulations, efficient and effective financial analysis, examination processes and communication, and appropriate organizational and personnel practices. According to NAIC’s description of the accreditation program, the standards are grouped under three objectives. Part A covers laws and regulations, Part B deals with regulatory practices and procedures, and part C includes organizational and personnel practices.To meet the requirements of Part A, state insurance departments must have adequate statutory and administrative authority to regulate an insurer’s corporate and financial affairs. Essentially, state legislatures need to have adopted NAIC’s 18 suggested model laws or substantially similar versions and authorized the state insurance regulators to implement appropriate regulation. The Part B compliance standards are designed to assess whether a state seeking accreditation has “effective and efficient financial analysis and examination processes.” In order for the state insurance department to satisfy the 19 Part B standards, a state must demonstrate the necessary capabilities and practices to conduct financial analyses and examinations, to communicate with other states, and to develop and implement procedures for troubled companies. Part C has three standards designed to ensure that state insurance departments have appropriate organizational and personnel practices that encourage professional development, establish minimum educational and experience requirements, and allow the departments to attract and retain qualified personnel.

To receive NAIC accreditation, state insurance departments must satisfy these minimum standards. To be accredited initially, a state must undergo an on-site accreditation review. To maintain accredited status, states must undergo interim annual reviews (off-site evaluations by NAIC staff) and full on-site reviews every 5 years. As of August 2001, most accredited states had completed their second on-site accreditation review, and some states have already completed their third. Evaluating the state’s oversight of insurer’s financial condition is the major focus of the on-site reviews.

Since the accreditation program is focused solely on solvency regulation, it does not evaluate other aspects of an insurance department’s regulatory responsibility and oversight. For example, market conduct is one important area of regulatory responsibility that accreditation does not address. Market conduct includes all issues related to the sale of insurance products to consumers of insurance.

Oversight Activities of State Insurance Regulators

The oversight activities of state insurance regulators may differ, but each regulator is to oversee several safety and solvency functions through key phases of oversight activities, including chartering and change in ownership approvals, routine financial analyses, and periodic on-site examinations. Before approving a new charter or change of ownership, regulators are to review the background and qualifications of individuals making the request. The application must be made in the domiciliary state. Subsequently, an insurer may also apply for a license in other states where it intends to sell insurance.

In general, once a domiciliary state has approved an ownership application, that state continues to oversee the insurer through routine financial analyses and reviewing annual and quarterly reports and supplemental filings submitted by the insurance companies. These reports contain information such as financial statements, responses to questions about company activities, and schedules summarizing investment and other business activity. NAIC assists these review efforts with financial analysis tools such as Insurance Regulatory Information System (IRIS) and Financial Analysis Solvency Tracking (FAST) ratios. These tools help state insurance analysts identify areas of potential regulatory concern, particularly indicators that could suggest financial difficulties.

NAIC also issues guidance to assist regulators in performing financial analyses and examinations. For example, NAIC’s Financial Analysis Handbook is designed to help states identify troubled insurance companies as early as possible. The handbook includes checklists on financial concepts and analyses deemed important for assessing the company’s financial condition. The NAIC’s Financial Condition Examiner’s Handbook is another tool NAIC has developed to assist state regulators in detecting as early as possible insurers experiencing financial trouble or engaging in unlawful and improper activities and to develop the information needed for timely, appropriate action.

Key States Affected by Insurance Fraud Subsequently Receive Reaccreditation

In September 2000, we reported on a $200 million fraud that resulted in insurance company failures in six states. Four of the failed insurance companies were domiciled in Tennessee and Mississippi. Both Tennessee and Mississippi received their initial accreditation in 1994. The fraud was subsequently discovered in May 1999. In the aftermath of the failures, the Tennessee Bureau of Insurance did not control certain documents related to the failed insurance company that were being reviewed by other Tennessee officials. As a result, Tennessee’s second-round accreditation review was delayed until February 2000. NAIC suspended the state’s accreditation in March 2000. However, Tennessee’s accreditation was reinstated in September 2000 after another on-site review. Mississippi’s second round accreditation was awarded in December 2000, about one year after the five-year anniversary date of its initial accreditation.

Both the Tennessee and Mississippi second-round accreditations occurred in an environment of long-standing insurance solvency oversight weaknesses that had been uncovered by the discovery of the $200 million insurance fraud (fig.1). Each company that ultimately failed because of the fraud had been looted of its assets shortly after the company’s purchase by Thunor Trust, the entity allegedly controlled by Martin Frankel. The investment fraud scheme then continued, in some cases for years, until the fraud became public in May 1998. Appendix I describes the details of the fraud allegedly perpetrated by Mr. Frankel.

NAIC’s Accreditation Program Has Improved Over Time, Helping States Strengthen Solvency Regulation

Prior to the inception of the NAIC accreditation program, solvency regulation varied widely across the states. NAIC had developed numerous model laws and regulations, but adoption by the states was inconsistent. NAIC instituted the accreditation program in order to improve the quality and consistency of solvency regulation across the states. The program has demonstrated its value by defining a broadly accepted set of basic regulatory requirements for solvency regulation and successfully engineering their adoption in nearly all states. Currently, 47 state insurance departments and the District of Columbia are accredited—a level of consistency far superior to what existed before the program. The number of insurance company insolvencies in 1993−2000 was 109, a substantial decrease from the 276 insolvencies reported in the previous 7- year period. Although several factors have likely contributed to this decline, one, according to NAIC officials, was a concerted effort by NAIC and state governors’ offices, legislatures, and insurance departments to improve solvency regulation in the states, including the adoption of NAIC’s Financial Regulation Standards and Accreditation Program.

In addition to encouraging the widespread adoption of fundamental insurance laws and regulations, the accreditation program has required state insurance departments to make other changes in order to satisfy the solvency standards. For example, NAIC officials described to us improvements in the financial analysis and examination processes used by state insurance departments that can be attributed to the accreditation program. Between 1990 and 2000, state insurance departments increased the number of financial analysts from 165 to 471. To support increased demands for training from the states, NAIC has expanded its training programs for financial analysis and examination staff from state insurance departments. In 2000, more than 1,900 insurance regulators attended the training programs. In addition, NAIC officials added a new standard to the accreditation program requiring states to adopt and follow the NAIC’s Financial Condition Examiners’ Handbook or develop a document that is substantially similar. NAIC officials said that the new standard has improved the consistency and quality of state examination procedures.

