|
|
|
A BILL TO BE ENTITLED
|
|
AN ACT
|
|
relating to independent audits of insurer financial statements and |
|
insurer internal controls. |
|
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: |
|
SECTION 1. Section 401.001, Insurance Code, is amended by |
|
adding Subdivisions (2-a), (2-b), (4-a), (4-b), (6), (7), (8), and |
|
(9) and amending Subdivision (4) to read as follows: |
|
(2-a) "Audit committee" means a committee established |
|
by the board of directors of an entity for the purpose of overseeing |
|
the accounting and financial reporting processes of an insurer or |
|
group of insurers and auditing financial statements of the insurer |
|
or group of insurers. At the election of the controlling person, |
|
the audit committee of an entity that controls a group of insurers |
|
may be the audit committee for one or more of the controlled |
|
insurers solely for the purposes of this subchapter. If an audit |
|
committee is not designated by the insurer, the insurer's entire |
|
board of directors constitutes the audit committee. |
|
(2-b) "Group of insurers" means those authorized |
|
insurers included in the reporting requirements of Chapter 823, or |
|
a set of insurers as identified by management, for the purpose of |
|
assessing the effectiveness of internal control over financial |
|
reporting. |
|
(4) "Insurer" means an insurer authorized to engage in |
|
business in this state, including: |
|
(A) a life, health, or accident insurance |
|
company; |
|
(B) a fire and marine insurance company; |
|
(C) a general casualty company; |
|
(D) a title insurance company; |
|
(E) a fraternal benefit society; |
|
(F) a mutual life insurance company; |
|
(G) a local mutual aid association; |
|
(H) a statewide mutual assessment company; |
|
(I) a mutual insurance company other than a |
|
mutual life insurance company; |
|
(J) a farm mutual insurance company; |
|
(K) a county mutual insurance company; |
|
(L) a Lloyd's plan; |
|
(M) a reciprocal or interinsurance exchange; |
|
(N) a group hospital service corporation; |
|
(O) a stipulated premium company; [and] |
|
(P) a nonprofit legal services corporation; and |
|
(Q) a health maintenance organization. |
|
(4-a) "Internal control over financial reporting" |
|
means a process implemented by an entity's board of directors, |
|
management, and other personnel designed to provide reasonable |
|
assurance regarding the reliability of the entity's financial |
|
statements. The term includes policies and procedures that: |
|
(A) relate to the maintenance of records that, in |
|
reasonable detail, accurately and fairly reflect the transactions |
|
and dispositions of assets; |
|
(B) provide reasonable assurance that: |
|
(i) transactions are recorded as necessary |
|
to permit preparation of the financial statements; and |
|
(ii) receipts and expenditures are made |
|
only in accordance with authorizations of management and directors; |
|
and |
|
(C) provide reasonable assurance regarding |
|
prevention or timely detection of unauthorized acquisition, use, or |
|
disposition of assets that could have a material effect on the |
|
financial statements. |
|
(4-b) "Management" means the management of an insurer |
|
or group of insurers subject to this subchapter. |
|
(6) "SEC" means the United States Securities and |
|
Exchange Commission. |
|
(7) "Section 404" means Section 404, Sarbanes-Oxley |
|
Act of 2002 (15 U.S.C. Section 7262), and rules adopted under that |
|
section. |
|
(8) "Section 404 report" means management's report on |
|
internal control over financial reporting as determined by the SEC |
|
and the related attestation report of an accountant. |
|
(9) "SOX-compliant entity" means an entity that is |
|
required to comply with or voluntarily complies with: |
|
(A) the preapproval requirements provided by 15 |
|
U.S.C. Section 78j-1(i); |
|
(B) the audit committee independence |
|
requirements provided by 15 U.S.C. Section 78j-1(m)(3); and |
|
(C) the internal control over financial |
|
reporting requirements provided by 15 U.S.C. Section 7262(b) and |
|
Item 308, SEC Regulation S-K. |
|
SECTION 2. Sections 401.002, 401.003, and 401.004, |
|
Insurance Code, are amended to read as follows: |
|
Sec. 401.002. PURPOSE OF SUBCHAPTER. The purpose of this |
|
subchapter is to: |
|
(1) require an annual audit by an independent |
|
certified public accountant of the financial statements reporting |
|
the financial condition and the results of operations of each |
|
insurer; |
|
(2) require communication of internal control related |
|
matters noted in an audit; and |
|
(3) require management to report on internal control |
|
over financial reporting [or health maintenance organization]. |
|
Sec. 401.003. EFFECT OF SUBCHAPTER ON AUTHORITY TO EXAMINE. |
|
This subchapter does not limit the commissioner's authority to |
|
order or the department's authority to conduct an examination of an |
|
insurer [or health maintenance organization] under this code or the |
|
commissioner's rules. |
|
Sec. 401.004. FILING AND EXTENSIONS FOR FILING OF AUDITED |
|
FINANCIAL REPORT. (a) Unless exempt under Section 401.006, |
|
401.007, or 401.008 and except as otherwise provided by Sections |
|
401.005 and 401.016, an insurer [or health maintenance
|
|
organization] shall: |
|
(1) have an annual audit performed by an accountant; |
|
and |
|
(2) file with the commissioner on or before June 30 an |
|
audited financial report for the preceding calendar year. |
|
(b) The commissioner may require an insurer [or health
|
|
maintenance organization] to file an audited financial report on a |
|
date that precedes June 30. The commissioner must notify the |
|
insurer [or health maintenance organization] of the filing date not |
|
later than the 90th day before that date. |
|
(c) An insurer [or health maintenance organization] may |
|
request an extension of the filing date by submitting the request in |
|
writing before the 10th day preceding the filing date. The request |
|
must include sufficient detail for the commissioner to make an |
|
informed decision on the requested extension. The commissioner |
|
may extend the filing date for one or more 30-day periods if the |
|
commissioner determines that there is good cause for the extension |
|
based on a showing by the insurer [or health maintenance
|
|
organization] and the insurer's [or health maintenance
|
|
organization's] accountant of the reasons for requesting the |
|
extension. An extension granted under this subsection also applies |
|
to the filing of management's report on internal control over |
|
financial reporting. |
|
(d) An insurer required to file an annual audited financial |
|
report under this subchapter shall designate a group of individuals |
|
to serve as its audit committee. The audit committee of an entity |
|
that controls an insurer may, at the election of the controlling |
|
person, be the insurer's audit committee for purposes of this |
|
subchapter. |
|
SECTION 3. The heading to Section 401.005, Insurance Code, |
|
is amended to read as follows: |
|
