A performance audit of the Arizona Department of Insurance

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
of
THE ARIZONA DEPARTMENT OF INSURANCE
D
JULY 1979
QUARTERLY REMITTANCE OF INSURANCE
PREMIUM TAXES TO THE STATE WOULD ENABLE
THE STATE TREASURER TO INVEST THESE FUNDS
SOONER AND EARN ADDITIONAL INTEREST IN-COME.
DURING 1979 THIS ADDITIONAL INCOME
COULD HAVE BEEN AS MUCH AS $ 1,660,000.
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 4
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
SUITE 600
112 NORTH CENTRAL AVENUE
PHOENIX, ARIZONA 85004
255- 4385
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
BILLIE J. ALLRED, CPA
DEPUTY AUDITOR GENERAL
SUITE 820
33 NORTH STONE AVENUE
TUCSON, ARIZONA 85701
882- 5465
The Honorable Bruce B a b b i t t , Governor
Members of t h e Arizona L e g i s l a t u r e
John N. Trimble, Director of Insurance
Transmitted herewith is a r e p o r t of the Auditor General, A Performance Audit
of the Arizona Department of Insurance. This r e p o r t is i n response t o a
September 19, 1978, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Budget Committee
and a January 18, 1979, r e s o l u t i o n o f t h e J o i n t L e g i s l a t i v e Oversight
Committee.
A summary of t h i s r e p o r t is found on t h e blue pages a t t h e f r o n t of the
r e p o r t . A response t o t h i s r e p o r t from t h e Director of Insurance is found
on the yellow pages preceding t h e appendices.
Also, we have included f o r your information t h e r e s u l t s of our r e c e n t l y
completed f i n a n c i a l a u d i t of the Department of Insurance.
My s t a f f and I w i l l be happy t o meet with the a p p r o p r i a t e l e g i s l a t i v e
committees, i n d i v i d u a l l e g i s l a t o r s or other s t a t e o f f i c i a l s t o discuss or
c l a r i f y any items i n t h i s r e p o r t or t o f a c i l i t a t e the implementation of
the recommendations.
Respectfully submitted,
~ o u ~ l Ra . s N orton
Auditor General
S t a f f :
Gerald Silva
William Thomson
Steve Thacker
J e r r y M i l l s
Kirk Schneider
O F F I C E OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF
THE ARIZONA DEPARTMENT OF INSURANCE
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 4
TABLE OF CONTENTS
Page
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS " .
, se 8 - f: i# t/ z
FINDINGS jPr / . r $ / ref* x 6
.4
<+*
FINDING I 2 c.$-/+ 9.. / Y; " P.
13 7 '- ) p cF*>@$. p f { $ ? ~
6 . $\
Quarterly remittance of insurance premium taxes t o the '
S t a t e would enable the S t a t e Treasurer t o invest these
funds sooner and earn additional i n t e r e s t income. ,/
During 1979 t h i s additional income could have been as , r
much as $ 1,660,000. ,." ; -
CONCLUSION
RECOMMENDATION
FINDING I1
Improvements needed i n the licensing procedures of
the Department of Insurance
CONCLUSION
RECOMMENDATION
FINDING I11
The public is unaware t h a t consumer complaint services
a r e available t o a s s i s t them. Also, the Department
of Insurance is f a i l i n g t o use the complaint data it has
t o review the a c t i v i t i e s of companies and agents.
CONCLUSION
RECOMMENDATION
FINDING I V
More action is needed
as it pertains t o consumer education and public
involvement.
CONCLUSION
RECOMMENDATION
FINDING V
Page
44
Prior approval of most property- casualty insurance
r a t e s is not needed. Changing t o open- competition
would eliminate current problems experienced i n
reviewing r a t e s and also eliminate the need f o r
additional s t a f f .
CONCLUSION
RECOMMENDATION
FINDING V I
The Arizona Department of Insurance needs additional
l e g i s l a t i o n t o enable it t o develop a stronger
regulatory program and t o recover a l l the costs of
company examinations.
CONCLUSION
RECOMMENDATION
OTHER PERTINENT INFORMATION
REPORT ON EXAMINATION OF FINANCIAL STATEMENTS
WRITTEN RESPONSE TO THE AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX A - Consumer brochures published by the Pennsylvania
Insurance Department
APPENDIX B - Life insurance buyer's guide developed by the National
Association of Insurance Commissioners ( NAIC)
APPENDIX C - Arizona Legislative Council opinions issued
March 27, 1979 and March 29, 1979.
LIST OF TABLES
TABLE 1 -
TABLE 2 -
TABLE 3 -
TABLE 4 -
TABLE 5 -
TABLE 6 -
TABLE 7 -
TABLE 8 -
TABLE 9 -
TABLE 10 -
Department of Insurance Expenditures for FY 1977- 78
Summary of Frequency of S t a t e Premium Tax
Collections
Additional I n t e r e s t Income That Would Have
Accrued t o the S t a t e of Arizona During 1979
if it Collected Insurance Premium Taxes as
Frequently as New York, California or
I l l i n o i s
Summary of Areas of P o t e n t i a l Improvements
i n the Licensing Procedures of the Department
of Insurance and the Benefits These Improvements
Would Generate i n Terms of Reduced License
Processing Time, S t a f f Requirements and
Department Expenditures
Summary of Average Elapsed Time i n Days f o r
the Steps i n the Department of Insurance
Licensing Process
A Comparison of Examination Fees for
Professional Licenses i n Arizona
A Comparison of the Fingerprinting Processes
a t the Real Estate Department and the Department
of Insurance
A Comparison of Arizona's Number of Complaints
Per 1,000 Population With Those of the Ten Leading
S t a t e s and the Average For 46 S t a t e s
A Comparison of Complaints/$ 100,000 of Business
for Companies " Called Inn and not " Called InM by
the Department of Insurance
Eighteen S t a t e s With Open- Competition Rating
Laws
Page
4
SUMMARY
-
The first Department of Insurance was created i n 1913 and placed under the
direction of the Arizona Corporation Commission. However, i n 1968 voters
approved a c o n s t i t u t i o n a l amendment creating an independent Department of
Insurance. A r t i c l e 15 section 5 of the Arizona S t a t e Constitution e s t a b l i s h e s
the Department of Insurance as a c o n s t i t u t i o n a l e n t i t y charged with
" . . . l i c e n s i n g , c o n t r o l and supervision ..." of i n s u r e r s .
The Department of Insurance has a s t a f f of 58 full- time employees and is funded
>
through the S t a t e General Fund.
Our review of the Department of Insurance showed the s t a t e could have earned
more than $ 1,660,000 i n i n t e r e s t income i n 1979 i f premium taxes were collected
as frequently as is done by other s t a t e s . ( page 13)
Our review a l s o showed improvements are needed i n the licensing procedures.
The l i c e n s e processing time can be reduced by 23 days and licensing s t a f f
reduced by s i x positions if i n e f f i c i e n c i e s are eliminated. ( page 18)
We found the Department's consumer complaint services are generally e f f e c t i v e ,
but the public is l a r g e l y unaware the services are available t o help them.
( page 33) Also, the Department has been i n e f f e c t i v e i n using data from
consumer complaints t o i d e n t i f y and regulate " problem" companies and agents.
( page 36)
Greater Department action is needed with regard t o consumer education and
public i n t e r e s t . More needs t o be done to develop consumer brochures and
" r e a d a b i l i t y n r e g u l a t i o n s should be enacted governing Life and Health
insurance p o l i c i e s . ( page 41 )
Our audit found prior approval of most property- casualty insurance r a t e s is not
needed. Competitive r a t i n g laws work equally as w e l l . Adopting such a law i n
Arizona would- eliminate delays, questions o f authority and the need for
additional s t a f f associated with the current prior approval law. ( page 44)
Finally, g r e a t e r s t a t u t o r y authority is needed f o r the Department t o effec-t
i v e l y regulate companies. S t a t u t e s governing unfair claims practices should
be enacted and the director should be given authority t o f i n e companies for
v i o l a t i o n s o f the insurance code. ( page 62)
INTRODUCTION AND BACKGROUND
In response t o a September 19, 1978, resolution of the J o i n t Legislative Budget
Committee and a January 18, 1979, resolution of the J o i n t Legislative Oversight
Committee, the Office of the Auditor General has conducted a performance audit
of the Department of Insurance. This performance audit was conducted as a part
of the sunset review s e t f o r t h i n ARS 43- 2351 through 43- 2374.
Regulation of the insurance industry i n Arizona preceded statehood with the
passage of t e r r i t o r i a l laws r e l a t i n g t o the insurance business. It was not
u n t i l a f t e r statehood, however, t h a t the first department of insurance was
created. In 1913, the l e g i s l a t u r e created the Department of Insurance and
placed it under the direction of the Corporation Commission.
The first Department of Insurance was staffed by a superintendent and three
stenographers. In its i n i t i a l year of operation the Department spent $ 4,000,
collected $ 41,000 i n taxes and fees, and supervised 147 foreign and seven
domestic companies. Since 1913, both the insurance industry i n Arizona and the
Department of Insurance have grown. Now, sixty- five years later, the number of
insurance companies licensed i n Arizona has increased from 154 t o more than
1,600. The Department has a l s o grown t o 58 full-€ Zme employees organized
i n t o seven divisions with an annual budget of $ 1,091,715 as shown i n the f o l -
lowing table.
TABLE 1
- DE PARTMENT OF INSURANCE EXPENDITURES
FOR FY 1977- 78
Expenditures
Employees Travel
% Professional I n Out of Other Capital
Division
%
Number of Total S a l a r i e s Benefits Services State S t a t e Operating Outlay Total of Total
Director 2 3.5% $ 39,993 $ 7,527 $ 72 $ 2,821 $ 9,391 $ 808 $ 60,612 5 .' 6%
Hearing Division 2 3.5 37,138 5,784 $ 14,797 114 570 6,202 1,325 65,930 6.0
Property & Casualty Division 6 10.3 78,230 14,604 7,645 168 552 14,394 699 116,292 10.7
Consumer Affairs Division
Examiner 7 12.0 101,788 19,157 6,176 364 179 16,846 1,104 145,614 13.3
Complaint 9 15.5 110,477 19,495 5,745 1,748 22,693 160,245 14.7
License - 12 - 20.7 109,575 16,750 33,578 - 28,823 87 189405 17.4
- 28 - 48.2 321,840 55,402 45,499 2,112 179 68,362 1,867709 4951264 45.4
Life & D i s a b i l i t y Division 8 13.8 109,110 20,342 8,006 42 19,145 156,645 14.3
Administration Division 8 13.8 87,502 15,363 20,470 1,209 124,544 11.4
Tucson Office - 4 - 6.9 55,125 9,932 36 1 - 615 - 6,395 72,428 6.6
Totals -- 58* - 100 .0% $ 728,938 $ 128,954 -$ 76,308 -$ 3,123 -$ 4,122 $ 144,359 $ 5,911 $ 1,091,715 100.0%
* This figure does not include 2.7 FTE seasonal positions.
The growth of the Department of Insurance and the number of insurance companies
supervised led i n 1968 t o voter approval of a c o n s t i t u t i o n a l amendment creating
an independent Department of Insurance. Legislation enacting Article 15,
section 5 of the Arizona S t a t e Constitution removed the Department of Insurance
from t h e d i r e c t i o n of the Corporation Commission and established a separate
department with its own objectives and functions.
The Department of Insurance has s t a t e d its objectives t o be:
Administer the S t a t e insurance code t o protect the c i t i z e n s of
Arizona who purchase insurance of a l l descriptions, and provide a
b e t t e r response t o needs of Arizona insurance and r e l a t e d consumers.
Stimulate the insurance market by encouraging competition.
To accomplish these objectives, the Department performs the following activ-i
t i e s :
- t e s t s and licenses agents, brokers, a d j u s t e r s and s o l i c i t o r s
- reviews and approves i n s u r e r s ' i n i t i a l and continuing q u a l i f i c a t i o n s
t o do business i n the state
- approves property and casualty insurance rates
- approves l i f e and d i s a b i l i t y insurance policy forms
- r e h a b i l i t a t e s , supervises and/ or l i q u i d a t e s insolvent insurers
- c o l l e c t s premium taxes and fees
- oversees the administration of the guaranty funds
- oversees the administration of the J o i n t Underwriting Plan for
medical malpractice insurance
- i n v e s t i g a t e s consumer complaints
The objectives of t h i s audit were to:
( a) Review the nine sunset f a c t o r s t o aid i n the process of determining
whether the Department of Insurance should be continued or
terminated.
( b) Determine whether t h e t a x and audit functions are performed
s a t i s f a c t o r i l y .
( c) Determine whether the licensing process is e f f i c i e n t and timely.
( dl Determine if consumer complaint services a r e e f f e c t i v e i n handling
complaints and a s s i s t i n g the public.
( e) Determine whether the Department of Insurance's actions are
s a t i s f a c t o r y with regard t o consumer education and public
involvement.
( f ) Review the need for prior approval of property- casualty r a t e s .
( g) Review the need for additional l e g i s l a t i o n t o enable the Department
t o f u l f i l l its regulatory role.
( h) Review and report o t h e r p e r t i n e n t information of value t o the
Legislature.
The Office of the Auditor General expresses its g r a t i t u d e to the Director of
the Department of Insurance and h i s s t a f f for t h e i r cooperation, assistance and
consideration during the course of the audit.
SUNSET FACTORS
In accordance with ARS 43- 2351 through ARS 43- 2374, nine f a c t o r s were reviewed
t o aid i n the process of determining whether the Department of Insurance should
be continued or terminated.*
SUNSET FACTOR: OBJECTIVE AND PURPOSE
I N ESTABLISHING THE DEPARTMENT
A r t i c l e 15, section 5 of the Arizona S t a t e Constitution provides that " Domestic
and foreign insurers s h a l l be subject t o l i c e n s i n g , control and supervision by
a department of insurance as prescribed by law." ( emphasis added) T i t l e 20 of
the Arizona Revised S t a t u t e s provides the Department with authority to:
l i c e n s e companies, l i c e n s e agents, approve l i f e and d i s a b i l i t y insurance
p o l i c i e s and advertising used i n the s t a t e , approve property- casualty r a t e s ,
conduct examinations and i n v e s t i g a t i o n s and c o l l e c t premium taxes and fees.
