806 KAR 3:170.
Annual audited financial reports.
RELATES TO: KRS
304.1-050, 304.2-065, 304.2-210-304.2-290, 304.3-120, 304.3-125, 304.3-240,
304.3-241, 304.17A-820, 304.32-210, 304.35-040, 304.37-010, 304.37-020,
304.36-140, 304.42-150, 304.45-030, 304.45-040, 304.48-110, 304.49-070(2),
304.49-080, 304.49-090, 304.50-060, 304.50-075, 18 U.S.C. 1961, 1968
STATUTORY
AUTHORITY: KRS 304.2-110, 304.3-240, 304.49-140
NECESSITY,
FUNCTION, AND CONFORMITY: KRS 304.2-110 authorizes the Commissioner of the
Department of Insurance to promulgate administrative regulations necessary for
or as an aid to the effectuation of any provision of the Kentucky Insurance
Code as defined in KRS 304.1-010. KRS 304.3-240 authorizes the commissioner to
promulgate administrative regulations concerning the publication of financial
statements. KRS 304-49-140 authorizes the commissioner to promulgate
administrative regulations relating to captive insurance companies that are
necessary to enable the commissioner to carry out the provisions of KRS
304.39-010 to 304.49-230. This administrative regulation establishes
requirements concerning the annual filing of audited financial reports by
insurers.
Section 1.
Definitions. (1)(a) "Accountant" and "independent certified
public accountant" mean an independent certified public accountant or
accounting firm in good standing with the American Institute of Certified
Public Accountants and in all states in which they are licensed to practice.
(b) For Canadian
and British insurers, "accountant" means a Canadian-chartered or
British-chartered accountant.
(2)
"Affiliate" or "affiliated" is defined by KRS
304.37-010(4).
(3) "Audit
Committee" means a committee, or equivalent body, established by the board
of directors of an entity for the purpose of overseeing the accounting and
financial reporting processes of an insurer or group of insurers and audits of
financial statements of the insurer or group of insurers.
(4) "Audited
financial report" means those items specified in Section 4 of this administrative
regulation.
(5)
"Commissioner" is defined in KRS 304.1-050(1).
(6)
"Controlling person" is defined in KRS 304.37-010(8).
(7)
"Department" is defined in KRS 304.1-050(2).
(8) "Group of
Insurers" means those licensed insurers included in the reporting
requirements of KRS 304.37-020, or a set of insurers as identified by
management, for the purpose of assessing the effectiveness of internal control
over financial reporting.
(9) "Insurer"
is defined by KRS 304.1-040.
(10) "Internal
control over financial reporting" means a process affected by an entity’s
board of directors, management, and other personnel designed to provide
reasonable assurance regarding the reliability of the financial statements and
includes those policies and procedures that:
(a) Pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets;
(b) Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements and that receipts and expenditures are
being made only in accordance with authorizations of management and directors;
and
(c) Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on
the financial statements.
(11)
"SEC" means the United States Securities and Exchange Commission.
(12) "Section
404" means Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC’s
rules and regulations promulgated under Section 404.
(13) "Section
404 Report" means management’s report on "internal control over
financial reporting" as defined by the SEC and the related attestation
report of the independent certified public accountant.
(14) "SOX
Compliant Entity" means an entity that either is required to be compliant
with, or voluntarily is compliant with, all of the following provisions of the
Sarbanes-Oxley Act of 2002:
(a) The preapproval
requirements of Section 201;
(b) The audit
committee independence requirements of Section 301; and
(c) The internal
control over financial reporting requirements of Section 404.
(15) "Work
papers" mean the records kept by the independent certified public
accountant of the procedures followed, the tests performed, the information
obtained, and the conclusions reached pertinent to the independent certified
public accountants audit of the financial statements of an insurer. Work papers
may include audit planning documentation, work programs, analyses, memoranda,
letters of confirmation and representation, abstracts of insurer documents, and
schedules or commentaries prepared or obtained by the independent certified
public accountant in the course of the independent certified public accountants
audit of the financial statements of an insurer and which support the independent
certified public accountants opinion of the financial statements of an insurer.
Section 2. Purpose
and Scope. (1) This administrative regulation shall be to improve the
department's surveillance of the financial condition of insurers by requiring:
(a) An annual audit
of financial statements reporting the financial position and the results of
operations of insurers by independent certified public accountants;
(b) Communication
of internal control related matters noted in an audit; and
(c) Management's
report of internal control over financial reporting.
(2) Every insurer
shall be subject to this administrative regulation. Insurers having direct
premiums written in this state of less than one (1) million dollars in any
calendar year and less than 1,000 policyholders or certificate holders of
direct written policies nationwide at the end of the calendar year shall be
exempt from this administrative regulation.
