Report 2003-138 Summary - June 2004

Department of Insurance: It Needs to Make Improvements in Handling Annual Assessments and Managing Market Conduct Examinations

HIGHLIGHTS

Our review of the Department of Insurance's (Insurance) effectiveness in improving consumer services and reducing organized automobile fraud activity through the use of SB 940 and AB 1050 funds and its market conduct examinations found that:

RESULTS IN BRIEF

Since 1989, state law has required insurers doing business in California to pay an annual assessment of $1 for each vehicle they insure. In 1999, the Legislature enacted two statutes designed to provide additional funding to the Department of Insurance (Insurance) for activities related to automobile insurance: Chapter 884, Statutes of 1999 (SB 940) adds 30 cents per insured vehicle to fund consumer operations and Chapter 885, Statutes of 1999 (AB 1050) adds up to 50 cents per insured vehicle to target the prosecution and elimination of organized automobile fraud activity.

Because it lacks adequate data to determine how many vehicles are insured in California, Insurance does not know how much it should have received since the enactment of these two bills. Unaudited data from the Department of Motor Vehicles indicate that Insurance is collecting revenues for far less than the number of registered vehicles in the State, resulting in the possible loss of as much as $7 million in assessments for fiscal year 2002-03 alone. Insurance has not made sufficient efforts to verify that insurers are remitting all revenues due, even though it identified discrepancies in the number of insured vehicles reported by them. Of the 349 insurers its Budget and Revenue Management Bureau analyzed in May 2003, 230 failed to make one or more quarterly payments between 1998 and 2002. Further, 73 insurers paid annual assessments for fewer total vehicles in 2002 than the number of private passenger vehicles they reported insuring to Insurance's Statistical Analysis Division. As of April 15, 2004, Insurance had followed up on only nine of these insurers to determine whether additional assessments are due. Insurance acknowledges that it lacks adequate data to verify the accuracy of the assessments it receives from insurers and is considering regulatory changes that will enable it to capture more specific information from insurers about the number of vehicles 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 in that fiscal year. Had it conducted sufficient analysis before making this change, it could have timed the change to avoid all or part of the resulting $11 million revenue loss.

Insurance has used some SB 940 revenues to reduce the backlog of cases in its Investigation Division by 1,580 cases, or 51 percent. Despite this, it can make improvements in how it reviews and assigns cases to avoid their being open for long periods of time. Insurance spent other SB 940 funds to increase public awareness of the services it provides, and its Legal Division used $9.4 million in SB 940 funds. However, because the Legal Division's case tracking system is not linked to the time reporting system, Insurance cannot easily demonstrate that these expenditures were only for allowable activities.

Insurance's use of AB 1050 funds includes working on 446 organized automobile insurance fraud cases since the program's inception, which resulted in 432 arrests. Nonetheless, Insurance could not demonstrate that all AB 1050 expenditures were for allowable activities. We identified 20 cases that do not meet state law criteria for which the department used approximately $22,000 in AB 1050 funds. Insurance does not transfer the expenditures charged to AB 1050 funds to the regular automobile fraud program when it identifies cases that do not meet the criteria in state law. Insurance also needs to ensure that it follows laws and regulations for monitoring the use of AB 1050 funds by district attorneys and the Department of the California Highway Patrol (California Highway Patrol). For example, although required to do so, the California Highway Patrol does not submit annual reports on its expenditures to Insurance.

Based on our analysis of the department's market conduct examination system, it appears unlikely that Insurance could gain increased efficiencies, including time and cost savings for insurers, by combining the three bureaus that currently perform 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. 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:

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:

To ensure that it uses AB 1050 funds appropriately, Insurance should do the following:

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.