September 18, 2000
Commissioner George Nichols, III Dear Commissioner Nichols: I am greatly concerned by the U.S. General Accounting Office’s (GAO) report to me about the insurance investment scam of Martin Frankel ("INSURANCE REGULATION: Scandal Highlights Need for Strengthened Regulatory Oversight" GAO/GGD-00-198). The GAO’s report shows this travesty occurred because state insurance regulators were either too blind to see, or too unwilling to acknowledge, the scam Mr. Frankel perpetrated, openly and fearlessly, over a period of eight years. This fraud went on far too long, not because Mr. Frankel was clever and deceptive, but because he was operating in an environment where the regulators lacked the skill, authority, access to basic information, resources, and "healthy skepticism" needed to protect insurance consumers. Had state insurance regulators bothered even to check with their own state securities regulators, the more than $200 million in losses attributable to Mr. Frankel’s alleged thievery may have been avoided. Had employees of the Mississippi State Insurance Department bothered even to talk with each other, the Mississippi department would never have approved redomestication of a Frankel-controlled insurance company with assets of more than $100 million at the very moment Mississippi examiners were close to uncovering Mr. Frankel’s fraudulent activities. And, certainly Tennessee’s insurance regulators should never have delayed action, enabling Mr. Frankel to continue his fraud, after one of its examiners determined that there was a possibility that Mr. Frankel’s company "had been looted of its assets." The failure of insurance regulators in different states to talk with each other regarding Mr. Frankel’s activities also allowed this fraud to continue. When Tennessee insurance regulators finally caught on to Mr. Frankel’s fraudulent scheme and asked that insurance company assets be redeposited in a state depository, they kept their suspicions to themselves, enabling Mr. Frankel to buy another insurance company and to engage in a fraudulent reinsurance scheme. That delay produced losses of an additional $5 million in Arkansas and $45 million in Virginia. The American taxpayers, and policyholders whose losses are not covered by state guarantee funds, will pay for the failures and deficiencies of state insurance regulators. If state regulators cannot do the job insurance consumers deserve and require, new regulatory mechanisms must be put in place that will. I understand that the National Association of Insurance Commissioners (NAIC) has reviewed GAO’s report and generally agrees with it. I also understand that the NAIC has proposed both short- and long-term actions that it and the state commissioners will initiate. I am very concerned, however, that it could take up to four years for some of your most important improvements in state regulation to be implemented. Much of what you propose will require new state laws, and your recommendations for coordinating financial examinations and providing statutory accounting guidance will require development and action by NAIC committees as well as legislative implementation by the states. The potential for real harm from these serious regulatory weaknesses at the state level is even greater due to provisions of the Gramm-Leach-Bliley Act which now permit banks, insurance companies, and securities firms to engage in each other’s businesses. No longer will the fraudulent schemes of rogues like Mr. Frankel harm only insurance policyholders. Instead, investors, banks, and the American taxpayer who underwrites bank solvency, may be threatened as well. Given the seriousness of both the weaknesses in state insurance regulation and the harm those weaknesses may produce, I urge the NAIC and the states to seek immediate, "stop-gap" authority to deal with the problems at hand. I know you share my concern for the security and well-being of America’s insurance consumers. I trust you will use all resources at your disposal to make the improvements in state regulation needed to give insurance consumers appropriate protection. Sincerely,
JOHN D. DINGELL cc: The Honorable Tom Bliley, Chairman
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