230-RICR-20-45-7
230-RICR-20-45-7. Annual Financial Reporting (version Technical Revision, 12/02/2016 to 08/11/2021)
7.1 Authority
This regulation is
promulgated pursuant to R.I. Gen. Laws §§ 27-12-6 and 42-14-17.
7.2 Purpose
A. The purpose of this
regulation is to improve the Rhode Island Insurance Division's
surveillance of the financial condition of insurers by requiring
1. an annual audit of
financial statements reporting the financial position and the results
of operations of insurers by independent certified public
accountants,
2. Communication of Internal
Control Related Matters Noted in an Audit, and
3. Management’s Report of
Internal Control over Financial Reporting.
B. Every insurer (as defined
in § 7.3 of this Part) 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 holders of direct 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.
C. Foreign or alien insurers
filing the Audited financial report in another state, pursuant to
such other state's requirement for filing of Audited financial
reports, which has been found by the Commissioner to be substantially
similar to the requirements herein, are exempt from §§ 7.4 - 7.13
of this Part if:
1. A copy of the Audited
financial report, Communication of Internal Control Related Matters
Noted in an Audit, 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 §§ 7.4, 7.11 and
7.12 of this Part, respectively (Canadian insurers may submit
accountants' reports as filed with the Office of the Superintendent
of Financial Institutions, Canada).
2. 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 § 7.10 of
this Part.
D. Foreign or alien insurers
required to file Management’s Report of Internal Control over
Financial Reporting in another state are exempt from filing the
Report in this state provided the other state has substantially
similar reporting requirements and the Report is filed with the
commissioner of the other state within the time specified.
E. 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.
7.3 Definitions
A. The terms and definitions
contained herein are intended to provide definitional guidance as the
terms are used within this regulation.
1. "Accountant" and
"Independent Certified Public Accountant" mean an
independent certified public accountant or accounting firm in good
standing with the American Institute of Certified Public Accountants
(AICPA) 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.
2. An “affiliate” of, or
person “affiliated” with, a specific person, means a person that
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, the person
specified.
3. “Audit committee” means
a committee (or equivalent body) 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,
the Internal audit function of an insurer or Group of insurers (if
applicable), and external audits of financial statements of the
insurer or Group of insurers. The Audit committee of any entity that
controls a Group of insurers may be deemed to be the Audit committee
for one or more of these controlled insurers solely for the purposes
of this regulation at the election of the controlling person. Refer
to § 7.14(A)(3) of this Part for exercising this election. If an
Audit committee is not designated by the insurer, the insurer’s
entire board of directors shall constitute the Audit committee.
4. "Audited financial
report" means and includes those items specified in § 7.5 of
this Part.
5. "Commissioner,"
"Commissioner of Insurance" or "Insurance
Commissioner" means the Director of the Department of Business
Regulation of this state or his or her designee.
6. “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 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.
7. “Independent board
member” has the same meaning as described in § 7.14(A)(3) of this
Part.
8. "Insurer" means a
licensed insurer as defined in 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 an authorized insurer to as
defined in R.I. Gen. Laws § 27-3-28 transact the business of surplus
lines insurance in this state.
9. “Group of insurers”
means those licensed insurers included in the reporting requirements
of R.I. Gen. Laws § 27-35-1 et seq. , or a set of insurers as
identified by management, for the purpose of assessing the
effectiveness of Internal control over financial reporting.
10. “Internal audit
function” means a person or persons that provide independent,
objective and reasonable assurance designed to add value and improve
an organization’s operations and accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control and governance
processes.
11. “Internal control over
financial reporting” means a process effected by an entity’s
board of directors, management and other personnel designed to
provide reasonable assurance regarding the reliability of the
financial statements, i.e., those items specified in § 7.5(B)(2)-(7)
of this Part and includes those policies and procedures that:
a. Pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of assets;
b. Provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of the financial statements, i.e., those items specified
in § 7.5(B)(2)-(7) of this Part and that receipts and expenditures
are being 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, i.e., those items specified in§
7.5(B)(2)-(7) of this Part.
12. “SEC” means the United
States Securities and Exchange Commission
13. “Section 404” means
Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC’s rules
and regulations promulgated thereunder.
