Performance audit, Department of Insurance

              DOlJGLAS R NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
October 24, 1989
Members of the Arizona L e g i s l a t u r e
The Honorable Rose Mofford, Governor
Ms. Susan Gal l i n g e r , D i r e c t o r
LINDA J BLESSING. CPA
DEPUTY AUDITOR GENERAL
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the Department of Insurance. This report i s i n response to a
June 2, 1987, 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 Oversight Committee.
The report concludes that the type of rate r e g u l a t i o n does not
s i g n i f i c a n t l y a f f e c t automobile insurance rates. Therefore, other
reforms may be needed to address the r i s i n g cost of automobile insurance
i n Arizona. These reforms could include " no- fault insurance," and other
t o r t reforms.
We also found t h a t a d d i t i o n a l actions - i n c l u d i n g more l e g a l s e r v i c e s -
are needed t o i n v e s t i g a t e and resolve consumer complaints i n a more
timely manner.
My s t a f f and I w i l l be pleased to discuss or c l a r i f y items i n the r e p o r t .
S i n c e r e l v ,
~ 6u@ hs R. Norton
Auditor General
DRN : lmn
STAFF: W i l l i a m Thomson
Mark Fleming
Cindy G. Whitaker
Dennis B. Murphy
David J. Vidoni
Jennifer DuBois
2700 NORTH CENTRAL AVE. 0 SUITE 700 PHOENIX, ARIZONA 85004 ( 602) 255- 4385
SUWARY
The O f f i c e o f the Auditor General has conducted a performance audit of the
Arizona Department of lnsurance ( DO1 ) i n response to a June 2, 1987,
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 Oversight Committee. This performance
audit was conducted as p a r t o f the Sunset review set f o r t h i n Arizona
Revised Statutes ( A. R. S.) 5941- 2351 through 41- 2379.
The Department of lnsurance was created i n 1913 and placed under the
d i r e c t i o n o f the Arizona Corporation Commission. A 1968 c o n s t i t u t i o n a l
amendment created an independent Department of lnsurance responsible for
the l i c e n s i n g , c o n t r o l , and supervision of a l l insurers operating w i t h i n
the State of Arizona. As o f August 31, 1989, t h i s r e s p o n s i b i l i t y included
the r e g u l a t i o n of 2,548 insurance companies. A d d i t i o n a l l y , as of f i s c a l
year 1988- 89, 31,648 l i f e and d i s a b i l i t y , and 17,324 property and casualty
licensees were r e g i s t e r e d w i t h the department.
Our p r e l i m i n a r y work indicated that the department functions well i n a
number of areas. For example, DO1 r o u t i n e l y conducts f i n a n c i a l
examinations t o a s c e r t a i n the f i n a n c i a l status of domestic insurers. The
department conducts these examinations more f r e q u e n t l y than many other
s t a t e s ' insurance regulatory agencies i n an e f f o r t t o p r o t e c t consumer
i n t e r e s t s . F u r t h e r , u n l i k e many s t a t e s , the department monitors c e r t a i n
aspects of i n s u r e r s ' p r a c t i c e s by performing market conduct and rate
examinations. I n the area of consumer awareness, DO1 r e g u l a r l y publishes
information on complaints received about insurance companies and also
publishes various premium comparisons. We d i d , however, determine t h a t
improvements can be made i n the handling of consumer complaints.
Because Automobile lnsurance Rates Are Not Significantly Affected by
the Type of Rating System Used, Other Reforms Should Be
Considered ( see pages 7 through 19)
Although rate r e g u l a t i o n i s o f t e n a focus of discussions about
c o n t r o l l i n g automobile insurance r a t e s , other reforms may be needed to
address the r i s i n g cost of automobi le insurance i n Arizona. Most states
regulate automobile insurance rates i n some form. U n t i l r e c e n t l y , the
trend i n r e g u l a t i o n was toward r e l i a n c e on competition as a means of
preventing excessive rates. This approach was seen as more e f f i c i e n t and
less c o s t l y than requi r i n g insurers to obtain s t a t e approval before
changing rates. Twenty- six s t a t e s , including Arizona, use a competitive
approach, while 24 s t a t e s continue to use some form o f p r i o r approval.
Recently, several s t a t e s have moved back to p r i o r approval i n order to
control the cost of automobile insurance. However, discussions with
insurance experts and a review of numerous studies and a r t i c l e s show that
rates are not s i g n i f i c a n t l y affected by the system used. Some experts
also warn that stronger r e g u l a t i o n may create adverse r e s u l t s such as
less insurance a v a i l a b i l i t y , more r e s t r i c t i v e e l i g i b i l i t y c r i t e r i a , and
expanded use of higher cost assigned r i s k insurance.
Rather than focusing on the type of r a t i n g system, many insurance experts
suggest that reforms are needed to address the underlying cost factors
behind rate increases. These experts strongly support no- fault insurance
as a way to make insurance more e f f i c i e n t and a f f o r d a b l e . No- fault
insurance provides payment to an i n j u r e d p a r t y through h i s or her own
insurance company, regardless of f a u l t , and l i m i t s the injured p a r t y ' s
r i g h t to recover damages through the courts. Suits may be i n s t i t u t e d
only i n cases where medical losses exceed a s p e c i f i e d threshold o r a
c e r t a i n level of i n j u r y i s sustained. Thresholds are u s u a l l y s t a t e d i n
monetary terms ( c u r r e n t l y $ 2,000 i n the one state u t i l i z i n g a monetary
threshold), i n verbal terms describing s p e c i f i c levels of i n j u r y ( f o r
example, " permanent and serious damage"), or a combination of both.
T h i r t e e n s t a t e s c u r r e n t l y have some form of no- fault automobile insurance
and various studies have shown no- fault systems to be an e f f e c t i v e means
for reducing insurance costs. However, no- fault insurance i s not a
panacea. Some states have found t h a t n o - f a u l t a c t u a l l y resulted i n
higher insurance costs, p r i m a r i l y because the threshold for i n s t i t u t i n g
lawsuits has been too low t o s u b s t a n t i a l l y a f f e c t legal claims for
i n j u r i e s . As a r e s u l t , nearly every s t a t e that has adopted n o - f a u l t has
e i t h e r increased i t s monetary threshold, changed to a verbal threshold,
or established a combination monetary/ verbal threshold.
Insurance experts and professional l i t e r a t u r e also suggest that other
measures can reduce insurance costs and, u l t i m a t e l y , premiums. These
include various t o r t reforms, such as l i m i t i n g noneconomic losses, as
well as improved t r a f f i c management and prevention of auto t h e f t and
fraud. Thus, the Arizona L e g i s l a t u r e should consider a l l p o t e n t i a l
causes of high automobile insurance rates before focusing on any
p a r t i c u l a r remedy.
Actions Are Needed t o Reduce Delays o f Complaint
Cases Referred t o the Attorney General's O f f i c e ( see pages 21 through 29)
Many of the most serious complaint cases r e f e r r e d t o the Attorney General
are delayed excessively. O v e r a l l , 21 o f the 53 cases involving
misappropriation of funds and misrepresentation of facts to policyholders
referred to the Attorney General during 1987 and 1988 were delayed for
time periods ranging from 100 to over 500 days. For example, the
Attorney General has delayed a c t i o n for nearly one and a h a l f years
concerning a case i n which DO1 charged that an unlicensed i n d i v i d u a l
misappropriated monies by f a i l i n g to pay the State of Arizona an
estimated $ 39,000 i n taxes and p e n a l t i e s .
A major cause of the delays appears to be that DO1 ' s legal needs exceed
the number of attorneys assigned by the Attorney General to DOI. Both
DO1 and the Attorney General's O f f i c e s t a t e that DO1 needs more legal
support. However, the Attorney General's o f f i c e maintains that i t cannot
provide more than the two attorneys already assigned. Several possible
options for addressing DOl's legal needs e x i s t and should be considered.
I f the Attorney General's o f f i c e cannot assign more s t a f f to DOI, then
one s o l u t i o n would be for DO1 to contract w i t h p r i v a t e attorneys. A
second a l t e r n a t i v e would be for DO1 to create an attorney p o s i t i o n w i t h i n
the department to help prepare complaint cases for prosecution. Third,
DO1 could fund an a d d i t i o n a l attorney p o s i t i o n in the Attorney General's
o f f i c e .
The addi t i o n a l l e g a l services needed by DO1 could be funded by
e s t a b l i s h i n g a revolving fund, supported by department- imposed
p e n a l t i e s . The Department of Banking uses t h i s method to fund the
a d d i t i o n a l legal services i t requires.
High S t a f f Turnover, Heavy Workload, and a Manual
System Slow Complaint Handling ( see pages 31 through 36)
In a d d i t i o n to the s i g n i f i c a n t delays occurring w i t h more serious
complaints, DO1 i s not resolving many routine complaints w i t h i n the
expected time frames. While the department has established an informal
30 working day standard for r e s o l v i n g r o u t i n e complaints, 48 percent of
these complaints exceed the standard by an average of about 5.5 weeks.
Much of the delay i n resolving these complaints i s due to untimely
responses from insurance companies and licensees, Although DO1 requires
a response from companies and l icensees w i t h i n 15 working days, 41
percent of the companies and licensees take longer to provide a f i n a l
response.
Although DO1 attempts to follow up on these complaint i n q u i r i e s , high
turnover among the department's investigators and a heavy workload impact
DOl's a b i l i t y to resolve complaints i n a timely manner. During f i s c a l
year 1988- 89, for example, the department's s i x i n v e s t i g a t o r s handled
approximately 8,000 w r i t t e n complaints. This workload i s compounded by
turnover. In 1987, the department experienced 100 percent turnover i n
i t s i n v e s t i g a t o r s . Two more resigned i n 1988. Another problem i s the
department's current use of a manual system for tracking the 8,000
w r i t t e n complaints. DO1 has begun to address these problems. However,
f u r t h e r e f f o r t s are needed to a l l e v i a t e them.
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND. . . . . . . . . . . . . . . . . . .
FINDING I: BECAUSE AUTOMOBILE INSURANCE RATES ARE NOT
SIGNIFICANTLY AFFECTED BY THE TYPE OF RATING SYSTEM
USED, OTHER REFORMS SHOULD BE CONSIDERED . . . . . . . . . .
Trends inRegulation. . . . . . . . . . . . . . . . . . . .
Current Research Indicates No Significant
Difference i n R a t i n g Systems. . . . . . . . . . . . . . . .
Experts Call for Other Insurance Reforms. . . . . . . . . .
Recomnendation. . . . . . . . . . . . . . . . . . . . . . .
FINDING II: ACTIONS ARE NEEDED TO REDUCE DELAYS
OF COMPLAINT CASES REFERRED TO THE ATTORNEY
GENERAL'SOFFICE. . . . . . . . . . . . . . . . . . . . . .
Complaint Cases Referred to Attorney General
Are Excessively Delayed . . . . . . . . . . . . . . . . . .
Delays Are Caused by Several Factors. . . . . . . . . . . .
Recomnendations . . . . . . . . . . . . . . . . . . . . . .
FINDING I l l : HIGH STAFF TURNOVER, HEAVY WORKLOAD,
AND A MANUAL SYSTEM SLOW COMPLAINT HANDLING . . . . . . . .
Department Is Unable to Resolve Almost Half of Routine
Complaints within Established Standard. . . . . . . . . . .
Inadequate Staffing Levels and a Manual System
of Tracking Complaints Have Contributed to
Untimeliness. . . . . . . . . . . . . . . . . . . . . . . .
Recomnendations . . . . . . . . . . . . . . . . . . . . . .
OTHER PERTINENT INFORMATION. . . . . . . . . . . . . . . . . . .
AREAS FOR FURTHER AUDIT WORK . . . . . . . . . . . . . . . . . .
SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . .
RESPONSES
Department of Insurance
Attorney General
APPEND l X
BIBLIOGRAPHY
Page
1
LIST OF TABLES
Page
TABLE 1 - Department of lnsurance Selected Workload
Indicators, Fiscal Year 1988- 89 ( unaudited) . . . . . . . 2
TABLE 2 - Department of lnsurance Statement of FTEs and
Actual Expenditures, Fiscal Years 1986- 87,
1987- 88, and 1988- 89 ( unaud i ted) . . . . . . . . . . . . . 5
TABLE 3 - Type of Automobile lnsurance Rate Regulation
Used by the 50 States and the D i s t r i c t of
Columbia as of August 1989. . . . . . . . . . . . . . . . 10
TABLE 4 Number of Days to Issue Notice of Hearing
in Serious Cases Referred to the Attorney
General during1987 and1988 . . . . . . . . . . . . . . 24
TABLE 5 - Number of Days Serious Cases Pending after
Referral to the Attorney General during
1987and1988. . . . . . . . . . . . . . . . . . . . . . 25
TABLE 6 - DOI Resolution Time of a Sample of Routine
Complaints Closed i n Calendar Year 1988. . . . . . . . . 33
TABLE 7 - lnsurance Company and Licensee Response
Time to DO1 Consumer Complaint Inquiries
For a Sample of Complaints Closed i n
Calendar Year 1988 . . . . . . . . . . . . . . . . . . . 34
INTRODUCTION AND BACKGROUND
The O f f i c e of the Auditor General has conducted a performance a u d i t of
the Arizona Department of Insurance ( 001) i n response to a June 2, 1987,
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 Oversight Committee. This
performance a u d i t was conducted as p a r t o f the Sunset Review set f o r t h i n
Arizona Revised Statutes ( A. R. S.) § § 41- 2351 through 41- 2379.
The Department of Insurance was created i n 1913 and placed under the
d i r e c t i o n of the Arizona Corporation Commission. I n 1968, Arizona voters
approved a c o n s t i t u t i o n a l amendment that created an independent
Department of Insurance. Arizona State C o n s t i t u t i o n A r t i c l e 15, Section
5 establishes that a l l insurers operating w i t h i n the State of Arizona
s h a l l be subject to " l i c e n s i n g , c o n t r o l and supervision" by a department
of insurance as established by law. Arizona Revised S t a t u t e 920- 101
s t a t u t o r i l y e s t a b l i s h e s the department.
The department has extensive r e g u l a t o r y r e s p o n s i b i l i t y which has grown
s i g n i f i c a n t l y i n recent years. As of August 31, 1989, the department was
responsible f o r r e g u l a t i n g 2,548 insurance companies. I n a d d i t i o n , as of
June 30, 1989, 31,648 l i f e and d i s a b i l i t y , and 17,324 property and
casualty licensees ( agents, brokers, s o l i c i t o r s , f i r m s , c o r p o r a t i o n s , or
others licensed to transact insurance business) were r e g i s t e r e d w i t h the
department. Table 1 ( see page 2) i l l u s t r a t e s these and other recent
department workload s t a t i s t i c s .
Organization
The department i s headed by a d i r e c t o r who i s appointed by the Governor.