The Insurance Department has s t a t e d its objectives t o be:
" Administer the S t a t e insurance code t o protect the
c i t i z e n s of Arizona who purchase insurance of a l l
descriptions, and provide a b e t t e r response t o the needs
of Arizona insurance and r e l a t e d consumers. Stimulate the
insurance market by encouraging c ~ m p e t i t i o n . ~
SUNSET FACTOR: THE DEGREE TO WHICH
THE DEPARTMENT HAS BEEN ABLE TO
RESPOND TO THE NEEDS OF THE PUBLIC
AND THE EFFICIENCY WITH WHICH I T HAS OPERATED
The Department has responded t o the public need when such need has become
evident. For example, the Department is currently developing Medicare supple-ment
regulations i n response t o a growing problem with e l d e r l y consumers being
sold excessive numbers of t h i s type of policy. The Department has also
developed r u l e s prohibiting insurance companies from denying benefits or
coverage on the basis of sex or marital s t a t u s . However, when compared with
some other s t a t e s , the Department could do more t o encourage public input on
insurance needs. ( page 42)
* Because the Department of Insurance is created by the S t a t e c o n s t i t u t i o n ,
a c o n s t i t u t i o n a l amendment w i l l be required should a decision be reached
t o terminate the Department. Such an amendment procedure was provided
for i n SB1313 which was passed by the 1979 session of t h e L e g i s l a t u r e .
Our review of the Department's operations revealed the following opportunities
e x i s t t o improve the Department's level of efficiency.
- The Ticensing processes of the Department cause unnecessary delays
i n i s s u i n g l i c e n s e s and t h e l i c e n s i n g s t a f f is excessive. ( page 18)
- The prior approval by the Department of insurance r a t e s charged for
auto, homeowner, f i r e and other forms of property and casualty
insurance causes long delays, procedural problems, and an unneces-sary
u t i l i z a t i o n of s t a f f resources. ( page 44)
- The number of formal Department hearings can be s i g n i f i c a n t l y
reduced without impairing the Department's a b i l i t y t o obtain neces-sary
information. ( page 65)
SUNSET FACTOR: THE EXTENT TO WHICH
THE DEPARTMENT HAS OPERATED WITHIN
THE PUBLIC INTEREST
Essentially, a l l of the Department's a c t i v i t i e s appear t o be i n the public
i n t e r e s t . Many of the Department's practices such as reviewing policies t o
make sure provisions are not misleading, licensing agents t o ensure agents have
basic knowledge of insurance laws, processing consumer complaints, and exam-ining
the market conduct of companies are d e f i n i t e l y i n the public i n t e r e s t .
Our audit revealed t h a t the policy review functions and market conduct exam-inations
are e f f e c t i v e i n protecting the public i n t e r e s t .
Policy Review - The Life and D i s a b i l i t y Division approves a l l policy forms and
advertising used i n s e l l i n g l i f e , d i s a b i l i t y ( accident and h e a l t h ) , and c r e d i t
insurance i n Arizona. This is done under t h e a u t h o r i t y of ARS 20- 1111 which
requires the Department t o disapprove the use of any policy which contains any
" . . . i n c o n s i s t e n t , ambiguous or misleading clauses..." P o l i c i e s must also be
disapproved if they f a i l t o contain s p e c i f i c standard provisions required by
law. In addition, policies may be disapproved i f " . . . f a l s e , deceptive or
misleading ..." advertising is used t o s e l l the p o l i c i e s .
According t o experts, Arizona's policy review function is e f f e c t i v e . Attorneys
for the Health Insurance Association of America and the ~ mgrican Council of
Life Insurance-( who a r e familiar with policy review functions throughout the
country) s t a t e d t h a t Arizona is e f f e c t i v e i n its policy review. Arizona
attorneys who specialize i n insurance law s t a t e d t h a t the policy review was
e f f e c t i v e ; and two such attorneys s t a t e d t h a t the function probably helped
minimize l i t i g a t i o n over insurance contract terms.
The Department's complaint i n v e s t i g a t o r s s t a t e d t h a t they were unaware of any
insurance contract provisions t h a t were not caught i n review t h a t were causing
consumer complaints. In addition, the Supervisor of the s e c t i o n s t a t e d t h a t
the review and approval of advertising f o r policies was one reason the
Department received only f i v e complaints about misleading advertising during
1978.
Market Conduct Examinations - Market conduct examinations i n v e s t i g a t e company
treatment of policyholders i n such areas as: s a l e s and a d v e r t i s i n g , under-writing,
r a t i n g practices and claims handling. The department performs the
market conduct examinations both i n conjunction with regular f i n a n c i a l exam-inations
and as s p e c i a l , separate examinations. We found market conduct
examinations are e f f e c t i v e i n identifying and correcting problems. The seven
special market conduct examinations performed i n the l a s t two years i d e n t i f i e d
numerous problems, most of which were rapidly resolved following the exam-inations.
Examples of problems i d e n t i f i e d include:
- use of policies with provisions t h a t v i o l a t e S t a t e law
- f a i l u r e t o pay proper i n t e r e s t and dividends
- excessive premiums charged f o r p o l i c i e s
- delayed payment of claims
- noncompliance with r a t e approval requirements of the Departzent
- underpayment and overpayment of p r e s c r i p t i o n claims for Health
Insurance
- the use of advertising not approved by the Department
- f a i l u r e t o pay policyholder's benefits on terminated p o l i c i e s
I n t h e case of one company, the market conduct examination disclosed indica-t
i o n s of insolvency t h a t prompted a Department f i n a n c i a l examination and
u l t i m a t e l y l e d € 0 t h e company being placed i n r e c e i v e r s h i p . I n other i n s t a n c e s
t h e market conduct examination and subsequent Department follow- up l e d t o
c o r r e c t i o n of the problems.
However, market conduct examinations need t o be used i n conjunction with
complaint d a t a already i n the Department's f i l e s . ( page 36) F u r t h e r , the
Department does not engage i n some public i n t e r e s t a c t i v i t i e s t h a t are provided
by other s t a t e insurance departments. ( page 40)
SUNSET FACTOR: THE EXTENT TO WHICH RULES
AND REGULATIONS PROMULGATED BY THE DEPARTMENT
ARE CONSISTENT WITH THE LEGISLATIVE MANDATE
The Arizona Attorney General reviews all r u l e s and r e g u l a t i o n s proposed by the
Department of Insurance t o ensure t h a t 1) the r u l e s and r e g u l a t i o n s a r e within
t h e a u t h o r i t y of t h e Department and 2) the goals and o b j e c t i v e s o f t h e r u l e s
a r e c o n s i s t e n t with t h e Department's s t a t u t o r y a u t h o r i t y .
SUNSET FACTOR: THE EXTENT TO WHICH THE
AGENCY HAS ENCOURAGED INPUT FROM THE
PUBLIC BEFORE PROMULGATING ITS RULES AND
REGULATIONS AND THE EXTENT TO WHICH IT
HAS INFORMED THE PUBLIC AS TO ITS
ACTIONS AND THEIR EXPECTED IMPACT
ON THE PUBLIC
The Department's e f f o r t s i n p u b l i c i z i n g proposed r u l e s and public hearings a r e
comparable t o t h e other Arizona S t a t e agencies. A survey of S t a t e agencies by
t h e O f f i c e o f the Auditor General revealed t h a t most agencies f i l e proposed
r u l e s with t h e Secretary of S t a t e and post n o t i c e s o f p u b l i c hearings i n its
building. These a r e t h e same a c t i o n s taken by the Department of Insurance. I n
a d d i t i o n , the Department does send copies of t h e n o t i c e s of hearings t o the
C a p i t o l p r e s s room and industry groups.
SUNSET FACTOR: THE EXTENT TO WHICH
THE DEPARTMENT HAS BEEN ABLE TO
INVESTIGATE ANBRESOLVE COMPLAINTS
THAT ARE WITHIN ITS JURISDICTION
The Department has established a consumer complaint section which appears to be
e f f e c t i v e i n i n v e s t i g a t i n g and resolving most complaints. I n 1978 the Depart-ment
handled more than 5,000 complaints and a s s i s t e d consumers i n obtaining 1.5
million d o l l a r s i n payments from insurance companies and agents. Moreover, i n
1978 the Department experimented with a program of h a v i n g i n v e s t i g a t o r s v i s i t
the county s e a t s of outlying counties t o receive consumer complaints from r u r a l
residents. This program was known as the AIDS program, an acronym for Arizona
Insurance Department Services. However, the public is still generally unaware
of the consumer complaint section ( page 36) and complaint data is not used t o
monitor the a c t i v i t i e s of insurance companies and agents. ( page 36)
SUNSET FACTOR: THE EXTENT TO WHICH
THE ATTORNSY GENERAL OR ANY OTHER
APPLICABLE AGENCY OF STATE GOVERNMENT
HAS THE AUTHORITY TO PROSECUTE ACTIONS
UNDER ENABLING LEGISLATION
According t o the Assistant Attorney General for the Department of Insurance the
Attorney General has s u f f i c i e n t authority t o prosecute actions under the
enabling law. Further, the Department of Insurance is very cooperative i n
a s s i s t i n g the Attorney General i n prosecuting cases. Such cases include
instances involving j o i n t i n v e s t i g a t i o n s between the Department of Insurance,
the Corporation Commission and the Banking Department.
SUNSET FACTOR: THE EXTENT TO WHICH
THE DEPARTMENT HAS ADDRESSED DEFICIENCIES
I N THE ENABLINeSTATUTES WHICH PREVENT
I T FROM FULFILLING IT'S STATUTORY MANDATE
The Department has been active i n addressing d e f i c i e n c i e s i n it's enabling
s t a t u t e s . In 1977, the Department submitted or a c t i v e l y supported ten b i l l s
which were passed by the Legislature. In 1978 the Department submitted or
a c t i v e l y supported s i x b i l l s which were passed by the Legislature. In the 1979
session the Department submitted or actively supported 11 b i l l s of which eight
were enacted i n t o law.
A s a r e s u l t the Department has been p a r t i a l l y responsible f o r s t a t u t o r y changes
involving: the licensing and regulation of agents, the c e r t i f i c a t i o n of
insurers and the regulation of f i n a n c i a l a c t i v i t i e s of insurers. Worthy of
special note is the Department- supported 1977 l e g i s l a t i o n which increased
c a p i t a l and surplus requirements for i n s u r e r s .
SUNSET FACTOR: THE EXTENT TO WHICH CHANGES
ARE NECESSARY I N THE LAWS OF THE DEPARTMENT
TO ADEQUATELY COMPLY WITH THE FACTORS LISTED
I N THIS SUBSECTION
For a discussion o f these issues see pages 13, 44 and 6 1.
FINDING I
QUARTERLY REMITTANCE OF INSURANCE PREMIUM TAXES TO THE STATE WOULD ENABLE THE
STATE TREASURER TO INVEST THESE FUNDS SOONER AND EARN ADDITIONAL INTEREST
INCOME. DURING 1979 THIS ADDITIONAL INCOME COULD HAVE BEEN AS MUCH AS
Arizona would have earned as much as $ 1,660,000 i n additional i n t e r e s t income
i f it required insurance companies t o remit t h e i r insurance premium taxes as
frequently as is required by some other s t a t e s . This additional i n t e r e s t
income could be earned without causing a s i g n i f i c a n t increase i n Insurance
Department workload or s t a f f i n g .
Insurance companies operating i n Arizona a r e subject t o a tax on gross
insurance premiums collected* and are exempt, except as t o unrelated business
income, from Arizona income tax. The volume of insurance sold i n Arizona and
t h e r e s u l t a n t insurance premium taxes have increased s u b s t a n t i a l l y i n recent
years as shown below.
Arizona Premium Tax Collections
Year
1960
Amount
$ 3,275,189
$ 9,364,192
$ 21,841,928
$ 25,715,518
$ 29,606,406
$ 33,592,923
$ 39,154,000
Arizona law ( ARS 20- 224) currently requires insurance companies t o pay premium
taxes once a year on March 31st for domestic corporations and March 1 s t for
foreign corporations. However, 21 other s t a t e s require insurance companies t o
remit insurance premium taxes more frequently than once a year. Table 2
summarizes the frequency of insurance premium t a x c o l l e c t i o n s by s t a t e . The
s t a t e s are l i s t e d i n order based upon the volume of 1975 insurance premiums.
* Premium tax r a t e s are two percent of the t o t a l Arizona d i r e c t premium
income for foreign or a l i e n companies and one percent for domestic
companies.
TABLE 2
SUMMARY OF FREQUENCY OF
STATE PREMIUM TAX COLLECTIONS
S t a t e
New York
California
I l l i n o i s
Texas
Pennsylvania
Ohio
Michigan
Florida
New Jersey
Massachusetts
Indiana
Missouri
Georgia
Wisconsin
North Carolina
Minnesota
Maryland
Tennessee
Virginia
Louisiana
Washington
Albama
Oregon
Connecticut
Iowa
Colorado
Oklahoma
Kansas
South Carolina
Kentucky
ARIZONA
Arkansas
Nebraska
Mississippi
West Virginia
Utah
Rhode Island
New Mexico
D i s t r i c t of Columbia
Maine
New Hampshire
Idaho
Hawaii
South Dakota
North Dakota
Montana
Delaware
Nevada
Alaska
Vermont
Wyoming
Annual Premium ( 1 )
Volume
$ 1 3,794,252,385
11,887,068,000
6,863,789,200
6,612,938,873
6,038,302,000
5,727,314,982
5,628,856,526
4,492,449,372
4,301,021,569
3,100,000,000 ( 2)
Frequency
of Collection
Quarterly 4
Quarterly
Quarterly
Annually
Annually
Semiannually ( foreign)
Semiannually 4
Annually
Annually
Quarterly
Quarterly ( foreign)
Annually
Quarterly 4
Quarterly ( foreign)
Annually
Quarterly
Semiannually
Semiannually
Quarterly
Annually
Annually
Annually
Annually
Semiannually ( foreign)
Annually 4
Quarterly
Quarterly
Annually
Annual 1 y
Triannually
Annually 4
Annually
Annually
Annual 1 y
Annually
Annually
Triannually 4
Annually
Annually
Quarterly
Semiannually
Annually
Monthly or quarterly 4
Annually
Annually
Annually
Annually
Annually
Annually 4
Annually
Annually
( 1) Listed i n order from the l a r g e s t 1975 annual premium volume t o the smallest
( 2) Estimated 4
If Arizona collected insurance premium taxes as frequently as some of the
s t a t e s shown i n Table 2, t h e S t a t e could invest these funds e a r l i e r and earn
additional i n t e r e s t income." Table 3 i l l u s t r a t e s the additional income t h a t
would have accrued t o the S t a t e of Arizona during 1979 i f it collected
insurance premium taxes as frequently as New York, California or I l l i n o i s .
These three s t a t e s were selected for comparative purposes because New York,
California and I l l i n o i s are the three l a r g e s t s t a t e s i n terms of annual
insurance premiums.
A s shown i n Table 3, t h e S t a t e of Arizona could have earned from $ 1,180,000 t o
$ 1,660,000 i n additional i n t e r e s t income i f it collected insurance premium
taxes as frequently as New York, California or I l l i n o i s . It should be noted
t h a t the amount of additional i n t e r e s t income r e s u l t i n g from more frequent
collection of insurance premium taxes w i l l increase as insurance premium taxes
and/ or as the annual r a t e of r e t u r n on investment f o r the S t a t e of Arizona
increases. I f future premium t a x c o l l e c t i o n s meet or exceed current estimates
almost $ 1,900,000 i n additional i n t e r e s t could be earned i n 1980.
