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 fees.

  • 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 are detected.

  • 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 centers.

Agency Comments

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.

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