A deputy d i r e c t o r a s s i s t s the d i r e c t o r , oversees the a d m i n i s t r a t i o n o f
the two Arizona guaranty funds, and coordinates a l l receiverships,
conservatorshi ps, and superv i s i ons conducted by the department . ( 1
( ' 1 Arizona has two guaranty funds - the Property and Casualty Guaranty Fund, and the
L i f e and D i s a b i l i t y Guaranty Fund. These funds assess member insurers to obtain
monies f o r operating costs and the payment of policyholder claims when insurers
become insolvent and are unable t o meet t h e i r o b l i g a t i o n s .
TABLE 1
DEPARTMENT OF INSURANCE
SELECTED WORKLOAD INDICATORS
FISCAL YEAR 1988- 89
( unaud i ted)
Current licenses:
L i f e and d i s a b i l i t y
Property and casualty
Licenses issued:
New
Renewal
N r i t t e n complaints received
Telephone i n q u i r i e s and complaints received
F i I i ngs received : ( a )
L i f e and d i s a b i l i t y
Property and casualty
Examinations completed:
Financialcb)
Market conduc t ( c )
Companies' and agents' licenses suspended or
revoked, or companies placed i n
receivership
( a) A f i l i n g i s the term general1 y used to denote the request and r e l a t e d documentation
f o r an insurance r a t e change o r the use of a new insurance p o l i c y ( o r s i m i l a r
forms) by i n s u r e r s . DO1 reviews r a t e f i l i n g s t o ensure t h a t rates w i l l not be
inadequate, excessive, o r u n f a i r l y d i s c r i m i n a t o r y . Form f i l i n g s are reviewed and
approved by DO1 t o p r o t e c t consumers from mi s l eadi ng, ambiguous, o r deceptive
insurance forms.
( b) Financial examinations are a review of an i n s u r e r ' s f i n a n c i a l status. Such exams
a s s i s t DO1 i n monitoring the f i n a n c i a l solvency of an i n s u r e r .
( c ) Market conduct examinations are used by DO1 t o evaluate market conduct p r a c t i c e s of
insurers and t h e i r deal i ngs wi th pol i cyholders and claimants.
Source: Department o f Insurance Budget Request for f i s c a l year 1991
DO1 i s divided i n t o s i x d i v i s i o n s - Hearing, Corporate and Financial
A f f a i r s . Receivership, Consumer A f f a i r s and I n v e s t i g a t i o n s , Rates and
Regulation, and Information Systems.
0 The Hearing D i v i s i o n conducts a l l administrative hearings held by
DO!, issues orders, and provides legal assistance to the other
d i v i s i o n s . In a d d i t i o n , t h i s d i v i s i o n a s s i s t s i n d r a f t i n g
insurance- related l e g i s l a t i o n and regu! ations. The Hearing D i v i s i o n
has two employees.
m The Corporate and Financial A f f a i r s D j \ ~ i S i o n i s responsible for
monitoring the f i n a n c i a l status and solvency of insurance companies
s e l l i n g insurance i n Arizona. Part o f t h i s r e s p o n s i b i l i t y includes
a s s i s t i n g the d i r e c t o r i n supervision, conservatorship, and
r e h a b i l i t a t i o n actions against f i n a n c i a l l y troubled o r insolvent
insurers. The 13 d i v i s i o n s t a f f also assess and a u d i t premium taxes
and other fees, f i n e s , and charges.
m The Receivership D i v i s i o n i s responsible f o r o r g a n i z i n g and tracking
a l l receiverships, conservatorships and supervisions commenced by the
department. The d i v i s i o n consists of two l i m i t e d appointment
positions which are not included i n the department's count of
authorized FTEs.
( I The Consumer A f f a i r s and Investigations D i v i s i o n administers the
department's consumer assistance programs and conducts i n v e s t i g a t i o n s
for administrative hearings or l i t i g a t i o n regarding Arizona insurance
law v i o l a t i o n s . This d i v i s i o n has 20 employees.
0 The Rates and Regulation D i v i s i o n i s comprised o f three sections:
Licensing, L i f e and D i s a b i l i t y , and Property and Casualty. The
d i v i s i o n I icenses agents, brokers, adjusters, and other appl i c a n t s .
The d i v i s i o n also reviews and approves a d v e r t i s i n g , p o l i c y forms,
rates, and contracts ( f o r c e r t a i n insurance l i n e s ) u t i l i z e d by
insurers. Other d i v i s i o n r e s p o n s i b i l i t i e s include supervising market
conduct and rate exami nat ions, and conduct i ng premi um compar i sons and
a v a i l a b i l i t y s t u d i e s . Twenty- seven s t a f f perform these functions.
e The lnformation Systems D i v i s i o n i s responsible for implementing the
department's automation plan. The d i v i s i o n i s s t a f f e d w i t h 2 l i m i t e d
appointment employees.
I n a d d i t i o n t o d i v i s i o n s t a f f , 16 DO1 business o f f i c e and a d m i n i s t r a t i v e
s t a f f a s s i s t the d i r e c t o r and deputy d i r e c t o r .
The department conducts most operations i n i t s Phoenix o f f i c e . However,
DO1 maintains a small Tucson o f f i c e , p r i m a r i l y t o i n v e s t i g a t e and handle
consumer complaints i n southern Arizona.
S t a f f i n g
Department s t a f f i n g levels have grown i n recent years. The department
had 61 authorized f u l l - t i m e equivalent ( FTE) p o s i t i o n s during f i s c a l year
1987- 88. For f i s c a l year 1988- 89, DO1 was authorized 69 FTE p o s i t i o n s ,
an increase of 8 new p o s i t i o n s ( see Table 2, page 5). For f i s c a l year
1989- 90, DO1 was authorized a t o t a l of 78 FTE p o s i t i o n s , a g a i n of 9 new
p o s i t i o n s . These new p o s i t i o n s consisted of three i n v e s t i g a t o r s , two
insurance a n a l y s t s , an examiner technician, and three c l e r k s . In
a d d i t i o n to i t s FTE p o s i t i o n s , DO1 i s authorized two l i m i t e d appointment
p o s i t i o n s f o r i t s Receivership d i v i s i o n and two for i t s lnformation
Systems d i v i s i o n . DO1 also u t i l i z e s approximately 40 independent
contractors to perform f i n a n c i a l , market conduct, and r a t e examinations
of insurers. These examiners are paid through a r e v o l v i n g fund
administered by the department. Insurance companies pay exam costs to
the revolving fund.
Budget
The department receives a General Fund a p p r o p r i a t i o n . Revenues from
insurance premium taxes, l icenses, other fees, charges, and c i v i l
penalties are deposited i n t o the General Fund. According to the
department ' s budget request for f i sca l year 1989- 90, f i sca I year 1987- 88
gross premium tax r e c e i p t s t o t a l e d over $ 86.8 mi l l ion do1 l a r s , whi Ie
licenses, fees, and other charges amounted to over $ 3.2 m i l l i o n . Premium
tax receipts for 1989 are expected to t o t a l over $ 99 mi l l i o n . For i t s
operations, the department spent $ 2,397,566 during f i s c a l year 1988- 89.
Table 2 ( see page 5) contains a summary of recent DO1 expenditures.
Audit Scope and Purpose
This performance a u d i t was conducted t o evaluate the Department of
Insurance operations, focusing on these three o b j e c t i v e s .
TABLE 2
DEPARTMENT OF INSURANCE
STATEMENT OF FTEs AND ACTUAL EXPENOITURES
FISCAL YEARS 1986- 87, 1987- 88, AND 1988- 89
( unaud i t ed )
1986- 87 1987- 88 1988- 89
FTE Positions 6 1 6 1 69
Personal services $ 1,366,729
Employee- related 272,297
P r o f . & o u t s i d e s e r v i c e s 27,583
T r a v e l , in- state 6,040
o u t - o f - s t a t e 15,745
Other operating 352,327
Equ i pmen t 22,316
TOTAL $ 2.063.037
Source: Arizona F i n a n c i a l Information Systems and the State of Arizona,
Appropriations Report for the F i s c a l Year Ended June 30, 1989
a To i d e n t i f y current trends and research regarding automobile
insurance rate r e g u l a t i o n .
a To determine i f the department e f f e c t i v e l y handles serious consumer
complaints.
r To evaluate DO1 t i m e l i n e s s i n i n v e s t i g a t i n g consumer complaints.
The a u d i t scope focused on these three areas f o r several reasons. Our
p r e l i m i n a r y work i n d i c a t e d t h a t the department appeared to be f u n c t i o n i n g
w e l l i n some areas. For example, DO1 r o u t i n e l y conducts f i n a n c i a l
examinations to ascertain the f i n a n c i a l s t a t u s of domestic i n s u r e r s . The
department conducts these examinations more f r e q u e n t l y than many other
s t a t e s ' insurance r e g u l a t o r y agencies i n an e f f o r t to p r o t e c t consumer
i n t e r e s t s . F u r t h e r , u n l i k e many s t a t e s , the department has been a c t i v e
i n monitoring c e r t a i n aspects of i n s u r e r s ' p r a c t i c e s by performing market
conduct examinations. I n the area of consumer awareness, DO1 r e g u l a r l y
publishes information on complaints received about insurance companies
and also publishes various premium comparisons.
In a d d i t i o n t o the three o b j e c t i v e s , we addressed the 12 s t a t u t o r y Sunset
Factors ( pages 43 through 49). This r e p o r t a l s o contains the section
Other Pertinent Information ( page 37) regarding DOI's e f f o r t s i n
implementing the recommendations contained i n two previous performance
audit reports of the department ( r e p o r t s 79- 4 and 80- 6). The section
Areas For Further Audit Work ( page 39) addresses issues we i d e n t i f i e d
during the course of our audit but were unable to research because of
lack of time.
This audit was conducted in accordance w i t h generally accepted
governmental a u d i t i n g standards.
The Auditor General and s t a f f express appreciation to the d i r e c t o r and
s t a f f of the Department of Insurance for t h e i r cooperation and assistance
during the course of our a u d i t .
FINDING I
BECAUSE AUTOMOBILE INSURANCE RATES ARE NOT SIGNIFICANTLY
AFFECTED BY THE TYPE OF RATING SYSTEM USED,
OTHER REFORMS SHOULD BE CONSIDERED
Although rate r e g u l a t i o n i s o f t e n a focus of discussions on c o n t r o l l i n g
insurance rates, other reforms a f f e c t i n g rates may be needed to address
the r i s i n g costs of auto insurance i n Arizona. Over the years, the trend
i n automobi Ie insurance has been to move from p r i o r approval r a t i n g
systems to competitive systems. More r e c e n t l y , because the high cost of
auto insurance has created consumer demand f o r lower r a t e s , the focus i n
some s t a t e s f o r a l l e v i a t i o n o f t h i s concern has been on the r a t e approval
process. To assess t h i s issue, we contacted several insurance experts
and reviewed more than 50 studies and a r t i c l e s . We found t h a t r a t e s are
not s i g n i f i c a n t l y a f f e c t e d by the use of any p a r t i c u l a r type o f r a t e
r e g u l a t i o n system, and t h a t other reforms are necessary to reduce r a t e s
and premiums. ( 1 )
Most states regulate automobile insurance r a t e s to some degree to ensure
that insurance w i l l be a v a i l a b l e and a f f o r d a b l e to consumers. Three main
p r i n c i p l e s , as adopted by the National Association of Insurance
Commissioners ( NAIC) i n 1945, guide s t a t e r a t e r e g u l a t i o n . These
p r i n c i p l e s s t a t e t h a t r a t e s must be 1) adequate ( t o m a i n t a i n i n s u r e r
solvency), but 2) n o t excessive ( not unnecessari l y high so as to produce
e x o r b i t a n t p r o f i t s ) , nor 3) u n f a i r l y d i s c r i m i n a t o r y ( p r i c e d i f f e r e n c e s
must r e f l e c t expected loss and expense di f ferences).
Most s t a t e s have adopted various r a t i n g systems to regulate automobile
insurance. These r a t i n g systems f a l l i n t o two general categories - p r i o r
approval ( noncompet i t i v e ) and compet i t ive - a l though several var i a t ions
of each e x i s t . P r i o r approval systems r e q u i r e t h a t r a t e changes be f i l e d
w i t h the s t a t e ' s insurance r e g u l a t o r y agency p r i o r to use. The insurance
commissioner then e i t h e r approves or disapproves the proposed r a t e s .
Competitive systems r e l y on market forces t o s e t r a t e s under the
( 1 ) See B i bl iography .
7
assumption t h a t t h e r e i s adequate competition w i t h i n the i n d u s t r y . Under
t h i s r a t i n g system, insurers may or may not be required to f i l e rates
w i t h the s t a t e insurance commissioner. However, under a l l types of
competitive systems, new rates may be used by an insurance company
without the commissioner's p r i o r approval. I f a new rate does not meet
the three p r i n c i p l e s of r a t e r e g u l a t i o n , the commissioner can
subsequently d i s a l l o w i t and require the insurer t o make policyholder
premium adjustments.
Trends I n Regulation
Several trends i n automobi le insurance rate regu l a t ion have appeared.
Before 1960, p r i o r approval systems were commonplace. Many states moved
toward competitive systems during the 1960s through the mid- 1980s. In
recent years, however, some states have returned or are considering a
return to greater regulation because of consumer d i s s a t i s f a c t i o n over
high premiums.
Move toward competitive systems i n the past - Most states u t i l i z e d
p r i o r approval approaches for rate reviews u n t i l the 1960s. This was
believed to be an appropriate method to ensure reasonable rates.
However, during the 1960s, state l e g i s l a t u r e s , f o l l o w i n g the general
trend toward deregulation, began moving towards the adoption of
competitive r a t i n g laws for automobile and most o t h e r p r o p e r t y and
casualty insurance l i n e s . States adopted competitive laws because i t was
f e l t that adequate competition would prevent excessive rates and that
such systems are more e f f i c i e n t and less c o s t l y to administer than p r i o r
approval systems. '" This trend continued through the mid- 1980s. By
1984, 25 states had implemented competitive r a t i n g laws for some
insurance l i n e s . Arizona enacted i t s competitive r a t i n g law i n 1980.
Currently, some i n t e r e s t i n stronger r e g u l a t i o n - More r e c e n t l y , some
states have moved to s t r i c t e r r e g u l a t i o n for automobile insurance i n an
e f f o r t to curb high and r a p i d l y increasing rates. Auditor General s t a f f
( 1 I n the l a t e 1960s, a National Association of Insurance Commissioners ( NAIC) study
of property and casualty r a t e r e g u l a t i o n concluded t h a t competition w i t h i n the
market should a c t as the predominant regulatory device. U l t i m a t e l y , i n 1980, the
NAIC adopted a model s t a t u t e f o r a competitive r a t i n g system.
8
completed a survey of the insurance regulatscy agencies i n the 50 states
and the D i s t r i c t of Columbia. "' The survey r e s u l t s i n d i c a t e d t h a t
four states have changed from competitive systems to less compet i t ive or
noncompe t i t i ve sys terns s i nce 1986. Mary land, New Mex i co , and Ca l i forn i a
changed from competitive to p r i o r approval systems. (') Kentucky
changed to a less competitive f l e x - r a t i n g system. ( 3 ) O f f i c i a l s from
these states s t a t e d t h a t the changes were made i n an attempt to slow rate
and premium increases, and simply t o make insurance cheaper.