GAO first reviewed NAIC’s accreditation program about 10 years ago.Since then, NAIC has made several improvements, some in response to GAO’s recommendations and others in response to suggestions from within NAIC itself and from other outside observers. It has added model laws and regulations—for example, the standards now require insurance companies to measure and report risk-based capital, and depending on the level reported, departments must take specific corrective actions. NAIC has also added standards that reflect best practices for conducting financial analyses and examinations. For example, it has expanded the financial analysis standards to require departments to analyze each company in depth, document the financial analysis procedures, and report and act on material adverse findings. The expanded financial examination standards require the examination staff to exchange information with other department staff. In addition, a new standard requires states to adopt the statutory authority required to share confidential information with other state insurance departments and to protect confidential information those departments provide. Finally, NAIC has increased its reviews of insurance department files documenting actual financial analyses and examinations, changed the scoring system, and provided detailed guidance for accreditation review teams.

In the first round of accreditation reviews, the review team was responsible primarily for assessing whether each state had the laws, regulations, processes, and resources necessary to regulate solvency. With the beginning of the second round of accreditation reviews in 1996, the focus expanded to better assess how effectively a state has used the laws, regulations, processes, and resources to regulate the solvency of insurers since the last accreditation on-site review. In the original round of accreditations, the review team concentrated only on the most current state analysis and examination procedures. While current department procedures continue to be the primary focus in the second and subsequent rounds of reviews, the teams may also review department analysis and examination files for all years since the previous review. For example, when selecting a sample of insurance company analysis and examination files, NAIC now requires the review teams to select at least one company from each of the following three categories, even if they have to go back as long as 5 years to find examples: companies that are not financially troubled; companies the state has identified as financially troubled; companies that are insolvent and that have been subject to receivership proceedings during the last 5 years.

Although the teams may have selected companies from each of these categories in the first round of reviews, NAIC did not specifically direct them to do so.

NAIC continues to be open to improvements in the accreditation program. In our September 2000 report on the $200 million fraud allegedly perpetrated by Martin Frankel, we identified a number of regulatory weaknesses that contributed to the failures of seven insurance companies. Although the accreditation program had minimum standards that the NAIC believed were sufficient for effective solvency regulation, the alleged Frankel scam exposed weaknesses in the accreditation program standards for financial examination, analysis, and related review guidelines, and in the standard for communication among states. Specifically, the program did not have an accreditation standard for asset custodians and lacked review team guidelines requiring the use of investment specialists. Moreover, while the program did have a standard about communication with other regulators, the standard did not require a regulator to proactively tell other interested states about a troubled insurer. Similarly, there was no standard requiring a state to obtain ownership applicant information from other states or to alert other states about possible fraud.

The insurance fraud led NAIC, as part of its overall corrective actions strategy, to propose changes to its accreditation standards and guidelines that are designed to minimize the likelihood of a similar fraud occurring again. NAIC has given these changes—one new standard and four review team guidelines—high priority and anticipates making them effective during 2002. The standard identifies requirements for asset custodians. NAIC expects to add it to the accreditation standards after adopting the model law at the 2001 Fall National Meeting. The three review team guidelines cover the use of investment expertise, more frequent examination of troubled insurers, and proactive communication by states regarding troubled insurers have been adopted and are expected to become effective in January 2002. The fourth review team guideline would require that states use a centralized database on applicants seeking to charter or buy an insurer that is currently being developed. This database is to be called the Form A database because the information will come from Form A’s filed by insurers and those seeking to charter or buy an insurer. At present, specifications for the Form A database have been approved and a prototype of the database system was presented at the NAIC 2001 Summer National Meeting. The database is expected to become operational in March 2002.

Other changes to the review team guidelines have been suggested, but their prospects and time frames are less certain. These include requirements that actions associated with the Part A process be reviewed during the financial analysis and examination processes and that communication between state insurance departments and other federal and state regulators be improved. A proposal to revise the Preamble to the Review Team Guidelines that would require the accreditation review teams to evaluate the implementation of the Part A standards has been presented to the relevant NAIC committee. Other proposals to expand accreditation standards by requiring communication with other state and federal regulators are under consideration.

Accreditation Program Still Has Gaps and Weaknesses

While there have been changes and improvements in the NAIC accreditation program since its inception, our analysis of the second round of accreditation reviews for Tennessee and Mississippi disclosed shortcomings in the scope, operations, and methodology of the accreditation program (table 1). Tennessee and Mississippi were the states of domicile for four of the seven companies that were looted of their assets early in the insurance fraud allegedly perpetrated by Martin Frankel that extended over an 8-year period ending in May 1999. The long-term failure of insurance regulators to uncover the fraud and associated asset theft revealed a number of regulatory deficiencies in both states. These shortcomings were identified in our September report. NAIC officials, as well as the head of the NAIC accreditation review teams that conducted on-site accreditation reviews in Tennessee and Mississippi, knew of the investment fraud prior to the accreditation reviews. However, because of gaps and procedural weaknesses in the structure of the accreditation program, known regulatory oversight deficiencies existing in Tennessee and Mississippi had a relatively minor effect on the accreditation process and resulting decisions.

The Accreditation Program Does Not Evaluate Chartering and Changes in Ownership

The accreditation program is intended to provide baseline requirements for effective solvency protection by state insurance departments. Overseeing chartering and changes of control of insurance companies is a key element of solvency regulation. However, the accreditation program largely ignores this important aspect of oversight—the so-called front-end of solvency regulation.

