CSA
Summary
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REPORT BY THE STATE AUDITOR
OF CALIFORNIA
THE DEPARTMENT OF INSURANCE CANNOT COMPLETELY
IDENTIFY ITS COSTS FOR IMPLEMENTING PROPOSITION 103
AND PERFORMING EXAMINATIONS
93030 APRIL 1994
The Department of Insurance Cannot Completely
Identify Its Costs for Implementing Proposition 103
and Performing Examinations
93030, April 1994
California State Auditor
Bureau of State Audits
Table of Contents
Page
Summary S-1
Introduction 1
Chapters
1 The Fees the Department Assesses for Proposition 103
Are Not Based on Actual Costs 7
2 The Department Does Not Separately
Identify All Expenditures Incurred
for Conducting Examinations 15
3 The Department's Allocation of Overhead
Costs Is Not Always the Most Appropriate or Consistent 19
4 The Department Has Collected More
Revenues Than It Has Needed
To Cover Its Operating Costs 23
5 The Department Has Begun Revising
Its Accounting System, But Additional
Changes Are Needed 27
6 Conclusions and Recommendations 31
Appendix Department of Insurance Fees Addressed
in Chapter 1247, Statutes of 1993 35
Response Department of Insurance 37
to the
Audit
Summary
Results in Brief The fees that the Department of Insurance (department) collects from
insurance companies and brokers doing business in the State fund the
operating activities of the department. The Insurance Code generally
anticipates that the fees the department collects will approximate the
costs that the department incurs to regulate the insurance industry and
that the fees established to cover the costs of specific regulatory
activities will approximate the amount of those related costs. The
purpose of this audit was to determine whether the fees that the
department levies under Section 12979 of the Insurance Code are based
on the actual costs to the department for enforcing Proposition 103, a
voters' initiative that passed in November 1988. In addition, the audit
was to determine whether the department's charges for the
examinations of insurers authorized under Section 736 of the Insurance
Code are based on the actual costs to the department for conducting
these examinations. Finally, the audit was to report on the actual costs
for Proposition 103 and examination activities and to report on whether
the costs exceed the revenues from the fees or whether the revenues
exceed the costs. Our audit examined this information for fiscal year
1992-93.
During our review, we found the following conditions:
Although it can separately identify revenues from fees collected to
cover the costs of implementing Proposition 103, the department
cannot separately identify those costs. The department did not
design its accounting system to distinguish the expenditures for
Proposition 103 from the costs for performing other regulatory
activities. In addition to this problem with the department's design
of its accounting system, the department could not provide a
reliable alternative methodology for identifying Proposition 103
costs. The department was not able to provide documentation to
support many of the costs it stated were incurred for
Proposition 103 activities.
The department had similar problems documenting costs for its
examinations of insurance companies. Although the department
separately identifies some of its costs for examinations, it does not
have a comprehensive method for identifying all costs.
S-1
Because it cannot identify all costs for Proposition 103 or
examinations, the department does not have an effective way of
determining whether Proposition 103 fees or examination fees
should be increased or decreased to match the costs. As a result,
the department may be overcharging or undercharging insurance
companies for Proposition 103 and for examinations.
The department does not always use the most appropriate basis for
allocating indirect, or overhead, costs to Proposition 103 or
examinations. For example, the department allocated indirect costs
on the basis of budgeted employee positions, rather than on actual
cost data. In addition, the department treated certain expenditures
as indirect costs when they should have been charged directly to
particular programs, including Proposition 103.
The department has collected more in revenues for operations than
it has needed to cover operating costs. It has had sufficient
resources not only to pay for the costs of the department's
regulatory activities, but also to lend over $20 million to other
funds in one fiscal year. Most, but not all, of these loans have been
repaid. In addition, the department has replaced the State's
General Fund as the source of funding for the Health Insurance
Counseling and Advocacy Program as required by the State's
budget acts. In fiscal year 1992-93 alone, the department's funding
for this program was $2.9 million. Further, the department
transferred $10 million to the State's General Fund, as the budget
act for fiscal year 1992-93 required.
For fiscal year 1993-94, the department is revising its accounting
system to identify expenditures related to specific fees. However,
to meet its objective, the department must develop an effective way
to document resources spent on each type of activity.
Agency The Department of Insurance generally agrees with the information and
Comments conclusions in our report, and it has indicated that it has already begun
implementing changes to its accounting system to correct the problems
we reported with its cost allocation, cost accounting, billing, and
measurement of workload processes. The department plans to have a
legal review of the appropriate source of funding for the Health
Insurance Counseling and Advisory Program.
S-2
Introduction
The primary responsibility of the Department of Insurance
(department) is to protect insurance policyholders in the State of
California. To meet this responsibility, the department administers
programs to protect policyholders, beneficiaries, and the public from
the insolvency of insurers and to prevent unlawful or unfair practices
by insurers. The department also protects the general public and
policyholders from discriminatory, unlawful, or fraudulent practices
and incompetence relating to the sale of insurance. The department's
activities include conducting examinations of insurance companies and
brokers to ensure that their operations comply with the requirements of
the Insurance Code. In addition, Proposition 103, a voters' initiative
passed in the elections of November 1988, has required the department
to develop regulations and implement rollbacks of property and
casualty insurance rates. The proposition also requires the department
to review and approve changes in property and casualty insurance rates
before they go into effect.
The department's regulatory activities are funded almost exclusively
from fees assessed against the entities the department is regulating, the
insurers and brokers operating in the State. The department assesses
various types of fees, which it calculates in different ways, including
the following:
fees established in the Insurance Code for the licensing and
certification of insurance companies or brokers, with the amount of
the fee varying, depending on the type of license or certification
issued;
direct charges to cover the hourly and travel costs of staff engaged
in financial analysis, field, and other examinations that the
department conducts on insurance companies;
fees for closed consumer complaint examinations that vary in
amount, depending on the complexity of the issues involved; and
fees based on the amount of insurance premiums issued to recover
the costs the department incurs to meet its regulatory obligations
under Proposition 103.
During fiscal year 1992-93, the department received no funding from
the State's General Fund. The table on page 3 provides a summary of
1
the department's operating expenditures and receipts for the fiscal year
ended June 30, 1993, based on the department's accounting records.
During fiscal year 1992-93, the department had additional receipts and
expenditures relating to prior fiscal years that are not included in the
table. For example, the department's total expenditures were
$86 million, including approximately $12 million attributable to prior
years.1 During the last five fiscal years, the department's operating
expenditures have increased significantly, from $35.9 million during
fiscal year 1988-89 to $86 million.