While four states have recently increased regulatory e f f o r t s , two states
- Iowa and Rhode Island - have s h i f t e d from p r i o r approval to competitive
systems. According to o f f i c i a l s from these s t a t e s , the reasons the
changes were made was because of the i n e f f i c i e n c i e s and high costs of the
former p r i o r approval systems. The r e s u l t s o f our survey, and one
conducted i n 1989 by the National Conference o f State L e g i s l a t u r e s , found
that at least s i x other s t a t e s , including Arizona, are c u r r e n t l y studying
possible changes to t h e i r automobi le r a t e r e g u l a t i o n system.
Table 3 ( see page 10) shows the current status of automobile insurance
rate r e g u l a t i o n i n the 50 states and the D i s t r i c t of Columbia. The table
indicates that s l i g h t l y more than h a l f of the states u t i l ize competi t i v e
systems, while the remainder " t i l i z e noncompetitive systems.( 4)
( 1 ) See Appendix f o r a discussion and copy o f the survey.
( 2 ) P r i o r approval r e g u l a t i o n i n C a l i f o r n i a i s the r e s u l t of the passage of Proposition
103 i n the November 1988 e l e c t i o n .
( 3) A f l e x - r a t i n g system i s described as a blending of open competition and p r i o r
approval systems, r e q u i r i n g r a t e change appt- oval by the r e g u l a t o r on1 y i f the
change exceeds s p e c i f i e d percentage ranges. Proponents of f l e x - r a t i n g contend t h a t
it w i l l promote f u l l , yet f a i r competition, while f a c i l i t a t i n g meaningful reviews
o f s u b s t a n t i a l r a t e adjustments - up or down - i n order to avert r a t e inadequacy or
excess over the long run. F l e x - r a t i n g i s mainly used f o r commercial property and
casualty 1 i nes.
( 4) Competitive c l a s s i f i c a t i o n s of r a t e regulatory laws include such systems as no
r e g u l a t i o n , i n f o r m a t i o n f i l i n g only ( use and f i l e ) , or no f i l i n g ( o f r a t e
documents). Noncompetitive c l a s s i f i c a t i o n s would i n c l u d e systems such as p r i o r
approval, modi f i ed p r i o r approval , state set rdtes, and general 1 y, f i 1 e and use
laws. Fl ex- rati ng systems are a cross between competitive and noncompetitive
systems.
TABLE 3
TYPE OF AUTOMOBILE INSURANCE RATE REGULATION
USED BY THE 50 STATES AND THE DISTRICT OF COLUMBIA
AS OF AUGUST 1989
No Open
Regulation Competition Flex- rating
I I l i n o i s Ar i zona Kentucky
Arkansas
Colorado
Connecticut
De l aware
F l o r i d a
Georgia
Hawai i
l daho
l nd i ana
l owa
Ma i ne
Michigan
Minnesota
Missouri
Montana
Nevada
Oh i o
Oregon
Rhode Island
Utah
Ve rmon t
V i r g i n i a
Wisconsin
Wyom i ng
P r i o r State
App r ova l Set( a)
A l abama Massachusetts
A l aska Texas
Gal i f ~ r n i a ( ~ )
Kansas
Lou i s i ana
Maryland
M i s s i s s i p p i
Nebraska
New Hampshire
New Je r sey( c)
New Mexico
New York
N. Carolina
N. Dakota
Ok l ahoma
Pennsy I van i a
S. Carolina
S. Dakota
Tennessee
Washington
Washington, D. C.
W . V i r g i n i a
( a ) State s e t r a t e s a r e r a t e s set by a state agency t h a t a l l insurers must use.
( b ) C a l i f o r n i a was an open competition state beginning i n 1947. However, as a r e s u l t
of the passage of Proposition 103 i n a 1988 e l e c t i o n , C a l i f o r n i a voters changed the
r a t i n g system to p r i o r approval.
( c ) New Jersey did not respond to our survey. The information presented i n t h i s table
f o r New Jersey was obtained from the N a t i o n a l A s s o c i a t i o n of Insurance
Commissioners and i s current as of January 1989.
Source: Prepared by Auditor General s t a f f from Auditor General
automobile insurance survey, completed August 1989
Current Research I n d i c a t e s No S i g n i f i c a n t
Difference I n Rating Systems
Current research does not c l e a r l y e s t a b l i s h e i t h e r of the r e g u l a t o r y
approaches as s u p e r i o r . General l y , zost research shows that no
s i g n i f i c a n t d i f f e r e n c e e x i s t s between the two r a t e r e g u l a t i o n systems,
and when a d i f f e r e n c e does e x i s t , i t u s u a i i y i n d i c a t e s t h a t competitive
approaches provide more consumer value. Furthermore, some i n f o r m a t i o n
suggests that noncompetitive systems are p c t e n t i a l l y harmful as well as
more c o s t l y .
Reports show no d i f f e r e n c e i n systems - Various s t u d i e s and insurance
experts i n d i c a t e that no one type of r a t i n g system i s most e f f e c t i v e a t
c o n t r o l l i n g insurance costs and r a t e f l u c t u a t i o n s . One insurance expert
we contacted s t a t e d t h a t the type of r e g u l a t o r y system used makes l i t t l e
d i f f e r e n c e i n costs. No c o r r e l a t i o n e x i s t s between the two. ( ' ) Other
industry observers agree. A January 1388 insurance i n d u s t r y j o u r n a l
( Best's Review) states there i s no c l e a r consensus on the most e f f e c t i v e
method of rate r e g u l a t i o n . The a r t i c l e c i t e s i n d u s t r y and s t a t e
insurance r e g u l a t o r y agency s t u d i e s that i n d i c a t e t h a t p r i o r approval
systems are no more e f f e c t i v e i n c o n t r o l l i n g r a t e f l u c t u a t i o n s than are
competitive systems.
Several other studies supported these same conclusions. These studies
analyzed the impact of r a t e r e g u l a t i o n systems on p r i c e by comparing loss
r a t i o s . A loss r a t i o r e f l e c t s the p r o p o r t i o n of the premium d o l l a r
returned to insurance consumers i n the form of loss payments.
Accordingly, t h i s r a t i o ( a higher r a t i o means greater consumer value)
shows some of the d i r e c t b e n e f i t s t h a t automobile insurance consumers
have obtained i n r e t u r n f o r t h e i r premium payments. I n each of the
following three s t u d i e s , no s i g n i f i c a n t d i f f e r e n c e occurred among
competitive versus noncompetitive s t a t e s , or where such a d i f f e r e n c e d i d
occur, the competitive approach gave consumeis a somewhat greater value.
( I ) J e f f e r y O'Connell , Professor of Law, U n i v e r s i t y o f V i r g i n i a
11
o P h i l i p R . OIConner, Palmer Bellevue Corporation, i n the study " Rate
Regulation and Consumer Value In Automobile Insurance: A Review of
Twelve Years ( 1975- 86) of Loss Ratios I n A l l States" ( 1989) concludes
that the type of r a t e r e g u l a t i o n e i t h e r has no systematic e f f e c t on
loss r a t i o levels or tends to have the e f f e c t , i n competitive s t a t e s ,
of increasing loss r a t i o s somewhat, i n d i c a t i n g greater consumer value.
o Kenneth Meier, i n h i s book The P o l i t i c a l Economy of Regulation: The
Case of Insurance ( 19881, concludes that i n no case are the rates i n
reaulated states s i q n i f i c a n t l y d i f f e r e n t from the rates i n less
regulated s t a t e s , a f i n d i n g consistent w i t h other empi r i c a l
l i t e r a t u r e . The c l e a r conclusion i s t h a t r e g u l a t i o n , in general, has
no impact on the p r i c e of insurance.
0 Robert C. Witt and Harry M i l l e r , i n a December 1980 CPCU Journal
a r t i c l e t i t l e d " A Comparative Analysis of R e l a t i v e Costs Under
Competitive and Non- Competitive Rate Regulatory Laws" found, using
data for a l l s t a t e s from the period 1971 through 1978, t h a t ,
s t a t i s t i c a l l y , there i s b a s i c a l l y no r e l a t i v e cost d i f f e r e n c e between
the two c l a s s i f i c a t i o n s of rate r e g u l a t o r y laws. The authors
conclude that based on t h i s f i n d i n g , " there appears to be no
empirical economic j u s t i f i c a t i o n for the r e g u l a t i o n of automobi Ie
insurance rates by regulatory a u t h o r i t i e s , e s p e c i a l l y when
considering the costs of r e g u l a t i n g rates."
Although most reports found no s i g n i f i c a n t d i f f e r e n c e between r a t i n g
systems, a report by the U. S. General Accounting O f f i c e ( GAO) gave mixed
r e s u l t s regarding premium reduct ions due to types o f r a t i n g systems. In
i t s report Auto Insurance: State Regulation A f f e c t s Cost and A v a i l a b i l i t y
( 1986), GAO conducted two d i f f e r e n t analyses of the e f f e c t of
noncompetitive and c o m p e t i t i v e r a t i n g s systems on insurance costs.
However, the chairman of the Arizona Study Commission on P r i v a t e
Passenger Automobile Insurance, who i s a s t a t i s t i c a l expert and Arizona
State U n i v e r s i t y p r o f e s s o r , said that the analyses used by GAO are
problematic, and the r e s u l t s of the analyses are not r e l i a b l e . One of
the analyses found t h a t average premiums for physical damage insurance
were s t a t i s t i c a l l y s i g n i f i c a n t l y higher i n noncompetitve s t a t e s , but
found no s t a t i s t i c a l l y s i g n i f i c a n t d i f f e r e n c e i n l i a b i l i t y coverage
costs. The second a n a l y s i s , a m u l t i p l e regression a n a l y s i s , showed no
s i g n i f i c a n t d i f f e r e n c e s i n the cost of physical damage coverage between
competitive and p r i o r approval states except i n one case. The cost of
l i a b i l i t y coverage was generally higher i n s t a t e s t h a t used competitive
approaches, with the s i z e of t h e cost d i f f e r e n c e dependent on the degree
of urbanization of a s t a t e .
Stronger rate r e g u l a t i o n may r e s u l t in negative consequences - Some
insurance experts also warn that stronger rate- making r e g u l a t i o n w i l l
l i k e l y have adverse consequences that may outweigh any b e n e f i t s of such a
move. For example, a 1989 study on auto insurance issued by the Insurance
Information I n s t i t u t e found that the r e s u l t s o f some attempts to keep
prices down through regulatory p r i c e controls have been negative. The
report continues that t h i s has resulted i n less insurance, t i g h t e r
e l i g i b i l i t y c r i t e r i a , cross- subsidies from low- risk to h i g h - r i s k d r i v e r s ,
expanded residual markets, and s u b s t a n t i a l insurer operating d e f i c i t s
that u l t i m a t e l y produce higher premiums.
In further support of t h i s view, an insurance expert suggests i n a recent
paper that r e g u l a t i o n of voluntary automobile insurance market rates w i l l
reduce voluntary market coverage a v a i l a b i l i t y and thus, w i l l force some
d r i v e r s into the residual market, such as an assigned r i s k plan. The
paper also warned that . p e r s i s t e n t l i m i t a t i o n s on rate increases below
levels consistent w i t h growth i n expected claim c ~ s t sa re l i k e l y to cause
insurers to withdraw from a s t a t e , may incrgase insurance company
insolvencies, or both.") Another insurance expert c i t e d simi l a r
information i n a recent business journal a r t i c l e . ' "
In addition to these p o t e n t i a l problems, i t t y p i c a l l y costs more to
administer a noncompetitive, or p r i o r approval type system. Many studies
are quick to p o i n t out t h i s concern. Additional insurance department
s t a f f are needed to review and approve the rate f i l i n g s w i t h i n s p e c i f i e d
time periods. O f f i c i a l s responding to our survey stated t h i s to be
true. I n C a l i f o r n i a , for example, d i r e c t costs of changing to p r i o r
approval resulted in insurance department budget increases of $ 2.1
m i l l i o n and 43 ~ t a f f . ' ~ ' Maryland's budget increased by about $ 1
m i l l i o n when i t implemented a p r i o r approval system. I f a t y p i c a l
( 1 ) Scott E. Harrington, " Rate Regulation, No- Faul t , and the Automobile Insurance
Af f o r d a b i l i t y Problem," unpubl ished working paper of the U n i v e r s i t y of South
Carol ina, Coll ege of Business A d m i n i s t r a t i o n , January 1989.
( 2) J. David Cummins, " Whatas D r i v i n g Auto insurance Lip," The Wall S t r e e t Journal,
January 5, 1989.
( 3) I n a d d i t i o n to the d i r e c t costs, an a d d i t i o n a l $ 15.6 m i l l i o n i n resources have been
allocated t o other departmental functions t h a t sspport, a t l e a s t i n p a r t , the new
p r i o r approval system. Examples of these include equipment, a d m i n i s t r a t i v e ,
actuari a1 , and 1 egal servi ces.
p r i o r approval system were to be implemented i n Arizona, DO1 o f f i c i a l s
estimate i t could cost over $ 1 m i l l ion for 37 a d d i t i o n a l s t a f f alone.")
Experts Call For Other
l nsurance Re forms
Research i n d i c a t e s t h a t simply changing rate review and approval methods
w i l l not a f f e c t the cost of insurance because such changes do not address
underlying problems. Some experts suggest that the implementation of a
good n o - f a u l t system i s key to reducing costs and improving a f f o r d a b i l i t y
and avai l a b i l i t y . In a d d i t i o n , other measures may also be b e n e f i c i a l t o
t h i s e f f o r t .
Support for no- fault - Some researchers s t r o n g l y support a good
no- fault system as a way to make automobile insurance more e f f e c t i v e and
a f f o r d a b l e . I n past years, a number of states have moved t o n o - f a u l t
automobile insurance. Experts studying these s t a t e s have found that good
no- fault systems can impact t h e cost of auto insurance.
No- fault insurance i s a form of automobi le insurance i n which a person's
economic losses, such as medical expenses, and loss of income, are paid
by h i s or her i n s u r e r ( through personal i n j u r y p r o t e c t i o n - " PIP")
regardless of who was a t f a u l t . Such a law l i m i t s the a b i l i t y of an
i n j u r e d party to sue for recovery of damages and f o r p a i n and s u f f e r i n g .
Thus, the law avoids the necessity of determining, through l i t i g a t i o n ,
who i s a t f a u l t i n an accident. S u i t s for pain and s u f f e r i n g can only be
i n s t i t u t e d when medical type losses exceed the " t o r t threshold" amount.
