230-RICR-20-45-7. Annual Financial Reporting (version Amendment, 07/09/2002 to 04/15/2009)

Page 1 of 11 Reg. # 87 State of Rhode Island and Providence Plantations DEPARTMENT OF BUSINESS REGULATION Division of Insurance 233 Richmond Street Providence, RI 02903 INSURANCE REGULATION 87 ANNUAL AUDITED FINANCIAL REPORTS Table of Contents Section 1 Authority Section 2 Purpose Section 3 Definitions Section 4 Filing and Extensions for Filing of Annual Audited Financial Reports Section 5 Contents of Annual Audited Financial Report Section 6 Designation of Independent Certified Public Accountant Section 7 Qualifications of Independent Certified Public Accountant Section 8 Consolidated or Combined Audits Section 9 Scope of Examination and Report of Independent Certified Public Accountant Section 10 Notification of Adverse Financial Condition Section 11 Report on Significant Deficiencies in Internal Controls Section 12 Accountant's Letter of Qualifications Section 13 Definition, Availability and Maintenance of CPA Workpapers Section 14 Exemptions and Effective Dates Section 15 Canadian and British Companies Section 16 Severability Section 17 Effective Date Section 1 Authority This Regulation is promulgated pursuant to R.I. Gen. Laws §§ 27-12-6 and 42-14- 17. Section 2 Purpose The purpose of this Regulation is to improve the Rhode Island Insurance Division's surveillance of the financial condition of insurers by requiring an annual examination by independent certified public accountants of the financial statements reporting the financial position and the results of operations of insurers. Every insurer (as defined in Section 3) shall be subject to this Regulation. Insurers having direct premiums written in this state of less than one million dollars ($1,000,000) in any calendar year and less than one thousand (1,000) policyholders or if certificate Page 2 of 11 Reg. # 87 holders of directly written policies nationwide at the end of such calendar year shall be exempt from this Regulation for such year (unless the Commissioner makes a specific finding that compliance is necessary for the Commissioner to carry out statutory responsibilities) except that insurers having assumed premiums pursuant to contracts and/or treaties of reinsurance of one million dollars ($1,000,000) or more will not be so exempt. Foreign or alien insurers filing audited financial reports in another state, pursuant to such other state's requirement of audited financial reports which has been found by the Commissioner to be substantially similar to the requirements herein, are exempt from this Regulation if: A. A copy of the Audited Financial Report, Report on Significant Deficiencies in Internal Controls, and the Accountant's Letter of Qualifications which are filed with such other state are filed with the Commissioner in accordance with the filing dates specified in Sections 4, 11 and 12 of this Regulation, respectively (Canadian insurers may submit accountants' reports as filed with the Canadian Dominion Department of Insurance). B. A copy of any Notification of Adverse Financial Condition Report filed with such other state is filed with the Commissioner within the time specified in Section 10 of this Regulation. This Regulation shall not prohibit, preclude or in any way limit the Commissioner from ordering and/or conducting and/or performing examinations of insurers under the rules and regulations of the Rhode Island Division of Insurance and the practices and procedures of the Rhode Island Division of Insurance. Section 3 Definitions A. "Audited financial report" means and includes those items specified in Section 5 of this Regulation. B. "Accountant" and "Independent Certified Public Accountant" means an independent certified public accountant or accounting firm in good standing with the American Institute of CPAs and in all states in which they are licensed to practice; for Canadian and British companies, it means a Canadian-chartered or British-chartered accountant. C. "Commissioner," "Commissioner of Insurance" or "Insurance Commissioner" means the Director of the Department of Business Regulation of this state. D. “Indemnification” means an agreement of indemnity or a release from liability where the intent or effect is to shift or limit in any manner the Page 3 of 11 Reg. # 87 potential liability of the person or firm for failure to adhere to applicable auditing or professional standards, whether or not resulting in part from knowing or other misrepresentations made by the insurer or its representatives. E. "Insurer" means any person or legal entity considered to be an insurer by the Division of Insurance for the purpose of this Regulation including but not limited to entities engaged in the business of insurance in accordance with R.I. Gen. Laws §§ 27-1-1 et seq, 27-2-1 et seq, 27-19-1 et seq, 27-20- 1 et seq, 27-20.1-1 et seq, 27-20.2-1 et seq, 27-20.3-1 et seq, and 27-41-1 et seq and such other entities, including surplus lines insurers, authorized to transact the business of insurance in this state. F. "Section" means, unless otherwise specified herein, the section of this Regulation. Section 4 Filing and Extensions for Filing of Annual Audited Financial Reports All insurers shall have an annual audit by an independent certified public accountant and shall file an audited financial report with the Commissioner on or before June 1 for the year ended December 31 immediately preceding. The Commissioner may require an insurer to file an audited financial report earlier than June 1 with ninety (90) days advance notice to the insurer. Extensions of the June 1 filing date may be granted by the Commissioner for thirty (30) day periods upon showing by the insurer and its independent certified public accountant the reasons for requesting such extension and determination by the Commissioner of good cause for an extension. The request for extension must be submitted in writing not less than ten (10) days prior to the due date in sufficient detail to permit the Commissioner to make an informed decision with respect to the requested extension. Section 5 Contents of Annual Audited Financial Report The Annual Audited Financial Report shall report