Sec. 401.005. ALTERNATIVE FILING FOR CANADIAN OR BRITISH |
|
INSURERS [OR HEALTH MAINTENANCE ORGANIZATIONS]. |
|
SECTION 4. Section 401.005(a), Insurance Code, is amended |
|
to read as follows: |
|
(a) Instead of the audited financial report required by |
|
Section 401.004, an insurer [or health maintenance organization] |
|
domiciled in Canada or the United Kingdom may file the insurer's [or
|
|
health maintenance organization's] annual statement of total |
|
business on the form filed by the insurer [or health maintenance
|
|
organization] with the appropriate regulatory authority in the |
|
country of domicile. The statement must be audited by an |
|
independent accountant chartered in the country of domicile. |
|
SECTION 5. Section 401.006, Insurance Code, is amended to |
|
read as follows: |
|
Sec. 401.006. EXEMPTION FOR CERTAIN SMALL INSURERS [AND
|
|
HEALTH MAINTENANCE ORGANIZATIONS]. (a) An insurer [or health
|
|
maintenance organization] that has less than $1 million in direct |
|
premiums written in this state during a calendar year is exempt from |
|
the requirement to file an audited financial report if the insurer |
|
[or health maintenance organization] submits an affidavit, made |
|
under oath by one of the insurer's [or health maintenance
|
|
organization's] officers, that specifies the amount of direct |
|
premiums written in this state during that period. |
|
(b) Notwithstanding Subsection (a), the commissioner may |
|
require an insurer [or health maintenance organization], other than |
|
a fraternal benefit society that does not have any direct premiums |
|
written in this state for accident and health insurance during a |
|
calendar year, to comply with this subchapter if the commissioner |
|
finds that the insurer's [or health maintenance organization's] |
|
compliance is necessary for the commissioner to fulfill the |
|
commissioner's statutory responsibilities. |
|
(c) An insurer [or health maintenance organization] that |
|
has assumed premiums of at least $1 million under reinsurance |
|
agreements is not exempt under Subsection (a). |
|
SECTION 6. The heading to Section 401.007, Insurance Code, |
|
is amended to read as follows: |
|
Sec. 401.007. EXEMPTION FOR CERTAIN FOREIGN OR ALIEN |
|
INSURERS [OR HEALTH MAINTENANCE ORGANIZATIONS]. |
|
SECTION 7. Sections 401.007(a) and (b), Insurance Code, are |
|
amended to read as follows: |
|
(a) A foreign or alien insurer [or health maintenance
|
|
organization] that files an audited financial report in another |
|
state in accordance with that state's requirements for audited |
|
financial reports may be exempt from filing a report under this |
|
subchapter if the commissioner finds that the other state's |
|
requirements are substantially similar to the requirements |
|
prescribed by this subchapter. |
|
(b) An insurer [or health maintenance organization] exempt |
|
under this section shall file with the commissioner a copy of: |
|
(1) the audited financial report, the report on |
|
significant deficiencies in internal controls, and the |
|
accountant's letter of qualifications filed with the other state; |
|
and |
|
(2) any notification of adverse financial conditions |
|
report filed with the other state. |
|
SECTION 8. Section 401.008, Insurance Code, is amended to |
|
read as follows: |
|
Sec. 401.008. HARDSHIP EXEMPTION. (a) An insurer [or
|
|
health maintenance organization] that is not eligible for an |
|
exemption under Section 401.006 or 401.007 may apply to the |
|
commissioner for a hardship exemption. |
|
(b) Subject to Subsection (c), the commissioner may grant an |
|
exemption under this section if the commissioner finds, after |
|
reviewing the application, that compliance with this subchapter |
|
would constitute a severe financial or organizational hardship for |
|
the insurer [or health maintenance organization]. The |
|
commissioner may grant the exemption at any time for one or more |
|
specified periods. |
|
(c) The commissioner may not grant an exemption under this |
|
section if: |
|
(1) the exemption would diminish the department's |
|
ability to monitor the financial condition of the insurer [or
|
|
health maintenance organization]; or |
|
(2) the insurer [or health maintenance organization]: |
|
(A) during the five-year period preceding the |
|
date the application for the exemption is made: |
|
(i) has been placed under supervision, |
|
conservatorship, or receivership; |
|
(ii) has undergone a change in control, as |
|
described by Section 823.005; or |
|
(iii) has been subject to a significant |
|
number of complaints, as determined by the commissioner; |
|
(B) has been identified by the department as |
|
troubled; |
|
(C) has been or is the subject of a disciplinary |
|
action by the department; or |
|
(D) is not complying with the law or with a rule |
|
adopted by the commissioner. |
|
SECTION 9. Sections 401.009(a), (b), and (c), Insurance |
|
Code, are amended to read as follows: |
|
(a) An audited financial report required under Section |
|
401.004 must: |
|
(1) describe the financial condition of the insurer |
|
[or health maintenance organization] as of the end of the most |
|
recent calendar year and the results of the insurer's [or health
|
|
maintenance organization's] operations, changes in financial |
|
position, and changes in capital and surplus for that year; |
|
(2) conform to the statutory accounting practices |
|
prescribed or otherwise permitted by the insurance regulator in the |
|
insurer's [or health maintenance organization's] state of domicile; |
|
and |
|
(3) include: |
|
(A) the report of an accountant; |
|
(B) a balance sheet that reports admitted assets, |
|
liabilities, capital, and surplus; |
|
(C) a statement of gain or loss from operations; |
|
(D) a statement of cash flows; |
|
(E) a statement of changes in capital and |
|
surplus; |
|
(F) any notes to financial statements; |
|
(G) supplementary data and information, |
|
including any additional data or information required by the |
|
commissioner; and |
|
(H) information required by the department to |
|
conduct the insurer's [or health maintenance organization's] |
|
examination under Subchapter B. |
|
(b) The notes to financial statements required by |
|
Subsection (a)(3)(F) must include: |
|
(1) a reconciliation of any differences between the |
|
audited statutory financial statements and the annual statements |
|
filed under this code, with a written description of the nature of |
|
those differences; |
|
(2) any notes required by the appropriate National |
|
Association of Insurance Commissioners annual statement |
|
instructions or by generally accepted accounting principles; and |
|
(3) a summary of the ownership of the insurer [or
|
|
health maintenance organization] and that entity's relationship to |
|
any affiliated company. |
|
(c) An insurer [or health maintenance organization] |
|
required under Section 401.004 to file an audited financial report |
|
that does not retain an independent certified public accountant to |
|
perform an annual audit for the previous year may not be required to |
|
