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PA Bulletin, Doc. No. 04-2294

NOTICES

Financial Regulation Updates; No. 2004-10

[34 Pa.B. 6808]

   This notice is being issued to inform all Pennsylvania domestic insurers of the following recent developments relating to regulatory requirements:

Legislative Changes--Act 216 of 2004

   Senate Bill 1096 (Printer's No. 1970) was enacted on November 30, 2004, and became Act No. 216 of 2004. The act includes the following Insurance Department initiatives:

   *  New Surplus Note Law--A new section 322.2 has replaced sections 322.1 and 809 of The Insurance Company Law (40 P. S. §§ 445.1 and 919). The new statute applies to all types of licensed insurers and is consistent with the Accounting Practices and Procedures Manual (SSAP No. 41 Surplus Notes) adopted by the National Association of Insurance Commissioners (NAIC). Therefore, Pennsylvania's surplus note law is no longer considered a law relating to statutory financial statement presentation that may require disclosure in the notes to financial statements and CPA audit reports as a departure from the NAIC Manual. An important change in the new law is the elimination of outdated requirements relating to interest rates and the forfeiture of interest earned on surplus notes. The new law became effective November 30, 2004.

   *  Investment Limitations--The life and property/casualty investment laws (40 P. S. §§ 504.2(15)(ii)(C) and 653c(a)(11)(ii)(C)) have been amended to increase the permissible limit in investments in agreements for the lending of securities, repurchase or reverse repurchase agreements with any one business entity from 2% to 5% of admitted assets. This change also reflects current national standards adopted in the NAIC Model Investment Law (Defined Limits) and became effective November 30, 2004.

   *  Standard Nonforfeiture Law for Individual Deferred Annuities--The nonforfeiture law for deferred annuities has been amended to revise the expense charges and interest rates used in determining minimum nonforfeiture amounts. The interest rates shall be based on the Five-Year Constant Maturity Treasury Rate. In addition, the interest rate used in determining minimum nonforfeiture amounts for an equity-indexed benefit may be reduced by up to 100 basis points depending on the value of the equity index benefit. The amendment is effective for contracts issued on or after January 1, 2006, or before January 1, 2006, if an insurer files with the Insurance Department a notice of election of the amendment. An interest rate of 1.5% is used in determining minimum nonforfeiture amounts for contracts issued on or after July 1, 2002, and before January 1, 2006, except if the insurer has elected to apply the amendment prior to January 1, 2006.

   Pennsylvania Regulatory Requirements for Annual Audits and the Sarbanes-Oxley Act of 2002

   31 Pa. Code Chapter 147, Annual Audited Insurers' Financial Report Required, applies to all domestic insurers. If significant deficiencies in internal controls are identified in an annual audit, § 147.10 of this regulation requires notice to the Department, as follows:

§ 147.10. Report on significant deficiencies in internal controls.

(a)  Concurrently with the filing of the annual audited financial reports, each insurer shall furnish the Commissioner with a written report prepared by the independent certified public accountant describing significant deficiencies in the insurer's internal control structure noted by the independent certified public accountant during the audit. The Statement of Auditing Standard No. 60, Communication of Internal Control Structure Matters Noted in an Audit (AU Section 325 of the Professional Standards of the American Institute of Certified Public Accountants, Inc.) requires an independent certified public accountant to communicate significant deficiencies, known as ''reportable conditions,'' noted during a financial statement audit to the appropriate parties within an entity. A report should not be issued if the independent certified public accountant does not identify significant deficiencies.
(b)  The insurer is required to provide, within 60 days of the date of the independent certified public accountant's report on significant deficiencies, a description of remedial actions taken or proposed to correct significant deficiencies, if the actions are not described in the independent certified public accountant's report.

   The Sarbanes-Oxley Act of 2002 applies to companies that are required to register with the U.S. Securities and Exchange Commission. Section 404, Management Assessment of Internal Controls, of Sarbanes-Oxley requires companies that file annual reports under section 13(a) or 15(d) of the Securities Exchange of Act of 1934 (15 U.S.C.A. §§ 78m or 78o(d)) to include an internal control report that contains (1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and (2) management's assessment of the effectiveness of the company's internal control structure and procedures for financial reporting. The company's auditor is required to attest to and report on the management's assessment.

   As a point of clarification relating to the interrelationship of these state and federal requirements, please be advised that compliance with 31 Pa. Code § 147.10 is required if an auditor's review conducted under section 404 of Sarbanes-Oxley results in the identification of significant deficiencies in internal controls that affect statutory financial reporting, as described in 31 Pa. Code § 147.10.

   Coordination of Multistate Licensing

   The Department is involved in NAIC efforts to coordinate and streamline multistate licensing of insurers. To facilitate these efforts, the Department requires notice of efforts by domestic insurers to transact business in other states, including applications to:

   *  become licensed or expand licensing authority

   *  obtain approval to transact surplus lines or reinsurance business.

   Therefore, domestic insurers should notify the Department of these types of activities no later than the date the applications are filed. Notice should be e-mailed to: stjohnson@state.pa.us.

   Questions concerning this notice may be directed to Stephen J. Johnson, CPA, Deputy Insurance Commissioner, Office of Corporate and Financial Regulation, 1345 Strawberry Square, Harrisburg, PA 17120, (717) 783-2142, fax (717) 787-8557 and stjohnson@state.pa.us

M. DIANE KOKEN,   
Insurance Commissioner

[Pa.B. Doc. No. 04-2294. Filed for public inspection December 23, 2004, 9:00 a.m.]


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