This report provides the results of our operational audit of the Florida Workers’ Compensation Joint Underwriting Association, Inc. (FWCJUA).  Our audit disclosed the following:

Finding No. 1:  Our contracted actuary’s review of the FWCJUA’s reserves reported as of December 31, 2003, and the rates established in its July 7, 2004, rate filing, concluded that the FWCJUA’s actuary determined the best estimate of required reserves using an undocumented and unquantified approach, and established a range of reasonableness that produced an upper bound that is too high in relation to the best estimate of required reserves.  In addition, the FWCJUA Board exercised additional conservatism by reporting reserves that were $8.4 million higher than the FWCJUA actuary’s best estimate of required reserves.

Our contracted actuary recommended that the FWCJUA consider using a quantifiable approach to determine required reserves, and using such an approach concluded that: required reserves should be significantly less than the FWCJUA actuary’s best estimate of required reserves; the FWCJUA could have established a lower rate for Tier Three policies; and the rates mandated by Chapter 2004-266, Laws of Florida, for Tiers One and Two are too low.

Finding No. 2:  Certain provisions of Chapter 2004-266, Laws of Florida, regarding the administration of a $15 million contingency reserve for funding subplan D cash deficits, need clarification.

Finding No. 3: The FWCJUA did not, of record, demonstrate that its “controllable costs,” or compensation paid to its policy administration service provider, were reasonable.  Through legislative action, it may be possible to reduce the FWCJUA’s costs by making the FWCJUA exempt from Federal taxation.  In addition, the FWCJUA has not recently provided for a cost/benefit analysis to determine whether its essential functions are better handled by FWCJUA staff or by independent contractors. 

Finding No. 4:  The FWCJUA’s basis for awarding at-risk compensation to executive staff was not clear because the FWCJUA had not established specific performance evaluation rating factors for each staff member.  Also, the basis for the allocation of a special project bonus paid to executive staff was not documented.

Finding No. 5:  The FWCJUA has not subjected most of its contractual services to a competitive selection process since 1995.  In addition, the FWCJUA had no written agreement with its contracted General Counsel; had an insufficiently detailed written agreement with its independent auditors; made payments to the General Counsel and independent auditors that were not supported by sufficiently detailed invoices; and did not properly bill the contracted service provider for its share of audit costs.

Finding No. 6:  The FWCJUA generally did not, of record, monitor the contracted service provider’s performance regarding producer commission payments, payroll audits, loss control surveys, or the handling of delinquent accounts. 

Finding No. 7:  The FWCJUA did not verify producer commissions calculated and paid by its contracted service provider.

Finding No. 8:  The contracted service provider did not always perform required preliminary payroll audits, or perform final and cancellation payroll audits within the time frame specified in the FWCJUA’s Operations Manual.

Finding No. 9:  The contracted service provider did not always perform required loss control surveys, or perform on-site surveys, contrary to the FWCJUA’s Operations Manual.  Also, the Operations Manual does not address requirements for surveys of policyholders with multiple locations.

Finding No. 10:  The FWCJUA’s percentage of uncollected written premiums appears to be high, which may be at least partially due to untimely cancellation and final audits or to an insufficiently aggressive collection policy.  Additionally, the contracted service provider did not always place delinquent accounts with the designated collection agency within the time frame specified in the FWCJUA’s Operations Manual.

Finding No. 11:  The FWCJUA has generally not measured the effectiveness of its depopulation methods to ensure it is accomplishing the intent of Section 627.311(5)(c)4., Florida Statutes.

All responses can be viewed in their entirety on the Auditor General Web site.