Thresholds may be monetary ( c u r r e n t l y $ 2,000 i n the one n o - f a u l t s t a t e
( 1 ) These estimates were based on a p r i o r approval law i n which rates must be approved
w i t h i n 30 days before t h e i r e f f e c t i v e date ( t h e y u s u a l l y " deem," or become
e f f e c t i v e , i f not disapproved by t h i s t i m e ) , and no hearing i s required. The
estimates do not include other costs, such as a d d i t i o n a l computer usage, t h a t would
a1 so be needed.
u t i l i z i n g a monetary t h r e s h o l d ) , verbal ( d e s c r i b i n g the k i n d or level of
i n j u r y o f the accident v i c t i m , for exampie, " permanent and serious
damage" or d i s f igurement), or a combinat ion of inonetary and verbal'.')
C u r r e n t l y , 13 states have some form of n o - f a u l t automobile insurance and
most are mandatory plans. Our survey found t h a t nine of these states
have a combination o f monetary and v e r b a l t h r e s h o l d s . Three s t a t e s have
verbal only thresholds: Michigan, New York, and F l o r i d a . Massachusetts
i s the only n o - f a u l t s t a t e w i t h a monetary only t h r e s h o ~ d . ' ~ )
Scott Harrington, an insurance expert and professor at the U n i v e r s i t y of
South Carolina, maintains t h a t the most e f f e c t i v e way to reduce costs
would be for states to adopt t r u e n o - f a u l t auto insurance, or at least
some type of t o r t reform. He believes the primary cause of high
insurance costs i s the rapid r i s e i n b o d i l y i n j u r y l i a b i l i t y claims.
Higher medical expenses, l i t i g a t i o n costs, and pain and s u f f e r i n g awards
have g r e a t l y c o n t r i b u t e d to these c l a i m s c o s t s . ' 3 ' Other experts,
Professor David Cummins of the Wharton School and Professor J e f f e r y
OtConnell of the U n i v e r s i t y o f V i r g i n i a , share t h i s view.
Various studies also recommend n o - f a u l t 3s an important element i n
insurance reform.
( l ) Although reduced l e g a l costs i s one p o t e n t i a l b e n e f i t of n o - f a u l t , several other
goals, or b e n e f i t s , e x i s t . These i n c l u d e t h e payment of medical costs and l o s t
wages t o more people, the avoidance of long delays inherent i n t o r t l i t i g a t i o n , and
the assurance t h a t v i c t i m s s u f f e r i n g simi lar i n j u r i e s w i l l receive comparable
l e v e l s of b e n e f i t s . O f f i c i a l s of some s t a t e s s t a t e d these other b e n e f i t s as the
major reason they implemented no- fault insurance.
( 2) I n addition t o these 13 states, a t l e a s t 7 others u t i l i z e d PIP insurance, but do
not l i m i t an i n s u r e d ' s r i g h t t o sue. St~ ch systems are r e f e r r e d t o as " add- on"
systems. Although not s t r i c t l y no- fault systems ( because there i s no l i m i t a t i o n on
l a w s u i t s ) , some professional l i t e r a t u r e r e f e r s t n add- on systems as a type of
no- fault. O f f i c i a l s of a t l e a s t s i x states also t o l d us t h a t t h e i r s t a t e s were
e i t h e r studying o r considering adopting n o - f a u l t .
( 3) According to Best's Insurance Manaaement R ? ~ ~ r ( t!! asrch 1989), " Economic Factors i n
Property/ Casual t y Insurance Claims Costs." fi- oin 1381 through 1988, the indexes
( percent increase) f o r physicians' services iG4.7%;, hospi t a l room rates ( 83.5%),
auto body work ( 41.7%), and l e g a l services ( 79.0%) have exceeded the general
Consumer Price Index ( 30.2%).
a In the book, The P o l i t i c a l Economy of Regulation: The Case of
Insurance ( 19881, Kenneth J. Meier concludes that both h i s and other
research convincingly demonstrates that p o l i c y h o l d e r s b e n e f i t from
real forms o f no- fault insurance, that i s , those that I i m i t
l i t i g a t i o n . He f u r t h e r s t a t e s that the consuming p u b l i c would be
well served by w e l l - d r a f t e d , no- fault laws i n the s t a t e s .
a The U. S. Department of Transportation, i n i t s 1985 r e p o r t ,
Compensating Auto Accident Victims: 1984 Follow- up Report on No- Fault
Auto lnsurance Experiences, found t h a t n o - f a u l t has led t o reductions
i n the number of lawsuits and, thus, to s i g n i f i c a n t savings i n court
and other p u b l i c legal costs paid by the taxpayer. Although the
study found that n o - f a u l t s t a t e s , on average, had higher t o t a l
insurance premiums than t r a d i t i o n a l s t a t e s , t h i s seemed to be due to
states w i t h unbalanced n o - f a u l t l a w s . ( ' ) However, i n nearly a l l
other aspects, including f a s t e r payments to more insurance v i c t i m s ,
no- fault was shown as superior to the regular t o r t system.
e The A l l i a n c e of American Insurers, i n The Cost of No- Fault ( 1984) and
" Reexamining the Cost B e n e f i t s of No- Fault," CPCU Journal, ( March
1989), found that c e r t a i n types of n o - f a u l t were e f f e c t i v e i n
reducing insurance costs. These studies concluded that cost savings
generally occur i n those s t a t e s that have adopted a strong t o r t
threshold, p a r t i c u l a r l y a verbal threshold. However, i n states with
weak thresholds, costs under no- fault are l i k e l y t o be higher than
under the t o r t systems they replaced. Both studies also found t h a t ,
when comparing estimated t o r t i n j u r y coverage pure premium to
no- fault i n j u r y coverage pure premium, the three states w i t h verbal
thresholds showed s u b s t a n t i a l cost savings under n o - f a u l t . For those
states w i t h monetary thresholds, the number of states that showed
cost savings decreased as the threshold amount decreased, and i n most
add- on states i t was determined t h a t n o - f a u l t was t y p i c a l l y more
c o s t l y .
In addition to the above s t u d i e s , i n i t i a l f i n d i n g s o f the Arizona Study
Commission on P r i v a t e Passenger Automobile Insurance also support
no- fault insurance. The commission states i n i t s i n t e r i m report dated
March 1989, t h a t n o - f a u l t would be a fundamental s o l u t i o n t o high
insurance costs. In one of i t s recommendations, the commission states
that no- fault insurance o f f e r s promise of real savings i n the provision
( 1 ) " B a l a n ~ e ' i~ n a n o - f a u l t system r e f e r s to the extent t o which the costs of n o - f a u l t
b e n e f i t s ( medical, wage replacement, e t c . ) are greater than, equal t o , o r l e s s than
the savings made possible by the r e s t r i c t i o n on t o r t recovery ( p a i n and s u f f e r i n g
lawsuits and awards). Therefore, the savings i n " unbalanced" states from
r e s t r i c t i o n s on or reductions i n t o r t recoveries i s not as great as the cost of
no- fault P I P b e n e f i t s . Some studies i n d i c a t e t h a t high d o l l a r and verbal
thresholds a r e g e n e r a l l y a f a c t o r i n achieving balance i n a n o - f a u l t s t a t e .
A1 though an appropriate thresh01 d may be the s i n g l e most important f a c t o r i n
determining balance, other f a c t o r s may also impact balance i n a p a r t i c u l a r s t a t e .
and consumption of automobile insurance. I t continues t h a t " n o - f a u l t
insurance i s the one a l t e r n a t i v e which does appear to o f f e r real savings
i n both the a d m i n i s t r a t i o n of an insurance program and i n the cost of
t h i s product to the consumer."
Although a considerable amount of research tends to support n o - f a u l t as a
useful a l t e r n a t i v e i n the struggle to reduce t h e costs of automobile
insurance, some s t a t e s have encountered mixed r e s u l t s w i t h n o - f a u l t . For
example, some states have experienced s i g n i f icant premium increases as a
r e s u l t o f n o - f a u l t . I n many of these cases, the reason for t h i s i s that
no- fault thresholds f o r t o r t recovery have o f t e n been too low to
s u b s t a n t i a l l y impact b o d i l y i n j u r y l i a b i i i t y claims, e s p e c i a l l y when
b e n e f i t levels are h i g h . " ' To help a l l e v i a t e t h i s , many n o - f a u l t
states have been strengthening t h e i r n o - f a u l t thresholds. Since the
f i r s t no- fault system was adopted i n 1971 by Massachusetts, most states
that have adopted and continue to use n o - f a u l t have e i t h e r increased
t h e i r monetary t h r e s h o l d , moved to a combination monetary/ verbaI
t h r e s h o l d , o r moved to a verbal threshoid i n an e f f o r t t o make t h e i r
systems more e f f e c t i v e and e f f i c i e n t . A t least four states are c u r r e n t l y
considering changing to a verbal threshold.'"
Other measures may also be beneficial - I n a d d i t i o n t o the p o t e n t i a l
b e n e f i t s and cost savings of n o - f a u l t , other measures may also be useful
i n the e f f o r t to reduce automobile insurance costs, and u l t i m a t e l y rates
and premiums. For example, the r e s u l t s of our survey and other research
show that some s t a t e s e i t h e r have attempted or are attempting
( 1 ) I n a d d i t i o n , come c r i t i c s of no- fault contend t h a t other problems e x i s t w i t h such a
system. C r i t i c s a l l e g e n o - f a u l t may redut? d r i v e r r e s p o n s i b i l i t y and lead to more
accidents, force i n d i v i d u a l s to purchase p r o t e c t i o n against the i rresponsi b l e acts
of others, and not l e s s e n t h e number of l a w s u i t s .
( 2) According t o the DO1 d i r e c t o r , a c o n s t ~ t u t ? o ~ aalm endment may be required i f
Arizona was t o adopt a no- fault system. S p e c ~ t : c a l ! y , A r t i c l e 11, Section 31 of
the Arizona C o n s t i t u t i o n provides t h a t " no law s h a l l be enacted i n t h i s State
l i m i t i n g the amount o f damages to be recovered f o r causing the death o r i n j u r y o f
any person." I n a d d i t i o n , A r t i c l e X V I I I , Section 6 states t h a t " the r i g h t of
a c t i o n t o recover damages f o r i n j u r i e s s h a l l never be abrogated, and the amount
recovered s h a l l n o t be subject to any s t a t u t o r y l i m i t a t i o n . "
comprehensive t o r t reform. Since 1982, at least nine States have enacted
l e g i s l a t i o n p l a c i n g l i m i t a t i o n s on noneconomic damage ( pain and
s u f f e r i n g ) awards or amending or e l i m i n a t i n g j o i n t and several
l i a b i l i t y . " O f f i c i a l s we talked w i t h i n several other s t a t e s s a i d
these reforms were made i n an e f f o r t t o h e l p make insurance more
affordable by reducing insurance company payouts. A t least four other
states have introduced s i m i l a r l e g i s l a t i o n during 1989.")
Automobile t h e f t i s another s i g n i f i c a n t cost factor i n automobile
insurance, and i s said to be the fastest- growing crime i n the U. S.
According to the Insurance Information I n s t i t u t e , the largest component
of comprehensive insurance cost i s compensation for t h e f t . I n a d d i t i o n ,
the National Automobile Theft Bureau and other analysts have determined
that fraudulent a c t i v i t i e s account for 15 to 20 percent of a l I auto
insurance , payments. As w i t h t o r t reform, some states have e i t h e r
implemented or are considering various a n t i t h e f t and a n t i f r a u d
i n i t i a t i v e s to reduce these abuses.
F i n a l l y , other f a c t o r s , though not d i r e c t l y r e l a t e d to insurance, can
also impact automobile insurance costs and should also be considered when
studying insurance reform. For example, t r a f f i c management concepts,
including changes i n speed l i m i t s and p u b l i c education against drunk
d r i v i n g , may reduce the number and seriousness of automobile accidents.
The L e g i s l a t u r e should consider other possible reforms to the insurance
system i n a d d i t i o n t o the type of r a t i n g system used for automobile
insurance. Other factors that should be considered include:
a. No- Fault insurance, p a r t i c u l a r l y a plan w i t h a strong verbal threshold
A l i a b i l i t y i s said t o be " j o i n t and several" when the c r e d i t o r may sue one or more
of the p a r t i e s t o the 1 i a b i l i t y separately, or a l l o f them together a t h i s or her
option.
( 2 ) As i s the case w i t h no- fault insurance, a c o n s t i t u t i o n a l amendment may be required
i f a t o r t reform program i n v o l v i n g a l i m i t a t i o n on damages i s pursued i n Arizona.
FINDING I1
ACTIONS ARE NEEDED TO REDUCE DELAYS OF COMPLAINT
CASES REFERRED TO THE ATTORNEY GENERAL'S OFFICE
The Arizona Department of Insurance ( DOI) could reduce delays of serious
complaint cases referred to the Attorney General's o f f i c e . Some
complaint cases are delayed for hundreds o f days w i t h i n the Attorney
General's o f f i c e . Many of these delays can be a t t r i b u t e d to the fact
that DOl's need for legal services exceeds the number of attorneys
assigned to DOI. However, DOI's f a i l u r e to e s t a b l i s h p r i o r i t i e s and
f o l low up on cases referred to the Attorney General has a l s o c o n t r i b u t e d
to the delays.
DO1 i s responsible for ensuring equitable treatinent of Arizona c i t i z e n s
who purchase insurance. One method used by DO1 for t h i s purpose i s
i n v e s t i g a t i n g complaints received from consumers. Within DOI,
i n v e s t i g a t i o n s of consumer complaints are conducted by the Consumer
A f f a i r s and I n v e s t i g a t i o n s D i v i s i o n . According to D o l t s f i s c a l year
1990- 91 budget request, the d i v i s i o n handled over 8,000 w r i t t e n
complaints and responded to over 99,000 telephone i n q u i r i e s and
complaints during f i s c a l year 1988- 89. A d d i t i o n a l l y , during t h i s period
the d i v i s i o n was successful i n a s s i s t i n g Arizona c i t i z e n s i n obtaining
over $ 8.6 m i l l i o n i n settlements from insurers. As noted below, more
serious complaints ( those i n v o l v i n g possible s t a t u t o r y , o r a d m i n i s t r a t i v e
r u l e o r r e g u l a t i o n v i o l a t i o n s ) are referred by DO1 to the Attorney
General's o f f i c e .
Complaint Cases Referred t o
Attorney General Are Excessively Delayed
Many serious complaint cases referred to the Attorney General are
delayed. Although the Attorney General i s responsible for prosecuting
serious v i o l a t i o n s of insurance laws, action i s sometimes delayed for
time periods ranging from 100 to over 500 days.
