Each insurance company is chartered under the laws of a single state, known as its state of domicile. Although an insurance company can conduct business in multiple states, the regulator in the insurer’s state of domicile is its primary regulator. States in which an insurer is licensed to operate, but in which it is not chartered, typically rely on the company’s primary regulator in its state of domicile to oversee the insurer. Regarding Year 2000 issues, NAIC has emphasized this approach by encouraging each state to focus its Year 2000 oversight efforts on its domiciliary companies. In total, state-regulated insurance entities wrote an estimated $895.2 billion in direct premiums sold nationally during 1998. Life/health and property/casualty insurance companies represent the key industry segments, accounting for 85 percent of the total direct premiums written in that year. HMOs; HMDIs; and other entities, such as fraternal organizations and title companies, accounted for the remaining 15 percent. To update our previous assessment of the regulatory oversight of the insurance industry’s Year 2000 readiness, we interviewed NAIC officials and reviewed documentation related to NAIC’s efforts to facilitate state oversight of the industry’s Year 2000 readiness. We also reviewed available state examination reports and executive summaries covering companies’ Year 2000 preparations, which were available at NAIC. While we did not verify the accuracy of the reports, this review included well over 200 reports and summaries prepared by or on behalf of 22 states. To the extent available through NAIC, we present updates pertaining to regulatory oversight through November 1999. In addition, we conducted follow-up work of Year 2000 validation efforts at the same 17 state insurance departments on which we reported in April. Our follow-up work for the 17 states included (1) a second survey administered in July 1999 that covered their Year 2000 oversight activities, including examination efforts in the area; (2) site visits to 6 of the 17 states to interview regulatory officials and review guidelines for conducting Year 2000-related examinations as well as available reports, summaries, and workpapers covering companies’ Year 2000 preparations; and (3) additional contacts in October 1999 with regulatory officials from each of the 17 states for a final update of their Year 2000-related examination efforts. The domiciliary companies of these 17 state insurance departments collectively accounted for 76 percent of the insurance sold nationally during 1998. See appendix I for a list of the 17 states and their respective domiciled insurers’ market shares. Our review of examination-related documents was limited by restrictions at two of the states we visited and at NAIC, which had examination report summaries for the same two states. For one state, regulatory officials cited an existing law that restricted access to its examination reports and related workpapers by external parties. Regulatory officials for another state explained that, under special agreements reached with insurers prior to conducting Year 2000 examinations, their department was precluded from sharing examination-related documents with other states or external entities without the consent of the companies involved. Although one of the two states provided some limited access to their examination documents, we were unable to independently verify the adequacy of Year 2000 examination efforts for either state. To determine the status of the insurance industry’s Year 2000 readiness, we surveyed all 50 state insurance departments on the state of readiness of their domiciled companies as of September 30 and the extent of the departments’ on-site verification efforts. For each state, NAIC provided a Year 2000 contact to assist us in this survey effort. Appendix II contains a copy of the Year 2000 survey we administered to the states. With NAIC’s assistance, we obtained a 100-percent response rate from the 50 states. To obtain updated insights regarding the industry’s Year 2000 outlook pertaining to readiness and liability exposure issues, we contacted representatives of key rating companies, including A.M. Best Company, Standard and Poor’s, Moody’s Investors Service, and Weiss Ratings, Inc. We also obtained and reviewed information from (1) the Gartner Group, which is a business and technology advisory company that conducts research on the global state of Year 2000 readiness; (2) the American Academy of Actuaries, which is a public policy organization that presents actuarial analyses, comments on proposed federal regulation, and works with state officials on insurance-related issues; and (3) the Casualty Actuarial Society, which is a professional organization to advance knowledge of actuarial science applied to property, casualty, and similar risk exposures. In addition, we spoke to representatives of Milliman and Robertson, Inc., an actuarial and consulting firm, and the American Bar Association. We performed our work between June 1999 and December 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from NAIC. Its written comments, which are included in appendix III, are discussed near the end of this letter. Since March 1999, NAIC has stepped up its Year 2000 efforts by (1) issuing expanded guidance to state regulators on how to examine companies’ preparedness and (2) encouraging state regulators to do on-site validation reviews of companies with the greatest potential public impact. NAIC reports that many of the nation’s state regulators have also made substantial progress in conducting Year 2000 validation reviews. They were projected to complete, by the end of November, on-site Year 2000 reviews for 91 percent of the nationally significant companies that accounted for about 84 percent of the direct premiums written by life/health and property/casualty insurers in 1998, according to NAIC. Despite this progress, uncertainties remain regarding the extent that on- site validation reviews have been conducted for some states’ companies, including some major health insurers and other segments of the insurance industry, such as HMOs and managed care organizations. In November 1999, NAIC was still in the process of quantifying the extent to which on- site verification was conducted at some of the major health insurers that did not fall into the category that NAIC had designated as nationally significant and at the larger managed care organizations, which had not been specifically covered by NAIC’s earlier efforts. After we reported on the insurance industry’s Year 2000 readiness in March and April, 1999, NAIC stepped up its efforts to facilitate state actions to verify insurers’ reported information on their Year 2000 preparations. For example, one undertaking involved NAIC’s provision of expanded examination guidance for assessing companies’ Year 2000 preparations and related training. Another important part of NAIC’s stepped up efforts has been its initiative that was aimed at prioritizing companies for review and encouraging states to perform on-site validation reviews. With only 9 months remaining before 2000 and 5,247 state- regulated insurance companies to account for, NAIC developed a pragmatic approach of focusing on the companies with the greatest potential impact on the public if they were to experience major computer problems. NAIC also worked with the states and encouraged them to implement this focused approach. In April 1999, NAIC provided the states with an enhanced version of the Financial Examiners Handbook, which provided additional guidance for performing Year 2000 readiness reviews. According to NAIC, the guidance was borrowed from audit programs developed by the Federal Financial Institutions Examination Council for federal examiners’ reviews of the Year 2000 readiness of U.S. financial institutions and a few of the state insurance departments that had been especially active in their Year 2000 oversight. NAIC also contracted for the services of a national consulting firm to develop and provide training to help state examiners better understand the review procedures and assist them in incorporating the procedures into their examinations. According to an NAIC official, this 2-day training, which was provided during the latter part of April in Atlanta, Chicago, and Denver, was attended by examiners representing almost 20 states. Compared to the timing of guidance provided by the banking and securities regulators, such Year 2000-related guidance and training would be considered late. However, we were told that this training and guidance were timely enough to be useful for some state insurance departments because they did not start their targeted Year 2000 examination process until mid-1999. In March, NAIC’s Year 2000 Industry Preparedness Task Force launched an initiative that was intended to (1) encourage states to perform on-site validation reviews and (2) determine the extent to which the states had verified the insurance industry’s Year 2000 readiness. The initiative focused on life/health and property/casualty insurance companies that NAIC had designated as nationally significant. This designation included 1,161 companies, located in 44 states and the District of Columbia, that were responsible for almost $650 billion in total premiums written during 1998. According to NAIC information, the insurance industry is relatively concentrated, with nationally significant companies representing approximately 86 percent of the premiums written for the life/health and property/casualty segments in 1998 and 27 percent of the 4,325 companies in the two insurer segments. It is also noteworthy, however, that many insurers that far exceeded NAIC’s criteria for the level of direct premiums written were not considered nationally significant because they did not meet the second criteria of being licensed in 17 states or more. These companies tended to conduct a significant amount of business on a more localized rather than national basis. We noted, for example, that 36 life/health insurers and 195 property/casualty insurers that each wrote more than $100 million in direct premiums during 1998 were not covered by NAIC’s nationally significant designation. Over the past several months, NAIC’s Year 2000 initiative focusing on nationally significant companies has involved an ongoing, interactive process with the individual state insurance departments. In April, NAIC administered a survey to all 50 states and the District of Columbia to develop preliminary baseline information on state efforts to conduct on- site examinations of companies’ Year 2000 compliance status, particularly, the compliance of nationally significant companies.