(a) Unless the
commissioner makes a specific finding that compliance is necessary for the
department to carry out its statutory responsibilities, insurers shall be
exempt during years in which the following conditions exist. The insurer has,
at the end of the calendar year:
1. Direct premiums
written in this state of less than $1,000,000; and
2. Less than 1,000
policyholders or certificate holders of direct written policies nationwide.
(b) Insurers that
have assumed premiums of $1,000,000 or more pursuant to contracts or treaties
of reinsurance shall not be exempt from this administrative regulation.
(3) Foreign or
alien insurers filing the audited financial report in another state, pursuant
to the other state's requirement for filing an audited financial report which
has been found by the commissioner to be substantially similar to the
requirements of this administrative regulation, shall be exempt from this
administrative regulation if:
(a) The following
documents, which are filed with the other state, are filed with the
commissioner in accordance with Sections 4, 11, and 12 of this administrative
regulation:
1. A copy of the
audited financial report;
2. Communication of
internal control related matters noted in an audit; and
3. The accountant's
letter of qualifications; Canadian insurers may submit accountants' reports as
filed with the Office of Superintendent of Financial Institutions, Canada; and
(b) A copy of any
notification of adverse financial condition report filed with the other state
is filed with the commissioner within the time specified in Section 9 of this
administrative regulation.
(4) Foreign or
alien insurers required to file management’s report of internal control over
financial reporting in another state shall be exempt from filing the report in
this state if:
(a) The other state
has substantially similar reporting requirements; and
(b) The report is
filed with the commissioner of the other state within the time specified.
(5) This
administrative regulation shall not prohibit, preclude, or in any way limit the
commissioner from ordering, conducting, or performing examinations of insurers
under KRS 304.2-210 through 304.2-290, 304.17A-820, 304.32-210, 304.35-040,
304.36-140, 304.42-150, 304.48-110, 304.49-080, or 304.50-075.
Section 3. General
Requirements Related to Filing and Extensions for Filing of Annual Audited
Financial Reports and Audit Committee Appointment. (1) All insurers shall have
an annual audit by an independent certified public accountant and shall file an
audited financial report with the commissioner on or before June 1 for the year
ended December 31 immediately preceding. The commissioner may require an
insurer to file an audited financial report earlier than June 1 with ninety
(90) days advance notice to the insurer.
(2) Extensions of
the June 1 filing date may be granted by the commissioner for thirty (30) day
periods upon showing by the insurer and its independent certified public
accountant the reasons for requesting the extension and determination by the
commissioner of good cause for an extension. The request for extension shall be
submitted in writing not less than ten (10) days prior to the due date and
contain sufficient detail to permit the commissioner to make an informed
decision as to the requested extension.
(3) If an extension
is granted in accordance with subsection (2) of this section, a similar
extension of thirty (30) days shall be granted to the filing of management’s
report of internal control over financial reporting.
(4) Every insurer
required to file an annual audited financial report pursuant to this
administrative regulation shall designate a group of individuals as
constituting its audit committee. The audit committee of an entity that
controls an insurer may be deemed to be the insurer’s audit committee for
purposes of this administrative regulation at the election of the controlling
person.
Section 4. Contents
of Annual Audited Financial Report. (1) The annual audited financial report
shall report 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 insurance
supervisory authority of the insurer's state of domicile.
(2) The annual
audited financial report shall include the following:
(a) Report of
independent certified public accountant;
(b) Balance sheet
for reporting admitted assets, liabilities, capital, and surplus;
(c) Statement of operations;
(d) Statement of
cash flows;
(e) Statement of
changes in capital and surplus;
(f) Notes to
financial statements as required by KRS 304.3-240 in accordance with KRS
304.3-241. These notes shall also include:
1. A reconciliation
of differences, if any, between the audited statutory financial statements and
the annual statement filed pursuant to KRS 304.3-240 with a written description
of the nature of these differences; and
2. A summary of
ownership and relationships of the insurer and all affiliated companies; and
(g) The financial
statements included in the audited financial report shall be:
1. 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 commissioner;
and
2. Comparative,
presenting the amounts as of December 31 of the current year and the amounts as
of the immediately preceding December 31. However, in the first year in which
an insurer is required to file an audited financial report, the comparative
data may be omitted. The annual statement forms and instructions are those
prescribed by the National Association of Insurance Commissioners as required
by KRS 304.3-240.
Section 5.
Designation of Independent Certified Public Accountant. (1) Each insurer
required by this administrative regulation to file an annual audited financial
report shall, within sixty (60) days after becoming subject to this
requirement, register with the commissioner in writing the name and address of
the independent certified public accountant or accounting firm retained to
conduct the annual audit set forth in this administrative regulation. Insurers
not retaining an independent certified public accountant on the effective date
of this administrative regulation shall register the name and address of their
retained certified public accountant not less than six (6) months before the
date when the first audited financial report is to be filed.
