December 11, 1996 The Honorable George W. Bush Governor of Texas Governor's Office State Capitol, Room E1.304 Austin, Texas 78701 Dear Governor Bush: The Texas Health Reinsurance System (System), effective September 1, 1995, is operating according to statute (V.T.C.S. Insurance Code, Article 26) and its Plan of Operation. It is governed by a Board of Directors (Board), whose nine members are appointed by the Commissioner of Insurance. In addition, the Board and the Department of Insurance (Department) have the necessary controls to ensure efficient and effective management of the System. No public funds are at risk in the System because it is financed by reinsurance premiums and carrier assessments, and the assessments do not qualify as offsets to premium taxes. As of September l, 1996, the System had 44 small-employer insurance carriers, with 18 group and 52 individual health plans reinsured (a total of 168 individuals). Our recommendations concerning the System are as follows: System Board of Directors Amend the Plan of Operation to include System requirements for reinsured carriers to provide their own audits. This Plan of Operation provision will serve as notice and explanation to reinsured carriers. The Board may also wish to consider tracking loss ratios for the reinsured carriers to help evaluate System performance. Department of Insurance Consider asking the Legislature to change the two-year, non-staggered terms for the Board of Directors to two- or three-year staggered terms. Under current statute, unless a Board member agrees to serve another term, a new Board is created every two years. Consider appointing a small carrier to the Board of Directors when a private-industry vacancy occurs. The five private-industry members currently serving the Board are from medium and large companies, but more small companies participate in the System.

December 11, 1996 The Honorable George W. Bush Governor of Texas Governor's Office State Capitol, Room E1.304 Austin, Texas 78701 Dear Governor Bush: The Texas Health Reinsurance System (System), effective September 1, 1995, is operating according to statute (V.T.C.S. Insurance Code, Article 26) and its Plan of Operation. It is governed by a Board of Directors (Board), whose nine members are appointed by the Commissioner of Insurance. In addition, the Board and the Department of Insurance (Department) have the necessary controls to ensure efficient and effective management of the System. No public funds are at risk in the System because it is financed by reinsurance premiums and carrier assessments, and the assessments do not qualify as offsets to premium taxes. As of September l, 1996, the System had 44 small-employer insurance carriers, with 18 group and 52 individual health plans reinsured (a total of 168 individuals). Our recommendations concerning the System are as follows: System Board of Directors Amend the Plan of Operation to include System requirements for reinsured carriers to provide their own audits. This Plan of Operation provision will serve as notice and explanation to reinsured carriers. The Board may also wish to consider tracking loss ratios for the reinsured carriers to help evaluate System performance. Department of Insurance Consider asking the Legislature to change the two-year, non-staggered terms for the Board of Directors to two- or three-year staggered terms. Under current statute, unless a Board member agrees to serve another term, a new Board is created every two years. Consider appointing a small carrier to the Board of Directors when a private-industry vacancy occurs. The five private-industry members currently serving the Board are from medium and large companies, but more small companies participate in the System.

December 11, 1996 The Honorable George W. Bush Governor of Texas Governor's Office State Capitol, Room E1.304 Austin, Texas 78701 Dear Governor Bush: The Texas Health Reinsurance System (System), effective September 1, 1995, is operating according to statute (V.T.C.S. Insurance Code, Article 26) and its Plan of Operation. It is governed by a Board of Directors (Board), whose nine members are appointed by the Commissioner of Insurance. In addition, the Board and the Department of Insurance (Department) have the necessary controls to ensure efficient and effective management of the System. No public funds are at risk in the System because it is financed by reinsurance premiums and carrier assessments, and the assessments do not qualify as offsets to premium taxes. As of September l, 1996, the System had 44 small-employer insurance carriers, with 18 group and 52 individual health plans reinsured (a total of 168 individuals). Our recommendations concerning the System are as follows: System Board of Directors Amend the Plan of Operation to include System requirements for reinsured carriers to provide their own audits. This Plan of Operation provision will serve as notice and explanation to reinsured carriers. The Board may also wish to consider tracking loss ratios for the reinsured carriers to help evaluate System performance. Department of Insurance Consider asking the Legislature to change the two-year, non-staggered terms for the Board of Directors to two- or three-year staggered terms. Under current statute, unless a Board member agrees to serve another term, a new Board is created every two years. Consider appointing a small carrier to the Board of Directors when a private-industry vacancy occurs. The five private-industry members currently serving the Board are from medium and large companies, but more small companies participate in the System.

