By: Eiland (Senate Sponsor - Averitt) H.B. No. 2752
(In the Senate - Received from the House April 14, 2009;
April 27, 2009, read first time and referred to Committee on
Business and Commerce; May 19, 2009, reported adversely, with
favorable Committee Substitute by the following vote: Yeas 7, Nays
0; May 19, 2009, sent to printer.)
COMMITTEE SUBSTITUTE FOR H.B. No. 2752 By: Estes
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 audits of 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 1 [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 1 [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 and fewer than
1,000 policyholders or certificate holders of direct written
premiums nationwide at the end of the 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 and the number of
policyholders or certificate holders of direct written premiums
nationwide at the end of the calendar year.
(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. Section 401.007, Insurance Code, is amended by
amending Subsections (a) and (b) and adding Subsection (c) 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 communication of
internal control-related matters noted in the audit [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.
(c) A foreign or alien insurer required to file management's
report of internal control over financial reporting in another
state is exempt from filing the report in this state if the other
state has substantially similar reporting requirements and the
report is filed with the commissioner in that state in the time
specified.
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) The financial statements included in the audited
financial report must be prepared in a form and use language and
groupings substantially the same as the relevant sections of the
annual statement of the insurer filed with the commissioner. The
financial statements must be comparative, including amounts on
December 31 of the current year and amounts as of the immediately
preceding December 31, except for the first year in which an insurer
is required to file the report. [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 may not act in that capacity [or health
maintenance organization] for more than five [seven] consecutive
years and 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:
(1) function in the role of management, audit the
accountant's own work, or serve in an advocacy role for the insurer;
or
(2) directly or indirectly enter into an agreement of
indemnity or release from liability regarding the audit of 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 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 is authorized to do
business and with the National Association of Insurance
Commissioners. If a state, other than this state, in which the
insurer does or 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. 112, "Communicating
Internal Control Related Matters Identified 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].
[(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. 114, "The Auditor's Communication With Those
Charged With Governance," 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 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 beginning with the reporting
period ending December 31, 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.
* * * * *