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An Audit Report on the Texas Windstorm Insurance Association

August 2012

Report Number 12-048

Overall Conclusion

The Texas Windstorm Insurance Association (Association) has improved its processing of claims. The Association also has controls to help produce accurate financial information, ensure accountability for Association funds, and adequately support and authorize non-claims-related expenditures. In addition, the Association's accounting practices for reporting selected financial transactions comply with the National Association of Insurance Commissioners' standards.

However, auditors identified areas for improvement in the Association's processing of claims, premium payments, adjusting journal entries, contracting, and information technology.

The scope of this audit engagement was from January 1, 2011, through March 31, 2012. It should be noted that the Association is currently under administrative oversight and has been under new executive management since April 2011. In addition, the Association hired a new vice president of claims and a new controller in January 2012.

Processing of Claims. Since December 2008, the Association has undergone six external reviews. Some of the reports from those reviews identified issues involving claims processing.

From January 1, 2011, through March 31, 2012, the Association processed 88,408 payments. Those payments represented 24,411 total claims. For 50,466 (57 percent) of those 88,408 payments, the Association was involved in some form of litigation. 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 to defend and settle $333,683,706 in claims litigation.

Auditors reviewed timeliness, appropriateness, and payment authorization for a sample of claims the Association paid from January 1, 2011, through March 31, 2012, and determined that the Association had addressed certain issues previously identified. Specifically, auditors tested the Association's processing of 39 claims and determined that the Association adequately authorized payment and had supporting documentation for those claims. House Bill 3 (82nd Legislature, First Called Session) established different requirements and processes for Association policies issued after November 27, 2011. It is important to note that 30 of the claims tested were associated with policies with effective dates before November 27, 2011, and 9 of the claims tested were associated with policies with effective dates on or after November 27, 2011.

Although the Association adequately processed the 39 claims tested, auditors identified improvements the Association should make within its claims processing. Specifically, the Association should:

- Monitor the assignment of claims to its claims examiners to identify potential conflicts of interests.

- Ensure that its claims examiners do not exceed their authorized limits for approving the payment of claims.

- Establish and enforce reasonable time frames for making payments to policyholders for additional living expenses.

- Ensure that its quality assurance and training department meets operational targets, notifies Association management of errors it identifies in claims processing, and accurately reports results.

Processing of Premium Payments. Auditors tested 30 premium payments the Association received, and the Association properly recorded and had supporting documentation for those 30 premium payments. However, the Association should strengthen its reconciliations of the premium payments it receives with the bank deposits it makes to ensure that those reconciliations are documented, accurate, and receive appropriate supervisory review. In addition, the Association should improve its documentation of journal entries and ensure that they receive appropriate supervisory review.

Contracting. The Association's non-claims-related expenditures totaled $123,615,341 from January 1, 2011, through March 31, 2012. Those expenditures were generally supported and authorized. However, auditors identified certain weaknesses in the Association's contracting process. Specifically:

- Auditors were unable to determine whether the services and related expenditures associated with seven contracts for contract workers were reasonable and necessary. Those seven contracts were with Odyssey Information Services, 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 contract expiration, (3) contracts that had expired or had been replaced, and (4) documents for items that were not contracts for services.

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