VA needs more financial information in order to more closely supervise administration of invested funds.
Report No.: 7R1-B12-002
Date: October 23, 1996
Office of Inspector General
Washington DC 20420
Page
Memorandum to the Director, Insurance Service
(29) i
RESULTS AND RECOMMENDATION
VA needs more financial information from
The Insurer to more closely supervise
administration of invested funds 1
Conclusion 6
Recommendation 6
APPENDIXES
I OBJECTIVES, SCOPE AND
METHODOLOGY 9
II BACKGROUND 11
III MONETARY BENEFITS IN ACCORDANCE
WITH IG ACT AMENDMENTS 13
IV MEMORANDUM FROM THE UNDER SECRETARY
FOR BENEFITS 14
V FINAL REPORT DISTRIBUTION
17
Audit of Administration of Invested Funds for the Servicemen's
Group Life Insurance and Veterans' Group Life Insurance Programs
1. The Office of Inspector General conducted an audit of the
administration of invested funds for the Servicemen's Group Life
Insurance (SGLI) and Veterans' Group Life Insurance (VGLI) programs.
SGLI and VGLI are programs supervised by the Department of Veterans
Affairs (VA), Veterans Benefits Administration (VBA), and administered
by a major insurance company hereinafter referred to as The Insurer.
During Calendar Years (CYs) 1993 and 1994, The Insurer reported
$32 million and $40 million of program earnings from investments,
respectively. The purpose of the audit was to assess the accuracy,
reliability, and sufficiency of The Insurer's financial information
regarding SGLI and VGLI investment funds, and to determine whether
opportunities exist to enhance the management of invested funds.
This audit is one in a series of audits performed of the SGLI
and VGLI programs.
2. We concluded that more information needs to be obtained about
program financial operations to assess whether opportunities exist
for improvement. Our audit of the Insurer's financial records
and reports showed that:
3. Governing legislation and provisions of the group insurance policy did not require The Insurer to report this financial information to VA. However, its absence impeded VA management's ability to fully assess the accounting of invested funds and program reserves, and determine whether program investment earnings could be enhanced. As a result of the audit, The Insurer is considering a restoration of $3.8 million to invested assets and a reimbursement of lost income to the SGLI and VGLI programs' reserves of $3.2 million. The amounts of these reimbursements are subject to further review by Insurance Service management.
4. VBA insurance program management indicated that they were
aware of The Insurer's investment methodology and considered it
superior to other methods used in the insurance industry. However,
they were not informed of the source and use of invested program
funds, nor did they consider investment portfolio management as
an appropriate function within their program oversight. Management
did review reported rates of return credited to the SGLI and VGLI
programs in comparison to average rates reported by commercial
life insurance companies. Management also instituted independent
audits of certain segments of program administration. While these
assessments were useful in evaluating program adherence to industry-wide
practices and earnings, they did not address the potential for
increased earnings.
5. We recommend that the Director, Insurance Service, obtain
more information about program financial operations, and take
action to verify the accuracy of The Insurer's accounting of SGLI
and VGLI investment funds, to include:
6. The Under Secretary for Benefits concurred with the recommendation
and provided an acceptable implementation plan. He plans to obtain
additional financial information from The Insurer, review these
disclosures for opportunities to enhance program earnings, and
implement the other recommended improvements. We consider all
issues resolved and will follow up on the implementation of corrective
actions planned.
For the Assistant Inspector General for Auditing
[Signed]
THOMAS L. CARGILL, JR.
More financial information needs to be obtained about the Servicemen's
Group Life Insurance (SGLI) and the Veterans' Group Life Insurance
(VGLI) programs' financial operations to enable the Department
of Veterans Affairs (VA) to more closely supervise the administration
of invested funds. Our audit of the Insurer's financial records
and reports showed that:
Governing legislation and provisions of the group insurance policy
did not require The Insurer to report this financial information
to VA. However, its absence impeded VA management's ability to
fully assess the accounting of invested funds and program reserves,
and determine whether program investment earnings could be enhanced.
As a result of the audit, The Insurer is considering a restoration
of $3.8 million to invested assets and a reimbursement of lost
income to the SGLI and VGLI programs' reserves of $3.2 million.
The amounts of these reimbursements are subject to further review
by Insurance Service management.