14. “Section 404 Report”
means management’s report on “internal control over financial
reporting” as defined by the SEC and the related attestation report
of the independent certified public accountant as described in §
7.3(A)(1) of this Part.
15. “SOX Compliant Entity”
means an entity that either is required to be compliant with, or
voluntarily is compliant with, all of the following provisions of the
Sarbanes-Oxley Act of 2002: (i) the preapproval requirements of
Section 201 (Section 10A(i) of the Securities Exchange Act of 1934);
(ii) the Audit committee independence requirements of Section 301
(Section 10A(m)(3) of the Securities Exchange Act of 1934); and (iii)
the Internal control over financial reporting requirements of Section
404 (Item 308 of SEC Regulation S-K).
7.4 General Requirements Related
to Filing and Extensions for Filing of Annual Audited Financial
Reports and Audit Committee Appointment
A. 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.
B. 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.
C. If an extension is granted
in accordance with the provisions in § 7.4(B) of this Part, a
similar extension of thirty (30) days is granted to the filing of
Management’s Report of Internal Control over Financial Reporting.
D. Every insurer required to
file an annual Audited financial report pursuant to this regulation
shall designate a group of individuals as constituting its Audit
committee, as defined in § 7.3 of this Part. The Audit committee of
an entity that controls an insurer may be deemed to be the insurer’s
Audit committee for purposes of this regulation at the election of
the controlling person.
7.5 Contents of Annual Audited
Financial Report
A. 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.
B. The annual Audited
financial report shall include the following:
1. Report of independent
certified public accountant.
2. Balance sheet reporting
admitted assets, liabilities, capital and surplus.
3. Statement of operations.
4. Statement of cash flow.
5. Statement of changes in
capital and surplus.
6. 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
7. The financial statements
included in the Audited financial report shall be prepared in a form
and using language and groupings substantially the same as the
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).
7.6 Designation of Independent
Certified Public Accountant
A. 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 retained
to conduct the annual audit set forth in this regulation. Insurers
not retaining an independent certified public accountant on the
effective date of this regulation shall register the name and address
of their retained independent certified public accountant not less
than six (6) months before the date when the first Audited financial
report is to be filed.
B. 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 the accountant 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 Insurance Department, specifying such
exceptions as he or she may believe appropriate.
C. 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 Commissioner 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 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 or her
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 § 7.6 of this Part include both those
resolved to the former accountant's satisfaction and those not
resolved to the former accountant's satisfaction. Disagreements
contemplated by § 7.6 of this Part 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.
7.7 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 AICPA 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 AICPA 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. The lead (or coordinating)
audit partner (having primary responsibility for the audit) may not
act in that capacity for more than five (5) consecutive years. The
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 five (5) consecutive years. An insurer may
make application to the Commissioner for relief from the above
rotation requirement on the basis of unusual circumstances. This
application should be made at least thirty (30) days before the end
of the calendar year. 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.
E. The insurer shall file,
with its annual statement filing, the approval for relief from §
7.7(D) of this Part with the states that it is licensed in or doing
business in and with the NAIC. If the nondomestic state accepts
electronic filing with the NAIC, the insurer shall file the approval
in an electronic format acceptable to the NAIC.
F. The Commissioner shall
neither 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.
G. 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 an independent 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.
H. The commissioner shall not
recognize as a qualified independent certified public accountant, nor
accept an annual Audited financial report, prepared in whole or in
part by an accountant who provides to an insurer, contemporaneously
with the audit, the following non-audit services:
1. Bookkeeping or other
services related to the accounting records or financial statements of
the insurer;
2. 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. The accountant may assist an insurer in
understanding the methods, assumptions and inputs used in the
determination of amounts recorded in the financial statement only if
it is reasonable to conclude that the services provided will not be
subject to audit procedures during an audit of the insurer’s
financial statements. An accountant’s actuary may also issue an
actuarial opinion or certification (“opinion”) on an insurer’s
reserves if the following conditions have been met:
a. Neither the accountant nor
the accountant’s actuary has performed any management functions or
made any management decisions;
b. The insurer has competent
personnel (or engages a third party actuary) to estimate the reserves
for which management takes responsibility; and
c. The accountant’s actuary
tests the reasonableness of the reserves after the insurer’s
management has determined the amount of the reserves;
5. Internal audit outsourcing
services;
6. Management functions or
human resources;
7. Broker or dealer,
investment adviser, or investment banking services;
8. Legal services or expert
services unrelated to the audit; or
9. Any other services that the
commissioner determines, by regulation, are impermissible.