Although t h e S t a t e could have earned from $ 1,180,000 t o $ 1,660,000 during 1979
by c o l l e c t i n g insurance premium taxes more frequently, t h e c o s t s t o the
Department t o process t h e s e a d d i t i o n a l remittances would be r e l a t i v e l y insig-n
i f i c a n t . Currently i n Arizona there are 1,700 insurance companies subject t o
insurance premium taxes. However, of these 1,700 companies only 850 pay more
than $ 1,000 and 600 pay more than $ 5,000, i n annual insurance premium taxes.
If only those companies with annual insurance premium taxes i n excess of $ 1,000
or $ 5,000 were required t o remit t h e i r taxes q u a r t e r l y , Department of Insurance
o f f i c i a l s estimate it would require two additional employees a t a cost of
$ 30,000 t o process these additional remittances. This a d d i t i o n a l c o s t is less
than two percent of the additional i n t e r e s t income t h a t could have been earned
i n 1979 i f insurance premium taxes had been collected more frequently.
* Based upon an annual r a t e of return on investment of 9 percent. Currently
the S t a t e of Arizona invests temporarily excess S t a t e funds t o earn
additional revenue. According t o the S t a t e Treasurer the annual r a t e of
r e t u r n on investment for 1979 is projected t o be 9 percent.
TABLE 3
ADDITIONAL INTEREST INCOME THAT
WOULD HAVE ACCRUED TO THE STATE
OF ARIZONA DURING 1979 IF IT
COLLECTED INSURANCE PREMIUM TAXES
AS FREQUENTLY AS NEW YORK,
CALIFORNIA OR ILLINOIS
I l l i n o i s New York California Arizona
Arizona Premium Taxes
f o r 1979 ( e s t . ) $ 39,154,000 $ 39,154,000 $ 39,154,000 $ 39,154,000 4
Actual Taxes for
p r i o r Year ( 1978) $ 33,592,923 $ 33,592,923 $ 33,592, 923 $ 33 95g29 923
Minimum Tax Subject t o
Quarterly Collections $ 5,000 $ 1,000 $ 5,000 - 4
Amount of 1979 Taxes Subject
t o Quarterly Collections
( based on prior years
actual tax and minimum
tax provisions) $ 32,793,412 $ 33,471,989 $ 3217931412 - 4
Amount of Quarterly Payments 25% of prior 25% of prior 1st 3 payments -
years actual years a c t u a l 26 &% of prior
tax tax years a c t u a l
tax
- 4
Quarterly Collection Dates April 1979 March 1979 May 1979
June 1979 July 1979 Aug. 1979 -
Sept. 1979 Oct. 1979 Nov. 1979 -
Dec. 1979 Jan. 1980 -
F i n a l Collection Date March 1980 March 1980 April 1980 March 1980 4
Additional I n t e r e s t Earned
@ 9% i n t e r e s t by Collecting
and Investing Taxes
Quarterly $ 1,660,000 $ 1,550,000 $ 1,180,000 $ - 0-
4
CONCLUSION
Arizona does not c o l l e c t insurance premium taxes as frequently as 21 other
s t a t e s . Had Arizona required insurance companies t o remit t h e i r insurance
premium taxes as frequently a s is required by some other s t a t e s an additional
$ 1,660,000 i n i n t e r e s t income could have been earned during 1979.
RECOMMENDATION
We recommend ARS 20- 224 be revised t o provide f o r q u a r t e r l y c o l l e c t i o n of a l l
premium taxes i n excess of $ 1,000.
FINDING 11
IMPROVEMENTS NEEDED I N THE LICENSING PROCEDURES OF THE DEPARTMENT OF INSURANCE
The Licensing Section o f the Department of Insurance annually l i c e n s e s more
than 17,000 insurance agents, brokers, adjustors and s o l i c i t o r s . Our review of
the Licensing Section revealed t h a t current licensing procedures and policies
cause unnecessary delays i n issuing l i c e n s e s and t h a t the Section's s t a f f i n g
l e v e l is excessive.
The time required f o r the Licensing Section t o issue a l i c e n s e can be reduced
by as much as 34 weeks, Section s t a f f i n g reduced by as much as five full- time
positions and Department expenditures reduced by as much as $ 51,800 per year if
the Department:
1) amends its policy regarding f i n g e r p r i n t checks and
2) eliminates current i n e f f i c i e n c i e s i n t h e l i c e n s i n g process.
Table 4 summaries the areas of p o t e n t i a l improvement i n the licensing proce-dures
of the Department of Insurance, and the benefits these improvements would
generate i n terms of reduced l i c e n s e processing time, staff requirements, and
Department expenditures.
TABLE 4
SUMMARY OF AREAS OF POTENTIAL IMPROVEMENTS
I N THE LICENSING PROCEDURES OF THE DEPARTMENT
OF INSURANCE AND THE BENEFITS THESE IMPROVE-MENTS
WOULD GENERATE I N TERMS OF REDUCED
LICENSE PROCESSING TIME, STAFF REQUIREMENTS
AND DEPARTMENT EXPENDITURES
Reduced Reduced
Areas of Potential Improvements Reduced License Staff Department
i n the Licensing Procedures of Processing Time Requirements Expenditures
the Department of Insurance ( Days ( F. T. E. ) ( Annual )
1. Issue licenses before the r e s u l t s
of F. B. I. f i n g e r p r i n t checks are
received ( page 19)
2. Improve telephone procedures
( page 24)
3. Use computer t o type and mail
license ( page 25)
4. Use video- terminals t o input
licensing data ( page 26)
5. Use p r i v a t e firms t o perform
t e s t i n g and fingerprinting
functions ( page 26) - 7 2.50 $ 20,000
Cumulative Benefits
* Includes savings i n processing costs as well as s t a f f i n g . ** Because some events i n the licensing process occur concurrently, these
reduced processing times are not cumulative.
Issue Licenses Before the Results of
FBI Fingerprint Checks are Received
The primary cause of delays i n the issuance of l i c e n s e s by the Licensing
Section of the Department of Insurance is the f i n g e r p r i n t i n g of applicants. It
is the policy of the Department to not issue a l i c e n s e t o an applicant u n t i l the
Department receives the r e s u l t s of a Federal Bureau of Investigation ( FBI)
f i n g e r p r i n t check on the applicant. This policy delays the issuance of
licenses t o applicants approximately three weeks and imposes an unnecessary
f i n a n c i a l hardship on applicants.
The Department f i n g e r p r i n t s all l i c e n s e a p p l i c a n t s at the time of a p p l i c a t i o n .
The Department sends the a p p l i c a n t ' s f i n g e r p r i n t s t o t h e FBI t o v e r i f y the
a p p l i c a n t ' s responses on its l i c e n s e a p p l i c a t i o n regarding any criminal
r e c o r d . T h i s process takes approximately s i x weeks and delays the o v e r a l l
l i c e n s i n g process approximately t h r e e weeks. Table 5 summarizes the average 4
elapsed time i n days f o r t h e s t e p s i n the Department of Insurance l i c e n s i n g
process.
TABLE 5
SUMMARY OF THE AVERAGE ELAPSED
TIME I N DAYS FOR THE STEPS I N
THE DEPARTMENT OF INSURANCE
LICENSING PROCESS
Steps i n the
Licensing Process
1. Applicant submits a p p l i c a t i o n
and f i n g e r p r i n t s
Elapsed Time
i n Days From
the Preceding Step
2. Applicant takes examination 18
3. Examination scores mailed t o
a p p l i c a n t s
4. F i n g e r p r i n t check received
from the FBI and l i c e n s e mailed
t o s u c c e s s f u l a p p l i c a n t s 23
Cumulative
Elapsed Time
i n Days
A survey conducted by the o f f i c e of the Auditor General revealed t h a t the 23-
day waiting period between s t e p s 3 and 4 above is viewed by a p p l i c a n t s ,
insurance agent a s s o c i a t i o n s and insurance companies as imposing an unneces-sary
f i n a n c i a l hardship on a p p l i c a n t s i n t h a t a p p l i c a n t s cannot begin employ-ment
as i n s u r a n c e a g e n t s u n t i l they receive t h e i r l i c e n s e s from the Department.
These groups a l s o maintain t h a t t h e v a s t majority o f a p p l i c a n t s do not have
c r i m i n a l r e c o r d s and t h a t t h e s e a p p l i c a n t s a r e u n f a i r l y penalized because of
t h e few a p p l i c a n t s t h a t do have records. These groups f u r t h e r noted t h a t t h e
Department can at any t i m e revoke t h e l i c e n s e of any person who l i e d on t h e i r
a p p l i c a t i o n regarding any c r i m i n a l r e c o r d . Therefore, t h e r i s k s associated
with i s s u i n g l i c e n s e s before the Department receives the r e s u l t s of the FBI
f i n g e r p r i n t checks do not j u s i t f y the a d d i t i o n a l l i c e n s e processing time.
A review of the insurance applicant f i n g e r p r i n t checks made by the FBI during
1978 supports the contention there would be l i t t l e r i s k i n i s s u i n g l i c e n s e s
before f i n g e r p i n t r e s u l t s a r e received. For example, of t h e a p p l i c a n t s
fingerprinted during 1978:
- Only 6% had criminal records. O f 4,212 a p p l i c a n t s , only 252 had
criminal records. Many of the records were f o r driving while under
the influence of alcohol.
- Only 0.5% were denied licenses because of criminal records. O f 4,212
a p p l i c a n t s , only 20 were denied licenses because o f criminal
records .
- Many of the applicants t h a t were denied l i c e n s e s because of a
criminal record had correctly reported t h e i r record on t h e i r
application. In a t e s t sample of 51 a p p l i c a n t s , only three were
denied l i c e n s e s because of criminal records. However, all three
applicants correctly reported t h e i r record on t h e i r application.
Based upon the above review it appears there is l i t t l e r i s k i n licensing
applicants before f i n g e r p r i n t r e s u l t s a r e received. However, the policy of
f i n g e r p r i n t i n g applicants appears t o be a sound one i n t h a t 1) f i n g e r p r i n t i n g
o f f e r s a control over the t r u t h f u l n e s s of applicant responses on applications
and 2) the service is performed by the FBI without charge t o the Department.
Further, it appears t h a t the practice of f i n g e r p r i n t i n g may deter persons with
criminal records from applying for licensure. For example, prior t o 1976- 77
the Department f i n g e r p r i n t e d a p p l i c a n t s but did not compare the r e s u l t s of the
f i n g e r p r i n t check against the a p p l i c a n t ' s responses on t h e l i c e n s e appli-cation.
A review of the Department's records revealed t h a t eleven percent of
the applicants prior t o f i s c a l year 1976- 77 had criminal records. However,
since the Department has begun t o follow up on f i n g e r p r i n t r e s u l t s the number
of applicants with criminal records has dropped t o - s i x percent.
Screen Applications and Schedule
Tests " Over the Counterv
An indeterminable but p o t e n t i a l l y s u b s t a n t i a l amount of time i n the licensing
process of the Department could be eliminated i f l i c e n s e applications were
screened and t e s t s scheduled " Over the Counter when applicants personally bring
t h e i r applications t o the Department.
Currently, two- thirds of t h e a p p l i c a n t s f o r new l i c e n s e s bring t h e i r appli-cations
t o the Department. Instead of a Licensing Section employee reviewing
the application f o r correctness and scheduling the examination while the
applicant is there, the application is placed i n a basket and reviewed l a t e r .
This procedure is i n e f f i c i e n t and p o t e n t i a l l y wasteful of time i n t h a t ;
- Some applications are not reviewed by the Department u n t i l ten days
a f t e r they are received.
- If a problem is detected on the a p p l i c a t i o n , t h e Department must
write the applicant who then must provide the needed information.
- E v e n i f n o p r o b l e m i s d e t e c t e d o n t h e a p p l i c a t i o n t h e D e p a r t m e n t m u s t
write the applicant t o schedule the examination.
- Department personnel spend as much as eight hours per week typing
l e t t e r s t o applicants regarding problems with applications and
scheduling examination dates.
" Over the Countert1 screening o f applications brought t o the Department, and
scheduling of t e s t s would eliminate 1 ) the time delays i d e n t i f i e d above, and
2) the eight hours of s t a f f t i m e spent on typing.
Realign Key Employee Functions
Three employees i n the Licensing Section a r e primarily responsible f o r proces-sing
a l l new l i c e n s e s . Realignment of license processing r e s p o n s i b i l i t i e s
among these employees would help prevent delays i n i s s u i n g licenses.
Currently, each of t h e t h r e e Licensing Section employees is responsible for
performing the following tasks for an assigned group of new l i c e n s e appli-cations.
- reviewing applications
- monitoring l i c e n s e examinations
- grading l i c e n s e examinations
- n o t i f y i n g a p p l i c a n t s of l i c e n s e examination r e s u l t s
- typing the licenses
- typing congratulatory l e t t e r s t o the applicants
- preparing computer input documents
- preparing agent folders
- answering telephone i n q u i r i e s
A problem is created when the employee is interrupted while performing a task.
For example, if an employee is grading an examination and is interrupted t o
prepare computer input documents or some other duty, the examination w i l l be
put aside and l e f t u n t i l the employee can find time t o grade it. This present
system may prevent an applicant from receiving h i s or her l i c e n s e i n the
minimal amount of time.
Realignment of new l i c e n s e processing r e s p o n s i b i l i t i e s , s o t h a t s p e c i f i c
employees were responsible f o r s p e c i f i c l i c e n s i n g t a s k s would help t o prevent
1) new l i c e n s e applications from being delayed a t various processing s t e p s , and
2) the r e s u l t a n t overall delays i n i s s u i n g l i c e n s e s t h a t invariably follow such
detainments.
Improve Telephone Procedures
The amount of time spent by Licensing Section employees on the telephone
answering i n q u i r i e s can be reduced by approximately 15 hours per day i f
s p e c i f i c employees were trained t o answer the most frequently asked questions.
Licensing Section employees currently spend an average of 30 hours each day, or
the equivalent of four full- time positions, on the telephone answering
i n q u i r i e s . There are eight employees i n the Licensing Section whose responsi-b
i l i t y it is t o i n i t i a l l y answer the telephones and provide information i f they
a r e q u a l i f i e d t o do so. However, our study revealed that:
- More than 50 percent of the telephone c a l l s t o the Licensing Section
involve questions of a general nature such as agent q u a l i f i c a t i o n s .
- The employees i n i t i a l l y answering the telephones i n the Licensing
Section a r e not qualified t o answer such questions and must t r a n s f e r
the c a l l t o another Section employee.
- The other Section employee t o whom the c a l l is t r a n s f e r r e d is usually
one of the Section's key employees ( page 23) who must stop proces-sing
l i c e n s e applications t o answer the c a l l e r ' s question.
