N.H. Audit Blasts State Insurance Buying Practices

The state of New Hampshire routinely bypasses competitive bidding for insurance contracts and awards them to incumbent producers, a state audit report that severely criticizes many of the state’s insurance practices has found.

The report also blasts the state’ risk management office for failing to do its job in assessing the value and insurance needs for state properties and auto fleets.

The report says that the Department of Administrative Services and its Bureau of Risk Management (BRM) regularly renew contracts under $5,000 in premium as well as specialty line policies costing more with existing producers rather than seek competitive bids.

“We found significant noncompliance with procurement principles and standards in each of the five steps of public procurement: planning, soliciting, vendor selection, contract execution, and contract monitoring, ” claims the report prepared for legislators by the Office of Legislative Budget Assistant.

“Competition, government’s most effective means of obtaining goods and services at a fair and reasonable price, is the preferred selection method but the bureau routinely sole-sourced contracts under $5,000 to incumbent insurance producers providing coverage for similar risks and sole-sourced ‘specialty line’ insurance contracts over $5,000 without required justification,” the authors concluded.

The Office of Legislative Budget Assistant is the audit office of the New Hampshire legislature and is headed by Catherine A. Provencher, CPA.

Overall, the audit found that the bureau sole-sourced 44 percent of the insurance secured during the audit period and used limited competition in 23 percent of procurements. These procurements totaled $702,399 and $1.3 million respectively during the audit period. In one instance, the auditors said they found that the BRM sole-sourced an additional $429,495 in insurance services onto an ongoing contract over a two-year period.

The auditors also said that two sole-sourced specialty line insurance policies totaling $474,459 for the audit period. The report says both lacked Governor and Executive Council approval and full and complete justification for sole-sourcing.

Further, the study claims, BRM “inadequately ensured against incumbent producers having an unfair advantage in the insurance procurement process, affecting over $2.4 million in insurance service procurements during the audit period.”

Exeter Rep. Lee Quandt, a Republican, pushed for the audit. He told the Associated Press he thinks every contract should be approved by the state insurance department.

“We knew this whole operation was a mess and thats why we asked for the audit”, he said.

In 2003, health and dental insurance companies paid more than $180,000 in commissions to Linda Pepin, a volunteer working for then-Gov. Craig Benson. The political firestorm that erupted over that disclosure prompted Quandt to ask for the audit.

Other findings of the state audit::

• The BRM lacked data quantifying state property risk, policies or procedures to obtain such data, and loss control programs to mitigate related risks. Despite these and other shortcomings, the BRM procured statewide property insurance covering state-owned real property without cost benefit or similar analysis. In place of analysis to determine the balance between the level of self-insured risk retention and commercial insurance, the BRM used budget constraints to determine the level of real property coverage. Further, the BRM did not implement a loss control program for real property and the property valuation data the BRM used to procure the state’s real property insurance were inconsistent and incomplete.

• The BRM did not assess personal property risk facing the state, establish a system to regulate and monitor state personal property, collect personal property risk data, or have policies and procedures or administrative rules relative to these responsibilities. As a result, the bureau neither determined if any state personal property were essential to state operations nor the amount of personal property risk the state faced. We found certain State agencies obtained property insurance policies separate from the statewide policy without cost-benefit analysis, risk assessment, or competitive process. During the audit period, the state’s separately insured property policies totaled $436,168 in premiums, while claims totaled $132,756, resulting in a loss ratio for the period of $3.29 in premiums to $1 in claim payments.

• The BRM inadequately managed the state automobile fleet loss control program. The bureau lacked a program to comprehensively address state automobile fleet risks, conducted no periodic reviews of contract efficiency, and had no rules, policies, or procedures related to automobile fleet loss control. Additionally, adequate competition was not always available to the state, as incumbent vendors were afforded an unfair advantage during the request for proposal (RFP) process. In one instance, the BRM sole-sourced additional fleet insurance services from a producer after the contract was in place. There was no evidence of a contract or other formalization of the state’s relationship with the BRM-procured defensive driver course (DDC) vendor or the use of competitive procurement to obtain these services.

• The BRM inefficiently administered foster care provider insurance. From October 1997 through October 2005, the state paid a total of $456,268 in premiums while claims totaled $138,190, resulting in a loss ratio of $3.30 to $1. The BRM has not conducted a cost-benefit analysis to determine whether this insurance is cost effective. No foster care provider loss control program has been implemented by the BRM. Further, the New Hampshire Insurance Department was not consulted prior to purchasing foster care provider insurance as state law requires.

• The BRM inefficiently and ineffectively administered the state’s motorcycle rider education loss prevention program. The auditors said they found no cost-benefit analysis concluding commercial insurance procurement is the most efficient way to mitigate motorcycle rider education program risk. Over the audit period the state paid $126,081 for motorcycle rider education program insurance premiums, offset by $4,358 in paid claims, for a loss ratio of $29 in premiums for every $1 received in claim payments. There was no evidence these contracts were put out to bid nor did auditors find written justification for sole-sourcing these contracts.

• Producers assisting the state with employee health benefits were assigned the business of acting on the state’s behalf without any formal procurement process or contract protecting state interests. During the audit period, four brokers received $484,288 in commissions on employee dental insurance premiums. From March 2002 to November 2003, three brokers received $382,683 in commissions on employee medical insurance premiums. Further, there was evidence an additional insurance producer, with no formal relationship to the state, was soliciting bids, receiving and evaluating proposals, and rejecting vendors for at least three potential state contracts in May 2003. The DAS reports since November 2003, the state has not used brokers to assist with medical or dental benefits.