the financial position of the insurer as of the end of the most recent calendar year and the results of its operations, cash flows and changes in capital and surplus for the year then ended in conformity with statutory accounting practices prescribed, or otherwise permitted, by the Department of Insurance of the state of domicile. The annual Audited Financial Report shall include the following: A. Report of independent certified public accountant; B. Balance sheet reporting admitted assets, liabilities, capital and surplus; Page 4 of 11 Reg. # 87 C. Statement of operations; D. Statement of cash flows; E. Statement of changes in capital and surplus; F. Notes to financial statements. These notes shall be those required by the appropriate NAIC Annual Statement Instructions and NAIC Accounting Practices and Procedures Manual. The notes shall include a reconciliation of differences, if any, between the audited statutory financial statements and the Annual Statement filed pursuant to R.I. Gen. Laws § 27-12-1, with a written description of the nature of these differences; and G. The financial statements included in the Audited Financial Report shall be prepared in a form and using language and groupings substantially similar to those relevant sections of the Annual Statement of the insurer filed with the Commissioner, and the financial statement shall be comparative, presenting the amounts as of December 31 of the current year and the amounts as of the immediately preceding December 31. (However, in the first year in which an insurer is required to file an audited financial report, the comparative data may be omitted). Section 6 Designation of Independent Certified Public Accountant Each insurer required by this Regulation to file an annual audited financial report must, within sixty (60) days after becoming subject to such requirement, register with the Commissioner in writing the name and address of the independent certified public accountant or accounting firm (generally referred to in this Regulation as the "accountant") retained to conduct the annual audit set forth in this Regulation. Insurers not retaining an Accountant on the effective date of this Regulation shall register the name and address of their retained Accountant not less than six (6) months before the date when the first audited financial report is to be filed. The insurer shall obtain a letter from the Accountant, and file a copy with the Commissioner stating that the Accountant is aware of the provisions of the Insurance Code and the Rules and Regulations of the Insurance Department of the state of domicile that relate to accounting and financial matters and affirming that he or she will express his or her opinion on the financial statements in terms of their conformity to the statutory accounting practices prescribed or otherwise permitted by that Department, specifying such exceptions as he or she may believe appropriate. If an Accountant who was the Accountant for the immediately preceding filed audited financial report is dismissed or resigns the insurer shall within five (5) business days notify the Department of this event. The insurer shall also furnish the Commissioner with a separate letter within ten (10) business days of the above notification stating whether in the twenty-four (24) months preceding such event there were any disagreements with the former Accountant on any matter of accounting principles or Page 5 of 11 Reg. # 87 practices, financial statement disclosure, or auditing scope or procedure; which disagreements, if not resolved to the satisfaction of the former Accountant, would have caused him to make reference to the subject matter of the disagreement in connection with his or her opinion. The disagreements required to be reported in response to this Section include both those resolved to the former Accountant's satisfaction and those not resolved to the former Accountant's satisfaction. Disagreements contemplated by this section are those that occur at the decision-making level, i.e., between personnel of the insurer responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report. The insurer shall also in writing request such former Accountant to furnish a letter addressed to the insurer stating whether the Accountant agrees with the statements contained in the insurer's letter and, if not, stating the reasons for which he or she does not agree; and the insurer shall furnish such responsive letter from the former Accountant to the Commissioner together with its own. Section 7 Qualifications of Independent Certified Public Accountant A. The Commissioner shall not recognize any person or firm as a qualified Independent Certified Public Accountant if the person or firm: (1) Is not in good standing with the American Institute of CPAs and in all states in which the Accountant is licensed to practice, or, for a Canadian or British company, that is not a chartered Accountant; or (2) Has either directly or indirectly entered into an agreement of indemnity or release from liability (collectively referred to as “indemnification”) with respect to the audit of the insurer. B. Except as otherwise provided herein, the Commissioner shall recognize an Independent Certified Public Accountant as qualified as long as he or she conforms to the standards of his or her profession, as contained in the Code of Professional Ethics of the American Institute of Certified Public Accountants and Rules and Regulations and Code of Ethics and Rules of Professional Conduct of the Rhode Island Board of Public Accountancy, or similar code. C. A qualified Independent Certified Public Accountant may enter into an agreement with an insurer to have disputes relating to an audit resolved by mediation or arbitration. However, in the event of a delinquency proceeding commenced against the insurer under R.I. Gen. Laws §§ 27- 14.3-1 et seq. and 27-14.2-1 et seq., the mediation or arbitration provisions shall operate at the option of the statutory successor. D. No partner or other person responsible for rendering a report may act in that capacity for more than seven (7) consecutive years. Following any Page 6 of 11 Reg. # 87 period of service such person shall