Therefore, more than half the time the current Licensing Section telephone
procedures r e s u l t i n two employees responding t o one telephone c a l l and
frequent i n t e r r u p t i o n s and r e s u l t a n t delays i n the processing o f l i c e n s e
applications. If s p e c i f i c Licensing Section employees were trained t o answer
telephones and respond t o questions of a general nature 1) t o t a l staff hours
spent on the telephone could be reduced by approximately one h a l f , or 15 hours
per day, and 2) the equivalent of two f u l l - t i m e p o s i t i o n s could be reassigned
t o other duties.
Use Computer t o Type
and Mail Licenses
The use of available computer capacity by the Licensing Section t o p r i n t
l i c e n s e s , and type and address congratulatory l e t t e r s would reduce s t a f f
workload.
The Department currently uses the equivalent of a 1/ 3 full- time position t o
hand type a l l new l i c e n s e s , renewal l i c e n s e s needing correction, and
congratulatory l e t t e r s from the Director t o s u c c e s s f u l a p p l i c a n t s . This manual
process is time consuming and unnecessary i n t h a t the Department's computer is
already programmed t o type licenses and can be e a s i l y programmed t o correct
renewal licenses and type and address congratulatory l e t t e r s .
The Arizona Real Estate Department, which issues approximately twice as many
l i c e n s e s as the Department of Insurance, currently uses its computer t o p r i n t
l i c e n s e s . The Real Estate Department computer produces a three- part form which
includes a printed l i c e n s e , an addressed envelope and a duplicate l i c e n s e f o r
the Department's f i l e s .
By expanding the use of its computer t o type l i c e n s e s , congratulatory l e t t e r s
and envelopes the Department would reduce the workload i n the Licensing Section
approximately 1/ 3 of a full- time equivalent position.
Use Video- Terminals t o
Input Licensing Data
The use of video- terminals t o input l i c e n s i n g d a t a i n t o the computer would
reduce s t a f f workload and costs.
Licensing Section employees currently hand post l i c e n s i n g information onto
computer coding forms. These forms are sent t o the Department of
Administration where the information is keypunched and entered i n t o the
computer. A study by the Department of Administration's Data Center revealed
t h a t 1 ) it would be more e f f i c i e n t f o r the Insurance Department t o use video-terminals
t o i n p u t l i c e n s i n g information i n t o the computer and 2) the use of
video- terminals would generate a net annual savings t o the Department of
approximately $ 4,000 i n t h a t Department of Administration keypunching charges
($ 8,500 during f i s c a l year 1977- 78) would be eliminated. In addition, it
appears t h a t the use of video- terminals would reduce the Licensing Section
workload approximately 1/ 6 of an equivalent full- time position.
Use P r i v a t e Firms To Perform
Testing and Fingerprinting Functions
The Department currently t e s t s and f i n g e r p r i n t s l i c e n s e applicants. These
functions can be performed more e f f i c i e n t l y by private companies with r e s u l t a n t
reductions i n Licensing Section s t a f f requirements.
Testing
Department personnel currently perform a l l of the functions associated with
t e s t i n g l i c e n s e applicants. Department personnel develop, monitor and grade
examinations and notify applicants of t h e i r scores.
I n order t o evaluate the t e s t i n g of applicants the Office of the Auditor
General reviewed Department t e s t i n g practices and p o l i c i e s and observed two
actual examination sessions. This review revealed t h a t :
- The Department uses the equivalent of two full- time positions t o
perform the functions associated with t e s t i n g l i c e n s e applicants.
- The Department uses only one version of each t e s t and some t e s t
contents have not been changed for four years. This allows t e s t
contents to be communicated by word of mouth, thereby compromising
the t e s t . It also allows applicants who retake the t e s t t o " learn
the t e s t n r a t h e r than the subject matter.
- The Department does not have adequate t e s t i n g space. A s a r e s u l t ,
applicants sometimes sit shoulder t o shoulder during t e s t i n g
sessions with answer sheets only s i x inches apart, thereby
jeopardizing t h e i n t e g r i t y of the t e s t i n g process.
- Department personnel do not maintain adequate s e c u r i t y during
t e s t i n g sessions. It was observed t h a t i d e n t i f i c a t i o n is not always
checked when applicants report t o examining areas. It was also
observed t h a t monitors l e f t the applicants unattended twice during
one examination session for periods of f i v e t o ten minutes.
Educational Testing Service ( ETS) is a nationwide, professional t e s t i n g
service. Currently, there are seven state Insurance Departments ( Colorado,
Delaware, Illl'zIois, Indiana, Massachusetts, Pennsylvania and Wisconsin) t h a t
use ETS t o perform a l l of the t e s t i n g functions currently being performed by
Department personnel. The Insurance Departments using ETS reported t o the
Office of the Auditor General t h a t they previously performed a l l of the t e s t i n g
functions themselves but encountered many of the same problems the Arizona
Department is presently experiencing. These Insurance Departments s t a t e d t h a t
by using ETS:
- The Department workload was reduced
- The content q u a l i t y of the examinations improved
- The examinations were revised by ETS a t l e a s t once a year
- Testing f a c i l i t i e s were improved as ETS provides its own t e s t i n g
f a c i l i t i e s
- Examination monitoring and s e c u r i t y improved
Based upon our review of the t e s t i n g practices and p o l i c i e s of the Department
and the experience of the seven s t a t e Insurance Departments t h a t use ETS, it
appears t h a t overall insurance l i c e n s i n g t e s t q u a l i t y would improve and
Department workload would decrease if the Department used ETS t o perform its
t e s t i n g functions. While there would be no a d d i t i o n a l c o s t t o t h e S t a t e , it
should be noted t h a t the use of ETS would n e c e s s i t a t e an increase i n the
examination fee charged l i c e n s e applicants. However, even an increased
insurance examination fee would be lower than t h a t charged for most occupa-t
i o n a l examinations i n Arizona as shown i n Table 6.
TABLE 6
- A COMPARISON OF EXAMINATION FEES
FOR PROFESSIONAL LICENSES I N ARIZONA
License
Medical Doctor
V e t e r i n a r i a n
Contractor
Psychologist
Dentist
Chiropractor
C e r t i f i e d Public Accountant
Pharmacist
Osteopath
Barber
Nurse
Optometrist
Naturopath
Real E s t a t e Agent
INSURANCE Agent - Present
INSURANCE Agent - Using ETS
- Fee
$ 200
$ 150
$ 135"
$ 130
$ 125
$ 100
$ 100
$ 100
$ 75
$ 50
$ 50
$ 25
$ 25
$ 25
$ 5-$ lo**
$ 17-$ 34""
* $ 135 is the lowest examination f e e charged
f o r a c o n t r a c t o r ' s l i c e n s e . ** Fees vary depending upon t h e number of
insurance l i n e s f o r which t h e a p p l i c a n t
wishes t o be t e s t e d .
F i n g e r p r i n t i n g
The Department c u r r e n t l y uses the equivalent of a 1/ 2 f u l l - t i m e p o s i t i o n t o
f i n g e r p r i n t l i c e n s e a p p l i c a n t s . T h i s f u n c t i o n can be performed more
e f f i c i e n t l y by p r i v a t e companies.
Department o f Insurance personnel f i n g e r p r i n t a l l insurance l i c e n s e a p p l i c a n t s
and forward t h e f i n g e r p r i n t s t o t h e Federal Bureau of I n v e s t i g a t i o n ( FBI) for
review. ( page 19) The Arizona Real E s t a t e Department, however, uses p r i v a t e
companies t o f i n g e r p r i n t l i c e n s e a p p l i c a n t s . The following comparison between
t h e f i n g e r p r i n t i n g processes a t the Department of Insurance and t h e Real E s t a t e
Department demonstrates the b e n e f i t s of using p r i v a t e companies t o f i n g e r p r i n t
a p p l i c a n t s .
TABLE 7
Measurable
Attributes
A COMPARISON OF THE FINGERPRINTING
PROCESSES AT THE REAL ESTATE DEPART-MENT
AND THE DEPARTMENT OF INSURANCE
Department
of Insurance
Staff t i m e devoted t o finger-printing
applicants 1/ 2 full- time position
Cost t o applicants No charge
Average number of applicants
i n i t i a l l y fingerprinted each
month
Percent of i n i t i a l f i n g e r p r i n t s
returned by the FBI as being
unreadable
Real Estate
Department
4
None
$ 2 i f taken a t the
Department. No
charge i f taken a t 4
law enforcement
agency
The percentage o f f i n g e r p r i n t s returned by the FBI as being unreadable is
important because i n the event t h e f i n g e r p r i n t s are unreadable, the applicants
must be fingerprinted again. Refingerprinting is inconvenient f o r applicants 4
and adds time t o the e n t i r e licensing process. It is noteworthy t h a t the
percentage o f returned i n i t i a l f i n g e r p r i n t s is f i v e times higher for the
Department of Insurance and yet the Real Estate Department f i n g e r p r i n t s f i v e
times as many applicants.
Replace Pool Employees
With Permanent Employees
Currently, four Department of Insurance pool employees a r e used exclusively i n 4
the Licensing Section. This practice is i n e f f i c i e n t and an apparent
circumvention of l e g i s l a t i v e i n t e n t .
The Licensing Section is authorized 12 full- time equivalents ( FTE's). In
a c t u a l i t y , however, the Licensing Section s t a f f i n g level is 16 FTE i n t h a t four
Department pcol employees are used exclusively and on a full- time basis by the
Licensing sectidn. These four pool employees, a t a s a l a r y cost of $ 33,500 per
year, a r e not shown against the Licensing Section authorized s t a f f i n g l e v e l .
A s such, the use of these four employees as de facto Licensing Section
employees has never received o f f i c i a l l e g i s l a t i v e sanction. Therefore, it
appears t h a t a Licensing Section s t a f f i n g l e v e l of 16 FTE c o n s t i t u t e s a
circumvention of l e g i s l a t i v e i n t e n t . However, implementing the e f f i c i e n c i e s
discussed i n the previous pages would reduce s t a f f i n g by s i x FTS1s thereby
eliminating the need f o r these four pool employees.
CONCLUSION
Licensing Section procedures and policies cause unnecessary delays issuing
l i c e n s e s and create a need f o r excessive s t a f f i n g . The time required t o issue
a l i c e n s e can be reduced by as much a s 3 1/ 2 weeks, Section s t a f f i n g by as much
as fivefull- time positions and Department expenditures reduced by as much as
$ 43,800 per year i f 1) the Department amends its f i n g e r p r i n t i n g policy and 2)
current licensing i n e f f i c i e n c i e s a r e eliminated.
RECOMMENDATION
1. We recommend t h a t the Department of Insurance i s s u e l i c e n s e s before the
r e s u l t s of FBI f i n g e r p r i n t checks are received. We a l s o recommend the
Department continue t o i n v e s t i g a t e and take appropriate action when FBI
f i n g e r p r i n t checks disclose criminal records not previously s t a t e d on
l i c e n s e applications.
2. We recommend t h a t the following changes be made i n work procedures:
a ) screen applications and schedule examinations Ifover the counter1'
r a t h e r than by mail.
b) r e a l i g n t a s k s assigned t o key employees.
c) t r a i n s p e c i f i c employees t o answer a l l general telephone i n q u i r i e s .
d) use the computer t o type licenses and envelopes.
e) use video- terminals to i n p u t d a t a t o the computer.
3. We recommend t h a t the Department of Insurance use private companies t o
conduct t e s t i n g and f i n g e r p r i n t i n g of applicants.
- a
4. We recommend t h a t the Department of Insurance discontinue the practice of
using pool employees as de f a c t o Licensing Section employees.
FINDING I11
THE PUBLIC IS UNAWARE THAT CONSUMER COMPLAINT SERVICES ARE AVAILABLE TO ASSIST
THEM. ALSO, THE DEPARTMENT IS FAILING TO USE THE COMPLAINT DATA I T HAS TO
REGULATE COMPANIES AND AGENTS.
The Consumer Complaint Section o f the Department of Insurance annually receives
and processes more than 5,000 written complaints against insurance companies
and agents. The Department is generally e f f e c t i v e i n its actions with these
complaints. However, the public is generally unaware the Department o f f e r s
such s e r v i c e s , and l i t t l e is done by the Department t o use complaint data i n
the regulation of companies and agents.
The Public Is Unaware of Consumer
Complaint Services
Despite the f a c t t h a t consumer complaint i n v e s t i g a t i o n s are both e f f e c t i v e and
f r e e of charge, Arizona consumers appear t o be l a r g e l y unaware t h a t the
Department o f f e r s t h e s e s e r v i c e s . Overall complaint r a t i o s a r e s i g n i f i c a n t l y
lower than those of s e v e r a l o t h e r s t a t e s and many of the complaints t h a t a r e
f i l e d a r e i n i t i a l l y directed t o other e n t i t i e s because of the lack of public
awareness of the Department's consumer s e r v i c e s . F u r t h e r , most complainants
l e a r n of these services by " word of mouth." Several other s t a t e insurance
departments have developed programs t o increase public awareness of consuiner
complaint services.
Complaint Ratios Are Low
The Arizona Department of Insurance receives fewer complaints per 1,000
population than the average for 46 other s t a t e s . Further, Arizona receives
s i g n i f i c a n t l y fewer complaints per 1,000 population than the ten leading
s t a t e s . Table 8 compares Arizona's complaint r a t i o with those of t h e t e n
leading s t a t e s and the average complaint r a t i o for a l l s t a t e s .
TABLE 8
A COMPARISON OF ARIZONA'S NUMBER OF COMPLAINTS
PER 1,000 POPULATION WITH THOSE OF THE TEN LEADING
STATES AND THE AVERAGE FOR 46 STATES
S t a t e Complaints/ 1,000
Delaware
Georgia
Kansas
North Carolina
Florida
Nevada
Colorado
Maryland
Pennsylvania
New York
Average f o r 46 States*
ARIZONA
* Complaint data was not available from three
s t a t e s : Alabama, Missouri and Rhode Island.
A s shown i n Table 8, the ten leading s t a t e s have complaint r a t i o s from 1 1/ 2 t o
11 times g r e a t e r than Arizona's. Arizona's r e l a t i v e l y low complaint r a t i o may
manifest a general public unawareness of the Department's complaint services.
People Don't Know Where t o Complain
A s much a s 20% of the people who do f i l e complaints with the Department
i n i t i a l l y contact other e n t i t i e s because they do not know the Department's
services e x i s t .
The Office o f the Auditor General contacted seven e n t i t i e s consumers might c a l l
t o resolve an insurance complaint. These e n t i t i e s were: The Better Busines
Bureau, the Governor's Office, the Office o f the Attorney General, The
Corporation Commission, the Department of Economic Security, the Department of
Public Safety and the Capital Switchboard. These e n t i t i e s receive and r e f e r
more than 100 c a l l s per week regarding insurance complaints. It should be
noted t h a t i n most cases, these c a l l e r s were not i n i t i a l l y aware t h a t the
Department of Insurance existed.
