CSA
Summary
Read the report at California State Auditor ↗
Department of
Insurance:
It Needs to Make Improvements in
Handling Annual Assessments and
Managing Market Conduct Examinations
June 2004
2003-138
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June 15, 2004 2003-138
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee (audit committee), the Bureau of State Audits presents its audit report
concerning the Department of Insurance’s (Insurance) effectiveness in improving consumer services and reducing organized
automobile fraud activity as a result of the additional funding it received through Chapter 884, Statutes of 1999 (SB 940),
and Chapter 885, Statutes of 1999 (AB 1050). This report concludes that Insurance lacks adequate data to determine how
much it should have received since the enactment of these two bills. Using unaudited data from the Department of Motor
Vehicles, we estimate the possible loss of as much as $7 million in assessments for fiscal year 2002-03 alone. Further,
Insurance has not made sufficient efforts to follow up on most of the discrepancies in insurers’ payments that it identified in
a May 2003 analysis.
Insurance has used some of the SB 940 funds to increase its outreach and communication efforts to consumers related
to several automobile insurance programs. However, Insurance needs to improve tracking the use of SB 940 funds; for
example, the Legal Division cannot easily demonstrate that it used $9.4 million it received only for allowable activities.
Further, Insurance used some AB 1050 funds to work on cases that do not meet the criteria in state law. Finally, Insurance
does not monitor the use of AB 1050 funds by either the district attorneys or the Department of the California Highway
Patrol, as state laws and regulations require.
The audit committee also requested that we examine the functions of Insurance’s bureaus that perform market conduct
examinations. Based on our analysis, it appears unlikely that Insurance could gain increased efficiencies, including time and
cost savings for insurers, by combining the three bureaus that currently conduct market conduct examinations. However,
Insurance may be able to realize some cost savings by combining some of these bureaus’ administrative functions. Further,
because the Market Conduct Division does not fully utilize Insurance’s database, it cannot report on the time and cost
associated with its examinations or measure the efficiency of its market conduct operations.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
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CONTENTS
Summary 1
Introduction 5
Chapter 1
The Department of Insurance Does Not
Ensure That It Receives All Annual Assessments Due 13
Recommendations 19
Chapter 2
The Department of Insurance Has Spent
Some Annual Assessment Funds on
Inappropriate Activities 21
Recommendations 29
Chapter 3
Opportunities Exist for the Department of
Insurance to Improve Management of Its
Market Conduct Examinations 31
Recommendations 37
Appendix A
Glossary of Commonly Used Terms 39
Appendix B
State-to-State Comparison of Market Conduct
Examinations 41
Response to the Audit
Department of Insurance 43
California State Auditor’s Comments on the
Response From the Department of Insurance 53
SUMMARY
RESULTS IN BRIEF
Since 1989, state law has required insurers doing business
in California to pay an annual assessment of $1 for each
Audit Highlights . . . vehicle they insure. In 1999, the Legislature enacted
two statutes designed to provide additional funding to the
Our review of the Department
Department of Insurance (Insurance) for activities related to
of Insurance’s (Insurance)
automobile insurance: Chapter 884, Statutes of 1999 (SB 940)
effectiveness in improving
consumer services and adds 30 cents per insured vehicle to fund consumer operations
reducing organized and Chapter 885, Statutes of 1999 (AB 1050) adds up to 50 cents
automobile fraud activity
per insured vehicle to target the prosecution and elimination of
through the use of SB 940
organized automobile fraud activity.
and AB 1050 funds and its
market conduct examinations
found that: Because it lacks adequate data to determine how many vehicles
þ Insurance lacks adequate are insured in California, Insurance does not know how much
data to know how much it should have received since the enactment of these two
it should have received bills. Unaudited data from the Department of Motor Vehicles
from insurers since the
indicate that Insurance is collecting revenues for far less than
enactment of SB 940 and
the number of registered vehicles in the State, resulting in the
AB 1050. Unaudited data
from the Department of possible loss of as much as $7 million in assessments for fiscal
Motor Vehicles indicate year 2002–03 alone. Insurance has not made sufficient efforts to
that Insurance is collecting
verify that insurers are remitting all revenues due, even though
revenues for far less than
the number of registered it identified discrepancies in the number of insured vehicles
vehicles in the State, reported by them. Of the 349 insurers its Budget and Revenue
resulting in the possible loss
Management Bureau analyzed in May 2003, 230 failed to make
of as much as $7 million in
one or more quarterly payments between 1998 and 2002.
assessments for fiscal year
2002–03 alone. Further, 73 insurers paid annual assessments for fewer total
vehicles in 2002 than the number of private passenger vehicles
þ Insurance has not made
they reported insuring to Insurance’s Statistical Analysis Division.
sufficient efforts to verify
that insurers are remitting As of April 15, 2004, Insurance had followed up on only nine of
all revenues due, even these insurers to determine whether additional assessments are
though it identified
due. Insurance acknowledges that it lacks adequate data to verify
discrepancies in the
the accuracy of the assessments it receives from insurers and is
number of insured vehicles
reported by them. considering regulatory changes that will enable it to capture more
specific information from insurers about the number of vehicles
continued on next page. . .
they insure.
Further, during fiscal year 2001–02, Insurance changed its
revenue collection methodology for how insurers are to calculate
and remit the annual assessments before analyzing the effect
this change would have, and revenues dropped dramatically
California State Auditor Report 2003-138 11
in that fiscal year. Had it conducted sufficient analysis before
making this change, it could have timed the change to avoid all
þ Despite reducing the or part of the resulting $11 million revenue loss.
backlog of cases in its
Investigation Division
Insurance has used some SB 940 revenues to reduce the
by 51 percent, Insurance
backlog of cases in its Investigation Division by 1,580 cases,
can improve how it
reviews and assigns cases or 51 percent. Despite this, it can make improvements in how
to ensure they are not it reviews and assigns cases to avoid their being open for long
outstanding for long
periods of time. Insurance spent other SB 940 funds to increase
periods of time.
public awareness of the services it provides, and its Legal
þ Insurance cannot easily Division used $9.4 million in SB 940 funds. However, because
demonstrate that its Legal
the Legal Division’s case tracking system is not linked to the
Division used SB 940
time reporting system, Insurance cannot easily demonstrate that
funds for allowable
activities only. these expenditures were only for allowable activities.
þ Insurance could not
Insurance’s use of AB 1050 funds includes working on
demonstrate that all
AB 1050 expenditures 446 organized automobile insurance fraud cases since the
were for allowable program’s inception, which resulted in 432 arrests. Nonetheless,
activities. Specifically,
Insurance could not demonstrate that all AB 1050 expenditures
Insurance spent $22,000
were for allowable activities. We identified 20 cases that do
on cases that do not meet
the criteria in state law. not meet state law criteria for which the department used
approximately $22,000 in AB 1050 funds. Insurance does not
þ Insurance does not ensure
transfer the expenditures charged to AB 1050 funds to the regular
that it follows state
laws and regulations automobile fraud program when it identifies cases that do not
for monitoring district meet the criteria in state law. Insurance also needs to ensure that
attorneys’ and the
it follows laws and regulations for monitoring the use of AB 1050
California Highway Patrol’s
funds by district attorneys and the Department of the California
use of AB 1050 funds.
Highway Patrol (California Highway Patrol). For example,
þ Its Market Conduct
although required to do so, the California Highway Patrol does
Division does not fully
not submit annual reports on its expenditures to Insurance.
utilize Insurance’s
database. Therefore,
Insurance cannot report Based on our analysis of the department’s market conduct
on the time and cost
examination system, it appears unlikely that Insurance could
associated with its
gain increased efficiencies, including time and cost savings for
examinations or measure
the efficiency of its market insurers, by combining the three bureaus that currently perform
conduct operations. market conduct examinations. Market conduct examinations
are reviews of insurers’ compliance with California laws and
regulations, and Insurance conducts two main examinations:
claims examinations and rating and underwriting examinations.
The objectives of the two examinations are separate and
distinct, and examiners need differing expertise and experience
to conduct them. Insurance may be able to realize some cost
savings, however, by combining some of the three bureaus’
administrative functions. Finally, the Market Conduct Division
does not fully use Insurance’s database, which can collect and
track data on insurers, accounts receivable, and examinations.
22 California State Auditor Report 2003-138 California State Auditor Report 2003-138 33
Consequently, Insurance cannot report on the time and cost
associated with its examinations or measure the efficiency of its
market conduct operations.
RECOMMENDATIONS
To ensure that it receives all assessments due, Insurance should
do the following:
• Move forward in its efforts to make regulatory changes that
will result in it capturing more specific data from insurers
about the number of vehicles they insure.
• Follow up on the discrepancies identified in the Budget and
Revenue Management Bureau’s analysis.
Insurance should perform sufficient analysis of the impact of
future changes to its regulations before implementing them.
To improve its service to consumers and provide appropriate
oversight of SB 940 funds, Insurance should do the following:
• Revise its Investigation Division’s policies and procedures
to ensure that cases are not outstanding for long periods
of time. For example, Insurance should assign cases to an
investigator as soon as they are received and establish a goal
that investigators take no more than a year from the date
they receive a case to complete their investigations, barring
extenuating circumstances.
• Link its Legal Division’s case tracking system to its time
reporting system to better document the use of SB 940 funds.
To ensure that it uses AB 1050 funds appropriately, Insurance
should do the following:
• Transfer expenditures it charges to AB 1050 from its organized
automobile fraud program when it transfers cases to the
regular automobile fraud program.
• Follow state laws and regulations governing the oversight of
the district attorneys and the California Highway Patrol’s use
of AB 1050 funds.
22 California State Auditor Report 2003-138 California State Auditor Report 2003-138 33
To determine whether it could generate savings from combining
the administrative tasks of the three bureaus that perform
market conduct examinations, Insurance should prepare an
analysis and quantify possible savings.
To assess the performance of its market conduct operations,
including the average time and cost of examinations, Insurance
should develop a plan to fully use its database.
AGENCY COMMENTS
Insurance agreed with our recommendations and stated
that it has already begun implementing several of the
recommendations in our report. n
44 California State Auditor Report 2003-138 California State Auditor Report 2003-138 55
INTRODUCTION
BACKGROUND
States have the primary responsibility for regulating the
insurance industry in the United States. The Department
of Insurance (Insurance) oversees most of the insurance
industry in the State, including automobile, homeowner,
and workers’ compensation insurance.1 It regulates the rates
and practices of insurers that sold more than $102 billion in
insurance premiums in 2002. Insurance oversees the industry
by licensing agents and brokers (also known as producers).2
Additionally, it enforces state laws and regulations and
investigates and arrests those who commit insurance fraud.
An elected insurance commissioner oversees the activities and
functions of the various units within Insurance that carry out
these tasks.
ANNUAL ASSESSMENTS RECEIVED FROM AUTOMOBILE
INSURERS
Since 1989, state law has required insurers doing business in
California to pay an annual assessment for each vehicle they
insure. The insurance commissioner has set this assessment
at the maximum allowed under state law—$1 per insured
vehicle. State law requires Insurance to use these funds to
increase investigation and prosecution of fraudulent automobile
insurance claims and economic automobile theft. State
law defines economic automobile theft as automobile theft
perpetrated for financial gain, including theft of a motor vehicle
or reporting that a motor vehicle has been stolen for the purpose
of filing a false insurance claim. Figure 1 on the following
page shows Insurance’s and other entities’ use of the various
assessments it receives from automobile insurers.
1 Insurance is responsible for overseeing almost all types of insurance in California with
the exception of those regulated by the Department of Managed Health Care, such as
health maintenance organizations and some preferred provider organizations.
2 See Appendix A for definitions of commonly used terms.
44 California State Auditor Report 2003-138 California State Auditor Report 2003-138 55
FIGURE 1
Use of the Annual Assessments Mandated by Law
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Source: Insurance Code, sections 1872.8, 1872.81, and 1874.8.
* We computed the amounts distributed to the various entities using percentages presented in state law.
66
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California
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Senate Bill 940 Activities
In 1999, the Legislature enacted Chapter 884, Statutes of 1999
(SB 940), which requires insurers to pay Insurance an annual
assessment of 30 cents for each vehicle they insure to fund
certain consumer operations relating to automobile insurance.