The commissioner is currently the defendant in lawsuits related to the
subject of this report. For example, National Fire Insurance Company
of Hartford, et al., v. John Garamendi questions the constitutionality of
the fees for Proposition 103 activities. Alternatively, should the fees
be found constitutional, the lawsuit charges that the fees are invalid
because they are not the type of fee required by Proposition 103 or
because they have been improperly put in place. National Association
of Independent Insurers, et al., v. John Garamendi similarly challenges
the commissioner's authority to charge for the investigation of
consumers' complaints against insurance companies and claims that the
fees have not been established through the required regulatory
procedures.
1 The table does not include amounts that were received and expended during fiscal
year 1992-93 but were related to prior year activity because the department could not
provide the detailed information that we needed for the table. The detail was not
available for prior years because the department's application and reversal of
accruals for those years was done as a single amount that applied to all operating
expenditures, not to detailed categories of expenditures.
2
Department of Insurance Operating Receipts
and Expenditures for Fiscal Year 1992-93,
As of June 30, 1993
Receipts:
Insurance company license fees
and penalties $20,587,736
Statistical analysis 8,543
Field rating and underwriting examinations 2,039,270
Conservation and liquidation examinations 755,345
Market conduct examinations 919,037
Field examinations 5,938,439
Actuary examinations 275,122
Financial analysis examinations 1,402,626
Consumer complaint examinations 3,636,053
Proposition 103 fees 23,379,562
Auto fraud assessments 5,805,837
Property fraud assessments 1,318,915
Worker's compensation fraud
assessments 3,498,748
Income from surplus money investments 829,230
All other receipts 5,206,851
Total $75,601,314
Expenditures:
Salaries, wages, and benefits $43,258,324
General expense 1,572,972
Communications 2,559,201
Travel 1,817,342
Facilities operations 5,901,903
Interdepartmental 4,937,797
Departmental services 3,974,419
Consolidated data center 2,102,329
Central administration 2,648,234
Equipment 2,328,203
All other expenditures 3,094,396
Total $74,195,120
3
Scope and The purpose of this audit was to determine if the fees that the
department levies under Section 12979 of the Insurance Code are based
Methodology
on the actual costs to the department for enforcing Proposition 103. In
addition, the audit was conducted to determine if the daily rates the
department charges for the examination of insurers and any other rate,
charge, or fee levied under Section 736 of the Insurance Code are based
on the actual costs to the department for conducting these
examinations. Finally, the audit was conducted to report on the actual
costs for each of these activities and report on whether the costs
exceeded the revenues from the fees or whether the revenues exceeded
the costs. The Appendix lists the major fees referred to in the
legislation mandating this audit, describes the types of activities each
fee funds, and describes how the department calculates invoices for
each fee.
In conducting this audit, we reviewed laws, regulations, and
departmental policies relating to Proposition 103 and to the fees
authorized under Section 736 of the Insurance Code. We interviewed
personnel in the department's Fiscal Services Bureau, Technology
Division, Consumer Services Division, Financial Surveillance Branch,
Rate Regulation Division, Legal Division, Press and Publications
Office, Public Advisor's Office, and Administrative Law Bureau.
To determine the nature and completeness of the information from the
department's accounting records, we reviewed the following for fiscal
years 1991-92 and 1992-93:
selected invoices, receipts, and related documentation;
recording of fees for Proposition 103 activities and fees for each of
the types of examinations of insurance companies conducted and
authorized under Section 730, et seq., of the Insurance Code; and
selected charges for personal services and operating expenditures
and the recording of these expenditures in the department's
accounts.
Further, we evaluated the department's method for allocating indirect
costs by obtaining the list of all program cost accounts used in the
department's accounting system in fiscal year 1992-93. Through
interviews with department staff and reviews of accounting reports, we
determined which accounts accumulated expenditures directly related
to Proposition 103 and to the examination of insurance companies and
which accounts accumulated indirect costs that were later allocated to
the direct accounts. Using this information, we assessed the adequacy
4
of the department's accounting and cost allocation system and
determined whether information necessary for our audit was available.
Because the department did not record costs for each regulatory activity
and because of other reasons described in Chapter 1 of this report, we
cannot provide a documented, detailed analysis of the revenues and
expenditures related to each of the activities. We cannot determine
with precision how closely revenues matched related expenditures for
each of the activities. Instead, we compared the revenues and
expenditures for the fund as a whole for fiscal years 1988-89 through
1992-93. We also summarized and analyzed financial data reported in
the department's financial reports and the State's annual financial
reports issued by the State Controller's Office.
In addition, because the department's accounting system does not
disclose which expenditures are related to Proposition 103 activities
and which are related to examination activities, we requested from the
department a detailed description of these expenditures for fiscal years
1991-92 and 1992-93. We also asked the department to explain the
bases for the department's assertion that these expenditures were
legitimately related to the fees. Specifically, we asked the department
to identify the departmental units that were funded, either in whole or
in part, from each of the fees; the percentage of each unit's funding that
was from each of the fees; and the nature of the documentation the
department could provide to substantiate its responses to our request.
We also requested written statements from administrators to confirm
our understanding of information we obtained during interviews with
them.
Using this information, we compiled expenditure data associated with
the fees and compared expenditures to the related revenues reported in
the accounting records. The department's information included actual
expenditures and encumbrances, which are amounts committed for
goods or services to be received after the end of the fiscal year.
Throughout the report, when we refer to expenditures, the amounts
include both expenditures and encumbrances. We selected detailed
data on Proposition 103 fees and on one of the fees, field examination
fees, authorized under Section 736 of the Insurance Code for our
analysis. To assess the accuracy and validity of the department's
information, we interviewed department staff in each of the units that
the department told us incurred direct costs related to Proposition 103
and field examinations. We also determined the nature of the
supporting documentation for the assertions about costs incurred, and,
5
where possible, tested the validity of the supporting documentation.
We noted the reasons for the potentially significant inaccuracies in
these data.
In addition to using interview information, we examined significant
expenditures that the department included in indirect, or overhead,
costs that were allocated to Proposition 103 and the field examinations.
We assessed whether these costs should have been included in
Proposition 103 and field examination costs.
Finally, we interviewed staff members in the Fiscal Services Bureau
who have begun revising the department's accounting system to allow
the capture of expenditures for specific fee-related activities. We also
reviewed documents describing the nature and purpose of these
revisions.
6
Chapter 1 The Fees the Department Assesses for
Proposition 103 Are Not Based on Actual Costs
Chapter The Insurance Code limits the amount of fees the Department of
Summary Insurance (department) should charge to insurance companies under
Proposition 103 to the approximate cost the department incurs for its
regulatory activities mandated by the proposition. However, the
department is unable to separately identify its expenditures related to
Proposition 103. Neither its accounting system nor an alternative
method for linking costs with the revenues from fees reliably identifies
these costs. Because it cannot accurately identify the costs, the
department cannot determine whether Proposition 103 fees should be
increased or decreased to match the costs of regulatory activities. The
department's inability to identify whether Proposition 103 fees should
be increased or decreased could result in inaccurate charges to
individual companies.
