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. 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. 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. 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.