(2) The insurer
shall obtain a letter from the accountant, and file a copy with the
commissioner, stating that the accountant is aware of the provisions of the
insurance laws of the insurer's state of domicile that relate to accounting and
financial matters and affirming that the accountant will express the
accountant's opinion on the financial statements in terms of their conformity
to the statutory accounting practices prescribed or otherwise permitted by the
insurance regulatory authority in that state, specifying any exceptions as the
accountant may believe appropriate.
(3) If an
accountant who was the accountant for the immediately preceding filed audited
financial report is dismissed or resigns the insurer shall:
(a) Within five (5)
business days notify the commissioner of this event;
(b) Furnish the
commissioner with a separate letter within ten (10) business days of the above
notification stating whether in the twenty-four (24) months preceding the
accountant's resignation there were any disagreements with the former
accountant which, if not resolved to the satisfaction of the former accountant,
would cause the accountant to make reference to the subject matter of the
disagreement in connection with the opinion. These shall include disagreements:
1. Concerning
accounting principles, financial statement disclosure, or auditing scope or
procedure;
2. That have been
resolved to the former accountant's satisfaction and those not so resolved; and
3. That occur at
the decision-making level, that is, between personnel of the insurer
responsible for presentation of its financial statements and personnel for the
accounting firm responsible for rendering its report;
(c) Request the
former accountant to furnish a letter addressed to the insurer stating whether
the accountant agrees with the statements contained in the insurer's letter,
and, if not, stating the reasons for which the accountant does not agree; and
(d) Furnish the
responsive letter from the former accountant to the commissioner together with
its own.
Section 6.
Qualifications of Independent Certified Public Accountant. (1) The commissioner
shall not recognize any person or firm as a qualified independent certified
public accountant if the person or firm:
(a) Is not in good
standing with the American Institute of Certified Public Accountants and in all
states in which the accountant is licensed to practice, or, for a Canadian or
British insurer, that is not a chartered accountant; or
(b) Has either
directly or indirectly entered into an agreement of indemnity or release from
liability with respect to the audit of the insurer.
(2) Except as
otherwise provided in this administrative regulation, an independent certified
public accountant shall be recognized as qualified if the independent certified
public accountant conforms to the standards of the accounting profession, as contained
in the statutes, administrative regulations, and codes of ethics and rules of
professional conduct administered by the State Board of Accountancy of Kentucky
in accordance with KRS Chapter 325 and 201 KAR Chapter 1.
(3) The lead or
coordinating audit partner having primary responsibility for the audit shall
not act in that capacity for more than five (5) consecutive years. The person
shall be disqualified from acting in that or a similar capacity for the same
insurer or its insurance subsidiaries or affiliates for a period of five (5)
years.
(a) An insurer may
make application to the commissioner for relief from this rotation requirement
on the basis of unusual circumstances. Application shall be made at least
thirty (30) days before the end of the calendar year. The commissioner may consider
the following factors in determining if the relief should be granted:
1. Number of
partners, expertise of the partners, or the number of insurance clients in the
currently registered firm;
2. Premium volume
of the insurer; or
3. Number of
jurisdictions in which the insurer transacts business.
(b) The insurer
shall file with its annual statement filing the approval for relief from
paragraph (a)1 of this subsection with the states that it is licensed in or
doing business in and with the National Association of Insurance Commissioners.
If the nondomestic state accepts electronic filing with the National
Association of Insurance Commissioners, the insurer shall file the approval in
an electronic format acceptable to the National Association of Insurance
Commissioners via the Web site, https://www2.naic.org/servlet/Index.
(c) The
commissioner shall not recognize as a qualified independent certified public
accountant, nor accept any annual audited financial report, prepared in whole
or in part by any natural person who:
1. Has been
convicted of fraud, bribery, or a conviction of the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. 1961, 1968;
2. Has been found
to have violated the insurance laws of this state with respect to any previous
reports submitted under this administrative regulation; or
3. Has demonstrated
a pattern or practice of failing to detect or disclose material information in
previous reports filed under this administrative regulation.
(4) If an insurer
disagrees with a determination made by the commissioner pursuant to subsection
(3) of this section, it may request a hearing in accordance with KRS 304.2-310.
(5)(a) The commissioner
shall not recognize as a qualified independent certified public accountant, nor
accept an annual audited financial report prepared in whole or in part by an accountant
who provides to an insurer, contemporaneously with the audit, the following nonaudit
services:
1. Bookkeeping or
other services related to the accounting records or financial statements of the
insurer;
2. Financial
information systems design and implementation;
3. Appraisal or
valuation services, fairness opinions, or contribution-in-kind reports;
4.