Background The passage of Proposition 103 in the November 1988 elections
resulted in significant new responsibilities, growth, and costs for the
department. The department established several new organizational
units and incurred additional costs in established units to meet these
new responsibilities, which include monitoring and reviewing rates that
automobile and property and casualty insurance companies charge in
California. The department also anticipated assuming the
responsibility for conducting rate application hearings and enforcement
proceedings.
In establishing fees to reimburse the department for its costs of
implementing Proposition 103, the Insurance Code associates the
amount of allowable fees with the costs of performing the regulatory
activities. Specifically, Section 12979 states that the Insurance
Commissioner (commissioner) shall establish a schedule of filing fees
to be paid by insurers to cover any administrative or operational costs
arising from the provisions of the code relating to Proposition 103.
The commissioner has established this schedule in the California Code
of Regulations. Revenues from Proposition 103 fees for fiscal year
1992-93 totaled almost $23 million. The department used the fee
schedule in the California Code of Regulations to assess
Proposition 103 fees based on the amount of applicable premiums
written by an insurance company during the preceding calendar year.
7
Chapter 1247 of the Statutes of 1993 directed us to determine whether
the fees the department assesses for Proposition 103 actually
approximate the department's related costs. Specifically, we were
required to determine if the fees that the department levies under
Section 12979 of the Insurance Code are based on the actual costs to
the department for enforcing Proposition 103. In addition, the audit
was to report on the actual costs for Proposition 103 regulatory
activities and report on whether the costs exceed the revenues from the
fees or whether the revenues exceed the costs.
To be able to meet its obligations under the Insurance Code, the
department needs an accounting system that correlates the total
expenditures of a particular regulatory activity with the total fees
collected to support that activity. To be able to assess the appropriate
amount of fees, the department must know what its total costs are for
that regulatory activity. However, the department did not design its
accounting system to track costs in this way.
The Department's To accurately identify costs by regulatory activity and to link the costs
Accounting to fees collected for specific regulatory activities, the department needs
a more effective accounting system. A well-designed accounting
System
system uses accounts, called "cost centers," to summarize costs at the
Does Not Link
level and in the format needed to help managers of an organization
Costs to Fees
make decisions and control costs. Cost centers can be established in a
variety of ways, depending on the needs of the organization. For
example, a management team may need cost information summarized
by organizational units or by a product.
The department's managers need cost information summarized as it
relates to the fees that the department charges for particular regulatory
activities. This information would allow management to make
appropriate decisions about the amount of fees to charge. As a
hypothetical example, if the department collected $20 million from its
Proposition 103 fees, but incurred $23 million in costs to meet its
obligations under Proposition 103, the department would have to
increase the fees it collects by $3 million to ensure that all necessary
costs were covered.
The department's accounting system does not provide the department
with the information necessary to make important decisions about how
much to charge insurance companies to cover the costs of
Proposition 103 activities. Specifically, the department based its cost
centers on types of costs, such as salaries and wages, benefits, rent, and
telephone costs, or on organizational units, rather than on the nature of
the activity performed. The system could capture unit costs in total
8
and by type, but it does not identify costs of activities as they relate to
the fees assessed to reimburse the costs.
The department's approach to identifying costs would work only if each
organizational unit performed an activity that related to one specific
fee. However, some units perform a variety of activities. For
example, the Underwriting Services Bureau, which had $5.5 million in
expenditures during fiscal year 1992-93, conducted work for both
Proposition 103 activities and for consumer complaint activities, which
are funded by two separate fees. Although the department provided us
with an estimate of the costs associated with each of the two activities,
the accounting system itself made no such distinction. Similar
conditions existed for several other organizational units, including the
Rating Services Bureau, which had $1.7 million in expenditures that
the department told us was split between Proposition 103 and consumer
complaint activities. In each case, the accounting system made no
distinction between the amount of expenditures for each kind of
activity. As a result, the accounting system failed to provide the
department with critical information for determining whether the fees
collected for each activity approximated the department's costs for each
activity.
The Department's Adding to the department's failure to establish an accounting system to
Alternative link costs with fees collected is the department's lack of any
documented alternative system to link them. We asked the department
Methodology for
to provide us with an alternative methodology it considered reliable for
Linking Costs to
linking costs for Proposition 103 to fees collected. The information in
Fees Collected
the alternative methodology that the department provided identifies the
Is Unreliable departmental units that were funded, either in whole or in part, from
Proposition 103 fees; the percentage of each unit's funding that was
from each of the fees; and the nature of the documentation the
department could provide to substantiate its responses to our request.
When we used the department's methodology to calculate the costs
related to Proposition 103 and then compared the total expenditures to
revenues from Proposition 103 fees, we found that the revenues and
expenditures were almost equal during fiscal year 1992-93. However,
we question the reliability of these data for several reasons. The
department could not provide documentation to support the validity of
much of the information in the methodology. In addition, at different
times, the department provided different descriptions of how to
9
determine costs related to Proposition 103. Finally, the department
included some costs that we do not believe were legitimate
Proposition 103 costs.
The Department Cannot Document the
Reliability of Its Alternative Methodology
The department often could not provide documentation supporting its
assertions in its methodology that either all or some of the expenditures
of certain organizational units were related to Proposition 103
activities. In many instances, the department based its assertions on
proposals for changes to the department's budgeted expenditures.
Although such documents provide information about the anticipated
purposes for requested resources and additional staff, they do not
document the actual use of the resources or staff. To assess the
reliability of the department's assertions and their applicability to the
1992-93 fiscal year, we interviewed key personnel in 14 of these units.
None of the units that engaged in more than one regulatory activity
required activity-based reporting of staff time. An activity-based time
reporting system for the department would require staff members to
record the amount of time they spend in each type of regulatory
activity. In addition, only one unit had completed an analysis that
documented expenditures incurred for Proposition 103 regulatory
activities.
Because at least six units were created in response to Proposition 103, it
is reasonable to assume that most of these units' expenditures, totaling
approximately $11 million in fiscal year 1992-93, relate to
Proposition 103. However, other units, such as certain consumer
services units, existed before passage of the proposition and appear to
be incurring some Proposition 103 costs. These units also apparently
have significant responsibilities unrelated to Proposition 103 and do not
document which of their expenditures relate to Proposition 103
activities and which expenditures relate to other activities.
