RULES AND REGULATIONS
Title 31—INSURANCE
INSURANCE DEPARTMENT
[ 31 PA. CODE CH. 147 ]
Annual Financial Reporting Requirements
[46 Pa.B. 7819]
[Saturday, December 17, 2016]The Insurance Department (Department) amends Chapter 147 (relating to annual financial reporting requirements) to read as set forth in Annex A. This final-form rulemaking is made under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P.S. §§ 66, 186, 411 and 412), regarding the general rulemaking authority of the Department, sections 320, 630, 1007 and 2452 of The Insurance Company Law of 1921 (40 P.S. §§ 443, 764a, 967 and 991.2452), regarding the authority of the Insurance Commissioner (Commissioner) to require insurance companies, associations, exchanges, fraternal benefit societies and preferred provider organizations to file statements concerning their affairs and financial condition, sections 205 and 206 of The Pennsylvania Fair Plan Act (40 P.S. §§ 1600.205 and 1600.206), section 731 of the Medical Care Availability and Reduction of Error (MCARE) Act (40 P.S. § 1303.731), 40 Pa.C.S. §§ 6125, 6331 and 6701 (relating to reports and examinations; reports and examinations; and regulation), sections 11 and 14 of the Health Maintenance Organization Act (40 P.S. §§ 1561 and 1564) and sections 7 and 25 of the Continuing-Care Provider Registration and Disclosure Act (40 P.S. §§ 3207 and 3225), regarding the specific regulatory and rulemaking authority of the Department as to financial reporting by the Pennsylvania Fair Plan, the Pennsylvania Professional Liability Joint Underwriting Association, hospital plan corporations, professional health service corporations, beneficial associations, health maintenance organizations and continuing care providers, respectively.
Purpose
The purpose of this final-form rulemaking is to update Chapter 147, commonly referred to as the ''CPA Audit Rule.'' Chapter 147 was initially adopted in 1979 and requires insurers to have annual audits of their year-end statutory financial statements performed by independent certified public accountants. It is based on a model regulation developed by the National Association of Insurance Commissioners (NAIC) and included in the NAIC's Financial Regulation Standards and Accreditation Program.
This final-form rulemaking is based on changes to NAIC Model Regulation # 205 adopted by the NAIC in 2014, which were developed as a result of the NAIC's determination that it was necessary for insurers to maintain an effective internal audit function capable of providing the insurer's audit committee with independent assurance regarding the insurer's governance, risk management and internal controls. As such, the NAIC determined that the best way to implement an internal audit requirement would be to place the requirement within the NAIC's existing Annual Financial Reporting Model Regulation (# 205). Model Regulation # 205 currently includes a requirement for insurers to receive an annual financial statement audit, as well as requirements related to the establishment of audit committees and maintenance of effective internal controls over financial reporting. This final-form rulemaking adds corporate governance-related functions to the audit committee's responsibilities.
The Department expects that the amendments to Chapter 147 will be required for the Department to maintain accreditation by the NAIC.
Comments and Responses
Notice of proposed rulemaking was published at 46 Pa.B. 458 (January 23, 2016), with a 30-day public comment period. Comments were received from the Pennsylvania Association of Mutual Insurance Companies (PAMIC), the Insurance Federation of Pennsylvania (IFP) and the Pennsylvania Institute of Certified Public Accounts (PICPA).
PAMIC and IFP expressed support for the proposed rulemaking as drafted.
Although the comment letter from PICPA expressed general support for the rulemaking, the comments made by PICPA were not responsive to the rulemaking as proposed by the Department. Instead, the comments focused on provisions of the NAIC model and provisions of Chapter 147 that the Department is not amending as part of this final-form rulemaking. The comment letter, does, however, recognize that the comments made are more appropriately directed to the NAIC. As such, because the PICPA comments were not relevant to the amendments to Chapter 147, the Department declines to make revisions to this final-form rulemaking based upon the comments from PICPA.
IRRC submitted comments to the proposed rulemaking on March 23, 2016. IRRC noted that § 147.8a(f) contained nonregulatory language which was inappropriate. In response to IRRC's comments, the Department deleted proposed § 147.8a(f). The Department intends to include this information in a policy statement as suggested.
Additionally, IRRC requested the Department clarify the date of compliance for insurers that no longer qualify for an exemption. In response to IRRC's comment, the Department added language to clarify that the period to attain compliance with § 147.8a (relating to internal audit function requirements) as referenced in § 147.13(j) (relating to effective date and exemption) is 1 calendar year after the threshold is exceeded, as shown on the insurer's annual statement. As stated in § 147.8a(a), the exemption is determined by the amount of company's ''annual direct written and unaffiliated assumed premium'' (emphasis added). These numbers are reported on an insurer's annual statement, which is filed on March 1 but is based upon the previous year's data. See section 320 of The Insurance Company Law of 1921, which requires a company to file ''a statement which shall exhibit its financial condition on the thirty-first day of December of the previous year.'' For example, if a company's annual premium exceeds the threshold on December 31, 2017, and the insurer reports accordingly on its annual statement due on March 1, 2018, it will have until December 31, 2018, to come into compliance with the requirements of this final-form rulemaking.
