FSCO Tightens Compliance Standards

From the beginning of February this year the Financial Services Commission of Ontario (FSCO) released revisions to the audit protocol for market conduct self audits. The package included an explanatory letter, revised audit report forms, revised audit worksheets and updated Q&A pages.

For the past 2 years, a branch of FSCO has overseen the self-auditing of insurers. Companies are required to file an audit of “statutory accident benefit schedule” (SABS) claims files in accordance with protocol established by FSCO. The audits measure transactions to determine if claim responses to the insured claimant are completed within the tight timelines established under the SABS.

Companies are required to file an audit report based on a minimum of 100 claim files for transactions taking place within the previous year. FSCO have set an acceptable threshold of less than 10% non-compliance. In other words, payments and other responses to claims are expected to be on time within the legislation time frames at least 90% of the time. In the reports required to be filed by June 30,1999, transactions taking place in 1998 were audited. Approximately 31 companies were asked to file in 1999.

The result was:

18 Insurers reported a non-compliance ratio of greater than 10%;

13 Insurers reported a non-compliance ratio of less than 10%;

The non-compliance ratios ranged from 0.33% to 66.97%;

FSCO re-inspected 19 of the 31 companies audits.

FSCO released the above results along with an explanation of the interpretative changes to a meeting of the Canadian Insurance Claims Managers Association (CICMA) Ontario Chapter on February 2nd.

Immediate retroactive effect

The changes take effect for the current round of FSCO compliance audit reporting which means that they apply to auditing of files for the period January 1, 1999 to December 31, 1999 for reports to be filed by June 30,2000.

One of the recurrent problems for company claims managers is that changes are announced in February of the year in which the audit report is to be filed. The transactions on which the audit is based, however, have already taken place in the previous year. Activities which did not count for compliance purposes during the year they took place could now be brought in retroactively. FSCO representatives assured the audience at the CICMA meeting that transactions would be looked at in light of the retroactive nature of the changes and insurers would not be unduly penalized. Nothing, however, in the written documentation sets out what type of consideration would be given.

The author recommends that non-compliant transactions on “retroactive” changes be included in the audit result but separately tracked. This will enable a special consideration to be argued if they result in substantial non-compliance ratios.

Payments every two weeks

One of most significant changes in the audit for this year is the method of calculation of late payments for continuing weekly IRB benefits. FSCO have been applying a strict interpretation of Section 35(4) that once a payment is issued for weekly income replacement benefits, IRB, the next payment falls due two weeks (14 days) after the first payment and every two weeks thereafter. The section of the SABS actually states that an insurer “shall pay the benefit at least once every second week”.

On reviewing submissions from some insurers and obtaining a legal opinion on interpretation of S. 35(4), FSCO have now modified their interpretation. An ongoing IRB payment is not overdue if paid within the second week following.

Administrative versus non-administrative

In the most recent bulletin, FSCO seek to distinguish between administrative and non-administrative transactions. Under the SABS legislation some insurers have performed well within the compliance standards on non-administrative matters, specifically delivering payments for income, medical and other benefits and promptly paying interest to insured claimants where the payment was late. This clearly is the goal of the legislation and arguably the raison d’tre for SABS market compliance audits.

When other types of transactions are counted, however, some insurers who performed well on the non-administrative criteria, end up with enough non-compliant transactions to take them out of the acceptable compliance ratio. By separately identifying the types of non-compliant transactions, perhaps FSCO is leaning toward different treatment of responses to the audit result if the breaches are only administrative.

One of the most common non-compliant transactions reported to date is failure to comply with Section 38(8)(a) by responding in writing to the insured within 14 days of receipt of a treatment plan. This should be an administrative transaction, if the insurer approves the plan verbally. The explanatory letter with the latest release of documents, however, seems to suggest that this may be considered a non-administrative transaction if it results in delay of treatment to the insured. How this will be measured would appear to be totally subjective.

Another frequent breach of the SABS Bill 59 Regulations is Section 42. Subsection (2) stipulates that insurers must state the purpose to which the benefit relates when setting up an insurers examination. Subsection (7) stipulates that Insurers provide a copy of the IE report to the insured within 7 days of its receipt. In both of these cases, the insured is not prejudiced by any late payment of benefits. These should be administrative transactions.

Payments to treatment providers

Following the same rationale, is it significant from the insured’s viewpoint that service providers under an approved treatment plan are paid within 30 days? FSCO has now stated that they will include payments to service providers under an approved treatment plan as transactions for compliance purposes. Section 38(11) of the SABS clearly dictates that such invoices should be paid within 30 days of receipt but, in the past, payment requests have been ignored for audit purposes unless submitted by the insured claimant. Some insurers pay these types of accounts promptly. While all insurers will see a dramatic rise in the number of transactions counted, insurers that have been paying treatment providers promptly should see their compliance ratios improve significantly.

Example

Under the existing protocol an insurer counted 1000 transactions on 100 files with 120 non-compliant transactions for a non-compliance ratio of 12%. Under the new protocol, the same insurer auditing the same files may easily have 3000 or more transactions. Assuming that 95% of the 2000 additional transactions were paid on time, the result would be:

[120+(5% of 2000)] non compliant out of 3000 transactions = 220 out of 3000 = 7.33%

If however, the non-compliance rate of these payments were 10%, the result would be:

[120+(10% of 2000)] non compliant out of 3000 transactions = 320 out of 3000 = 10.67%

Conclusion

How any particular insurer fares under the new method of count- ing transactions remains to be seen. One thing is certain, significantly more transactions will require identification and comparison of the date the invoice was received to the date a cheque was issued. Early indications are that this additional process may double or triple the time required to complete the audit.

The compliance audit becomes even more difficult and time consuming. At the same time, FSCO have suggested that the audit criteria targets of 10% non-compliance may at some point be reduced further. How long will it be before FSCO move closer to imposing fines or other penalties for continued non-compliance? In this upcoming round of audits, insurers are being reminded that this is the second audit for them and FSCO may be less tolerant in interpretation of non-compliance issues. The honeymoon is over.

This example highlights the difference:

Existing interpretation: Payment issued Monday March 6th. Next payment falls due on Monday March 21 and is overdue if not issued and mailed by Monday March 21.

New interpretation :Payment issued Monday March 6th. Next payment falls due within the second week following, the week of March 21st to 25th. Therefore payment can be issued and mailed up to Friday March 25th. However, a payment following a cheque issued on Friday March 11th is overdue if not issued and mailed by Friday March 25.

FSCO stressed that they expect Insurers to issue IRB continuing benefits on a regular basis on the same day. Insurers habitually taking advantage of the extra few days grace in this interpretation will not be looked at favorably.