Disturbing Insurance Audit

November 23, 1991

The recently released legislative audit of the Maryland Insurance Division identifies deep and disturbing deficiencies, but it also illustrates, clearly and compellingly, the troubles created by the funding vacuum that faces Insurance Commissioner John A. Donaho.

This audit casts serious doubts on the agency's ability to detect and monitor at-risk insurers. No formal early-warning guideposts exist to tip off regulators that a company might be heading for trouble. Interim financial reporting is haphazard and poorly documented. Some companies don't submit reports and the agency doesn't get around to reviewing all of those that are turned in. Most of this is due to lack of funds in the agency.

From July 1, 1988, to December 31, 1990, for example, the only reviews logged were for June 30, 1990, quarterly statements. The division could only produce evidence that 81 out of a required 219 companies bothered to submit reports. Of those, six in ten were wrong. In one case, the division projected an $11 million improvement in net income when the company's statement really indicated a projected decline of $1.9 million.

An element of incompetence is almost always implicit in findings like these. But the division is suffering from a serious and continuing lack of resources that threatens not only its mission but the future of Maryland's home-grown insurance industry. Mr. Donaho has been a tireless advocate of automation, training and educating the public. But his efforts have been compromised by budget contortions. Over the past couple of years, the division's budget has shrunk to $7.6 million from $8.9 million. It has 23 vacant positions. It can't offer competitive salaries for actuaries and other much-needed professionals. It is charging insurers for examinations. Even now, Mr. Donaho is waiting word on a $425,000 emergency request for automation funds.

Accreditation by the National Association of Insurance Commissioners is another problem. In order to win this key certification by next fall, the division's budget would have to remain where it is -- an unlikely prospect given the state's financial situation. If the division isn't accredited by 1994, Maryland's examinations of insurance companies would not be accepted in other states.

Mr. Donaho testified Thursday before legislators in Annapolis this week on an audit he characterized as "criticism for miscounting the deck chairs on the Titanic." We agree. There are no easy answers; the division is one of many vying for state funds. It is time those holding the purse strings commit themselves to ensuring adequate protection for millions of policyholders in this state.

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