For fiscal years 1999–2000 and 2000–01, Insurance had to use
20 cents of the assessment to improve service to consumers,
with its highest priority dedicated to eliminating the backlog
of complaints related to automobile insurance policies and
insurers, agents, and brokers selling those policies. Insurance
could use the remaining 10 cents to improve such activities as
its ability to respond to consumer complaints and information
requests through its toll-free telephone number and its ability
to offer information about automobile insurance rates to the
public. After fiscal year 2000–01, Insurance could use the entire
30-cent annual assessment to continue to fund its consumer
operations until January 1, 2007, when the law is repealed.
Two of Insurance’s bureaus that can spend SB 940 funds—the
Claims Services Bureau and the Rating and Underwriting
Services Bureau—are within its Consumer Services Division.
The Claims Services Bureau investigates consumer allegations
of improper claims handling by insurers, such as the wrongful
denial of a claim, reductions in claim payments, and delays
in processing claims. The Rating and Underwriting Services
Bureau is responsible for investigating, evaluating, and
resolving complaints such as the cancellation or nonrenewal
of insurance policies, refusal to insure, billing problems,
and agent misrepresentation and mishandling of policies.
Staff in these bureaus generally resolve complaints by
communicating through letters, e-mail, or telephone calls
with insurers, producers, and complainants. When warranted,
they will forward cases to Insurance’s Fraud, Investigation,
or Legal divisions for additional action or investigation. The
Investigation Division relies on SB 940 funds to minimize crimes
committed by businesses and individuals related to automobile
insurance. The scope of the Investigation Division’s cases can
begin with the sale of the policy and can typically include
premium theft, senior citizen abuse, and consumer abuse by
automobile insurance agents and claims adjusters.
The Consumer Communications Bureau and the External
Affairs Office use SB 940 funds to improve community outreach
related to automobile insurance. For example, the Consumer
Communications Bureau maintains a toll-free hotline to provide
66 California State Auditor Report 2003-138 California State Auditor Report 2003-138 77
consumers immediate access to information such as agents’
or brokers’ licensing status or answers to questions relating to
insurance claims and underwriting practices.
Assembly Bill 1050 Activities
Chapter 885, Statutes of 1999 (AB 1050) requires insurers doing
business in California to pay an annual assessment of up to
50 cents for each vehicle they insure.3 Insurance must use these
revenues to fund a coordinated grant program, the Organized
Automobile Fraud Activity Interdiction Program, which is targeted
at the successful prosecution and elimination of organized
automobile fraud activity (see text box). The grants
may only be awarded to district attorneys.
Organized automobile fraud activity
occurs when two or more persons conspire, State law requires the insurance commissioner to
aid and abet, or in any other manner act give funding priority to those grant applications
together to engage in economic automobile
with the potential to have the greatest impact on
theft or to violate any of several state laws
relating to automobile insurance claims. organized automobile insurance fraud activity.
Figure 1 on page 6 shows that 21 cents, or
42.5 percent, of the assessments Insurance receives
Source: Insurance Code, Section 1874.8(g).
from AB 1050 must fund these grants. Additionally,
8 cents, or 15 percent, goes to the Department of
the California Highway Patrol (California Highway
Patrol) and 21 cents, or 42.5 percent, goes to Insurance’s Fraud
Division, both of which must use these assessments to fund their
investigators who coordinate their activities with the district
attorneys. Insurers must continue to pay the 50-cent annual
assessment until January 1, 2007, when the law is repealed.
MARKET CONDUCT EXAMINATIONS
Insurance also provides consumer protection through its
market conduct examinations. The goal of market conduct
examinations is to reduce the frequency and severity of
insurance practices that are unfair to policyholders and
claimants, and to evaluate insurers’ compliance with laws and
regulations. Because no generally accepted standards exist that
stipulate how often, or even how, regulators should examine
insurers, market conduct examination policies and practices vary
widely from state to state. In California, Insurance conducts two
main examination types: claims examinations and rating and
3 The insurance commissioner set the annual assessment at 25 cents for calendar year
2000 and 50 cents for all subsequent years.
88 California State Auditor Report 2003-138 California State Auditor Report 2003-138 99
underwriting examinations. State law requires Insurance to carry
out both types of examinations for every company licensed in
the State at least once every fi ve years.
Three bureaus within Insurance’s Market Conduct
Division conduct these examinations. The Field
Proposition 103, enacted by voters in
November 1988, changed California Claims Bureau examines the claims payment
from an “open competition” system of
practices of all licensed California insurers, focusing
regulation where rates were set by insurers
without approval from the insurance on compliance with state law and California’s
commissioner to a system where any Fair Claims Settlement Practices regulations. This
rate changes must be approved by the
bureau’s examinations include tests designed to
insurance commissioner before they can
take effect. Additionally, among other identify claim payment delays and improper claim
items, Proposition 103 does the following:
denials. Two Field Rating and Underwriting bureaus
• Makes the insurance commissioner examine insurers’ rating and underwriting practices.
an elected, rather than an appointed,
They focus on insurers’ advertising and sales
offi cial.
materials, compliance with prior approval and other
• Requires automobile insurance rates to rating laws, consistency within the adopted rating
be determined primarily by four factors
processes, and overall conformity of insurers’ rating,
(in decreasing order of importance):
(a) the driver’s safety record; (b) the underwriting, policy issuance, and termination
number of miles driven annually; (c) the
procedures with state law. These bureaus also
number of years of driving experience;
and (d) any other factors the insurance conduct reviews of insurers’ compliance with
commissioner adopts by way of a Proposition 103 (see text box). Insurance’s staff
regulation that have a substantial
perform examinations at the insurers’ offi ces. State
relationship to risk of loss.
law requires insurers to pay for the examination
costs. However, all costs attributable to Proposition
Source: Insurance Code, sections 1861.01 to
1861.16; Proposition 103 text; and the Personal 103 examinations are built into an annual
Insurance Federation of California Web site.
assessment paid by each insurer.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
requested that we assess Insurance’s effectiveness in improving
consumer services and its Fraud Division activities as a result of
the additional funding it received through SB 940 and AB 1050.
In addition, the audit committee requested that we examine the
functions of Insurance’s bureaus that perform market conduct
examinations to determine the effi ciency and necessity of
having more than one examination bureau.
To obtain an understanding of the insurance industry and
Insurance’s role in regulating this industry, we reviewed
applicable state laws and regulations and Insurance’s policies
and procedures. We also consulted staff at the National
Association of Insurance Commissioners (NAIC) and three
insurance regulatory agencies: the Florida Department of
88 California State Auditor Report 2003-138 California State Auditor Report 2003-138 99
Financial Services-Office of Insurance Regulation, the New York
State Insurance Department, and the Texas Department of
Insurance. We reviewed reports issued by the NAIC and the
United States General Accounting Office as well.
To obtain an understanding of the amount of revenues it has
received and spent under SB 940 and AB 1050, we reviewed
Insurance’s accounting records. We also reviewed information
it submitted to the Office of Administrative Law to request a
change to its regulations for collecting these revenues and its
subsequent analysis of the effect of this change.
To evaluate Insurance’s progress in reducing the backlog
of cases in its Investigation Division, we compared the
number of cases outstanding before the inception of SB 940
(December 31, 1999) to those cases outstanding as of
December 31, 2003. We also analyzed Insurance’s reports
showing the number of consumer inquiries to determine the
impact of its use of SB 940 funds for education and outreach
activities. To determine whether Insurance restricted its use
of AB 1050 funds to allowable activities, we reviewed grant
agreements, payments to district attorneys, and payments to
the California Highway Patrol, as well as Insurance’s monitoring
efforts. We also selected and reviewed 25 cases to determine if
they met the criteria outlined in AB 1050.
To evaluate whether Insurance is receiving all automobile
fraud assessments due from insurers, we requested information
from Insurance on the number of insured vehicles in the State.
However, state law requires insurers to only report to Insurance
certain data on lightweight commercial vehicles that are not
part of a group of five or more vehicles owned as part of a fleet.
Thus, Insurance’s data for commercial vehicles are incomplete.
Because state law requires owners of vehicles to establish
financial responsibility at the time they renew their vehicle
registration with the Department of Motor Vehicles (DMV), we
used DMV’s unaudited data on the number of registered vehicles
to estimate the number of insured vehicles. However, DMV’s
data have certain limitations. State law allows owners to provide
evidence of financial responsibility in forms other than liability
insurance policies, such as certificates of self-insurance issued
by DMV or cash deposits. DMV data include vehicles where the
owner provided evidence other than a liability insurance policy
at the time of renewing the registration, but DMV could not
1100 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1111
identify the number of vehicles affected. The information we
present in this report is our best attempt to estimate the amount
of funds that Insurance is not collecting from insurers.
To determine whether it would be efficient or beneficial
to combine Insurance’s Field Claims and Field Rating and
Underwriting bureaus, we reviewed state laws governing each
bureau’s examinations and their policies and procedures.
We also interviewed key staff about the job functions and
qualifications Insurance requires its examiners to have. We
attempted to calculate the average time and cost of the two
market conduct examinations, but Insurance does not maintain
its data in a manner that would allow us to do so. Finally,
we contacted representatives from the three states previously
mentioned. Appendix B presents a comparison of California’s
market conduct procedures to those of these states. n
1100 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1111
Blank page inserted for reproduction purposes only.
1122 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1133
CHAPTER 1
The Department of Insurance Does
Not Ensure That It Receives All
Annual Assessments Due
CHAPTER SUMMARY
The Department of Insurance (Insurance) does not have
sufficient data to ensure that amounts insurers remit
to it for annual assessments are all amounts due under
state law. Consequently, it could be missing out on assessment
revenues, as much as $7 million for fiscal year 2002–03 alone.
Additionally, Insurance does not make sufficient efforts to oversee
collection of these assessments. Also, it has yet to follow up on
most of the discrepancies in insurers’ payments identified by
its Budget and Revenue Management Bureau in its May 2003
analyses to determine whether some insurers actually underpaid
and to collect additional amounts due. Finally, Insurance did
not adequately plan the change it made to its methodology for
how insurers are to remit payments for the annual assessments;
as a result, it experienced a decrease of almost $11 million, or
24 percent, in its assessment revenues during fiscal year 2001–02.
INSURANCE HAS NO WAY OF KNOWING IF IT RECEIVES
ALL ASSESSMENTS
Insurance lacks adequate data to verify that the amounts
insurers remit to it for the three annual automobile assessments
constitute all amounts due. Currently, it does not collect
complete data on the number of insured vehicles in the State.
State law only requires insurers to report data on family-owned
private passenger motor vehicles and lightweight commercial
vehicles used for specific purposes that are not part of a fleet
of five or more vehicles. Therefore, insurers do not report data
on many larger commercial vehicles owned as part of a fleet,
although they are responsible for paying assessments on these
vehicles. Moreover, Insurance believes that the different types
of commercial policies for fleets make it difficult for insurers
to track data on each vehicle. Lacking complete information
on the number of insured vehicles in the State means that
Insurance does not know how much it should have received
1122 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1133
since the enactment of Chapter 1119, Statutes of 1989 (regular
automobile fraud program), Chapter 884, Statutes of 1999
(SB 940), and Chapter 885, Statutes of 1999 (AB 1050).
Using the unaudited data of the Department of Motor Vehicles
(DMV), we found that Insurance collects revenues for far fewer
than the total number of registered vehicles. As Table 1 shows,
in fiscal year 2002–03 Insurance received assessments from
insurers for about 22.5 million vehicles, which represented
roughly 85 percent of the 26.4 million registered vehicles.
TABLE 1
Total Number of Registered Vehicles Versus Those for
Which the Department of Insurance Received
Annual Assessment Payments
Fiscal Year
Revenue Source 2000–01 2001–02 2002–03
Number of registered
vehicles in the State * 25,276,473 26,043,725 26,440,451
Number of vehicles for
which Insurance received
assessment payments† 26,211,486 19,022,644 22,503,737
Difference in the vehicle
counts (number) 935,013 (7,021,081) (3,936,714)
Difference in the vehicle
counts (percent) 4% (27%) (15%)
Potential lost revenues ($1,566,147) $12,637,946 $7,086,085
Source: Department of Insurance remittance reports for the period October 2000 through
January 2004 and Department of Motor Vehicles’ unaudited data on registered vehicles.