I. In general, the principles
of independence with respect to services provided by the qualified
independent certified public accountant are largely predicated on
three basic principles, violations of which would impair the
accountant’s independence. The principles are that the accountant
cannot function in the role of management, cannot audit his or her
own work, and cannot serve in an advocacy role for the insurer.
J. Insurers having direct
written and assumed premiums of less than $100,000,000 in any
calendar year may request an exemption from § 7.7(G) of this Part.
The insurer shall file with the commissioner a written statement
discussing the reasons why the insurer should be exempt from these
provisions. If the commissioner finds, upon review of this statement,
that compliance with this regulation would constitute a financial or
organizational hardship upon the insurer, an exemption may be
granted.
K. A qualified independent
certified public accountant who performs the audit may engage in
other non-audit services, including tax services, that are not
described in § 7.7(G) of this Part or that do not conflict with §
7.7(H) of this Part, only if the activity is approved in advance by
the Audit committee, in accordance with § 7.7(L) of this Part.
L. All auditing services and
non-audit services provided to an insurer by the qualified
independent certified public accountant of the insurer shall be
preapproved by the Audit committee. The preapproval requirement is
waived with respect to non-audit 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
such non-audit services provided to the insurer constitutes not more
than five percent (5%) of the total amount of fees paid by the
insurer to its qualified independent certified public accountant
during the fiscal year in which the non-audit services are provided;
2. The services were not
recognized by the insurer at the time of the engagement to be
non-audit services; and
3. The services are promptly
brought to the attention of the Audit committee and approved prior to
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 authority to grant such approvals has been
delegated by the Audit committee.
M. The Audit committee may
delegate to one or more designated members of the Audit committee the
authority to grant the preapprovals required by § 7.7(L) of this
Part. 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.
N. The commissioner shall not
recognize an independent certified public accountant as qualified for
a particular insurer if a member of the board, president, chief
executive officer, controller, chief financial officer, chief
accounting officer, or any person serving in an equivalent position
for that insurer, was employed by the independent certified public
accountant and participated in the audit of that insurer during the
one-year period preceding the date that the most current statutory
opinion is due. Section 7.7 of this Part shall only apply to partners
and senior managers involved in the audit. An insurer may make
application to the commissioner for relief from the above requirement
on the basis of unusual circumstances.
O. The insurer shall file,
with its annual statement filing, the approval for relief from §
7.7(N) of this Part with the states that it is licensed in or doing
business in and the NAIC. If the nondomestic state accepts electronic
filing with the NAIC, the insurer shall file the approval in an
electronic format acceptable to the NAIC.
7.8 Consolidated or Combined
Audits
A. 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:
1. Amounts shown on the
consolidated or combined Audited financial report shall be shown on
the worksheet;
2. Amounts for each insurer
subject to § 7.8 of this Part shall be stated separately;
3. Noninsurance operations may
be shown on the worksheet on a combined or individual basis;
4. Explanations of
consolidating and eliminating entries shall be included; and
5. 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.
7.9 Scope of Audit and Report of
Independent Certified Public Accountant
Financial statements furnished
pursuant to § 7.5 of this Part shall be examined by an independent
certified public accountant. The audit of the insurer's financial
statements shall be conducted in accordance with generally accepted
auditing standards. In accordance with AU Section 319 of the
Professional Standards of the AICPA, Consideration of Internal
Control in a Financial Statement Audit, the independent certified
public accountant should obtain an understanding of internal control
sufficient to plan the audit. To the extent required by AU 319, for
those insurers required to file a Management’s Report of Internal
Control over Financial Reporting pursuant to § 7.17 of this Part,
the independent certified public accountant should consider (as that
term is defined in Statement on Auditing Standards (SAS) No. 102,
Defining Professional Requirements in Statements on Auditing
Standards or its replacement) the most recently available report in
planning and performing the audit of the statutory financial
statements. Consideration shall be given to the 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.