None of the NAIC accreditation reviews in Tennessee and Mississippi looked at or commented on this aspect of solvency regulation. Our review of the accreditation program material and the work papers for these reviews shows why. Accreditation standards and review team guidelines focusing on a department’s performance during chartering and change in ownership do not exist. However, one Part A standard requires a state to have statutory authority for changes in the control of insurance companies; what this standard requires is substantially similar to the authority provided by the NAIC’s model Insurance Holding Company System Regulatory Act and Regulation. The Act and Regulation sets out the procedures that insurance companies must follow when requesting a change in control of an insurer. Moreover, according to an NAIC representative, both Tennessee and Mississippi had these statutory and administrative authorities in place at the time Martin Frankel was allegedly buying insurance companies. However, the accreditation program includes no standards for the chartering process and no Part B Standards or review team guidelines requiring evaluation of the states’ performance in these areas. As a result, the existing weaknesses were ignored.

Although not fully addressed in the accreditation reviews, regulatory oversight in this area is key to preventing undesirable individuals from owning or managing insurance companies and to blocking companies from becoming involved in questionable business strategies. Both Tennessee and Mississippi had regulatory oversight processes in place for approving charters and changes in ownership for insurance companies. However, our report on the insurance fraud perpetrated in those states noted several weaknesses in regulatory performance existing during change in ownership approval activities. These weaknesses included (1) inadequate due diligence performed on buyer application data, (2) inadequate tools and procedures to validate individuals’ regulatory or criminal backgrounds, and (3) lack of coordination between regulators within and outside the insurance industry.

As we noted in our earlier report, performing due diligence on buyer application data is an essential part of regulatory oversight, as the purchase of insurance companies provides a number of opportunities for regulators to ask questions about the prospective owners. This phase of insurance regulation involves determining the intentions and appropriateness of the buyer and the business strategy they intend to employ. In addition, the states’ review of the data associated with an application for the change in ownership of an insurance company, documented in a format prescribed by NAIC known as a Form A, requires key information to be provided by applicants, but does not include checks on individuals’ regulatory or possible criminal histories. A fundamental aspect of the investment fraud was the concealment of a secret affiliation that allegedly existed between entities in the insurance and securities industries, so that the investment entity controlling the insurers and the entity controlling their invested assets were one and the same. Had regulators in Tennessee and Mississippi (as well as the four other states having primary regulatory responsibility for companies involved in the insurance fraud) exercised a higher degree of scrutiny or professional skepticism during the Form A application process, the fraud might have unraveled at the outset.

NAIC and state officials have acknowledged the need to include additional assessments of chartering and change of ownership in the accreditation program. However, NAIC officials told us that they don’t plan to add new accreditation standards until after establishing a Form A database that can be shared by the states. A prototype of the database has been demonstrated, and it is expected to become operational in March 2002. Once this step is completed, NAIC intends to begin focusing on developing accreditation standards for front-end solvency regulation. NAIC, through its committee process, has already made progress in developing checklists and procedures for the review of Form A filings. Such checklists and procedures may further enable state insurance departments to evaluate solvency issues related to change of ownership.

Analysis Procedures Contain Many Weaknesses

NAIC’s descriptions of the accreditation program stress the importance to consumers of “effective solvency regulation.” NAIC’s guidance on the standards and the review process for the second round accreditation reviews requires review teams to evaluate the insurance department’s performance in addition to determining whether the departments has the appropriate procedures in place. Second round accreditation policy guidance from NAIC for the Part B Standards (Regulatory Practices and Procedures)states that insurance departments are to “…demonstrate to the review team that they timely identify potentially troubled insurers and institute appropriate courses of action.” Regulators’ failure to do so was precisely the problem in both Tennessee and Mississippi. The failure of the accreditation process to fully recognize this regulatory failure illustrates additional weaknesses that limit the effectiveness of NAIC’s accreditation process. These weaknesses include the review teams’ failure to adequately consider all potentially relevant examination information, the use of a biased scoring methodology, a reliance on cursory compliance testing, and a general inflexibility in review procedures that does not allow reviewers to address all material issues. As a result, accreditation reviews may not consistently focus on important regulatory weaknesses and areas of vulnerability—that is, those that heighten the risk of material losses.

Potentially Relevant Exam Information Is Not Adequately Considered

Accreditation review teams generally include only the most recent examination activity for the companies they sample when assessing a state for accreditation. For this reason, the analysis does not include all the examinations of these companies that were completed during the current accreditation cycle. In the case of the first Tennessee reaccreditation review in February 2000, reviewers selected six companies for the review of examination files. One of these companies was the Franklin American Life Insurance Company, which failed after having been looted in the fraud allegedly perpetrated by Martin Frankel. The theft of company assets, which occurred shortly after the company changed ownership in 1991, had been discovered in the most recent exam (between September 1998 and May 1999). Because the theft was discovered, the examination received good marks from the review team. This good score contributed to the state’s high mark for the examination standard.

At the time of the reaccreditation on-site review in February 2000, Tennessee had completed three solvency examinations of Franklin American during the period of its participation in the fraud, two of them covering the full scope of the company’s activities and one targeted to investment activities. The first two exams had missed the fraud and the theft of assets. Accreditation officials explained that the review team did not consider the first examination of the company because, although the examination report had been issued after the first-round review, the “as of” date of the examination was December 31, 1992, before the date of the review. The second examination, in September 1996, also missed the fraud. This examination specifically targeted Franklin American’s investment activities—the precise area that was the focal point of the fraud. Accreditation officials told us that this examination was considered by the review team in its review and deliberations. However, it could not have been given much weight in the scoring. Summary notes from the review team voting session indicated that the reporting of material adverse findings by the Tennessee department was “good” (with a score of 4.2 out of 5) and action on material adverse findings was “timely” (also given a score of 4.2). In fact, both the fraud and the fact that the assets of the company had been stolen went undetected by the department for nearly 8 years.

One possible explanation for the accreditation review team’s apparent disregarding of the department’s failure to identify the theft of assets from Franklin American in a timely manner may be found in the standards themselves and in the review team guidelines. While there are two standards on material adverse conditions, there is no standard for assessing the failure of examiners to find an existing material adverse condition. Even without an explicit standard, however, the review team could have considered whether a department failed to find a material adverse condition. This consideration would be included in the scoring of the standard for reporting a material adverse condition, because if the condition is not found, it can not be reported. Yet the review team guidelines do not include any direction to the team concerning this important scoring issue, and the Tennessee review team did not choose to consider the failure of Tennessee examiners to identify the fraud in a timely fashion. As a consequence, Tennessee’s accreditation results did not fully reflect the department’s performance during the accreditation review period.