The Department's Alternative Methodology
Differs From Other Methods It Has Prepared
To Identify Proposition 103 Costs
Different descriptions from the department about how to calculate
Proposition 103 costs also bring into question the reliability of the data
that the department provided to us. During this audit, we obtained the
following four methods, which the department prepared at different
times and for different purposes, for identifying Proposition 103 costs
One method consists of a set of assertions from questionnaires and
interviews with unit administrators that were completed in July and
10
August 1993. The department has used the results of these
interviews and questionnaires to help revise the department's
accounting system for fiscal year 1993-94;
Another method consists of a set of assertions we obtained during
the audit when we interviewed the same administrators to determine
if they still considered their initial assertions reliable. We
conducted our interviews between December 1993 and
March 1994. The department has not used this information in any
practical application;
A third method, from the department's written representation to us
dated February 7, 1994, was prepared in response to our request.
This is the methodology we have discussed above. Again, the
department has not used this information in any practical
application; and
The last method consists of an additional description from the
department about how it calculated Proposition 103 costs. The
department included this description in its transmittal letter
accompanying the department's billings for Proposition 103 fees to
insurance companies for fiscal year 1992-93.
Significant differences exist among the methods. Data from the first
method identify 12 units with direct costs and the percentage of unit
costs associated with Proposition 103. None of the other three
methods uses exactly the same data. Following are examples of the
differences.
Data from our interviews with the same administrators differ from
the information used for the accounting system. For example,
according to the estimates provided for use in the revision of the
accounting system, the percentage of total expenditures for the
press and publications unit, which had $343,000 in 1992-93
expenditures, was 75 percent. According to the interviews we
conducted, the unit's percentage of costs for Proposition 103
activities was 10 to 20 percent;
The February 7, 1994, representation asserts that four
organizational units that were not identified in the questionnaires
used to revise the accounting system also incurred costs for
Proposition 103 activities. The department estimates the additional
Proposition 103 costs associated with these four units to be
$5 million; and
11
The department's transmittal letter accompanying the billings to
insurance companies contains a general description of how costs for
Proposition 103 were determined that conflicts with the data from
the three other methods. The estimate of Proposition 103 costs in
the transmittal letter was up to 20 percent higher than the estimates
from the other methods.
Without thorough documentation supporting any of the four methods,
we were unable to conclude which method, if any, is accurate.
The Department Included Questionable Costs
in Its Summary of Proposition 103 Costs
We also question other costs the department said it incurred for
Proposition 103 activities. Specifically, the department included in its
February 1994 representation $1.45 million in costs for the Health
Insurance Counseling and Advocacy Program (HICAP), even though
the HICAP is concerned with health insurance for elderly Californians.
The program is designed to help them understand the federal Medicare
health insurance coverage, evaluate what additional coverage they
might need, and avoid the purchase of unnecessary or duplicative
health insurance coverage. Because Proposition 103 is concerned with
property and casualty insurance, not health insurance, we question the
relevance of the HICAP to Proposition 103.
The department's chief fiscal officer informed us that the budget act for
1992-93, Chapter 587 of the Statutes of 1992, requires that costs for the
HICAP be charged against the department's support appropriation,
which includes the Proposition 103 costs, and therefore Proposition 103
should be charged for part of the HICAP costs. Although we
recognize the requirements of the budget act, we nevertheless find no
benefit to Proposition 103 activities from the HICAP and see no
justification for spending fees collected to fund regulatory activities for
Proposition 103 to support a program for disseminating health
insurance information to the elderly. In addition, in determining which
programs to charge with the HICAP costs, the department asserted that
it excluded the tax collection, earthquake, and fraud programs funded
by the department's support appropriation because of specific statutory
restrictions on these revenues. Based on the statutory provision that
Proposition 103 fees should be used to cover the costs of implementing
Proposition 103, we believe that the department should also exclude the
Proposition 103 program.
12
Because it cannot identify Proposition 103 costs as they relate to fees
The collected, the department has no basis for determining whether the fees
Department it assesses for Proposition 103 are accurate. As a result, the
department cannot demonstrate that it has met its obligation under the
May Be
Insurance Code of assessing fees to cover administrative and
Inaccurately
operational costs.
Calculating
Proposition 103
Nevertheless, in its transmittal letter accompanying the billings to
Fees insurance companies for fiscal year 1992-93, the department stated that
it would adjust Proposition 103 fees for fiscal year 1993-94 for any
excess fees collected in fiscal year 1992-93. When we interviewed the
staff responsible for the accounting and rate-setting activities for
Proposition 103, we found that the department could not provide any
evidence that it had compared expenditures with revenues to determine
whether any excess revenues were collected. Furthermore, the
department did not adjust the fees. Indeed, without an accurate way of
identifying whether the fees exceeded the costs, the department could
not have justified any adjustment it might have made.
13
BLANK PAGE INSERTED FOR REPRODUCTION PURPOSES
ONLY
14
Chapter 2 The Department Does Not Separately
Identify All Expenditures Incurred
for Conducting Examinations
Chapter According to the Insurance Code, the fees the Department of Insurance
Summary (department) assesses for several types of examinations it conducts
should approximate the amount of related costs the department incurs
in performing these examinations of insurance companies. However,
the department does not have a system to separately identify all the
expenditures related to the fees collected. Although the department
documents the number of hours staff members directly spend on
examinations, it cannot adequately support the basis for some of the
related costs. As a result, the department is unable to determine
effectively whether fees charged to insurance companies for regulatory
examinations should be increased or decreased to match the costs of
regulatory activities. The department's inability to identify whether
specific fees should be increased or decreased could result in
overcharging or undercharging individual companies. Indeed, by its
own estimates, the department often overcharges or undercharges.
Background The department conducts several kinds of regulatory examinations of
insurance companies, such as market conduct, financial analysis, field,
and various other examinations. The Insurance Code indicates that the
fees the department assesses for these examinations should
approximate the amount of related costs the department incurs in
conducting these examinations. Specifically, Section 736 of the
Insurance Code directs that all examinations shall be at the expense of
the insurer, organization, or person examined, except that special
examinations that are in addition to regular examinations may be at the
expense of the State at the discretion of the Insurance Commissioner.
In general, the department reimburses its costs for these examinations
by directly charging the insurance companies it examines to cover the
hourly and travel costs of staff members engaged in the examination.
The Appendix lists the categories of fees, describes the types of
examinations each fee funds, and describes how the department
calculates invoices for each fee.
15
Chapter 1247 of the Statutes of 1993 directed us to determine whether
the fees the department assesses for conducting examinations actually
approximate the department's related costs. Specifically, we were
required to determine if the fees that the department levies under
Section 736 of the Insurance Code are based on the actual costs to the
department for conducting the examinations. In addition, the audit
was to report on the actual costs for examination activities and report
on whether the costs exceed the revenues from the fees or whether the
revenues exceed the costs.
We selected the examination with the most revenues, field
examinations, for review in greater detail. Field examinations, a
long-standing department activity, are periodic on-site examinations of
insurers to determine their financial condition and ensure that they are
complying with laws and regulations. Total revenues for field
examinations for fiscal year 1992-93 were almost $6 million. The
department assessed the field examination fees based on the number of
staff hours needed to complete each examination and on standard
hourly rates. The department also billed for travel costs incurred
during the examinations.