7.10 Notification of Adverse
Financial Condition
A. 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 audit 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
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.
B. 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 § 7.10(A) of this
Part.
C. If the accountant,
subsequent to the date of the Audited financial report filed pursuant
to this regulation, becomes aware of facts that might have affected
his or her report, the Commissioner notes the obligation of the
accountant to take such action as prescribed in Volume 1, Section AU
561 of the Professional Standards of the AICPA.
7.11 Communication of Internal
Control Related Matters Noted in an Audit
A. In addition to the annual
Audited financial report, each insurer shall furnish the commissioner
with a written communication as to any unremediated material
weaknesses in its Internal control over financial reporting noted
during the audit. Such communication shall be prepared by the
accountant within sixty (60) days after the filing of the annual
Audited financial report, and shall contain a description of any
unremediated material weakness (as the term material weakness is
defined by Statement on Auditing Standard 60, Communication of
Internal Control Related Matters Noted in an Audit, or its
replacement) as of December 31 immediately preceding (so as to
coincide with the Audited financial report discussed in § 4(A) of
this Part in the insurer’s Internal control over financial
reporting noted by the accountant during the course of their audit of
the financial statements. If no unremediated material weaknesses were
noted, the communication should so state.
B. The insurer is required to
provide a description of remedial actions taken or proposed to
correct unremediated material weaknesses, if such actions are not
described in the accountant's communication.
7.12 Accountant's Letter of
Qualifications
A. The accountant shall
furnish the insurer in connection with, and for inclusion in, the
filing of the annual Audited financial report, a letter stating:
1. 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 AICPA and the Rules of Professional
Conduct of the Rhode Island Board of Public Accountancy, or similar
code;
2. 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
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;
3. 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;
4. That the accountant
consents to the requirements of § 7.13 of this Part and that the
accountant consents and agrees to make available for review by the
commissioner, or the commissioner’s designee or appointed agent,
the workpapers, as defined in § 7.13 of this Part;
5. A representation that the
accountant is properly licensed by an appropriate state licensing
authority and is a member in good standing in the AICPA; and
6. A representation that the
accountant is in compliance with the requirements of § 7.7 of this
Part.
7.13 Definition, Availability and
Maintenance of Independent Certified Public Accountant Workpapers
A. 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 the accountant’s audit 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 audit of the accountant’s the financial statements of an
insurer and which support his or her opinion.
B. Every insurer required to
file an Audited financial report pursuant to this regulation, shall
require the accountant to make available for review by insurance
department examiners, all workpapers prepared in the conduct of the
accountant’s audit 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.
C. In the conduct of the
aforementioned periodic review by the insurance department examiners,
it shall be agreed that photocopies or electronic copies of pertinent
audit workpapers may be made and retained by the department. Such
reviews by the department examiners shall be 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 in accordance with R.I. Gen. Laws § 27-13.1-5.
7.14 Requirements for Audit
Committees
A. Section 7.14 of this Part
shall not apply to foreign or alien insurers licensed in this state
or an insurer that is a SOX Compliant Entity or a direct or indirect
wholly-owned subsidiary of a SOX Compliant Entity.
1. The Audit committee shall
be directly responsible for the appointment, compensation and
oversight of the work of any accountant (including resolution of
disagreements between management and the accountant regarding
financial reporting) for the purpose of preparing or issuing the
Audited financial report or related work pursuant to this regulation.
Each accountant shall report directly to the Audit committee.
2. The Audit committee of an
insurer or Group of insurers shall be responsible for overseeing the
insurer’s Internal audit function and granting the person or
persons performing the function suitable authority and resources to
fulfill their responsibilities if required by § 7.15 of this Part.
3. Each member of the Audit
committee shall be a member of the board of directors of the insurer
or a member of the board of directors of an entity elected pursuant
to §§ 7.14(A)(6) and 7.3(A)(3) of this Part.
