Report 95018 Summary - January 1996
Department of Insurance:
Needs To Refine Its Cost Model for Insurance Examination and Proposition 103 Fees
The department has modified its cost accounting system to capture the costs of its examination and Proposition 103 activities. However, it:
- Incorrectly calculated insurance examination fees.
- Accurately calculated Proposition 103 fees.
- Needs to improve the collection of labor costs and the allocation of indirect charges.
Results in Brief
The Department of Insurance (department) is responsible for protecting
the insurance policyholders of the State. To meet this responsibility,
the department administers various programs designed to monitor
insurance companies. These programs include ones that examine
insurance companies. In addition, the department must enforce
Proposition 103, a voters' initiative passed in November 1988.
The Insurance Code limits the amount of fees the department can
charge for examinations and Proposition 103 activities to the
actual cost of these regulatory activities. In a Bureau of State
Audits report, issued in April 1994, we reported that the department
could not completely identify its costs related to the regulatory
activities. Since that audit was issued, the department has modified
its cost accounting system so that it can capture costs by activity.
Our review focused on whether the department's fees for fiscal
year 1995-96 were based on actual costs from the previous fiscal
year. We noted the following concerns:
- The fees that the department will charge for examinations
of insurance companies during fiscal year 1995-96 are inaccurate.
These inaccuracies are caused by errors and flaws in the department's
cost model used to calculate these fees. Specifically, the department
did not properly adjust for errors in reporting employee time,
it included travel costs in its calculations when it should not
have, and it made several mathematical errors. As a result, the
department's estimated billings for examinations of $13.1 million
will be underbilled by $1.6 million in fiscal year 1995-96. The
department intends to correct any underbillings or overbillings
in one fiscal year by adjusting the fees for the following fiscal
year. This method is not equitable because the department does
not examine the same insurance companies each year. Therefore,
insurance companies examined during fiscal year 1995-96 will generally
be underbilled, whereas insurance companies examined during fiscal
year 1996-97 will be overbilled.
- The fees that the department will charge during fiscal year
199596 to recoup costs incurred in carrying out its regulatory
responsibilities under Proposition 103 are accurate and generally
based on actual costs, as required by the Insurance Code.
- Although the department adjusted for errors in the actual
cost data used in its fee calculations, it needs to improve its
procedures for gathering the data. Specifically, department employees
are not always charging their time correctly. In addition, late
or unapproved employee time sheets are not appropriately recorded
in the department's cost accounting system. Moreover, errors
in the reporting of employee time skew the department's allocation
of indirect costs.
Based on the flaws and errors we found in the department's cost
model for calculating insurance examination fees, the department
should revise the fees it will charge during fiscal year 1995-96.
To ensure that its future fees are accurate, the department needs
to improve its cost model for calculating insurance examination
fees and improve its process for gathering data used in the cost
model. Specifically, it should do the following:
- In its actual cost data, make the proper adjustments for errors
in reporting employee time.
- Exclude travel costs from the calculation of insurance examination
- Perform a detailed review of its calculations to ensure that
all mathematical errors are detected and corrected.
- Implement procedures to ensure that time reporting errors
- Improve its process for ensuring that employee time sheets
are submitted and approved promptly.
- Modify its time reporting procedures to ensure that employees
charge program and administrative activities to the proper cost
The department agrees with the information and conclusions in
our report. Further, the department is taking steps to implement
all our recommendations. For the one insurance examination fee
that we reported was overstated, the department has reduced the
fee to the amount we calculated. For the three insurance examination
fees we reported were understated, the department is seeking a
legal opinion to determine if it is allowed to increase these
fees more than once during fiscal year 1995-96. If their legal
counsel believes the department cannot increase those three fees
immediately, then the department intends to adjust billings to
those affected insurers at the close of fiscal year 1995-96.
Blank page inserted for reproduction purposes only.