Summary

Citizens Property Insurance Corporation (Citizens) has been established to operate as the State’s last resort insurer.  As such, the Legislature’s intent, as expressed in Section 627.351(6), Florida Statutes, is that diligent efforts be made to place risks with voluntary insurers and that risks to be placed with Citizens only when coverage is not available in the voluntary market.  As of August 31, 2008, Citizens had 1,172,401 policies in force, with annualized premiums of $2.7 billion and related loss exposure of $433 billion.

Section 627.351(6)(l), Florida Statutes, requires the Auditor General to conduct an operational audit of Citizens every three years.  The findings of our audit of the period March 1, 2006, through February 29, 2008, and selected actions taken through December 16, 2008, are summarized below.

Enterprise Risk Management

Finding No. 1:    In audit report No. 2006-096, we noted that Citizens had no documentation to support that it had conducted an enterprise-wide evaluation of the effectiveness of operational and financial controls.  Similarly, our current audit disclosed that no such evaluation had been completed during the audit period.  However, on October 23, 2008, Citizens management presented to the Board a proposal to create an Enterprise Risk Management function that at a minimum will encompass risk management, compliance, and quality assurance.

Conflict of Interest Disclosure Forms

Finding No. 2:    Citizens’ records in some instances did not contain a completed and signed Conflict of Interest Disclosure Form to evidence that the Citizens employees taking part in the evaluation and contract award processes were independent of, and had no conflict of interest with respect to, the vendors evaluated and selected.  Additionally, we determined that in some instances, Citizens did not timely receive Conflict of Interest Disclosure Forms executed by the vendors. 

Security Awareness Program

Finding No. 3:    Citizens had not established an information technology security awareness program.  The purpose of a security awareness program is to inform personnel of the importance of the information they handle and the legal and business reasons for maintaining its integrity, confidentiality, and availability.

Security Controls

Finding No. 4:    Effective security controls include access controls that ensure that users have only the access privileges needed to perform their duties, access to sensitive resources is limited to only a few users, and users are restricted from performing incompatible functions.  Our audit disclosed deficiencies in certain security controls.

Finding No. 5:    We noted certain other deficiencies in Citizens’ security control features, the details of which have been disclosed to appropriate members of Citizens management.

Internal Audit Procedures

Finding No. 6:    Policies and procedures providing guidance for the internal audit activity had not been completed.  The objective of such policies and procedures is to provide for the internal audit function an operational framework which reasonably ensures auditor compliance with governing auditing standards.

Take-Out Program Long-Term Monitoring

Finding No. 7:    Section 627.351(6), Florida Statutes, as amended, required that effective July 1, 2007, in order to evaluate the costs and benefits of approved take-out plans, if Citizens pays a bonus or other payment to an insurer for an approved take-out plan, then Citizens shall maintain a record of all addresses or such other identifying information on the property or risk removed in order to track if and when the property or risk is later insured by the corporation.  To address the requirements of the statute, Citizens developed a software application (application) to identify policies that may be returning to Citizens after having been assumed by a take-out insurer.  The application was run monthly beginning in October 2007.  However, the output from the application has not been reviewed by Citizens staff to determine what policies may be returning to Citizens from take-out insurers.

Policyholder Notification

Finding No. 8:    Insurers which were interested in considering the take-out of policies were to request from Citizens a selection file.  In response to the request for a selection file, Citizens provided a data file to the prospective take-out insurer of all policies eligible for take-out.  However, prior to March 11, 2008, when the selection file was provided, Citizens also communicated to the prospective take-out insurer that the policies written by certain insurance agencies or captive agents should not be selected, as the agencies or agents would be unable or unwilling to be appointed as an agent of the prospective take-out insurer and, thus, may not present a take-out proposal to the policyholder.  Effective March 2008, Citizens was required by consent order of the Office of Insurance Regulation, to send notice to any policyholder whose policy has been selected for take-out, but whose agent is unable or unwilling to be appointed by the take-out insurer, that an offer of coverage was made which may have saved them premium dollars.

Market Assistance Plan

Finding No. 9:    Section 627.3515, Florida Statutes, requires that, through such measures as are found appropriate by the Plan’s Board, the Plan shall take affirmative steps to assist in the removal from Citizens any risk that can be placed in the voluntary market.  Section 627.3515(3)(a), Florida Statutes, as amended, also requires that the Plan and Citizens develop a business plan providing for the implementation of an electronic database for the purpose of confirming eligibility.  Our audit disclosed:

• Additional opportunities to promote the Market Assistance Plan, and thereby increase its production of voluntary insurer placements, may exist through real estate professionals, mortgage companies and brokers, and others involved in the sale of real estate and the financing and refinancing thereof.
• The business plan was submitted to the Financial Services Commission, and in presenting the Plan, Citizens identified several potential implementation issues that required further consideration.  As of December 16, 2008, further development of the proposed electronic database was pending.

Managing Stakeholder Feedback

Finding No. 10:    Citizens has taken steps to improve customer service, including but not limited to, the establishment of a Consumer Services Department and a Consumer Services Committee, Web site enhancements, and the conduct of policyholder forums.  In evaluating customer service issues, we surveyed a sample of policyholders, analyzed complaint data maintained by the Department of Financial Services, and surveyed a sample of agents appointed by Citizens.  The results of these surveys and analyses indicate that there remain opportunities for Citizens to further enhance customer service.  One such opportunity involves the establishment of a central reporting mechanism to aggregate and evaluate customer service issues for Citizens as a whole. 

Claim Adjustment and Payment

Finding No. 11:    With respect to claims reviewed, we evaluated the timeliness with which the claims were 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, and the sufficiency of the steps taken by Citizens to review the findings of the adjusters.  Our audit disclosed that some improvements were needed.  Specifically:

• In audit report No. 2006-096, we noted that in adjusting claims, Citizens was not enforcing the 80 percent co-insurance clause in its various insurance policies.  Our current audit again found few insurance-to-value analyses in the claim files reviewed.
• For some of the claims reviewed, Citizens did not appear to have taken sufficient action to subrogate claims.

Mediation and Appraisal

Finding No. 12:    Of the sixty reopened claims that we tested, we found that 28 went through mediation, appraisal, or lawsuit.  For 26 of these 28 claims, a public adjuster had been hired by the policyholder.  Our testing disclosed the following relating to the mediation and appraisal process:

• For 18 of the 28 reopened cases that went to mediation, appraisal, or umpire, either the public adjuster representing the policyholder or the public adjuster’s firm performed the appraisal.  This appears to be contrary to policy terms which require that appraisals be performed by a disinterested appraiser.
• There was no requirement that the umpires, in making award decisions, itemize or otherwise explain the rationale followed in determining the award, and in the files we reviewed, the umpire’s award did not itemize the specific cost elements in the award or the rationale for the award.

Underwriting Files

Finding No. 13:   Citizens’ underwriters (internal and contracted) are required, at a minimum, to review the applications and supporting documentation and to make decisions concerning eligibility, insurability, and receipt of correct premium.  Our tests of 30 applications, including policy renewals, disclosed in three applications issues that were not appropriately addressed.

Financing Arrangements

Finding No. 14:    Citizens should continue its efforts to reduce the cost-of-carry on any pre-event financing while maintaining the safety and liquidity of the financing proceeds through conservative investment.

The President’s response is included as Exhibit A.