Massachusetts State Auditor Suzanne Bump conducted a performance audit of the Division of Insurance in August 2019
In our September 10th newsletter, Agency Checklists published an article outlining the findings of a performance audit, Massachusetts State Auditor Suzanne Bump issued on August 21, 2019. The audit, conducted under §12 of Chapter 11 of the Massachusetts General Laws, reviewed the performance of the Division of Insurance for the period between July 1, 2016, and June 30, 2018. In particular, Auditor Bump and her office reviewed, “…how the DOI administered its operations assessment process, and its market conduct analysis of Massachusetts licensed insurers.”
As a result of that review the Auditor issues the following findings and recommendations:
- Finding 1 – The DOI did not bill insurers for $857,306 in operations assessments.
- DOI should discontinue its practice of excluding some insurers from annual operations assessments and notify insurers that have traditionally been exempt from these assessments that they will no longer be exempt.
- DOI should work with insurers that were overbilled for operations assessments to determine whether any restitution is necessary.
The Division of Insurance’s response to State Auditor Bump’s report…
After publishing our September 10 article, Agency Checklists filed a public record request with the Division of Insurance seeking to find out if the Division had made any comment about the audit either before or after the State Auditor published the report.
In response to Agency Checklists’ statutory record request, the Division produced a May 30, 2019 letter it had sent to the State Auditor with the subject, “Response to Draft Audit Report.” The five-page letter addressed the State Auditor’s recommendations and findings as contained in a draft audit report.
Since Agency Checklists’ article on the State Auditor’s report did not have the benefit of the Division of Insurance’s response and position, Agency Checklists wants to share the full response with those readers who showed an interest in our original article on the report.
The following is a reprinting of the majority of the salient responses and corrections put forth by the Division to the State Auditor:
DOI’S RESPONSE TO AUDIT FINDINGS AND RECOMMENDATIONS
The draft audit report’s only finding is that “DOl did not bill insurers for $857,306 in operations assessments.” [Executive Summary, at 1; Detailed Audit Findings, at 7.] As written, this statement of finding could be misinterpreted to suggest that this amount of assessment was not actually billed or assessed, which is not the case. For each fiscal year during the audit period, the DOI was charged with collecting the amount appropriated for its operations in accordance with the applicable budgetary language (line item 7006-0020), instructions from the Office of Consumer Affairs and Business Regulation, and DOI’s own policies and procedures then in effect. As demonstrated by the documents and information provided during the audit and summarized in the chart below, DOI assessed licensed insurance companies 100% of the amount indicated for the operations assessment for each fiscal year, and no portion of any operations assessment was not billed by DOI during the audit period.
Fiscal Year Amount To Be Assessed Amount Actually Assessed 2018 $16,609,215.90 $16,609,215.90 2017 $16,635,887.94 $16,635,887.94 2016 $16,092,994.50 $16,092,994.50 2015 $15,760,591.73 $15,760,591.73 2014 $15,037,293.88 $15,037,293.88 Total $80,135,983.95 $80,135,983.95
The draft audit report also states: “In fiscal years 2014 through 2018, the Division of Insurance (DOI) did not bill 62 out of a total of 5,816 insurers for $857,306 in annual operations assessments even though the insurers were required to pay them. As a result DOI overbilled the remaining insurers to whom it assessed annual operations assessments…” No insurers were “overbilled.” While the DOl did not assess certain insurers during the audit period (62 instances identified compared to 5,754 invoices sent for the operations assessments and 9,425 assessment invoices created for 13 different annual assessments during the audit period), the DOI did bill insurers that “were required to pay.” The annual budgetary provisions are the controlling statutory authority for the DOl to administer the operations assessment, not M.G.L. c. 26, § 8C as cited in the draft report. This budgetary language does not dictate how the assessment must be made; rather, it provides the DOI with the discretion to calculate, bill and collect the operations assessment in the manner in which it did, including the application of the “maxed-out” exclusion policy. The DOI apportioned the operations assessment during the audit period in accordance with the relevant fiscal year budget and pursuant to then-applicable DOI policies and procedures.
As we previously informed your staff, the DOI formed an assessment working group in April 2017 for the purpose of updating its comprehensive Assessment Calculation and Billing Procedures Manual, which had last been revised in November 2008. In December 2017, the DOI assessment working group recommended that the “maxed-out” exclusion policy be discontinued, consistent with the recommendation of the draft audit report. The working group’s recommendation reflects a policy decision that is within the discretion of the DOI, and does not imply that the original policy was unlawful, arbitrary or unsound. During the audit period, the DOI administered 13 different annual assessments, and insurers often paid more than one assessment, each with its own purpose. The “maxed-out” exclusion policy avoided a circumstance in which a small number of insurers would be paying to support the DOI’s general operations and, at the same time, supporting the DOI’s operations through two separate assessments that fund the State Rating Bureau, which is a core unit of the DOI. At all times, the operations assessment has been administered in accordance with DOI’s Assessment Calculation and Billing Procedures, which requires the DOI to “[a]llocate the assessment on a fair and reasonable basis among all insurers…” It was fair and reasonable during the audit period to apply the “maxed-out” exclusion policy, and it is fair and reasonable to have discontinued the policy as of FY19.
