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Windstorm Update

Windstorm Update

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Published by mlisheron
The Texas Auditor reviews the processing of claims by the Texas Windstorm Insurance Association, finds improvement and a need for further improvement.
The Texas Auditor reviews the processing of claims by the Texas Windstorm Insurance Association, finds improvement and a need for further improvement.

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Published by: mlisheron on Aug 03, 2012
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John Keel, CPAState Auditor
An Audit Report on
The Texas Windstorm InsuranceAssociation
August 2012
Report No. 12-048
 An Audit Report on 
The Texas Windstorm InsurancAssociation 
SAO Report No. 12-048August 2012
This audit was conducted in accordance with Texas Insurance Code, Sections 2210.054(a) and 2210.058.For more information regarding this report, please contact Lisa Collier, Assistant State Auditor, or John Keel, State Auditor, at (512)936-9500.
Overall Conclusion 
The Texas Windstorm Insurance Association(Association) has improved its processing ofclaims. The Association also has controls tohelp produce accurate financial information,ensure accountability for Association funds,and adequately support and authorize non-claims-related expenditures. In addition, theAssociation’s accounting practices for reportingselected financial transactions comply with theNational Association of InsuranceCommissioners’ standards.However, auditors identified areas forimprovement in the Association’s processing ofclaims, premium payments, adjusting journalentries, contracting, and informationtechnology.The scope of this audit engagement was fromJanuary 1, 2011, through March 31, 2012. Itshould be noted that the Association iscurrently under administrative oversight (seetext box) and has been under new executivemanagement since April 2011. In addition, theAssociation hired a new vice president ofclaims and a new controller in January 2012.
Processing of Claims.
Since December 2008, the Association has undergone sixexternal reviews. Some of the reports from those reviews identified issuesinvolving claims processing.From January 1, 2011, through March 31, 2012, the Association processed 88,408payments. Those payments represented 24,411 total claims. For 50,466 (57percent) of those 88,408 payments, the Association was involved in some form oflitigation. According to data the Association provided to auditors, from January 1,2011, through March 31, 2012, the Association paid $25,224,655 to law firms todefend and settle $333,683,706 in claims litigation.Auditors reviewed timeliness, appropriateness, and payment authorization for asample of claims the Association paid from January 1, 2011, through March 31,2012, and determined that the Association had addressed certain issues previously
Background Information
The Texas Windstorm InsuranceAssociation (Association) is the insurerof last resort for wind and hail damagein 14 Texas coastal counties and parts ofHarris County (see Appendix 3 for a mapof the counties). The Legislaturecreated the Association in 1971.The Association is composed of a pool ofall property and casualty insurancecompanies authorized to provideinsurance coverage in Texas. TheAssociation provides basic wind and hailinsurance coverage for property ownerswho might otherwise be uninsured.The Association is governed by a boardof directors with nine voting membersand one non-voting member. TheCommissioner of Insurance appoints allmembers.Since February 2011, the Association hasbeen under the administrative oversightof the Department of Insurance (seeAppendix 2 for additional information onadministrative oversight).Source: The Association.
An Audit Report on The Texas Windstorm Insurance Association SAO Report No. 12-048 i
identified. Specifically, auditors tested the Association’s processing of 39 claimsand determined that the Association adequately authorized payment and hadsupporting documentation for those claims. House Bill 3 (82nd Legislature, FirstCalled Session) established different requirements and processes for Associationpolicies issued after November 27, 2011. It is important to note that 30 of theclaims tested were associated with policies with effective dates before November27, 2011, and 9 of the claims tested were associated with policies with effectivedates on or after November 27, 2011.Although the Association adequately processed the 39 claims tested, auditorsidentified improvements the Association should make within its claims processing.Specifically, the Association should:
Monitor the assignment of claims to its claims examiners to identify potentialconflicts of interests.
Ensure that its claims examiners do not exceed their authorized limits forapproving the payment of claims.
Establish and enforce reasonable time frames for making payments topolicyholders for additional living expenses.
Ensure that its quality assurance and training department meets operationaltargets, notifies Association management of errors it identifies in claimsprocessing, and accurately reports results.
Processing of Premium Payments.
Auditors tested 30 premium payments theAssociation received, and the Association properly recorded and had supportingdocumentation for those 30 premium payments. However, the Association shouldstrengthen its reconciliations of the premium payments it receives with the bankdeposits it makes to ensure that those reconciliations are documented, accurate,and receive appropriate supervisory review. In addition, the Association shouldimprove its documentation of journal entries and ensure that they receiveappropriate supervisory review.
The Association’s non-claims-related expenditures totaled$123,615,341 from January 1, 2011, through March 31, 2012. Those expenditureswere generally supported and authorized. However, auditors identified certainweaknesses in the Association’s contracting process. Specifically:
Auditors were unable to determine whether the services and relatedexpenditures associated with seven contracts for contract workers werereasonable and necessary. Those seven contracts were with Odyssey InformationServices, Inc., to which the Association paid $1,050,836 in calendar year 2011.
The Association’s contracts database was not reliable because it contained (1)duplicate contracts, (2) incorrect dates for contract inception and contractexpiration, (3) contracts that had expired or had been replaced, and (4)documents for items that were not contracts for services.

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