Summary: GAO discussed two insurance companies' business practices and the events that caused them to fail. GAO found that: (1) both companies attempted growth-oriented strategies, used managing general agents (MGA) to write business on their behalf without adequately ensuring that MGA acted in their best interest, and expanded their businesses beyond their traditional lines; (2) many of the companies' reinsurers were either not financially sound or refused to pay large claims from poorly underwritten policies; (3) state examinations of insurance companies every 3 to 5 years were not adequate to prevent insolvency; (4) recovery on claims against insolvent insurers depends on the state where the insurer is domiciled, since each state is responsible for claims against the insolvent insurer and states differ in how much they pay; (5) the two failed companies had claims filed against them in over 30 states, resulting in state assessments against other insurers of over $233 million and $221 million through 1987; (6) documentation deficiencies and understated loss reserves were the most common accounting errors; (7) one failed company did not know how many policies it had issued or how much premium income it had written, paid, or collected; and (8) both companies had ineffective internal controls and experienced widespread noncompliance with laws and regulations. GAO believes that: (1) insurance regulators should require annual financial audits prepared in conformity with accepted accounting principles; and (2) experiences gained in resolving failed thrift institutions may provide valuable lessons for insurance regulation.
