Weak Oversight Allowed Executive Life to Report Inflated Bond Values
GGD-93-35: Published: Dec 9, 1992. Publicly Released: Dec 9, 1992.
- Full Report:
GAO reviewed the National Association of Insurance Commissioners' (NAIC) Securities Valuation Office (SVO), focusing on: (1) SVO development of ratings and values for securities; and (2) state regulators' compliance with valuation procedures.
GAO found that SVO: (1) valuation criteria did not take into account all impairments of a bond's value which directly affect a company's solvency; (2) did not obtain current or complete information to evaluate an insurer's bond holdings and did not provide its analysts with clear standards to assign ratings and document work; (3) used outdated financial information to develop bond ratings and understate the bonds' risk; (4) did not update its bond ratings in its valuation manual supplement to reflect changing bond values; (5) did not require insurers to detail all the provisions and conditions of each bond; (6) did not maintain adequate records and necessary supporting documentation; and (7) did not verify that insurers followed it procedures. GAO also found that: (1) state regulators could not effectively enforce use of SVO valuations, since they relied on infrequent field examinations to detect improper bond valuations; (2) to facilitate state regulators' verification of bond information, NAIC required that insurers submit detailed lists of securities holdings in a computer-readable format, and developed software to compare insurer ratings and values with those in the SVO valuation database; and (3) SVO needs to improve the determinations of statutory bond reserves and link it to current market values.