Privatization of Office of Risk Management Insurance Operations Fell Short of Meeting Guaranteed Claims Savings

The state’s decision to move the administration of its lines of insurance and loss prevention services from the Office of Risk Management (ORM) to a private company resulted in a net savings of $9.8 million over the five years of the contract, the Legislative Auditor said in a report released today.

However, auditors found that the company that was awarded the contract – F.A. Richard & Co. (FARA) – was only able to achieve $43.8 million of the $50 million in claims and litigation payment savings it guaranteed in the contract. As a result, FARA is required to refund 3% of the shortfall to the state, up to $1.5 million. The contract ended on June 30, 2015.

Auditors calculated that FARA owed the state $185,288 for not meeting the contractually-guaranteed savings. However, according to the state auditor, ORM only billed the company for $59,252. Auditors found that ORM used the wrong inflation rate for three fiscal years, which resulted in a higher savings figure than FARA actually achieved. As a result, ORM calculated that FARA owed the state less than auditors did.

ORM officials agreed that they used the wrong inflation rate, but said based on their professional judgment and day-to-day involvement with property claims, the inflation factors they used more accurately reflected the inflation rate for property insurance during the contract period.