Scoring Can Provide Misleading Assessments

The accreditation reviews in Tennessee and Mississippi revealed three weaknesses in the scoring methods used that, taken collectively, can dilute the role of professional judgement and cause misleading or questionable results. Part B, where the scoring weaknesses occur, is broken into three components, or subparts—financial analysis (with eight elements), financial examinations (with nine elements), and troubled companies and communication with other regulators (with two elements). (See appendix II.) The weaknesses in scoring the Part B standards include giving equal weight to each of the elements of the standards, averaging or “netting” the scores within each of the subparts of the Part B standards, and maintaining an inherent scoring bias toward passing.

The scoring system assigns equal weights to all 19 elements in Part B. Thus the elements in each section are treated equally, irrespective of their potential impact on an insurance company’s solvency. For example, two of the eight financial analysis elements on which states are scored are reporting of material adverse findings and action on material adverse findings. During the first Tennessee accreditation review in February 2000, reviewers gave the department a score of 4.24 for reporting on material adverse findings (a process-oriented element) and a score of 1.54 for action on material adverse findings (an outcome-oriented element). Thus, the fact that the state took no action on an adverse material finding of fraud—which resulted in theft and a company’s failure—carried no more weight than the other elements.

A March 1996 Ernst and Young analysis of the accreditation program (the only independent analysis of the accreditation program requested by NAIC) recommended that the elements of Part B standards be weighted. The report noted that the overall contribution each standard made to regulating financial solvency appeared to vary. For example, according to the report, supervisory review of work papers appeared to Ernst and Young analysts to be a more critical activity than formatting examination reports, even though NAIC accreditation procedures weighted them equally. NAIC’s Financial Regulation Standards and Accreditation Committee considered revising the scoring system and weighting the elements of the standards. However, the committee concluded that all of the standards were equally important to an overall financial solvency program and thus decided not to revise the scoring system.

The second scoring methodology weakness involves the averaging of scores for standards within the financial analysis and examination sections. For example, the scores for each of the nine financial examination elements are totaled and a straight average calculated to determine the score for the financial examination section. Such an approach allows a “netting” process to take place by allowing an above average score on one element to offset a below average score on another element within the same section. This “netting” feature is particularly critical because the standards themselves are all of equal weight. For example, on the first Tennessee accreditation review in February 2000, a score of 3.88, above that needed for passing, was awarded for the element on scheduling of exams and a 2.60, or below that required overall for passing, for the element on appropriate supervisory review. Thus, the 3.24 straight average of the two scores is above that needed for a passing grade even though one element received a low score. Tennessee’s accreditation was suspended because it failed to pass the financial analysis section portion of the review. However, the failing score was by the slimmest of margins—a 2.98 average, with a 3.0 average needed in order to pass. Thus, above average scores for some elements, including that for “reporting of material adverse findings,” were nearly able to offset below average scores for others, most notably the element for “action on material adverse findings.” To further illustrate how close Tennessee came to passing, in spite of the known problems, three of the five review-team members’ individual scores averaged to a passing score for the entire financial analysis section.

The third area of scoring weakness is the built-in bias toward passing, which comes into play when there is no basis to judge a department’s performance on an element. For example, if none of the companies sampled in a state had an identified adverse material finding during the period under review, then review team members (following NAIC policy for second-round accreditation scoring) assign a score of 4 (out of 5) for both reporting and acting on material adverse findings. This situation occurred in the second Tennessee review, since the review team did not identify any material adverse issues for the companies reviewed in the sample. Such a policy, when used in conjunction with other scoring techniques such as giving equal weight to all elements and averaging scores, makes it easier for a state to attain an overall passing score, even if there are deficiencies in other elements. Some rating systems attempt to reduce this type of bias, either by having a “no basis to judge” category that excludes a standard or element from the scoring, or by assigning a neutral score to minimize the impact on the overall score.

Compliance Testing Is Sometimes Cursory Because of Limited On-Site Review

Compliance testing may be cursory because reviewers are allowed only 1 week or less on site, regardless of the size and complexity of the insurance department or the extent of problems that are identified. Moreover, the review is typically performed by 4 or 5 contract staff and an NAIC observer, whether the state being reviewed has more than 100 multistate insurers or only a handful. While team members review the self- assessment materials prepared by insurance departments before on-site visits, the parameters on time and resources limit the team’s ability to perform in-depth analyses and independently corroborate what the insurance department officials report. According to NAIC, the first day of a review commonly consists of meeting with state insurance department officials and obtaining an overview of the states’ financial and examination procedures and resources. In addition, the review team selects a judgmental sample of multistate companies for an in-depth review that begins the afternoon of the first day. The team generally continues reviewing the sample files during the 2nd, 3rd, and sometimes 4th days of the on-site visit, while also interviewing insurance department staff associated with the sampled companies. At the same time, the team reviews the adequacy of the state’s organizational and personnel practices—the Part C standards. During the 4th and 5th days, the team must also make time for internal team member discussions of findings, accreditation review scoring, preparing and writing the team report and management letter, and discussing the findings with state insurance department officials. NAIC officials explained that the Tennessee visit in February 2000 lasted 5 days and had a five-member team and one NAIC observer—typical numbers for both the duration and level of resources of on-site visits.

While it may not always be necessary to schedule more than 5 days for an on-site accreditation review, the ability to do so when appropriate would help avoid inadequate compliance testing. Too little compliance testing can have serious consequences for the effectiveness of the review process. During the Mississippi second-round accreditation review, Franklin Protective Life (one of the Mississippi companies that failed owing to losses associated with the $200 million fraud) was selected for review by the Mississippi accreditation team. By the time the accreditation on-site review took place (in October 2000), it was commonly known that Franklin Protective Life and two other insurance companies domiciled in Mississippi had operated for several years after having been looted of their assets in the fraud. Financial analysts from the Mississippi Insurance Department had failed over a number of years to notice that the company’s assets were missing and either failed to notice or failed to take action on other “red flags” that could have led to an earlier identification of the fraud. Nevertheless, the accreditation team leader, after reviewing the financial analysis files for Franklin Protective Life, concluded in the review team’s summary notes that “no serious failing in regulatory duties and responsibilities was noted in the five year analysis review for this company.”