Attorney General r e s p o n s i b i l i t y - The Attorney General i s s t a t u t o r i l y
responsible for p r o v i d i n g legal representat ion to the Department of
Insurance. This representation encompasses a wide v a r i e t y of issues
including, for example, a d m i n i s t r a t i v e and c o u r t a c t i o n s i n v o l v i n g
p o t e n t i a l l y insolvent insurers, matters i n v o l v i n g mergers, a c q u i s i t i o n s ,
withdrawals and other f i n a n c i a l regulatory requirements, and
a d m i n i s t r a t i v e and c o u r t a c t i o n s r e l a t i n g to p o l i c y forms and rates. The
Attorney General also serves as general counsel for the two guaranty
funds. In a d d i t i o n , the Attorney General i s responsible for prosecuting
v i o l a t i o n s of Arizona's insurance laws. Arizona Revised Statutes
( A. R. S.) 920- 152. A. reads, i n p a r t :
" I f the d i r e c t o r has cause to b e l i e v e t h a t a person has v i o l a t e d any
penai provision of t h i s t i t l e o r other laws related to insurance
. . . he s h a l l c e r t i f y the facts of such v i o l a t i o n to the attorney
general, who s h a l l b r i n g and prosecute such action as may be required
for the purpose of punishing the v i o l a t i o n ( emphasis added)."
In a d d i t i o n , A. R. S. 520- 152. C. reads:
" The attorney general s h a l l prosecute or defend a l l proceedings
brought pursuant t o or r e s u l t i n g from enforcement of t h i s t i t l e when
requested by the d i r e c t o r ( emphasis added)."
Complaints i n v o l v i n g possible insurance law v i o l a t i o n s , generally
representing the more serious complaint cases handled by DOI, are
referred to the Attorney General. A f t e r reviewing and accepting the
case, the Attorney General d r a f t s a Notice of Hearing for the d i r e c t o r ' s
signature, n o t i f y i n g the accused party of the charges against him or
her. The Attorney General then prosecutes the case, usually i n an
a d m i n i s t r a t i v e hearing before the department's hearing o f f i c e r .
Serious complaints move slowly - Many of the most serious complaint
cases r e f e r r e d t o the Attorney General are excessively delayed. O v e r a l l ,
21 of the 53 cases i n v o l v i n g misappropriation of funds and
misrepresentation of facts t o p o l i c y h o l d e r s r e f e r r e d to the Attorney
General during 1987 and 1988 were delayed for more than 100 days. A t
least some of the delay appears t o r e s u l t from the Attorney General's
slowness i n issuing Notices of Hearings. For example, i n almost every
closed case i n which a Notice of Hearing was issued, more than 25 days
passed between r e f e r r a l of the case to the Attorney General and issuance
of the notice ( see Table 4, page 2 4 ) . i l i The average delay was 72
days. One case took 236 days. These del3ys occurred even though
Attorney General o f f i c i a l s i n d i c a t e that when adequate i n v e s t i g a t i o n s
have been performed, they should be able to d r a f t a Notice of Hearing for
the d i r e c t o r ' s review w i t h i n one working day. Attorney General o f f i c i a l s
a t t r i b u t e d the delays i n issuing the Notice of Hearing to a combination
of other DO1 work being more c r i t i c a l and a lack of s t a f f . They noted
that some non- complaint cases ( f o r exampie, those i n v o l v i n g f i n a n c i a l l y
insolvent insurers) may a f f e c t thousands of policyholders and receive
higher p r i o r i t y than many complaint cases. % hen s t a f f are working on
these cases, there i s no one to work on complaint cases.
( ' I A t t h e time of our analysis, of the 53 complaint cases reviewed, 15 remained open.
The Attorney General declined t o prosecute 3 cases and 35 cases were closed.
However, of the 35 closed cases, a Notice o f Hearing was not issued i n 8 cases,
usually because a Consent Order was signed by the licensee before the case reached
t h i s p o i n t .
TABLE 4
NWER OF DAYS TO I SSUE NOT l CE OF HEAR1 NG
IN SERIOUS CASES REFERRED TO THE ATTORNEY GENERAL
DURING 1987 AND 1988
Numbe r of Days
to Issue Number of Percentage of
Notice of Hearing( a1 Closed Cases Total
1 - 25
26 - 50
51 - 100
101 - 200
More than 200
Totals
( a ) This represents the number of days from the date the case was referred to the
Attorney General u n t i l a Notice of Hearing was issued.
Source: Auditor General analysis of a l l misappropriation and
misrepresentation complaint cases r e f e r r e d to t h e Attorney
General during calendar years 1987 and 1988
A review of cases s t i l l open shows even more serious delays. As shown i n
Table 5 ( page 251, 15 misappropriation and misrepresentation cases
r e f e r r e d t o the Attorney General i n 1987 and 1988 have been open, on
average, for nearly 300 days. These delayed cases represent serious
v i o l a t i o n s o f insurance laws, as i l l u s t r a t e d i n the f o l l o w i n g case
examples .
CASE 1
On August 27, 1987, DO1 r e f e r r e d a case to the Attorney General
charging an insurance agency w i t h misappropriation by having f a i l e d
to pay the State of Arizona over $ 39,000 i n surplus l i n e s taxes and
penalties ( c o l l e c t e d by the agent from p o l i c y h o l d e r s and to be
remitted to the State by the agent) during the period 1984 through
mid- 1987. A d d i t i o n a l l y , DO1 contended that the agency had transacted
insurance business without a license and had placed insurance through
an unauthorized insurance company. During the course of t h e i r
i n v e s t i g a t i o n , DO1 found evidence to suggest that the p r i n c i p a l
i n d i v i d u a l behind the agency was not licensed to transact insurance
business i n Arizona and had l o s t h i s license i n another s t a t e f o r
misappropriation o f premiums i n 1985.
TABLE 5
N W E R OF DAYS SERIOUS CASES PENDING
AFTER REFERRAL TO THE ATTORNEY GENERAL
DURING 1987 AND 1988
Complaint
Case
Number of Days Pending
w i t h Attorney General( a)
Average Days Open 2 93
( a) This represents the number of days from t h e d a t e the case was r e f e r r e d t o the
Attorney General u n t i l February 17, 1989, t h e d a t e o f o u r a n a l y s i s .
Source: Auditor General analysis of a l l misappropriation and
misrepresentation complaint cases referred to the Attorney
General during 1987 and 1988
On February 17, 1989, 54q days ( approximately 1.5 years) a f t e r
r e f e r r a l , Auditor General s t a f f reviewed the case and found that no
formal a c t i o n had been taken by the Attorney General. According to
Attorney General o f f i c i a l s , the delay was due to the technical nature
of the case and inadequate time to conduct legal research needed t o
proceed w i t h prosecution.
CASE 2
I n October 1987, DO1 received a complaint from a consumer charging a
licensed agent of misappropriating $ 6,500 given to the agent i n June
1983. The policyholder was unaware of the misappropriation u n t i l
checking h i s account i n September 1987. I n e a r l y May 1988, a f t e r
informal negotiations w i t h the agent and h i s a t t o r n e y , 001 was
successful i n obtaining r e s t i t u t i o n of the p o l i c y h o l d e r ' s money plus
i n t e r e s t t o t a l l i n g nearly $ 12,000.
On May 25, 1988, DO1 r e f e r r e d the case to the Attorney General to
begin formal a c t i o n against the a g e n t ' s l i c e n s e .
On February 17, 1989, 268 days a f t e r r e f e r r a l , Auditor General s t a f f
reviewed the case and found that the Attorney General had taken no
formal a c t i o n on the case. According to Attorney General o f f i c i a l s ,
delays i n t h i s case occurred because other assignments from DO1 were
perceived to be more important and there was i n s u f f i c i e n t time to
work on t h i s case.
Delays Are Caused
by Several Factors
A major cause of the delays appears to be a lack of resources for DO1
legal work w i t h i n t h e Attorney General's o f f i c e . However, some of the
delays may be caused by a lack o f d i r e c t i o n by DOI.
Attorney General staffing - The biggest cause z f delays appzars t o be
the imbalance between the level of Attorney General s t a f f i n g and the DO1
legal workload. C u r r e n t l y , the Attorney General a l l o c a t e s approximately
two attorneys to represent 001. "' Both DO1 and Attorney General
o f f i c i a l s feel the department's requirements g r e a t l y exceed the workload
capacity of two a t t o r n e y s . As a r e s u l t , lengthy delays occur i n many of
the assignments made by D01. Furthermore, Attorney General o f f i c i a l s
feel that they w i l l be unable to add s t a f f for DO1 a t t h i s time.
Several options for addressing DOl's legal needs are a v a i l a b l e i f the
Attorney General i s unable to assign a d d i t i o n a l s t a f f to DO1 matters.
One option would be to contract w i t h p r i v a t e a t t o r n e y s . The Attorney
General's o f f i c e has e s t a b l i s h e d c o n t r a c t s f o r p r i v a t e attorneys to
provide legal services to the State. DO1 has occasionally used these
contracts to obtain attorneys to represent i t i n receivership cases.
However, i f DO1 contracted f o r legal services at the same r a t e obtained
by the Attorney General ( a t a minimum of about $ 100 per hour), a
f u l I- time attorney would cost over $ 175,000 annual l y .
( 1 ) The l e v e l of s t a f f i n g assigned to DO1 matters was increased by .5 o f a p o s i t i o n i n
l a t e 1988. P r i o r t o t h i s time, 1.5 attorneys were assigned to conduct DO1 l e g a l
work. I n a d d i t i o n t o the two attorneys c u r r e n t l y assigned to represent 001, an
a s s i s t a n t c h i e f counsel stated that he also conducts some DO1 l e g a l work when
necessary.
A second option would be for DO1 to fund an a d d i t i o n a l attorney p o s i t i o n
w i t h i n the Attorney General's o f f i c e . The Departments of Banking and
Real Estate c u r r e n t l y use t h i s approach to meet some of t h e i r legal
needs. According to the Attorney General's o f f i c e , an a d d i t i o n a l
attorney would cost approximately $ 45,000 to $ 48,000 annually ( i n c l u d i n g
r e l a t e d expenses).
A t h i r d a l t e r n a t i v e would be to create an attorney p o s i t i o n w i t h i n DO1 to
handle complaint cases. The Arizona Corporation Commission's S e c u r i t i e s
D i v i s i o n has i t s own attorneys who prepare cases f o r prosecution by the
Attorney General. According to the DO1 d i r e c t o r , a departmental attorney
would reduce the workload on the Attorney General s t a f f and could lessen
delays i n handling complaint cases. A t the S e c u r i t i e s D i v i s i o n , the
s t a r t i n g salary and r e l a t e d expenses for a mid- level attorney i s
approximately $ 37,850 ( i n c l u d i n g r e l a t e d expenses). For DO1 to u t i l i z e
such a p o s i t i o n , e i t h e r special a u t h o r i z a t i o n from the Attorney General,
o r l e g i s a t i o n exempting DO1 from A . R . S. 541- 192. E. would be
necessary. "' According t o the DO1 d i r e c t o r , DO1 has requested three
attorney p o s i t i o n s i n i t s f i s c a l year 1990- 91 budget request.
Funding for any of t h e three a l t e r n a t i v e s above could be accomplished by
e s t a b l i s h i n g a r e v o l v i n g fund supported by the c i v i l p e n a l t i e s c o l l e c t e d
by the department. This would not only help provide the needed legal
s e r v i c e s , b u t would also have the e f f e c t of r e q u i r i n g those who create a
need for the enforcement program to help pay p a r t o f i t s costs. The
Department of Banking c u r r e n t l y has such a r e v o l v i n g fund.
Another option would be to r e q u i r e A r i z o n a ' s two guaranty funds to pay
the cost of thei r Attorney General representat ion.( 2' The Attorney
( 1 A. R. S. $ 41- 192. E. states t h a t " no state a y e n ~ y other than t h e Attorney General
s h a l l employ l e g a l counsel or make an expendi t u r ~.. . f o r 1e gal services. "
( 2 ) Arizona has two insurance guaranty funds estabiished by law: the Property and
Casualty Fund and the L i f e and D i s a b i l i t y Fund. The funds' purpose i s to p r o t e c t
policyholders i n the event of an insurance company's insolvency by making payments
t o policyholders of insolvent companies. The funds are supported by a d i r e c t
assessment on companies w r i t i n g these insurance pol i cies. The assessments a1 so pay
the a d m i n i s t r a t i v e costs of each fund. Hokevet-, n e i t h e r fund c u r r e n t l y pays f o r
i t s Attorney General representation.
General c u r r e n t l y serves as general C O U ~ tSo ~ thIe guaranty funds which
require approximately 20 percent of one of the two a t t o r n e y s ' time. The
DO1 deputy d i r e c t o r feels s t a t u t o r y a u t h o r i t y c u r r e n t l y e x i s t s for the
two guaranty funds to pay for representation provided by the Attorney
General. The department has suggested such an arrangement to the
management of the guaranty funds, but no a c t i o n has been taken yet to
obtain payment from the funds.
Although both DO1 and the Attorney General's o f f i c e agree that the
department requires a d d i t i o n a l legal support, the level of support needed
has not been determined. An Attorney General o f f i c i a l estimates that at
least one a d d i t i o n a l attorney i s needed to meet D01' s workload. However,
neither the department nor the Attorney General's o f f i c e has analyzed the
workload created by DOI legal work. Therefore, any estimates of
a d d i t i o n a l s t a f f i n g made at t h i s time are t e n t a t i v e because they are not
based on workload analysis.
Lack of DO1 p r i o r i t i e s and follow- up - In a d d i t i o n t o i n s u f f i c i e n t
Attorney General s t a f f i n g levels, DO1 may have also contributed to the
extensive delays because i t has not established p r i o r i t i e s and followed
up on cases r e f e r r e d t o the Attorney General for prosecution. L i t t l e
evidence e x i s t s to suggest that DO1 p r i o r i t i z e s complaint cases i n
r e l a t i o n s h i p to other assignments made to the Attorney General.
According to Attorney General o f f i c i a l s , they receive assignments from
f i v e sources w i t h i n DOI, each wanting p r i o r i t y of t h e i r work over the
others.
Furthermore, l i t t l e documentation e x i s t s to suggest that DO1 a c t i v e l y
followed up on complaint cases that had been w i t h the Attorney General
for long periods of time. Although many cases had been referred over s i x
months ago, the only documentat ion supporting DO1 f o l low- up was a January
1989 memo to the Attorney General i n q u i r i n g as to the status of several
complaint cases.
RECWENDATIONS
1. DO1 and the Attorney General's o f f i c e should review and analyze the
department's need for l e g a l services to determine the number of s t a f f
required. The r e s u l t s o f t h i s analysis should be used as a b a s i s f o r
increasing the l e g a l resources a v a i l a b l e to the department.
2. DO1 should evaluate the a l t e r n a t i v e s f o r o b t a i n i n g a d d i t i o n a l legal
services for the department i n c l u d i n g :
a Requesting the Attorney Gene'ral's o f f i c e to assign more s t a f f to
DO I
a Contracting w i t h p r i v a t e attorneys
a Funding a d d i t i o n a l Attorney General s t a f f
a Obtaining a u t h o r i z a t i o n from the Attorney General, or requesting
l e g i s l a t i v e exemption from A. R. S. 541- 132. E. to add an attorney
p o s i t i o n to the DO1 s t a f f
a Requiring the two guaranty funds t o pay f o r legal services
provided by the Attorney General
3. DO1 should e s t a b l i s h a system for p r i o r i t i z i n g work referred to the
Attorney General and follow up on cases referred to the Attorney
General .