Actuarially-oriented advisory services involving the determination of amounts
recorded in the financial statements. The accountant may assist an insurer in
understanding the methods, assumptions, and inputs used in the determination of
amounts recorded in the financial statement only if it is reasonable to conclude
that the services provided will not be subject to audit procedures during an
audit of the insurer’s financial statements. An accountant’s actuary may also
issue an actuarial opinion or certification on an insurer’s reserves if the following
conditions have been met:
a. Neither the
accountant nor the accountant’s actuary has performed any management functions
or made any management decisions;
b. The insurer has
competent personnel or engages a third party actuary to estimate the reserves
for which management takes responsibility; and
c. The accountant’s
actuary tests the reasonableness of the reserves after the insurer’s management
has determined the amount of the reserves;
5. Internal audit
outsourcing services;
6. Management
functions or human resources;
7. Broker or
dealer, investment adviser, or investment banking services; or
8. Legal services
or expert services unrelated to the audit.
(b) A qualified
independent public accountant shall not:
1. Function in the
role of management;
2. Audit his or her
own work; and
3. Serve in an
advocacy role for the insurer.
(6)(a) Insurers
having direct written and assumed premium of less than $100,000,000 in any
calendar year may request an exemption from subsection (5)(a) of this section.
(b) To request an
exemption, the insurer shall file with the commissioner a written statement
discussing the reasons why the insurer should be exempt from these provisions.
(c) If the commissioner
finds, upon review of this statement, that compliance with this administrative
regulation would constitute an organizational hardship upon the insurer, an
exemption may be granted.
(7) A qualified
independent certified public accountant who performs the audit may engage in
other nonaudit services, including tax services, that are not described in
subsection (5)(a) of this section or that do not conflict with subsection
(5)(b) of this section, only if the activity is approved in advance by the
audit committee in accordance with subsection (8) of this section.
(8)(a) All auditing
services and nonaudit services provided to an insurer by the qualified
independent certified public accountant of the insurer shall be preapproved by
the audit committee.
(b) The preapproval
requirement shall be waived with respect to nonaudit services if:
1. The insurer is a
SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX
compliant entity; or
2.a. The aggregate
amount of all non-audit services provided to the insurer constitutes not more
than five (5) percent of the total amount of fees paid by the insurer to its
qualified independent certified public accountant during the fiscal year in
which the nonaudit services are provided;
b. The services
were not recognized by the insurer at the time of the engagement to be nonaudit
services; and
c. The services are
promptly brought to the attention of the audit committee and approved prior to
the completion of the audit by the audit committee or by one or more members of
the audit committee who are the members of the board of directors to whom
authority to grant approvals has been delegated by the audit committee.
(9) The audit
committee may delegate to one (1) or more designated members of the audit committee
the authority to grant the preapprovals required by subsection (8) of this
section. The decisions of any member to whom this authority is delegated shall
be presented to the full audit committee at each of its scheduled meetings.
(10)(a)1. The commissioner
shall not recognize an independent certified public accountant as qualified for
a particular insurer if the following were employed by the independent
certified public accountant and participated in the audit of that insurer
during the one (1) year period preceding the date that the most current
statutory opinion is due:
a. A member of the
board;
b. President;
c. Chief executive
officer;
d. Controller;
e. Chief financial
officer;
f. Chief accounting
officer; or
g. any person
serving in an equivalent position for that insurer.
2. This subsection
shall only apply to partners and senior managers involved in the audit.
3. An insurer may
make application to the commissioner for relief from the above requirements on
the basis of unusual circumstances.
(b) The insurer
shall file, with its annual statement filing, the approval for relief from
subsection (10)(a) of this section with the states that it is licensed in or
doing business in and the National Association of Insurance Commissioners. If the
nondomestic state accepts electronic filing with the National Association of
Insurance Commissioners, the insurer shall file the approval in an electronic
format acceptable to the National Association of Insurance Commissioners via
the Web site, https://www2.naic.org/servlet/Index.
Section 7.
Consolidated or Combined Audits. An insurer may make written application to the
commissioner for approval to file audited consolidated or combined financial
statements in lieu of separate annual audited financial reports if the insurer
is part of a group of insurers which utilizes a pooling or 100 percent reinsurance
agreement that affects the solvency and integrity of the insurer's reserves and
the insurer cedes all of its direct and assumed business to the pool. In these
cases, a columnar consolidating or combining worksheet shall be filed with the
report, as follows:
(1) Amounts shown
on the consolidated or combined audited financial report shall be shown on the worksheet;
(2) Amounts for
each insurer subject to this section shall be stated separately;
(3) Noninsurance
operations may be shown on the worksheet or a combined or individual basis;
(4) Explanations of
consolidating and eliminating entries shall be included; and
(5) A
reconciliation shall be included of any differences between the amounts shown
in the individual insurer columns of the worksheet and comparable amounts shown
in the annual statements of the insurers.
Section 8. Scope of
Examination and Report of Independent Certified Public Accountant. (1)
Financial statements furnished pursuant to Section 4 of this administrative
regulation shall be examined by the independent certified public accountant.
(2) The examination
of the insurer's financial statements shall be conducted in accordance with
generally accepted auditing standards.