By way of contrast in terms of depth of review, the Tennessee state auditors spent from July 1999 to July 2000, or about 1 year, analyzing and summarizing their findings. While the objectives and approach of the state auditors and the accreditation review team differed, both efforts were, in part, an attempt to evaluate the performance effectiveness of the Tennessee Department of Commerce and Insurance. The state auditors’ more detailed and comprehensive analysis disclosed a number of serious problems, including the failure to take action on reported material adverse findings—the principal reason Tennessee’s accreditation was suspended in March 2000. The audit report noted the Tennessee Insurance Division’s gross regulatory breakdown in this case, despite significant warning signs of questionable activity. The report also recommended a number of improvements, including additional confirmation procedures for insurance company assets held by custodians, improved documentation, improved supervisory review procedures, longer retention of examination work papers when a troubled insurer is involved, and improved supervisory control over financial analysis checklists. While a year would certainly be too long for an accreditation review, limiting all reviews to a week or less may be too constraining.

We compared the February 2000 accreditation findings in Tennessee with findings disclosed in our prior report on the investment fraud and found a number of weaknesses that were noted in our report but were not identified in the accreditation reviews. In analyzing the review team’s work papers, we found no discussion of weaknesses or concerns that had been identified in areas such as staff investment expertise or failure to detect misappropriation of assets. (See appendix I for a listing of weaknesses identified in our earlier report.)

Review Teams Lack Flexibility to Focus on the Most Material Issues

Perhaps the most significant weakness of the accreditation review team process is its limited flexibility. Without flexibility, the examination team is unable to focus on areas known to be of concern or to use the limited review team time to concentrate on material issues. Instead, the team uses exactly the same process and procedures regardless of the prevailing circumstances—even in an environment where fraud is known to have occurred. In spite of the fact that the NAIC accreditation officials and the accreditation team’s leader knew about the insurance fraud problems in Tennessee, the review team’s work plans were not substantially modified to address what was clearly the most material event existing in the department at that time.

To further illustrate this inflexibility, the Mississippi accreditation work plans were not tailored to address weaknesses in the Mississippi Insurance Department, even though both NAIC and the Mississippi Insurance Department had acknowledged them. While a detailed review of the same issues could be viewed as unfair, we found no evidence that the review team was instructed or attempted to determine what corrective actions were being taken or whether closer scrutiny of certain standards were warranted based on recent material adverse events. The program’s inflexibility, which does not allow the review team to focus its limited capacity on material issues, seems counter to the goal of increasing public trust in the solvency regulation process. Moreover, a risk-focused approach would allow the most efficient use of limited review team time and resources.

Additional Observations About the Accreditation Program

Our assessment of the accreditation reviews in Tennessee and Mississippi showed that the processes and practices were in accordance with accreditation guidelines and instructions. NAIC also reports that the accreditation reviews conducted in Tennessee and Mississippi were typical of the review processes used in all the accreditation reviews conducted in other states. NAIC officials reported that a total of 99 first- and second-round accreditation reviews were brought before the Financial Regulation Standards and Accreditation Committee between the program’s inception and July 26, 2001. A total of two suspensions resulted from these on-site reviews—Tennessee and Washington State—both in connection with second-round reviews. Both states were subsequently reaccredited.

We also found two other structural features of the accreditation program that could affect its effectiveness. First, while NAIC advises and provides technical assistance to individual states, it does not oversee or supervise state insurance departments. Thus, any recommendations and suggestions made by NAIC to the states do not have to be accepted. Second, the accreditation assessments are not independent, because NAIC is an association of the heads of the state insurance departments. Specifically, the commissioners are simultaneously the source of the standards, the heads of the entities being evaluated—and the state insurance departments, and the ultimate judges of the departments’ success or failure in terms of accreditation. This lack of organizational independence creates inherent impairments that can affect the ability of review teams to do their work and report their findings impartially. For example, states have a “right of refusal” regarding individuals selected for the on-site review team. In addition, while NAIC can choose from a number of contract review team members, it has only four review team leaders. While the experience and continuity provided by this small pool of team leaders might be a plus, there is also the possibility that the leaders could be “co- opted” by the program and its undeniably positive goals.

Conclusions

The accreditation program has been evolving since its inception more than 10 years ago. NAIC has taken a number of steps that it believes have strengthened the program. NAIC has reported improvements in a number of areas, including adding standards that suggest best practices for the states; expanding NAIC’s reviews of state solvency regulation, which now include analyses of a sample of failed or troubled companies; and increasing the number of states in the program, so that most are now participating. Following the scam allegedly perpetrated by Martin Frankel, NAIC and state insurance regulators in Tennessee and Mississippi as well as other states acknowledged the need to further strengthen insurer solvency regulation. Corrective actions emanating from the insurance fraud have included identifying the appropriate custodial requirements for insurers’ 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 that are submitted to other state regulators. We believe these positive steps have been designed to strengthen NAIC’s accreditation program in its efforts to strengthen solvency oversight of insurance companies.

NAIC’s description of its accreditation program points out that America’s insurance consumers need “a system of effective solvency regulation.” The accreditation program is intended to certify that accredited states have the baseline authorities, processes, procedures, and resources needed to provide a system to protect consumers not only in those states where insurance companies are domiciled, but also in every state where the companies operate. Clearly, determining whether a state has the laws and regulations necessary for insurance regulators to act is fundamental. Moreover, NAIC has designed its accreditation program so that model laws and regulations can be added to the standards as needed, and a number of such models have been added since the program’s inception. The recent fraud in Tennessee, Mississippi, and other states has illuminated another area where NAIC can assist the states. The accreditation program can be improved by developing or revising model laws relative to chartering and changes in the control of insurance companies and adding them to the standards along with associated practices and procedures.

