The Division of Insurance Did Not Bill Insurers for $857,306 in Operations Assessments.

Audit calls on DOI to discontinue practice that exempts some companies from paying this assessment.

Overview

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 which it assessed annual operations assessments, as indicated below.

DOI Operations Assessments by Fiscal Year

Fiscal Year	Assessments Sent	Insurers Excluded from Assessments	Amount Overbilled to Assessed Insurers
2018	1,156	14	$198,743
2017	1,147	13	186,437
2016	1,149	13	180,042
2015	1,153	12	162,341
2014	1,149	10	129,744
Total	5,754*	62	$857,306†

*    This number does not represent an unduplicated count of insurers; some insurers may have been assessed in multiple years.

†    Discrepancies in totals are due to rounding.

Authoritative Guidance

Section 8C of Chapter 26 of the Massachusetts General Laws states that DOI assessments made in each fiscal year are against all licensed insurers in the Commonwealth. Additionally, line item 7006-0020 in the Commonwealth’s budget summaries for fiscal years 2014–2018 reads as follows:⁴

For the operation of the division of insurance . . . provided, that notwithstanding any general or special law to the contrary, 100 per cent of the amount appropriated in this item . . . shall be assessed upon the institutions which the division currently regulates pursuant to general or special laws or regulations . . . and provided further, that the assessment shall be in addition to any assessments currently assessed upon those institutions.

Also, Section 7A of Chapter 26 of the General Laws states, “The [operational] assessment shall be allocated on a fair and reasonable basis among all carriers.”

Further, the Office of Consumer Affairs and Business Regulation’s Division of Insurance Assessment Calculation and Billing Procedures states that DOI is required to do the following for operations assessments:

Allocate the assessment on a fair and reasonable basis among all insurers licensed, admitted, authorized or approved by the commissioner. The Division evenly distributes the assessment among the companies based on their license/certificate status.

Reasons for Issue

DOI officials pointed out that the division had a longstanding practice of not billing some insurers for annual operations assessments. DOI management stated that DOI excluded insurers from annual operations assessments if the amounts it received from an insurer for other assessments (for example, the State Rating Bureau [SRB] medical malpractice assessment and the SRB Workers Compensation Rating and Inspection Bureau assessment) exceeded what would be its annual operations assessment. However, this practice is not required by statute or the agency’s internal policies and procedures. Further, DOI officials informed us that, before they were informed of this audit, the division had established a working group related to the operations assessment process. As a result of a recommendation from the working group, DOI’s commissioner determined that the agency would notify companies that had traditionally been exempt from operations assessments that they would no longer be exempt starting in fiscal year 2019. However, as of the end of our audit fieldwork, DOI had not sent out these notifications.

Recommendations

1. 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.
2. DOI should work with insurers that were overbilled for operations assessments to determine whether any restitution is necessary.

Auditee’s Response

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, . . . instructions from the Office of Consumer Affairs and Business Regulation, and DOI's own policies and procedures then in effect. . . . 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. . . .

No insurers were “overbilled.” While the DOI did not assess certain insurers 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 DOI to administer the operations assessment. . . . 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 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 “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.”

Auditor’s Reply

Although DOI asserts in its response that it has the discretion to calculate and collect the assessments the way it did, there is nothing in Section 8C of Chapter 26 of the General Laws, budgetary language, or any other authoritative guidance that allows DOI to exempt the agencies in question from paying the assessments if they meet an exclusion threshold DOI says it has established. In fact, as noted above, the budgetary language specifically states that “the assessment shall be in addition to any assessments currently assessed upon those institutions.” Moreover, as noted above, the “maxed-out” exclusion policy that DOI said it was following does not exist in agency policies or procedures; it was therefore unclear to the Office of the State Auditor (OSA) why this billing practice was followed. Although we do not dispute the fact that DOI may have collected sufficient amounts through these assessments to cover what was appropriated for its operations in accordance with the applicable budgetary language, OSA believes that DOI should have complied with the Office of Consumer Affairs and Business Regulation’s Division of Insurance Assessment Calculation and Billing Procedures to allocate the assessment fairly among all insurers, not just a subset. By not doing this, DOI clearly overbilled the insurers that did receive annual operations assessments in an amount equal to what it should have billed to the insurers it should not have excluded. For example, as noted above, in fiscal year 2018, DOI should have billed 1,170 insurers for operations assessments but instead only billed 1,156 of these insurers. Consequently, DOI effectively shifted the operations assessment costs of $198,743 that needed to be collected from the 14 excluded insurers to the 1,156 insurers that were charged an operations assessment, resulting in these 1,156, on average, paying $171.92 more ($198,743/1,156 insurers) than they should have if DOI had not excluded any insurers.

Based on its response, DOI is taking measures to address our concerns in this area.

4.    This quotation is from the 2018 budget, but the line item exists with only minor differences in wording in the previous four years’ budgets.

Date published:	August 21, 2019