Affected Parties
This final-form rulemaking applies to insurers licensed to transact business in this Commonwealth that are not exempt under § 147.8a(a).
Fiscal Impact
State government
This final-form rulemaking will strengthen and clarify existing regulatory requirements. There will not be a material increase in cost to the Department as a result of this final-form rulemaking.
General public
The public will benefit to the extent this final-form rulemaking strengthens financial solvency regulatory requirements for insurers, thereby promoting the ability of the insurance industry to meet obligations under insurance policies.
Political subdivisions
This final-form rulemaking will not impose additional costs on political subdivisions.
Private sector
This final-form rulemaking may impose additional costs on insurers that have not yet established an internal audit function. However, the strengthened requirements are consistent with National standards to be adopted by all states participating in the NAIC Financial Regulation Standards and Accreditation Program. This final-form rulemaking minimizes costs by including a number of exemptions for smaller insurers.
Paperwork
This final-form rulemaking will not impose additional paperwork on the Department, as no filing is required to be made by insurers regarding this new requirement. To the extent that insurers document internal audit function requirements in written format, the amendments may impose additional paperwork on insurers.
Effectiveness Date and Sunset Date
This final-form rulemaking will become effective on January 17, 2017. The Department continues to monitor the effectiveness of regulations on a triennial basis. Therefore, a sunset date has not been assigned.
Contact Person
Questions or comments regarding this final-form rulemaking may be addressed in writing to Bridget Burke, Regulatory Coordinator, Insurance Department, 1341 Strawberry Square, Harrisburg, PA 17120, fax (717) 772-1969, briburke@pa.gov.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P.S. § 745.5(a)), on January 11, 2016, the Department submitted a copy of the notice of proposed rulemaking, published at 46 Pa.B. 458, to IRRC and the Chairpersons of the Senate Banking and Insurance Committee and the House Insurance Committee for review and comment.
Under section 5(c) of the Regulatory Review Act, the Department shall submit to IRRC and the House and Senate Committees copies of comments received during the public comment period, as well as other documents when requested. In preparing the final-form rulemaking, the Department has considered all comments from IRRC and the public.
Under section 5.1(j.2) of the Regulatory Review Act (71 P.S. § 745.5a(j.2)), on November 16, 2016, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on November 17, 2016, and approved the final-form rulemaking.
Findings
The Commissioner finds that:
(1) Public notice of intention to adopt this final-form rulemaking was 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 final-form 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 adding § 147.8a and amending §§ 147.2, 147.3a and 147.13 to read as set forth in Annex A, with ellipses referring to the existing text of the regulations.
(b) The Department shall submit this order and Annex A to IRRC and the House and Senate Committees as required by law.
(c) The Department 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.
(d) The Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(e) This order shall take effect on January 17, 2017.
TERESA D. MILLER,
Insurance Commissioner(Editor's Note: See 46 Pa.B. 7603 (December 3, 2016) for IRRC's approval order.)
Fiscal Note: Fiscal Note 11-254 remains valid for the final adoption of the subject regulations.
Annex A
TITLE 31. INSURANCE
PART VIII. MISCELLANEOUS PROVISIONS
CHAPTER 147. ANNUAL FINANCIAL REPORTING REQUIREMENTS § 147.2. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
Affiliate—As defined in section 1401 of The Insurance Company Law of 1921 (40 P.S. § 991.1401).
Assumed premiums—Total premiums assumed by an insurer from nonaffiliated insurers.
Audit committee—
(i) A committee or equivalent body established by the board of directors or equivalent body of an entity for the purpose of overseeing the following functions of an insurer or insurer group:
(A) Accounting and financial reporting processes.
(B) Internal audit function.
(C) External audits of financial statements.
(D) Internal control structure.
(ii) The term includes a committee established under section 1405(c)(4) or (5) of The Insurance Company Law of 1921 (40 P.S. § 991.1405(c)(4) and (5)).
* * * * * Insurer group—Two or more affiliated insurers identified by a controlling entity for the purpose of evaluating the effectiveness of internal control over financial reporting.
Internal audit function—The role of a person or persons in providing independent, objective and reasonable assurances that add value to and improve upon the organization's operations and assist the organization in accomplishing its objectives by employing a systematic, disciplined approach to evaluate and improve the effectiveness of the risk management, control and governance processes.
Internal control over financial reporting—The process effected by the board of directors, management and other personnel of an insurer or insurer group, which provides reasonable assurances regarding the reliability of the financial statements in accordance with § 147.9a (relating to establishment and communication of internal control over financial reporting).
* * * * * § 147.3a. Requirements for audit committees.