4. The L e g i s l a t u r e should consider e s t a b l i s h i n g a revolving fund,
supported by c i v i l penalties c o l l e c t e d by the department, t o be used
to fund legal services needed for the department's enforcement
e f f o r t s .
FINDING I l l
HIGH STAFF TURNOVER, HEAVY WORKLOAD, AND A MANUAL SYSTEM
SLOW COMPLAINT HANDLING
In a d d i t i o n to the delays experienced w i t h the more serious complaints,
DO1 i s slow i n resolving many routine complaints. Inadequate s t a f f i n g
levels coupled w i t h a manual system of tracking complaint f i l e s appear to
be the primary causes of untimely complaint handling.
The process for handling routine complaints i s ell established. A f t e r a
w r i t t e n complaint i s received, d i v i s i o n management assigns i t to an
i n v e s t i g a t o r . The i n v e s t i g a t o r then n o t i f i e s the complainant that an
i n v e s t i g a t i o n has s t a r t e d . A t the same time, a l e t t e r i s sent to the
party or p a r t i e s the complaint i s against n o t i f y i n g them of the complaint
and requesting a response. Once DO1 receives a response, the
i n v e s t i g a t o r evaluates the case and makes a d e c i s i o n . The i n v e s t i g a t o r
sends the complainant a l e t t e r o u t l i n i n g the company's response and h i s
or her decision. The complainant has f i v e days to appeal the decision
before the i n v e s t i g a t i o n i s considered closed.
Department I s Unable t o Resolve Almost Half o f Routine
Complaints w i t h i n Established Standard
DO1 f a i l s to resolve nearly h a l f of a l l consumer complaints i t receives
i n accordance w i t h i t s established standards. DO1 has f a l l e n short of
meet i ng these standards l a r g e l y because of delays i n receiving responses
from insurance companies and licensees.
DO1 has established informal standards to ensure the timely r e s o l u t i o n of
consumer complaints. According to the a s s i s t a n t d i r e c t o r of the Consumer
A f f a i r s and Investigations D i v i s i o n , routine consumer complaints handled
by the d i v i s i o n should be resolved and a response sent to the complainant
w i t h i n 30 working days ( 6 weeks) of r e c e i p t . " ' This 30 working day
( 1 Routine consumer complaints a r e g e n e r a l l y those complaints which do n o t i n v o l v e a
p o t e n t i a l v i o l a t i o n of s t a t u t e or a d m i n i s t r a t i v e r u l e and r e g u l a t i o n . For example,
such complaints may i n v o l v e claim settlements or premium disputes.
standard i s based upon several factors which include processing and
analysis time by d i v i s i o n i n v e s t i g a t o r s and s t a f f , as well as 15 working
days given t o insurance companies and insurance l icensees to respond to
001' s i n q u i r y regarding the complaint. ( 1 )
DO1 has f a l l e n short of meeting standards - While an informal 30
working day standard for resolving complaints has been established, DO1
has f a l l e n short of accomplishing t h i s standard. An analysis of routine
complaints handled by DO1 i n d i c a t e s the average time to resolve
complaints exceeded 37 working days. Much of the delay consists of the
time i t takes to obtain responses from insurance companies and
licensees. However, DO1 may not have the necessary a u t h o r i t y t o obtain
more timely responses i n some cases.
An Auditor General a n a l y s i s o f routine consumer complaints closed by DO1
during 1988 indicates that 48 percent of complaints exceeded the 30
working day standard by 27 working days. As i l l u s t r a t e d i n Table 6
( page 33), 149 of the 308 sampled complaints exceeded the ~ t a n d a r d . ' ~ )
Delays in receiving responses - Much of the delay i n resolving these
complaints i s due to the time i t takes to obtain responses from insurance
companies and licensees. Upon n o t i f i c a t i o n of a complaint f i l e d against
them, DO1 requires the company or licensee ta provide a response w i t h i n
15 working days. However, as i l l u s t r a t e d i n Table 7 ( page 34), i n 41
percent of a sample of complaints, companies and licensees took more than
18 working days to provide a f i n a l response to DOI. ( 3 ) l n many cases,
DO1 a t t r i b u t e s i t s i n a b i l i t y to obtain timely responses from companies
and licensees to i n v e s t i g a t o r t u r n o v e r . Turnover l i m i t s the department's
a b i l i t y to follow up because when i n v e s t i g a t o r s leave the department,
t h e i r caseloads are neglected u n t i l reassigned to other i n v e s t i g a t o r s .
( 1 ) DO1 issues 1 i censes and regulates insurance agents, brokers, adjusters, s o l i c i t o r s ,
service representatives, and r i s k management consultants.
( 2 ) We analyzed a s t a t i s t i c a l sample of 356 closed consumer complaints. However, some
of the complaint f i l e s did not contain p e r t i n e n t dates necessary f o r t h i s p o r t i o n
o f t h e a n a l y s i s , or other analyses presented i n t h i s Finding.
( 3) An a d d i t i o n a l three working days was added to the 15 working day requirement t o
r e f l e c t m a i l i n g time from DO1 t o the company or licensee.
TABLE 6
DO1 RESOLUTION TIME OF A SAMPLE OF ROUTINE COMPLAINTS
CLOSED IN CALENDAR YEAR 1988
Number o f Working Days Number o f Closed Percentage o f
t o Resolve Complaints( a) Cornplaints( b) Total
0 - 30
31 - 40
41 - 50
51 - 60
61 - 75
76 - 100
Over 100
TOTAL
( a ) This represents the number of working days from the date t h e complaint was
received u n t i l a l e t t e r was mailed t o the complainant containing DOT'S p o s i t i o n on
the r e s o l u t i o n of the complaint. Holidays were not excluded from t h e a n a l y s i s .
( b) Of the 356 t o t a l closed complaints i n the sample, 308 of the complaint f i l e s
contained the i n f o r m a t i o n necessary t o conduct t h i s analysis.
Source: Auditor General analysis of a s t a t i s t i c a l sample of consumer
complaints closed by DO1 during calendar year 1988
Even i f DO1 could f o l l o w up on complaint i n q u i r i e s i n a more timely
manner, i t may not have the necessary a u t h o r i t y t o o b t a i n timely
responses for approximately one- half of the complaints. Presently, i f
the consumer complaint involves an insurance claim, the Unfair Claims
Practices Act gives DO1 the a u t h o r i t y t o require a response w i t h i n 15
working days. I f an insurance company or licensee does not respond
w i t h i n t h i s time period, DO1 can take such enforcement actions as issuing
a Notice o f Hearing and imposing c i v i l p e n a l i t i e s . However, i n
complaints not i n v o l v i n g a claim, DOl's a u t h o r i t y i s less c l e a r .
According to the DO1 d i r e c t o r , s t a t u t o r y a u t h o r i t y c l e a r l y o u t l i n i n g
steps that DO1 could take to enforce the 15 working day response
requirement would help reduce delays i n the complaints handling
process. Yet, as discussed below, such a u t h o r i t y may not be
( 1 ) Current1 y, however, there i s no d i f f e r e n c e i n response times between claims f a l l i n g
under the U n f a i r Claims P r a c t i c e Act and those which do not.
TABLE 7
INSURANCE COMPANY AND LICENSEE RESPONSE TIME
TO DO1 CONSUMER COMPLAINT INQUIRIES FOR A SAMPLE
OF COMPLAINTS CLOSED IN CALENDAR YEAR 1988
Number o f Working Days
To Receive F i na l Response ( a )
0 - 18
19 - 25
26 - 30
31 - 40
41 - 50
Over 50
TOTAL
Number of C l osed Percentage o f
Complaints( b) Total
( a) This represents the number of working days from the date DOI sent an o f f i c i a l
n o t i c e i n f o r m i n g t h e insurance company or l i c e n s e e t h a t a complaint had been
f i l e d u n t i l a f i n a l response was received upon which 001 could resolve the
complaint. Holidays were not excluded from t h e a n a l y s i s .
( b ) O f the 356 t o t a l closed complairits i n the sample, 337 of the complaint f i l e s
contained t h e i n f o r m a t i o n necessary t o conduct t h i s a n a l y s i s .
Source: Auditor General analysis of a s t a t i s t i c a l sample of consumer
complaints closed by DO1 during calendar year 1988
e f f e c t i v e u n t i l DO1 improves current s t a f f i n g and information systems
inadequacies.
Inadequate S t a f f i n g Levels and a Manual System o f
Tracking Complaints Have Contributed t o Untimeliness
lnadequate s t a f f i n g levels w i t h i n the Consumer A f f a i r s and I n v e s t i g a t i o n s
D i v i s i o n have c o n t r i b u t e d t o the delays i n resolving consumer
complaints. A d d i t i o n a l l y , the d i v i s i o n ' s use of a manual system to track
complaints has f u r t h e r contributed to the untimeliness of responses.
lnadequate s t a f f i n g levels have contributed t o delays - High turnover
among the d i v i s i o n ' s i n v e s t i g a t o r s has contributed to complaint- handling
untimeliness. I n a d d i t i o n , the d i v i s i o n may not have a s u f f i c i e n t number
of i n v e s t i g a t o r s t o ensure the timely r e s o l u t i o n of complaints. DO1 has
attempted to address these problems.
DO1 has experienced considerable turnover of i t s i n v e s t i g a t o r s i n the
past two years. I n 1987, a l l s i x authorized i n v e s t i g a t o r p o s i t i o n s
became vacant, r e s u l t i n g i n a turnover rate of 100 percent. I n 1988. two
of the s i x i n v e s t i g a t o r p o s i t i o n s became vacant, a turnover rate of
approximately 33 percent. According to the d i v i s i o n ' s a s s i s t a n t
d i r e c t o r , the s u b s t a n t i a l turnover rates have reduced the d i v i s i o n ' s
a b i l i t y to process complaints i n a timely manner because a d d i t i o n a l time
i s needed for remaining i n v e s t i g a t o r s to become f a m i l i a r w i t h the cases
of i n v e s t i g a t o r s who leave. Furthermore, new i n v e s t i g a t o r s require
t r a i n i n g and are unable to perform at the i e v e l s of experienced s t a f f .
The a s s i s t a n t d i r e c t o r s t a t e d that he believes the most s i g n i f i c a n t
reason f o r the high turnover rate among i n v e s t i g a t o r s i s the p o s i t i o n ' s
low salary l e v e l .
Beyond the problem of s t a f f turnover, DO1 may lack s u f f i c i e n t s t a f f to
handle the number of complaints received annually. I n the three- year
period between f i s c a l year 1985- 86 and f i s c a l year 1987- 88, the number of
w r i t t e n complaints received by DO1 steadi l y increased from 5,986 to
6,817, a 14 percent increase. However, during the same time period the
number o f i n v e s t i g a t o r p o s i t i o n s remained a t s i x . F u r t h e r , t h i s
increased workload came on top of a workload which appears higher than
t h a t of other agencies. For example, for f i s c a l year 1987- 88, the
Department of Real Estate received approximately 2,185 w r i t t e n complaints
and had a s t a f f of 11 i n v e s t i g a t o r s .
DO1 has attempted to address the problems of turnover and i n s u f f i c i e n t
s t a f f . I n e a r l y 1988 i n response to the high turnover of i n v e s t i g a t o r s ,
the department was successful i n upgrading three of the s i x i n v e s t i g a t o r
p o s i t i o n s from l n v e s t i g a t o r I I s to I n v e s t i g a t o r I l I s . A d d i t i o n a l I y , the
department requested and received three new i n v e s t i g a t o r p o s i t i o n s f o r
f i sca l year 1989- 90.
Manual system t o t r a c k complaints - A second factor c o n t r i b u t i n g to
DOlls untimely processing of consumer complaints i s i t s use of a manual
system to track complaints. C u r r e n t l y , DO1 processes over 8,000 w r i t t e n
complaints annually without the use of any automated systems. Complaint
f i l e s are generated by c l e r i c a l s t a f f and an index card system i s used to
record and track the complaint f i l e inventory. With t h i s system,
d i v i s i o n management i s unable to determine the age of the complaints
inventory or to q u i c k l y determine the status of an i n d i v i d u a l
i n v e s t i g a t o r ' s caseload. According to DO1 o f f i c i a l s , each investigator
i s responsible for managing h i s or her caseload, w i t h most using t i c k l e r
f i l e s on t h e i r desk calendars to keep track of the progress of t h e i r
cases.
The implementation of a new computer system may a l l e v i a t e complaint
processing delays a t t r i b u t e d to t h i s manual system. According to DO1
o f f i c i a l s , an agencywide automation p r o j e c t that was i n i t i a t e d t h i s year
w i l l include the automation of the complaint- handling process. Although
plans have not been formalized at t h i s w r i t i n g , DO1 o f f i c i a l s a n t i c i p a t e
that the system w i l l allow tracking o f i n d i v i d u a l complaints as well as
management r e p o r t i n g on the e n t i r e complaint inventory. A d d i t i o n a l l y ,
the system should reduce processing time of complaints, DO1 expects t h i s
p a r t of the system to be implemented by September 1990.
RECOWENDATIONS
1. DO1 should continue e f f o r t s to develop an automated system for
complaint processing and for obtaining management reports on the
status of the complaint inventory.
2. DO1 should continue i t s e f f o r t s to increase the number of
i n v e s t i g a t o r s , as well as possible upgrades of those p o s i t i o n s ,
considering the a n t i c i p a t e d e f f e c t s planned automation w i l l have on
s t a f f i n g needs.
3. The L e g i s l a t u r e should consider granting DO1 s t a t u t o r y a u t h o r i t y
comparable to that under the Unfair Claims Practices Act to allow
enforcement actions on consumer complaints that do not involve claims.
OTHER PERTINENT INFORMATION
During the a u d i t , we developed information about DOl's e f f o r t s i n
implementing the recommendations contained i n two previous performance
a u d i t r e p o r t s . These r e p o r t s , issued by the Auditor General i n 1979 and
1980 are Report 79- 4, The Arizona Department of Insurance, and Report
80- 6, Department of Insurance Consumer Complaint Function.
The 1980 report followed up on the p r i o r a u d i t r e p o r t to determine i f DO1
implemented the recommendations made i n 1979. The r e p o r t i n d i c a t e d t h a t
the department generally had implemented the recommendations of Report
79- 4 r e l a t i n g to consumer complaints. In a d d i t i o n , i t noted that DO1 had
also g r e a t l y improved r e g u l a t i o n of agents and companies, as well as
consumer assistance.
During our current a u d i t , we found that DO1 has continued w i t h e a r l i e r
recommended changes and has made f u r t h e r improvements. For example, some
signi f i cant changes i n insurance laws have been made. Some of these
changes include the c o l l e c t i o n o f premium taxes on a q u a r t e r l y basis
rather than annually for most companies, the use of competitive r a t i n g
systems rather than p r i o r approval systems for most property and casualty
l i n e s , and the adoption of provisions r e l a t i n g to the Unfair Claims
Practices Act.