4. In order to be considered
independent for purposes of this § 7.14 of this Part, a member of
the Audit committee may not, other than in his or her 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 thereof. However, if law requires board
participation by otherwise non-independent members, that law shall
prevail and such members may participate in the Audit committee and
be designated as independent for Audit committee purposes, unless
they are an officer or employee of the insurer or one of its
affiliates.
5. If a member of the Audit
committee ceases to be independent for reasons outside the member’s
reasonable control, that person, with notice by the responsible
entity to the state, may remain an Audit committee member of the
responsible entity until the earlier of the next annual meeting of
the responsible entity or one year from the occurrence of the event
that caused the member to be no longer independent.
6. To exercise the election of
the controlling person to designate the Audit committee for purposes
of this regulation, the ultimate controlling person shall provide
written notice to the commissioners of the affected insurers.
Notification shall be made timely prior to the issuance of the
statutory audit report and include a description of the basis for the
election. The election can be changed through notice to the
commissioner by the insurer, which shall include a description of the
basis for the change. The election shall remain in effect for
perpetuity, until rescinded.
7. The Audit committee shall
require the accountant that performs for an insurer any audit
required by this regulation to timely report to the Audit committee
in accordance with the requirements of SAS 61, Communication with
Audit Committees, or its replacement, including:
a. All significant accounting
policies and material permitted practices;
b. All material alternative
treatments of financial information within statutory accounting
principles that have been discussed with management officials of the
insurer, ramifications of the use of the alternative disclosures and
treatments, and the treatment preferred by the accountant; and
c. Other material written
communications between the accountant and the management of the
insurer, such as any management letter or schedule of unadjusted
differences.
8. If an insurer is a member
of an insurance holding company system, the reports required by §
7.14(A)(7) of this Part may be provided to the Audit committee on an
aggregate basis for insurers in the holding company system, provided
that any substantial differences among insurers in the system are
identified to the Audit committee.
9. The proportion of
independent Audit committee members shall meet or exceed the
following criteria:
Prior Calendar Year
Direct Written and Assumed Premiums
$0 - $300,000,000
Over $300,000,000
-$500,000,000
Over $500,000,000
No
minimum
requirements. See also §
7.14(A)(9)(a) and (b) of this Part.
Majority (50% or more)
of members shall be independent. See also § 7.14(A)(9)(a) and (b)
of this Part.
Supermajority of members
(75% or more) shall be independent. See also § 7.14(A)(9)(a) of
this Part.
a. The commissioner has
authority afforded by state law to require the entity’s board to
enact improvements to the independence of the Audit committee
membership if the insurer is in a RBC action level event, meets one
or more of the standards of an insurer deemed to be in hazardous
financial condition, or otherwise exhibits qualities of a troubled
insurer.
b. All insurers with less
than $500,000,000 in prior year direct written and assumed premiums
are encouraged to structure their Audit committees with at least a
supermajority of independent Audit committee members.
c. Prior calendar year direct
written and assumed premiums shall be the combined total of direct
premiums and assumed premiums from non-affiliates for the reporting
entities.
10. An insurer with direct
written and assumed premium, excluding premiums reinsured with the
Federal Crop Insurance Corporation and Federal Flood Program, less
than $500,000,000 may make application to the commissioner for a
waiver from the § 7.14 of this Part requirements based upon
hardship. The insurer shall file, with its annual statement filing,
the approval for relief from § 7.14 of this Part with the states
that it is licensed in or doing business in and the NAIC. If the
nondomestic state accepts electronic filing with the NAIC, the
insurer shall file the approval in an electronic format acceptable to
the NAIC.
7.15 Internal Audit Function
Requirements
A. Exemption
1. An insurer is exempt from
the requirements of § 7.15 of this Part if:
a. The insurer has annual
direct written and unaffiliated assumed premium, including
international direct and assumed premium but excluding premiums
reinsured with the Federal Crop Insurance Corporation and Federal
Flood Program, less than $500,000,000; or,
b. If the insurer is a member
of a Group of insurers that has annual direct written and
unaffiliated assumed premium including international direct and
assumed premium, but excluding premiums reinsured with the Federal
Crop Insurance Corporation and Federal Flood Program, less than
$1,000,000,000.