be disqualified from acting in that or a similar capacity for the same company or its insurance subsidiaries or affiliates for a period of two (2) years. An insurer may make application to the Commissioner for relief from the above rotation requirement on the basis of unusual circumstances. The Commissioner may consider the following factors in determining if the relief should be granted: (1) Number of partners, expertise of the partners or the number of insurance clients in the currently registered firm; (2) Premium volume of the insurer; or (3) Number of jurisdictions in which the insurer transacts business. The requirements of this paragraph shall become effective two (2) years after the enactment of this Regulation. E. The Commissioner shall not recognize as a qualified Independent Certified Public Accountant, nor accept any annual Audited Financial Report, prepared in whole or in part by, any natural person who: (1) Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961- 1968, or any dishonest conduct or practices under federal or state law; (2) Has been found to have violated the insurance laws of this state with respect to any previous reports submitted under this Regulation; or (3) Has demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this Regulation. F. The Commissioner of Insurance may, in accordance with the requirements of the Administrative Procedures Act, R.I. Gen. Laws §§ 42-35-1 et seq hold a hearing to determine whether a Certified Public Accountant is qualified and, considering the evidence presented, may rule that the Accountant is not qualified for purposes of expressing his or her opinion on the financial statements in the annual Audited Financial Report made pursuant to this Regulation and require the insurer to replace the Accountant with another whose relationship with the insurer is qualified within the meaning of this Regulation. Page 7 of 11 Reg. # 87 Section 8 Consolidated or Combined Audits An insurer may make written application to the Commissioner for approval to file audited consolidated or combined financial statements in lieu of separate annual audited financial statements if the insurer is part of a group of insurance companies which utilizes a pooling or one hundred percent (100%) reinsurance agreement that affects the solvency and integrity of the insurer's reserves and such insurer cedes all of its direct and assumed business to the pool. In such cases, a columnar consolidating or combining worksheet shall be filed with the report, as follows: A. Amounts shown on the consolidated or combined Audited Financial Report shall be shown on the worksheet; B. Amounts for each insurer subject to this section shall be stated separately; C. Noninsurance operations may be shown on the worksheet on a combined or individual basis; D. Explanations of consolidating and eliminating entries shall be included; and E. A reconciliation shall be included of any differences between the amounts shown in the individual insurer columns of the worksheet and comparable amounts shown on the Annual Statements of the insurers. Section 9 Scope of Examination and Report of Independent Certified Public Accountant Financial statements furnished pursuant to Section 5 of this Regulation shall be examined by an Independent Certified Public Accountant. The examination of the insurer's financial statements shall be conducted in accordance with generally accepted auditing standards. Consideration should also be given to such other procedures illustrated in the Financial Condition Examiner's Handbook promulgated by the National Association of Insurance Commissioners as the Independent Certified Public Accountant deems necessary. Section 10 Notification of Adverse Financial Condition The insurer required to furnish the annual Audited Financial Report shall require the Independent Certified Public Accountant to report, in writing, within five (5) business days to the board of directors or its audit committee any determination by the Independent Certified Public Accountant that the insurer has materially misstated its financial condition as reported to the Commissioner as of the balance sheet date currently under examination or that the insurer does not meet the minimum capital and surplus requirement of the Rhode Island Insurance Laws as of that date. An insurer who has received a report pursuant to this paragraph shall forward a copy of the report to the Page 8 of 11 Reg. # 87 Commissioner within five (5) business days of receipt of such report and shall provide the Independent Certified Public Accountant making the report with evidence of the report being furnished to the Commissioner. If the Independent Certified Public Accountant fails to receive such evidence within the required five (5) business day period, the Independent Certified Public Accountant shall furnish to the Commissioner a copy of its report within the next five (5) business days. No Independent Certified Public Accountant shall be liable in any manner to any person for any statement made in connection with the above paragraph if such statement is made in good faith in compliance with the above paragraph. If the Accountant, subsequent to the date of the Audited Financial Report filed pursuant to this Regulation, becomes aware of facts which might have affected his or her report, the Department notes the obligation of the Accountant to take such action as prescribed in Volume 1, Section AU 561 of the Professional Standards of the American Institute of Certified Public Accountants. Section 11 Report on Significant Deficiencies in Internal Controls In addition to the annual audited financial statements, each insurer shall furnish the Commissioner with a written report prepared by the Accountant describing significant deficiencies in the insurer's internal control structure noted by the Accountant during the audit. SAS No. 60, Communication of Internal Control Structure Matters Noted in an Audit (AU Section 325 of the Professional Standards of the American Institute of Certified Public Accountants) requires an accountant to communicate significant deficiencies (known as "reportable conditions") noted during a financial statement audit to