(3) In accordance
with SAS No. 109, "Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement" and SAS No. 110,
"Performing Audit Procedures in Response to Assessed Risks and Evaluating
the Audit Evidence Obtained", or their replacements, the independent
certified public accountant shall obtain an understanding of internal control
sufficient to plan the audit.
(4) To the extent
required by SAS 109 and SAS 110, for those insurers required to file a
management’s report of internal control over financial reporting pursuant to
Section 2 of this administrative regulation, the independent certified public
accountant shall consider the most recently available report in planning and performing
the audit of the statutory financial statements.
(5) Consideration
shall also be given to other procedures illustrated in the Financial Condition
Examiner's Handbook of the National Association of Insurance Commissioners
which the independent certified public accountant deems necessary.
Section 9.
Notification of Adverse Financial Condition. (1)(a) The insurer required to
furnish the annual audited financial report shall require the independent certified
public accountant to report, in writing, within five (5) business days to the
board of directors or its audit committee any determination by the independent
certified public accountant that the insurer has materially misstated its
financial condition as reported to the commissioner as of the balance sheet
date currently under examination or that the insurer does not meet the minimum
capital and surplus requirements of KRS 304.3-120 and 304.3-125 as of that
date.
(b) An insurer
which has received a report pursuant to this subsection shall forward a copy of
the report to the commissioner within five (5) business days of receipt of the
report and shall provide the independent certified public accountant making the
report with evidence of this report being furnished to the commissioner.
(c) If the
independent certified public accountant fails to receive this evidence within
the required five (5) business day period, the independent certified public
accountant shall furnish to the commissioner a copy of its report within the
next five (5) business days.
(2) An independent
certified public accountant shall not be liable in any manner to any person for
any statement made in connection with subsection (1) of this section if the
statement is made in good faith in compliance with subsection (1) of this section.
(3) If the
accountant, subsequent to the date of the audited financial report filed
pursuant to this administrative regulation, becomes aware of facts which might
have affected his report, the commissioner notes the obligation of the
accountant to take the action prescribed in volume 1, section AU 561 of the
Professional Standards of the American Institute of Certified Public Accountants.
Section 10.
Communication of Internal Control Related Matters Noted in an Audit.
(1)(a) In addition
to the annual audited financial statements, each insurer shall furnish the
commissioner with a written communication as to any unremediated material
weakness in its internal control over financial reporting noted during the
audit.
(b) The
communication shall be prepared by the accountant within sixty (60) days after
the filing of the annual audited financial report, and shall contain a
description of any unremediated material weaknesses as of December 31
immediately preceding in the insurer’s internal control over financial
reporting noted by the accountant during the course of their audit of the
financial statements.
(c) If no
unremediated material weaknesses were noted, the communication shall state that
none were found.
(2) An insurer
shall provide a description of remedial actions taken or proposed to correct
unremediated material weaknesses, if the action is not described in the
accountant’s communication.
Section 11.
Accountant's Letter of Qualifications. The accountant shall furnish the insurer
in connection with, and for inclusion in, the filing of the annual audited
financial report, a letter stating:
(1) That the
accountant is independent with respect to the insurer and conforms to the
standards of the accountant's profession as contained in statutes,
administrative regulations, and rules of professional conduct of the State
Board of Accountancy of Kentucky set forth in KRS Chapter 325 and 201 KAR
Chapter 1;
(2) The background
and experience in general, and the experience in audits of insurers of the
staff assigned to the engagement and whether each is an independent certified
public accountant. This administrative regulation shall not prohibit the
accountant from utilizing staff as the accountant deems appropriate if use is
consistent with the standards prescribed by generally accepted auditing
standards;
(3) That the
accountant understands the annual audited financial report, that the
accountant's opinion on it will be filed in compliance with this administrative
regulation, and that the commissioner will be relying on this information in
monitoring the financial position of insurers;
(4) That the
accountant consents to the requirements of Section 12 of this administrative
regulation and that the accountant consents and agrees to make available for
review by the commissioner, his designee, or his appointed agent, the work
papers;
(5) A
representation that the accountant is properly licensed by an appropriate state
licensing authority and is a member in good standing of the American Institute
of Certified Public Accountants; and
(6) A
representation that the accountant is in compliance with the requirements of
Section 6 of this administrative regulation.
Section 12.
Availability and Maintenance of Independent Certified Public Accountant Work
Papers. (1) Every insurer required to file an audited financial report pursuant
to this administrative regulation shall require the accountant to make
available for review by department examiners all work papers prepared in the
conduct of the accountant's audit and any communications related to the audit
between the accountant and the insurer, at the offices of the insurer, at the
department, or any other reasonable place designated by the commissioner. The
insurer shall require that the accountant retain the audit work papers and
communications until the department has filed a report on examination covering
the period of the audit, but no longer than seven (7) years from the date of
the audit report.
(2) In the conduct
of the periodic review by department examiners described in subsection (1) of
this section, it shall be agreed that photocopies of pertinent audit work
papers may be made and retained by the department. Reviews by the department
examiners shall be considered investigations and all working papers and
communications obtained during the course of shall be afforded the same
confidentiality as other examination work papers generated by the department.