The draft audit report includes two recommendations based on the finding that the DOI did not bill insurers for $857,306 in operations assessments.
The draft audit report’s first recommendation is that “DOI should discontinue its practice of excluding some insurers from annual operations assessments and notify insurers that have traditionally been exempt from these assessments that they will no longer be exempt.” As was noted during the audit, DOI decided to discontinue the “maxed-out” exclusion policy in December 2017. As a result, the DOI did not apply the “maxed-out” exclusion policy for calculation of the FY19 operations assessment. In December 2018, all licensed insurers were notified via an invoice implementing the revised policy for the operations assessment as of FY19. Going forward, this same process will be followed.
The draft audit report’s second recommendation is that “DOl should work with insurers that were overbilled for operations assessments to determine whether any restitution is necessary.” The DOI does not agree that any insurer was “overbilled” for the operations assessment during the audit period because it was within the DOI’s discretion to implement the “maxed-out” exclusion policy. Accordingly, there is no legal basis to provide “restitution.”
We also point out that the impact of the “maxed-out” exclusion policy during the period audited (FY14-18) is minimal.
- The policy in question impacted only 0.0003% of the more than $220 million in total assessments administered by the DOI during the audit period and only 0.6% (62) of the 9,425 invoices the DOl processed.
- The policy in question did not impact insurance consumers or the Commonwealth’s taxpayers in
any way, as the DOI’s operations are 100% funded by assessments on the insurance industry.
- The “maxed-out” exclusion policy already has been discontinued, as reflected in the operations assessments made in FY19.
The DOl requests that the report be amended to provide this additional context.
In reviewing the draft audit report, we identified a few factual errors or statements that do not accurately reflect the operations of the DOI. We respectfully request that the final audit report reflect the following technical corrections:
- DOI recommends that on page 2, first paragraph, last sentence, the word “guidance” as used in describing the Commissioner’s role be replaced with “direction.” This would be consistent with the language used in the most recent audit reports for the Division of Banks and Division of Telecommunications and Cable and is closer to the language in the DOI’s most recent audit report in 2015 which stated that the Commissioner “managed” the agency. This change would also more accurately describe the Commissioner’s role at the DOI.
- On page 2, second paragraph, the report lists various types of regulated entities, and we suggest that “health management organizations” be replaced with “health maintenance organizations” [see M.G.L. c. 176G, § 1]. Also, it would be more accurate to define a domestic insurer as “an insurer incorporated or formed in the Commonwealth of Massachusetts” and a foreign insurer as “an insurer formed by authority of any state or government other than the Commonwealth of Massachusetts” in the footnotes corresponding to the second paragraph [see M.G.L. c. 175 § 1].
- On page 3, last paragraph, the report states that the DOI had staff of approximately 173 during the audit, which is not correct. The full-time staff during FY17 was 128 and was 123 during FY18. The final report should correct these figures. In addition, the appropriations listed in the last paragraph do not accurately reflect DOI’s line item for FY17 and FY18. The DOI’s line item (7006-0020) was $13,612,080 in the FY17 budget [see Chapter 133 of the Acts of 2016] and $13,349,218 in the FY18 budget [see Chapter 47 of the Acts of 2017].
- On page 4, fourth paragraph, the last sentence reads: “We did not identify controls related to DOI’s operations assessment process.” During the applicable time frame, the DOI did, in fact, have process controls in place. The DOI provided to your staff copies of DOI’s Assessment Calculation and Billing Procedures [updated May 2017], DOI’s Assessment Billing Process [corresponding to FY16], FSU Assessment Calculation Procedures, and FSU Procedure Used for FY17 Assessment, all of which reflect process controls were in place during the audit period. Additionally, since 2017, DOI has taken action to improve and more thoroughly document those process controls by updating and enhancing the comprehensive process and policy document governing the calculation, billing and collection of all assessments, including the DOI operations assessment.
- On page 8, under the heading “Reasons for Issue,” the relevant time frames should be clarified. For example, the second sentence refers to DOI management’s statement that “DOI excludes insurers…” but at the time of the audit, the DOI had already terminated the “maxed-out” exclusion policy. Therefore we would suggest that the second sentence state that “DOI excluded insurers.” Similarly, the fourth sentence (starting with “Further”) suggests that the working group was formed “during our audit period.” We would suggest that the fourth sentence be rewritten to read: “Further, DOI officials informed us that, prior to notification of the audit, the agency had established a working group related to the operations assessment process.” Given that the working group made a recommendation to end the “maxed-out” exclusion policy in late 2017, which the Commissioner adopted shortly thereafter, it follows that the working group had been formed earlier and well in advance of the DOI’s notification of the audit in July 2018.
For those interested in reading the official response of the Division of Insurance, one can do so by accessing the .pdf here.