During the storm season of 2004, within a period of seven weeks, four hurricanes struck Florida, with some areas of the State being hit by more than one storm event.  In connection with these storms, as of October 20, 2005, a total of 124,997 claims had been submitted by, or on behalf of, Citizens’ policyholders, and more than $2.5 billion in claims had been paid.  Citizens experienced significant difficulties in marshalling, maintaining, and managing the resources necessary to timely process these claims, and these difficulties exposed the need for major changes in Citizens’ operational approach, particularly with respect to the handling of catastrophe claims. 

 In response to these difficulties, Citizens’ management, and a task force appointed by the Chief Financial Officer, initiated significant changes in Citizens’ organizational structure and operations.  Also, the Legislature, in Chapter 2005-111, Laws of Florida, has required a complete reexamination and study of the statutory requirements and operations of Citizens.  Section 26 of this law required that the Auditor General conduct an operational audit of Citizens, with the scope of the audit to include an analysis of Citizens’ infrastructure, customer service, claims handling, accessibility of policyholder information to the agent of record, take-out programs, take-out bonuses, and financing arrangements.  The scope was to also include an evaluation of costs associated with the administration and servicing of Citizens’ policies to determine alternatives by which costs can be reduced, customer service can be improved, and claims handling improved. 

 Further, in accordance with an October 19, 2005, letter from the President of the Senate, the scope of the audit included an evaluation of Citizens’ standards of conduct and ethical requirements for employees and Board members, hiring practices, background screenings, compensation for employees and consultants, and Board oversight and internal controls over procurement practices.

 Our audit, for the period January 1, 2004, through October 20, 2005, and selected actions taken through December 7, 2005, disclosed the following:

 Infrastructure

 Finding No. 1:            Enterprise Risk Management

No documentation was available to show that Citizens had conducted an enterprise-wide evaluation of the effectiveness of operational and financial controls.  Had Citizens conducted evaluations of controls, the control deficiencies disclosed on audit and described throughout this report may have been subject to more timely identification and correction.

 Finding No. 2:            Education and Experience Verifications

Prior to October 2005, Citizens’ human resource policies and procedures did not require the verification of the education and experience claimed by prospective employees, and generally, no such verifications were performed.  Absent such verifications, the potential exists for Citizens to have hired as employees individuals who did not possess the appropriate qualifications to carry out the assigned duties.

 Finding No. 3:            Background Investigations

Citizens’ procedures did not ensure that background investigations had been performed for all employees at the time of employment.  Also, for employees and management, background checks conducted by Citizens had been limited to Statewide criminal correspondence checks and did not include other steps that may identify information that may bear on the employee’s suitability for employment.  Such other steps may include, for example, fingerprint verification and checks of criminal history data originating at the Federal level and in states other than Florida.

 Further, current statute does not require the Office of Insurance Regulation (OIR) to conduct reviews of the backgrounds and business dealings of Citizens’ management, officers, and Board members.  Such reviews are required for voluntary insurers pursuant to Section 624.404(3), Florida Statutes.

 Finding No. 4:            Salary Survey

 Our comparison of the salaries paid Citizens’ management and staff to the compensation levels provided to management and employees of voluntary insurers led us to conclude that the salaries paid by Citizens were not excessive.

 Finding No. 5:            Standards of Conduct

 Citizens has made progress within the last year in developing effective standards of conduct and related policies and procedures.  However, additional steps should be taken to further strengthen the standards of conduct framework.  Areas for improvement include, for example, an expanded description of the familial and personal relationships that should be considered a conflict of interest, enhanced requirements for filing annual conflict of interest forms, expanded prohibitions and guidance regarding the receipt of gifts, a methodology to be used to review financial disclosures for indications of actual and potential conflicts of interest, the addition of a requirement that members of the Board of Governors file financial disclosures, and the adoption of policies specifically restricting the use of Citizens’ assets to corporate business.

 Finding No. 6:            Contractor Selection, Engagement, and Monitoring

 Citizens had not developed and implemented comprehensive written procurement policies and procedures that would provide Citizens’ Board and management assurance that vendors would be selected and engaged in a manner that best serves the business interests of Citizens and the public interests of other stakeholders.  Deficiencies in contractor selection and contract management policies, procedures, and practices included a lack of documentation showing that potential conflicts of interest on the part of Citizens and prospective contractors had been identified and considered, an absence of competitive procurement, the absence of written contracts, and limited evaluations of contractor performance.

 Finding No. 7:            Travel Policy

As Citizens is a public body created pursuant to law, and as there is no statutory provision of law exempting Citizens from the application of Section 112.061, Florida Statutes, it would appear that the travel and per diem expenses of Citizens must be authorized and paid in accordance with the requirements and rates established by Section 112.061, Florida Statutes.  However, our audit tests disclosed that the travel and per diem payments made by Citizens were often not made in accordance with Section 112.061, Florida Statutes.

 Policy Eligibility Determinations and Depopulation

 Finding No. 8:            Eligibility Determinations

 Our review of statutes relevant to eligibility determinations and tests of the effectiveness of related Citizens’ procedures disclosed that enhancements in some areas may provide additional assurance that Citizens’ policies are issued to only those applicants who cannot find insurance in the voluntary market.

