PROPOSED RULEMAKING
INSURANCE DEPARTMENT
[ 31 PA. CODE CH. 147 ]
Annual Financial Reporting Requirements
[46 Pa.B. 458]
[Saturday, January 23, 2016]The Insurance Department (Department) proposes to amend Chapter 147 (relating to annual financial reporting requirements) to read as set forth in Annex A. This 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), regarding the general proposed 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 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 proposed 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 proposed rulemaking is based upon changes to NAIC Model Regulation #205 adopted by the NAIC in 2014. The amendments to the NAIC model 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 to 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. The proposed amendments add corporate governance-related functions to the audit committee's responsibilities.
The Department expects that the proposed amendments to Chapter 147 will be required for the Department to maintain accreditation by the NAIC.
Explanation of Regulatory Requirements
The following is a description of the changes in the proposed rulemaking:
Proposed amendments to § 147.2 (relating to definitions) revise the definition of ''audit committee'' to add functions and add a definition for ''internal audit function.''
Proposed amendments to § 147.3a (relating to requirements for audit committees) add a requirement for an audit committee to oversee the insurer's internal audit function, to fix an error in existing text and to renumber the remainder of the section accordingly.
Proposed § 147.8a (relating to internal audit function requirements) would set forth the requirements for the establishment of the internal audit function, including independence and reporting requirements. This section would also specify which insurers would be exempt from those requirements.
Proposed amendments to § 147.13 (relating to effective date and exemption) include a provision requiring an insurer no longer qualifying for an exemption to comply with the requirements of § 147.8a within 1 year of exceeding the exemption thresholds.
Affected Parties
The proposed rulemaking applies to insurers licensed to transact business in this Commonwealth that are not exempt under proposed § 147.8a(a).
Fiscal Impact
State government
There will not be a material increase in cost to the Department as a result of this proposed rulemaking.
General public
The public will benefit to the extent the proposed rulemaking strengthens financial solvency regulatory requirements for insurers, thereby promoting the ability of the insurance industry to meet obligations under insurance policies.
Political subdivisions
The proposed rulemaking will not impose additional costs on political subdivisions.
Private sector
The proposed 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 proposed rulemaking minimizes costs by including a number of exemptions for smaller insurers.
Paperwork
The proposed rulemaking would 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
The proposed rulemaking will become effective 30 days after final-form publication in the Pennsylvania Bulletin. 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 concerning this proposed rulemaking may be addressed in writing to Bridget E. Burke, Regulatory Coordinator, 1341 Strawberry Square, Harrisburg, PA 17120, fax (717) 772-1969, briburke@pa.gov within 30 days after the publication in the Pennsylvania Bulletin.
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 this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee. A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria in section 5.2 of the Regulatory Review Act (71 P. S. § 745.5b) which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Department, the General Assembly and the Governor of comments, recommendations or objections raised.
TERESA D. MILLER,
Insurance CommissionerFiscal Note: 11-254. No fiscal impact; (8) recommends adoption.
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:
* * * * * Audit committee—
(i) A committee or equivalent body established by the board of directors or equivalent body of an [insurer] entity for the purpose of overseeing the [accounting and financial reporting processes, audits of financial statements, and internal control structure of the insurer or insurer group.] 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 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:
* * * * * (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 performing the function suitable authority and resources to fulfill their responsibilities as required under § 147.8a (relating to internal audit function requirements).
[(g)] (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 [complaint] compliant entities or direct or indirect wholly owned subsidiaries of Sarbanes Oxley [complaint] compliant entities.
[(h)] (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) [(relating to], regarding suspension of business and risk-based capital requirements[), 31 Pa. Code], Chapter 160 (relating to standards to define insurers deemed to be in hazardous financial condition) or other provisions of law.
(Editor's Note: The following section is new and printed in regular type to enhance readability.)
§ 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.
(f) Internal review by exempt entities. An insurer or group of insurers exempt from the requirements of this section is encouraged, but not required, to conduct a review of the insurer business type, sources of capital and other risk factors to determine whether an internal audit function is warranted. The potential benefits of an internal audit function should be assessed and compared against the estimated costs.
§ 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 [of annual audited financial report] 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 has 1 year after the year the threshold is exceeded to comply with the requirements of § 147.8a.
[Pa.B. Doc. No. 16-111. Filed for public inspection January 22, 2016, 9:00 a.m.]
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