Insurance Regulation:

Scandal Highlights Need for States to Strengthen Regulatory Oversight

T-GGD-00-209: Published: Sep 19, 2000. Publicly Released: Sep 19, 2000.

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Thomas J. McCool
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Pursuant to a congressional request, GAO discussed the details of Martin Frankel's insurance scandal, focusing on: (1) how the scam happened; (2) the regulatory weaknesses exposed by this scam; and (3) the crucial importance of regulatory information sharing.

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 industry; (2) Mr. Frankel is accused of secretly purchasing 7 insurance companies in several states; (3) using a securities firm as a front, Frankel then allegedly took custody of insurance company assets and provided false documents on investment activity to disguise his actual purpose; (4) instead of managing these assets in a prudent manner, he allegedly diverted them to other accounts he controlled and used them to support the ongoing scam and his lifestyle; (5) GAO observed regulatory weaknesses in multiple states over several years during key phases of insurance regulatory oversight; (6) specifically, GAO observed inadequate measures for assessing the appropriateness of buyers of insurance companies, analyzing securities investments, evaluating 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; (7) GAO also found some weaknesses in support services provided by the National Association of Insurance Commissioners; (8) information sharing failures existed between state insurance departments and other state and federal regulators, including state securities departments, as well as among state insurance departments in different states; (9) as highlighted in the Gramm-Leach-Bliley Act, the importance of regulatory information sharing is greater than ever before; and (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.

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