Insurance Regulation

Despite being barred from the securities industry, Martin Frankel is alleged to have anonymously acquired and controlled insurance companies in several states and to have exercised secret control over a small securities firm, using it to take custody of insurance company assets and provided false documents on investment activity. He allegedly diverted these assets to other accounts he controlled to support the scam and his lavish lifestyle. Weaknesses in insurance regulatory oversight, including inadequate analysis of security investments and failure to detect misappropriate of assets, delayed detection of the scam. GAO has noted regulatory weaknesses in regard to change of ownership approvals, route financial analyses, and periodic on-site examinations. Furthermore, the National Association of Insurance Commissioners lacks effective interstate coordination oversight of entities under holding companies and has gaps in control to prevent the migration of unscrupulous securities brokers to other sectors of the financial services industry. The Gramm-Leach-Bliley Act of 1999 underscores the importance of consultation and information-sharing among federal financial regulators and state insurance regulators. Regulators recognize the need to improve their coordination and have taken or plan to take several measures. GAO summarized this report in testimony before Congress; see: Insurance Regulation: Scandal Highlights Need for States to Strengthen Regulatory Oversight, by Richard J. Hillman, Associate Director for Financial Institutions and Market Issues, before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce. GAO/T-GGD-00-209, Sept. 19 (16 pages).

GAO noted that: (1) throughout the 1990s, Martin Frankel, with assistance from others, allegedly obtained secret control of entities in both the insurance and securities industries; (2) he is alleged to have anonymously acquired and controlled insurance companies in several states and, despite being barred from the securities industry, to have exercised secret control over a small securities firm; (3) using the name of this securities firm, Mr. Frankel allegedly took custody of insurance company assets and provided false documents on investment activity to disguise his actual purpose; (4) GAO observed some regulatory weaknesses in multiple states over several years during each of the key phases of insurance regulatory oversight--change of ownership approvals, routine financial analyses, and periodic on-site examinations; (5) specifically GAO observed inadequate measures for assessing the appropriateness of buyers of insurance companies, analyzing securities investments, evaluating the appropriateness of asset custodians, verifying the insurers' assets, and sharing information within and outside the insurance industry; (6) GAO also found some weaknesses in support services provided by the National Association of Insurance Commissioners (NAIC), a voluntary association of state insurance regulators; (7) some of these weaknesses were similar to those GAO identified in its previous reports, including weaknesses in interstate coordination, oversight of entities under holding companies, and gaps in controls to prevent migration of unscrupulous securities brokers to other sectors of the financial services industry; (8) NAIC and the Tennessee Comptroller of the Treasury have also conducted parallel reviews of the scam and disclosed similar weaknesses along with recommendations for corrective actions; (9) the GLB Act financial modernization legislation highlights the importance of consultation and information-sharing among federal regulators and state regulators when banks and insurance companies are affiliated; (10) the fraudulent activities allegedly perpetrated by Mr. Frankel further demonstrate the need for heightened coordination of oversight activities among regulators in cases where affiliated entities exist; and (11) although the legislation is recent, regulators have recognized the need to improve their coordination and have taken or plan to take a number of actions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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