*Total number of registered vehicles in the State is as of June 30 and includes
automobiles, commercial vehicles, and motorcycles, but does not include planned
nonoperational vehicles, off-highway vehicles, or fee-exempt vehicles and trailers.
† Although we excluded trailers from the number of registered vehicles in the State, the
number of vehicles for which Insurance received assessment payments may include
trailers that require insurance, such as those owned by household goods carriers.
Additionally, for fiscal year 2000–01, the number of vehicles for which Insurance
received assessment payments has been adjusted to reflect an increase from 25 cents
to 50 cents for the Organized Automobile Fraud Interdiction Program (AB 1050) fees,
effective January 1, 2001.
The Legislature enacted the regular automobile fraud program,
SB 940, and AB 1050 to help reduce crimes related to automobile
insurance and intended Insurance to collect these assessments
on all insured vehicles. State law requires every owner of a
motor vehicle to establish financial responsibility for the vehicle
at the time he or she renews a DMV registration. However, as we
stated in the Introduction, evidence of financial responsibility
can be other than a liability insurance policy, such as a
1144 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1155
certificate of self-insurance issued by DMV or a cash deposit. If
the owners of almost four million registered vehicles in the State
for which Insurance did not receive an assessment use other
than a liability insurance policy to show financial responsibility
and do not have insurance, then Insurance received the correct
amounts. However, if any or all of these vehicles did carry
insurance for at least part of the year, then Insurance should
have received up to $1.80 for each vehicle and thus could have
missed out on up to roughly $7 million in additional revenues
for fiscal year 2002–03 alone.
INSURANCE LACKS SUFFICIENT OVERSIGHT FOR
COLLECTING ASSESSMENTS
Insurance has many procedures to ensure that the assessments it
receives from insurers are deposited and recorded correctly in its
accounting system. However, it has not made sufficient efforts
to verify that the amounts insurers remit are based on the actual
number of vehicles they insure. As of April 15, 2004, Insurance
has verified that the amounts remitted are correctly calculated
and constitute all revenues due for only nine insurers.
Insurers pay the three annual assessments on an honor system.
Insurance sends an invoice and requires each insurer to certify
under penalty of perjury that the number of insured vehicles
reported is correct. However, as discussed earlier, Insurance lacks
complete information on the total number of insured vehicles
in the State. Therefore, it cannot easily verify the accuracy
of insurers’ payments. Moreover, Insurance does not follow
A Department of up when it identifies discrepancies in the number of insured
Insurance analysis shows vehicles for which insurers remit assessments.
that, among other
discrepancies, 73 insurers In May 2003, Insurance’s Budget and Revenue Management
paid annual assessments Bureau analyzed annual assessments received from
for fewer total vehicles in 349 insurers between 1998 and 2002.4 The analyses found that
2002 than the number 230 companies failed to make one or more quarterly payments
of private passenger over the five-year period and that 73 paid annual assessments
vehicles they reported for fewer total vehicles in 2002 than the number of private
having insured. passenger vehicles they reported having insured to Insurance’s
Statistical Analysis Division.
4 The bureau selected insurers with an annual assessment in 2002 of more than $1,000
for analysis.
1144 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1155
Although its Budget and Revenue Management Bureau identified
these and other discrepancies, Insurance has yet to follow up
with most of these insurers to determine whether they actually
underpaid their assessments, and if so, to collect additional
amounts that may be due. A supervising insurance examiner in
the Field Examination Division stated that Insurance’s intent was
to have Field Examination Division teams within the Financial
Surveillance Branch use these analyses as a place to begin their
reviews of insurers.5 However, as of April 15, 2004, Insurance
has completed examinations of only nine of the 349 insurers in
the year since it did the analyses. Although in most instances
insurers either overpaid their assessments or the discrepancy
was immaterial, Insurance also discovered that two of the nine
insurers underpaid their assessments by a total of $126,000.
For 50 of the 349 insurers analyzed by the Budget and Revenue
Management Bureau, we compared their written premiums to
Our comparison of the assessments they paid and found additional discrepancies.
written premiums to For example, although the written premiums for 17 insurers
assessments paid found increased from 2001 to 2002, the amount of their annual
that the written premiums assessments decreased. In one instance, the insurer’s written
for 17 of 50 insurers premiums increased by $24 million to more than $518 million,
increased from 2001 to but its annual assessment paid to Insurance decreased by
2002, but the amount of almost $300,000 to about $1.4 million. Four insurers paid no
their annual assessments assessments in 2001 and 2002, even though they reported to
decreased. Insurance they had written premiums. We believe it would
be beneficial for Insurance to conduct a similar review of all
insurers and investigate any unusual trends to ensure that it
receives all assessments due.
Finally, in January 2004, Insurance’s Fraud Division conducted
a survey of 701 insurers to verify the methodology they used to
calculate and remit assessments during the last quarter of 2003.
Of the 66 insurers responding to the survey as of May 2004, seven
reported they had incorrectly calculated assessments in previous
quarters and either reimbursed Insurance for the underpayments
or planned to adjust future assessments for these errors. For
example, one insurer remitted $28,300 to Insurance for its
underpayment of assessments in 2002 and 2003. Furthermore,
our review found that responses from 10 insurers indicated
that the methodology they were using was inconsistent with
5 The Financial Surveillance Branch is responsible for overseeing the financial condition
of the insurance industry to ensure it can provide the benefits and protection promised
to California policyholders. As part of this branch, the Field Examination Division
is responsible for examining the business and affairs of every admitted insurer to
determine its financial condition and compliance with applicable laws.
1166 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1177
state regulations. For example, one insurer reported that it uses
a formula based on written premium to approximate a vehicle
count for its policies that did not identify the specific vehicles.
Further follow-up with insurers to clarify its methodology could,
again, give Insurance more assurance that it is collecting all
amounts due. Insurance acknowledges that it lacks adequate data
to ensure the accuracy of the assessments it receives from insurers.
It is considering regulatory changes that will enable it to capture
more specific information from insurers about the number of
vehicles they insure.
INSURANCE DID NOT ADEQUATELY PLAN FOR
A CHANGE TO ITS ASSESSMENT CALCULATION
METHODOLOGY
Concerned that its revenue collection methodology was causing
Had Insurance conducted an inconsistent cash flow to fund its operations, during fiscal
sufficient analysis, it may year 2001–02 Insurance changed the methodology for how
have been able to better insurers were to calculate and remit payments for the three
time its change and annual assessments. However, it did not conduct any analysis
thus could have avoided of the effect this change would have before implementing it. As
a drop in revenue of a result, assessment revenues dropped dramatically during that
roughly $11 million. fiscal year. Had Insurance conducted sufficient analysis, it may
have been able to better time its change and thus avoided losing
roughly $11 million, the amount by which its revenues declined
that year.
State laws require insurers doing business in California to
pay annual assessments totaling $1.80 for each vehicle they
insure. Insurance collects these amounts by sending invoices
to insurers on a quarterly basis. Before April 2002, during the
first quarter of each calendar year, Insurance required insurers
to calculate assessments due on all vehicles for which they had
a policy in force as of January 1 plus any newly insured during
the quarter. For each of the remaining quarters in the calendar
year, Insurance required insurers to calculate the assessment due
for all vehicles newly insured during those quarters. Under this
methodology, insurers paid the majority of their assessments in
the first quarter of each calendar year.
Effective April 1, 2002, Insurance notified insurers that beginning
with the first quarter of 2002, they were to calculate the
assessments due for each quarter by multiplying one-fourth of the
$1.80, or 45 cents, by the number of vehicles insured as of the first
day of each quarter plus any newly insured during the quarter.
1166 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1177
However, Insurance did not perform any analysis to fully study
the impact this change would have on its revenues. It did not
complete such an analysis until December 2002 and concluded
that implementing the new methodology would likely decrease
assessment revenues between 16.2 percent and 18.5 percent for
fiscal year 2001–02. However, as Table 2 shows, the decrease was
greater than 18.5 percent.
TABLE 2
Dollars Received From the Annual Assessments
Fiscal Years 2000–01 Through 2002–03
Fiscal Year
Assessments 2000–01 2001–02 2002–03
30 cents* $ 7,863,446 $ 5,706,793 $ 6,751,121
50 cents† 10,928,541 9,511,322 11,251,869
$1‡ 26,211,486 19,022,644 22,503,737
Annual assessment
totals $45,003,473 $34,240,759 $40,506,727
Change from prior
year (dollars) — ($10,762,714) $ 6,265,968
Change from prior
year (percent) — (24%) 18%
Source: Department of Insurance remittance reports from October 2000 through
January 2004. Because these reports do not detail amounts received for each of the
three assessments, we calculated the separate amounts Insurance should have received
for each.
* Chapter 884, Statutes of 1999 (SB 940).
† Chapter 885, Statutes of 1999 (AB 1050).
‡ Chapter 1119, Statutes of 1989, Program for the Investigation and Prosecution of
Automobile Insurance Fraud (regular automobile fraud program).
As the table shows, Insurance’s revenues from the three annual
assessments dropped by almost $11 million, or 24 percent, from
fiscal years 2000–01 to 2001–02. Revenues increased in fiscal year
2002–03 but did not return to the same levels as before the change
was made. Had Insurance analyzed the effect of the change to its
methodology before making the change, it would have been able to
avoid this large drop in revenue by postponing its implementation
date until after the first quarter of the calendar year.
1188 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1199
RECOMMENDATIONS
To ensure that it receives all assessments due, Insurance should
do the following:
• Move forward in its efforts to make regulatory changes that
will result in capturing more specific data from insurers about
the number of vehicles they insure.
• Compare the number of private passenger vehicles insurers
report on their assessment invoices to the number they report
to its Statistical Analysis Division annually and investigate
discrepancies.
• Direct its Field Examination Division to follow up on
the discrepancies identified in the Budget and Revenue
Management Bureau’s analysis.
• Periodically perform analytical reviews of insurers’ data, such
as comparing changes in written premiums to changes in the
assessments insurers remit, and investigate unusual trends.
• Direct its Fraud Division to follow up on the calculation
and remittance discrepancies identified as a result of the
January 2004 survey of insurers.
Insurance should perform sufficient analysis of the impact of
future changes to its regulations before implementing them. n
1188 California State Auditor Report 2003-138 California State Auditor Report 2003-138 1199
Blank page inserted for reproduction purposes only.
2200 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2211
CHAPTER 2
The Department of Insurance Has
Spent Some Annual Assessment Funds
on Inappropriate Activities
CHAPTER SUMMARY
Although the Department of Insurance (Insurance) has not
received all assessments that may be due, it has been
able to use the funds it has received to make some
improvements in services related to automobile insurance.
Insurance reduced the backlog of cases in its Investigation
Division with the additional funds provided by Chapter 884,
Statutes of 1999 (SB 940), but it did not reduce the amount
of time that cases remain open. Insurance also used SB 940
funds to increase consumer public awareness of automobile
insurance, particularly the low-cost automobile insurance pilot
programs. However, it may be able to improve how it tracks
the use of some of these funds. Insurance’s Legal Division
used $9.4 million in SB 940 funds, but because its case tracking
system is not linked to its time reporting system, it cannot easily
demonstrate whether it used the funds for allowable activities.
Insurance also received additional funding through Chapter 885,
Statutes of 1999 (AB 1050). This funding has allowed district
attorneys, Insurance, and the Department of the California
Highway Patrol (California Highway Patrol) to work on 446 cases
involving organized automobile insurance fraud since the
program’s inception. However, Insurance used AB 1050 funds
to work on some cases that do not meet the criteria established
in state law. Finally, Insurance does not properly oversee district
attorneys’ or the California Highway Patrol’s use of AB 1050
funds; consequently, it is unable to ensure that they are using
AB 1050 funds only for allowable activities.