Background
The SGLI and VGLI programs' group policy is the largest group
life policy underwritten by The Insurer. In policy year ended
June 30, 1993, the reserves held by The Insurer for the SGLI and
VGLI programs ($344 million) far exceeded those reserves held
for any other group policy. Policy reserves are
a measure of the value of obligations to policyholders. Most
assets held and invested by insurance companies support these
policy reserve liabilities. In addition to policy reserves, there
are other liabilities for taxes, licenses, fees, etc.
Title 38 U.S.C., Chapter 19, Subchapter III, requires The Insurer
to submit an annual accounting statement to VA. That statement
is to include the amounts of premiums actually accrued, the total
of all mortality and other claim charges, and the amounts of the
insurers' expense and risk charge. In addition, the group policy
requires The Insurer to report the amount of premiums returned
to VA, and the amount of interest added to the Contingency Reserve.
Neither Title 38 nor the provisions of the group policy provides
detailed guidance for VA's role of oversight in supervising The
Insurer's administration of the SGLI and VGLI programs' activities
or programs' reserves. The Insurer's responsibilities as program
administrator are based on the provisions of the above legislation,
which include receiving premium payments, paying death claims,
and submitting a Statement of Annual Accounting to VA. These
provisions are also articulated in the group life insurance policy
agreement with VA. The Insurer's custody and investment of reserves
and earnings are outlined in Article I, Section 7 of the policy,
which states that the contingency reserve shall bear interest
at a rate to be determined by The Insurer and approved by VA.
VA's selection of The Insurer, as prescribed in Title 38 U.S.C,
Chapter 19, Subchapter III, is based on certain business volume
and financial size thresholds, without mandatory adherence to
government procurement requirements. Title 38 also provides that
VA will approve prospective interest rates for crediting to the
contingency reserve, as being consistent with rates generally
used by The Insurer for similar funds held under other group life
insurance policies.
Investment Operations and Fund Transfers Were Not Reported
or Audited
Our review of The Insurer's financial records and reports indicated
that critical financial information, including deductions from
income and assets, was not reported to VA. Invested assets and
some reserves were not reported, nor were differences between
investments and reserves reconciled. Audits of these investment
operations were not performed, and provisions were not established
governing the insureds' program equity. Governing legislation
and provisions of the group insurance policy did not require The
Insurer to report this financial information to VA. However,
these information gaps impaired management's and the OIG's ability
to make sound assessments of investment performance and opportunities
to enhance earnings.
The Insurer routinely deducted investment management fees from
program investment income and did not inform VA. Although not
required to be reported, VA management should be informed of these
deductions as they directly affect program income. These fees
amounted to $1.3 million or 4 percent of reported earnings in
CY 1993, and $3.2 million or 8 percent of reported earnings in
CY 1994. Management fees represented internally allocated costs
of The Insurer for real estate transfer costs, investment company
salaries, rents, etc. These charges were deducted from earnings
reported to VA, but were not itemized as expenses or deductions
in any documents routinely provided to VA.
The Insurer's records indicated that a series of transfers occurred
during CYs 1991, 1993 and 1994. These transfers involved additions
to and deductions from the SGLI and VGLI programs' capital and
surplus account, amounted to $18.3 million, and were not reported
to VA. Additional funds may have been transferred in years prior
to CY 1991, which we did not review. In July 1995, we requested
the Insurer to explain these deductions, which were identified
as meeting various objectives including "dividends
to stockholders" and "interbranch
transfers". The Insurer's officials responded
that these transactions were transfers of surplus funds between
corporate accounts and SGLI and VGLI programs' funds. As a result
of the audit inquiry, The Insurer provided documentation regarding
a proposed estimated $3.8 million restoration of invested assets
and a $3.2 million reimbursement of lost income to the SGLI and
VGLI programs' reserves. These reimbursements are subject to
review and approval by VA.
Federal income taxes and capital asset losses were deducted from
program assets and not reported to VA. The Insurer routinely
deducted ordinary federal income tax (FIT) payments from program
invested assets, which amounted to $3.5 million in CY 1993 and
$.7 million in CY 1994. These taxes are commonly paid by life
insurance companies, and are computed by The Insurer's tax department
based on the proportion of SGLI and VGLI programs' earnings.