include in the report audited statements of operations, cash flows, |
|
or changes in capital and surplus for the first year. The insurer |
|
[or health maintenance organization] must include those statements |
|
in the first-year report and label the statements as |
|
unaudited. The insurer [or health maintenance organization] must |
|
include in the first-year report all other reports described by |
|
Section 401.004. |
|
SECTION 10. Section 401.010, Insurance Code, is amended to |
|
read as follows: |
|
Sec. 401.010. REQUIREMENTS FOR FINANCIAL STATEMENTS IN |
|
AUDITED FINANCIAL REPORT. (a) An accountant must audit the |
|
financial reports provided by an insurer [or health maintenance
|
|
organization] for purposes of an audit under this subchapter. The |
|
accountant who audits the reports must conduct the audit in |
|
accordance with generally accepted auditing standards or with |
|
standards adopted by the Public Company Accounting Oversight Board, |
|
as applicable, and must consider the standards specified in the |
|
Financial Condition Examiner's Handbook adopted by the National |
|
Association of Insurance Commissioners or other analogous |
|
nationally recognized standards adopted by commissioner rule. |
|
(a-1) In accordance with "Consideration of Internal Control |
|
in a Financial Statement Audit," AU Section 319, Professional |
|
Standards of the American Institute of Certified Public |
|
Accountants, the accountant shall obtain an understanding of |
|
internal control sufficient to plan the audit. To the extent |
|
required by AU Section 319, for those insurers required to file a |
|
management's report of internal control over financial reporting |
|
under Section 401.024, the accountant shall consider the most |
|
recently available report in planning and performing the audit of |
|
the statutory financial statements. In this subsection, "consider" |
|
has the meaning assigned by Statement on Auditing Standards No. |
|
102, "Defining Professional Requirements in Statements on Auditing |
|
Standards," or a successor document. |
|
(b) The financial statements included in the audited |
|
financial report must be prepared in a form and using language and |
|
groupings substantially the same as those of the relevant sections |
|
of the insurer's [or health maintenance organization's] annual |
|
statement filed with the commissioner. Beginning in the second |
|
year in which an insurer [or health maintenance organization] is |
|
required to file an audited financial report, the financial |
|
statements must also be comparative, presenting the amounts as of |
|
December 31 of the reported year and the amounts as of December 31 |
|
of the preceding year. |
|
SECTION 11. Section 401.011, Insurance Code, is amended by |
|
amending Subsections (a), (b), and (c) and adding Subsections |
|
(c-1), (e), (f), (g), (h), (i), (j), (k), (l), and (m) to read as |
|
follows: |
|
(a) Except as provided by Subsections (c), [and] (d), (e), |
|
(f), (g), and (l), the commissioner shall accept an audited |
|
financial report from an independent certified public accountant or |
|
accounting firm that: |
|
(1) is a member in good standing of the American |
|
Institute of Certified Public Accountants and is in good standing |
|
with all states in which the accountant or firm is licensed to |
|
practice, as applicable; and |
|
(2) conforms to the American Institute of Certified |
|
Public Accountants Code of Professional Conduct and to the rules of |
|
professional conduct and other rules of the Texas State Board of |
|
Public Accountancy or a similar code. |
|
(b) If the insurer [or health maintenance organization] is |
|
domiciled in Canada, the commissioner shall accept an audited |
|
financial report from an accountant chartered in Canada. If the |
|
insurer [or health maintenance organization] is domiciled in Great |
|
Britain, the commissioner shall accept an audited financial report |
|
from an accountant chartered in Great Britain. |
|
(c) A lead partner or other person responsible for rendering |
|
a report for an insurer [or health maintenance organization] for |
|
five [seven] consecutive years may not, during the five-year |
|
[two-year] period after that fifth [seventh] year, render a report |
|
for the insurer [or health maintenance organization] or for a |
|
subsidiary or affiliate of the insurer [or health maintenance
|
|
organization] that is engaged in the business of insurance. On |
|
application made at least 30 days before the end of the calendar |
|
year, the [The] commissioner may determine that the limitation |
|
provided by this subsection does not apply to an accountant for a |
|
particular insurer [or health maintenance organization] if the |
|
insurer [or health maintenance organization] demonstrates to the |
|
satisfaction of the commissioner that the limitation's application |
|
to the insurer [or health maintenance organization] would be unfair |
|
because of unusual circumstances. In making the determination, |
|
the commissioner may consider: |
|
(1) the number of partners or individuals the |
|
accountant employs, the expertise of the partners or individuals |
|
the accountant employs, or the number of the accountant's insurance |
|
clients; |
|
(2) the premium volume of the insurer [or health
|
|
maintenance organization]; and |
|
(3) the number of jurisdictions in which the insurer |
|
[or health maintenance organization] engages in business. |
|
(c-1) On filing its annual statement, an insurer for which |
|
the commissioner has approved an exception under Subsection (c) |
|
shall file the approval with the states in which it is doing or is |
|
authorized to do business and with the National Association of |
|
Insurance Commissioners. If a state other than this state accepts |
|
electronic filing with the National Association of Insurance |
|
Commissioners, the insurer shall file the approval in an electronic |
|
format acceptable to the National Association of Insurance |
|
Commissioners. |
|
(e) In providing services, the accountant shall not |
|
function in the role of management, audit the accountant's own |
|
work, or serve in an advocacy role for the insurer. |
|
(f) The commissioner may not recognize as qualified an |
|
accountant, or accept an annual audited financial report that was |
|
prepared wholly or partly by an accountant, who provides an insurer |
|
at the time of the audit: |
|
(1) bookkeeping or other services related to the |
|
accounting records or financial statements of the insurer; |
|
(2) services related to financial information systems |
|
design and implementation; |
|
(3) appraisal or valuation services, fairness |
|
opinions, or contribution-in-kind reports; |
|
(4) actuarially oriented advisory services involving |
|
the determination of amounts recorded in the financial statements; |
|
(5) internal audit outsourcing services; |
|
(6) management or human resources services; |
|
(7) broker or dealer, investment adviser, or |
|
investment banking services; |
|
(8) legal services or other expert services unrelated |
|
to the audit; or |