DO1 implementation of some a u d i t recommendations has changed several
departmental functions and processes. Regarding l i c e n s i n g , c o n d i t i o n a l
licenses are issued to p o t e n t i a l licensees p r i o r to actual l i c e n s i n g ,
pending the r e s u l t s of applicant f i n g e r p r i n t checks. A l s o , a p p l i c a n t
f i n g e r p r i n t i n g i s now performed by a law enforcement agency or p r i v a t e
company, and licensee t e s t i n g i s now conducted by a p r i v a t e company
s p e c i a l i z i n g i n such t e s t i n g .
DO1 has also strengthened i t s consumer complaints process and has
improved i t s consumer assistance programs. The department employs
consumer s p e c i a l i s t s to provide assistance to the p u b l i c . DO1 now
analyzes and p u b l i s h e s i n f o r m a t i o n about complaints against companies,
and also uses t h i s i n f o r m a t i o n t o i d e n t i f y companies f o r market conduct
examinat ions. To a i d consumers i n compar i son shopping, the agency also
publishes personal auto and homeowner's premium comparisons a t least once
a year. I n a d d i t i o n , the p u b l i c also b e n e f i t s from the review and
evaluation of p o l i c y forms by department s t a f f . Such reviews are
conducted to ensure t h a t p o l i c y forms are not misleading, and that the
language used i n the forms i s c l e a r and unambiguous.
Although the department has implemented most of the recommendations
contained i n the p r i o r a u d i t r e p o r t s , i n some cases, i t s actions have
been l i m i t e d . For example, i t appears t h a t DO1 does not use data on
t o t a l complaints for each agent to monitor and regulate agent conduct.
Furthermore, DOI does not s p e c i f i c a l l y document telephone complaints
received. O v e r a l l , however, the department appears to have made
s u b s t a n t i a l progress i n implementing recommendations from the previous
a u d i t r e p o r t s .
AREAS FOR FURTHER AUDIT WORK
During the course of the a u d i t , we i d e n t i f i e d four p o t e n t i a l issues that
we were unable to pursue because they were beyond the scope of our audit
or because we lacked s u f f i c i e n t time.
0 I s DO1 adequately funded and s t a f f e d t o regulate the insurance
industry i n Arizona?
Some studies i n d i c a t e that more resources should be u t i l i z e d i n
r e g u l a t i n g the insurance industry i n Arizona. A recent national
study of s t a t e insurance departments found that most insurance
regulators lack the necessary personnel and tools to provide adequate
consumer p r o t e c t i o n and to monitor insurers for insolvency.
The study suggests that at least 10 percent of the amount of a
s t a t e ' s premium tax c o l l e c t i o n s should be a v a i l a b l e for insurance
r e g u l a t i o n . DO1 funding ( General Fund) amounts to about 3 percent of
premi um tax col l e c t ions. When compared to the 45 s t a t e s ( i n c l u d i n g
the D i s t r i c t o f Columbia) included i n the study, 34 ( 75%) s t a t e
insurance regulatory agencies had higher budget to premium tax
c o l l e c t i o n r a t i o s than Arizona. In a d d i t i o n , when expressed as a
r a t i o of budget t o t o t a l s t a t e population, 39 s t a t e s spent more than
Arizona, o f t e n many times over.
DO1 o f f i c i a l s contend that the department lacks enough s t a f f to
perform i n v e s t i g a t i o n s and review rate and form f i l i n g s . In
a d d i t i o n , i t appears that DO1 may need a d d i t i o n a l analysts to review
insurer f i n a n c i a l information and conduct premium tax a u d i t s . Some
of these assertions were supported i n the March 1987 Report of the
Arizona Property and Casualty Insurance Rate Advisory Council. The
report s t a t e s that DO1 d i d not have adequate resources for e f f e c t i v e
rate/ price r e g u l a t i o n . Furthermore, the size of DOI's s t a f f was
s i g n i f i c a n t l y smaller than regulatory departments i n other states
even c o n s i d e r i n g d i f f e r e n c e s i n population and insurance a c t i v i t y .
Further audit work i s necessary to 1) determine s p e c i f i c s t a f f i n g and
other resource needs, 2) c a l c u l a t e t o t a l a d d i t i o n a l costs of these
resources, and 3) plan for p o t e n t i a l i n t e g r a t i o n of these resources
i n t o the department.
a Have the guaranty funds and the department acted responsibly
regarding the sharing of information about insurance companies that
may be having financial d i f f i c u l t i e s ?
S t a t u t o r i l y , the guaranty funds' boards o f d i r e c t o r s are required to
inform 001 of any company which the boards and i t s members feel could
be facing a possible insolvency. In essence, the boards have a
r e s p o n s i b i l i t y to n o t i f y DO1 of information they become aware of
regarding f i n a n c i a l l y troubled c a r r i e r s or c a r r i e r s conducting
a c t i v i t i e s that could lead to insolvency. However, some board
members are concerned that because they are employees of competing
companies, sharing such information could lead t o a n t i t r u s t charges
against t h e i r respective member companies.
I n a d d i t i o n , i n at least one i n c i d e n t , some board members of one fund
f e l t that DO1 acted i n a p p r o p r i a t e l y w i t h information supplied by the
fund about a possible insolvency. During a recent fund meeting, two
members s t a t e d t h a t a f t e r n o t i f y i n g DO1 o f possible problems w i t h the
company, DO1 named the members i n a f o l low- up l e t t e r to the company.
Because of t h i s , the two members said they would be hesitant to share
information w i t h DO1 i n the f u t u r e . Further audit work i s necessary
to determine whether other states have s i m i l a r r e p o r t i n g requirements
and, i f so, how they address the issues of possible a n t i t r u s t
v i o l a t i o n s and c o n f i d e n t i a l i t y of r e p o r t i n g . Additional work should
also include obtaining l e g a l opinions on these issues.
a Does DO1 perform market conduct examinat ions in such a manner as to
properly protect - Arizona - consumers from inappropriate practices by
insurance companies?
Although DOI conducts more market conduct examinations annually than
most other s t a t e s , we i d e n t i f i e d several areas of concern regarding
the manner i n which DO1 performs these examinations. In the f i v e
examinations we reviewed, i t appeared t h a t DO1 o f f i c i a l s l i m i t e d the
scope of the examination to f i r s t p a r t y t o t a l loss automobile claims,
an area i n which v i o l a t i o n s are o f t e n found. Other areas such as
sales, a d v e r t i s i n g , u n d e r w r i t i n g , and r a t i n g were given less
a t t e n t i o n , although the NAlC Model Market Conduct Examination
Handbook suggests t h a t these areas be reviewed as a p a r t of a
complete examination.
Once market conduct examinat ions have been completed, the amount of
p e n a l t i e s and f i n e s imposed by DO1 may not be e q u i t a b l e . For
example, i n one examination reviewed, company o f f i c i a l s v i o l a t e d
insurance s t a t u t e s by improperly deducting or f a i l i n g to document
nearly $ 36,000 of payments to claimants i n 56 f i l e s i d e n t i f i e d by DO1
examiners. The insurer agreed to make r e s t i t u t i o n and was fined
$ 5,000. In a second case a company that improper Iy deducted or
f a i led to document approximately $ 3,600 of claim payments i n 27
claims and agreed to make r e s t i t u t i o n was fined $ 3,000. Although the
f i r s t v i o l a t i o n involved ten times the amount of the second case and
twice the number of claims, the f i n e imposed on the f i r s t company
does not appear t o r e f l e c t the d i f f e r e n c e i n the s e v e r i t y of the
v i o l a t i o n s .
F i n a l l y , DO1 may not be completing adequate follow- up to ensure
compliance w i t h orders issued as a r e s u l t o f a market conduct
examination. For example, i n one examination reviewed, DO1 found a
company had not complied w i t h a consent order signed approximately
two years e a r l i e r . Further a u d i t work i s needed to determine the
adequacy of market conduct examinations completed by DOI.
a Are c a p i t a l and surplus amounts required of insurers by the State
adequate?
Arizona r e q u i r e s i n s u r e r s to maintain c e r t a i n amounts of c a p i t a l and
surplus i n order t o w r i t e insurance i n the State. These requirements
are intended to help p r o t e c t p o l i c y h o l d e r s i f an insurer becomes
i n s o l v e n t . According to information obtained from a DO1 o f f i c i a l ,
Arizona c a p i t a l and surplus requirements are often less than that
required by many other s t a t e s . For example, Arizona ranks i n the bottom
20 percent of the t o t a l general amount of c a p i t a l and surplus
requirements for l i f e and d i s a b i l i t y insurers among the 50 s t a t e s .
Regarding requirements for property and casualty insurers for both s i n g l e
and m u l t i p l e l i n e c a r r i e r s , at least 10 states have higher c a p i t a l
requirements and 26 states have higher surplus requirements.
Increases i n these s t a t u t o r y requirements would l i k e l y increase an
i n d i v i d u a l i n s u r e r ' s f i n a n c i a l r e s p o n s i b i l i t y and reduce Guaranty Fund
assessments and payouts. Further audit work i s needed to determine the
adequacy of Arizona's c a p i t a l and surplus requirements, and the impact,
i f any, changes i n these amounts would have on the insurance industry and
the guaranty funds.
SUNSET FACTORS
I n accordance w i t h Arizona Revised Statutes ( A. R. S.) 541- 2354, the
L e g i s l a t u r e should consider the f o l l o w i n g 12 f a c t o r s i n determining
whether t h e Arizona Department of lnsurance ( 001) should be continued or
terminated.")
1 . Objectives and purpose i n e s t a b l i s h i n g the department
The Arizona Department of lnsurance was created by the L e g i s l a t u r e i n
1913, as p a r t of t h e Arizona Corporation Commission. I n 1968,
Arizona voters approved a c o n s t i t u t i o n a l amendment removing DO1 from
the d i r e c t i o n of t h e Corporation Commission and e s t a b l i s h i n g i t as a
separate agency.
The department was established to regulate the insurance i n d u s t r y i n
Arizona. As provided i n the Arizona State C o n s t i t u t i o n , a l l insurers
s e l l i n g w i t h i n the State s h a l l be subject to l i c e n s i n g , c o n t r o l , and
supervision by a department of insurance. F u r t h e r , A. R. S. T i t l e 20
authorizes the Arizona Department of lnsurance to license insurance
companies and agents, provide consumer assistance, i n v e s t i g a t e
complaints from the p u b l i c , review and approve insurance forms and
rate f i l i n g s , monitor the f i n a n c i a l s t a t u s of insurers, oversee the
guaranty funds, and c o l l e c t premium taxes and other fees.
The department has defined i t s o b j e c t i v e s as:
a To a d m i n i s t e r A r i z o n a insurance laws
a To p r o t e c t Arizona c i t i z e n s who purchase insurance
0 To provide p r o f e s s i o n a l assistance to persons who purchase
i nsu rance
a To s t i m u l a t e the insurance marketplace by encouraging competition
( 1 ) Should the Legislature decide to terminate the department, a constitutional
amendment will be necessary.
2. The effectiveness with which the department has met i t s objective
and purpose and the e f f i c i e n c y w i t h which the department has operated
The department has met i t s o b j e c t i v e o f p r o t e c t i n g and a s s i s t i n g the
pub1 i c . I t has monitored the insurance industry and provided
consumer assistance. During f i s c a l year 1987- 88, for example, DO1
reviewed over 34,000 rate and form f i l i n g s , issued approximately
10,000 new and 15,000 renewal licenses, and monitored the f i n a n c i a l
status o f over 2,500 insurers. In a d d i t i o n , each year DO1 conducts
and publishes premium comparisons and studies of various types of
coverage a v a i l a b l e i n the Arizona insurance market.
Since our previous audits i n 1979 and 1980 ( r e p o r t s 79- 4 and 80- 6,
r e s p e c t i v e l y ) , DO1 has made improvements i n many of i t s operations.
For example, DO1 now uses a p r i v a t e company to ci+ nduct I icensee
examination t e s t i n g . In the area of consumer , r o t e c t i o n and
awareness, DO1 publishes the number of complaints received annually
against insurance companies. I n an e f f o r t to strengthen i t s
regulatory and consumer p r o t e c t i o n e f f o r t s , the department supported
the adoption of the Unfair Claims Practices Act i n 1981. This
provides the department w i t h greater a u t h o r i t y over the marketing of
insurance p o l i c i e s and the payment of claims by insurers. ( See also
Other Pertinent information, page 37.)
However, our review revealed that the department could improve i t s
consumer complaint i n v e s t i g a t i o n s . Although the department handles
thousands of w r i t t e n complaints annually, we i d e n t i f i e d ways i t could
improve t h e t i m e l i n e s s of i t s complaint i n v e s t i g a t i o n s .
a The department could reduce the delay of serious consumer
complaints by having a l l requests and assignments to the
Attorney General's o f f i c e made and p r i o r i t i z e d by a single
source w i t h i n the department. In a d d i t i o n , the department and
the Attorney General should evaluate a l t e r n a t i v e s to reduce
delays w i t h i n the Attorney General's o f f i c e . Possible
a l t e r n a t i v e s include: 1) DO1 funding an Attorney General
p o s i t i o n , 2) c o n t r a c t i n g f o r a d d i t i o n a l legal services w i t h a
p r i v a t e a t t o r n e y , and 3) h i r i n g a departmental attorney ( see
Finding I I , page 21).
a The department could expedite i t s handling of routine consumer
complaints by continuing i t s e f f o r t s to obtain and r e t a i n
i n v e s t i g a t o r s . A d d i t i o n a l l y , the department should continue i t s
e f f o r t s to develop an automated system for the complaint-handling
process, which should at low i n d i v i d u a l complaint
tracking and the a b i l i t y to prepare management status reports of
the e n t i r e complaint inventory ( see Finding I l l , page 31).
Department management a l s o f e e l s that the department as a whole could
be more e f f e c t i v e and e f f i c i e n t i n meeting i t s objectives i f i t had
more s t a f f . Although DO1 has requested and received some a d d i t i o n a l
s t a f f p o s i t i o n s i n recent years, department management contends that
s t a f f i n g levels have not increased i n proportion to the demands
placed upon the department ( see Areas For Further Audit Work, page
39).
The extent to which the department has operated within the public
interest
DO1 has generally operated w i t h i n the p u b l i c i n t e r e s t , accomplishing
t h i s i n a v a r i e t y of ways. For example, the department conducts and
publishes automobile and homeowner's premium comparisons to a s s i s t
consumers i n obtaining coverage for the best p r i c e .
I n a d d i t i o n , DO1 helps protect the p u b l i c by imposing requirements on
insurers and monitoring those requirements. Examples of t h i s include
v e r i f y i n g c a p i t a l and surplus amounts required to be maintained by
insurers, r o u t i n e l y examining insurer f i n a n c i a l information to
i d e n t i f y p o t e n t i a l solvency problems, conducting market conduct and
rate examinations o f insurers, and r e q u i r i n g insurers to disclose
c e r t a i n material information to prospective policyholders p r i o r to
s e l l i n g p o l i c i e s .
