An audit released today of California's state-created workers' compensation insurer has described an inefficient, costly operation and past board members with conflicts of interest.
The findings announced by California's Department of Insurance concerned the State Compensation Insurance Fund, and revealed what Insurance Commissioner Steve Poizner referred to as "serious structural and operational issues."
The audit revealed "what we expected," Mr. Poizner said of the problems. "Fortunately, we have identified important issues, communicated our recommendations, and we expect that the State Fund will continue to work to make necessary reforms," he added.
He promised, "As SCIF's regulator, I will continue to monitor their activities and work with them. Given SCIF's size, its fiscal health is integral to ensuring a healthy and competitive workers' compensation marketplace."
Among the key concerns outlined in the audit findings are that the SCIF's board of directors is too small and lacks the resources to adequately oversee the organization.
Specifically, the audit notes that the SCIF lacks important executive positions, including chief financial officer, chief operating officer and chief investment officer.
In response, SCIF President Janet Frank said the fund "has already accomplished or begun to implement most of the recommendations in CDI's report."
Additionally, the fund said it "strongly agrees" with the findings regarding new executive positions, and said that job descriptions to be used in filling those posts are being finalized for petitioning the state legislature.
The report revealed concerns regarding potential conflicts of interest by two past SCIF board members.
According to the Insurance Department the audit found that SCIF paid in excess of $500 million in group association administration fees from 1997 through January 2007. Of this amount, over $140 million was paid to an entity controlled by "a person who was a board member from 2003 through 2006."
In addition, over $125 million was said to have been paid to associations with whom another member of the board from 2004 through 2006 had a business affiliation.
The board members were identified in the report as Frank DelRe and Kent Dagg. According to the audit, Western Insurance Administrators is controlled by Mr. DelRe and Mr. Dagg links to two associations. Both resigned in 2006.
Group administrative fees paid to associations were incorrectly classified as legal and auditing fees in SCIF's financial statements, the department. This classification was misleading to users of the financial statements.
"At a minimum, it is clear that board members must not benefit personally as a result of any decision made by the board," the SCIF noted in its response. The SCIF added that it will adopt a code of ethics prepared by outside counsel to enforce this principle during the first quarter of 2008.
The audit also outlined numerous concerns about the spending of SCIF funds and a lack of efficiency that resulted in the SCIF paying $19.5 million in penalties between January and July of 2007 due to late payments on medical and indemnity bills.
Additionally, the audit noted a significant reliance on outside information technology vendors. In several areas, the audit results also classified oversight of spending at the state fund as inadequate.
As with other areas, the SCIF responded by saying that it recognizes the problems as outlined in the audit report and that efforts to address them are underway.
"State Fund has never been in a better position to improve its operations and align them with industry best practices," the SCIF said in its response to the audit. "The work of the board, new management and the Department of Insurance has provided an invaluable road map for the way forward."
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