2200 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2211
ALTHOUGH INSURANCE HAS MADE IMPROVEMENTS
TO CONSUMER SERVICES, IT CANNOT DEMONSTRATE
THAT IT SPENDS ALL SB 940 FUNDS ON ALLOWABLE
ACTIVITIES
Between October 2000 and January 2004, Insurance received
almost $26 million in SB 940 revenues. The additional staff
and resources provided through these revenues allowed it to
reduce the backlog of open cases in its Investigation Division by
1,580 cases, or 51 percent. Insurance can, however, improve how
it reviews and assigns these cases to ensure shorter processing
time. Additionally, Insurance used SB 940 funds to increase
its outreach and communication efforts related to several
automobile insurance programs, and in doing so, it may have
increased public awareness of the services it provides. Insurance
does need to improve tracking the use of SB 940 funds; for
example, the Legal Division cannot easily demonstrate that it
used the $9.4 million it received only for allowable activities.
Insurance Used SB 940 Funds to Reduce the Investigation
Division’s Backlog, but It Could Make Further Improvements
SB 940 required Insurance to dedicate 20 cents of its additional
revenues for fi scal years 1999–2000 and 2000–01 to improving
service to consumers, with its highest priority dedicated to
eliminating the backlog of consumer complaints. SB 940 also
directed Insurance to develop and submit a plan for the use
of these funds to the committees on insurance in both the
Assembly and Senate. In its March 2000 plan to the
committees, Insurance noted that it did not have a
backlog of complaints but rather a backlog of cases
The Investigation Division focuses on
in its Investigation Division. Insurance therefore
allegations of suspected violations of state
laws and regulations that arise when the planned to use $2.5 million of the SB 940 funds
policy is sold by agents, brokers, and insurers.
annually to pay for the costs of adding 53 positions
Examples of cases investigated include the in its Investigation Division and compliance bureaus
following: within its Legal Division to reduce this backlog and
• Anti-consumer practices. to assist with consumer-protection programs.
• Bogus insurers.
We determined that Insurance signifi cantly reduced
• Insurance company insider fraud. this backlog between December 31, 1999—just
prior to the start of the SB 940 program—and
• Premium theft.
December 31, 2003. As shown in Table 3, the total
• Senior citizen insurance abuse.
number of open cases in the Investigation Division
dropped from 3,116 to 1,536, a reduction of 1,580
Source: Department of Insurance, Investigation
cases, or 51 percent. According to the Investigation
Division.
Division’s policy and procedures manual, supervisors
are to direct and encourage their staff to average
2222 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2233
six months from the date they receive a complaint to the date
they close a major case. To be considered major, a case must be
important to Insurance or be considered a potential risk of serious
harm to the public. The Investigation Division was able to resolve
3,818 of the 5,841 cases it closed in 2000 through 2003 within
six months of the date it assigned the case.
TABLE 3
Number of Open Cases for
2000 Through 2003
2000 2001 2002 2003
Open cases as of
January 1 3,116 2,762 2,135 1,438
New cases added
during the year 1,323 1,103 916 919
Cases closed during
the year (1,677) (1,730) (1,613) (821)
Open cases as of
December 31 2,762 2,135 1,438 1,536
Source: Department of Insurance’s Investigation Division case tracking system.
However, Insurance has not reduced the length of time
some of the cases in its Investigation Division remain open.
As of December 31, 1999, 2,178 cases, about 70 percent of
all open cases, had been open more than six months. As
of December 31, 2003, 1,161 cases, 76 percent of all open
cases, had been open more than six months. Moreover,
656 cases, or 43 percent of those open cases, still were not
assigned to an investigator. The Investigation Division chief
stated that supervisors are expected to review the unassigned
cases periodically. If unassigned cases are three years old,
supervisors are expected to assign or close them, unless there is
a reason to keep the cases open longer, such as a request from
another agency. However, supervisors are to make their final
determination to assign or close any case within four years of
the alleged misconduct to allow time for Insurance to investigate
and file charges.
Insurance’s policy regarding unassigned cases is unreasonable
and does not promote consumer protection. In fact, our review
of various state laws applicable to several departments found
that state law requirements for investigating complaints range
from 15 days to one year. For example, state law requires the
2222 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2233
Contractors State License Board within the Department of
Consumer Affairs to set as a goal that an average of no more
than six months elapse from the receipt of a complaint to
the completion of an investigation and that investigations of
complaints involving complex fraud or contractual arrangements
take no more than one year. Insurance acknowledges that
prompt and effective investigations are critical to its overall law
enforcement program. Its Investigation Division chief told us
that he plans to reevaluate the current review process. Insurance
told us that it is in the process of hiring two investigators and has
requested five investigative positions to eliminate the backlog
relating to SB 940, but it believes it will take six years to eliminate
the remaining backlog of unassigned cases. Until Insurance
revises its policy and reevaluates its approach to eliminating the
backlog, suspected violations of insurance laws and regulations
by agents, brokers, and insurers will continue to remain
unresolved longer than necessary.
Insurance Used Some SB 940 Assessments to Increase
Consumer Awareness of Automobile Insurance
State law allows Insurance to use SB 940 funds to improve its
ability to offer information about automobile insurance rates
to the public. In its March 2000 plan, Insurance stated that
it would use $1.5 million in SB 940 funds each fiscal year to
establish an education and awareness program for underserved
communities and for consumers. This program includes
educating consumers in Los Angeles and San Francisco counties
about the State’s low-cost automobile insurance pilot programs
that offer annual rates as low as $300 to $450 to people who
meet criteria such as living in a household with a gross income
that does not exceed 250 percent of the federal poverty level.
Between July 2000 and March 2004, Insurance paid a public
Insurance used SB 940 relations firm roughly $2.9 million in SB 940 funds to educate
funds to educate consumers and increase their public awareness about its mission,
consumers and increase the low-cost automobile insurance pilot programs, its toll-free
public awareness of its consumer hotline, and automobile insurance requirements.
low-cost automobile Insurance’s External Affairs Division also incurred costs totaling
insurance pilot programs, $524,000 from fiscal years 2000–01 to 2002–03 relating to its
among other things. low-cost automobile insurance pilot programs.
Insurance believes that its education and awareness efforts help
to increase the number of inquiries it receives about the low-cost
automobile insurance pilot programs, the number of visits to its
Web site, and the number of consumer complaints. For example,
2244 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2255
according to Insurance’s unaudited data, consumer inquiries
about its low-cost automobile insurance pilot programs increased
from 3,619 in 2000 to a total of 61,000 between 2001 and 2003.
Insurance’s unaudited data also show a steady increase in visits to
its Web site, from almost 212,000 during fiscal year 1999–2000 to
more than 905,000 in fiscal year 2002–03.
Insurance’s Legal Division Cannot Demonstrate That It Only
Used SB 940 Funds for Allowable Activities
State law does not expressly allow Insurance’s Legal Division to use
SB 940 funds. However, according to our legal counsel, such use of
these funds would be reasonable to the extent the Legal Division’s
services support the purpose of SB 940. The Legal Division assists the
Consumer Services Division and Investigation Division by preparing
and filing pleadings in connection with disciplinary actions
against insurers and producers. Cases referred by the Investigation
Division represent 95 percent of the caseload of the Legal Division’s
compliance bureaus.
State law requires Insurance to adopt an accounting system that
will allow it to accurately identify costs by regulatory activities
and to link the costs to the fees collected for those activities. In
Insurance could not July 1994, Insurance implemented its Time Activity Reporting
easily demonstrate that System (time reporting system), which tracks expenditures by
the roughly $9.4 million program, unit, program cost account code, activity, and task.
in SB 940 funds it used The Legal Division also uses a case tracking system to monitor
to pay for expenses the status of its cases. However, unlike the tracking systems of
related to the Legal other divisions or bureaus within Insurance, the Legal Division’s
Division’s assistance to case tracking system does not link to its time reporting system.
the Investigation Division Without this link, we could not readily identify the cases
was accurate or for worked on by staff in the Legal Division’s compliance bureaus.
allowable activities. Therefore, Insurance could not easily demonstrate that the
roughly $9.4 million in SB 940 funds it used to pay for expenses
related to the Legal Division’s assistance to the Investigation
Division was accurate or for allowable activities. The Legal
Division’s assistant chief counsel stated that Insurance intends
to relate the two systems by September 2004.
INSURANCE NEEDS TO SIGNIFICANTLY IMPROVE ITS
OVERSIGHT OF AB 1050 FUNDS
Insurance has received about $39 million in AB 1050 funds since
the law went into effect; however, it cannot demonstrate that
it is using the money only for allowable activities. Some of its
2244 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2255
expenditures appear to be for unallowable activities. To ensure
appropriate use of this funding for the most benefit possible,
Insurance should better review the expenditures made by district
attorneys and the California Highway Patrol.
AB 1050 Revenues Have Funded Coordinated Efforts to Fight
Automobile Insurance Fraud
The Legislature enacted AB 1050 to fund a coordinated grant
program, the Organized Automobile Fraud Interdiction Program
(organized automobile fraud program), to target the successful
prosecution and elimination of organized automobile fraud
activity. State law requires Insurance to award three-year grants
from AB 1050 funds to between three and 10 district attorneys.
For the period of July 1, 2000, through June 30, 2003, it awarded
grants totaling almost $14.5 million to eight counties—Alameda,
Los Angeles, Riverside, San Bernardino, Sacramento, San Diego,
San Francisco, and Santa Clara. For fiscal year 2003–04, Insurance
awarded $4.5 million to nine counties—the eight counties
that previously received grants plus Fresno. District attorneys
have been able to use these grants to dedicate additional staff,
such as prosecutors, investigators, and clerical support, to the
organized automobile fraud program. Each grantee enters
into a memorandum of understanding with Insurance’s Fraud
Division and the California Highway Patrol. The agreement
establishes a chief investigator from the Fraud Division as the
regional coordinator responsible for administering and managing
investigative resources.
Insurance awarded grants based on a variety of needs outlined
by the district attorneys in their applications. In some instances,
these needs had the potential to affect not only the county
applying for the funds but also neighboring counties. For
example, in its grant application Alameda’s district attorney
outlined a problem with “chop shops” operating in Alameda
that are dismantling vehicles stolen in neighboring counties.
Los Angeles County’s district attorney noted that investigators
have traced organized accident rings to Southern California
gangs, making Los Angeles County the core of the automobile
insurance fraud problem. In their applications, the district
attorneys outlined a variety of plans to use grant funds to
address these issues.
2266 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2277
Since its inception, the AB 1050 funds have supported a joint
Since its inception, approach to investigating a number of organized automobile
the AB 1050 program fraud activity cases. Insurance reports that it has used these
has supported a joint funds to work on 446 cases, resulting in 432 arrests. Among
approach to investigating the successes reported by district attorneys was Sacramento
446 organized County’s 19 convictions, including nine defendants who
automobile fraud activity were ordered to pay restitution totaling more than $145,000.
cases, which have led to Los Angeles County’s district attorney reported using AB 1050
432 arrests. funds for 137 arrests between October 1, 2001, and June 6, 2003,
estimating overall losses from fraudulent claims for two of the
arrests alone at over $35 million.
Insurance Used Some AB 1050 Funds for Inappropriate
Activities
We reviewed case files for 25 of the 446 cases billed to AB 1050
funds since the inception of the organized automobile fraud
program and found four that involved only one suspect
working alone to commit economic automobile theft. The
organized automobile fraud program is aimed at investigating
cases involving more than one person. We also reviewed case
descriptions for all 446 cases. Based on these descriptions and
discussions with department staff, we identified an additional
16 cases that did not meet the criteria in state law. According to
Insurance’s unaudited data, it used roughly $22,000 in AB 1050
funds to work on these 20 cases.
The deputy commissioner of Insurance’s Administration and
Licensing Services Branch stated that the decision to classify an
investigation as an organized automobile fraud case, making
it eligible for AB 1050 funds, is generally made by a supervisor
when entering it into the case tracking system. Although the
organized automobile fraud program may initially investigate
them, some cases are transferred to Insurance’s Program for
Investigation and Prosecution of Automobile Insurance Fraud
(regular automobile fraud program) once investigators make the
determination that the case does not meet the criteria in state
law for AB 1050 funds. Because state law requires it to limit the
expenditures of AB 1050 funds to specific activities, Insurance’s
accounting records should be sufficient to demonstrate that
the funds are spent on allowable activities only. However, the
Fraud Division does not transfer the expenditures it has already
incurred on these cases to the regular automobile fraud program.
