Florida Citizens Property Insurance Ethics Program, Fee Bills Get Satisfactory Audits; Forensic Audit Program Introduced

 

Audit results of various internal Citizens Property Insurance Corporation (“Citizens”) programs were reviewed during a lengthy meeting of Citizens’ Audit Committee (“Committee”) yesterday, March 22, 2013.

Notably, Citizens’ Ethics Program was deemed satisfactory, as was a review of its Standard Fee Bill, the latter which is used by third parties as a billing invoice calculation template for services rendered to Citizens, excluding catastrophe claims. The Standard Fee Bill review was intended to provide

additional levels of reasonable assurance that Citizens’ Independent Adjuster Firms’ fee billing is accurate.

To view the meeting materials, click here.

The updates were part of a presentation by Citizens Internal Auditor Joe Martins, who highlighted the major accomplishments of Citizens’ Office of Internal Audit (“OIA”).   The OIA also reviewed forensic audits of two complaints received through the “Tell Citizens” internal employee grievance line, he noted.

 

Ethics Program Audit

Mr. Martins explained that the Ethics Program audit showed a 100 percent rate of compliance by employees in the areas of refresher training and ethics attestation requirement.  The satisfactory rating was based on an assessment that the awareness and training components are well developed.

However, the Ethics Program audit showed some weaknesses, with the program scoring “low” ratings in the following areas:

• Ethics Training Material for Vendors -Training materials had not been updated since 2008
• Ethics Survey Process – the survey is not detailed enough to measure the ethical climate of the organization
• Annual Ethics Refresher Training – Annual employee training materials do not contain exercises in ethical decision making as recommended by ethics training best practices
• Gift Policy – Gift policy appears to be difficult for employees to understand

 

Forensic Audits

New to Citizens is the Forensic Audit program, the aim of which is to “proactively develop a company culture that embraces mitigation efforts for fraud waste and abuse and compliance with company policy and state regulation, thus reducing the cost of fraud, waste and abuse that are passed on to the company and citizens of Florida,” according to Josh Shilts, Citizens’ director of Internal Audit/Forensics.

Citizens’ Forensic program will focus on four components:  Deterrence, detection, investigation and remediation, Mr. Shilts said.

“At a very high level, forensic means ‘in lieu of law’,” he noted.  “The discipline is transforming itself.   Gone are the times where we are just merely supporting litigation.  We have unique skills.  We have investigative hats and we are also CPAs (certified public accountants).”

Two recent forensic audits addressed a workplace harassment case and alleged code of ethics violation.

In the first instance, the OIA review confirmed that a supervisor’s actions resulted in a violation of Citizens’ discrimination or harassment policy and well as a violation of Citizens’ Code of Conduct.  Management instituted disciplinary action and the supervisor was dismissed, Mr. Shilts noted.

The second audit involved an alleged code of ethics violation. It was determined that no actions were done out of intent to commit an unethical act and that internal ethics training would be provided.  No other action was required.

 

Audit Committee Charter and OIA Charter

An annual review of the Audit Committee Charter resulted in suggested minor changes regarding the description of the Committee duties and responsibilities, such as a requirement to develop a comprehensive Forensic Audit Program, Mr. Martins said.

 

Open Items

As of March 1, 2013, Citizens had 56 remaining open audit items, three of which were a high priority, Mr. Martins said.  The first is the need to develop comprehensive physical security policies and procedures.

The second is the need to establish and design appropriate governance of data privacy.  A privacy officer was recruited to develop the organizations privacy management process.

The third relates to a corporate wide vendor management policy, which is currently being developed.

After hearing all the updates, the Committee unanimously voted to recommend Citizens Board of Governors (“Board”) approve the updated Audit Committee Charter, OIA Charter and Internal Audit Corporate policy.

 

Financial Report

Citizens Chief Financial Officer Sharon Binnun then gave an overview of Citizens recent financials.  She noted that the audit of financials is “well underway” and with significant progress having been made.

