Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO: KRS 304.49-010-304.49-230
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
304.2-110 provides that the Commissioner of
Insurance may promulgate administrative regulations necessary for or as an aid
to the effectuation of any provisions of the Kentucky Insurance Code.
KRS
304.49-140 authorizes the Commissioner of
Insurance to establish and amend administrative regulations related to captive
insurance companies as necessary to effectuate the provisions of
KRS
304.49-010 to
304.49-230.
KRS
304.49-070(2) requires the
Commissioner of Insurance to promulgate administrative regulations concerning
the reporting requirements of captive insurers. This administrative regulation
establishes financial and reporting requirements for captive insurers.
Section 1. Definition. "Company" means the
captive insurer.
Section 2. A
consortium captive insurer, and a pure or industrial insured captive insurer
engaged in insurance in Kentucky shall annually submit to the commissioner a
report of its financial condition, verified by oath of two (2) of its executive
officers on the Annual Statement Convention Blank. The report shall be filed in
the same format and content as required by
KRS
304.2-205 and
304.3-240.
Section 3.
(1) A captive insurer shall have an annual
audit by an independent certified public accountant, authorized by the
commissioner, and shall file an audited financial report with the commissioner
on or before July 1 for the year ending December 31 immediately
preceding.
(2) The annual audit
report shall be considered part of the company's annual report of financial
condition except with respect to the date by which it shall be filed with the
commissioner.
(3) The annual audit
shall consist of the following:
(a) Opinion
of independent certified public accountant.
1.
Financial statements furnished pursuant to this section shall be examined by an
independent certified public accountant in accordance with generally-accepted
auditing standards as determined by the American Institute of Certified Public
Accountants.
2. The opinion of the
independent certified public accountant shall cover all years
presented.
3. The opinion shall:
a. Be addressed to the company on stationery
of the accountant showing the address of issuance;
b. Bear original manual signatures;
and
c. Be dated.
(b) Report of
evaluation of internal controls.
1. This
report shall include an evaluation of the internal controls of the company
relating to the methods and procedures used in the securing of assets and the
reliability of the financial records, including the controls as the system of
authorization and approval, and the separation of duties.
2. The review shall be conducted in
accordance with generally accepted auditing standards and the report filed with
the commissioner.
(c)
Accountant's letter. The accountant shall furnish the company, for inclusion in
the filing of the audited annual report, a letter stating:
1. That he is independent with respect to the
company and conforms to the standards of his profession as contained in the
Code of Professional Ethics and pronouncements of the American Institute of
Certified Public Accountants and pronouncements of the Financial Accounting
Standards Board;
2. The general
background and experience of the staff engaged in audit including the
experience in auditing captives or other insurance companies;
3. That the accountant understands that the
audited annual report and his opinions thereon will be filed in compliance with
this administrative regulation with the Kentucky Department of
Insurance;
4. That the accountant
consents to the requirements of Section 6 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 as defined
in Section 6 of this administrative regulation;
5. That the accountant is properly licensed
by an appropriate state licensing authority; and
6. That the accountant is a member in good
standing in the American Institute of Certified Public Accountants.
(d) Financial statements. The
following statements are required:
1. Balance
sheet;
2. Statement of gain or loss
from operations;
3. Statement of
changes in financial position;
4.
Statement of changes in capital paid up, gross paid in and contributed surplus
and unassigned funds or unassigned surplus; and
5. Notes to financial statements. The notes
to financial statements shall be those required by generally accepted
accounting principles, and shall include:
a.
A reconciliation of differences, if any, between the audited financial report
and the statement or form filed with the commissioner;
b. A summary of ownership and relationship of
the company and all affiliated corporations or companies insured by the
captive; and
c. A narrative
explanation of all material transactions and balances with the
company.
(e)
Certification of loss reserves and loss expense reserves.
1. The annual audit shall include an opinion
as to the adequacy of the company's loss reserves and loss expense
reserves.
2. The individual who
certifies as to the adequacy of reserves shall be approved by the commissioner
and shall be:
a. A Fellow of the Casualty
Actuarial Society;
b. A member in
good standing of the American Academy of Actuaries; or c. An individual who has
demonstrated his competence in loss reserve evaluation to the
commissioner.
3.
Certification shall be in the form as the commissioner deems
appropriate.
(f) A
filing fee for audited financial statements shall be as prescribed by
806 KAR
4:010.
Section 4. A company shall within ninety (90)
days report to the commissioner in writing, the name and address of the
independent certified public accountant retained to conduct the annual audit
established in this administrative regulation.
Section 5. A company shall require the
certified public accountant to immediately notify, in writing, an officer and
all members of the board of directors of the company of any determination by
the independent certified public accountant that the company has materially
misstated its financial condition in its report to the commissioner as required
in
KRS
304.49-070. The company shall furnish the
notification to the commissioner within five (5) working days of
receipt.
Section 6. Work Papers.
(1) Each company shall require the
independent certified public accountant to make available for review and
inspection by the commissioner or his appointed agent the work papers prepared
in the conduct of the audit of the company.
(2) The company shall require that the
accountant retain the audit work papers for a period of not less than five (5)
years after the period reported upon.
(3) Any review by the commissioner shall be
considered a part of an examination or investigation and all working papers
obtained during the course of an examination or investigation shall be
confidential.
(4) The company shall
require that the independent certified public accountant provide photocopies of
any of the working papers the Department of Insurance requests and the working
papers may be retained by the department.
(5) Work papers shall include:
(a) Schedules;
(b) Analyses;
(c) Reconciliations;
(d) Abstracts;
(e) Memoranda;
(f) Narratives;
(g) Flow charts;
(h) Copies of company records; or
(i) Other documents prepared or obtained by
the accountant and his employees in the conduct of their examination of the
company.
Section
7.
(1) If the commissioner deems
that the financial condition of the company warrants additional security, he
may require a company to deposit with the Treasurer of this state, cash or
securities approved by the commissioner or, to furnish the commissioner a clean
irrevocable letter of credit issued by a bank chartered by the State of
Kentucky or a member bank of the Federal Reserve System and approved by the
commissioner.
(2) The company may
receive interest or dividends from the deposit or exchange the deposits for
others of equal value with the approval of the commissioner.
(3) If the company discontinues business, the
commissioner shall return the deposit only after being satisfied that all
obligations of the company have been discharged.
STATUTORY AUTHORITY:
KRS
304.2-110,
304.49-070(2),
304.49-140