The 100 c a l l s per week referred by the above seven e n t i t i e s is s i g n i f i c a n t i n
t h a t 1) many formal written complaints first begin as telephone i n q u i r i e s and
2) these 100 c a l l s per week represent 15% t o 20% of the volume of telephone
i n q u i r i e s received by the Department of Insurance each week.
Most People Learn About the
Services by '' Word of Mouth1'
An a d d i t i o n a l i n d i c a t i o n of t h e l a c k of public awareness of the Department's
consumer complaint services is t h a t most people l e a r n of t h e s e s e r v i c e s by
" word mouth.'' An Auditor General survey of persons who f i l e d complaints with
the Department of Insurance during 1978 revealed t h a t 55% of these complainants
learned o f the Department's services from f r i e n d s , r e l a t i v e s or insurance
agents. This f a c t coupled with the high volume of consumer complaints t h a t a r e
i n i t i a l l y f i l e d with e n t i t i e s other than the Department of Insurance indicates
the need for a more vigorous program t o i n c r e a s e p u b l i c awareness of the
Department's consumer complaint s e r v i c e s ,
Methods Used by Other S t a t e s t o
Increase Public Awareness of Services
According t o Department of Insurance o f f i c i a l s , the Department has not exten-sively
publicized its consumer complaint services because of t i m e c o n s t r a i n t s .
An occassional news release or public speech c o n s t i t u t e s the extent of the
Department's publicity e f f o r t s i n 1978. Those news releases t h a t were issued
i n 1978 were confined t o small, r u r a l newspapers t o increase r u r a l awareness.
The limited public speeches t h a t were made i n 1978 were f o r the most part
presented a t insurance industry meetings, not t o the general public.
During one survey of other s t a t e insurance departments, we i d e n t i f i e d several
methods t h a t are being used t o increase public awareness of consumer services
t h a t could a l s o be used by the Arizona Department of Insurance. For example,
eight s t a t e s reported extensive use o f public speaking engagements t o community
groups ( such as schools, senior c i t i z e n associations, and c i v i c groups) t o
p u b l i c i z e s e r v i c e s . Seven s t a t e s heavily use the news media. One s t a t e
reported its insurance commissioner and s t a f f appear on t e l e v i s i o n and radio
programs t o explain public services. Another s t a t e i s s u e s llconswner alerts1' t o
the news media. Finally, three s t a t e s have the media publicize t o l l - f r e e
numbers persons can c a l l i f they need consumer s e r v i c e s .
Greater Use Needs to Be
Made Of Complaint Data
The cornpilatien and analysis of consumer complaint data is a potentially
effective means of monitoring and investigating the conduct of insurance
agents, agencies and companies. For example:
The investigation of a single complaint may disclose an act or practice
that is serious enough by itself to warrant further action.
Analysis of total complaint data may disclose patterns of behavior which
require further investigation. In these instances an individual
complaint may not require action but a number of such complaints may be
indicative of a problem.
Our audit revealed that the Department generally takes appropriate action when
it appears that an individual complaint warrants further investigation. The
Department does not, however, accumulate or analyze data on total consumer
complaints as a means to identify patterns of inappropriate behavior by
insurance companies or agents.
Total Complaints Against Companies
Insurance departments in at least four other states ( Wisconsin, Illinois,
Pennsylvania and Massachusetts) analyze total complaints against companies to
look for " problemn companies. These departments analyze the numbers of
complaints in relation to the companies1 volume of business
( complaints/ million dollars of premium volumes). For example, the Wisconsin
Insurance Department selects all Accident, Health and Auto insurance companies
with ten or more complaints and calculates the ratio of complaints to million
dollars of premium volume. An average ratio for those insurance companies is
developed and all companies with higher than average complaint ratios are
identified.
By i d e n t i f y i n g companies with higher than average complaint r a t i o s the
Wisconsin Insurance Department 1) can b e t t e r s e l e c t companies r e q u i r i n g
f u r t h e r i n v e s t r g a t i o n and/ or market conduct examinations, and 2) can bring
p u b l i c p r e s s u r e on companies t o reduce complaints i n t h a t the c a l c u l a t e d
complaint r a t i o s a r e published i n newspapers.
I n v e s t i g a t i o n s and Market Conduct Examinations
The market conduct examinations t h a t a r e performed by t h e Arizona Department of
Insurance a r e designed t o review treatment of policyholders by insurance
companies. However, t h e department does n o t formally use consumer complaint
data t o determine companies t h a t should be considered f o r such examinations.
Other s t a t e s , such a s Wisconsin and C a l i f o r n i a , review t h e d i f f e r e n c e s i n
complaint r a t i o s i n determining which companies r e c e i v e i n v e s t i g a t i o n s and
market conduct examinations. Analysis of Arizona's complaints a g a i n s t
companies revealed wide d i f f e r e n c e s i n complaint r a t i o s . For example, the
company with the highest complaint r a t i o had 1,100 times the r a t i o o f t h e
company with the lowest r a t i o . ( 577 complaints per $ 100,000 of business
compared t o .49 complaints per $ 100,000 of business.)
The Department does not c u r r e n t l y develop complaint r a t i o s and t h e r e f o r e ,
cannot use consumer complaint data t o i d e n t i f y p o t e n t i a l problem companies.
I n s t e a d , t h e Department s u b j e c t i v e l y reviews t h e number and types of complaints
received a g a i n s t companies and " c a l l intt companies f o r informal hearings when
they b e l i e v e the number of complaints is i n o r d i n a t e l y high. The Department
does not maintain records of companies " c a l l e d i n , " but department o f f i c i a l s
i d e n t i f i e d s i x companies t h a t were " c a l l e d infv during 1978. A review of .
complaint r a t i o s f o r 1978 showed t h a t only one of the s i x companies " c a l l e d in"
had an above average complaint r a t i o while f i f t e e n companies w i t h h i g h e r
complaint r a t i o s were not " c a l l e d in." F u r t h e r , the f i f t e e n companies t h a t
were not " called in" had complaint r a t i o s t h a t were f r o m 6 ( f o r l i f e - d i s a b i l i t y
companies) t o - 78 times ( f o r property- casualty companies) h i g h e r t h a n the
complaint r a t i o s of the companies t h a t were l f c a l l e d i n . " It should be noted
t h a t none o f t h e s e f i f t e e n companies received a market conduct examination
during 1978. A comparison of the complaint r a t i o s of the s i x companies " called
in" and t h e f i f t e e n companies not " c a l l e d intf is shown i n Table 9.
A COMPARISON OF COMPLAINTS/$ 100,000 OF
BUSINESS FOR COMPANIES " CALLED I N " AND NOT
" CALLED IN" BY THE DEPARTMENT OF INSURANCE
Companies llCalled Inn Companies Not " Called In"
Public Pressure
Developing data on complaint r a t i o s also provides a p o t e n t i a l l y powerful tool
f o r using p u b l i c p r e s s u r e t o regulate companies. I n Wisconsin, I l l i n o i s and
Massachusetts such complaint r a t i o data is e i t h e r published by the departments
or made available t o the p r e s s . This public disclosure of complaint data
provides an added incentive t o reduce and resolve complaints.
Total Complaints Against Agents
A t l e a s t two other s t a t e s ( Wisconsin and Kentucky) a l s o monitor data on t o t a l
complaints against agents. In both s t a t e s agents a r e investigated when ( a) a
serious complaint is received and/ or ( b) two complaints are received against
an agent.
Arizona does not formally monitor complaints against agents; however, the
complaints s e c t i o n supervisor has advised us t h a t three complaints against an
agent might warrant an investigation. During our review, we i d e n t i f i e d
fourteen agents t h a t received three or more complaints i n 1978. However, only
two of the fourteen agents were brought before formal departmental hearings."
It should be noted t h a t i n these cases it was the seriousness of the complaints
r a t h e r than the number of complaints t h a t led t o t h e i n v e s t i g a t i o n and hearing.
Further, it appears t h a t monitoring complaints could have prevented some harm
t o customers. For example, one of these agents had amassed seven complaints
before being brought t o hearing.
* The Department revoked t h e l i c e n s e s of both agents.
No formal action was taken by the Department against the other twelve agents
with three or more complaints ( one of which had seven complaints and two had
s i x complaints). It should be noted t h a t it is r e l a t i v e l y r a r e for an
insurance agent i n Arizona t o have one complaint f i l e d against them. O f the
insurance agents i n Arizona, l e s s than 4% had a complaint f i l e d against them i n
1978 and only .08% had three or more complaints f i l e d against them.
CONCLUSIONS
It appears t h a t the public is generally unaware of the Department of
Insurance's consumer complaint s e r v i c e s . F u r t h e r , the Department is not
compiling and analyzing consumer complaint data t o i d e n t i f y p o t e n t i a l problem
insurance companies, agencies and agents. A s a r e s u l t , Arizona consumers may
have complaints but be unaware of where t o find help and the Department's
a b i l i t y t o i d e n t i f y and regulate problem insurance companies, agencies and
agents is diminished.
RECOMMENDATIONS
1. We recommend t h a t the Department a c t i v e l y seek t o publicize its complaint
services.
2. We recommend t h a t the Department develop and analyze data on
complaints/$ 100,000 d o l l a r s of premium volume. We recommend f u r t h e r t h a t
t h i s data:
( a) be used t o determine which companies receive f u r t h e r i n v e s t i g a t i o n
and market conduct examinations
( b) be publicized e i t h e r by r e l e a s e t o the press or by publication i n the
Department's annual report
3. We recommend t h a t the Department monitor t o t a l complaints received by
each agent and conduct investigations of a l l agents receiving more than a
specified number of complaints.
FINDING I V
GREATER DEPARTPIENT ACTION IS NEEDED WITH REGARD TO THE PUBLIC INTEREST AS IT
PERTAINS TO CONSUMER EDUCATION AND PUBLIC INVOLVEMENT.
The Arizona Department of Insurance is substandard with regard t o the develop-ment
of consumer brochures and the development of r e a d a b i l i t y regulations when
compared t o other s t a t e insurance departments. In addition, the Department has
been generally unsuccessful i n involving the public i n the making of r u l e s and
regulations.
Consumer Brochures
Most other s t a t e insurance departments have found it t o be i n the public
i n t e r e s t t o encourage and f a c i l i t a t e consumer education. A t l e a s t t h i r t y - t h r e e
other s t a t e s now prepare and d i s t r i b u t e consumer brochures covering a variety
of t o p i c s including guides on how t o buy health, automobile, homeowners and
l i f e insurance. Other brochures a r e designed t o inform consumers of t h e i r
r i g h t s and/ or t e l l them how t o resolve complaints. Several s t a t e s also publish
insurance price comparisons t o show consumers the savings available by shopping
f o r insurance.
The Arizona Department of Insurance has not developed any consumer brochures.
According t o Department o f f i c i a l s , the Department does not have the necessary
s t a f f or resources t o develop consumer brochures. However, e f f e c t i v e
January 1, 1979, the Department did begin t o require l i f e insurance companies
t o furnish a buyer's guide* with each policy s o l d . While t h i s is noteworthy, a
number of other s t a t e s do more. For example, Pennsylvania has published more
than 40 consumer brochures since 1971. ( Appendix A) Kansas and Washington
have published s i x and eight consumer brochures, respectively.
* This guide was developed by the National Association of Insurance Commis-sioners
and is included on Appendix B.
READABILITY REGULATIONS
Although insurance policies a r e reviewed by the Department t o eliminate
ambiguous or misleading clauses, many consumers may still not understand t h e i r
policies.* This is due t o the f a c t t h a t the policies a r e still complicated
documents containing many technical and legal terms unfamiliar t o the consumer.
Further, the 12nguage used t o d r a f t p o l i c i e s often does not f a c i l i t a t e reading.
Some s t a t e s , such as California and Wisconsin, have developed r e a d a b i l i t y
regulations t o help consumers i n understanding l i f e and d i s a b i l i t y p o l i c i e s .
Readability regulations generally specify t h a t policies must pass r e a d a b i l i t y
tests. They regulate the s i z e of p r i n t t h a t may be used and the arrangement of
the policy. Policies developed f o r r e a d a b i l i t y a l s o often include examples t o
help the reader although t h i s is not required. An a c t u a l example of a clause
from a standard policy and an example of a clause from a readable policy are
shown below.
( Standard Policy)
RECURRENT DISABILITIES. Successive periods of t o t a l
d i s a b i l i t y which occur while t h i s policy is i n force, and
which r e s u l t from the same or r e l a t e d causes w i l l be
considered as one continuous period of t o t a l d i s a b i l i t y if
monthly income or a portion thereof was payable f o r t h e
e a r l i e r of the two periods except t h a t i f the Insured has
between such periods engaged i n the Insured's regular
occupation and performed a l l the important d u t i e s thereof
on a full- time basis for a t l e a s t s i x consecutive months,
the l a t t e r period w i l l be considered as a new and indepen-dent
period of t o t a l d i s a b i l i t y and the benefits of t h i s
policy w i l l be payable accordingly.
( Readable Policy)
RECURRENT DISABILITIES. A period o f d i s a b i l i t y due t o the
same or r e l a t e d cause as t h a t of an e a r l i e r period of
d i s a b i l i t y may be considered t o be a continuation o f the
e a r l i e r period. This depends on how much time has passed
from the end of e a r l i e r period t o the date the current
d i s a b i l i t y began. I f l e s s than s i x months have passed, we
w i l l consider it t o be a continuation o f the e a r l i e r
period. I f s i x months or more have passed, we w i l l
consider it t o be a new period of d i s a b i l i t y .
Example: You were disabled for 14 months
because of a severe knee injury. Four months
a f t e r you recover, your knee f a i l s and you a r e
disabled. We consider t h i s t o be a continuation
of the e a r l i e r period of d i s a b i l t i y .
* A survey of persons f i l i n g complaints with the Department of Insurance
revealed t h a t many complaints originated because policyholders did not
understand the provisions of t h e i r p o l i c i e s - - p a r t i c u l a r l y health insur-ancz
p o l i c i e s .
Comparing t h e two p o l i c i e s t h e reader f i n d s the f i r s t provision is one
sentence. The readable policy provision is s t a t e d i n four sentences. Also,
simpler words a r e used and an example is given i n t h e readable p o l i c y .
ARS 20- 1110.01 provides f o r the Department t o adopt r u l e s and r e g u l a t i o n s
governing t h e form and r e a d a b i l i t y of insurance p o l i c i e s . The Department has
developed such r e g u l a t i o n s f o r Property- Casualty p o l i c i e s but not L i f e and
D i s a b i l i t y p o l i c i e s . The Department had i n i t i a l l y delayed work with read-a
b i l i t y i n L i f e and D i s a b i l i t y p o l i c i e s u n t i l the National Association of
Insurance Commissioners ( NAIC) developed a model law on the s u b j e c t . I n July
1978 t h e NAIC - did develop t h e L i f e and Health Insurance Policy Language
S i m p l i f i c a t i o n Model Act.