Measuring a state’s effective performance of its regulatory responsibilities for solvency may be more difficult than determining whether it has the necessary laws and regulations. However, differentiating an “effective” system of solvency regulation from an ineffective one is an important objective of the accreditation program, particularly since the start of the second round of accreditation reviews. The examiner team instructions for determining compliance with Part B standards (Regulatory Practices and Procedures) require the teams to evaluate not only whether state insurance departments have the necessary laws and regulation on the books, but also whether the departments have implemented them appropriately. The instructions add, “To satisfy the standards set forth in this section, the Department should demonstrate to the review team that they timely identify potentially troubled insurers and institute appropriate courses of action….” This did not occur in Tennessee or Mississippi. As a result, while Tennessee’s accreditation was suspended for a short time, the accreditation reviews did not identify many of the regulatory weaknesses that had allowed the affected companies in both states to evade detection and operate for several years not only without adequate capital but also without assets. While we recognize the difficulties of detecting deliberate fraud, there is room for the accreditation program to continue improving its mechanisms for assessing the effectiveness of states’ regulatory performance in the same way it has expanded the basic set of laws and regulations states are expected to have. Its success in making these improvements will enhance the level of confidence insurance consumers can have in each accredited state’s insurance regulatory system. Without these improvements, the accreditation program may not succeed in clearly differentiating between the state insurance departments that can be expected, on the basis of past performance, to effectively regulate the solvency of insurance companies and those departments that may not.

Recommendations for Executive Action

We recommend that the Executive Vice President of NAIC Strengthen the accreditation program’s focus on chartering and change of ownership by developing appropriate model laws, regulations, and procedures for chartering insurance companies; reviewing the current standards and guidelines related to change in ownership and make any necessary changes; including the new and improved model laws and regulations in the accreditation standards and developing companion compliance standards for regulatory practices and procedures; and providing appropriate guidance to the review teams to assure better assessment of a state’s performance in these areas of solvency regulation.

Implement new on-site review team procedures by requiring the inclusion of all relevant exam information since the last accreditation review, and developing a scoring methodology that places more emphasis on standards that directly affect insurance company solvency.

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.

Agency Comments and Our Evaluation

We requested and received written comments on a draft of this report from the Executive Vice President, NAIC (see app. III for the complete text of NAIC’s letter). In summary, they were pleased to note the positive comments we made about the various improvements and successes since the accreditation program’s inception. They also appreciated our recommendations for further improvements and stated that they are committed to giving each of them serious consideration.

Regarding our specific recommendations, NAIC generally agreed with our first recommendation concerning the need to strengthen the accreditation program’s focus on chartering and change in ownership and noted some specific actions being taken or planned in that regard. Consistent with our second recommendation, NAIC is currently considering changes that would require review teams to consider examinations from earlier in the accreditation cycle. In addition, while NAIC has considered on more than one occasion the concept of weighting accreditation standards, it agreed to again review its scoring system in light of our concerns. Finally, regarding our third recommendation addressing the need to ensure review team flexibility to adjust on-site visits so that appropriate testing can occur, NAIC believed its program had the flexibility to consider known areas of weakness, but agreed to review its procedures in light of our concerns.

In NAIC’s more detailed comments (see page 2 of the comment letter in app. III), NAIC stated that not even the best-designed systems can ensure that fraud, intentionally perpetrated upon an insurance company, can be immediately detected. In addition, it believed that a Department’s performance on one individual company that was the subject of an alleged fraudulent scheme was not necessarily an accurate indicator of a Department’s overall financial solvency program. We agree that it can be difficult to immediately detect fraud, but note that the fraud discussed in this report went undetected for nearly 8 years despite numerous indicators, or red flags—many in documents available to regulators throughout this period. Further, we found no clear indication that the oversight weaknesses contributing to the long-term success of this fraud were unique to a single company. In fact, three of the failed companies were domiciled in Mississippi (although the NAIC review team looked at only one). Moreover, in the aftermath of the failures, both Tennessee and Mississippi acknowledged systemic weaknesses in their regulatory oversight practices that had made them overly vulnerable to the fraudulent activity. Since the fraud was uncovered, Tennessee, Mississippi, and NAIC have begun to implement various corrective actions designed to reduce the possibility of future occurrences. In a similar light, we believe that further corrective actions can be made to NAIC’s accreditation program to better ensure its success in evaluating the effectiveness of the states’ financial solvency programs.

Scope and Methodology

To obtain information on NAIC’s efforts to improve its accreditation program, we visited NAIC Headquarters in Kansas City, Missouri, and attended the open portions of the three most recent quarterly meetings of NAIC’s Financial Regulation Standards and Accreditation Committee (FRSAC). At NAIC headquarters, we obtained and analyzed relevant documents describing the accreditation program’s goals, objectives, scope, and accomplishments, as well as summary statistics. Officials at NAIC also provided us with their view of improvements made to the program since its inception in 1990. We did not independently verify every improvement, not did we independently review the laws and regulations of individual states to verify their adoption of the NAIC models. At NAIC quarterly meetings, we obtained various documents on accreditation issues and plans and discussed these with FRSAC members as appropriate. In addition, we interviewed key accreditation officials about the program’s operations and obtained their view of major accomplishments and improvements.

To analyze the accreditation reviews in Tennessee, we visited NAIC headquarters and reviewed all work papers and related reports summarizing the two reviews. We also reviewed the work papers and associated documents from the Mississippi accreditation review. We subsequently discussed these reviews with representatives of both the Tennessee and Mississippi Insurance Departments. We obtained and analyzed various documents pertaining to the goals, objectives, accreditation review procedures, scoring methodology, and criteria. We also interviewed NAIC officials responsible for these reviews and the contractor who functioned as team leader for the on-site visits. In addition, we reviewed an operational study of the accreditation program conducted by Ernst and Young, the only outside analysis of the program requested by NAIC.

We conducted our review in Kansas City, Missouri; Nashville, Tennessee; and Jackson, Mississippi, between December 2000 and July 2001 in accordance with generally accepted government auditing standards. While the findings of this report apply to the accreditation program as a whole, other issues related to NAIC’s accreditation program may need to be addressed. Our focus was on the accreditation process in Tennessee and Mississippi during and after the insurance scam allegedly perpetrated by Martin Frankel. Other issues unrelated to the circumstances found in those two states were outside the scope of our review.