Until it establishes procedures to do so, it will continue to
inappropriately use AB 1050 funds.
2266 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2277
Insurance Lacks Proper Oversight of the District Attorneys’
and the California Highway Patrol’s Use of AB 1050 Funds
State regulations require district attorneys to submit audited
financial reports to Insurance annually, and Insurance’s grant
guidelines state that failure to submit the annual report shall
affect its subsequent funding decisions. Two of the eight district
attorneys receiving AB 1050 grants in the first grant award
period, fiscal years 2000–01 to 2002–03, had failed to submit one
or more reports as of April 2004, yet Insurance did not modify
or withdraw these counties’ funding. Insurance told us that it
has contacted the two counties and requested that they comply
with the reporting requirement, but its inability to review these
reports in a timely manner diminishes Insurance’s effectiveness
in overseeing AB 1050 funds.
Additionally, Insurance does not follow state regulations that
Insurance does not follow require it to perform a fiscal audit of each county at least once
state regulations that every three years. Since Insurance began disbursing funds to
require it to perform a the counties in May 2001, it has completed only two audits
fiscal audit of each county of the eight counties that received AB 1050 funds. Insurance
at least once every three stated that because no additional funding was provided for staff
years, and has completed to audit AB 1050 and other grants to district attorneys, it has
audits of only two of been unable to comply with the three-year audit requirement.
the eight counties that However, Insurance found questionable and unallowable
received AB 1050 funds. expenditures in the two audits it completed since May 2001 for
the AB 1050 funds, demonstrating the need for the audits to
guarantee that funds are spent properly.
Moreover, although state law and regulations require it to
perform an annual review of the counties’ performance under
the organized automobile fraud program grant, Insurance does
not do so. It should review the number of arrests, prosecutions,
convictions, and dollar savings resulting from the counties’
efforts. Insurance acknowledges that it should conduct these
reviews and plans to do so at the end of each fiscal year
beginning with fiscal year 2003–04.
Finally, state law requires Insurance to distribute 15 percent
of all AB 1050 assessments to the California Highway Patrol
to fund investigators who are assigned to work solely in
conjunction with district attorneys who have been awarded
organized automobile fraud program grants. State law requires
the California Highway Patrol to report annually to Insurance
its use of AB 1050 funds. This report should include information
on the salaries and benefits of the California Highway Patrol’s
investigators. State law also requires Insurance to report to
2288 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2299
the Legislature on or before January 1, 2005, the results of the
organized automobile fraud program, including the California
Highway Patrol’s use of AB 1050 funds.
However, since the inception of the organized automobile
fraud program, Insurance has neither requested nor received
annual reports from the California Highway Patrol. According
to the Fraud Division chief, he does not feel it is a large problem
because the California Highway Patrol’s investigators report
to and work in the same office as Insurance’s investigators.
Nevertheless, without the annual reports, Insurance cannot
ensure that the California Highway Patrol is accurately charging
the salaries and benefits of those investigators working on
allowable activities under AB 1050.
RECOMMENDATIONS
To improve its service to consumers and provide appropriate
oversight of SB 940 funds, Insurance should do the following:
• Revise its Investigation Division’s policies and procedures
to ensure that cases are not outstanding for long periods
of time. For example, Insurance should assign cases to an
investigator as soon as they are received and establish a goal
that investigators take no more than a year from the date
they receive a case to complete their investigations, barring
extenuating circumstances.
• Review its open cases, both assigned and unassigned, to
determine whether any should be closed.
• Eliminate the Investigation Division’s backlog of unassigned
cases by requiring staff to work a reasonable amount of
overtime or seeking additional staff.
• Link its Legal Division’s case tracking system to its time
reporting system to better document the use of SB 940 funds.
To ensure that it uses AB 1050 funds appropriately, Insurance
should do the following:
• Transfer the hours and billable expenses it charges to AB 1050
from its organized automobile fraud program when it
transfers cases to the regular automobile fraud program.
2288 California State Auditor Report 2003-138 California State Auditor Report 2003-138 2299
• Follow state laws and regulations governing fiscal and
performance audits of counties to ensure that the district
attorneys use AB 1050 funds only for allowable activities and
in the most effective and efficient manner.
• Require the California Highway Patrol to submit annual
reports of its expenditures as state law requires. n
3300 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3311
CHAPTER 3
Opportunities Exist for the
Department of Insurance to Improve
Management of Its Market Conduct
Examinations
CHAPTER SUMMARY
The Department of Insurance (Insurance) has three bureaus
within its Market Conduct Division—the Field Claims
Bureau and two Field Rating and Underwriting bureaus—that
perform two types of examinations: claims examinations and
rating and underwriting examinations. The differing nature
and scope of the two examinations leave little room to achieve
efficiencies, including time and cost savings for examined insurers,
by combining the three bureaus. The Field Claims Bureau focuses
on claim payments, whereas the two Field Rating and Underwriting
bureaus focus on rating and underwriting issues, such as conduct
related to the issuance of policies or potential discrimination against
selected insurable populations in the State. However, Insurance
may be able to gain some efficiencies and cost savings by
studying whether any of the administrative tasks shared by these
bureaus can be combined.
In addition, the Market Conduct Division does not take full
advantage of Insurance’s database and does not adequately
capture or tally the time or costs associated with its market
conduct examinations; thus, it cannot measure the efficiency of
its operations. However, linking various modules in its database
would allow it to obtain data that meets its reporting needs.
COMBINING THE MARKET CONDUCT DIVISION’S
BUREAUS WOULD NOT LIKELY RESULT IN INCREASED
EFFICIENCIES
Combining Insurance’s Field Claims and two Field Rating and
Underwriting bureaus would not greatly reduce either the
time or cost to perform market conduct examinations. Market
conduct examinations are reviews of insurers’ compliance with
insurance laws and regulations. The goal of these examinations
is to reduce the frequency and severity of insurance practices
that are unfair to policyholders and claimants. However, the
3300 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3311
objective of each of the two examinations—claims examinations
and rating and underwriting examinations—is separate and
distinct. Further, the claims examiners and the underwriting
examiners possess separate expertise and experience. Thus,
combining the three bureaus would not substantially reduce
costs to insurers, who must pay for the examinations.
The three bureaus report to the chief of the Market Conduct
Division and are located in Los Angeles, Sacramento, and
San Francisco. Both types of examiners are housed in all three
locations and receive assignments based on factors such as
their proximity to the examination site and their experience.
As shown in Table 4, the examinations conducted by the three
bureaus have different objectives, focuses, and sample selection
methods. The Field Claims Bureau examines the claim payment
practices of all licensed California insurers. The Field Rating and
Underwriting bureaus, on the other hand, focus on insurers’
rating and underwriting practices, such as their compliance with
state requirements relating to advertising and sales material,
policy issuance, and policy termination.
Because of the different objectives of the two examinations,
bureau examiners possess different expertise and experience.
Insurance typically hires Field Claims Bureau examiners who
have prior experience investigating, evaluating, negotiating, and
settling claims as claims adjusters for insurance companies. It
hires examiners for its Field Rating and Underwriting bureaus
who have prior experience as underwriters determining
acceptability, coverage, and appropriate rating plans for
insurance companies. According to Insurance, none of its
26 Field Claims Bureau examiners have underwriting experience,
and none of its 14 Field Rating and Underwriting bureaus’
Insurers would not examiners have claims experience. Therefore, combining
benefit substantially the three bureaus would require all examiners to become
if Insurance were to knowledgeable of both types of examinations. Insurance
combine the market believes that this would require it to provide substantial initial
conduct examinations. and ongoing training. Further, Insurance stated that it is already
However, Insurance may faced with the challenge of training examiners on information
be able to realize some relating to their existing areas of expertise.
savings by combining
administrative tasks such Insurers also would not benefit substantially if Insurance were to
as timekeeping, scheduling combine the examinations. Insurance companies typically have
and coordinating separate departments for claims and underwriting functions.
examinations with insurers, Therefore, combining the bureaus would not eliminate the need
and preparing reports. for Insurance’s examiners to perform the same amount of work
they currently perform in the various offices of insurers to fulfill
3322 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3333
the objectives shown in Table 4. State law requires insurers to pay
for the examination costs, and they would still face essentially
the same costs if Insurance were to combine the three bureaus.
TABLE 4
Comparison of Activities of the Field Claims Bureau and
Field Rating and Underwriting Bureaus
Field Claims Bureau Field Rating and Underwriting Bureaus
Objective of the Verify insurers’ compliance with state laws, Verify insurers’ compliance with state laws,
examinations regulations, and policies and procedures regulations, and policies and procedures relating to
relating to handling claims. customer selection, sales, marketing, and pricing.
Areas of focus Claim. Underwriting guidelines, policy forms, and policy files.
File notes. Service standards relating to insurers’ issuance of
quotes, policies, and renewals.
Correspondence.
Insurer’s disclosure of correct and legal information
Investigative material.
to potential and actual consumers on its Web site,
Documentation of damage or loss. advertising materials, quotations, and policy forms.
Payments. Insurer’s compliance with the Insurance Information
Privacy and Protection Act.
Any other documentation, such as the
insurer’s claim procedure manual, needed to Insurer’s compliance with Proposition 103, if
support the insurer’s compliance with state applicable.
requirements.
Insurer’s cancellation, non-renewal, and declination
of policies.
Basis for selecting Homeowner and private passenger auto Review of premium written by class of insurance by
classes of insurance to classes of insurance are always reviewed. insurer’s branch or home office.
be reviewed* However, review of other classes of insurance
depends on factors such as Insurance’s
priorities, current concerns, and the number
of consumer complaints.
Sample size Statistically based on the number of claims Generally, a minimum of 50 policies for each class of
within each class of insurance. insurance to be reviewed.
Examination time Varies depending on factors such as the Generally, 20 days for each class of insurance.
allocation size of the sample, complexity of the issues,
cooperation from the insurer, and the
number of examiners assigned.
Source: Department of Insurance procedures manuals and interviews with Market Conduct Division staff.
* The Department of Insurance uses the terms “classes of insurance” and “lines of insurance” interchangeably. We use the term
“classes of insurance” in this report.
Insurance acknowledges it may be able to realize some savings
by combining administrative tasks such as timekeeping,
scheduling and coordinating examinations with insurers, and
preparing reports. However, it also believes that combining the
bureaus would reduce the efficiency and effectiveness of the
Market Conduct Division as a whole. Nevertheless, it could
benefit from preparing an analysis to quantify savings that could
be generated by combining administrative tasks.
3322 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3333
California’s use of multiple bureaus to conduct the fieldwork
portion of its examinations, which represent roughly 80 percent
of its examination efforts, is not uncommon among states.
For example, the state of New York focuses its market conduct
examinations on the fair treatment of policyholders in areas
such as insurers’ operations, complaint handling, marketing,
claims, rate and form filing, and policyholder service. New York
uses three bureaus to examine insurers: its health, life, and
property bureaus. New York’s organizational structure focuses on
types of insurers rather than California’s approach of focusing
on activities. Nonetheless, New York uses multiple bureaus to
perform its examinations.
INSURANCE CANNOT REPORT ON KEY DATA NEEDED
TO EVALUATE THE EFFICIENCY OF ITS MARKET
CONDUCT EXAMINATIONS
Insurance needs to improve its procedures for tracking
Because its Market examinations, including the number of examiners’ hours and
Conduct Division does other billable costs such as travel expenses. The Joint Legislative
not take full advantage Audit Committee requested that we determine the average
of Insurance’s database, length of time it takes Insurance to perform its market conduct
Insurance cannot examinations and the associated costs. Because the Market
report on time and Conduct Division does not take full advantage of Insurance’s
cost associated with a database, Insurance cannot report on the time and cost associated
particular examination or with a particular examination or the average time and cost for all
the average time and cost market conduct examinations it performs. As a result, it cannot
for all market conduct measure the efficiency of its market conduct operations.
examinations it performs,
and as a result cannot Insurance’s database includes modules designed to capture data
measure the efficiency of on insurers licensed to operate in California, including tracking
its operations. examinations, staff hours, and how much to bill insurers.
