Report 94118 Summary - April 1996
Department of Insurance:
The Management of Conserved Insurers Has Improved, but Problems With Liquidation and Administration Continue
Despite improvements in planning and managing conserved insurers, the department's Conservation and Liquidation Office (CLO) has had only limited success in closing estates.
Continued improvement is needed in the administration of conserved and liquidated insurers. Specifically, we found:
- Budgets are not adequately monitored;
- Plans are not regularly updated to close the estates the CLO manages;
- Procedures for awarding and managing contracts are not always followed; and
- Indirect costs are not always properly allocated.
Results in Brief
The Department of Insurance (department) is responsible for conserving and liquidating companies (insurers) that have financial or other problems, or that do not have authorization to transact insurance business in the State of California. During conservation, an insurance company is placed under courtordered control to conserve the insurer's assets until the insurer's status is determined by the courts. If the insurance commissioner (commissioner) determines that it would be futile to rehabilitate the insurer in conservation, he may apply to the court for an order to liquidate the assets of the conserved company. Liquidation is a process in which the department's Conservation and Liquidation Office (CLO) converts a conserved insurer's assets to cash and applies it to outstanding debt. After completing this procedure, the commissioner is required by the California Insurance Code to apply for a court order to distribute the liquidated company's assets to the policyholders, creditors, and other groups owed by the insurer. After final distribution of the assets takes place and the CLO makes a declaration of that fact to the court, the closure of the insurer is complete.
In May 1994, the Bureau of State Audits issued a report stating that the department's Conservation and Liquidation Division (division) needed corrective action of poor management practices. We found that the division had not developed either a strategic plan for the conservation and liquidation of conserved insurers or management plans to close the estates of those insurers under its control. Further, we reported that the division had not developed adequate administrative practices to control effectively its costs for conservation and liquidation activities. In response to our audit, reviews by the Department of Finance, and the department's own internal investigations, the department reorganized the division into the CLO and relocated the unit to San Francisco to enhance communication with the department's other units and to improve the department's oversight of CLO activities.
The focus in this audit has been to do a follow-up review of the CLO's operations to determine the effectiveness of corrective action taken or planned regarding the recommendations of our previous audit.
We found that the CLO has developed a strategy and management plans for the conservation and liquidation of conserved insurers, including plans to close the estates under its control. However, it has had only limited success in distributing the assets of the liquidated insurers under its control and in ultimately closing their estates. As of November 1995, the CLO was managing 64 estates with assets available to pay claims. Between June 1994 and November 1995, the CLO made a final distribution of assets for only six liquidated insurers. Accounting errors, incomplete claims records, and unresolved tax issues have impaired the CLO's ability to close estates readily. In addition, implementation of improvements in its processes was delayed when the department reorganized the division into the CLO and moved the entire operation from Los Angeles to San Francisco. Because of these conditions, we could not determine whether the CLO's strategy and estate management plans have been effective in maximizing the assets of conserved and liquidated insurers and distributing the assets at the earliest possible time.
Although the CLO has improved its policies and procedures for conservation and liquidation activities, we identified several areas requiring further improvement. Specifically, we found the following conditions:
- While the CLO has obtained computer software systems intended to add uniformity and efficiency to its accounting, budgeting, and claims processing activities, it has not fully implemented those systems.
- We also noted that although the CLO prepares budgets for its operations and the estates it manages, it does not calculate and report monthly on variances between budgeted and actual expenses even though it is required to do so by its own procedures.
- Although the CLO has twice revised its plans to close estates as part of its annual budgeting process, it does not have procedures to update frequently the closing plans for the estates it manages. Current estate planning information is important to ensure that the assets of conserved and liquidated insurers are maximized and to provide planning and budgeting information for the CLO's operations.
- The CLO sponsored a change in the Insurance Code, effective January 1, 1996, which allows for an expedited process for the closing of estates without sufficient assets to pay administrative costs or claims. However, the CLO and department legal staff have not yet determined timetables to close 10 of those estates now eligible for closure as a result of the change in the Insurance Code.
- We also noted that the CLO's efforts to identify and pay claims continue to be impeded by claims for which the validity or the dollar amount are not easily determined. The CLO cannot make final distribution of an affected estate's assets until the validity and dollar amount of all claims have been proven by the claimants and allowed by the courts. Based on a study of claims payouts prepared by its consultant, the CLO has identified 12 estates for which it anticipates paying claims until 2011 through 2020.
The positions and salaries established by the CLO are not civil service or under the guidelines set by state control agencies. Instead, under the supervision of the department, the CLO establishes positions and salaries with the guidance of its own policies and procedures. In 1994, we reported that the CLO based salaries for the division's executive-level personnel, managers, and other employees on wage and salary surveys that relied heavily on salaries paid in the private sector. During 1995, the CLO commissioned a new salary study and adjusted its salary scales to bring them up to date with new job specifications and responsibilities. However, we question the applicability of the 1995 salary study to the CLO, since this study also relied almost exclusively on comparable salaries paid in the private sector and in some cases exceed those established for state employees.
Although the CLO has made significant strides to develop its administrative practices, further improvement is needed. Because the department does not believe that the CLO is required to follow the administrative procedures practiced by most state departments, the CLO has created its own administrative policies and procedures for managing its activities. However, we found that the CLO does not always follow its policies and procedures for hiring employees and managing outside contractors. We also noted that the CLO has not established guidelines for borrowing from its investment pool to fund the cost of administering no-asset estates. In addition, we found that the CLO does not always properly allocate its indirect administrative costs to conserved and liquidated insurers.
The CLO should continue to improve and implement its plans to conserve and liquidate conserved insurers in a manner that maximizes the assets of liquidated insurers and distributes the assets at the earliest possible time.
To improve the effectiveness and efficiency of its operations, the CLO should take the following steps:
- Comply with its own procedures for monitoring the variances between the budgeted and actual expenses for its operations and the expenses of the estates it manages;
- Prepare and implement procedures to perform quarterly updates to closing plans for the estates it manages;
- Develop timelines for the rapid closure of those remaining no-asset estates that meet the provisions of the newly amended Section 1021 of the Insurance Code; and
- Continue to seek changes in the law that will allow the CLO to set reserves for contingent and undetermined claims and make distributions of the assets of liquidated insurers for proved and allowed claims.
The CLO should continue its effort to improve its administrative policies and procedures for the management of conserved insurers and liquidated insurers. In addition, the CLO should take the following specific actions:
- Ensure that future surveys conducted to adjust employee salaries include public sector comparisons;
- Establish processes to disclose the number of its permanent positions and the associated costs for each position in the governor's budget to the Legislature;
- Create and implement guidelines to ensure that borrowing from the investment pool complies with management's policies, and seek prompt reimbursement from the Insurance Fund to minimize the cost of borrowing charged to the Insurance Fund; and
- Follow its procedures designed to ensure that its indirect costs are allocated in an equitable manner to the estates that benefit from those costs.
The department generally concurs with the findings and recommendations in our report.
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