|
(9) any other service that the commissioner determines |
|
to be inappropriate. |
|
(g) Notwithstanding Subsection (f)(4), an accountant may |
|
assist an insurer in understanding the methods, assumptions, and |
|
inputs used in the determination of amounts recorded in the |
|
financial statement if it is reasonable to believe that the |
|
advisory service will not be the subject of audit procedures during |
|
an audit of the insurer's financial statements. An accountant's |
|
actuary may also issue an actuarial opinion or certification on an |
|
insurer's reserves if: |
|
(1) the accountant or the accountant's actuary has not |
|
performed management functions or made any management decisions; |
|
(2) the insurer has competent personnel, or engages a |
|
third-party actuary, to estimate the reserves for which management |
|
takes responsibility; and |
|
(3) the accountant's actuary tests the reasonableness |
|
of the reserves after the insurer's management has determined the |
|
amount of the reserves. |
|
(h) An insurer that has direct written and assumed premiums |
|
of less than $100 million in any calendar year may request an |
|
exemption from the requirements of Subsection (f) by filing with |
|
the commissioner a written statement explaining why the insurer |
|
should be exempt. The commissioner may grant the exemption if the |
|
commissioner finds that compliance with Subsection (f) would impose |
|
an undue financial or organizational hardship on the insurer. |
|
(i) An accountant who performs an audit may perform nonaudit |
|
services, including tax services, that are not described in |
|
Subsection (f) or that do not conflict with Subsection (e) only if |
|
the activity is approved in advance by the audit committee in |
|
accordance with Subsection (j). |
|
(j) The audit committee must approve in advance all auditing |
|
services and nonaudit services that an insurer's accountant |
|
provides to the insurer. The prior approval requirement is waived |
|
with respect to nonaudit services if the insurer is a SOX-compliant |
|
entity or a direct or indirect wholly owned subsidiary of a |
|
SOX-compliant entity or: |
|
(1) the aggregate amount of all nonaudit services |
|
provided to the insurer is not more than five percent of the total |
|
amount of fees paid by the insurer to its accountant during the |
|
fiscal year in which the nonaudit services are provided; |
|
(2) the services were not recognized by the insurer at |
|
the time of the engagement to be nonaudit services; and |
|
(3) the services are promptly brought to the attention |
|
of the audit committee and approved before the completion of the |
|
audit by the audit committee or by one or more members of the audit |
|
committee who are the members of the board of directors to whom the |
|
audit committee has delegated authority to grant approvals. |
|
(k) The audit committee may delegate to one or more |
|
designated members of the audit committee the authority to grant |
|
the prior approval required by Subsection (i). The decisions of any |
|
member to whom this authority is delegated shall be presented to the |
|
full audit committee at each of its scheduled meetings. |
|
(l) The commissioner may not recognize an accountant as |
|
qualified for a particular insurer if a member of the board, the |
|
president, chief executive officer, controller, chief financial |
|
officer, chief accounting officer, or any person serving in an |
|
equivalent position for the insurer, was employed by the |
|
accountant and participated in the audit of that insurer during the |
|
one-year period preceding the date on which the most current |
|
statutory opinion is due. This subsection applies only to partners |
|
and senior managers involved in the audit. An insurer may apply to |
|
the commissioner for an exemption from the requirements of this |
|
subsection on the basis of unusual circumstances. |
|
(m) The insurer shall file, with its annual statement |
|
filing, the approval of an exemption granted under Subsection (h) |
|
or (l) with the states in which it does or in which it is authorized |
|
to do business and the National Association of Insurance |
|
Commissioners. If a state other than this state in which the insurer |
|
does or in which it is authorized to do business accepts electronic |
|
filing, the insurer shall file the approval in an electronic format |
|
acceptable to the National Association of Insurance Commissioners. |
|
SECTION 12. Section 401.012, Insurance Code, is amended to |
|
read as follows: |
|
Sec. 401.012. HEARING ON ACCOUNTANT QUALIFICATIONS; |
|
REPLACEMENT OF ACCOUNTANT. The commissioner may hold a hearing to |
|
determine if an accountant is qualified and independent. If, after |
|
considering the evidence presented, the commissioner determines |
|
that an accountant is not qualified and independent for purposes of |
|
expressing an opinion on the financial statements in an audited |
|
financial report filed under this subchapter, the commissioner |
|
shall issue an order directing the insurer [or health maintenance
|
|
organization] to replace the accountant with a qualified and |
|
independent accountant. |
|
SECTION 13. Section 401.013(a), Insurance Code, is amended |
|
to read as follows: |
|
(a) The audited financial report required under Section |
|
401.004 must be accompanied by a letter provided by the accountant |
|
who performed the audit stating: |
|
(1) the accountant's general background and |
|
experience; |
|
(2) the experience of each individual assigned to |
|
prepare the audit in auditing insurers [or health maintenance
|
|
organizations] and whether the individual is an independent |
|
certified public accountant; and |
|
(3) that the accountant: |
|
(A) is properly licensed by an appropriate state |
|
licensing authority, is a member in good standing of the American |
|
Institute of Certified Public Accountants, and is otherwise |
|
qualified under Section 401.011; |
|
(B) is independent from the insurer [or health
|
|
maintenance organization] and conforms to the standards of the |
|
profession contained in the American Institute of Certified Public |
|
Accountants Code of Professional Conduct, the statements of that |
|
institute, and the rules of professional conduct adopted by the |
|
Texas State Board of Public Accountancy, or a similar code; |
|
(C) understands that: |
|
(i) the audited financial report and the |
|
accountant's opinion on the report will be filed in compliance with |
|
this subchapter; and |
|
(ii) the commissioner will rely on the |
|
report and opinion in monitoring and regulating the insurer's [or
|
|
health maintenance organization's] financial position; and |
|
(D) consents to the requirements of Section |
|
401.020 and agrees to make the accountant's work papers available |
|
for review by the department or the department's designee. |
|
SECTION 14. Sections 401.014(a) and (b), Insurance Code, |
|
are amended to read as follows: |
|
(a) Not later than December 31 of the calendar year to be |
|
