The NAIC Anti-Fraud Working Group met on June 22 & 23, 2003 to discuss the broad issue of fraud, with a specific focus on what needs to be done in the insurance sector to combat it.

Pressure is continuing to come from the Federal government as well as the banking and securities sectors for both the NAIC and state DOIs to demonstrate that they actively police and aggressively prosecute fraud. As a result, it is expected that more market conduct examinations will be conducted of both carriers and agencies.

The NAIC is developing a formal working agreement and information exchange with NASAA (state security commissioners association), the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). This agreement will parallel the one that the NAIC already has in place with the OCC. The banking and securities regulators are most interested in exchanging information regarding producer fraud and market conduct examinations.

PIA received a copy of this Anti Fraud Working Group's initial draft model law on premium accounts. It was noted that NAIC now understands the difference between trust accounts and premium pass-through accounts. As such, they have not called their draft "trust accounts." However, it was made clear by comments from both NAIC & the NASAA, OCC, SEC & FBI representatives that segregation of agency premium accounts must and will happen, because insurance must be compatible with the banking and securities sectors in this regard, in accordance with the Gramm-Leach-Bliley Act (GLBA).

The representative of the FBI who attended this meeting made it abundantly clear that neither the Department of Justice, the U.S. Treasury nor the FBI view co-mingled funds as in compliance with the USA Patriot Act.  Federal agencies are willing to give the insurance sector some time to resolve how the transition to the segregation of accounts will take place, but there was no doubt left that if the current situation does not change, further action from these federal agencies may directly follow - and that such action would not need to involve the NAIC, individual DOIs or other state authorities. In short - co-mingling is on life support.

We were advised by the NAIC and other DOI people that they want PIA to continue its leadership in this area, so that the final changes that result are more doable for our members. Accordingly, PIA will review the draft proposals and prepare comments. These will be made available to the Regulatory Affairs and Business Issues committees next week.

In more general discussion during this meeting, members of the NAIC Anti Fraud working group addressed the broad issue of fraud and its impact on the insurance business. The general consensus of participants in the discussion was that fraud is on the rise. Among the observationsmade:

• An increased number of unlicensed entities are offering insurance coverage, mostly in commercial lines but also in life & health as well as in securities.
• There is a noticeable increase in the number of insurance agents getting caught up in these unauthorized schemes because they are unaware of what constitutes an unauthorized entity.
• Agents need to understand the requirements placed upon them by state law when, as producers, they place business with such an unauthorized entity.
• Agents must know what expanded legal exposure they face - from the state, their insureds and others - when they do business with an unauthorized entity.
• Defaults in agent balances are on a marked increased, more in some state than others. While the number of these is still small compared to the number of licensed insurance agents, the group felt this trend is very worrisome.
• Highly publicized cases of Wall Street fraud have made all carriers more attuned to their own balances and those of their agents. Carriers are reporting agent balance problems more often & more quickly to DOIs.