Although the As we discussed in Chapter 1, the department does not have an
Department accounting system that links all expenditures incurred for examinations
to the fees assessed for each examination. We asked the department to
Documents Staff
provide us with alternative methodologies it considered reliable for
Time for Which
linking costs of specific examinations to fees assessed. In evaluating
It Directly Bills,
the reliability of the department's information about these expenditures,
It Cannot we found that some of the department's assertions in its methodologies
Document All lacked supporting documentation or were of questionable reliability.
Costs for We then selected field examinations, the type of examination with the
most revenues in fiscal year 1992-93, for a detailed review. We found
Examinations
that when the department allocated costs of the actuarial unit to field
examinations, it included $708,000 more than it should have. Because
it cannot document all costs for examinations, the department has no
effective way to determine whether examination fees should be
increased or decreased to match the costs incurred.
The examination units that directly bill insurance companies for
reimbursement of costs based on staff time require their staff members
to maintain detailed time sheets that document the amount of time they
spend on each examination. These units include staff members who
conduct field rating and underwriting examinations, conservation and
liquidation examinations, market conduct examinations, field
examinations, actuarial services, and financial analysis examinations.
We reviewed selected time sheets for these staff members and
16
determined that the hours for which the department billed insurance
companies agreed with the data on the certified time sheets.
However, the hourly billing rates that the department charged for
examinations in fiscal year 1992-93 were not based on the actual costs
of these examinations. During fiscal year 1990-91, the department
used data effective January 1, 1991, to calculate the billing rates of $66
per hour for nonsupervisorial staff and $87 per hour for supervisorial
staff. The department has not subsequently updated this calculation.
In addition, the department calculated the rates by averaging the costs
of five different units performing examinations for which the
department directly billed. These units were the conservation and
liquidation unit, the field rating and underwriting unit, the financial
analysis unit, the claims services unit, and the field examination unit.
Each unit has used the same billing rates, even though the department's
calculation of billing rates for individual units disclosed wide variances
from the average. For example, the department's calculated rates for
supervisorial services ranges from a low of $54 for field examinations
to a high of $164 for financial analysis examinations. Therefore, an
insurance company examined by the field examination unit would be
billed $33 ($87 less $54) more per hour of supervisorial time than the
department calculated as the appropriate rate for field examinations.
On the other hand, a company that underwent a financial analysis
examination would be billed $77 ($164 less $87) less per hour than the
calculated rate. Without a more current, specific calculation of the
rates for examinations, the department cannot demonstrate that the
charges to insurance companies under examination in fiscal year
1992-93 approximated actual costs.
In addition, we question the reliability and completeness of some of the
other information provided to us by the department to identify the costs
of field examinations. For example, the department asserted in the
alternative methodology that it provided at our request that 50 percent,
or $885,000, of the total expenditures of the actuarial unit related to
field examinations. However, in an interview with us, the unit
administrator stated that only 10 percent of the unit's costs, totaling
$177,000, related to field examinations. The administrator based his
statement on the results of a time-reporting system maintained in the
actuarial unit for the first half of the 1992-93 fiscal year. We
determined that the data from the unit's time-reporting system were
reliable by reviewing the system's summary of time spent on field
examinations and the supporting documentation that the unit
administrator provided to us. Based on our interview with the
17
administrator and our review of the actuarial time-reporting system, we
conclude that, in its representation to us, the department overstated
actuarial costs related to field examinations for fiscal year 1992-93 by
approximately $708,000.
The Department's The department's inability to identify whether specific fees should be
increased or decreased could result in overcharging or undercharging of
Estimates
individual companies. The department's own estimates of costs
Suggest That
suggest that material overcharging or undercharging is common.
Overcharging or
Using the alternative methodologies for identifying the costs for
Undercharging examinations that the department provided to us, we calculated the
Is Common expenditures, which we then compared to related revenues. Our
analysis of the department's data disclosed that fees assessed to
insurance companies reimbursed 91 percent of the expenditures for
field examinations, 59 percent of expenditures for financial analysis
examinations, 115 percent of expenditures for field rating and
underwriting examinations, 57 percent of expenditures for market
conduct examinations, 49 percent of expenditures for conservation and
liquidation examinations, and 59 percent of expenditures for consumer
complaint examinations. These estimates suggest that the department
is generally undercharging insurance companies for these regulatory
examinations or is not devoting sufficient staff time, which is the basis
for billings, to the examinations. However, we cannot attest to the
accuracy of these estimates because many of the department's
assumptions used in developing its methodologies were not based on
documented data.
18
Chapter 3 The Department's Allocation of Overhead
Costs Is Not Always the Most
Appropriate or Consistent
Chapter Problems and inconsistencies existed with the Department of
Summary Insurance's (department) accounting treatment of various indirect, or
overhead, costs that raise questions about the appropriateness of the
allocation system. For example, the department allocated indirect
costs to organizational units based on budget data for employee
positions, rather than on actual cost data. Additionally, the department
treated certain expenditures as indirect costs and allocated the costs to
the various organizational units, when they more appropriately
represented direct costs of particular programs. Finally, the
department's estimate of the portion of its costs related to Proposition
103 for a particular unit was inconsistent with the treatment of these
costs in the accounting system.
The Allocation Indirect costs generally are those costs that cannot be easily identified
of Overhead Costs with or assigned to a given cost center. During fiscal year 1992-93,
examples of the department's indirect costs included the expenditures
to Proposition 103
for office and photocopying supplies, library purchases, postage,
and Field
security, and similar purchases. The expenditures associated with
Examinations
Proposition 103 and field examinations consist of direct and indirect
Is Not Always the
costs, with indirect costs a substantial portion of the total. The
Most Appropriate department's accounting system accumulated these indirect costs in
or Consistent indirect cost centers and ultimately allocated them to direct cost
centers, including those related to Proposition 103 and field
examinations.
The cost allocation system that the department used during fiscal year
1992-93 was not always the most appropriate or reliable, a condition
that could have a substantial impact on the amount of indirect costs
attributable to Proposition 103 and field examination activities.
Specifically, the accounting system allocated indirect costs to
organizational units on the basis of budgeted employee positions. A
simple example illustrates the process. If a unit had 100 budgeted
positions and the department had 1,000 total budgeted positions and
total indirect costs of $2 million, the unit would be allocated 10 percent
of indirect costs, or $200,000. However, allocating costs based on
budgeted positions, rather than on positions actually filled, may result
in an inequitable distribution of costs because it is not based on actual
19
conditions. A program may have a budget for more positions than the
department has been able to fill, but the program would be allocated
indirect costs as if all the positions were filled. If the unit in the
example above had filled only 80 of its 100 budgeted positions under
an allocation system based on budgeted positions, the unit would still
be allocated $200,000 in indirect costs. Under an allocation system
based on actual positions, the unit would be allocated only $160,000.