covered by an audited financial report required by this subchapter, |
|
an insurer [or health maintenance organization] must register in |
|
writing with the commissioner the name and address of the |
|
accountant retained to prepare the report. |
|
(b) The insurer [or health maintenance organization] must |
|
include with the registration a statement signed by the accountant: |
|
(1) indicating that the accountant is aware of the |
|
requirements of this subchapter and of the rules of the insurance |
|
department of the insurer's [or health maintenance organization's] |
|
state of domicile that relate to accounting and financial matters; |
|
and |
|
(2) affirming that the accountant will express the |
|
accountant's opinion on the financial statements in terms of the |
|
statements' conformity to the statutory accounting practices |
|
prescribed or otherwise permitted by the insurance department |
|
described by Subdivision (1) and specifying any exceptions the |
|
accountant believes are appropriate. |
|
SECTION 15. Sections 401.015(a), (b), and (d), Insurance |
|
Code, are amended to read as follows: |
|
(a) If an accountant who signed an audited financial report |
|
for an insurer [or health maintenance organization] resigns as |
|
accountant for the insurer [or health maintenance organization] or |
|
is dismissed by the insurer [or health maintenance organization] |
|
after the report is filed, the insurer [or health maintenance
|
|
organization] shall notify the department not later than the fifth |
|
business day after the date of the resignation or dismissal. |
|
(b) Not later than the 10th business day after the date the |
|
insurer [or health maintenance organization] notifies the |
|
department under Subsection (a), the insurer [or health maintenance
|
|
organization] shall file a written statement with the commissioner |
|
advising the commissioner of any disagreements between the |
|
accountant and the insurer's [or health maintenance organization's] |
|
personnel responsible for presenting the insurer's [or health
|
|
maintenance organization's] financial statements that: |
|
(1) relate to accounting principles or practices, |
|
financial statement disclosure, or auditing scope or procedures; |
|
(2) occurred during the 24 months preceding the date |
|
of the resignation or dismissal; and |
|
(3) would have caused the accountant to note the |
|
disagreement in connection with the audited financial report if the |
|
disagreement were not resolved to the satisfaction of the |
|
accountant. |
|
(d) The insurer [or health maintenance organization] shall |
|
file with the statement required by Subsection (b) a letter signed |
|
by the accountant stating whether the accountant agrees with the |
|
insurer's [or health maintenance organization's] statement and, if |
|
not, the reasons why the accountant does not agree. If the |
|
accountant fails to provide the letter, the insurer [or health
|
|
maintenance organization] shall file with the commissioner a copy |
|
of a written request to the accountant for the letter. |
|
SECTION 16. Sections 401.016 and 401.017, Insurance Code, |
|
are amended to read as follows: |
|
Sec. 401.016. AUDITED COMBINED OR CONSOLIDATED FINANCIAL |
|
STATEMENTS. (a) An insurer [or health maintenance organization] |
|
described by Section 401.001 [401.001(3) or (4)] that is required |
|
to file an audited financial report under this subchapter may apply |
|
in writing to the commissioner for approval to file audited |
|
combined or consolidated financial statements instead of separate |
|
audited financial reports if the insurer [or health maintenance
|
|
organization]: |
|
(1) is part of a group of insurers [or health
|
|
maintenance organizations] that uses a pooling arrangement or 100 |
|
percent reinsurance agreement that affects the solvency and |
|
integrity of the insurer's [or health maintenance organization's] |
|
reserves; and |
|
(2) cedes all of the insurer's [or health maintenance
|
|
organization's] direct and assumed business to the pool. |
|
(b) An insurer [or health maintenance organization] must |
|
file an application under Subsection (a) not later than December 31 |
|
of the calendar year for which the audited combined or consolidated |
|
financial statements are to be filed. |
|
(c) An insurer [or health maintenance organization] that |
|
receives approval from the commissioner under this section shall |
|
file a columnar combining or consolidating worksheet for the |
|
audited combined or consolidated financial statements that |
|
includes: |
|
(1) the amounts shown on the audited combined or |
|
consolidated financial statements; |
|
(2) the amounts for each insurer [or health
|
|
maintenance organization] stated separately; |
|
(3) the noninsurance operations shown on a combined or |
|
individual basis; |
|
(4) explanations of consolidating and eliminating |
|
entries; and |
|
(5) a reconciliation of any differences between the |
|
amounts shown in the individual insurer [or health maintenance
|
|
organization] columns of the worksheet and comparable amounts shown |
|
on the insurer's [or health maintenance organization's] annual |
|
statements. |
|
(d) An insurer [or health maintenance organization] that |
|
does not receive approval from the commissioner to file audited |
|
combined or consolidated financial statements for the insurer [or
|
|
health maintenance organization] and any of the insurer's [or
|
|
health maintenance organization's] subsidiaries or affiliates |
|
shall file a separate audited financial report. |
|
Sec. 401.017. NOTICE OF ADVERSE FINANCIAL CONDITION OR |
|
MISSTATEMENT OF FINANCIAL CONDITION. (a) An insurer [or health
|
|
maintenance organization] required to file an audited financial |
|
report under this subchapter shall require the insurer's [or health
|
|
maintenance organization's] accountant to immediately notify the |
|
board of directors of the insurer [or health maintenance
|
|
organization] or the insurer's [or health maintenance
|
|
organization's] audit committee in writing of any determination by |
|
that accountant that: |
|
(1) the insurer [or health maintenance organization] |
|
has materially misstated the insurer's [or health maintenance
|
|
organization's] financial condition as reported to the |
|
commissioner as of the balance sheet date being audited; or |
|
(2) the insurer [or health maintenance organization] |
|
does not meet the minimum capital and surplus requirements |
|
prescribed by this code for the insurer [or health maintenance
|
|
organization] as of that date. |
|
(b) An insurer [or health maintenance organization] that |
|
receives a notice described by Subsection (a) shall: |
|
(1) provide to the commissioner a copy of the notice |
|
not later than the fifth business day after the date the insurer [or
|
|
health maintenance organization] receives the notice; and |
|
(2) provide to the accountant evidence that the notice |
|
was provided to the commissioner. |
|
(c) If the accountant does not receive the evidence required |
|
by Subsection (b)(2) on or before the fifth business day after the |