4. The extent to which rules and regulations promulgated by the
department are consistent with the Legislative mandate
A. R. S. $ 20- 143 grants the d i r e c t o r broad rule- making a u t h o r i t y .
S p e c i f i c a l l y , the law s t a t e s t h a t the d i r e c t o r " may make reasonable
r u l e s necessary f o r e f f e c t u a t i n g any p r o v i s i o n " of T i t l e 20.
According to the department, the L e g i s l a t u r e a l s o authorized the
d i r e c t o r to promulgate rules on s p e c i f i c subjects, such as Medicare
supplement insurance and l i fe- care fac i l i t i es. In add i t ion, the
d i r e c t o r has promulgated c e r t a i n r u l e s , as required by the
L e g i s l a t u r e , on the subjects of b a i l bond agents, service companies,
and the r e a d a b i l i t y o f insurance forms.
The Attorney General reviews a l l rules proposed by DO1 to c e r t i f y
that 1) the department has the power to promulgate the r u l e s , 2) the
rules are consistent w i t h the department's s t a t u t o r y a u t h o r i t y , and
3) the rules are appropriate i n form.
5. The extent to which the department has encouraged input from the
public before promulgating rules and regulations and the extent to
which i t has informed the public as to i t s actions and their expected
impact on the public
DO1 appears to have ensured adequate public input on proposed rules
and regulations. According to department management, the department
encourages p u b l i c input very e a r l y i n the rule- making process. In
f a c t , before the d i r e c t o r decides to begin the formal process, DO1
holds p u b l i c meetings to s o l i c i t preliminary comments on proposed
r u l e s . A n o t i c e i s published regarding t h i s meeting and copies are
sent to i n t e r e s t e d persons. The p u b l i c comment i s then reviewed and
evaluated.
I f the d i r e c t o r decides to proceed w i t h a proposed r u l e and DO1
receives approval from the Governor's Regulatory Review Council, DO1
then holds a formal public hearing. DO1 c i r c u l a t e s notice of t h i s
hearing to i n t e r e s t e d persons and t o a p p l i c a b l e i n d u s t r y and consumer
groups. I f s i g n i f i c a n t p u b l i c i n t e r e s t i s expected, the department
w i l l issue a press release on the proposed r u l e . Following the
hearing the department w i l l g e n e r a l l y a l l o w a short time period i n
which i t w i l l accept w r i t t e n comments. When a new r u l e i s c e r t i f i e d ,
the department t y p i c a l l y issues a press release summarizing i t s
e f f e c t .
6. The extent to which the department has been able to investigate and
resolve complaints that are within i t s jurisdiction
The department has been able to i n v e s t i g a t e and resolve most consumer
complaints i t receives. During f i s c a l year 1987- 88, the department's
Consumer A f f a i r s and I n v e s t i g a t i o n s D i v i s i o n handled approximately
7,000 w r i t t e n complaints from insurance consumers. However, the
department could improve t h i s function by r e s o l v i n g complaint
i n v e s t i g a t i o n s more r a p i d l y ( see Findings i I and I I I , pages 21 and
31, r e s p e c t i v e l y ) .
7. The extent to which the Attorney General or any other applicable
agency of state government has the authority to prosecute actions
under enabling legislation
The Attorney General has the a u t h o r i t y t o prosecute actions on behalf
of DOI. A. R. S. $ 20- 152 authorizes the Attorney General to prosecute
T i t l e 20 v i o l a t i o n s , b r i n g c i v i l actions to e n j o i n the v i o l a t i o n , and
prosecute or defend a l l actions r e s u l t i n g from enforcement of T i t l e
20 p r o v i s i o n s . Furthermore, A. R. S. 920- 401.04 provides that the
Attorney General may enforce t h e orders o f the d i r e c t o r i n Superior
Court. Other c r i m i n a l and c i v i l enforcement s t a t u t e s , i n a d d i t i o n to
T i t l e 20 p r o v i s i o n s , are a l s o a v a i l a b l e to the department. A DO1
Attorney General r e p r e s e n t a t i v e i n d i c a t e d t h a t t h e Attorney General
has a s u f f i c i e n t level of prosecutory a u t h o r i t y to meet DOl's needs.
8. The extent to which the department has addressed deficiencies in i t s
enabling statutes which prevent i t from f u l f i l l i n g i t s statutory
mandates
DO1 has a c t i v e l y addressed d e f i c i e n c i e s i n the insurance s t a t u t e s
over the years. For example, 11 b i l l s proposed by the department
from 1986 through 1988 were enacted by the L e g i s l a t u r e . Changes
r e s u l t i n g from these new laws were i n the areas of license renewals,
health- care s e r v i c e o r g a n i z a t i o n s ( f o r m e r l y r e f e r r e d to as h e a l t h
maintenance o r g a n i z a t i o n s , o r HMOs), long- term care, and fees.
DO1 submitted 9 proposals for c o n s i d e r a t i o n d u r i n g the 1989
l e g i s l a t i v e session. Three of these b i l l s are designed to increase
consumer p r o t e c t i o n for health- care s e r v i c e o r g a n i z a t i o n enrollees
( i n the event of insolvency), long- term care policyholders and
p o t e n t i a l pol icyholders, and Arizona residents w i t h group health
coverage under out- of- state employer group t r u s t s . Another b i l l
changes medical malpractice r a t e s t a t u t e s so that the d i r e c t o r can
more e a s i l y determine whether o r not " free competition" e x i s t s and
whether a rate i s " excessive." These b i I I s i I l u s t r a t e the
department's e f f o r t s i n addressing useful s t a t u t o r y changes.
9. The extent to which changes are necessary in the laws of the
department to adequately comply with the factors listed in the Sunset
Based on our audit work, we recommend that the L e g i s l a t u r e :
a Grant DO1 s p e c i f i c s t a t u t o r y a u t h o r i t y , comparable to the
a u t h o r i t y i t c u r r e n t l y has under the Unfair Claims Practices
Act, to take enforcement actions against insurance companies and
licensees who do not provide timely responses to those consumer
complaint i n q u i r i e s not f a l l i n g under the act ( see Finding I l l ,
page 3 1 ) .
10. The extent to which the termination of the department would
significantly harm the public health, safety or welfare
Regulating the insurance industry i s necessary to protect the pub l i c
i n transactions which can s i g n i f i c a n t l y a f f e c t t h e i r f i n a n c i a l
welfare. Pursuant to federal law, regulation of the insurance
business r e s t s e x c l u s i v e l y w i t h the states. Accordingly, a l l 50
s t a t e s r e g u l a t e the insurance industry t o v a r y i n g degrees.
Terminating the department would impact the p u b l i c w e l f a r e because
the federal government would most l i k e l y not assume regulatory
r e s p o n s i b i l i t y . I f DO1 were terminated, another State agency would
be needed to regulate the insurance industry for consumer protect ion
purposes.
11. The extent to which the level of regulation exercised by the
department i s appropriate and whether less or more stringent levels
of regulation would be appropriate
Our a u d i t work suggests that the c u r r e n t l e v e l o f r e g u l a t i o n i s
g e n e r a l l y a p p r o p r i a t e . However, questions remain as to the most
e f f e c t i v e methods f o r r e g u l a t i n g insurance rates ( see Finding I ,
page 7 ) .
12. The extent to which the department has used private contractors i n
the performance of i t s duties and how effective use of private
contractors could be accomplished
DO1 uses p r i v a t e c o n t r a c t o r s t o perform c e r t a i n functions. For
example, the department contracts w i t h a p r i v a t e t e s t i n g company to
t e s t license applicants. In a d d i t i o n , the department r e g u l a r l y uses
approximately 40 independent contractors to conduct f i n a n c i a l , r a t e ,
and market conduct exami nat ions of insurers. "' According to the
department, t h i s s i t u a t i o n has proven to be more c o s t - e f f e c t i v e than
using State employees. On an as needed basis, DO1 a l s o c o n t r a c t s
w i t h c o u r t r e p o r t e r s for p u b l i c hearings and w i t h s p e c i a l i s t s f o r
assistance w i t h companies i n receivership? or under supervision or
conservatorship.
( 1 ) A. R. S. 520- 148 allows DO1 t o contract f o r such services. These independent
c o n t r a c t o r examiners are compensated by the Insurance Examiners' Revolving Fund
pursuant t o A. R. S. $ 20- 159. The r e v o l v i n g fund i s reimbursed f o r examination costs
by the insurance companies.
STATE OF ARIZONA
DEPARTMENT OF INSURANCE
KOSE MOI: f'OKD
Governor
AIIAC'IJS 10WL: I< S
3030 NORTI{ 31il) ST Rt. 1' 1, S t i l l 8 1100
PIIOPNIX. ARIZONA 85012
SUSAN GALI. 1 NGI'R
D~ rector or Incurar~ ce
October 23, 1989
Mr. Douglas R. Norton
Auditor General
2700 North Central Avenue
Suite 700
Phoenix, Arizona 85012
Dear Mr. Norton:
The Arizona Department of Insurance (" Department")
appreciates the opportunity to respond to the report of the
performance audit conducted by the Office of the Auditor
General. The Department generally concurs with the findings and
recommendations contained in the report. We strongly concur
with the report's finding that the Department needs additional
staff and funding to enhance our regulatory function.
Additionally, the Department has begun to address many of
the concerns noted in the report. In fact, prior to and during
the audit we began and, in some cases have already completed,
many of the report's recommendations. Thus, rather than address
all the points raised i. n the report, we offer the following
comments and observations to clarify specific statements
contained in the report.
FINDING 1
The report makes a specific finding and recommendations
regarding the regulation of automobile insurance rates. The
Department agrees that legislative action is necessary to
address the high cost of automobile insurance, and also agrees
that all options should continue to be considered as is being
done by the Arizona Study Commission on Private Passenger
Automobile Insurance. It is important to recognize that under
Arizona's competitive rate system described in the report, the
law mandates that a rate shall not be held to be excessive if
competition exists in the area covered by the rate. For this
reason, in the area of automobile insurance, disapproval of a
rate must be based upon a finding that the rate is inadequate or
unfairly discriminatory.
The Department concurs with the recommendation that any
reform of laws relating to automobile insurance must include
provisions to combat insurance fraud because of fraud's
significant impact on high automobile insurance rates.
FINDING I1
The Department recognizes, as does the second finding of
the report, that delay in bringing administrative or judicial
proceedings is a problem and the Department is working with the
Attorney ~ eneral's Office to try to reduce the delay. While the
Department is very pleased with the efforts and representation
provided by the two attorneys who currently represent the
Department, the workload ( both in terms of the number and
seriousness of cases) is simply too great to allow for anything
but a very gradual reduction in the delay.
The Department has taken several steps to alleviate the
problem of insufficient attorney resources. On some emergency
cases, Department personnel have been appointed Special
Assistant Attorneys General. For example, the Department' s
Deputy Director and Chief Hearing Officer acted as Special
Assistant Attorneys General in the ~ epartment's litigation in
the Maxicare bankruptcy. More directly and as set forth in the
report, the ~ epartment's budget request for fiscal year 1991
includes a request for three attorneys. These attorneys would
not function as Assistant Attorneys General, i. e. would not give
legal advice to nor represent the Department during either
jiudicial or quasi judicial proceedings which is the function of
the Attorney General. Rather, they would assist the various
divisions of the Department to speed and better prepare the
cases to be sent to the Attorney ~ eneral's Office and assist the
Assistant Attorneys General with the preparation of Notices of
Hearing, petitions and complaints to Superior Court and other
aspects of the cases. When and if appointed by the Attorney
General as Special Assistant Attorneys General, they could also
directly reduce the current backlog of cases. In addition,
these attorneys could draft the ~ epartment's rules required by
statute so that when such rules are submitted to the Attorney
General's Office for certification, less time will need to be
spent by the Attorney General's Office reviewing, modifying and
rewriting the rules for certification. Finally, it is the
Department ' s understanding that the division of the Attorney
~ eneral's Office representing the Department has requested
funding for an additional attorney to represent the Department.
We have provided the Attorney General's Office with data to
support this request.
The Department does not feel that contracting with private
counsel for representation on routine cases is the most
efficient solution to the attorney resource problem. Although
this method is useful in some circumstances, we agree with the
report's finding that contracting with one full- time private
attorney would cost in excess of $ 175,000 whereas one full- time
staff attorney could be hired for approximately $ 37,850.
Moreover, full- time staff attorneys either at the Department or
at the Attorney General's Office would develop the requisite
expertise beyond that of most attorneys available in the
marketplace.
The Department intends to continue its efforts to obtain
funding for an additional attorney from the two guaranty
associations. Such an attorney, in addition to providing
representation to the guaranty associations, could assist in
other guaranty fund and insurer insolvency related activities.
PRIORITIZATION OFCASES
The Department has prioritized cases since mid- 1988. ---
In addition to working on the problem of an insufficient
number of attorneys, the Department has taken steps to
prioritize cases and other matters referred to the Attorney
General's Office. Since the appointment of the current Director
of Insurance in mid- 1988, the Department has been in the process
of implementing and refining prioritization procedures to be
used by Department staff in referring matters to the Attorney
General's Office.
We recognized that permitting each Division of the
Department to refer matters to the Attorney General with
priorities established by each Division rather than by the
Department as a whole created the potential for conflicting
priorities. As a result, each Division, with the exception of
the Consumer Affairs and Investigations Division, directs all
matters to be referred to the Attorney General's Office,
including hearing files and requests for informal legal
opinions, to a member of the Director's staff. The member of
the ~ irector's staff reviews the matter and determines its
priority in light of the ~ epartment's other matters, then refers
the matter to the Attorney General's Office, indicating its
priority.
The Consumer Affairs and Investigations Division continues
to refer hearing files directly to the Attorney General. The
reasons for this include the large volume of hearing files this
Division refers to the Attorney General, and the practice of
having a senior investigator review and discuss the hearing
files with the assistant attorney general as part of the
referral process. If, however, the Consumer Affairs and
Investigations Division needs to assign a case a higher priority
when referring it to the Attorney General, this must be done
through the Director's staff member responsible for prioritizing
all the Department's cases. This permits the Department to
assign priorities on a Departmental basis. In addition, the
Consumer Affairs and Investigations Division must direct all
requests for informal legal opinions to the Director's staff
member, as do all of the other Divisions.
- Th e Department has implemented a trackinq system
As part of the ~ epartment's efforts to better track matters
referred to the Attorney General's Office, the Department
prepares a monthly report that reflects the status of such
matters. This report indicates the date and nature of any
activity that occurred regarding hearing files and requests for
informal opinions pending with the Attorney General's Office.
Although this reporting process is fairly new, it is anticipated
that it will permit us to better monitor and follow up on
matters that have been referred to the Attorney General. We
wish to thank the Auditor ~ eneral's staff for its valuable input
on this matter.
Almost all cases referred to the Attorney General's Office are
serious. Thus, prioritization of cases by the Department will
not reduce delays in resolving serious complaints.
We agree with the Auditor General that prioritization of
complaints referred to the Attorney General is necessary and
that the Department should take steps to ensure that such
prioritizati