Public Involvement
The Department has a l s o done l e s s than some other s t a t e s t o encourage public
involvement i n t h e r e g u l a t o r y process, i n determining public need, and i n
o b t a i n i n g p u b l i c comment on r u l e s and r e g u l a t i o n s . For example, at l e a s t seven
other s t a t e s have e s t a b l i s h e d consumer advisory committees o r c i t i z e n ' s task
f o r c e s t o provide p u b l i c i n p u t t o the d i r e c t o r s on insurance needs. I n
a d d i t i o n , nine s t a t e s conduct " informational" p u b l i c hearings i n d i f f e r e n t
geographic regions t o g a i n p u b l i c i n p u t on insurance needs.
CONCLUSION
The Arizona Department o f Insurance is substandard with regard t o the develop-ment
of consumer brochures and t h e development o f r e a d a b i l i t y r e g u l a t i o n s when
compared t o other s t a t e insurance departments. Additional Departmental e f f o r t
is needed t o encourage and f a c i l i t a t e consumer education and p u b l i c i n p u t .
RECOMMENDATIONS
1. We recommend that the Department of Insurance increase its efforts to
develop bFochures to better educate the Arizona consumer.
2. We recommend that the Department of Insurance either adopt readability
regulations for Life and Disability policies or seek to have the NAIC
model law on readability in these areas enacted by the Arizona State
Legislature.
3. We also recommend that the Department consider establishing a consumer
advisory committee to provide input about public need.
FINDING V
- 4
PRIOR APPROVAL OF MOST PROPERTY CASUALTY INSURANCE RATES IS NOT NEEDED.
CHANGING TO OPEN- COMPETITION WOULD ELIMINATE CURRENT PROBLEMS EXPERIENCED I N
REVIEWING RATES AND ALSO ELIMINATE THE NEED FOR ADDITIONAL STAFF.
The Property- Casualty Division r e g u l a t e s the r a t e s charged for automobile,
home owner, f i r e and other forms of property and c a s u a l t y insurance. Under a
uprior- approval" law property- casualty r a t e s must be f i l e d with the Division
and approved before being put i n t o use i n Arizona. The Division reviews the
f i l i n g s t o determine t h a t t h e r a t e s a r e not " . . . e x c e s s i v e , inadequate or
u n f a i r l y discriminatory." It appears t h a t p r i o r approval of insurance r a t e s i n
Arizona is not necessary and could be eliminated f o r a l l but a few l i n e s of
insurance i f the s t a t e adopted a competitive or " open competition" r a t i n g law
and t h a t by s o doing t h e approval of insurance r a t e s could be accomplished more
economically and e f f i c i e n t l y .
I n reviewing the Department of I n s u r a n c e ' s r a t e r e g u l a t i o n function we reviewed
t h e two types of r a t i n g systems: p r i o r approval and open competition. Both
systems a r e designed t o achieve the same goals and appear t o be equally
e f f e c t i v e . However, because open competition e l i m i n a t e s the approval of most
r a t e s it o f f e r s p o t e n t i a l b e n e f i t s t o Arizona over the present p r i o r approval
system.
Two Types o f Rate Regulation
A s noted above, the two types of r a t e r e g u l a t i o n systems a r e p r i o r approval and
open competition. P r i o r approval r e q u i r e s companies t o f i l e t h e i r proposed
r a t e s with the Department of Insurance f o r approval before use. Rates must not
be excessive, inadequate o r u n f a i r l y d i s c r i m i n a t o r y . G e n e r a l l y , the
Department's review must be made within a s p e c i f i e d time p e r i o d . If the r a t e
is not s p e c i f i c a l l y denied within t h a t time period it is " deemedn t o be
approved. I f , however, the department subsequently f i n d s the r a t e s do not
comply with its requirements it may hold a hearing and withdraw approval of the
" deemed" r a t e s .
Under open competition insurance r a t e s are subject t o the same c r i t e r i a as with
prior approval i n t h a t r a t e s cannot be excessive, inadequate or unfairly
discriminatory. However, under open competition r a t e s need not be submitted t o
the Department for approval.* Instead, competition among insurance companies
is r e l i e d upon t o control r a t e s . Rates are assumed not t o be excessive as long
as adequate competition e x i s t s . It should be noted, however, that under open
competition a prior approval system can generally be reimposed i f it is found
t h a t adequate competition does not e x i s t . In addition, some open competition
s t a t e s require r a t e s t o be f i l e d with the s t a t e insurance department for
informational purposes.
H i s t o r i c a l l y , t h e prior approval system has been the dominant form of r a t e
regulation. However, seventeen s t a t e s have now adopted some form of open
competition law, with the majority adopting such laws within the l a s t ten
years. Further, one major s t a t e , I l l i n o i s , has - no r a t e regulation l a w . Rate-making
i n I l l i n o i s is subject only t o applicable a n t i - t r u s t s t a t u t e s . Table 10
lists the eighteen open- competiion s t a t e s and the years they adopted t h e i r
open- competition laws.
* Except for special l i n e s of insurance such as workman's compensation.
TABLE 10
EIGHTEEN STATES WITH OPEN- COMPETITION
RATING LAWS
S t a t e
California
Colorado
Connecticut
Florida
Georgia
Hawaii
Idaho
I l l i n o i s
Minnesota
Missouri
Montana
Nevada
New Mexico
New York
Oregon
Utah
Virginia
Wisconsin
Year Open- Competition Was Adopted
* In 1972 I l l i n o i s ' previous r a t e regulation law
expired. Since 1972 I l l i n o i s has not had a r a t e
regulation law.
The open competition r a t e regulation system has been studied and endorsed by:
a U. S. Senate sub- committee, the National Association of Insurance
Commissioners, the U. S. Department of J u s t i c e Anti- Trust Division and the
National Commission f o r the Review of Anti- Trust Laws and Procedures. In 1968
the National Association of Insurance Commissioners ( NAIC) recommended t h a t
e i t h e r ; ( a ) insurance commissions be granted authority t o suspend prior
approval where competition e x i s t s or, ( b) prior approval laws be repealed and
replaced with open competition laws.
Open- Competition is Equally Effective In Meeting
The Three Goals of Rate Regulation
S t a t e law s p e c i f i e s t h a t r a t e s s h a l l not be "... excessive, inadequate or
u n f a i r l y discriminatory." These c r i t e r i a may be viewed, however, as being
encompassed i n three broader goals of r a t e regulation defined by the NAIC as
being a v a i l a b i l i t y , p r i c e and s o l i d i t x . Data available from s t u d i e s by the
NAIC, the U. S. J u s t i c e Department, the California Insurance Department, the
New York Insurance Department and the Virginia Insurance Department a l l show
t h a t open competition is equally as e f f e c t i v e a s prior approval i n meeting the
goals of r a t e regulation.
A v a i l a b i l i t y
A v a i l a b i l i t y r e f e r s t o a prospective buyer's a b i l i t y t o obtain insurance.
Where mandatory insurance requirements e x i s t ( such a s i n automobile l i a b i l i t y )
it a l s o r e f e r s t o the buyer's a b i l i t y t o obtain t h a t insurance a t standard
r a t h e r than nonstandard or assigned r i s k r a t e s . Therefore, a v a i l a b i l i t y is
often measured by the number of persons who carry no insurance and/ or the
number of persons who a r e insured under non- standard and assigned r i s k plans.
Increases i n the number of uninsured persons and/ or persons i n non- standard
coverage a r e indicative of reduced a v a i l a b i l i t y ; conversely decreases i n these
numbers indicate increased a v a i l a b i l i t y .
Studies o f t h e d i f f e r e n c e s i n a v a i l a b i l i t y between open competition and prior
approval systems have been conducted by the NAIC ( 19741, the New York Insurance
Department ( 1977) and the Virginia Insurance Department ( 1978). These s t u d i e s 4
show there is generally1 no d i r e c t r e l a t i o n s h i p between a v a i l a b i l i t y and the
type of r a t i n g law. There is however, a d i r e c t r e l a t i o n s h i p between avail-a
b i l i t y and insurance company l o s s r a t i o s and p r o f i t s . When l o s s r a t i o s
increase companies apply more r e s t r i c t i v e underwriting p r a c t i c e s , thereby
reducing a v a i l a b i l i t y . Thus, insurance is a t l e a s t as available under open
competition.
Price •
Price r e f e r s t o a purchaser's a b i l i t y t o obtain insurance a t a reasonable
price. I n the context of r a t e regulation, price a l s o r e f e r s t o " reasonablew
p r o f i t s for companies and the absence of uncontrolled price- fixing. Therefore,
reasonableness of r a t e s , reasonableness of p r o f i t s and the degree of price- ( I
f i x i n g a b i l i t y ( market concentration) are used t o e v a l u a t e e f f e c t i v e n e s s .
Reasonable Rates Reasonable r a t e s a r e important indicators of the effective-ness
of a r a t e regulation system because of the fears t h a t r a t e s w i l l skyrocket a
i n the absence of regulation. Results o f the New York, Virginia and Department
of J u s t i c e s t u d i e s suggest r a t e s are as reasonable under open competition as
they a r e under prior approval. Points brought forth by these s t u d i e s include:
- National economic trends ( such as i n f l a t i o n a r y and l i t i g a t i o n costs) ( I
influence r a t e s more than the type of r a t e regulatory system ( New
York, Virginia)
- i f anything, statewide average r a t e s tend t o drop under open com-p
e t i t i o n because more companies f i l e r a t e s below those of statewide
r a t i n g bureaus ( New York, Virginia)
a
New York and Virginia found open competition d i d i n c r e a s e a v a i l a b i l i t y i n
f i r e and property insurance ( respectively) but did not a f f e c t automobile
insurance.
- open competition provides companies " . . . g r e a t e r i n c e n t i v e t o improve
efficiency and reduce expenses. lv2 ( New York)
- companies under open competition do reduce r a t e s when experience
warrants it ( U. S. Department of J u s t i c e )
Reasonable P r o f i t s . The concept of reasonable p r o f i t s is d i r e c t l y r e l a t e d t o
the concept of reasonable or ' lnon- excessivell r a t e s . The p r o f i t a b i l i t y of
companies becomes an indicator of the effectiveness of r e g u l a t i o n . S t u d i e s by
the NAIC and the New York Insurance Department show open competition is as
e f f e c t i v e as prior approval i n regulating p r o f i t a b i l i t y .
In the NAIC study, p r o f i t a b i l i t y by l i n e of insurance f o r f i v e open competition
and f i v e prior approval s t a t e s was compared using two d i f f e r e n t measures. This
comparison lead the NAIC s t a f f t o r e p o r t t h a t :
" Many have contended t h a t open competition r a t i n g laws
w i l l lead t o s i t u a t i o n s i n which insurers w i l l earn excess
p r o f i t s ... On the basis of the evidence which we have
collected and the evidence from these s t u d i e s which we
reviewed, there is no s t a t i s t i c a l difference i n p r o f i t -
a b i l i t y between open r a t i n g and prior approval s t a t e s . " 3
( emphasis added)
The NAIC study was supported by the New York Insurance Department study which
found t h a t p r o f i t a b i l i t y was basically dependent on long- run trends i n under-writing
losses and not the type of r a t e regulatory system used.
The Open Rating Law and Property- Liability Insurance, S t a t e of New York
Insurance Department 1977 p V I .
Monitoring Competition: A means of regulating the Property and Casualty
Insurance Business, ( National Association of Insurance Commissioners,
1974), Volume 1, p. 341. h e r e i n a f t e r r e f e r r e d t o as NAIC report.
S o l i d i t y
Company s o l i d i t y , o r solvency, was perhaps the f i r s t goal of r a t e r e g u l a t i o n .
Concern over company f a i l u r e s caused by r a t e wars i n the 1800s and e a r l y 1900s
l e d t o s t a t u t o r y requirements t h a t r a t e s be " adequate." The adequacy require-ments
were designed t o ensure t h a t companies1 r a t e s t r u c t u r e s produced enough
funds t o cover present and f u t u r e claims. Available evidence shows, however,
t h a t :
( a ) r a t e r e g u l a t i o n f o r r a t e adequacy has l i t t l e , i f any, e f f e c t i n
p r e v e n t i n g i n s u r a n c e f a i l u r e s , and
( b) t h e r e a r e no d i f f e r e n c e s i n solvency between open competition
and p r i o r approval s t a t e s .
The r o l e of r a t e adequacy i n insurance f a i l u r e s was s t u d i e d by the NAIC and the
following conclusions were reached:
( 1) Insurance f a i l u r e s a r e not caused by inadequate r a t e s . Companies
can, and do, become i n s o l v e n t even when charging the maximum
allowable r a t e s .
( 2) I n order of importance, i n s o l v e n c i e s a r e caused primarily by
( a ) inadequate i n i t i a l financing, ( b) poor underwriting,
( c ) excessive operating expenses, and ( d) poor investments. 4
S t u d i e s by t h e C a l i f o r n i a and New York Insurance Departments support the NAIC
data. C a l i f o r n i a reviewed the s i x domestic company f a i l u r e s it had under open-competition
i n a 19 year period. Three of the s i x f a i l u r e s were caused by
improper diversion of funds. The other t h r e e i n s o l v e n c i e s a l l involved
companies t h a t were charging r a t e s s u b s t a n t i a l l y h i g h e r t h a n the average r a t e s .
New York s t u d i e d 30 companies found t o be impaired or i n s o l v e n t s i n c e 1970. It
found the causes were a t t r i b u t a b l e t o inadequate i n i t i a l financing, poor
underwriting p r a c t i c e s , incompetent management and o u t r i g h t malfeasance.
I b i d p. 384
While concluding t h a t the effectiveness of r a t e regulation i n preventing
insolvencies is lldubiousll the NAIC report noted insurance departments do have
many a l t e r n a t i v e s t o control insolvencies including: c a p i t a l and surplus
requirements, reserve requirements, investment l i m i t a t i o n s and periodic exam-i
n a t i o n s . Also, most policy holders are now protected against insolvencies by
guaranty funds.
No matter t o what extent r a t e s may or may not a f f e c t solvency, data shows
solvency is not affected by the type of r a t e regulation system used. In a t e s t
of company solvency between f i v e open competition and f i v e prior approval
s t a t e s the NAIC found I t . . . no difference i n the solvency ranking for prior
approval and open competition s t a t e s . 115
Benefits of Open Competition
Open competition rate regulation would provide the following benefits over the
present system of prior approval r a t e regulation:
( a) It would remove the S t a t e from a r o l e it is questionable the
S t a t e can e f f e c t i v e l y f u l f i l l : determining proper r a t e s .
