Report 93030 Summary - April 1994

The Department of Insurance Cannot Completely Identify Its Costs for Implementing Proposition 103 and Performing Examinations

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.

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 199293 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 Comments

The Department of Insurance generally agrees with the information and 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.