|
date the accountant notified the insurer [or health maintenance
|
|
organization] under Subsection (a), the accountant shall file with |
|
the commissioner a copy of the accountant's written notice not |
|
later than the 10th business day after the date the accountant |
|
notified the insurer [or health maintenance organization]. |
|
(d) An accountant is not liable to an insurer [or health
|
|
maintenance organization] or the insurer's [or health maintenance
|
|
organization's] policyholders, shareholders, officers, employees, |
|
directors, creditors, or affiliates for a statement made under this |
|
section if the statement was made in good faith to comply with this |
|
section. |
|
SECTION 17. Section 401.019, Insurance Code, is amended to |
|
read as follows: |
|
Sec. 401.019. COMMUNICATION OF [REPORT ON SIGNIFICANT
|
|
DEFICIENCIES IN] INTERNAL CONTROL MATTERS NOTED IN AUDIT. (a) In |
|
addition to the audited financial report required by this |
|
subchapter, each insurer [or health maintenance organization] |
|
shall provide to the commissioner a written communication prepared |
|
by an accountant in accordance [report of significant deficiencies
|
|
required and prepared by an accountant in accordance] with the |
|
Professional Standards of the American Institute of Certified |
|
Public Accountants that describes any unremediated material |
|
weaknesses in its internal controls over financial reporting noted |
|
during the audit. |
|
(b) The insurer [or health maintenance organization] shall |
|
annually file with the commissioner the communication [report] |
|
required by this section not later than the 60th day after the date |
|
the audited financial report is filed. The communication must |
|
contain a description of any unremediated material weaknesses, as |
|
defined by Statement on Auditing Standards No. 60, "Communication |
|
of Internal Control Related Matters Noted in an Audit," or a |
|
successor document, as of the immediately preceding December 31, in |
|
the insurer's internal control over financial reporting that was |
|
noted by the accountant during the course of the audit of the |
|
financial statements. The communication must affirmatively state |
|
if unremediated material weaknesses were not noted by the |
|
accountant. |
|
(c) The insurer [or health maintenance organization] shall |
|
also provide a description of remedial actions taken or proposed to |
|
be taken to correct unremediated material weaknesses [significant
|
|
deficiencies], if the actions are not described in the accountant's |
|
communication [report]. |
|
(d) [(c)] The report must follow generally the form for |
|
communication of internal control structure matters noted in an |
|
audit described in Statement on Auditing Standard (SAS) No. 60, AU |
|
Section 325, Professional Standards of the American Institute of |
|
Certified Public Accountants. |
|
SECTION 18. Sections 401.020(a) and (b), Insurance Code, |
|
are amended to read as follows: |
|
(a) In this section, "work papers" means the records kept by |
|
an accountant of the procedures followed, the tests performed, the |
|
information obtained, and the conclusions reached that are |
|
pertinent to the accountant's audit of an insurer's [or health
|
|
maintenance organization's] financial statements. The term |
|
includes work programs, analyses, memoranda, letters of |
|
confirmation and representation, abstracts of company documents |
|
and schedules, and commentaries prepared or obtained by the |
|
accountant in the course of auditing the financial statements that |
|
support the accountant's opinion. |
|
(b) An insurer [or health maintenance organization] |
|
required to file an audited financial report under this subchapter |
|
shall require the insurer's [or health maintenance organization's] |
|
accountant to make available for review by the department's |
|
examiners the work papers and any record of communications between |
|
the accountant and the insurer [or health maintenance organization] |
|
relating to the accountant's audit that were prepared in conducting |
|
the audit. The insurer [or health maintenance organization] shall |
|
require that the accountant retain the work papers and records of |
|
communications until the earlier of: |
|
(1) the date the department files a report on the |
|
examination covering the audit period; or |
|
(2) the seventh anniversary of the date of the last day |
|
of the audit period. |
|
SECTION 19. The heading to Section 401.021, Insurance Code, |
|
is amended to read as follows: |
|
Sec. 401.021. COMMISSIONER-ORDERED AUDIT [PENALTY FOR
|
|
FAILURE TO COMPLY]. |
|
SECTION 20. Sections 401.021(a), (b), and (c), Insurance |
|
Code, are amended to read as follows: |
|
(a) If an insurer [or health maintenance organization] |
|
fails to comply with this subchapter, the commissioner shall order |
|
that the insurer's [or health maintenance organization's] annual |
|
audit be performed by a qualified independent certified public |
|
accountant. |
|
(b) The commissioner shall assess against the insurer [or
|
|
health maintenance organization] the cost of auditing the insurer's |
|
[or health maintenance organization's] financial statement under |
|
this section. |
|
(c) The insurer [or health maintenance organization] shall |
|
pay to the commissioner the amount of the assessment not later than |
|
the 30th day after the date the commissioner issues the notice of |
|
assessment to the insurer [or health maintenance organization]. |
|
SECTION 21. Subchapter A, Chapter 401, Insurance Code, is |
|
amended by adding Sections 401.022, 401.023, 401.024, and 401.025 |
|
to read as follows: |
|
Sec. 401.022. REQUIREMENTS FOR AUDIT COMMITTEES. (a) This |
|
section does not apply to foreign or alien insurers authorized in |
|
this state or to an insurer that is a SOX-compliant entity or a |
|
direct or indirect wholly owned subsidiary of a SOX-compliant |
|
entity. |
|
(b) An insurer to which this subchapter applies shall |
|
establish an audit committee conforming to the following criteria: |
|
(1) an insurer with over $500 million in direct |
|
written and assumed premiums for the preceding calendar year shall |
|
establish an audit committee with an independent membership of at |
|
least 75 percent; and |
|
(2) an insurer with $300 million to $500 million in |
|
direct written and assumed premiums for the preceding calendar year |
|
shall establish an audit committee with an independent membership |
|
of at least 50 percent. |
|
(c) The commissioner may require the insurer's board to |
|
enact improvements to the independence of the audit committee |
|
membership if the insurer: |
|
(1) is in a risk-based capital action level event; |
|
(2) meets one or more of the standards of an insurer |
|
considered to be in hazardous financial condition; or |
|
(3) otherwise exhibits qualities of a troubled |
|
insurer. |
|
(d) An insurer with direct written and assumed premiums, |
|
excluding premiums reinsured with the Federal Crop Insurance |
|
Corporation and the National Flood Insurance Program, of less than |
