RULES AND REGULATIONS
INSURANCE DEPARTMENT
[31 PA. CODE CH. 147]
Annual Audited Insurers' Financial Report Required
[31 Pa.B. 2002] The Insurance Department (Department) by this order amends Chapter 147 (relating to annual audited insurers' financial report required) to read as set forth in Annex A. 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) effective January 1, 2001. Insurers subject to these regulations have been advised by 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.
This rulemaking amends § 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. 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. This amendment will eliminate potentially confusing inconsistencies between the regulations and the manual.
Statutory Authority
This final-form rulemaking is adopted 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; section 1605(a)(3)(ii) of The Insurance Company Law of 1921 (40 P. S. § 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; and continuing care providers and fraternal benefit societies.
Comments
Notice of the proposed rulemaking was published at 30 Pa.B. 5023 (September 30, 2000) with a 30-day public comment period.
No comments were received from the standing committees. The Insurance Federation of Pennsylvania, Inc., commented in support of the proposed rulemaking. The Independent Regulatory Review Commission (IRRC) submitted its comments and recommendations to the Department on November 30, 2000.
IRRC recommended that the phrase ''and other applicable laws and regulations'' in § 147.4(b)(2) be deleted or clarified. Section 147.4(b)(2) requires an annual audited financial report to include a reconciliation of differences, if any, between the audited statutory financial statements and the annual statements already on file with the Department. A reference to the specific laws and regulations that require the filing of annual statements with the Department is not needed to understand the meaning and intent of § 147.4(b)(2). Therefore, the Department has responded to IRRC's comment by deleting the phrase ''under section 320 of The Insurance Company Law of 1921 (40 P. S. § 443) and other applicable laws and regulations'' in this final-form rulemaking.
Fiscal Impact
The final-form rulemaking has no fiscal impact on State government, the general public, political subdivisions or the private sector.
Paperwork
The final-form rulemaking would impose no additional paperwork requirements on the Department or affected insurers.
Persons Regulated
The final-form 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 this final-form rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, Insurance Department, Office of Special Projects, 1326 Strawberry Square, Harrisburg, PA 17120, (717) 787-4429. Questions and comments may also be e-mailed to psalvatore@state.pa.us or faxed to (717) 705-3873.
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 IRRC and to the Chairpersons of the Senate Committee on Banking and Insurance and the House Committee on Insurance. In addition to the submitted proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.''
In compliance with section 5(c) of the Regulatory Review, the Department also provided IRRC and the Committees with copies of the comments received. A copy of that material is available to the public upon request.
This final-form regulation was deemed approved by the Senate and House Committees on March 14, 2001, in accordance with section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)). IRRC met on March 22, 2001, and approved the final-form regulation in accordance with section 5.1(e) of the Regulatory Review Act.
Findings
The Commissioner finds that:
(1) Public notice of intention to adopt this rulemaking as amended by this order has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202), and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The adoption of this rulemaking in the manner provided in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.
Order
The Commissioner, acting under the authorizing statutes, orders that:
(a) The regulations of the Department, 31 Pa. Code Chapter 147, are amended by amending § 147.4 to read as set forth in Annex A.
(b) The Commissioner shall submit this order and Annex A to the Office of General Counsel and Office of Attorney General for approval as to form and legality as required by law
(c) The Commissioner shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
M. DIANE KOKEN,
Insurance Commissioner(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document see 31 Pa.B. 1925 (April 7, 2001).)
Fiscal Note: Fiscal Note 11-203 remains valid for the final adoption of the subject regulation.
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.
(a) The annual audited financial report shall reflect the financial condition 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. Statutory accounting practices are those practices and procedures prescribed by the Accounting Practices and Procedures Manuals published by the National Association of Insurance Commissioners, or as otherwise prescribed or provided by specific statutes, regulations, orders or rulings of the Commonwealth or the Department.
(b) The annual audited financial report shall, at a minimum, include the following:
(1) Financial statements that present in a comparable manner, as of the end of the current and the preceding calendar year, the financial condition of the insurer, including the following:
(i) Balance sheet reporting admitted assets, liabilities, capital and surplus.
(ii) Statement of operations.
(iii) Statement of cash flows.
(iv) Statement of changes in capital and surplus.
(2) Notes to financial statements. These notes shall be those required by the appropriate National Association of Insurance Commissioners Annual Statement Instructions and Acounting 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, 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.
(3) The report of an independent certified public accountant prepared in compliance with this chapter, including notification of adverse financial condition, report on significant deficiencies in internal controls and letter of qualifications of the independent certified public accountant.
(c) 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 Department, and the financial statements shall be comparative, presenting the amounts as of December 31 of the current year and the amounts as of the immediately preceding December 31. In the first year in which an insurer is required to file an audited financial report, the comparative data may be omitted if sufficient detail is made available to the Department upon request. An account which represents less than 5% of the insurer's admitted assets may be aggregated for reporting purposes, except that all invested asset accounts shall be separately reported.
(d) If an error is discovered after a report is filed, the accountant shall withdraw the report and issue a corrected report within 30 days of discovery of the error. To the extent that the error requires an amendment to the insurer's annual financial statement filed with the Department, the insurer shall file an amendment under subsection (b)(2).
[Pa.B. Doc. No. 01-637. Filed for public inspection April 13, 2001, 9:00 a.m.]
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