Although provisions for payment of FIT are included in the group
insurance policy (i.e. Article I, Section 7), they were not itemized
as deductions from program invested assets in any documents routinely
provided to VA for CY 1994 and previous years.
Losses from capital asset transactions were also deducted from
program assets, and not reported as such to VA. These capital
transactions amounted to a gain of $6 million in CY 1993 and a
net loss of $11.6 million in CY 1994 representing a net loss of
$5.6 million for the 2 years. Although amounts of capital gains
and losses were listed in a separate schedule in annual reports
submitted to VA, they were not shown as adjustments to invested
assets, as would be done in a cash flow statement.
The Insurer did not report the amounts of SGLI and VGLI programs'
assets invested and some amounts of program reserves to VA, or
reconcile differences in these funds. SGLI and VGLI program assets
are coinvested with other assets in The Insurer's group life and
health portfolio. The Insurer's overall corporate portfolio consists
of over 93 percent fixed income securities (e.g.
bonds) and less than 7 percent equities (e.g. common stocks).
An internal process, called the net cash available
process, is used to allocate investment income to various product
lines (e.g. group life) of The Insurer, including distribution
to the SGLI and VGLI programs. The Insurer did not periodically
inform VA management of the amount of SGLI and VGLI assets invested
($404.9 million and $564.7 million in CYs 1993 and 1994 respectively).
We found $78.6 million in reserves (13 percent of reserves) held
by The Insurer in CY 1995 which were not reported to VA in the
year-end financial reports. These reserves were held primarily
as "supplementary contracts" for future payments to
beneficiaries. Insurance Service officials were unsure of the
propriety of considering these funds as liabilities of the program
or The Insurer. They planned to clarify the issue with The Insurer.
There was also no reconciliation of differences between reserves
and invested assets. The Insurer disclosed there had been a $109
million overstatement of SGLI and VGLI invested assets for CY
1993 due to computer miscodings. This error remained unreported
for 2 years. We also observed an additional $55 million difference
between SGLI and VGLI programs' invested assets and reserves as
of December 31, 1993. The Insurer reconciled this difference
to within $2 million, but indicated it was not able to totally
reconcile this variance, since records prior to 1982 were not
readily available. This remaining variance between program assets
and reserves would have been resolved had a reconciliation been
routinely performed and reported to VA.
Audits of the SGLI and VGLI programs were initiated by program
officials in 1987, and focused on special interest issues, but
did not evaluate financial statements of condition or operations.
Three independent audits focused on restricted aspects of the
SGLI and VGLI programs' administration expenses which averaged
about 2 percent of invested assets. The remaining audit focused
on the conversion pool, which was about $44 million (6.8 percent
of assets invested in CY 1995). Audits of financial condition
and results of operations would better serve management in resolving
unreported deductions from program funds.
In summary, The Insurer's financial investment operations were not fully disclosed to VA for the SGLI and VGLI programs. VA management was not apprised of critical financial data including deductions from program funds, amounts of invested assets and segments of program reserves. Although these reporting omissions did not violate governing program requirements, they impeded VA management's ability to improve the financial operations of the SGLI and VGLI programs.
Provisions Were Not Established Governing The Insured's Program
Equity
We discussed with VA Insurance Service management what the residual
SGLI and VGLI insureds' equity would be in the event of program
dissolution or change of insurer. For example, at the end of
CY 1995, SGLI and VGLI programs' reserves totaled $608 million,
while invested assets totaled $630 million. Management was initially
uncertain of this residual equity amount. This question was also
not clarified in governing legislation or the group policy. After
discussing this matter with the Insurer, VA management agreed
that the insureds' equity would be the amount of existing reserves,
as distinguished from the amount of invested assets. Nevertheless,
clear, written documentation of this agreement is needed to avoid
potential conflict and litigation upon program dissolution or
change of insurer, and to resolve ownership of all program related
funds including those associated with "supplementary contracts"
as discussed above.
All Financial Information Was Not Available for Supervision
of the Program
While impeded from assessing several aspects of the programs'
financial investment operations, VA management determined that
earnings were comparable to those experienced in the insurance
industry. Insurance officials indicated they were aware of The
Insurer's investment methodology and considered it superior to
other methods used in the insurance industry. However, they were
not informed of the sources and use of invested program funds,
nor did they consider investment portfolio management as an appropriate
function within their program oversight.