* * * * * (f) The audit committee shall retain an independent certified public accountant to conduct the annual audit and issue an audited financial report under this chapter in accordance with the following requirements:
(1) The audit committee shall be directly responsible for the appointment, compensation and oversight of the work of the independent certified public accountant and resolve disagreements between management and the independent certified public accountant relating to financial reporting for the purpose of preparing or issuing the audited financial report or related work under this chapter.
(2) The independent certified public accountant retained to conduct the annual audit under this chapter shall report directly to the audit committee. The audit committee shall require the independent certified public accountant to report to the audit committee in sufficient time to enable the committee to take appropriate action as required by Statement on Auditing Standards 114 (SAS 114), The Auditor's Communication with Those Charged With Governance, or successor publication and all of the following requirements:
(i) All significant accounting policies and material permitted practices.
(ii) All material alternative treatments of financial information within statutory accounting principles that have been discussed with the management of the insurer, ramifications of the use of alternative disclosures and treatments, and the treatment preferred by the independent certified public accountant.
(iii) Other material written communications between the independent certified public accountant and the management of the insurer, such as any management letter or schedule of unadjusted differences.
(3) The report required under paragraph (2) may be provided to the audit committee on an aggregate basis for insurers in an insurer group, if the report identifies any substantial differences in reported items among the insurers in the group.
(g) The audit committee is 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 as required under § 147.8a (relating to internal audit function requirements).
(h) Exemptions are as follows.
(1) The requirements of subsections (b), (c), (e) and (f) do not apply to an insurer with direct written and assumed premiums less than $500,000,000, excluding premiums reinsured with the Federal Crop Insurance Corporation and the Federal Flood Program, which has been granted an exemption by the Department on the basis of financial or organizational hardship under § 147.13(g) (relating to effective date and exemption).
(2) This section does not apply to continuing care providers.
(3) The requirements of subsections (b)—(e) do not apply to insurers subject to section 1405(c)(4) and (5) of The Insurance Company Law of 1921 (40 P.S. § 991.1405(c)(4) and (5)), Sarbanes Oxley compliant entities or direct or indirect wholly owned subsidiaries of Sarbanes Oxley compliant entities.
(i) This section may not be interpreted to limit the Department's authority to require an insurer to take specific corrective action relating to the independence of audit committee members under sections 501—563, 501-A—515-A and 501-B—515-B of The Insurance Department Act of 1921 (40 P.S. §§ 221.1—221.63, 221.1-A—221.15-A and 221.1-B—221.15-B), regarding suspension of business and risk-based capital requirements, Chapter 160 (relating to standards to define insurers deemed to be in hazardous financial condition) or other provisions of law.
§ 147.8a. Internal audit function requirements.
(a) Exemption. An insurer is exempt from the requirements of this section if:
(1) The insurer meets the following requirements:
(i) Has annual direct written and unaffiliated assumed premium, including international direct and assumed premium excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, less than $500 million.
(ii) If the insurer is a member of a group of insurers, the group has annual direct written and unaffiliated assumed premium including international direct and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, less than $1 billion.
(2) It is a continuing care provider licensed to transact business in this Commonwealth under the Continuing-Care Provider Registration and Disclosure Act (40 P.S. §§ 3201—3225).
(b) Function. The insurer or group of insurers shall establish an internal audit function that provides independent, objective and reasonable assurance to the audit committee and the insurer's management regarding the insurer's governance, risk management and internal controls. This function includes the performance of general and specific audits, reviews and tests and employ other techniques deemed necessary to protect assets, evaluate control effectiveness and efficiency, and evaluate compliance with policies and regulations.
(c) Independence. To ensure that internal auditors remain objective, the internal audit function must be organizationally independent. Specifically, the internal audit function may 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 in this section at the ultimate controlling parent level, an intermediate holding company level or the individual legal entity level.
§ 147.13. Effective date and exemption.
* * * * * (i) In the case of insurers organized in Canada or the United Kingdom of Great Britain and Northern Ireland, the annual audited financial report is defined as the annual statement of total business on the form filed by the insurers with their domiciliary supervision authority, audited by an independent chartered accountant. For these insurers, the letter required in § 147.6a (relating to letter of qualifications of independent certified public accountant) must state that the independent certified public accountant is aware of the requirements relating to the annual audited financial report filed with the Commissioner under § 147.3 (relating to filing and extensions for filing required reports and communications) and affirm that the opinion expressed is in conformity with those requirements.
(j) If an insurer or group of insurers exempt from the requirements of § 147.8a (relating to internal audit function requirements) no longer qualifies for that exemption, it shall have until December 31 of the year in which the annual statement was filed showing the threshold is exceeded to comply with the requirements of § 147.8a.
[Pa.B. Doc. No. 16-2193. Filed for public inspection December 16, 2016, 9:00 a.m.]
No part of the information on this site may be reproduced for profit or sold for profit.This material has been drawn directly from the official Pennsylvania Bulletin full text database. Due to the limitations of HTML or differences in display capabilities of different browsers, this version may differ slightly from the official printed version.