|
$500 million may apply to the commissioner for a waiver from the |
|
requirements of this section based on hardship. The insurer shall |
|
file, with its annual statement filing, the approval of a waiver |
|
under this subsection with the states in which it does or is |
|
authorized to do business and with the National Association of |
|
Insurance Commissioners. If a state other than this state accepts |
|
electronic filing, the insurer shall file the approval in an |
|
electronic format acceptable to the National Association of |
|
Insurance Commissioners. |
|
(e) In this section, premiums that are assumed from |
|
affiliates in the same group of insurers are excluded in |
|
determining whether an insurer has less than $500 million in direct |
|
written premiums and assumed premiums. |
|
(f) The audit committee is directly responsible for the |
|
appointment, compensation, and oversight of the work of any |
|
accountant, including the resolution of disagreements between the |
|
management of the insurer and the accountant regarding financial |
|
reporting, for the purpose of preparing or issuing the audited |
|
financial report or related work under this subchapter. Each |
|
accountant shall report directly to the audit committee. |
|
(g) Each member of the audit committee must be a member of |
|
the board of directors of the insurer or a member of the board of |
|
directors of an entity elected under Subsection (j) and described |
|
under Section 401.001(2-a). |
|
(h) To be independent for purposes of this section, a member |
|
of the audit committee may not, other than in the person's capacity |
|
as a member of the audit committee, the board of directors, or any |
|
other board committee, accept any consulting, advisory, or other |
|
compensatory fee from the entity or be an affiliated person of the |
|
entity or any subsidiary of the entity. To the extent of any |
|
conflict with another statute requiring an otherwise |
|
nonindependent board member to participate in the audit committee, |
|
the other statute prevails and controls, and the member may |
|
participate in the audit committee unless the member is an officer |
|
or employee of the insurer or an affiliate of the insurer. |
|
(i) If a member of the audit committee ceases to be |
|
independent for reasons outside the member's reasonable control, |
|
the member may remain an audit committee member of the responsible |
|
entity if the responsible entity gives notice to the commissioner |
|
until the earlier of: |
|
(1) the next annual meeting of the responsible entity; |
|
or |
|
(2) the first anniversary of the occurrence of the |
|
event that caused the member to be no longer independent. |
|
(j) To exercise the election of the controlling person to |
|
designate the audit committee under this subchapter, the ultimate |
|
controlling person must provide written notice of the affected |
|
insurers to the commissioner. Notice must be made before the |
|
issuance of the statutory audit report and must include a |
|
description of the basis for the election. The election may be |
|
changed through a notice to the commissioner by the insurer, which |
|
must include a description of the basis for the change. An election |
|
remains in effect until changed by later election. |
|
(k) The audit committee shall require the accountant who |
|
performs an audit required by this subchapter to report to the audit |
|
committee in accordance with the requirements of Statement on |
|
Auditing Standards No. 61, "Communication with Audit Committees," |
|
or a successor document, including: |
|
(1) all significant accounting policies and material |
|
permitted practices; |
|
(2) all material alternative treatments of financial |
|
information in statutory accounting principles that have been |
|
discussed with the insurer's management officials; |
|
(3) ramifications of the use of the alternative |
|
disclosures and treatments, if applicable, and the treatment |
|
preferred by the accountant; and |
|
(4) other material written communications between the |
|
accountant and the management of the insurer, such as any |
|
management letter or schedule of unadjusted differences. |
|
(l) If an insurer is a member of an insurance holding |
|
company system, the report required by Subsection (k) may be |
|
provided to the audit committee on an aggregate basis for insurers |
|
in the holding company system if any substantial differences among |
|
insurers in the system are identified to the audit committee. |
|
Sec. 401.023. PROHIBITED CONDUCT IN CONNECTION WITH |
|
PREPARATION OF REQUIRED REPORTS AND DOCUMENTS. (a) A director or |
|
officer of an insurer may not, directly or indirectly: |
|
(1) make or cause to be made a materially false or |
|
misleading statement to an accountant in connection with an audit, |
|
review, or communication required by this subchapter; or |
|
(2) omit to state, or cause another person to omit to |
|
state, any material fact necessary in order to make statements |
|
made, in light of the circumstances under which the statements were |
|
made, not misleading to an accountant in connection with any audit, |
|
review, or communication required under this subchapter. |
|
(b) An officer or director of an insurer, or another person |
|
acting under the direction of an officer or director of an insurer, |
|
may not directly or indirectly coerce, manipulate, mislead, or |
|
fraudulently influence an accountant performing an audit under this |
|
subchapter if that person knew or should have known that the action, |
|
if successful, could result in rendering the insurer's financial |
|
statements materially misleading. |
|
(c) For purposes of Subsection (b), actions that could |
|
result in rendering the insurer's financial statements materially |
|
misleading include actions taken at any time with respect to the |
|
professional engagement period to coerce, manipulate, mislead, or |
|
fraudulently influence an accountant: |
|
(1) to issue or reissue a report on an insurer's |
|
financial statements that is not warranted and would result in |
|
material violations of statutory accounting principles prescribed |
|
by the commissioner, generally accepted auditing standards, or |
|
other professional or regulatory standards; |
|
(2) not to perform an audit, review, or other |
|
procedure required by generally accepted auditing standards or |
|
other professional standards; |
|
(3) not to withdraw an issued report; or |
|
(4) not to communicate matters to an insurer's or |
|
health maintenance organization's audit committee. |
|
Sec. 401.024. MANAGEMENT'S REPORT OF INTERNAL CONTROL OVER |
|
FINANCIAL REPORTING. (a) Each insurer required to file an audited |
|
financial report under this subchapter that has annual direct |
|
written and assumed premiums, excluding premiums reinsured with the |
|
Federal Crop Insurance Corporation and the National Flood Insurance |
|
Program, of $500 million or more shall prepare a report of the |
|
insurer's or group of insurers' internal control over financial |
|