“I don’t think there is anything really huge compared to the third quarter except for certainly improvement in losses which we are happy to see,” Ms. Binnun said.

She pointed out a big change in administrative expenses – comparing this year with last year.

“You will see will see a material increase in actual expenses from this year to last year.  We will see it coincides with budget. But 2012 was the year in which significant costs associated with CORE were being incurred,” Ms. Binnun noted.

“The secondary reason is if you look at other underwriting expenses and temporary services we had significant costs in 2012 associated with the inspection program on the wind mitigation credits,” she added.

During a brief summary of Citizens’ financials, she noted that there has been a significant uptick in depopulation, with November being the really big month.

“We had almost 300,000 policies coming out of Citizens, so we had a lot of premium ceded and you will see that with the policies in force – that has come down 21 percent from budget and 11 percent from last year.  That is a big positive,” she said.

The change in premium ceded to private reinsures from the budgeted amount is because Citizens budgeted the transfer of about $1 billion of risk to the private markets in 2012, she noted.  With the Everglades Re capital markets transaction, the Board decided to buy more private reinsurance to protect Citizens’ Coastal Account from assessments to taxpayers, thus creating an increase there.

Other positive information in terms of losses incurred includes a big decrease in sinkhole claims this year compared with last year.   Ms. Binnun attributed that decrease to Senate Bill 408, mandatory deductibles and inspections for new sinkhole coverage policies.

“We really did a good job in 2012 of making our selections on loss reserves, so we are seeing positive development, rather than adverse development on those old claims as well,” Ms. Binnun added, noting that water losses continue to be significant, especially in Citizens’ Personal Lines Account (“PLA”).

Cash and invested assets rose to $15 billion, ready and available to pay valid claims, she noted.

The loss ratio is also coming down, she said, noting that the PLA net written premium is much lower than last year.

“For Citizens, that is a good thing because we want to shrink, we want to get smaller and I believe we were wildly successful last year in our efforts there,” Ms. Binnun stated.  She said the PLA loss ratio in 2011 was 73 percent, due to sinkhole claims frequency.  It is now down to 48 percent, she said.

Loss Adjustment Expenses continue to rise due to the number of claims being litigated, she said.   A much larger percentage of claims are being litigated than in the past, inasmuch as Citizens is trying to ensure it only pays valid claims.

 

Sinkhole

While insuring the peril of sinkholes in the PLA has earned almost $57 million of premium, Citizens incurred $184 million in sinkhole-related losses, Ms. Binnun said.

“For every dollar of premium we brought in we lost $3.24,” she said.

Last year the direct premium earned was $51 million, the losses incurred were $446 million and the loss ratio was 873 percent, Ms. Binnun pointed out.

“That means for every dollar in 2011, we paid $8.73.  So we are still paying out three times more than we take in premium,” she added.  “The good news is that the number of reported sinkhole claims was 2,750 for the PLA, compared with nearly 4,000 a year ago.”

 

Other Reports

• Citizens’ new privacy officer will be starting on Monday, it was noted.

• A brief summary of recent internal complaints revealed that, between January 1, 2012 and December 31, 2012, 19 internal complaints were received through the Tell Citizens hotline and by Human Resources. Of those, nine were received through the Tell Citizens hotline, and 10 came through Human Resources. All the complaints were resolved. A summary of reports received between 2009 to 2012 showed that 318 complaints were received during that time period, with the total number of complaints decreasing from 99 in 2010 in to 78 in 2012. Of the 318 complaints, 193 were identified and 125 were made by anonymously.

• The Committee heard a summary of Enterprise Risk Management Program (“ERM”) highlights. Citizens had purchased ERM software this year to make the process of tracking risks and managing risk more automated. A review of Citizens’ ERM program will be made, along with recommendations for improvement. To view the ERM report, click here.

With no other business before the Committee, the meeting was adjourned.

 

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