VA insurance management judged program earnings as comparable
to the industry-wide average net rate of investment return for
commercial life insurance companies. According to management,
this comparison usually indicated the SGLI and VGLI rate of return
was about average, when compared to other U.S. life insurance
companies. This statistic is computed by the American Council
of Life Insurance, and involves 2,391 reserve life insurance companies.
As an indication of how representative this earnings statistic
is of the population of respective insurance companies (2,391),
we obtained the composite range of rates from the Program Director,
Statistical Research, American Council of Life Insurance. The
rate of investment return for individual companies in CY 1995
ranged from a loss of -54.6 percent of invested assets to a gain
of 289 percent of invested assets and, in our opinion, represented
a spectrum too broad to be an optimal measurement criterion.
As an alternative baseline for comparing investment return, we
analyzed earnings of the 14 largest American life insurance companies
which met minimum legislative criteria to administer the SGLI
and VGLI programs. Their average rate of return for CY 1994 (7.28
percent) was closely aligned with the SGLI and VGLI rate of return
(7.16 percent), representing an insignificant difference (.12
percent). A comparison for CY 1993 revealed similar results,
thus supporting the VA's conclusions regarding the comparability
of program and industry-wide earnings.
VA management was not able to assess the validity of all deductions
from program funds, as this information was not fully disclosed
to them by The Insurer. In addition, the basis used in calculating
the investment rate of return (i.e. average reserves or invested
assets) was also not reported to VA. We believe that additional
analysis of unreported deductions as well as the components used
in calculating the rate of return may provide further understanding
of reported earnings and the potential for enhanced program earnings.
Conclusion
We concluded that more information needs to be obtained about
program financial operations to assess whether opportunities exist
for improvement. While The Insurer fully complied with the contract
and all applicable legal provisions regarding financial reporting,
our audit showed that:
The absence of critical financial information impeded VA management's
ability to fully assess the accounting of invested funds and program
reserves, and determine whether program investment earnings could
be enhanced. As a result of the audit, The Insurer is considering
a restoration of $3.8 million to invested assets and a reimbursement
of $3.2 million of lost income to the SGLI and VGLI programs'
reserves. These amounts are subject to further review by Insurance
Service management.
Recommendation
We recommend that the Director, Insurance Service, obtain more
information about program financial operations, and take action
to verify the accuracy of The Insurer's accounting of SGLI and
VGLI investment funds, to include:
The monetary benefit associated with this recommendation is shown
in Appendix III, page 13.
Under Secretary for Benefits Comments
The Under Secretary for Benefits concurred with our findings and
recommendation. While noting that The Insurer has fully complied
with the terms of the contract and all applicable legal provisions
regarding financial reporting, he stated that they have agreed
to supply additional financial information and have done so for
Calendar Year 1995. He further stated that the financial information
provided by The Insurer was sufficient to allow effective program
management, which included increased SGLI and VGLI programs' coverage,
and revised premium scales for both programs.
However, he concurred with the need for expanding The Insurer's
financial disclosures, and stated that The Insurer has agreed
to provide a balance sheet and a statement of cash flows in addition
to the statement of program operations, and has furnished this
information for Calendar Year 1995. In addition, he indicated
having requested and received an investment exhibit disclosing
program investment expenses and rate of return information. Also,
he indicated plans to: have the accuracy of these financial presentations
audited annually, clarify the insureds' equity in program funds,
and review financial disclosures for opportunities to enhance
program earnings, without being involved in investment portfolio
decisions.
The Under Secretary for Benefits also stated that The Insurer's
report on erroneous transfers was being reviewed to confirm whether
the recommended funds restorations ($3.8 million) and reimbursements
($3.2 million) were both reasonable and equitable. (See Appendix
IV on pages 14 through 16 for the full text of the Under Secretary's
comments.)
Office of Inspector General Comments
The Under Secretary concurred with the recommendation and provided
an acceptable implementation plan. He plans to obtain additional
financial information from The Insurer, review these disclosures
for opportunities to enhance program earnings, implement annual
audits of these financial statements, clarify insureds' ownership
equity, and confirm whether reimbursements for erroneous interbranch
transfers of program funds are reasonable and equitable. The Under
Secretary reiterated statements by The Insurer's officials that
they have fully complied with the terms of the contract and all
applicable legal provisions regarding financial reporting. We
agree with this position and have revised segments of this report
to emphasize that the Insurer was fully compliant with governing
financial reporting requirements. We consider all issues resolved
and will follow-up on the implementation of corrective actions
planned.