Based on user needs, Insurance’s Information Technology
Division can interrelate various tables and modules in the
database so information can be shared. However, the Market
Conduct Division has not taken full advantage of this database’s
capabilities. For example, if examiners perform an examination
of an insurer that has multiple companies, they must enter data
for each company using separate examination identification
numbers. However, the examination tracking module can be
configured to allow examiners to create one identification
number for all companies included in a particular examination.
Additionally, although the examination tracking module
contains fields to track billable hours and costs, the Market
3344 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3355
Conduct Division does not use these fields. Instead, as Figure 2
on the following page shows, examiners must enter their hours
and other billable expenses into monthly time sheets and
billing summaries that do not track data by the examination
identification number. Without knowing all the insurer’s
companies that were part of a particular examination and the
hours and other billable expenses charged by examiners to those
companies, Insurance cannot aggregate the total hours and costs
associated with its examinations.
Measuring its operating efficiency is particularly important since
the Market Conduct Division does not appear to comply with
The Market Conduct state law, which requires Insurance to examine every admitted
Division does not appear insurer operating in California at least once every five years.
to comply with state law, According to one Field Rating and Underwriting Bureau chief,
which requires Insurance the two Field Rating and Underwriting bureaus may not review
to examine every admitted insurers with less than $10 million in annual written premium
insurer operating in due to inadequate resources. Additionally, although the Field
California at least once Claims Bureau chief believes claims examinations are occurring
every five years. as state law requires, he acknowledges that some insurers may
not be identified as requiring an examination using the current
examination tracking process.
Insurance’s database has an application that allows the Financial
Surveillance Branch to track the financial examination status
of active insurers. This application produces reports showing
pending and overdue examinations that allow staff in the
Financial Surveillance Branch to follow up on the status of
examinations so they occur within the five years as state law
requires. Even though it could take advantage of this application
to track and schedule its examinations, the Market Conduct
Division does not do so and thus lacks a way to ensure that it
complies with state law.
The Market Conduct Division chief acknowledges that the division
does not use Insurance’s database to measure the efficiency or
the time and cost of examinations, and hence the efficiency
of the division’s operations. The division chief also stated that
he plans to meet with Information Technology Division staff to
discuss modifications that will meet the Market Conduct Division’s
reporting needs. Until he does so, Insurance will continue to lack
key data relating to its market conduct examinations.
3344 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3355
FIGURE 2
Market Conduct Division’s System for Recording Hours and Billable Expenses Versus a Proposed System
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��������������������������
����������������������������
����������������������������
�������������������������������
����������������������������
��������������������������������
�������
���������������������������
���������������������������
�������
�������������������������
��������������������������� ��������������������
����������������������������� ��������������������������������
����������������������� ����������������������������
������������������������������� ����������������������
�������������������������� ��������������������������
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����������������������� ���������������������
��������������������������������
Source: Market Conduct Division policies and procedures manuals, database procedures manuals, and interviews with Insurance staff.
* Proposition 103 does not generally apply to claims examinations.
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RECOMMENDATIONS
To determine whether it could generate savings from combining
the administrative tasks of the three bureaus, Insurance should
prepare an analysis and quantify possible savings.
To ensure that it has sufficient data to assess the efficiency of the
Market Conduct Division, including an analysis of the average
length of time and cost of its examinations, the division should
work with Insurance’s Information Technology Division to make
full use of the existing database. At a minimum, Market Conduct
Division plans should include the following:
• Modifying its examination tracking module to create an
identification number that allows it to identify multiple
companies that are under a particular examination using the
existing company identification numbers.
• Eliminating the need for examiners to manually prepare
monthly time sheets and billing summaries by allowing them
to enter their hours directly into the timekeeping module.
• Linking its examination tracking, timekeeping, and accounts
receivable modules using the examination identification number.
• Using the application developed for the Financial Surveillance
Branch to track the financial examination status of active
insurers.
3366 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3377
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: June 15, 2004
Staff: Joanne Quarles, CPA, Audit Principal
Celina M. Knippling, CPA
Lindsey Johnson
Roberta Kennedy
Kris Patel
Katrina Williams
3388 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3399
APPENDIX A
Glossary of Commonly Used Terms
To provide context and definition to our report, we are
presenting this glossary of commonly used terms for the
aid of the reader.
Accident: An event causing loss that occurs unexpectedly or
without design, usually specific in time and place.
Admitted Insurer: An insurer who has obtained a certificate of
authority from the insurance commissioner that allows him or
her to transact business within the State.
Agent: A licensed individual or organization authorized to sell
and service insurance policies for an insurance company.
Automobile Insurance: A type of insurance that protects against
losses involving automobiles. Automobile policies contain a
variety of coverages that can be purchased depending upon the
needs and wants of the policyholder. Liability for bodily injury
and property damage, medical payments, uninsured motorist,
comprehensive, and collision are some of the common coverages
offered under an automobile insurance policy.
Broker: A licensed individual or organization that, on behalf of
the person being insured, sells and services insurance policies.
Claim: Notice to an insurance company that a loss has occurred
that may be covered under the terms and conditions of the
policy.
Class of Insurance: General types of insurance as defined in
sections 100 through 124 of the California Insurance Code, for
example, fire, automobile, or liability insurance.
Coverage: The scope of protection provided by an insurance
contract, which includes any of the listed benefits in an
insurance policy.
Insurance: A mechanism for shifting a risk from a person,
business, or organization to an insurance company in exchange
for payment of premiums. The insurance company commits to
being responsible for covered losses.
3388 California State Auditor Report 2003-138 California State Auditor Report 2003-138 3399
Insured: The policyholder(s) entitled to covered benefits in case
of an accident or loss.
Insurer: The insurance company that issues the insurance and
agrees to pay for losses and to provide covered benefits.
Policy: A contract that states the rights and duties of the
insurance company and the policyholders.
Premium: The price paid to the insurance company for a policy.
Producer: A term used by the insurance industry to refer to
agents and brokers.
Rating: The process of developing or applying classifications
and statistical standards to a specific risk that will be covered by
a policy to derive the appropriate premium.
Underwriting: The process of evaluating the insurance
application and independent sources to verify the information
provided and to determine the acceptability of risk.
Written Premium: The total premiums on all policies issued by
an insurance company during a specified period.
4400 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4411
APPENDIX B
State-to-State Comparison of Market
Conduct Examinations
The Joint Legislative Audit Committee asked us, to the
extent possible, to compare the average length of time
it takes the Department of Insurance (Insurance) to
perform its market conduct examinations and the average cost
associated with those examinations to large insurance regulatory
agencies in other states. Using the National Association of
Insurance Commissioner’s 2002 Insurance Department Resources
Report, we selected the states of Florida, New York, and Texas
because their rank was similar to California in the size of their
budgets, written premiums, and the number of market conduct
examinations. However, as discussed in Chapter 3, California
lacks data on the time and cost of its examinations. New York
tracks the average length of time it takes to conduct its market
conduct examinations, but not the average cost. According
to the bureau chief of Market Investigations in the Office of
Regulation, Florida’s data are confidential in accordance with
state law. Texas tracks the time and cost to conduct its market
conduct examinations, but does not generally calculate an
average cost or time to complete them. Hence, we are unable
to provide information comparing the average time and cost
of conducting market conduct examinations for California
and the other states. Table B.1 on the following page depicts
the structure of each state’s market conduct examinations and
highlights the differences from state to state.
4400 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4411
TABLE B.1
Comparison of Market Conduct Examination Procedures in Four States
Comparison Factors California Florida New York Texas
Who is responsible for market California Department of Office of Insurance Regulation New York State Insurance Texas Department of Insurance
conduct examinations?* Insurance Department
How many bureaus/divisions Three bureaus (the Field Claims One bureau (Bureau of Market Three bureaus Five divisions
perform market conduct Bureau and two Field Rating and Investigations)
examinations? Underwriting bureaus)
What types of market conduct Market conduct and some Targeted examinations Combined, market conduct, and Mostly targeted and some market
examinations are performed? targeted examinations† targeted examinations‡ conduct examinations
How are companies selected for State law requires the insurance Selection is based on a specific By state law, every insurer By state law, every insurer operating
examination? commissioner to conduct an area of market concern or an operating in the State must be in the State must be examined
examination of every insurer individual insurer’s practices examined at least once every annually for the first three years of
operating in the State at least three to five years operation and at least once every
once every five years three years thereafter
What classes of insurance are Almost all classes of insurance All classes and products Property and casualty, accident All classes of insurance
reviewed?§ except those regulated by the and health, non-profit health
Department of Managed Health services, medical expense
Care, such as health maintenance indemnity and dental expense
organizations and some preferred indemnity corporations, health
provider organizations maintenance organizations,
life insurers, public pension
funds, fraternal benefit societies,
retirement systems, charitable
annuity societies, viatical
settlement companies, and union
welfare funds
How many examinations were 207 claims market conduct 112 targeted examinations Four market conduct 124 combined examinations and
completed in 2002? examinations and 117 rating examinations, 115 targeted 33 targeted examinations
and underwriting market conduct examinations, and 43 combined
examinations examinations
How many market conduct 26 claims examiners and 14 rating Florida uses only independent 209 financial examiners and 61 financial examiners and
examiners does the state employ? and underwriting examiners contracted examiners 75 market conduct examiners five market conduct examiners
Source: National Association of Insurance Commissioners 2002 Insurance Department Resources Report and interviews with staff of California, Florida, New York, and Texas insurance
regulatory agencies.
* Market conduct examinations review agent licensing issues, complaints, types of products sold by the company or agents, agent sales practices, rating practices, claims handling,
and other market-related aspects of an insurer’s operation.
† Targeted, or limited scope, examinations are conducted when deemed necessary by a state regulator. The examination may focus only on a specific area of concern, such as a
company’s investment portfolio or reinsurance agreements, or could be a complete financial or market conduct examination.
‡ Combined examinations combine market conduct examinations with financial examinations (which investigate a company’s accounting methods, procedures, and financial
statement presentation to verify and validate what is presented in the annual statement to ascertain whether the company is in good financial standing).
§ The Department of Insurance uses the terms “classes of insurance” and “lines of insurance” interchangeably. We use the term “classes of insurance” in this report.
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Agency’s comments provided as text only.
Department of Insurance
300 Capitol Mall, Suite 1700
Sacramento, California 95814
May 28, 2004
Ms. Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
RE: BSA 2003-138: Response to Final Report
Dear Ms. Howle:
The California Department of Insurance has reviewed the Bureau of State Audit’s draft report
entitled, “Department of Insurance: It Needs to Make Improvements in Handling Annual
Assessments and Managing Market Conduct Examinations.”
The audit included an extensive review of several aspects of the Department’s operations related
to the SB 940 and AB 1050 programs, including accounting functions, revenue and expenditure
management, program cost accounting, time/activity systems, the Investigation Division, and the
1
Fraud Division. We are pleased that, for the most part, the audit found the Department is properly
accounting for and expending these dedicated resources. Additionally, we are pleased that the audit
affirms that the structure of our Market Conduct Division allows for an efficient review of the claims
handling and rating and underwriting processes that are two distinct functions of all insurance
companies.
The audit supports a conclusion that I reached early in my administration. Specifically, that the
Department lacks sufficient data upon which to determine whether or not insurance companies are
complying with the vehicle assessment laws. As noted in the audit report, my Department has taken
a number of actions to improve industry compliance and oversight of the assessment laws. We will
continue to be vigilant in our efforts to ensure greater compliance.
The automobile fraud and consumer protection programs supported by AB 1050 (Wright, Chapter
885, 1999), and SB 940 (Speier, Chapter 884, 1999), respectively, have greatly improved the
Department’s anti-fraud and law enforcement efforts. As described in the audit report the
* California State Auditor’s comments begin on page 53.
4422 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4433
Ms. Elaine M. Howle
Page Two
May 28, 2004
Department has significantly reduced the backlog of investigations and arrested hundreds of
insurance fraud suspects. I look forward to working with the Legislature to continue these important
programs beyond the scheduled sunset in January 2007.
I appreciate the thoroughness of the Bureau of State Audits report. As noted in the enclosed
overview and response, we are already acting on several of the recommendations.
We look forward to describing our specific progress in making further changes over the next
12 months.