Allocating indirect costs on a more equitable basis would result in more
accurate and meaningful cost information for the cost centers, helping
the department to identify more precisely the costs associated with
particular regulatory activities, such as Proposition 103 activities or
field examinations. We did not determine the effect of the differences
between the two allocation bases on Proposition 103 or field
examination costs.
Further, some costs associated with the Technology Division, which
provides data processing and telecommunications services for the
department, were directly chargeable to units associated with
Proposition 103 activities. However, the department indirectly
allocated the division's costs, which totaled $7.7 million in fiscal year
1992-93, to other organizational units as well as to Proposition 103
units. According to the division's administrator, a portion of the
resources of this division was devoted directly to Proposition 103
activities, and the functions of this division were expanded as a result
of Proposition 103. Specifically, the passage of the proposition
resulted in the division's hiring 14 additional staff members and
purchasing new computer systems. The administrator could not
quantify the costs of the unit that were devoted to Proposition 103
activities. By not directly charging these costs to the appropriate
organizational units within the department that work on
Proposition 103 activities, the department understated costs for
Proposition 103 and overstated costs to units engaged in other
activities, such as the field examinations.
We also question the reliability of the department's allocation of
indirect costs because the department's statements are inconsistent with
its own practices. Specifically, the department's written statements to
us about the costs of the statistical analysis unit conflicted with the
treatment of these costs in the department's indirect cost allocation
process. In its February 1994 representation to us, which we discuss in
detail in Chapter 1, the department asserted that 85 percent of the costs
of the statistical analysis unit were related to Proposition 103 activities
and 15 percent of the costs were related to statistical analysis
examinations during fiscal year 1992-93. However, according to
another description of its cost allocation system the department
provided to us, the department's accounting system treated the costs of
20
the statistical analysis unit as indirect costs that it distributed to other
cost centers. The department subsequently provided us with a still
different description of the allocation system that indicated that the
accounting system distributed 96 percent of the unit's costs to
Proposition 103 and 4 percent to activities of the earthquake recovery
program.
Because the department could not provide reliable documentation
demonstrating the propriety of any of these allocations, we were unable
to determine which, if any, is correct.
21
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ONLY
22
Chapter 4 The Department Has Collected More
Revenues Than It Has Needed
To Cover Its Operating Costs
Chapter The Department of Insurance (department) has collected more in
Summary revenues for operations than it has disbursed. From June 30, 1987, to
June 30, 1992, the balance in the department's operating fund increased
from $7.5 million to over $25 million, an increase of $17.5 million.
The department has had sufficient resources not only to pay for the
costs of the department's regulatory activities, but also to lend over
$20 million to other funds in one fiscal year. In addition, the
department has replaced the State's General Fund as the source of
funding for the Health Insurance Counseling and Advocacy Program
(HICAP). In fiscal year 1992-93 alone, the department's funding for
this program was $2.9 million. Further, the department transferred
$10 million to the State's General Fund, as the budget act for fiscal year
1992-93 required.
Revenues Have Although neither we nor the department can validate the costs
Significantly associated with any specific fee-related activity, revenues clearly
exceeded disbursements for the department's operating fund as a whole,
Exceeded
as indicated by increases in the fund balance and by other financial
Disbursements
activity in the department's operating fund. The fund balance
for the
generally indicates whether the fund has had more revenues or more
Department's disbursements during the existence of the fund. A fund balance of
Operating Fund zero indicates the revenues and disbursements have been equal,
as a Whole whereas a positive fund balance means that revenues have exceeded
disbursements and a negative fund balance indicates that disbursements
have exceeded revenues. We gathered our financial data from the
State's annual financial statements issued by the State Controller's
Office for fiscal years 1986-87 through 1991-92, the most recent of
such reports, and from the financial reports the department submitted to
the State Controller's Office for fiscal years 1988-89 through 1992-93.
Revenues clearly exceeded disbursements for the operating fund as a
whole both before and after June 30, 1987. The annual financial
reports for the State indicate that the fund balance in the department's
operating fund was $7.5 million at June 30, 1987, and had increased to
over $25 million by June 30, 1992. The amount that has accumulated
in the fund balance is not entirely the result of policies over which the
department has control. For example, the department has
23
demonstrated that $13.9 million of the fund balance consists of moneys
related to three fraud programs. The amount of fee assessments for
two of the fraud programs is established in the Insurance Code. For
the automobile fraud program, Section 1872.8 of the Insurance Code
requires the department to assess insurance companies $1 annually for
each automobile insured. For the general fraud program,
Section 1872.7 of the Insurance Code requires the department to assess
a $1,000 annual fee against insurance companies doing business in
California. For a third fraud program, the Workers' Compensation
fraud program, Section 1872.83 of the Insurance Code requires other
agencies to assess and collect the revenues and transfer a portion of the
revenues to the Department of Insurance. In each case, revenues for
each fraud program increased the fund balance in the department's
operating fund.
Although it received the revenues intended to support the three fraud
programs, the department asserts that budget legislation limited its
spending authority for the fraud programs to amounts significantly
lower than revenues collected and the department's ability to spend is
limited to the amounts budgeted. However, the department was
partially responsible for the limitation on its spending authority for
fiscal year 1991-92. The department applied to the Department of
Finance for a budget augmentation for the fraud program that was
rejected because the department failed to adequately justify its request.
Other financial activity in the fund indicates that the department has
more resources in its operating fund than it has needed for operating
expenditures. This financial activity includes, but is not limited to, the
following.
The department's financial reports submitted to the State
Controller's Office indicate that, during fiscal year 1992-93,
revenues exceeded expenditures by approximately $4 million.
(This differs from the information in the table on page 3, because
the table reflects only a portion of the financial activity during fiscal
year 1992-93, which we discuss in the footnote on page 2 of this
report.) The excess of revenues over expenditures would increase
the fund balance as of June 30, 1993;
The department transferred $10 million from the fund to the State's
General Fund in fiscal year 1992-93, reducing the fund balance as
of June 30, 1993. Chapter 587 of the Statutes of 1992 required the
transfer;
24
The operating fund had sufficient cash available to lend
$6.7 million to the State's General Fund and $15 million to the
California Residential Earthquake Recovery Fund as of June 30,
1992. The loan to the earthquake recovery fund was repaid in
fiscal year 1992-93;
The operating fund had sufficient cash available to lend
$8.3 million to the State's General Fund as of June 30, 1993; and
In fiscal year 1987-88, the department's operating fund began
funding the HICAP, a program previously funded through the
State's General Fund. The budget acts for fiscal years 1989-90
through 1992-93 required the transfer of a total of $11.2 million
from the department's operating fund to the Department of Aging to
support this program. For fiscal year 1992-93 alone, the budget act
required the transfer of $2.9 million, reducing the fund balance as
of June 30, 1993.