Objectives
The purpose of this audit was to assess the accuracy, reliability,
and sufficiency of The Insurer's financial information regarding
SGLI and VGLI investment funds, and to determine whether opportunities
exist to enhance the management of invested funds. This audit
is one in a series of audits performed of the SGLI and VGLI programs.
Scope and Methodology
We audited SGLI and VGLI investment funds and related expenses,
the adequacy of investment earnings, and the insureds' equity
in invested assets and reserves. The reserves amounted to $347
million and $481 million in Policy Years ended June 30, 1993 and
1994, respectively.
We evaluated the propriety of deductions (e.g. investment expenses,
federal income taxes, and capital losses) by researching Title
38 United States Code, and the SGLI and VGLI group insurance policy.
We obtained and analyzed documents and reports concerning investment
related administrative expenses, federal income taxes, capital
losses, and transfers from SGLI and VGLI capital and surplus account.
We tested the reliability of The Insurer's reports by comparing
The Insurer's internal reports of expenses/deductions to reports
routinely provided to VA. We compared the investment earnings
of the SGLI and VGLI portfolio with the earnings of the life insurance
industry as a whole, and also with the 14 largest life insurers
in the United States. We contacted the American Council of Life
Insurance in Washington D.C., and obtained information concerning
rates of investment return. We reviewed The Insurer's 'net cash
available' method of allocating investment earnings, capital gains
and taxes.
We discussed these matters with responsible officials from The
Insurer, and The Insurer's investment company and tax department.
We also discussed program equity with VA insurance and The Insurer's
officials, and requested a reconciliation of SGLI and VGLI invested
assets with SGLI and VGLI programs' reserves.
The Insurer appointed the SGLI and VGLI financial manager as the
primary point of contact during the audit to receive requests
for information and provide explanations. This contact obtained
information from primary sources within the company, and provided
requested information to us. Because of The Insurer's concerns
about safeguarding proprietary information and processes, we were
not afforded open access to, and we did not examine, primary sources
of data, e.g. The Insurer's general ledger accounts, and the capital
and surplus account. Because of this limitation, and the level
of reporting omissions which we noted during our examination,
we are unable to provide assurance that we identified all material
transactions which impacted SGLI and VGLI programs' reserves during
the period of audit. Nevertheless, nothing came to our attention
that information was deliberately withheld. Also, we did not
perform actuarial studies to attest to the adequacy of the reserves.
The audit was conducted in accordance with generally accepted
government auditing standards.
The Department of Veterans Affairs (VA), Veterans Benefits Administration
(VBA), Regional Office and Insurance Center, at Philadelphia,
Pennsylvania, supervises the administration of two life insurance
programs by a major insurance company (The Insurer).
Effective September 29, 1965, the Uniformed Services-Group Life
Insurance Act (Public Law 89-214) established the Servicemen's
Group Life Insurance (SGLI) program, which provided up to $10,000
group life insurance to members on active duty in the uniformed
services (i.e., Army, Navy, Air Force, Marine Corps, Coast Guard,
Public Health Service, and the National Oceanic and Atmospheric
Administration). Over the years this coverage was broadened to
include certain National Guard and Reserve personnel, and increased
to the maximum amount of $200,000.
The Veterans' Group Life Insurance (VGLI) program was established
by the Veterans' Insurance Act of 1974 (Public Law 93-289) effective
August 1, 1974, and currently provides 5-year term coverage, renewable
for life, in amounts ranging from $10,000 to $200,000. This coverage
is available to all veterans separated from active duty but only
for an amount equal to or less than their terminating SGLI program
coverage. Beginning January 1, 1986, the VGLI program became
available to members of the Individual Ready Reserve and the Inactive
National Guard.
The SGLI program began and continues because service members were
unable to obtain life insurance from private companies with warfare
coverage at reasonable rates. Additionally, Congress intended
to provide insurance benefits to service members' survivors and
dependents especially during war time. The intent of the VGLI
program was to provide a low-cost life insurance policy to veterans
during their readjustment from military to civilian life. The
Insurer administers the two insurance programs based on the provisions
of a group policy held by VA. As of December 31, 1993, the SGLI
and VGLI programs represented about 3 million and 335,946 insureds,
respectively, with a face value of nearly $494.8 billion. Premiums
collected for CYs 1993 and 1994 were $498 million and $486 million,
respectively. Death claims incurred were $519 million for CY
1993 and $454 million for CY 1994.