2. Note: An insurer or Group
of insurers exempt from the requirements of this § 7.15 of this Part
is encouraged, but not required, to conduct a review of the insurer
business type, sources of capital, and other risk factors to
determine whether an Internal audit function is warranted. The
potential benefits of an Internal audit function should be assessed
and compared against the estimated costs.
B. Function - The insurer
or Group of insurers shall establish an Internal audit function
providing independent, objective and reasonable assurance to the
Audit committee and insurer management regarding the insurer’s
governance, risk management and internal controls. This assurance
shall be provided by performing general and specific audits, reviews
and tests and by employing other techniques deemed necessary to
protect assets, evaluate control effectiveness and efficiency, and
evaluate compliance with policies and regulations.
C. Independence - In order
to ensure that internal auditors remain objective, the Internal audit
function must be organizationally independent. Specifically, the
Internal audit function will not defer ultimate judgment on audit
matters to others, and shall appoint an individual to head the
Internal audit function who will have direct and unrestricted access
to the board of directors. Organizational independence does not
preclude dual-reporting relationships.
D. Reporting - The head of
the Internal audit function shall report to the Audit committee
regularly, but no less than annually, on the periodic audit plan,
factors that may adversely impact the Internal audit function’s
independence or effectiveness, material findings from completed
audits and the appropriateness of corrective actions implemented by
management as a result of audit findings.
E. Additional Requirements -
If an insurer is a member of an insurance holding company system or
included in a Group of insurers, the insurer may satisfy the Internal
audit function requirements set forth in § 7.15 of this Part at the
ultimate controlling parent level, an intermediate holding company
level or the individual legal entity level.
7.16 Conduct of Insurer in
Connection with the Preparation of Required Reports and Documents
A. No director or officer of
an insurer shall, directly or indirectly:
1. Make or cause to be made a
materially false or misleading statement to an accountant in
connection with any audit, review or communication required under
this regulation; 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 regulation.
B. No officer or director of
an insurer, or any other person acting under the direction thereof,
shall directly or indirectly take any action to coerce, manipulate,
mislead or fraudulently influence any accountant engaged in the
performance of an audit pursuant to this regulation 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 § 7.16(B)
of this Part, actions that, “if successful, could result in
rendering the insurer’s financial statements materially misleading”
include, but are not limited to, 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
in the circumstances (due to material violations of statutory
accounting principles prescribed by the commissioner, generally
accepted auditing standards, or other professional or regulatory
standards);
2. Not to perform audit,
review or other procedures 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 Audit committee.
7.17. Management’s Report of
Internal Control over Financial Reporting
A. Every insurer required to
file an Audited financial report pursuant to this regulation that has
annual direct written and assumed premiums, excluding premiums
reinsured with the Federal Crop Insurance Corporation and Federal
Flood Program, of $500,000,000 or more shall prepare a report of the
insurer’s or Group of insurers’ Internal control over financial
reporting, as these terms are defined in § 7.3 of this Part. The
report shall be filed with the commissioner along with the
Communication of Internal Control Related Matters Noted in an Audit
described under § 7.11 of this Part. Management’s Report of
Internal Control over Financial Reporting shall be as of December 31
immediately preceding.
B. Notwithstanding the premium
threshold in § 7.17(A) of this Part, the commissioner may require an
insurer to file Management’s Report of Internal Control over
Financial Reporting if the insurer is in any RBC level event, or
meets any one or more of the standards of an insurer deemed to be in
hazardous financial condition as defined in R.I. Gen. Laws §
27-14.2-2.
C. An insurer or a Group of
insurers that 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; may file its or its parent’s Section
404 Report and an addendum in satisfaction of this § 7.16 of this
Part requirement provided that those internal controls of the insurer
or Group of insurers having a material impact on the preparation of
the insurer’s or Group of insurers’ audited statutory financial
statements (those items included in § 7.5(B)(2)-(7) of this Part)
were included in the scope of the Section 404 Report. The addendum
shall 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 (those
items included in § 7.5(B)(2)-(7) of this Part) 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 were not included in the scope
of the Section 404 Report, the insurer or Group of insurers may
either file (i) a report under § 7.17 of this Part, or (ii) the
Section 404 Report and a report under § 7.17 of this Part 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.