Section 13.
Requirements for Audit Committees. This section shall not apply to foreign or
alien insurers licensed in this state or an insurer that is a SOX compliant
entity or a direct or indirect wholly-owned subsidiary of a SOX compliant
entity.
(1) The audit
committee shall be directly responsible for the appointment, compensation, and
oversight of the work of any accountant, including resolution of disagreements
between management and the accountant regarding financial reporting, for the
purpose of preparing or issuing the audited financial report or related work
pursuant to this administrative regulation. Each accountant shall report
directly to the audit committee.
(2) Each member of
the audit committee shall be a member of the board of directors of the insurer
or a member of the board of directors of an entity elected pursuant to
subsection (5) of this section and section 3(4) of this administrative
regulation.
(3)(a) A member of
the audit committee shall not, other than in his or her capacity as a member of
the audit committee, the board of directors, or any other board committee;
1. Accept any
consulting advisory or other compensatory fee from the entity; or
2. Be an affiliated
person of the entity or any subsidiary.
(b) Notwithstanding
paragraph (a) of this subsection, if the law requires board participation by
otherwise nonindependent members, that law shall prevail and the members may
participate in the audit committee and be designated as independent for audit
committee purposes, unless they are an officer or employee of the insurer or
one of its affiliates.
(4) If a member of
the audit committee ceases to be independent for reasons outside the member’s
reasonable control, that person, with notice by the responsible entity to the
state, may remain an audit committee member of the responsible entity until the
earlier of:
(a) The next annual
meeting of the responsible entity; or
(b) One year from
the occurrence of the event that caused the member to be no longer independent.
(5)(a) To exercise
the election of the controlling person to designate the audit committee for
purposes of this administrative regulation, the ultimate controlling person
shall provide written notice to the commissioners of the affected insurers.
(b) Notification
shall be made timely prior to the issuance of the statutory audit report and
shall include a description of the basis for the election.
(c) The election
can be changed through notice to the commissioner by the insurer which shall
include a description of the basis for the change.
(d) The election
shall remain in effect for perpetuity, until rescinded.
(6)(a) The audit
committee shall require the accountant that performs for an insurer any audit
required by this administrative regulation to timely report to the audit
committee in accordance with the requirements of SAS 114, "The Auditor’s
Communication With Those Charged With Governance", or its replacement, including:
1. All significant
accounting policies and material permitted practices;
2. All material
alternative treatments of financial information within statutory accounting
principles that have been discussed with management officials of the insurer,
ramifications of the use of the alternative disclosures and treatments, and the
treatment preferred by the accountant; and
3. Other material
written communications between the accountant and the management of the
insurer, including any management letter or schedule of unadjusted differences.
(b) If an insurer
is a member of an insurance holding company system, the reports required by
paragraph (a) of this subsection may be provided to the audit committee on an
aggregate basis for insurers in the holding company system, provided that any
substantial differences among insurers in the system are identified to the
audit committee.
(7)(a) The
proportion of independent audit committee members shall meet or exceed the
following criteria:
1. For prior
calendar year direct written and assumed premiums between $0 and $300,000,000,
no minimum requirements;
2. For prior
calendar year direct written and assumed premiums over $300,000,000 to
$500,000,000, fifty (50) percent or more of members shall be independent; and
3. For prior
calendar year direct written and assumed premiums over $500,000,000;
seventy-five (75) percent of members shall be independent.
(b) Notwithstanding
subsection (7)(a) of this section, the commissioner may require the audit
committee’s board to enact improvements to the independence of the audit
committee membership if the insurer:
1. Is in a
risk-based capital action level in accordance with 806 KAR 3:190; or
2. Meets one or
more of the standards of an insurer deemed to be in hazardous financial
condition or otherwise exhibits qualities of a troubled insurer as set forth in
KRS 304.2-065.
(c) An insurer with
less than $500,000,000 in prior year direct written and assumed premiums may
structure its audit committee with at least a supermajority of independent
audit committee members.
(d) For purposes of
subsection (7)(a) of this section, prior calendar year direct written and
assumed premiums shall be the combined total of direct premiums and assumed
premiums from nonaffiliates for the reporting entities.
(8)(a) An insurer
with direct written and assumed premium, excluding premiums reinsured with the
Federal Crop Insurance Corporation and Federal Flood Program, less than
$500,000,000 may make application to the commissioner for a waiver from the
requirements of this section based upon hardship.
(b) The insurer
shall file, with its annual statement filing, the approval for relief from this
section with the states that it is licensed in or doing business in and the
National Association of Insurance Commissioners.
(c) If the
nondomestic state accepts electronic filing with the National Association of
Insurance Commissioners, the insurer shall file the approval in an electronic
format acceptable to the National Association of Insurance Commissioners, via
the Web site, https://www2.naic.org/servlet/Index.