( b) it would eliminate long delays and procedural problems i n
reviewing r a t e s , and
( c) it would provide cost- savings i n s t a f f i n g .
Effectively Determining Rates
It does not appear the Department can e f f e c t i v e l y determine " proper" insurance
r a t e s f o r two reasons. F i r s t , experts question whether lla proper ratet1 for a
company can, i n f a c t , be objectively determined. Second, the Department does
not have the a c t u a r i a l expertise needed t o properly analyze r a t e s . Finally,
the Department may not have the authority t o approve r a t e s i n the manner it
does. A move t o an open competition r a t e regulation system would eliminate
these problems.
Lack of Objectivity. A proper r a t e f o r a company cannot be determined
objectively. Experts and department o f f i c i a l s both s t a t e t h a t rate- making
involves several subjective f a c t o r s . These f a c t o r s can lead t o d i f f e r e n t I)
conclusions by d i f f e r e n t persons as t o what is a proper rate. A study by the
NAIC s t a f f concluded " Reasonable men may d i f f e r both as t o the approach used
and the r e s u l t s achieved i n the rate- making process.^^ The NAIC s t a f f also
c i t e another study t h a t concludes.
" . . . t h a t insurance rate- making is not an inevitably
accurate and s c i e n t i f i c calculation: It requires personal
i n t e r p r e t a t i o n and judgement at every step. Therefore,
not only is a r a t e which is proper f o r one company not
necessarily so for another, but what appears t o be proper
rate i n the estimation of one person is not necessarily
proper i n the judgment of another. From t h i s viewpoint,
there is no basis f o r presuming t h a t the judgment of the
insurance commissioner... is superior t o t h a t o f . . . a
filer. "'(
The matter of subjective judgment entering i n t o rate- making and rate- approval
processes may be indicated by the f a c t t h a t r a t e s a r e sometimes denied u n t i l
r e l a t i v e l y small adjustments are made. For example, we observed three f i l i n g s
i n which the r a t e revisions o r i g i n a l l y requested and the r a t e revisions f i n a l l y
approved varied by 0.3%, 0.4% and 0.8%.
Actuarial Expertise. The department does not possess the necessary a c t u a r i a l
expertise t o properly analyze r a t e s .
Ibid p. 70
Frederick Crane, Automobile Insurance Rate Regulation; The Public of
Price Competition. Columbus, Ohio: Ohio S t a t e University, Bureau of
Business Reasearch, 1962.
Although insurance rate- making does involve s e v e r a l s u b j e c t i v e judgments much
of the process is dependent upon highly technical a c t u a r i a l studies which are
submitted with the r a t e requests t o j u s t i f y the requested r a t e s . For the
Department t o e f f e c t i v e l y determine whether the r a t e s a r e j u s t i f i e d , the
Department must review t h e a c t u a r i a l support. However, the Department has no
actuary and is forced t o r e l y on the part- time services of a r e t i r e d actuary.
Although t h i s actuary is of g r e a t a s s i s t a n c e t o the Department h i s services are
part- time only and as a r e s u l t a limited number of f i l i n g s receive a c t u a r i a l
review. For example, Department o f f i c i a l s estimate 50% of a l l f i l i n g s do not
require an a c t u a r i a l review and a r e routinely reviewed and approved. However,
of the remaining f i l i n g s t h a t do require an a c t u a r i a l review only 2% receive
a c t u a r i a l review. Thus, 98% of the rate f i l i n g s t h a t may require some
a c t u a r i a l review do not receive it.
Authority. The Department's authority t o carry out the r a t e review process as
it presently operates may also be questionable. ARS 20- 351 and ARS 20- 357
require the Department t o hold a hearing t o disapprove f i l i n g s . However, only
one hearing was held i n 1978. According t o Department o f f i c i a l s t h i s occurred
because 1) the Department often cannot present a c t u a r i a l testimony, and 2)
companies d e s i r e t o avoid hearings for publicity reasons. In addition, r a t e
f i l i n g s t h a t a r e not approved when first submitted t o the Department received
" preliminary disapproval." These r a t e f i l i n g s do not receive Department
approval u n t i l acceptable r a t e s a r e agreed upon between the Department and the
submitting company. It is unclear a t what point, if any, these procedures
place the department i n the position of s e t t i n g r a t e s . What is c l e a r , however,
is t h a t i f the Department is r a t e s e t t i n g , e i t h e r d i r e c t l y or i n d i r e c t l y , it is
exceeding it's authority.
A March 27, 1979 opinion from the Arizona Legislative Council acknowledged t h a t
communication between the Director of Insurance and the companies was
permitted, and t o some extent encouraged, by s t a t u t e . However, the Arizona
Legislative Council noted
" Arizona Revised S t a t u t e s sections 20- 350, 20- 351 and 20-
358 provide f o r the disapproval of c e r t a i n r a t e f i l i n g s ,
but the sections do not authorize t h e d i r e c t o r t o f i x r a t e s
if the director does not approve of the r a t e s f i l e d .
To the extent t h a t ' negotiating1 r e s u l t s i n the director
s e t t i n g r a t e s e i t h e r d i r e c t l y o r i n d i r e c t l y , ' negotiating1
is not permitted. l1 ( emphasis added) *
In addition, the Assistant Attorney General who r e p r e s e n t s t h e Department
questions the Department llnegotiatingll r a t e s . The Assistant Attorney General
s t a t e d t h a t informal negotiations between the Department and insurance
companies produces an unhealthy atmosphere because the negotiations are con-ducted
i n private. He suggested t h a t harder questions would be asked and
broader i s s u e s addressed during the public hearings.
Eliminating Delays
Operating a system requiring prior approval of r a t e s of necessity creates some
delays i n the rate- making process. These delays, however, are compounded if
r a t e f i l i n g s a r e not acted upon promptly. The Department is not always acting
promptly and has delayed some r a t e f i l i n g s for years. Further, the Department
may not have authority t o delay r a t e f i l i n g s for excessive periods of t i m e . A
move t o open competition would eliminate these long delays.
* A complete t e x t of the opinion is shown i n Appendix C.
Even when the Department a c t s promptly upon a r a t e f i l i n g the approval process
can be lengthy, depending upon the depth of the review required. For example,
those f i l i n g s t h a t require an a c t u a r i a l analysis usually take longer t o
approve. Currently it takes the Department up t o 233 days t o approve f i l i n g s
from independent companies and up t o 241 days t o approve r a t i n g bureau f i l i n g s .
Any delays i n r a t e approvals can have negative e f f e c t s if they a r e excessive.
The NAIC s t a f f has noted
" In any i n f l a t i o n a r y s i t u a t i o n , delays i n granting r a t e
increases can c o s t i n s u r e r s s u b s t a n t i a l sums of money as
long as the obsolete r a t e s must be continued. On the other
hand, i f a decrease is i n order a delay may impair an
i n s u r e r ' s competitive position. 11 8'
Therefore, delays i n approving r a t e f i l i n g s may serve t o work against two of
the purposes of r a t e regulation: insuring solvency and reasonable prices.
( pages 49 and 51)
Rate f i l i n g s t h a t are not acted upon promptly by the Department can l i t e r a l l y
be delayed f o r years. The Department normally a c t s promptly upon r a t e f i l i n g s
from major companies and/ or major forms of coverage. However, some f i l i n g s
appear t o become " lost" i n the process.
NAIC report pg. 64.
When the Department receives a non- routine f i l i n g it generally sends the
companies a 11G- 122v form l e t t e r . This l e t t e r informs the company t h a t the
department is exercising its r i g h t t o take an additional 15 days t o review the
request and the 15 days w i l l begin a f t e r the company provides the department
with a l l of the a d d i t i o n a l d a t a it needs. Until the information is received
the f i l i n g remains Ifon hold" i n the approval process.
During our review we i d e n t i f i e d many f i l i n g s t h a t had been i n the approval
process for 100 and 200 days. We noted f i l i n g s t h a t were 539, 722, 1,145 and
1,337 days old. I n order t o gain more information about some of these f i l i n g s
we contacted a few of the companies which had submitted the f i l i n g s and found:
( a ) One f i l i n g had been approved but not removed from the pending
f i l e . ( 232 days old)
( b) One company had followed up on its f i l i n g s three d i f f e r e n t times
but could not get a reply from the Department. The company had
since dropped the program but the Department had still retained
the f i l i n g . ( 1,337 days old)
( c) Another company had contacted the Department several times.
The company said no additional information had been requested
by the Department when it made t h e s e c o n t a c t s so it was waiting
f o r the Department t o a c t . However, the Department was appar-ently
waiting f o r the company t o act because it had retained the
f i l i n g i n the pending f i l e s . This company had r e s t r i c t e d its
underwriting i n Arizona due t o t h i s delay. ( 160 days old)
( dl One company claimed t h a t the Department had been wambiguousn as
t o what a d d i t i o n a l d a t a was required. It was refusing t o s e l l
its policy i n Arizona because of the delay. ( 307 days old)
The primary causes for excessive delays appear t o be the Department's f a i l u r e
t o 1) follow up on it's requests t o companies f o r more information and 2)
respond t o company communications regarding f i l i n g s .
It should be noted t h a t the Department has taken action on many of the delays
observed during our review. The Department took action on 46 of the f i l i n g s we
reviewed only two days a f t e r we discussed the f i l i n g s with them. The
Department approved 29 f i l i n g s , requested more information on 16 and denied
one. The 29 f i l i n g s t h a t were approved by the Department had been pending an
average of 132 days.
The Department may not have the authority t o delay review of some r a t e f i l i n g s .
A s noted above, almost a l l companies submitting f i l i n g s received " G- 122"
l e t t e r s which extend the review periods f o r 15 days a f t e r a l l additional
information is received. This letter is based on the provisions of ARS 20- 344
which provide for submission of a d d i t i o n a l d a t a and 15 days extensions of the
review period for property and marine r a t e s . The general counsel of the
l a r g e s t property- casualty company i n Arizona r e c e n t l y questioned the v a l i d i t y
of using G- 122 l e t t e r for v e h i c l e , c a s u a l t y and s u r e t y r a t e s . In a l e t t e r t o
the Department dated February 19, 1979, t h e a s s o c i a t e general counsel noted:
" ARS 20- 357 contains the f i l i n g requirements f o r ' vehicle,
casualty and surety1 r a t e s . It provides an i n i t i a l
waiting period of 15 days, but does not have an extension
period, nor does it delay the waiting period u n t i l such
time as the Director has s u f f i c i e n t information t o
determine whether the f i l i n g meets s t a t u t o r y
requirements."
Department o f f i c i a l s have t o l d us they do not know i f the time extensions and
delays specified i n G- 122 l e t t e r s can be applied t o vehicle and casualty r a t e s .
They noted however, t h a t companies thus f a r have not formally challenged the
use of G- 122 l e t t e r s . Nevertheless, the p o s s i b i l i t y does e x i s t t h a t the
Department is exceeding its s t a t u t o r y authority and t h a t a challenge of such
authority could require the Department t o e i t h e r review a l l vehicle r a t e s
within 15 days or " deemn them approved. It would be extremely d i f f i c u l t for
the Department t o review these f i l i n g s i n 15 days given t h a t f i l i n g s often
require 30 days or more t o review. In order t o disapprove any r a t e s " deemed"
approved the Department would have t o hold hearings. Such a hearing process
would be both time consuming and expensive t o a l l p a r t i e s involved.
Reducing S t a f f i n g Costs
Adopting an open competition system of r a t e regulation would eliminate the need
f o r t h e Division t o add additional r a t e approval s t a f f and would allow present
Division s t a f f i n g l e v e l s t o be reduced or s h i f t e d t o other functions.
The present Property- Casualty Division s t a f f of s i x persons does not include an
actuary and is inadequate t o review r a t e s without delays. The deputy Director
over the Property- Casualty Division estimates it would require the addition of
an actuary and two t o three other employees a t a cost of approximately $ 70,000
per year t o be able t o review a l l r a t e s within what he believes t o be a
reasonable time of 30 days* These costs can be avoided by moving t o open
competition because r a t e review would no longer be required f o r a majority of
the f i l i n g s currently being received by the Department.
3 30 days may still not comply with t h e s t a t u t o r y 15 day review of vehicle
and casualty r a t e s discussed above.
In addition, present Division s t a f f i n g l e v e l s could be reduced and/ or staff
assigned t o perform other duties i f open competition were adopted. We estimate
t h a t the Department annually reviews 7,500 t o 8,000 f i l i n g s . * Under an open
competition system of r a t e regulation, f i l i n g s would not have t o be approved
except for a few special coverages such as worlanen's compensation or medical
malpractice insurance. We estimate t h a t the elimination o f the prior approval
system of r a t e regulation would allow two t o three current Division positions
t o be:
( a) assigned t o perform functions designed t o increase competition
and public awareness. When Virginia moved t o open competition
it did not reduce s t a f f . It i n s t e a d r e d i r e c t e d s t a f f e f f o r t s
towards such a c t i v i t i e s as the development of consumer
brochures and price comparisions.
( b) assigned t o other divisions within the department such as
consumer complaints. If greater public knowledge of the
a v a i l a b i l i t y of consumer complaint services is created ( see
page 36), some s t a f f might be used t o handle the additional
complaints t h a t w i l l be received.
( c) reduced. Such savings would be approximately $ 25,000 t o
$ 35,000 per year.
CONCLUSIONS
Open competition systems of r a t e regulation are equally as e f f e c t i v e as prior
approval systems i n achieving the goals of r a t e regulation: a v a i l a b i l i t y ,
price and solvency. Therefore, prior approval of most r a t e s is not needed.
Adopting an open competition system of r a t e regulation would 1) remove
questions regarding the a b i l i t y and authority of the department t o operate the
present r a t e approval system as it is presently doing 2) eliminate the long
delays and possible areas of non- compliance present i n the current system 3)
f o r e s t a l l the need for additional s t a f f t o correct current problems a t a
possible cost of up t o $ 70,000, and allow for possible reductions of present
s t a f f a t a cost of $ 30,000. Such savings could j o i n t l y t o t a l from $ 65,000 t o
$ 100,000 per year.
* Department records show 12,000 f i l i n g s per year but we discovered f i l i n g s
were being inadvertently double counted placing t h e a c t u a l f i g u r e s a t
approximately 7,500.
RECOMMENDATION
We recommend the present prior approval r a t e regulation law be repealed and
replaced with an open competition r a t e regulation law. @
FINDING V I
THE ARIZONA DEPARTMENT OF INSURANCE NEEDS ADDITIONAL LEGISLATION TO ENABLE I T
TO DEVELOP A STRONGER REGULATORY PROGRAM AND TO RECOVER ALL THE COSTS OF
COMPANY EXAMINATIONS.