Sincerely,
(Signed by: John Garamendi)
JOHN GARAMENDI
Insurance Commissioner
Enclosure
4444 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4455
California Department of Insurance
Response to the Bureau of State Audit Report 2003-138
Department of Insurance: It Needs to Make Improvements in Handling Annual Assessments and
Managing Market Conduct Examinations
Response Overview
Handling of Annual Assessments
One of the first issues that Commissioner Garamendi confronted upon assuming office in January 2003
was a significant reduction in vehicle assessment revenue collected by the Department. The decline in
this revenue was adversely impacting the Department’s anti-fraud efforts because revenues were not
sufficient to support the full level of spending authorized in the Governor’s Budget for fighting automobile
insurance fraud. Commissioner Garamendi instructed staff to determine the cause of the revenue
decline, and to recommend a course of action to ensure that insurers pay all assessments that are due.
As a result of that effort, it was determined that the revenue decline was caused primarily by a change
in the methodology for calculating the assessment that was implemented by the previous insurance
commissioner. Further, it was evident that the Department lacked adequate information to ascertain
whether or not insurers were paying the full amount of assessments due.
In response, Commissioner Garamendi initiated the following actions:
• In February 2003 the Field Examination Division began auditing insurers for compliance with the
vehicle assessment in conjunction with the regularly scheduled financial examination.
• In April 2003 the Department sent a bulletin to all property and casualty insurers to remind them
of the proper methodology for calculating and reporting the assessment amount.
• In May 2003 the Budget and Revenue Management Bureau conducted an analysis of all
insurers paying the $1.80 assessments and compared to previous years collections for the
$1.00 assessment. The process included reviewing the estimated and actual number of vehicles
reported and payments from the insurance companies. This data is provided to the Financial
Examination Division for use in the insurer audits.
• In January 2004 the Department sent a survey to 701 insurance companies. The survey sought to
collect information on the methodologies used by insurers to calculate the assessment, and whether
any changes to the regulations were needed to make them more specific to prohibit using surrogate
vehicle counting methods if those methods were not resulting in the collection of all assessments due.
• In April 2004 the Department held a pre-rulemaking workshop regarding the Department’s
proposed revision to the assessment regulations that would end the current practice of pro-rating
the amount of the assessment and make explicit a requirement that insurers calculate the
assessment based on a per policy, per vehicle, per year basis. Further requiring that the vehicle
count be based on a vehicle specific identification rather than a surrogate; and that a database
be maintained showing the specific vehicles for which an assessment has been paid for a given
assessment period. The Department has drafted revised regulations which it intends to file with
the Office of Administrative Law in June 2004.
The Department is confident that the revised regulations and continuation of the insurer audits will
significantly improve industry compliance with the vehicle assessment laws.
1
4444 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4455
However, the auditor’s analysis embodied in Table 1 suggests that the Department could increase fees
collected between $7 and $12.6 million dollars annually. In the Department’s view, the estimates of potential
lost revenues are too optimistic. The estimates rely on inappropriate assumptions that all registered vehicles
remain insured after registration, and that a $1.80 assessment is collected on each of those vehicles.
• The Department cannot collect fees on uninsured vehicles
The Department has anecdotal evidence that many uninsured motorists purchase insurance to register
their vehicle and then cancel the insurance for the remainder of the year. Current regulations allow
insurers to pay the assessment $.45 per quarter. If a motorist cancels their insurance within one quarter,
their insurer does not owe the Department an assessment in the other three quarters of the year. The
Department’s Statistical Analysis Division estimates the uninsured motorist rate at 6.1 percent (not
including unregistered vehicles). The auditor’s estimate of potential lost revenues assumes the Department
could collect $1.80 for 6.1 percent of the registered vehicles, when it is much more likely the Department
2
can only collect $.45. Hence, potential lost revenues could be about $2 million less in FY 2002-03
(26.4 million vehicles * .061 * $1.35).
• New vehicle sales occur throughout the year
A new vehicle sold on July 5 and insured that month will result in an assessment of $1.80 due to the
Department in that fiscal year. A new vehicle sold the following May will result in an assessment of $.45.
According to Department of Finance, 2.2 million new vehicles were sold in 2002. Assuming sales were evenly
distributed over the year, .5 million vehicles would be sold each quarter, resulting in a total assessment due
of $2.5 million. Since the BSA analysis uses the annual difference in registered vehicles, it assumes that the
Department could collect $1.80 on all 2.2 million newly sold/registered vehicles, roughly $4.0 million. The
difference, $1.5 million, is an overestimate of potential lost revenue.
The Department also disagrees with the auditor’s assertion that the Department could have avoided
3
the large drop in revenue from the regulations implemented on January 1, 2002. Shifting the date of
implementation would have merely postponed the effect of allowing insurers to pro-rate their assessment
on a quarterly basis to the following fiscal year.
Senate Bill 940 Activities
We are pleased that the audit findings recognize that the initial backlog of investigative cases that was the
impetus for the passage of SB 940 has been substantially reduced with the expenditure of SB 940 funds.
We want to emphasize our commitment to eliminating the backlog, to fulfill the intent of SB 940. Although we
had planned to fully eliminate the backlog in 2003, the prior administration directed a reduction of CDI staff
including 13 limited term investigator positions. This of course slowed down our ability to fully eliminate the
backlog. The Department remains committed to elimination of the backlog and will use available positions as
well as evaluating other efficiency measures to achieve this goal.
The audit report concludes also that we have not reduced the average length of time needed to
4
complete investigations. While we agree that the average time per case has not decreased much despite
the reduction of the number of cases pending, we do not believe that the age of case is necessarily a
good indicator of progress in reducing the backlog.
Our Investigation Division selects cases based on approved and articulated priorities, and the potential
that reported misconduct will cause future harm to insurance buying people. Nothing about that selection
process will reduce the average time frame per investigation. Instead, we have a formal goal setting and
5
a monthly supervisory review process in place for the purpose of ensuring that investigations progress
steadily and are completed appropriately. If we focused attention on the average time frames, we
would devalue our consumer protection to satisfy a rote system that does not distinguish high intensity
consumer frauds from technical licensing violations.
2
4466 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4477
Nonetheless, the Department agrees that it is appropriate to have investigations assigned for handling
as quickly as possible after receipt. However, the Investigation Division does not have enough staff to
assign all cases when they are received. The Division is in the process of filling two current vacancies.
In addition, we anticipate that we will receive five investigator positions in FY 2004-05 to specifically
address SB 940 cases. The new investigators, once trained and able to investigate cases on their own,
will contribute to reducing the unassigned cases and the amount of time cases are pending in the
division. The pending caseload has always been significantly affected by factors outside of our control,
especially new outbreaks of fraud and consumer abuse, the state of the economy, consumer and
industry awareness of CDI, effectiveness of prosecution and the gain and loss of staff and positions.
Assuming no significant change in such factors, we would expect to eliminate our pending unassigned
caseload in approximately six years. Once that is accomplished, we will be able to perform investigations
as soon as they are opened. Until that happens, our priority and control systems will continue to provide
a proper focus and impetus for the completion of investigations.
It is important to note that the pending unassigned cases are not consumer complaints awaiting
resolution. When consumer complaints are received in the Investigation Division, they are immediately
and routinely sent to the Consumer Services Division for resolution. After handling the consumer issue,
the file is referred back to the Investigation Division if a potential violation of law is noted.
Oversight of AB 1050 Funds
Assembly Bill 1050 (effective January 1, 2000) created the Organized Automobile Fraud Activity
Interdiction Program (“AB 1050 Program”). The program is administered by the Fraud Division and
provides grants and direct investigative support in the form of task forces, to District Attorneys who
apply for the AB 1050 Program funding. For the first three-year grant funding cycle, eight counties
were awarded grants under this program (Sacramento, Alameda, San Francisco, Santa Clara,
San Bernardino, Riverside, San Diego, and Los Angeles). Additionally, the Fraud Division houses and
supports the task forces for each of the participating grant counties. These task forces are comprised of
peace officers from the Fraud Division, the California Highway Patrol (CHP), local District Attorneys (DA),
and other allied agencies. For the Organized Automobile Fraud Activity Interdiction Program, the revenue
source is based upon increased collections of fifty cents ($.50) per insured vehicle. The assessment fee
generates approximately $11.1 million in revenue per year. Using this approximation, the Fraud Division
receives $4.8 million, DAs an identical $4.8 million, and the CHP receives $1.5 million.
From its inception in January 2000 through June 2003, the AB 1050 Program has investigated a
6
533 cases, 397 cases have been submitted to District Attorneys statewide resulting in 305 cases
being prosecuted, 438 arrests made, 189 convictions, and an additional 372 cases are currently under
investigation. For fiscal year 2002-03, court ordered restitution in the amount of $5,905,852 of which
$4,646,433 has been collected and returned to victims and the Insurance Fraud Fund.
Organized fraud rings/white collar crimes are recognized as the most difficult to successfully investigate
and prosecute. Conspirators often include medical doctors, chiropractors, and attorneys who use the
cover of their client relationships to provide the look of legitimacy to their activity. Given the complex
characteristics of these cases and the cohesive nature of the perpetrators involved in this type of activity,
the program has been highly successful.
The auditors report that they identified roughly $22,000 in expenditures that should not have been
charged to the AB 1050 Program because the underlying cases did not meet the required criteria. While
7
the Department of Insurance endeavors to ensure that every dollar of expenditures is charged to the
appropriate program, we want to point out that that $22,000 is less than one-tenth of one percent of all
expenditures incurred during the life of the AB 1050 Program.
3
4466 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4477
Market Conduct Examinations
In general, the Bureau of State Audits (BSA) review of the Market Conduct Division (MCD) is a fair
representation of the Division’s market conduct functions and activities. The review affirms that the
structure of the MCD is appropriate and, in fact, mirrors the insurance industry’s own organizational
structure. The MCD structure allows for the most comprehensive and efficient review of the claims
handling and rating and underwriting functions that are two distinct functions (often housed in different
locations) of all insurance companies.
The BSA audit accurately assessed the under-use of the Department’s integrated database to
electronically track the expenditures and duration for each exam, whether in-house or on-site at a
8
company location. However, the review was mistaken in the premise that MCD could not determine
the cost and time spent on each market conduct exam. Market Conduct tracks the number of hours
and travel costs it expends on the examination of each insurer, by individual examiner, on a monthly
basis. MCD bills the insurance entity accordingly, or charges the time and costs to the Proposition 103
assessment as appropriate. However, MCD does not currently use that information to calculate total
costs per exam or to do average exam cost comparisons. MCD can do this now, by compiling the data
manually. It would be a time consuming process but one that can be done if needed.
If it is possible to electronically collect the necessary data in sufficient detail, it would be useful to be
able to evaluate and compare exam duration and costs for companies of different sizes, varying lines
of insurance. Each exam is different in team make-up, exam locations, number of companies to be
reviewed, and the lines of insurance to be examined. The number and extent of the exam findings
impacts the amount of time and resources needed to resolve each examination. This data could help
MCD to evaluate efficiency and make changes as appropriate.
Regarding the general recommendation of “combining the administrative tasks of time keeping, scheduling
and coordinating examinations with insurers, and preparing reports,” MCD will review its administrative
responsibilities to identify possible areas for cost savings. MCD will certainly consider the BSA
recommendation in this area and seek to improve efficiency wherever possible, as discussed further below.
Provided below are specific comments addressing each audit report recommendation:
Chapter One
To ensure that it receives all assessments due, Insurance should do the following:
Recommendation 1:
Move forward in its efforts to make regulatory changes that will result in it capturing more specific data
from insurers about the number of vehicles they insure.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 2:
Compare the number of private passenger vehicles insurers report on their assessment invoices to the
number they report to its Statistical Analysis Division annually and investigate discrepancies.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 3:
Direct its Field Examination Division to follow up on the discrepancies identified in the Budget and
Revenue Management Bureau’s analysis.
Response to Recommendation: The Department of Insurance acknowledges that further follow-up work
is required to be performed on the discrepancies identified by the Budget and Revenue Management
Bureau. Prior to redirecting our field examiners from their financial solvency examinations to conduct
4
4488 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4499
a limited vehicle assessment review, the Budget and Revenue Management Bureau will aggressively
pursue further information and perform additional data analysis by requiring insurers to submit additional
documentation in support of the amounts remitted.”
