Summary: GAO assessed the insurance industry's development and use of financial guarantees, focusing on: (1) the scope and organization of the financial guarantee industry; (2) problems in the industry; and (3) current and proposed regulation of financial guarantees.
GAO found that there are two broad types of financial guarantees, including: (1) risk insurance, which protects investors by transferring risk to the guarantor; and (2) credit enhancement insurance, which improves insured instruments' credit ratings. GAO also found that: (1) it is difficult to assess the extent of the financial guarantee industry because insurance companies do not report financial guarantees separately, but rather as part of their overall surety activities; (2) despite varying estimates of the industry's size, it is clear that the industry is growing rapidly and still has great growth potential; and (3) there have been numerous media reports of substantial guarantee-related losses, including losses that may have occurred because insurance companies assumed excessive risk. In addition, GAO found that: (1) while insurance regulation has traditionally been a state responsibility, the Securities and Exchange Commission is studying the industry and has recommended that insurers disclose certain information relating to guarantee risk, revenues, and reserves; (2) a number of states have enacted or are considering enacting model legislation that the National Association of Insurance Commissioners recommended; (3) the legislation would generally require insurance firms to isolate financial guarantees from their other lines of insurance; and (4) there is considerable controversy within the industry and the states over the legislation, since many industry and state officials object to the model's approach.
