N.H. audit blasts state’s anti-competitive insurance purchasing 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’s 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.

Competition preferred
The auditors said they found “significant noncompliance” with state procurement standards.

“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,” claims the report prepared for legislators by the Office of Legislative Budget Assistant.

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 there were two sole-sourced specialty line insurance policies totaling $474,459 for the audit period. Both lacked Governor and Executive Council approval as required.

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 that’s why we asked for the audit,” he said.

Additonal findings:
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 shortcomings, the BRM procured property insurance covering state-owned real property without cost benefit or similar analysis.
• 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 rules relative to these responsibilities. State agencies obtained property insurance policies separate from the statewide policy without cost-benefit analysis 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. Incumbent vendors were afforded an unfair advantage during the request for proposal (RFP) process.
• 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. Further, the New Hampshire Insurance Department was not consulted as state law requires.
• The BRM ineffectively administered the state’s motorcycle rider education loss prevention program. 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.
• 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.

In another finding, the report noted non-health producers procuring coverage for the state received on average a 16 percent commission. Producers received more than $1 million in commissions during policy years 1998 through 2004.