Section 14. Conduct
of Insurer in Connection with the Preparation of Required Reports and
Documents. (1) A director or officer of an insurer shall not, directly or
indirectly:
(a) Make or cause
to be made a materially false or misleading statement to an accountant in
connection with any audit, review, or communication required under this
administrative regulation; or
(b) Omit to state,
or cause another person to omit to state, any material fact necessary in order
to make statements made, in light of the circumstances under which the
statements were made, not misleading to an accountant in connection with any
audit, review, or communication required under this administrative regulation.
(2) An officer or
director of an insurer, or any other person acting under the direction of the
officer or director, shall not, directly or indirectly, take any action to
coerce, manipulate, mislead, or fraudulently influence any accountant engaged
in the performance of an audit pursuant to this administrative regulation if
that person knew or should have known that the action, if successful, could
result in rendering the insurer’s financial statements materially misleading.
(3) An officer or
director of an insurer, or any other person acting under the direction of the
officer or director, shall not, directly or indirectly, take any of the
following actions to coerce, manipulate, mislead, or fraudulently influence an
accountant with respect to the professional engagement period:
(a) To issue or
reissue a report on an insurer’s financial statements that is not warranted in
the circumstances due to material violations of statutory accounting principles
as required by KRS 304.3-241, generally accepted auditing standards, or other
professional or regulatory standards;
(b) Not to perform
audit, review, or other procedures required by generally accepted auditing
standards or other professional standards;
(c) Not to withdraw
an issued report; or
(d) Not to
communicate matters to an insurer’s audit committee.
Section 15.
Management’s Report of Internal Control over Financial Reporting. (1)(a) Every
insurer required to file an audited financial report pursuant to this
administrative regulation that has annual direct written and assumed premiums,
excluding premiums reinsured with the Federal Crop Insurance Corporation and
Federal Flood Program, of $500,000,000 or more shall prepare a report of the
insurer’s or group of insurers’ internal control over financial reporting.
(b) The report
shall be filed with the commissioner along with the communication of internal
control related matters noted in an audit.
(c) Management’s
report of internal control over financial reporting shall be as of December 31
immediately preceding.
(2) Notwithstanding
the premium threshold in subsection (1)(a) of this section, the commissioner
may require an insurer to file management’s report of internal control over
financial reporting if the insurer:
(a) Is in any
risk-based capital level event in accordance with 806 KAR 3:190; or
(b) Meets one or
more of the standards of an insurer deemed to be in hazardous financial
condition in accordance with KRS 304.2-065.
(3) An insurer or a
group of insurers meeting the following requirements may file its or its
parent’s Section 404 Report and an addendum in satisfaction of the requirements
of this section if those internal controls of the insurer or group of insurers
having a material impact on the preparation of the insurer’s or group of
insurer’s audited statutory financial statements were included in the scope of
the Section 404 Report:
(a) Directly
subject to Section 404;
(b) Part of a
holding company system whose parent is directly subject to Section 404;
(c) Not directly
subject to Section 404, but is a SOX compliant entity; and
(d) A member of a
holding company system whose parent is not directly subject to Section 404 but
is a SOX compliant entity.
(4) Management’s
report of internal control over financial reporting shall include:
(a) A statement
that management is responsible for establishing and maintaining adequate
internal control over financial reporting;
(b) A statement
that management has established internal control over financial reporting and
an assertion, to the best of management’s knowledge and belief, after diligent
inquiry, as to whether its internal control over financial reporting is effective
to provide reasonable assurance regarding the reliability of financial
statements in accordance with statutory accounting principles;
(c) A statement
that briefly describes the approach or processes by which management evaluated
the effectiveness of internal control over financial reporting;
(d) A statement
that briefly describes the scope of work that is included and whether any
internal controls were excluded;
(e) Disclosure of
any unremediated material weaknesses in the internal control over financial
reporting identified by management as of December 31 immediately preceding.
Management shall not conclude that the internal control over financial reporting
is effective to provide reasonable assurance regarding the reliability of
financial statements in accordance with statutory accounting principles if
there is one or more unremediated material weaknesses in its internal control
over financial reporting;
(f) A statement
regarding the inherent limitations of internal control systems; and
(g) Signatures of
the chief executive officer and the chief financial officer.
(5) Management
shall document and make available upon financial condition examination the
basis upon which its assertions, required in subsection (4) of this section,
are made. Management may base its assertions, in part, upon its review, monitoring,
and testing of internal controls undertaken in the normal course of its
activities.
(a) Management
shall have discretion as to the nature of the internal control framework used,
and the nature and extent of the documentation, in order to make its assertion
in a cost effective manner and may include assembly of or reference to existing
documentation.
