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YELLOW SHEET Office of the State Auditor of Missouri |
Report No. 2005-75
October 2005
The following problems were discovered as a result of an audit conducted by our office of the Department of Insurance (MDI).
The department's examination billing policies may not comply with state law, and amounts billed may not accurately reflect actual costs incurred. State law requires the MDI to bill the expenses of any examination and to bill an additional 15 percent of the total expenses of the examination to pay for supervision and support of the examiners. Examination billings include indirect labor and operating expenses which appear to include some costs for the supervision and support of the examiners. Therefore, the billing of certain indirect labor costs, in addition to the 15 percent fee, could be considered double-billing of certain expenses.
In addition, current billing policies do not allow the department to track the true costs of examinations. Salaries for directors, managers, and closers are approximately $550,000 annually. Salaries for managers are billed monthly as indirect labor costs on a pro-rata basis. Based upon estimates made by department personnel, it appears approximately $350,000 of directors', managers', and closers' annual salaries could be billed as direct costs.
The State of Missouri is one of only five states to allow insurance companies to receive tax credits for examination costs. For the tax years 2004 and 2003, examination tax credits claimed were approximately $2.7 and $3.2 million, respectively. For the tax year 2004, available credits were $7.3 million with a carryover of approximately $4.3 million. In essence, the state's General Revenue Fund is paying a significant portion of examination costs instead of charging the costs to insurance companies as part of doing business in Missouri.
MDI policies do not require examiners to evaluate alternative work schedules to ensure the most cost-effective schedule is selected. Failure to evaluate alternative work schedules for each examination could result in increased travel costs. A similar finding was noted in our prior report. Additionally, MDI policies do not require examiners to obtain airfare quotes prior to incurring the costs. Also, airfare can be billed directly to the MDI or reimbursed through the examiner's expense accounts. Airfare costs billed directly to MDI for the two years ended June 30, 2004 and 2003, were approximately $139,000 and $165,000, respectively. However, MDI does not adequately track airfare costs to protect against double-billings.
The MDI does not require insurance companies in receivership to obtain independent audits, and the MDI does not perform examinations of these companies. At June 30, 2004, there were two Missouri chartered insurance companies in rehabilitation and sixteen in liquidation. Many of these receiverships have continued for several years with eleven companies in receivership since the 1990s.
Surplus lines revenues have almost tripled over the last five years. Revenues for the year ended June 30, 2000, were approximately $7.8 million, while revenues for the year ended June 30, 2004, were approximately $23.3 million. The number of surplus lines brokers also increased from 250 to 547 during this same time period. Examinations of surplus lines brokers are not conducted at least once every three years, as specified in MDI policy, and surplus lines procedures may be inadequate to handle current growth in surplus lines insurance. Additionally, the MDI does not bill examination costs to out-of-state surplus lines brokers as required by state law. This statute has been in effect since 1989 and the MDI has not billed any applicable costs.
Premiums on title insurance make up less than one percent of the total insurance premiums paid in Missouri; however, approximately 10 percent of the MDI's market conduct staff are used exclusively to conduct examinations of title insurance companies. State law requires examinations of all title insurance companies once every four years. The MDI should review current title insurance examination requirements and consider seeking legislation to revise the current requirements to better utilize MDI resources.
Receipts handled by the MDI totaled approximately $41.5 million and $39.5 million for the years ended June 30, 2004 and 2003, respectively. Some receipts are not transmitted to the Department of Revenue (DOR) for deposit on a timely basis. Additionally, for the period reviewed, approximately 75 percent of all monies were sent to a post office box specifically used for certain types of receipts. It appears that the receipts in this post office box could be sent directly to the support services section to be processed and not handled in the mailroom process, reducing the risk of loss or misuse of funds.
The MDI contracts with a not-for-profit foundation to provide insurance counseling services for senior citizens. As similarly noted in prior audits, the MDI does not always require the foundation to provide detailed documentation supporting amounts claimed for reimbursement under the grant agreement. Amounts paid to the foundation totaled approximately $272,000 and $312,000 for the years ended June 30, 2004 and 2003, respectively.