 Finding No. 9:            Market Assistance Plan

Although Section 627.3515(1), Florida Statutes, requires that the OIR adopt and operate the Market Assistance Plan (Plan), we found no evidence that the OIR had adopted the Plan, and responsibility for Plan operation and oversight appears to have been assumed by Citizens.  Also, historical data was not available to allow a determination of the effectiveness of the Plan.  Further, the Plan had not obtained access to certain OIR data that may be helpful in matching those customers seeking insurance to the insurers offering insurance in the voluntary market. 

 Finding No. 10:          Take-Out Bonuses

 Although Section 627.3511(2), Florida Statutes, appears to limit the amount of bonus that may be paid to an insurer to $100 for each risk (policy) that the insurer removes, Citizens had developed several programs that provided bonuses of up to $300 for each policy removed.  The bonus amounts paid or escrowed for each policy have averaged $148.  In response to our inquiries, both Citizens and the OIR responded that Section 627.351(6)(g)3.a., Florida Statutes, authorizes the payment of bonuses in excess of $100 for each policy taken out.  That statute provides, “The corporation shall adopt one or more programs subject to approval by the office [Office of Insurance Regulation] for the reduction of both new and renewal writings in the corporation.”  Citizens should seek legislative clarification of its authority to pay bonuses in excess of the $100 statutory limit established by Section 627.3511(2), Florida Statutes.

 Finding No. 11:          Take-Out Program Long-Term Monitoring

 We found that necessary historical data, such as the complete address of the insured property, was not available for use in an assessment of the long-term effectiveness of the take-out programs.  Such data would facilitate an analysis of the extent to which risks, following a take-out period, may be returning to Citizens.  Our limited tests did disclose some evidence that risks had been returned to Citizens and then subsequently taken out again by another insurer.

Accessibility of Policyholder Information to Agents

 Finding No. 12:          Policyholder Systems

 For its primary electronic policy administration systems, Citizens had not provided system functionality that allowed agents to electronically transact business, particularly with respect to commercial account and catastrophe claims information.  Citizens has initiated the Single System Project, which is to provide improved functionality.

Customer Service

Finding No. 13:          Complaint Handling Procedures

 Although Citizens had multiple functional units involved in addressing complaints, there was no one functional unit assigned the responsibility for coordinating the receipt and ensuring the timely and effective resolution of policyholder complaints.  To improve its complaint handling processes, Citizens plans to establish, effective January 2006, a consolidated complaint unit.

Claims Handling

Finding No. 14:          Monitoring of Contracted Adjuster Resources

Because of deficiencies in Citizens’ monitoring of its adjuster resources contracted for the 2004 storm season, Citizens did not have a reliable means for determining the extent to which the services provided conformed to Citizens’ requirements or a basis for timely identifying performance issues that may have required corrective actions.  Although significant procedural improvements have been implemented, additional enhancements continued to be needed.

Finding No. 15:          Catastrophe Claim Files

 For a sample of claims, we determined, with the assistance of an insurance industry consultant, the timeliness with which catastrophe claims had been processed, the extent to which file evidence supported the existence of a loss, the extent to which the described and depicted losses were consistent with the amounts paid, the sufficiency of case reserves, the sufficiency of the steps taken by Citizens to review the findings of the contracted adjusters, and the reasonableness of the fees paid to contracted adjusters.  We found:

• Many documents in the 2004 and 2005 claim files were not dated.  Notwithstanding the absence of dates in many instances, we were able to determine that for the 2004 storms, there was often a significant lag between the filing of a claim, the assignment of the claim to an adjuster, and the closing of the claim.  With respect to the 2005 storm claims reviewed, claims were processed more expeditiously.

• The fees paid by Citizens to contracted adjusters and claims administrators were sometimes high in relation to the services received.

• Few files included an insurance-to-value analysis.  Such an analysis facilitates a determination as to whether the property was insured at a level commensurate with the replacement cost of the property.  Absent an appropriate level of coverage, the amount due to the policyholder is subject to reduction through the application of a coinsurance penalty.  In explanation, Citizens’ management stated that because Citizens did not have a consistent valuation methodology available to agents and insureds to help them establish a replacement cost amount, nor an adopted valuation benchmark, it was unfair to impose a coinsurance penalty.

• Case reserves were not always properly maintained and adjusted to reflect the best and most recent estimate of the claim payment that will be due.

• For three claims, the amounts paid appeared to be inconsistent with claim file information.

Premiums

Finding No. 16:          Actuarial Soundness of Rates

• Actuarial studies were not available to demonstrate the extent to which the rates assessed through June 30, 2005, were, as required by Section 627.351(6)(d)1., Florida Statutes, actuarially sound.

Probable Maximum Loss Financing

Finding No. 17:          Financing Options

In general, we found the approach used by Citizens to provide financing for its estimated 100-year probable maximum loss (PML) to be reasonable.  Efforts to reduce the cost-of-carry associated with pre-event bonds should continue.  Also, the amount of surplus available to assist in the financing of the 100-year PML could, as addressed in other findings of this report, be increased by assessing and collecting all premiums due under the authority of law; reducing, where possible, loss adjustment expenses; and engaging service providers through competitive means.

Other Matters

A former employee of Citizens is currently the subject of an ongoing criminal investigation.  The outcome of this investigation and its implications, if any, relative to the controls or operations of Citizens was unknown as of the close of our audit field work.

The responses of the President and Executive Director of Citizens Property Insurance Corporation and the Commissioner of the Office of Insurance Regulation are included in their entirety at the end of this report as Appendix D.