(b) The following
shall have one (1) year following the year the threshold is exceeded to comply
with the independence requirements in Section 6 of this administrative
regulation, but not earlier than January 1, 2010. An insurer or group of
insurers that, pursuant to Section 13 of this administrative regulation:
1. Is not required
to have independent audit committee members or is required to have only a
majority of independent audit committee members because the total written and
assumed premiums is below the threshold; and
2. Subsequently
becomes subject to one (1) of the independence requirements due to changes in
premium.
Section 16.
Exemptions and Effective Dates. (1) Upon written application of any insurer,
the commissioner may grant an exemption from compliance with any and all
provision of this administrative regulation if the commissioner finds, upon
review of the application, that compliance with this administrative regulation
would constitute a financial or organizational hardship upon the insurer. An
exemption may be granted any time and from time to time for a specified period
or periods. Upon denial of an insurer's written request for an exemption from
this administrative regulation, the insurer may request a hearing on its
application for an exemption pursuant to KRS 304.2-310.
(2) Domestic
insurers retaining a certified public accountant on the effective date of this
administrative regulation who qualify as independent shall comply with this
administrative regulation for the year ending December 31, 2010, and each year
thereafter unless the commissioner permits otherwise.
(3) Domestic
insurers not retaining a certified public accountant on the effective date of
this administrative regulation who qualify as independent shall meet the
following schedule for compliance unless the commissioner permits otherwise:
(a) As of December
31, 2010, file with the commissioner an audited financial report.
(b) For the year
ending December 31, 2010, and each year thereafter, these insurers shall file
with the commissioner all reports and communication required by this
administrative regulation.
(4) Foreign
insurers shall comply with this administrative regulation for the year
beginning January 1, 2010, and each year thereafter.
(5)(a) The
requirements of Section 13 of this administrative regulation shall be effective
January 1, 2010.
(b) An insurer or
group of insurers that, pursuant to Section 13 of this administrative
regulation, is not required to have independent audit committee members or only
a majority of independent audit committee members because the total written and
assumed premiums is below the threshold and subsequently becomes subject to one
(1) of the independence requirements due to changes in premium shall have one
(1) year following the year the threshold is exceeded, but not earlier than
January 1, 2010, to comply with the independence requirements in Section 6 of
this administrative regulation.
(c) An insurer that
becomes subject to one of the independence requirements as a result of a
business combination shall have one (1) calendar year following the date of
acquisition or combination to comply with the independence requirements in
Section 13 of this administrative regulation.
(6)(a) The
requirements of Section 15 of this administrative regulation shall be effective
beginning with the reporting period ending December 31, 2010 and each year
thereafter.
(b) An insurer or
group of insurers that is not required to file an annual audit report because
the total written premium is below the threshold and subsequently becomes
subject to the reporting requirements shall have two (2) years following the
year the threshold is exceeded, but not earlier than December 31, 2010, to file
an annual audit report.
(c) An insurer
acquired in a business combination shall have two (2) calendar years following
the date of acquisition or combination to comply with the reporting
requirements in Section 4 of this administrative regulation.
Section 17.
Canadian and British Companies. (1) In the case of Canadian and British
insurers, the annual audited financial reports shall be defined as the annual
statement of total business in the manner filed by these insurers with their
supervisory authority duly audited by an independent chartered accountant.
(2) For Canadian
and British insurers, the letter required by Section 5 of this administrative
regulation shall state that the accountant is aware of the requirements
relating to the annual audited financial report filed with the commissioner
pursuant to Section 3 of this administrative regulation and shall affirm that
the opinion expressed is in conformity with the requirements of Section 3 of
this administrative regulation.
Section 18.
Incorporation by Reference. (1) The following material is incorporated by
reference:
(a) "Financial
Condition Examiner’s Handbook", 2008, National Association of Insurance Commissioners;
(b) AU Section 561,
"Subsequent Discovery of Facts Existing at the Date of the Auditor’s
Report", 1996 Professional Standards of the American Institute of
Certified Public Accountants;
(c) SAS 114,
"The Auditors Communication With Those Charged with Governance",
2007, American Institute of Certified Public Accountants;
(d) SAS 109,
"Understanding the Entity and Its Environment and Assessing the Risks of
material Misstatement", 2007 American Institute of Certified Public
Accountants; and
(e) SAS 110,
"Performing Audit Procedures in Response to Assessed Risks and Evaluating
the Audit Evidence", 2007 American Institute of Certified Public
Accountants.
(2) This material
may be inspected, copied, or obtained, subject to applicable copyright law, at
the Kentucky Department of Insurance, 215 West Main Street, Frankfort, Kentucky
40601, Monday through Friday, 8 a.m. to 4:30 p.m. This material is also
available on the department’s Web site at http://insurance.ky.gov. (18
Ky.R. 959; eff. 11-8-91; TAm eff. 8-9-2007; 35 Ky.R. 1304; 1831; 1765; eff.
3-6-2009; 37 Ky.R. 2746; 38 Ky.R. 37; eff. 9-2-2011.)
