PROPOSED RULEMAKING
[31 PA. CODE CH. 147]
Annual Audited Insurers' Financial Report Required
[30 Pa.B. 5023] The Insurance Department (Department) proposes to amend Chapter 147 (relating to annual audited insurers' financial report required) to read as set forth in Annex A. The rulemaking is proposed under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412) relating to the general rulemaking authority of the Department; section 320 of The Insurance Company Law of 1921 (40 P. S. § 443) relating to the authority of the Commissioner to require insurers to file statements concerning their affairs and financial condition; and section 1605(a)(3)(ii) of The Insurance Company Law of 1921 (40 P. S. § 991.1605(a)(3)(ii)); sections 205 and 206 of The Pennsylvania Fair Plan Act (40 P. S. §§ 1600.205 and 1600.206); 40 Pa.C.S. §§ 6125, 6331 and 6701; sections 11 and 14 of the Health Maintenance Organization Act (40 P. S. §§ 1561 and 1564); section 630 of the act of May 17, 1921 (P. L. 682, No. 284) (40 P. S. § 764a); sections 7 and 25 of the Continuing Care Provider Registration and Disclosure Act (40 P. S. §§ 3207 and 3225); and section 602 of the Fraternal Benefit Societies Code (40 P. S. § 1142.602) which, respectively, relate to the specific regulatory and rulemaking authority of the Department regarding financial reporting by surplus lines insurers, the Pennsylvania Fair Plan, hospital plan corporations, health services plan corporations, health maintenance organizations, preferred provider organizations; continuing care providers and fraternal benefit societies. The regulations require insurers to have annual audits of their year-end financial statements conducted by independent certified public accountants.
Purpose
The purpose of this rulemaking is to update Chapter 147, commonly referred to as the CPA Audit Rule, to reflect current statutory accounting practices and procedures adopted by the National Association of Insurance Commissioners (NAIC). The regulations prescribe requirements for annual audits of financial statements filed by insurers with the Department. The regulations were adopted in 1979 and last amended November 11, 1995. The regulations are based on a model regulation adopted by the NAIC and are included in the NAIC's state accreditation standards for regulation of the financial solvency of the insurance industry. The Commonwealth is currently accredited by the NAIC for compliance with the financial regulation standards. In 1998, the NAIC revised the model regulation to make it consistent with the NAIC's codified Accounting Practices and Procedures Manual (manual) that will be effective January 1, 2001. Insurers subject to these regulations have been advised by Insurance Department Notice Nos. 1998-04 and 2000-02 that they will be required to adhere to the manual in preparing financial statements to be filed with the Department. This rulemaking will update the regulations to be consistent with the manual and the 1998 revisions to the NAIC model regulation.
Explanation of Regulatory Requirements
This rulemaking proposes to amend § 147.4 (relating to contents of annual audited financial report) to address technical issues involving disclosures required in audit reports to be filed under the requirements of the manual.
Section 147.4(2) currently requires the notes to financial statements in annual audited financial reports to include notes required by generally accepted accounting principles (GAAP). Because the Statements of Statutory Accounting Principles (SSAPs) contained in the manual now address all types of required disclosures, the reference to GAAP is no longer needed and has been replaced with a reference to the manual. Section 147.4(2)(i) has been further amended to clarify that the notes shall include a reconciliation of any differences between the audited financial statement and the annual financial statement that the insurer has filed with the Department. In addition, the reference to section 320 of The Insurance Company Law of 1921 has been expanded to refer to other laws and regulations that may apply to financial statements filed by the various types of insurers under the scope of the regulations. Finally, § 147.4(2)(ii) has been deleted because a summary of the ownership and relationships of the insurer and all affiliated companies is required under SSAP No. 1 (relating to disclosure of accounting policies, risks and uncertainties, and other disclosures) in the manual. These amendments will eliminate potentially confusing inconsistencies between the regulations and the manual.
External Comments
The Department received comments from a group of ''Insurance Trade Associations in Support of NAIC Codification'' encouraging the Department to adopt the 1998 technical changes to the NAIC model regulation. The group includes the Alliance of American Insurers, American Association of Health Plans, American Council of Life Insurance, American Insurance Association, Blue Cross/Blue Shield Association, Health Insurance Association of America, National Association of Independent Insurers, National Association of Mutual Insurance Companies and Reinsurance Association of America. The Department also requested comments from The Insurance Federation of Pennsylvania, Inc., the Pennsylvania Association of Mutual Insurance Companies, and the Pennsylvania Fraternal Congress in the development of this rulemaking. The Department received no objections to the amendments in this rulemaking.
Fiscal Impact
The proposed rulemaking has no fiscal impact.
Paperwork
The proposed rulemaking would impose no additional paperwork requirements on the Department or affected insurers.
Persons Regulated
This proposed rulemaking applies to insurance companies, other insurer entities and continuing care providers licensed to transact business in this Commonwealth and the independent certified public accountants retained by those insurers to conduct annual audits.
Contact Person
Questions or comments regarding the proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, Pennsylvania Insurance Department, 1326 Strawberry Square, Harrisburg, PA 17120, within 30 days following the publication of this notice in the Pennsylvania Bulletin. Questions and comments may also be e-mailed to psalvato@ins.state.pa.us or faxed to (717) 772-1969.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 21, 2000, the Department submitted a copy of this proposed rulemaking to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Banking and Insurance Committee and the House Committee on Insurance. In addition to submitting this proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the agency in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, if IRRC has objections to any portion of the proposed amendments, it will notify the Department within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria that have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the regulations by the Department, the General Assembly and the Governor of objections raised.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: 11-203. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 31. INSURANCE
PART VIII. MISCELLANEOUS PROVISIONS
CHAPTER 147. ANNUAL AUDITED INSURERS' FINANCIAL REPORT REQUIRED § 147.4. Contents of annual audited financial report.
* * * * * (b) The annual audited financial report shall, at a minimum, include the following:
* * * * * (2) Notes to financial statements. These notes shall be those required by the appropriate National Association of Insurance Commissioners Annual Statement Instructions and [other notes required by generally accepted accounting principles and shall also include the following:
(i) A] Accounting Practices and Procedures Manual. The notes shall include a reconciliation of differences, if any, between the audited statutory financial statements and the annual statements filed with the Department under section 320 of The Insurance Company Law of 1921 (40 P. S. § 443) and other applicable laws and regulations, with a written description of the nature of these differences, particularly with respect to surplus or stockholder equity and the results of operations. The insurer shall file an amendment to its annual statement with the Department, the National Association of Insurance Commissioners and other states in which the insurer is licensed, to reflect differences between the audited statutory financial statement and the annual statement filed with the Department within 60 days of the filing date of the audited financial report. The Commissioner may require amendments to financial statements to be filed with the Department and the National Association of Insurance Commissioners on diskettes or other electronic information storage devices acceptable to the Commissioner.
[(ii) A summary of ownership and relationships of the insurer and affiliated companies.]
* * * * *
[Pa.B. Doc. No. 00-1666. Filed for public inspection September 29, 2000, 9:00 a.m.]
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