As agreed with your office, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Chairman of the House Committee on Energy and Commerce as well as the Chairman and Ranking Member of the House Committee on Financial Services and the Senate Banking, Housing, and Urban Affairs Committee. At that time, we will also send copies of this report to the Executive Vice President of NAIC and to the 55 state and other governmental entities that are members of NAIC and also make copies of the report available to other interested parties upon request.

Appendix I: Tennessee and Mississippi Received Accreditation During and After Thefts Causing Company Insolvency

In September 2000, we reported on a $200 million theft involving insurance company failures in six states. Four of the failed insurance companies were domiciled in Tennessee and Mississippi. In 1994, both Tennessee and Mississippi received their first round accreditation during the theft, which had not yet been discovered. The theft was subsequently discovered in May 1999. Events associated with that discovery led to the delay of the second round accreditation reviews in Tennessee. Tennessee’s second round accreditation was suspended in March 2000 and reinstated in September 2000. Mississippi’s second round accreditation was granted in December 2000. As discussed below, the Tennessee and Mississippi accreditation events occurred in an environment of long-standing insurance solvency regulatory oversight weaknesses.

In the 1980s, Martin Frankel worked in the securities industry. SEC permanently banned him from the securities industry in 1992. Even prior to his removal from the securities industry, he was setting up the mechanism to move into the insurance industry. He allegedly gained secret control of a small securities firm called Liberty National Securities (LNS), which in 1991, a year before his ban from the securities industry, he directed to become registered with the state securities department in Tennessee. The same year, he allegedly anonymously established an entity known as Thunor Trust, using the names of nominee grantors as the apparent source of the money. Thunor Trust then applied for regulatory approval from the Tennessee Department of Commerce and Insurance, Division of Insurance, to purchase the Franklin American Life Insurance Company, a small, financially weak insurer. This application was subsequently approved. In this and all subsequent interactions with insurers or with regulators, Mr. Frankel’s name was never used. He allegedly operated by using aliases or through fronts.

From 1991 to 1999, Thunor Trust purchased six more insurance companies domiciled in five additional states. All of the insurance companies owned by Thunor Trust were managed out of the Franklin American headquarters in Franklin, Tennessee, even though they continued to be domiciled for regulatory purposes in the states of Mississippi, Oklahoma, Missouri, Alabama, and Arkansas. The insurer bought by Thunor Trust in Alabama was later redomesticated (moved) for regulatory purposes to Mississippi, even though it continued to be operated out of Tennessee. Mr. Frankel allegedly used the same scheme to loot each of the insurance companies. After purchasing a company, Frankel removed the company’s assets from the control of the insurance company, using LNS as a front. Shortly after Thunor Trust purchased an insurer, the company’s assets would all be sold and apparently replaced with government bonds purchased on the insurer’s behalf by LNS, acting under the direction of Mr. Frankel who allegedly operated using an alias. None of this activity involved the real LNS; rather, it was carried out by a bogus LNS operated by Mr. Frankel out of his mansion in Connecticut.

In actuality, the companies lost control of their assets when the money was allegedly turned over to LNS. Mr. Frankel’s bogus company, using the name of the firm he secretly controlled—that is, the real LNS—provided monthly statement to each insurance company detailing a very active trading strategy and showing the bonds that were supposedly bought and sold that month by LNS as agent for the insurer. According to these statements, the bond trading was profitable, and the profits were returned to the company. In fact, the securities transactions shown on these statements did not happen. The statements were fabrications. Allegedly, Mr. Frankel actually used the company’s assets to (1) return phony profits to the company, (2) purchase additional insurance companies—a necessary step to continue the fraud, and (3) support his own lavish lifestyle. Ultimately, taxpayers, other insurers, and certain policyholders will bear the losses resulting from the scam.

The first round accreditations for Tennessee and Mississippi occurred in September 1994 and December 1994, respectively. After the $200 million theft became public in May 1999, NAIC delayed its second round accreditation review for Tennessee, scheduled for September 1999, at the request of the Tennessee State Auditors because of their ongoing review of the Tennessee Insurance Department triggered by the theft. In March 2000, Tennessee’s accreditation was suspended for failing the financial analysis portion of the review. Six months later, at Tennessee’s request, NAIC conducted an additional accreditation review that resulted in reaccreditation of the state in September 2000. NAIC also conducted a reaccreditation review of Mississippi after the $200 million theft became public, resulting in reaccreditation of Mississippi in December 2000.

Among other weaknesses in state regulatory oversight it exposed, the theft uncovered weaknesses in chartering and change in ownership approvals, a key phase of oversight for preventing undesirable individuals from controlling insurance companies and insurer involvement in questionable business strategies. The theft also showed that financial losses associated with risks heightened by such weaknesses in oversight could be material, leading to insurer failures and hundreds of millions of dollars in lost insurer assets. Because the accreditation reviews discussed in this report involved states closely involved with the scandal, an overview of our findings regarding regulatory oversight weaknesses is included in table 1.

The report included recommendations to help prevent or detect similar investment scams in insurance companies by proposing the adoption of appropriate asset custody arrangements, improved asset verification procedures, and the sharing of confidential regulatory information across industries and agencies. In addition to the above recommendations emanating from the Frankel matter, this report also contained a recommendation designed to broaden and help sustain cooperation among regulators of different financial services sectors.

NAIC and three affected states also conducted parallel reviews of the scam and disclosed similar weaknesses along with recommendations for corrective actions. In July 2001, we provided a status report on corrective actions that NAIC, Tennessee, Mississippi, and Missouri have taken or are taking to address recommendations contained in our September 2000 report to address the regulatory oversight weaknesses.