reporting. The report must be filed with the commissioner with the |
|
communication described by Section 401.019. The report of internal |
|
control over financial reporting shall be as of the immediately |
|
preceding December 31. |
|
(b) Notwithstanding the premium threshold under Subsection |
|
(a), the commissioner may require an insurer to file the |
|
management's report of internal control over financial reporting if |
|
the insurer is in any risk-based capital level event or meets one or |
|
more of the standards of an insurer considered to be in hazardous |
|
financial condition as described by Chapter 404. |
|
(c) An insurer or a group of insurers may file the insurer's |
|
or the insurer's parent's Section 404 report and an addendum if the |
|
insurer or group of insurers is: |
|
(1) directly subject to Section 404; |
|
(2) part of a holding company system whose parent is |
|
directly subject to Section 404; |
|
(3) not directly subject to Section 404 but is a |
|
SOX-compliant entity; or |
|
(4) a member of a holding company system whose parent |
|
is not directly subject to Section 404 but is a SOX-compliant |
|
entity. |
|
(d) A Section 404 report described by Subsection (c) must |
|
include those internal controls of the insurer or group of insurers |
|
that have a material impact on the preparation of the insurer's or |
|
group of insurers' audited statutory financial statements, |
|
including those items listed in Sections 401.009(a)(3)(B)-(H) and |
|
(b). The addendum must be a positive statement by management that |
|
there are no material processes with respect to the preparation of |
|
the insurer's or group of insurers' audited statutory financial |
|
statements, including those items listed in Sections |
|
401.009(a)(3)(B)-(H) and (b), excluded from the Section 404 report. |
|
If there are internal controls of the insurer or group of insurers |
|
that have a material impact on the preparation of the insurer's or |
|
group of insurers' audited statutory financial statements and those |
|
internal controls are not included in the Section 404 report, the |
|
insurer or group of insurers may either file: |
|
(1) a report under this section; or |
|
(2) the Section 404 report and a report under this |
|
section for those internal controls that have a material impact on |
|
the preparation of the insurer's or group of insurers' audited |
|
statutory financial statements not covered by the Section 404 |
|
report. |
|
(e) The insurer's management report of internal control |
|
over financial reporting must include: |
|
(1) a statement that management is responsible for |
|
establishing and maintaining adequate internal control over |
|
financial reporting; |
|
(2) a statement that management has established |
|
internal control over financial reporting and an opinion concerning |
|
whether, to the best of management's knowledge and belief, after |
|
diligent inquiry, its internal control over financial reporting is |
|
effective to provide reasonable assurance regarding the |
|
reliability of financial statements in accordance with statutory |
|
accounting principles; |
|
(3) a statement that briefly describes the approach or |
|
processes by which management evaluates the effectiveness of its |
|
internal control over financial reporting; |
|
(4) a statement that briefly describes the scope of |
|
work that is included and whether any internal controls were |
|
excluded; |
|
(5) disclosure of any unremediated material |
|
weaknesses in the internal control over financial reporting |
|
identified by management as of the immediately preceding December |
|
31; |
|
(6) a statement regarding the inherent limitations of |
|
internal control systems; and |
|
(7) signatures of the chief executive officer and the |
|
chief financial officer or an equivalent position or title. |
|
(f) For purposes of Subsection (e)(5), an insurer's |
|
management may not conclude that the internal control over |
|
financial reporting is effective to provide reasonable assurance |
|
regarding the reliability of financial statements in accordance |
|
with statutory accounting principles if there is one or more |
|
unremediated material weaknesses in its internal control over |
|
financial reporting. |
|
(g) Management shall document, and make available on |
|
financial condition examination, the basis of the opinions required |
|
by Subsection (e). Management may base opinions, in part, on its |
|
review, monitoring, and testing of internal controls undertaken in |
|
the normal course of its activities. |
|
(h) Management has discretion as to the nature of the |
|
internal control framework used, and the nature and extent of |
|
documentation, in order to form its opinion in a cost-effective |
|
manner and may include an assembly of or reference to existing |
|
documentation. |
|
(i) The department shall maintain the confidentiality of |
|
the management's report of internal control over financial |
|
reporting required by this section and any supporting documentation |
|
provided in the course of a financial condition examination. |
|
Sec. 401.025. TRANSITION DATES. (a) An insurer or group of |
|
insurers whose audit committee as of January 1, 2010, is not subject |
|
to the independence requirements of Section 401.022 because the |
|
total written and assumed premium is below the threshold under that |
|
section, and that later becomes subject to one of the independence |
|
requirements because of changes in the amount of written and |
|
assumed premium, has one year following the year in which the |
|
written and assumed premium exceeds the threshold amount to comply |
|
with the independence requirements. An insurer that becomes |
|
subject to one of the independence requirements as a result of a |
|
business combination must comply with the independence |
|
requirements not later than the first anniversary of the date of the |
|
acquisition or combination. |
|
(b) An insurer or group of insurers that is not required by |
|
Section 401.024 to file a report as of January 1, 2010, because the |
|
total written premium is below the threshold amount, and that later |
|
becomes subject to the reporting requirements, has two years after |
|
the year in which the written premium exceeds the threshold amount |
|
to file a report. An insurer acquired in a business combination |
|
must comply with the reporting requirements not later than the |
|
second anniversary of the date of the acquisition or combination. |
|
SECTION 22. Section 401.001(3), Insurance Code, is |
|
repealed. |
|
SECTION 23. (a) Section 401.011(c), Insurance Code, as |
|
amended by this Act, takes effect January 1, 2010. |
|
(b) Section 401.022, Insurance Code, as added by this Act, |
|
takes effect January 1, 2010. |
|
(c) Except as provided by Subsections (a) and (b) of this |
|
section, Chapter 401, Insurance Code, as amended by this Act, takes |
|
effect beginning with the reporting period ending December 31, |
|
2010. |
|
SECTION 24. Except as otherwise provided by this Act, this |
|
Act takes effect September 1, 2009. |