Our review of the Arizona Department of Insurance revealed t h a t there are
several regulatory areas t h a t a r e inadequate and r e q u i r e s t a t u t o r y or
procedural changes. These a r e a s a r e : 1) Arizona has not adopted s t a t u t e s and
regulations r e l a t i n g t o unfair claims settlement practices 2) The s t a t u t e s do
not provided the Director of Insurance with the authority t o f i n e companies for
i n f r a c t i o n s of the insurance code and insurance r e g u l a t i o n s , and 3) the
s t a t u t e s do not currently provide for f u l l recovery of - a l l examination costs as
is done by other s t a t e s .
Unfair Claims Settlement S t a t u t e s
And Regulations Are Needed
Arizona has not adopted the provisions of the NAIC sponsored Unfair Trade
Practices Act r e l a t i n g t o unfair claims settlement practices. Arizona has also
not adopted the Unfair Claims Settlement Regulation which is an NAIC Model
Regulation derived from the provisions of the Unfair Trade Practices Act. The
Unfair Claims Settlement Regulation p r o h i b i t s i n s u r e r s doing business i n a
s t a t e from engaging i n unfair claims settlement practices. The regulation
defines minimum standards which, i f violated ". . . with such frequency as t o
indicate a general business practice ..." are deemed t o c o n s t i t u t e unfair
claims settlement practices. The standards include provisions r e l a t i n g to:
misrepresentation of policy provisions, f a i l u r e t o acknowledge communications,
and prompt i n v e s t i g a t i o n and settlement of claims.
The need for regulation of claims handling is indicated by the f a c t t h a t 55% of
all complaints received by the Department r e l a t e t o claims handling. By not
adopting the provisions of the Unfair Trade Practices Act r e l a t i n g t o unfair
claims settlement p r a c t i c e s , and the accompanying regulation,
the S t a t e of Arizona lacks needed s t a t u t o r y authority t o regulate insurance
claims practices. The NAIC r e p o r t s forty- five s t a t e s have adopted the
s t a t u t o r y provisions of the Unfair Trade Practices Act and nine s t a t e s have
adopted Unfair Claims Settlement Regulations t o accompany the s t a t u t e s .
Authority To Fine Companies Is Needed
Currently, the Director of Insurance has no authority t o f i n e companies f o r
violations of insurance s t a t u t e s other than $ 100 f i n e s f o r l a t e f i l i n g of
annual statements. A s a r e s u l t , the Director has only two d i s c i p l i n a r y
options, 1) remove the company's authority t o do business i n Arizona or, 2) do
nothing a t a l l . Department o f f i c i a l s believe t h i s lack of d i s c i p l i n a r y options
r e s t r i c t s the Department's a b i l i t y t o e f f e c t i v e l y regulate companies because
removing a company's authority t o do business is such a d r a s t i c s t e p both i n
terms of its e f f e c t on the company and it's policyholders t h a t most violations
must go unpunished.
The NAIC model Unfair Trade Practices Act provides for d i r e c t o r s t o have
a u t h o r i t y t o order payment of monetatry penalties of from $ 1,000 t o $ 5,000 for
each violation of the a c t . Currently 24 s t a t e s have the authority t o f i n e
companies for violations of insurance s t a t u t e s . A survey by the Office of the
Auditor General revealed t h a t 22 of these s t a t e s do i n f a c t use the authority
t o f i n e companies when violations are found.* The surveyed s t a t e s reported
t h a t they had i n d i v i d u a l l y f i n e d as many as 50 companies per year and t h a t the
fines had proved t o be e f f e c t i v e i n obtaining company compliance with s t a t u t e s .
The current lack of authority t o f i n e companies a l s o appears inconsistent with
t h e D i r e c t o r ' s current authority t o f i n e agents. Presently, ARS 20- 316 pro-vides
the Director with the authority t o f i n e insurance agents a sum not i n
excess of one hundred d o l l a r s f o r each f a i l u r e or v i o l a t i o n "... of any law re-l
a t i n g t o insurance or of any r u l e , regulation or order promulgated by the
d i r e c t o r . . . " Thus, the Director can f i n e agents but not companies.
* Another s t a t e , Texas, reported it had " monetary penalties" which had the
same e f f e c t as f i n e s . Pennsylvania reported it used consent orders involving 4
payments of up t o $ 2,000 i n instances where laws o r r e g u l a t i o n s d i d not provide
for f i n e s .
Authority To Recover A l l Examination Costs
ARS 20- 159 provides for the Department t o recover the t r a v e l , per diem and
l i v i n g expenses of Department examiners from the companies examined. The
s t a t u t e is s i l e n t , however, on recovery of overhead costs such as the Chief
Examiner's s a l a r y , s e c r e t a r i a l support, e t c . A t l e a s t 11 other s t a t e s have
s t a t u t e s providing for the recovery of - a l l examination costs including overhead
expenses. I f Arizona had a similar provision more than $ 20,000 i n overhead
expenses would be recovered each year.
CONCLUSIONS
Our review of the Insurance Department has shown t h a t there are several
regulatory areas t h a t are inadequate, i n t h a t 1) Arizona has , not adopted
s t a t u t o r y provisions and r e g u l a t i o n s p e r t a i n i n g t o unfair claims settlement
practices, 2) t h e d i r e c t o r can f i n e only agents not companies, and 3) The
Department does not recover a l l examination costs as is done by other s t a t e s .
A s a r e s u l t the department lacks s t a t u t o r y authority needed t o e f f f e c t i v e l y
regulate the insurance industry and the Department is f a i l i n g t o recover more
than $ 20,000 per year i n overhead costs.
RECOMMENDATIONS
1. We recommend t h a t Arizona adopt s t a t u t o r y provisons and regulations
pertaining t o unfair claims settlement practices. We also recommend
t h a t the Director be given s t a t u t o r y authority t o f i n e companies to be
consistent with h i s power t o f i n e agents.
2. We recommend t h a t ARS 20- 159 be amended t o provide for recovery of all
examination costs.
OTHER PERTINENT INFORMATION
During the course of t h e a u d i t we i d e n t i f i e d t h e following pertinent items
r e l a t i n g to: c o n f l i c t of i n t e r e s t , the exempt c l a s s i f i c a t i o n of the chief
examiner, unnecessary hearings held, the absence of a need t o l i c e n s e
s o l i c i t o r s and an unnecessary requirement for color photographs.
Conflict of I n t e r e s t
An employee of the Department of Insurance is receiving renewal commissions
from a former employer ( an insurance company). These commissions r e s u l t from
continuing l i f e insurance policies which were sold by the employee when he was
an agent f o r the insurer. Although the amounts received have decreased and a r e
now small, such payments v i o l a t e t h e c o n f l i c t of i n t e r e s t provisions of ARS 20-
149. In a memo dated March 29,1979,* the Arizona Legislative Council reviewed
ARS 20- 149 and concluded "... any money transaction between an employee of the
director and an insurer is prohibited. This would apparently apply t o renewal
commission fees received from an insurer for p a s t s e r v i c e s rendered."
The Director of Insurance t o l d us he was unaware such payments constituted a
c o n f l i c t of i n t e r e s t . He said he would review the matter with the department's
a s s i s t a n t Attorney General and then take corrective actions.
Exempt C l a s s i f i c a t i o n of the Chief Examiner
The Director of Insurance has received permission from the Personnel Division
t o exempt the Chief Examiner and three other division d i r e c t o r s from the
j u r i s d i c t i o n of the Personnel Board. The d i r e c t o r has not exempted these
positions as of June 1979.
* A complete t e x t of the Legislative Council's opinion is shown i n Appendix C. 4
We found t h a t the NAIC takes no position on whether the chief examiner should
be covered by merit systems. We also found t h e p r a c t i c e v a r i e s among s t a t e s .
I n a survey of 25 s t a t e s we found the chief examiner is covered by merit systems
i n 18 s t a t e s and is not covered by merit systems i n seven s t a t e s . Moreover, i n
four of those seven s t a t e s not covered by merit systems none of the insurance
department employees were covered by merit systems.
Unnecessary Hearings
In 1978 the Arizona Insurance Department held 258 formal hearings. This number
is s i g n i f i c a n t l y higher than the number of hearings held by any of the 30 other
s t a t e s responding t o our survey. The two s t a t e s with the next highest numbers
of hearings were Iowa ( 150) and I l l i n o i s ( 122). The majority of the s t a t e s
held fewer than 50 hearings.
Reviewing the hearings held by the Department we found t h a t 31% of the hearings
were held t o o b t a i n d a t a from company o f f i c i a l s before i s s u i n g c e r t i f i c a t e s of
authority t o do business i n Arizona. Only one of the 30 s t a t e s we contacted
held hearings f o r such purposes, and it does so on an informal basis. The other
s t a t e s use a f f i d a v i t s t o obtain the information they desire.
The Department's Assistant Attorney General has advised us t h a t he believes
a f f i d a v i t s could be used i n most cases t o obtain data needed t o grant
c e r t i f i c a t e s of authority. This would reduce the number of hearings held by
the Department by almost one- third. It would also reduce t h e c o s t s incurred by
the company o f f i c i a l s who must often t r a v e l from out- of- state t o appear a t the
hearings.
S o l i c i t o r s ' Licenses Are Not Needed
ARS 20- 186 provides t h a t insurance agents and brokers may appoint individuals
t o s o l i c i t applications for insurance as representatives of the agent and ( I
broker. The agent or broker must f i l e an a f f i d a v i t with the Insurance
Department acknowledging w . . . r e s p o n s i b i l i t y and l i a b i l i t y for a l l transactions
under such s o l i c i t o r l s license" and swearing the s o l i c i t o r w i l l be " officedU
with the agent or broker. The s o l i c i t o r must then be licensed by the
Department .
There a r e few, perhaps four or f i v e , s o l i c i t o r s licensed each year. Such a
l i c e n s i n g requirement appears t o be u n j u s t i f i e d . The Council of S t a t e
Governments i n its publication Occupational Licensing, s t a t e s :
" There is l i t t l e j u s t i f i c a t i o n f o r licensure i f
P r a c t i t i o n e r s work under supervision. If regulation is
needed, it should be the supervisor who is regulated."
In the case of s o l i c i t o r s , they work under the supervision o f licensed agents
and brokers who acknowledge r e s p o n s i b i l i t y f o r the s o l i c i t o r s ' actions.
Requiring Unnecessary Color Photographs
Applicants a r e required t o submit a color photograph with t h e i r application for
licensure. If photos are not submitted, processing is delayed u n t i l the
photograph is received. However, the photographs are not needed. The
photographs were o r i g i n a l l y required because the Department had considered
putting photographs on t h e l i c e n s e s . They have been continued so the
Department can use the photographs f o r i d e n t i f i c a t i o n a t the examination, and
occassionally i n i n v e s t i g a t i n g complaints.
We found t h a t the other licensing agencies use d r i v e r ' s l i c e n s e s for
i d e n t i f i c a t i o n a t the examinations. Also, the Department can obtain photo-graphs
of agents, f r e e of charge, from the d r i v e r ' s l i c e n s e division i f a
photograph is needed for investigation. Thus, the color photograph requirement
is unnecessary and creates additional expenses, delays and inconveniences for
applicants.
STATE OF ARIZONA
DEPARTMENT OF INSURANCE
REPORT ON EXAMINATION OF FINANCIAL STATEMENTS
JUNE 30, 1978
I OPERATING FUNDS
STATE OF ARIZONA
DEPARTMENT OF INSURANCE
AUDITORS' OPINION
JUNE 30, 1978
CONTENTS
BALANCE SHEET - G e n e r a l , E x a m i n e r s and G e n e r a l
Fixed A s s e t s
REVENUES, EXPENDITURES AND CHANGES I N FUND BALANCE -
G e n e r a l and E x a m i n e r s
BUDGET AND ACTUAL EXPENDITURES - G e n e r a l
NOTES TO FINANCIAL STATEMENTS
I I TRUST FUNDS
AUDITORS' OPINION
ASSETS AND L I A B I L I T I E S ARISING FROM CASH TRANSACTIONS -
Joint U n d e r w r i t i n g P l a n
R E C E I P T S , DISBURSEMENTS AND CHANGES I N CASH BALANCE -
P r e m i u m T a x C l e a r i n g and J o i n t U n d e r w r i t i n g P l a n
NOTES TO FINANCIAL STATEMENTS
P a g e
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
SUITE 600
112 NORTH CENTRAL AVENUE AUDITOR GENERAL
PHOENIX, ARIZONA 85004
255- 4385 AUD ITORS ' OPINION
BILLIE J. ALLRED, CPA
DEPUTY AUDITOR GENERAL
SUITE 820
33 NORTH STONE AVENUE
TUCSON. ARIZONA 85701
882- 5465
The J o i n t Legislative Budget Committee of
The Arizona S t a t e Legislature
We have examined the f i n a n c i a l statements of the General and Examiners Funds
and the General Fixed Assets group of accounts of the S t a t e of Arizona,
Department of Insurance as of June 30, 1978, l i s t e d i n the foregoing table
of contents. Except as s e t forth in the following paragraph, our examina-tion
was made in accordance with generally accepted auditing standards, and
accordingly included such t e s t s of the accounting records and such other
auditing procedures as we considered necessary in the circumstances.
Evidence supporting t h e c o s t of o f f i c e furniture and equipment acquired prior
to June 30, 1970, is no longer available. The ~ e p a r t m e n t ' s records do not
permit t h e a p p l i c a t i o n of adequate a l t e r n a t i v e procedures regarding the cost
of o f f i c e furniture and equipment. Because we were unable t o s a t i s f y our-selves
as a r e s u l t of such incomplete records, we are unable to express, and
we do not express an opinion on the accompanying f i n a n c i a l statement of the
General Fixed Assets group of accounts.
In our opinion, the financial statements referred t o above present f a i r l y the
financial position of the General and Examiners Funds of the S t a t e of Arizona,
Department of Insurance a t June 30, 1978, and the r e s u l t s of operations of
such funds for the year then ended, in conformity with generally accepted
accounting principles applied on a b a s i s c o n s i s t e n t with that of the preceding
year,
December 21, 1978
~ o u g l a sR . Norton
Auditor General
STATE OF ARIZONA
DEPARTMENT OF INSURANCE
OPERATING FUNDS
BALANCE SHEET
JUNE 30, 1978
General
F ixed
General Examiners Assets
ASSETS
Funds on deposit with State Treasurer
Investments ( Note 2)
Reimbursements receivable
General fixed assets :
Office furniture and equipment
LIABILITIES AND FUND BALANCE
Accounts payable
Contingent liabilities ( Note 3)
B
Investment in general fixed assets
Fund balance
The accompanying notes to financial statements
are an integral part of this statement.
STATE OF ARIZONA
DEPARTMENT OF INSURANCE
- OPERATING FUNDS
REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE
YEAR ENDED JUNE 30, 1978
General Examiners
Revenues :
Legislative appropriations
Assessments
Reimbursements
Interest on investments
Total revenues
Expenditures:
Personal services
Employee related costs
Professional and outside services
Travel
Rental
Other
Capital outlay
Total expenditures
Refunds of assessments