Appendix II: An Overview of the NAIC Accreditation Program

Although the market for insurance is national in scope, with many companies selling insurance in multiple, if not all, states, the state-by-state system of insurance solvency regulation has traditionally been uneven. Regulatory capacity has varied across states, and laws, regulations, and practices have lacked uniformity. During the 1980s and early 1990s, a number of insurance companies became insolvent, focusing attention on the weaknesses of state insurance regulation and leading to speculation that the federal government would take over regulatory responsibility. In February 1990, Congressman John Dingell released a report entitled “Failed Promises: Insurance Company Insolvencies” that increased speculation about the imminent federal takeover. The National Association of Insurance Commissioners (NAIC), governors, and state legislatures realized that in order to preserve state regulatory authority, something had to be done to address the regulatory inconsistencies. NAIC had previously formed a special committee to address state regulation of insurance companies and devise an accreditation program. In 1989, NAIC formulated the Financial Regulation Standards (Standards) that would form the basis of the accreditation program, and in 1990 it implemented the program itself. Since the program began, the number of accredited states has grown to 47 and the District of Columbia.

How the Accreditation Program Works

The accreditation program is designed to make monitoring and regulating the solvency of multistate insurance companies easier by ensuring that states adhere to the NAIC’s standards, which establish the basic recommended practices for an effective regulatory department. To be accredited, states must show that they have solvency laws and regulations that protect insurance consumers; effective, efficient financial analysis and examination processes; and appropriate organizational and personnel practices. A team from NAIC examines state insurance departments that are seeking accreditation for compliance with the Standards. NAIC’s Financial Regulation Standards and Accreditation Committee (FRSAC), which comprises regulators from across the country, decides whether states are in compliance and provides additional guidance to those that are not.

States must be accredited every 5 years, and NAIC makes annual interim evaluations of Self-Evaluation Guides submitted by the states. The program uses a scoring system that ranges from a low of 0 (unacceptable) to a high of 5 (excellent). Insurance departments are examined for compliance with all three categories of Standards: Part A (laws and regulations), Part B (regulatory practices and procedures), and Part C (organizational and personnel practices).

Part A: Laws and Regulations

The purpose of this set of standards is to ensure that states have sufficient authority to regulate the solvency of multistate domestic insurers. To meet the requirements of Part A, state legislatures must adopt all of NAIC’s 18 model laws (or versions that are substantially similar) and have authorized the state insurance regulators to implement appropriate regulations. The required laws and regulations cover a range of issues as detailed in table 1.

Part B: Regulatory Practices and Procedures

The Part B standards, regulatory practices and procedures, are recommended practices designed to ensure that states have the necessary resources and capabilities to conduct financial analyses and examinations of firms operating within its jurisdiction. The standards cover the three areas considered necessary for effective solvency regulation: financial analysis, financial examinations, and communication with states and procedures for troubled companies (see table 2). To be accredited, states must attain an average score of 3 in both financial analysis and examinations.

Part C: Organizational and Personnel Practices

The Part C standards, organizational and personnel practices, are intended to ensure that the staff of state insurance departments have the appropriate skills and training to promote effective regulatory practices. The standards cover professional development, minimum educational and experience requirements, and personnel retention as detailed in table 5. These standards are not scored; instead, the review team provides comments to the state insurance department officials.

How Accreditation Reviews Are Conducted

States request an accreditation or reaccreditation review by contacting NAIC, which requires them to first fill out a “Self-Evaluation Guide.” This guide allows the state to assess itself against the detailed requirements of the Standards. The chair of FRSAC selects a review team of three to six contract examiners and appoints a review team leader. NAIC sends the names of the review team to the state, which can challenge any member. In this case, NAIC and the state negotiate until a new team is selected.

Once the review team is established, NAIC and the state schedule the visit. Generally, a site visit requires 3 to 5 days, depending on the size of the department. NAIC sends copies of the state’s completed Financial Regulation Standards Self-Evaluation Guide, with any applicable supporting documentation, to the review team and tells the state what the team will need for its review. Prior to the on-site review, the state can request an abbreviated review (“pre-review”) by an NAIC official in order to learn about any improvements that need to be made.

On-Site Review Procedures

The review team follows a set of procedural guidelines that are designed to make the evaluation process uniform across states. Before the on-site review, team members meet to discuss comments and concerns raised by the Self-Evaluation Guide and supporting documentation. During the on- site review itself, the team examines compliance with laws and regulations; assesses examination reports (usually six), supporting work papers, and interviews; inspects financial analysis and regulatory files for a sample of companies (usually 12); interviews department personnel and reviews organizational and personnel practices; and does a walk-through of the department. Once they have completed these tasks, the team members meet to discuss their findings and vote on a score for whether the state is in compliance with NAIC’s accreditation standards addressing regulatory practices and procedures. The team then holds a closing conference with the state and provides a copy of the scores and draft copies of the compliance report and other material, including the management letter addressed to the insurance department. After the site visit, the review team submits its report, a compliance report, and management letter comments to FRSAC. The reports summarize the procedures performed during the site visit, document the findings, highlight major recommendations, and recommends that accreditation be approved or suspended.

FRSAC’s Evaluation Process

FRSAC meets quarterly at the NAIC national meetings to discuss the accreditation reviews from the previous 3 months with team leaders, representatives of the states applying for accreditation, and the NAIC observers. FRSAC members will have reviewed the self-evaluation guides and supporting documents from each review, and team leaders present their reports and recommendations. FRSAC may also query the state insurance department representatives. On the basis of the review team’s recommendation and the meeting, FRSAC decides whether the state should be accredited, reaccredited, or have its accreditation suspended. If suspended, a state can apply for another accreditation review at a later date.

While states must undergo the full review process every 5 years in order to maintain accreditation, they may be subject to a special review if FRSAC receives information suggesting that a state may no longer meet the Standards. FRSAC then determines whether the state’s accreditation should be suspended or revoked. The state has the right to appeal the decision.

The annual reviews take place on the anniversary of the initial accreditation. For these reviews, states submit an updated self-evaluation guide. For the first annual review, states must also respond to any recommendations made during the initial accreditation review. NAIC reviews these materials and summarizes them for FRSAC. FRSAC then determines whether the state remains in compliance. The state has the right to appeal a negative decision.

Appendix III: Comments From the National Association of Insurance Commissioners

Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgements

In addition to those named above, James R. Black, Emily Chalmers, Thomas H. Givens III, Barry A. Kirby, LaSonya Roberts, and Desiree W. Whipple made key contributions to this report.