A Massachusetts state government bureau has severely criticised Massachusetts insurance regulators' handling of the reorganisation application of Electric Mutual Liability Insurance Co. (EMLICO), which brought the insurer to Bermuda in 1995.

The House Post Audit and Oversight (HPAO) bureau has concluded in an interim report to the HPAO committee of the Massachusetts legislature, that the Division of Insurance (DOI) regulatory review and approval of the reorganisation "was inappropriately and imprudently conducted''.

The report added: "The citizens, policyholders, and companies of Massachusetts are entitled to a more informed and aggressive insurance regulator.'' The bureau also weighed in on the controversial issue of how similar Bermuda's insolvency practice is to that of the US.

It reported: "Clearly, an insurer rendered insolvent under the laws of Bermuda is in an entirely different position than one rendered insolvent under the laws of Massachusetts.'' The bureau also said EMLICO should be returned to Massachusetts, if legally possible, noting the serious allegations of fraud against officers of EMLICO could best be ruled on in Massachusetts.

The report also stated: "The Bureau has serious reservations about the Commissioner's proposed settlement.'' The bureau is working on completing its final report next year, but has already listed 13 findings in the interim report, which include: The DOI does not have sufficient technical, actuarial and legal expertise to properly analyse complex and novel issues in order to meet its statutory obligation of regulation of the insurance industry; The DOI's practice of heavily relying on outside consultants often leaves the DOI's process fractured and disorganised; The DOI's process by which the EMLICO related transactions were handled was fundamentally flawed and failed to even consider a series of complicated issues directly related to the proposal; The DOI adopted a completely ad hoc approach to the issues raised by the EMLICO transaction and failed to conduct a comprehensive assessment of all of the potential effects despite numerous warning signs; The DOI never comprehensively examined the fundamental issue of whether the commissioner had the authority to allow the redomestication to Bermuda; The DOI failed to conduct an adequate independent inquiry as to the financial status of the company; The Bureau found no evidence that DOI conducted independent research to assess the potential loss exposures of EMLICO, including potential exposure for GE superfund sites; Despite the fact that insolvency of EMLICO would raise serious issues for the Massachusetts Insurers Insolvency Fund (MIIF), DOI never contacted or met with representatives of the fund until EMLICO was already in Bermuda and insolvent; The DOI accepted a document purporting to release the MIIF from claims by GE, yet failed to involve the insolvency fund in the process; The DOI did not conduct an analysis of the significant differences between Massachusetts and Bermudian insolvency law; Despite the fact that DOI's hearing June 20, 1995 was conducted under the provisions of (Massachusetts general law), no notice to any other insurer or reinsurer was given; The Commissioner took the position that she was to remain neutral and therefore excluded herself from the process, leading to the hearing officer's approval and ultimately her own approval. The Bureau found the Commissioner was not informed of the major issues raised by the transaction; DOI's working group in charge of reviewing the EMLICO reorganisation failed to recognise and explore the chronology of events that should have put a reasonably prudent regulator on notice that insolvency was a major issue confronting EMLICO.

Insurance redomestications come under increasing scrutiny: Page 46 COURTS CTS