Recommendation 4:
Periodically perform analytical reviews of insurers’ data, such as comparing changes in the insurers’
written premiums to changes in the assessments they remit, and investigative unusual trends.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 5:
Direct its Fraud Division to follow up on the calculation and remittance discrepancies identified as a
result of the January 2004 survey.
Response to Recommendation: The Department of Insurance concurs: The request for verification
issued by the Department in January 2004 was not designed solely for the purpose of identifying
discrepancies in the insurer remittance of the assessment. However, the Department is and will continue
its review of those responses and will follow-up on any actual and material discrepancies identified with
the individual insurers.
Recommendation 6:
Insurance should perform sufficient analysis of the impact of future changes to its regulations before
implementing them.
Response to Recommendation: The Department of Insurance concurs.
Chapter Two
To improve its service to consumers and provide appropriate oversight of SB 940 funds,
Insurance should do the following:
Recommendation 7:
Revise its Investigation Division’s policies and procedures to ensure that cases are not outstanding for
long periods of time. For example, Insurance should assign cases to an investigator as soon as they are
received and establish a goal that investigators take no more than a year from the date they receive the
case to complete their investigations, barring extenuating circumstances.
Response to Recommendation: The Department of Insurance cannot assign all cases as they are
received, until it has necessary additional resources. The Investigation Division (ID) has more cases than
it can assign, given the current number of authorized positions. It uses its priority system and a review
process to ensure the most egregious cases are assigned as soon as possible. ID selects and assigns
cases based on approved and articulated priorities and the potential that reported misconduct will cause
future harm to insurance buying people. ID bases the assignment of cases on the seriousness of the
cases and the optimal caseload for investigators.
The auditor apparently bases the one year recommendation on standards and statutes related to other
9
investigative agencies. The Contractors’ State Licensing Board is specifically mentioned. A one year
benchmark could lead to a process that assigns less complex investigations based on their shorter
duration, rather than on potential for serious consumer abuse. ID has a formal goal setting and monthly
supervisory review process in place for the purpose of ensuring that investigations progress steadily
and are completed properly. Our experience is that some very significant cases will take more than one
year to effectively investigate, due to high victimization, complexity and difficulty in obtaining evidence.
Consumer protection would suffer if our system emphasized the assignment of cases with short average
durations.
5
4488 California State Auditor Report 2003-138 California State Auditor Report 2003-138 4499
Recommendation 8:
Review its open cases, both assigned and unassigned, to determine whether any should be closed.
Response to Recommendation: The Department of Insurance concurs. The Division is revising its
policy on the monitoring of reports of suspected violations to provide for more frequent reviews and
to apply additional criteria consistent with the audit findings to enhance assignment or closing of
Reports of Suspected Violations (RSVs) as soon as warranted. Although the auditors recommend that
this determination be made based on age of file, it is our view that the proper criteria all relate to the
potential viability of the prospective investigation.
The revised policy is expected to issue within two weeks.
Recommendation 9: Eliminate the Investigation Division’s backlog of unassigned cases by requiring
staff to work a reasonable amount of overtime or seeking additional staff.
Response to Recommendation: The Department of Insurance concurs with this recommendation subject
to available funding and approval of additional staff.
Recommendation 10:
Link its Legal Division’s case tracking system to its time reporting system to better document the use of
SB 940 funds.
Response to Recommendation: The Department of Insurance concurs.
To ensure that it uses AB 1050 funds appropriately, Insurance should do the following:
Recommendation 11:
Transfer the hours and billable expenses it charges to AB 1050 from its Organized Automobile Fraud
Program when it transfers cases to the regular automobile fraud program.
Response to Recommendation: The Department of Insurance concurs: The Fraud Division’s time
reporting and case management data system (FIDB) has the capacity to make the necessary
adjustments between programs. The Fraud Division will continue to work closely with the Budget and
Revenue Management Bureau to ensure that those adjustments are reflected in the correct program
cost accounts.
Recommendation 12:
Follow state laws and regulations governing fiscal and performance audits of counties to ensure that the
district attorneys use AB 1050 funds only for allowable activities and in the most effective and efficient
manner.
Response to Recommendation: The Department of Insurance concurs. The Department will continue to
communicate with the California District Attorney’s Association Insurance Fraud Committee and provide
all grantees with information and assistance to meet the mandates of the program. New training courses
regarding grant management will be provided through the California District Attorney’s Annual Insurance
Fraud Conference. The Department will require timely reporting and performance measurements to
assist in evaluating the grants to maximize the return on investment. In addition, the Department has
reorganized its Internal Audits Unit to increase its efficiency in conducting financial and performance
audits of the grantees and will evaluate existing staffing to determine if more resources are needed.
6
5500 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5511
Recommendation 13:
Require the California Highway Patrol to submit annual reports of its expenditures as state law requires.
Response to Recommendation: The Department of Insurance concurs. The Department will work closely
with the California Highway Patrol to provide assistance in complying with the Annual Informational
Report regarding the expenditure of its funds pursuant to this program. The Department will also
recommend to the CHP that their personnel assigned to the program utilize the Department’s time
reporting and case management system (FIDB) to provide accountability related to personnel time and
expenditures related to this program.
Chapter Three
Recommendation 14:
To determine whether it could generate savings from combining the administrative tasks of the three
bureaus, Insurance should prepare an analysis and quantify possible savings.
Response to Recommendation: The Department of Insurance concurs. The Market Conduct Division will
conduct an analysis of the administrative tasks undertaken in the division. The overall purpose will be to
identify those tasks which can be combined or eliminated, and implement all practical improvements.
To ensure that it has sufficient data to assess the efficiency of its Market Conduct Division,
including an analysis of the average length of time and cost of its examinations, Insurance’s
Market Conduct Division should work with its Information Technology Division to make full use
of Insurance’s database. At a minimum, its plans should include the following:
Recommendation 15:
Modifying its examination tracking module to create an identification number that allows it to identify
multiple insurers that are under examination using the existing company identifications numbers.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 16:
Eliminating the need for examiners to manually prepare the monthly timesheets and billing summaries
by allowing them to enter their hours directly into the timekeeping module.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 17:
Linking its examination tracking, timekeeping, and accounts receivable modules using the examination
identification number.
Response to Recommendation: The Department of Insurance concurs.
Recommendation 18:
Utilizing the application developed for the Financial Surveillance Branch to track the financial
examination status of active insurers.
Response to Recommendation: The Department of Insurance will develop an enhanced exam tracking
system similar to the one developed for the Financial Surveillance Branch.
7
5500 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5511
Blank page inserted for reproduction purposes only.
5522 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5533
COMMENTS
California State Auditor’s Comments
on the Response From the
Department of Insurance
To provide clarity and perspective, we are commenting on
the Department of Insurance’s (Insurance) response to
our audit report. The numbers below correspond to the
numbers we have placed in the margin of Insurance’s response.
1
Insurance is mischaracterizing our audit results. Specifically,
on pages 15 through 17, we point out that Insurance has not
made sufficient efforts to verify that the amount insurers remit
in accordance with Chapter 1119, Statutes of 1989 (regular
automobile fraud program), Chapter 884, Statutes of 1999
(SB 940), and Chapter 885, Statutes of 1999 (AB 1050) are
based on the actual number of vehicles they insure. Moreover,
Insurance does not follow up when it identifies discrepancies
in the number of insured vehicles for which insurers remit
assessments. Similarly on pages 25 through 29, we point out
that Insurance could not easily demonstrate that the roughly
$9.4 million in SB 940 funds it used to pay for expenses related
to its Legal Division were accurate or for allowable activities,
it used roughly $22,000 in AB 1050 funds for cases that do
not meet the criteria in state law, and it lacks proper oversight
of district attorneys’ and the Department of the California
Highway Patrol’s use of AB 1050 funds. Thus, our report does
not conclude that Insurance is properly accounting for and
expending SB 940 and AB 1050 funds.
2
Although Insurance believes that our estimates of potential lost
assessment revenues rely on inappropriate assumptions, we
believe that our methodology is sound and based on actual data,
unlike Insurance’s assumptions. Insurance’s belief that many
uninsured motorists purchase insurance and then cancel the
insurance for the remainder of the year is, as they state in their
response, based on anecdotal evidence only, and is not supported
by any studies or actual data. Further, Insurance’s assumptions
related to new vehicles are similarly flawed. Specifically, Insurance
is incorrect in stating that we used the year to year difference
in registered vehicles. To calculate the potential lost revenue, as
shown in Table 1 on page 14, we used the Department of Motor
Vehicles’ (DMV) unaudited data on actual total registered vehicles
5522 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5533
in the State. Insurance’s statement that we should discount
the potential lost revenues for new vehicle sales assumes that
no vehicles are entering California from other states and that
purchasers of new vehicles did not own any vehicles prior to
their purchases. Under Insurance’s assumption, DMV’s data on
the number of registered vehicles would have to be steady or
decline from month to month. However, as Table 1 shows, the
total number of registered vehicles has increased every fiscal year
between fiscal years 2000–01 through 2002–03.
3
Insurance is mistaken. As we discuss on pages 17 and 18,
under the old methodology, insurers paid the majority of their
assessments in the first quarter of each calendar year. Had
Insurance waited to implement the change to its methodology
until after the first quarter of 2002, it would have avoided the
large reduction of roughly $11 million, or 24 percent, for fiscal
year 2001–02. Further, in its December 2002 analysis, Insurance
concluded that implementing the new methodology would
likely decrease assessment revenues between 16.2 percent and
18.5 percent for fiscal year 2001–02.
4
We agree that the age of a case is not necessarily a good indicator
of its progress in reducing the backlog, but we remain concerned
with the large number of open and unassigned cases that are
in Insurance’s backlog. As we state on page 23, Insurance has
656, or 43 percent of its open cases, that have been open and
unassigned for more than six months. Leaving these cases open
and unassigned, especially in light of the fact that Insurance was
able to close the majority of the cases it closed between 2000 and
2003 within six months of the date the case was assigned to an
investigator, means that suspected violations of insurance laws
and regulations by agents, brokers, and insurers are continuing to
remain unresolved longer than necessary.
5
Insurance is overstating its formal goal setting and monthly
supervisory reviews. Specifically, as we discuss on page 23,
Insurance’s policy of setting goals for reviewing unassigned
cases within three or four years is unreasonable and does not
promote consumer protection. Further, its monthly supervisory
review processes apply only to assigned cases and do not affect
the open and unassigned cases, which can remain outstanding
for long periods of time. Without a timely review of these
unassigned cases, suspected violations of insurance laws and
regulations by agents, brokers, and insurers will continue to
remain unresolved longer than necessary.
5544 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5555
6
Insurance’s figures are inconsistent with the data it provided
to us. Specifically, as we report on page 27, Insurance has used
AB 1050 funds to work on 446 cases from January 2000 through
December 2003, which have led to 432 arrests.
7
Insurance is correct that the $22,000 spent in AB 1050 funds
on cases that do not meet the criteria in state law is not a large
percentage of all funds expended for this program. However,
as we discuss on page 8, state law is clear on how Insurance
should spend these funds. Therefore, any noncompliance,
whether material or not, is relevant to Insurance’s
administration of these funds.
8
Insurance is incorrect that our premise is that the Market Conduct
Division is unable to determine the cost and time spent on
each market conduct examination. As we discuss on pages 34 to
36, Insurance’s database includes modules designed to capture
data such as examination time and cost. However, our point
is that Insurance’s Market Conduct Division needs to improve
its management of its market conduct examination operations
because it does not fully use this database and does not currently
use information from other sources to calculate the total costs
per exam or to do average examination cost comparisons—a
conclusion Insurance agrees with in its response.
9
We believe our recommendation on page 29 is reasonable.
Insurance should assign cases to an investigator as soon as
they are received and establish a goal that investigators take no
more than a year from the date they receive a case to complete
their investigations, barring extenuating circumstances. We
acknowledge that in some instances, cases can take more than
one year to investigate. However, we found it significant that,
as we discuss on page 23, Insurance was able to resolve the
majority—3,818 out of 5,841 cases closed in 2000 through 2003—
within six months of the date it assigned the case.
5544 California State Auditor Report 2003-138 California State Auditor Report 2003-138 5555
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
5566 California State Auditor Report 2003-138