the appropriate parties within an entity. No report should be issued if the Accountant does not identify significant deficiencies. If significant deficiencies are noted, the written report shall be filed annually by the insurer with the Department within sixty (60) days after the filing of the annual audited financial statements. The insurer is required to provide a description of remedial actions taken or proposed to correct significant deficiencies, if such actions are not described in the accountant's report. Section 12 Accountant's Letter of Qualifications The Accountant shall furnish the insurer in connection with, and for inclusion in, the filing of the annual audited financial report, a letter stating: A. That the Accountant is independent with respect to the insurer and conforms to the standards of his or her profession as contained in the Code of Professional Ethics and pronouncements of the American Institute of Certified Public Accountants and the Rules of Professional Conduct of the Rhode Island Board of Public Accountancy, or similar code; B. The background and experience in general, and the experience in audits of insurers of the staff assigned to the engagement and whether each is an Page 9 of 11 Reg. # 87 Independent Certified Public Accountant. Nothing within this Regulation shall be construed as prohibiting the Accountant from utilizing such staff as he or she deems appropriate where use is consistent with the standards prescribed by generally accepted auditing standards; C. That the Accountant understands the annual audited financial report and his or her opinion thereon will be filed in compliance with this Regulation and that the Commissioner will be relying on this information in the monitoring and regulation of the financial position of insurers; D. That the Accountant consents to the requirements of Section 13 of this Regulation and that the accountant consents and agrees to make available for review by the Commissioner, his or her designee or his or her appointed agent, the workpapers, as defined in Section 13; E. A representation that the Accountant is properly licensed by an appropriate state licensing authority and is a member in good standing in the American Institute of Certified Public Accountants; and F. A representation that the Accountant is in compliance with the requirements of Section 7 of this Regulation. Section 13 Definition, Availability and Maintenance of CPA Workpapers Workpapers are the records kept by the Independent Certified Public Accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to his or her examination of the financial statements of an insurer. Workpapers, accordingly, may include audit planning documentation, work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules or commentaries prepared or obtained by the Independent Certified Public Accountant in the course of his or her examination of the financial statements of an insurer and which support his or her opinion thereof. Every insurer required to file an Audited Financial Report pursuant to this Regulation, shall require the Accountant to make available for review by Department examiners, all workpapers prepared in the conduct of his or her examination and any communications related to the audit between the Accountant and the insurer, at the offices of the insurer, at the Insurance Department or at any other reasonable place designated by the Commissioner. The insurer shall require that the Accountant retain the audit workpapers and communications until the Insurance Department has filed a Report on Examination covering the period of the audit but no longer than seven (7) years from the date of the audit report. In the conduct of the aforementioned periodic review by the Department examiners, it shall be agreed that photocopies of pertinent audit workpapers may be made and retained by the Department. Such reviews by the Department examiners shall be Page 10 of 11 Reg. # 87 considered investigations and all working papers and communications obtained during the course of such investigations shall be afforded the same confidentiality as other examination workpapers generated by the Department. Section 14 Exemptions and Effective Dates Upon written application of any insurer, the Commissioner may grant an exemption from compliance with this Regulation if the Commissioner finds, upon review of the application, that compliance with this Regulation would constitute a financial or organizational hardship upon the insurer. An exemption may be granted at any time and from time to time for a specified period or periods. Within ten (10) days from a denial of an insurer's written request for an exemption from this Regulation, such insurer may request in writing a hearing on its application for an exemption. Such hearing shall be held in accordance with the Administrative Procedures Act, R.I. Gen. Laws §§ 42-35-1 et seq. All domestic and foreign insurers shall comply with this Regulation for the year ending December 31, 1996 and each year thereafter unless the Commissioner permits otherwise. Section 15 Canadian and British Companies A. In the case of Canadian and British insurers, the annual audited financial report shall be defined as the annual statement of total business on the form filed by such companies with their domiciliary supervision authority duly audited by an independent chartered accountant. B. For such insurers, the letter required in Section 6 of this Regulation shall state that the accountant is aware of the requirements relating to the annual audited statement filed with the Commissioner pursuant to Section 4 of this Regulation and shall affirm that the opinion expressed is in conformity with such requirements. Section 16 Severability If any section, term or provision of this Regulation should be adjudged invalid for any reason, that judgment should not effect, impair, or invalidate any remaining section, term, or provision, which shall remain in full force and effect. Page 11 of 11 Reg. # 87 Section 17 Effective Date This Regulation shall be effective twenty (20) days from the date of filing with the Secretary of State. EFFECTIVE DATE: July 23, 1996 AMENDED: January 2, 2002 July 9, 2002