The SGLI and VGLI programs' reserves are those amounts which,
together with future premiums and interest, are retained to pay
future claims. Thus, reserves are liabilities and represent obligations
to policyholders which stem from that portion of premiums not
used immediately to pay policy claims or expenses. Reserves held
for the SGLI and VGLI programs totaled $347 million
and $481 million in the Policy Years (PYs) ended June 30, 1993
and 1994, respectively. Some major components of reserves for
PY 1994 were: expected VGLI mortality costs reserve ($250 million),
reserve for pending SGLI and VGLI program death claims ($86 million),
and reserve for SGLI and VGLI programs' unreported death claims
($56 million). The SGLI and VGLI group policy specifies these
reserves will earn a minimum rate of return prospectively guaranteed
by The Insurer, and subject to an increase adjustment at year
end, depending on investment performance.
SGLI and VGLI programs' premiums and interest income, not immediately
used to pay claims and expenses, are invested by The Insurer's
subsidiary investment company to support reserve liabilities.
These investments are commingled with cash receipts from The
Insurer's other group life and health customers, and invested
primarily in fixed income securities. The Insurer's 'net cash
available' process allocates investment income, expenses, gains
and losses to various product lines (e.g. group life) of The Insurer,
including distribution to the SGLI and VGLI programs. Average
invested assets allocated to the SGLI and VGLI programs were $405
million and $565 million in CYs 1993 and 1994, respectively.
Net investment income earned on these assets was $32 million in
CY 1993 and $40 million in CY 1994.
REPORT TITLE: Audit of Administration
of Invested Funds for the Servicemen's Group Life Insurance and
Veterans' Group Life Insurance Programs
PROJECT NUMBER:
4R1-142
Recommendation Category/Explanation Better Use Questioned
Number of Benefits of Funds Costs
1 Improved Use of $3.8 million1
Resources. Insurer's
estimate of funds from
erroneous transfers to
be restored to invested
assets.
1 Potential Recovery. $3.2 million1
Insurer's estimate of
lost income to be
reimbursed to program
reserves.
1Insurer officials provided their analysis to VA after completion of our examination. These proposed reimbursements are subject to review and approval by VA.
Department of Veterans Affairs | Memorandum |
Date: September 20, 1996
From: Deputy Under Secretary for Benefits (201) Subj: Draft Report, Audit of Administration of Invested Funds for the
Servicemen's Group Life Insurance and Veterans' Group Life Insurance Programs
To: Assistant Inspector General for Auditing (52)
1. We have reviewed your draft report concerning the administration of invested funds for the Servicemen's Group Life Insurance (SGLI) and Veterans' Group Life Insurance (VGLI) programs. We concur with your findings and your recommendation, but would like to clarify and elaborate on a few points.
2. With regard to your recommendation, it should be noted that the Insurer has fully complied with the terms of the contract and all applicable legal provisions regarding financial reporting. For your information we have attached a copy of the Insurer's comments to us regarding your report. In their comments, they emphasize the point that they have been fully compliant with the group policy contract provisions. They have agreed to supply us with the additional financial information, and have already done so for calendar year 1995.
3. We would also like to put the scope of financial reporting into context. That is, in recent years the CFO Act and similar legislation has required increased financial disclosure and accountability. Nevertheless, the financial information provided by the Insurer has been sufficient to allow effective management of the program. In each year since the origin of the program, the Insurer has provided us with a Statement of Annual Accounting, as required under the contract. This is our primary source of financial information regarding program operations and program reserves. It has enabled us to effectively manage the financial operations of the SGLI and VGLI programs. In recent years, such management has included the quadrupling of SGLI coverage, the extension of the VGLI program from five year coverage to lifetime coverage, and the revision of premium scales for both the SGLI and VGLI programs. The Statement of Annual Accounting also includes an investment exhibit and a schedule of capital gains and losses since the origin of the program. | |
VA Form 2105
Mar 1989 |
2.