25
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26
Chapter 5 The Department Has Begun Revising
Its Accounting System, But Additional
Changes Are Needed
Chapter The Department of Insurance (department) has begun implementing
Summary changes to its accounting system that would permit it to identify
expenditures reimbursed by specific fees. Among the changes is the
restructuring of the accounting cost centers. The department has
established accounts that summarize the costs for Proposition 103 and
other discrete regulatory activities. However, costs are accumulated in
these accounts based on estimates of the appropriate amount to charge
to each activity, rather than on actual data documenting costs. Thus,
the structure exists to permit the department to identify the costs for
Proposition 103 separately, for example, but the amounts identified as
Proposition 103 costs will not be verifiable. In addition, the
department has not provided sufficient guidance to its staff for
distinguishing which of the staff's activities relate to each regulatory
fee.
The Department During fiscal year 1992-93, the department took preliminary steps to
Has Begun revise its accounting system. For example, in February 1993 it hired a
staff person to review its billing rates. For fiscal year 1993-94, the
Making Some
department began actually implementing revisions to its accounting
Necessary
system to better meet its informational and reporting needs. In
Changes to Its
particular, the department expects these changes to capture
Accounting expenditures by regulatory activity and to help provide accurate cost
System information for the purpose of billing insurance companies. Two
changes the department has made for fiscal year 1993-94 primarily
respond to the needs discussed in this report and are an appropriate
initial step for revisions to the system. First, the department has
established accounting cost centers based on activity, which should
allow the department to distinguish the amount of its costs related to a
particular regulatory activity. After the department is able to
determine the costs associated with an activity, it will know how much
it should collect in fees from those companies that benefit from the
activity. Second, the department has indicated that it allocates some of
its indirect costs on the basis of actual personnel costs and other
indirect costs, such as rent and information technology services, on
actual usage.
Although we did not review the department's preliminary revisions in
detail, during our audit we noted certain issues that the department will
27
have to address before the revised accounting system will fully capture
costs accurately. One such issue deals with the department's need for
an effective way to document actual resources spent on each type of
regulatory activity. Many units still do not use activity-based time
reporting or an alternative method of documenting resources spent on
specific activities. The accounting system put in effect during fiscal
year 1993-94 uses pre-set percentages to allocate costs of
organizational units to cost centers in which the costs of regulatory
activities are accumulated. The pre-set percentages are based partially
on estimates of time spent on each type of regulatory activity that the
department obtained from its administrators. For example, 43 percent
of the cost of the Policy Research Bureau is allocated to a cost center
for Proposition 103 regulatory activity. This is an effective way for
the department to accumulate the costs associated with a particular
regulatory activity if the pre-set percentages are accurate. However,
our interviews with unit administrators generally disclosed that they did
not base their estimates on any documented analysis. Thus, the
accounting system will use the pre-set percentages to distribute
expenditures to the activity-based accounting cost centers, providing
the appearance that the accounting system is recording actual costs
associated with these activities. If the pre-set allocation percentages
are not based on actual conditions, this appearance would be
misleading. The department staff members who are revising the
accounting system have recognized the need for activity-based time
reporting to document time spent on each activity and have indicated
that the development of such a system is in progress.
The lack of consistency in the department's assertions about
Proposition 103 costs further emphasizes the need for a
well-documented basis for the percentages used in the accounting
system during fiscal year 1993-94. As we discussed in Chapter 1, data
in the department's alternative methodology for identifying its costs for
Proposition 103 differed significantly from the information the
department obtained from the unit administrators for the purposes of
revising the accounting system.
Another issue that the department should address to ensure that its
revisions to the accounting system result in the accurate identification
of expenditures is the need for the department to provide general
guidance to its staff on properly distinguishing between activities when
the potential for overlap exists. Several of the administrators we
interviewed stated that they had not been given any guidance on how to
make such distinctions.
For example, the underwriting services unit addressed various kinds of
consumer complaints, including some related to Proposition 103. In
28
categorizing which of the complaints were related to the proposition
and which were not, the unit supervisor used a definition that he stated
had been reviewed and approved by executive staff. The definition
limited Proposition 103 costs to those costs incurred to deal with
specific complaints about providers of automobile insurance. The
specific complaints included the cancellation and nonrenewal of
insurance, the refusal to insure, and the refusal to send a policy.
In contrast, the administrator of the rating services unit, which deals
with other consumer complaints, used a much broader definition of
Proposition 103 costs. The administrator indicated that he determined
Proposition 103 costs based on the type of insurance in each consumer
complaint. Our review of some of the closed consumer complaint files
in his unit confirmed that the type of insurance, such as automobile
insurance or property and casualty insurance, dictated its classification
as a Proposition 103 complaint or another category of complaint.
Thus, any complaint about automobile insurance, regardless of the
issue, was categorized as a Proposition 103 complaint. This lack of
general guidance could have a significant effect on the costs the
department charges to each activity.
29
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30
Chapter 6 Conclusions and Recommendations
Conclusions The fees that the Department of Insurance (department) collects from
insurance companies and brokers doing business in the State fund the
operating activities of the department. The Insurance Code generally
anticipates that these fees will approximate the related costs the
department incurs to regulate the State's insurance industry. The
Insurance Code also anticipates that the fees established to cover the
costs of specific regulatory activity will approximate the amount of
those related costs. Because it is unable to determine the actual costs it
incurs for specific regulatory activities, however, the department has
not ensured its compliance with these provisions of the Insurance Code.
The department clearly has collected more total revenue than it has
needed to cover the expenditures it has incurred for its regulatory
activities.
Proposition 103 The department separately identifies the revenues that it receives from
Fees and fees collected to cover the costs of implementing Proposition 103.
However, it cannot separately identify these costs. The department's
Expenditures
accounting records do not distinguish the costs it incurs to implement
Proposition 103 from the costs for conducting its other regulatory
activities. In addition, an alternative methodology for identifying the
costs, which the department prepared at our request, is unreliable.
Because it cannot accurately identify the costs of implementing
Proposition 103, the department is left without an effective way of
determining whether Proposition 103 fees should be increased or
decreased to match the costs. As a result, the department may be
inaccurately charging insurance companies for Proposition 103.
