Insurance Regulation:

State Handling of Financially Troubled Property/Casualty Insurers

GGD-91-92: Published: May 21, 1991. Publicly Released: May 22, 1991.

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Pursuant to a congressional request, GAO examined how states dealt with financially troubled property and casualty insurers.

GAO found that: (1) state regulators used informal actions, formal regulatory actions, rehabilitation, or liquidation to correct financially troubled property and casualty insurers; (2) in 71 percent of failed insurer cases, state insurance regulators delayed regulatory or rehabilitative action until or after insolvency; (3) 56 percent of insurers placed in liquidation were insolvent for 7 months prior to liquidation; (4) state delays in taking formal actions allowed companies to continue to operate, and led to delayed claim payments and increased costs to policy holders; and (5) the reasons for delays included reliance on untimely or unverified data, lack of legal or regulatory standards for identifying troubled insurers, vague statutory definitions of insolvency, and regulatory reluctance to take quick action. GAO believes that such measures as more frequent submission of independently certified financial information, a standard for determining whether an insurer is financially troubled, and a legal definition of insolvency would represent a step forward in helping to protect policyholders and state guaranty funds.

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