Assistant Inspector General for Auditing (52)
4. While the Statement of Annual Accounting has been the primary tool for the financial management of the group life insurance programs, we concur that it does not provide the extensive financial disclosure that the Comptroller General has required Government agencies to provide in their financial statements. As is the case for most annual report presentations, including our internal CFO statements, the statement of operations should also be accompanied by a balance sheet and a statement of cash flows. The Insurer has agreed to provide these statements and has furnished such for calendar year 1995. In addition, an investment exhibit disclosing program investment expenses and rate of return information has been requested and provided. We believe that the provision of these additional statements by the Insurer should satisfactorily address the first two findings in your report.
5. The third issue concerns the formal auditing of these financial statements and exhibits. We plan to address this issue by having the Insurer bring in an independent auditor to certify the accuracy of these financial presentations each year. The audit report also expressed concern that further written clarification is needed concerning the insureds' equity in program funds in the event of program dissolution or change of insurer. While we are confident that the Insurer and VBA officials had a clear understanding of this issue, we plan to provide such clarification as part of the next set of contractual revisions with the Insurer. In the meantime, we will pursue an exchange of letters of understanding with the Insurer so that written documentation of our agreement will be available.
6. With the additional financial disclosure that the Insurer has agreed to provide each year, we believe that we will be in a position to address that part of your recommendation that we review such information to determine whether opportunities exist to enhance program earnings. This additional reporting will better enable us to review program asset allocation, as well as changes to such allocation resulting from program operations, capital gains and losses, federal income taxes and credits, and investment management expenses. This type of review could lead to specific areas of investigation that may afford opportunities for improved program earnings. We want to clarify, however, that does not mean that Insurance program managers should or will be involved in investment portfolio decisions. We do not believe that is an appropriate function for program managers under the current statutory arrangement, which requires that the program's assets be invested similarly to the Insurer's other large group policies. |
3.
Assistant Inspector General for Auditing (52)
7. Regarding the final finding, on the guaranteed rate of return, although we agree that the Insurer did not disclose the basis of the guaranteed rate of return, we did not and do not consider that significant. In fact, we have a unique agreement with the Insurer that benefits servicemembers. Namely, instead of crediting the program with the guaranteed rate of return as they do with other group policies, the SGLI program receives the actual rate of return, which has always been higher than the conservatively calculated guaranteed rate of return.
8. The final portion of your recommendation concerned some erroneous transfers that were made by the Insurer from program allocated assets in recent years. The Insurer has investigated these transfers and has furnished us with a formal report of their findings. This report recommends a restoration of $3.8 million in allocated assets and a reimbursement to the program of $3.2 million of lost investment income that resulted from these errors. It appears that these figures are accurate and the Insurer has agreed to the restoration and reimbursement. We are now reviewing these findings to confirm that their resolution of this matter is both reasonable and equitable.
9. We appreciate your interest on behalf of the group life insurance programs. Questions may be referred to Mr. Paul Koons, Assistant Director for Insurance, telephone (215) 381-3029. [Signed]
Stephen L. Lemons
Attachment |
VA Distribution
Secretary (00)
General Counsel (02)
Under Secretary for Benefits (20A11)
Assistant Secretary for Management (004)
Assistant Secretary for Policy and Planning (008)
Chief Financial Officer (24)
Deputy Assistant Secretary for Congressional Affairs (60)
Deputy Assistant Secretary for Public Affairs (80)
Director, Office of Management Controls (004B)
Director, Insurance Service (29)
Non-VA Distribution
Office of Management and Budget
U.S. General Accounting Office
Congressional Committees:
Chairman, Senate Committee on Governmental Affairs
Senate Ranking Minority Member, Committee on Governmental Affairs
Chairman, Senate Committee on Veterans' Affairs
Senate Ranking Minority Member, Committee on Veterans' Affairs
Chairman, Senate Committee on Appropriations
Chairman, House Committee on Appropriations
Chairman, Subcommittee on VA, HUD, and Independent Agencies, Senate Committee
on Appropriations
Senate Ranking Minority Member, Subcommittee on VA, HUD, and Independent
Agencies, Committee on Appropriations
Chairman, House Committee on Government Reform and Oversight
House Ranking Minority Member, Committee on Government Reform and Oversight
Chairman, House Committee on Veterans' Affairs
House Ranking Minority Member, Committee on Veterans' Affairs