D. Management’s Report of
Internal Control over Financial Reporting shall 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
assertion, to the best of management’s knowledge and belief, after
diligent inquiry, as to whether 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 evaluated the
effectiveness of its Internal control over financial reporting; and
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 December 31
immediately preceding. Management is not permitted to 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;
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 equivalent
position/title).
E. Management shall document
and make available upon financial condition examination the basis
upon which its assertions, required in § 7.17(D) of this Part, are
made. Management may base its assertions, in part, upon its review,
monitoring and testing of internal controls undertaken in the normal
course of its activities.
1. Management shall have
discretion as to the nature of the internal control framework used,
and the nature and extent of documentation, in order to make its
assertion in a cost effective manner and, as such, may include
assembly of or reference to existing documentation.
2. Management’s Report on
Internal Control over Financial Reporting, required by § 7.17(A) of
this Part, and any documentation provided in support thereof during
the course of a financial condition examination, shall be kept
confidential by the state insurance department.
7.18 Exemptions and Effective
Dates
A. Upon written application of
any insurer, the commissioner may grant an exemption from compliance
with any and all provisions of 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.
B. Domestic insurers retaining
a certified public accountant on the effective date of this
regulation who qualify as independent shall comply with this
regulation for the year ending December 31, 2010, and each year
thereafter unless the Commissioner permits otherwise.
C. Domestic insurers must
retain a certified public accountant on the effective date of this
regulation who qualifies as independent unless the commissioner
permits otherwise. All requests for an exemption from the
requirement shall be made in writing to the Department and the
Commissioner shall have the authority to grant and exemption for a
period not to exceed twenty-four months.
D. Foreign insurers shall
comply with this regulation for the year ending December 31, 2010 and
each year thereafter, unless the commissioner permits otherwise. All
requests for an exemption shall be made in writing to the Department
and the Commissioner shall have the authority to grant an exemption
for a period not to exceed twenty-four months.
E. The requirements of §
7.7(D) and (E) of this Part shall be in effect for audits of the year
beginning January 1, 2010 and thereafter.
F. The requirements of § 7.14
of this Part are to be in effect January 1, 2010. An insurer or Group
of insurers that is not required to have independent Audit committee
members or only a majority of independent Audit committee members (as
opposed to a supermajority) because the total written and assumed
premium is below the threshold and subsequently becomes subject to
one of the independence requirements due to changes in premium shall
have one (1) year following the year the threshold is exceeded (but
not earlier than January 1, 2010) to comply with the independence
requirements. Likewise, an insurer that becomes subject to one of the
independence requirements as a result of a business combination shall
have one (1) calendar year following the date of acquisition or
combination to comply with the independence requirements.
G. The requirements of § 7.17
of this Part and other modified sections (§§ 7.1, 7.2, 7.3, 7.4,
7.7, 7.9, 7.11, 7.15, 7.17, 7.18, and 7.19), except for § 7.14 of
this Part covered above, are effective beginning with the reporting
period ending December 31, 2010 and each year thereafter. An insurer
or Group of insurers that is not required to file a report because
the total written premium is below the threshold and subsequently
becomes subject to the reporting requirements shall have two (2)
years following the year the threshold is exceeded (but not earlier
than December 31, 2010) to file a report. Likewise, an insurer
acquired in a business combination shall have two (2) calendar years
following the date of acquisition or combination to comply with the
reporting requirements.
H. The requirements of § 7.15
of this Part are to be in effect January 1, 2017. If an insurer or
Group of insurers that is exempt from the § 7.15 of this Part
requirements no longer qualifies for that exemption, it shall have
one year after the year the threshold is exceeded to comply with the
requirements of this article.
7.19 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 supervision authority duly audited by an
independent chartered accountant.
B. For such insurers, the
letter required in § 7.6(B) of this Part shall state that the
accountant is aware of the requirements relating to the annual
audited financial report filed with the Commissioner pursuant to §
7.4 of this Part and shall affirm that the opinion expressed is in
conformity with such requirements.
7.20 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.