Examination Fees The department separately identifies only some of the costs it incurs to
and Expenditures conduct its examinations of insurance companies. Specifically, the
department bases the fees it charges insurance companies on the
number of hours staff members spend on each examination, and the
department documents these hours with detailed time sheets that the
staff members prepare. However, the hourly rates the department
charges for examinations are not based on actual costs. In addition,
when we selected the examination fee with the most revenues, field
examinations, for a detailed review of the documentation of its costs,
we found that the department could not document the basis for some of
the costs. For example, the department claimed that 50 percent of the
costs of the actuarial unit were devoted to field examinations, but we
31
reviewed summaries of time sheets that indicated that only 10 percent
of the unit's time was spent on field examinations. Because it cannot
accurately identify all costs for each examination, the department
cannot determine whether it should increase or decrease its fees to
cover the costs of the examinations. In addition, the department may
be overcharging or undercharging for examinations. In fact, the
department's own estimates suggest that significant overcharging or
undercharging is common.
Indirect Costs The department's allocation of indirect, or overhead, costs is not always
the most appropriate or consistent. Specifically, the department
allocated indirect costs based on budget data for employee positions,
rather than on actual cost data. Further, the department treated certain
expenditures as indirect costs that it allocated to various cost centers,
when the costs should have been treated as direct costs of particular
programs. Finally, the department estimated that 85 percent of the
costs of the statistical analysis unit was directly chargeable to
Proposition 103 cost centers and 15 percent was directly chargeable to
statistical analysis examinations. However, the department charged
different amounts to these programs.
Total Revenues The department has collected more revenues than it has needed to cover
and Expenditures operating costs. From June 30, 1987, through June 30, 1992, the fund
balance in the department's operating fund increased from $7.5 million
for the
to over $25 million. At the same time, the department has had
Department
sufficient resources not only to pay for the costs of the department's
operating activities, but also to lend over $20 million to other funds in
one fiscal year. As required by the State's budget acts, the department
has also replaced the State's General Fund as the source of funding for
the Health Insurance Counseling and Advocacy Program, funding that
amounted to $2.9 million for fiscal year 1992-93 alone. Finally,
during fiscal year 1992-93, the department transferred $10 million to
the State's General Fund, as required by Chapter 587 of the Statutes of
1992.
Changes to the The department has begun implementing changes to its accounting
Accounting System system that would permit it to identify expenditures that are reimbursed
by specific fees. Among the changes is the restructuring of the
for Fiscal Year
accounting cost centers. The department has established accounts that
1993-94
summarize the costs for Proposition 103 and other discrete regulatory
activities. However, costs are accumulated in these accounts based on
estimates of the appropriate amount to charge to each activity, rather
than on actual data documenting costs. Thus, the structure exists to
32
permit the department to separately identify the costs for Proposition
103, for example, but the amounts identified as Proposition 103 costs
will not be verifiable. In addition, the department has not provided
sufficient guidance to its staff members for distinguishing which of the
staff members' activities relate to each regulatory fee.
Recommendations To ensure that it complies with statutory requirements that fees
approximate the amount of costs the department incurs to conduct its
regulatory activities, the department should periodically compare
expenditures and related revenues from fees. When the department's
costs significantly exceed the fees collected or when the fees collected
significantly exceed the department's costs, the department should
adjust fees accordingly.
The department should devote sufficient resources to promptly
implement the necessary changes to its accounting system.
To ensure consistency in its allocation of expenditures to cost
centers related to regulatory activities, the department should
provide clear guidance to its staff members on distinguishing
among activities; and
To ensure that its revised accounting system satisfies its reporting
and informational needs, the department should document the
propriety of its allocation of costs to the activity-based cost centers.
Such documentation may vary among organizational units and
could consist of activity-based time reporting, workload or output
analyses, or any other reasonable analysis that uses data spanning
enough time or resources to be reliable. For example, with
activity-based time reporting, the department would be able to
document what portion of its personnel costs were devoted to each
of the activities. If an organizational unit incurred total costs of
$1 million, and time sheets indicated that 50 percent of staff time
was spent on Proposition 103, 40 percent was spent on field
examinations, and 10 percent was spent on a special project, the
department would charge $500,000 to the Proposition 103 cost
center, $400,000 to the field examination cost center, and $100,000
to the special project cost center.
33
We conducted this review under the authority vested in the state auditor
by Section 8543 et seq. of the California Government Code and
according to generally accepted governmental auditing standards. We
limited our review to those areas specified in the audit scope of this
report.
Respectfully submitted,
KURT R. SJOBERG
State Auditor
Date:
Staff: Steven M. Hendrickson, Audit Principal
Lois Benson, CPA
Star Castro
Debbie Meador, CPA
Michael Tilden
34
APPENDIX
Department of Insurance Fees Addressed
in Chapter 1247, Statutes of 1993
Name of Fee Nature of Activity Funded by Fee Procedures for Calculating Fee
Proposition 103 Monitor and review rates charged by property and The Department of Insurance (department)
recoupment fees casualty insurance companies; evaluate rate establishes the Proposition 103 recoupment fees
applications; conduct rate application hearings by estimating the department's expenditures
and enforcement proceedings; provide actuarial related to Proposition 103 for the coming fiscal
services; study auto rate comparisons and year and then assessing each insurance company
maintain statistics from rate filings; provide legal a fee. The fee is based on the amount of
representation, including outside consultants, premiums the insurance company issued for each
expert witnesses, and intervenor compensation; type of insurance covered by Proposition 103. If
and provide centralized services from various a company does not sell policies for any
state agencies. insurance types covered by Proposition 103, then
it does not pay a recoupment fee.
Field Conduct on-site audits of insurers to determine The department recovers the costs of these
examinations the financial condition of insurers and ensure that examinations from the examined company by
they are complying with laws and regulations. charging an hourly rate for the examiners' time,
plus travel expenses directly attributable to each
examination. The daily rate is based on the
Field rating and Conduct on-site audits of insurers to ensure that salary level of the employees performing the
underwriting they are complying with laws and regulations examination plus an overhead factor. The
examinations related to underwriting and rating practices. department currently uses two hourly rates, one
for personnel at or below the level of associate
insurance rate analyst and a second for personnel
at or above the level of senior insurance rate
Conservation and Operate insolvent companies to ensure that
analyst. However, if specialized personnel are
liquidation claims are properly adjusted.
required, such as an actuary or attorney, the
activities
department uses hourly rates established for those
classifications.
Market conduct Conduct on-site audits to review insurers' claim
surveys handling practices.
Actuary Conduct reviews of insurance companies' ability
examination to pay claims. Review requests for rate
increases.
Financial analysis
activity Maintain ongoing surveillance of insurers to
identify those in hazardous financial condition
and perform financial analysis of insurance
companies for various purposes, such as
applications for certificates of authority.
Statistical
analysis activity Provide technical advice relating to rating data
collection plans and automation of statistical and
rating systems.
Complaint Investigate and resolve consumer complaints Upon completion of the investigation, the
investigation regarding the handling of claims, underwriting department charges a fee to the company against
practices, and rates. which the complaint was filed. The department
charges one of two flat fees: $198 for complaints
with relatively simple issues and $285 for
complaints with more complex issues.
35
36