December 11, 1996 The Honorable George W. Bush Governor of Texas Governor's Office State Capitol, Room E1.304 Austin, Texas 78701 Dear Governor Bush: The Texas Health Reinsurance System (System), effective September 1, 1995, is operating according to statute (V.T.C.S. Insurance Code, Article 26) and its Plan of Operation. It is governed by a Board of Directors (Board), whose nine members are appointed by the Commissioner of Insurance. In addition, the Board and the Department of Insurance (Department) have the necessary controls to ensure efficient and effective management of the System. No public funds are at risk in the System because it is financed by reinsurance premiums and carrier assessments, and the assessments do not qualify as offsets to premium taxes. As of September l, 1996, the System had 44 small-employer insurance carriers, with 18 group and 52 individual health plans reinsured (a total of 168 individuals). Our recommendations concerning the System are as follows: System Board of Directors Amend the Plan of Operation to include System requirements for reinsured carriers to provide their own audits. This Plan of Operation provision will serve as notice and explanation to reinsured carriers. The Board may also wish to consider tracking loss ratios for the reinsured carriers to help evaluate System performance. Department of Insurance Consider asking the Legislature to change the two-year, non-staggered terms for the Board of Directors to two- or three-year staggered terms. Under current statute, unless a Board member agrees to serve another term, a new Board is created every two years. Consider appointing a small carrier to the Board of Directors when a private-industry vacancy occurs. The five private-industry members currently serving the Board are from medium and large companies, but more small companies participate in the System.

OFFICE OF THE STATE AUDITOR
TWO COMMODORE PLAZA
206 EAST NINTH STREET, SUITE 1900
LAWRENCE F. ALWIN, CPA
AUSTIN, TEXAS 78701
State Auditor
December 11, 1996
The Honorable George W. Bush
Governor of Texas
Governor's Office
State Capitol, Room E1.304
Austin, Texas 78701
Dear Governor Bush:
The Texas Health Reinsurance System (System), effective September 1, 1995, is operating according
to statute (V.T.C.S. Insurance Code, Article 26) and its Plan of Operation. It is governed by a Board
of Directors (Board), whose nine members are appointed by the Commissioner of Insurance. In
addition, the Board and the Department of Insurance (Department) have the necessary controls to
ensure efficient and effective management of the System.
No public funds are at risk in the System because it is financed by reinsurance premiums and carrier
assessments, and the assessments do not qualify as offsets to premium taxes. As of September l,
1996, the System had 44 small-employer insurance carriers, with 18 group and 52 individual health
plans reinsured (a total of 168 individuals).
Our recommendations concerning the System are as follows:
System Board of Directors
Amend the Plan of Operation to include System requirements for reinsured carriers to provide their
own audits. This Plan of Operation provision will serve as notice and explanation to reinsured
carriers. The Board may also wish to consider tracking loss ratios for the reinsured carriers to help
evaluate System performance.
Department of Insurance
Consider asking the Legislature to change the two-year, non-staggered terms for the Board of
Directors to two- or three-year staggered terms. Under current statute, unless a Board member agrees
to serve another term, a new Board is created every two years.
Consider appointing a small carrier to the Board of Directors when a private-industry vacancy
occurs. The five private-industry members currently serving the Board are from medium and large
companies, but more small companies participate in the System.
SAO Report No. 97-021
P.O. BOX 12067 AUSTIN, TEXAS 78711-2067 l PHONE: (512) 479-4700 l FAX: (512) 479-4884 l INTERNET: AUDITOR@sao.state.tx.us

The Honorable George W. Bush
Governor of Texas
December 11, 1996
Page 2
Audit Objectives, Scope, and Methodology
The State Auditor’s review of the Texas Health Reinsurance System was conducted in accordance
with V.T.C.S. Insurance Code, Article 26.57(a). The audit objectives were to evaluate System
compliance with Texas statutes and its Plan of Operation and to identify any opportunities to
improve the efficient and effective operation by the Board of Directors and the Department of
Insurance. We did not review the administering carrier (third-party administrator) or the reinsured
carriers because they are already subject to independent audit.
To accomplish our audit objectives, we:
C
Reviewed Texas statutes and the System’s Plan of Operation
C
Reviewed documentary evidence provided by the Department and the administering carrier
C
Interviewed Board members and Department personnel
C
Conducted the review in accordance with Generally Accepted Government Auditing
Standards
The Board’s and the Department’s response to our report and acceptance of our recommendations
are attached.
We appreciate the cooperation of the Board of Directors and the Department of Insurance staff
during this audit. If you have questions or need additional information please call Barnie Gilmore,
Audit Manager, at (512) 479-4785.
Sincerely,
Lawrence F. Alwin, CPA
State Auditor
LFA/rmn
cc:
Mr. Elton Bomer, Commissioner of Insurance - Texas Department of Insurance
Mr. Bruce A. Bradley, Chair, Board of Directors - Texas Health Reinsurance System