Current through Register Vol. 54, No. 44, November 2, 2024
(a)
Every insurer required to file an annual audited financial report under this
chapter shall establish an audit committee.
(b) An ultimate controlling person may
designate an audit committee of a controlling person to be the audit committee
for one or more controlled insurers. The designation must:
(1) Be in writing.
(2) Identify the ultimate controlling
person.
(3) Explain the basis for
the designation in sufficient detail for the Department to determine compliance
with this chapter.
(4) Be provided
by the ultimate controlling person or the insurer to the Department and the
chief insurance regulatory official of each other state in which the controlled
insurers are domiciled no later than April 1 of the year in which the insurer's
audited financial report is required to be filed under this chapter.
(5) Be effective upon receipt by the
Department and remain in effect unless modified or rescinded by subsequent
notice provided by the ultimate controlling person or the insurer as required
under paragraph (4).
(c)
Each member of the audit committee shall be a natural person who is either a
member of the board of directors of the insurer or a member of the board of
directors of a controlling person whose audit committee has been designated as
the insurer's audit committee under subsection (b).
(d) If an audit committee other than the
entire board of directors of the insurer has not been established by the
insurer or designated by an ultimate controlling person under subsection (b),
the insurer's entire board of directors shall constitute the audit
committee.
(e) A proportion of an
audit committee's members shall be independent in accordance with the following
requirements:
(1) The proportion of an audit
committee's members who shall be independent shall be calculated as follows:
(i) When an insurer's direct written and
assumed premiums are less than or equal to $300,000,000 at the end of the most
recent calendar year, 0% of the members are required to be
independent.
(ii) When an insurer's
direct written and assumed premiums exceed $300,000,000 but are not more than
$500,000,000 at the end of the most recent calendar year, at least 50% of
members are required to be independent.
(iii) When an insurer's direct written and
assumed premiums exceed $500,000,000 at the end of the most recent calendar
year, at least 75% of members of the audit committee are required to be
independent.
(2) If an
audit committee of a controlling person has been designated to be the audit
committee for one or more controlled insurers, the proportion of audit
committee members who shall be independent shall be based on the insurer in the
group with the greatest direct written and assumed premium.
(3) If an insurer's direct written and
assumed premiums meet or exceed the direct written and assumed premiums
threshold in paragraph (1)(ii) or (iii) as of the end of a calendar year, the
insurer shall comply with the required minimum proportion of independent audit
committee members by January 1 following the next full calendar year, as
described in the NAIC Implementation Guide.
(4) To be considered independent for purposes
of this subsection, an audit committee member may not:
(i) Be an affiliate of the insurer.
(ii) Accept any consulting, advisory or other
compensatory fee from the insurer or an affiliate of the insurer other than in
the member's capacity as a member of the audit committee, board of directors or
any other board committee.
(5) If an audit committee member ceases to be
independent under this chapter, the person may remain an audit committee member
until the earlier of the next annual meeting of the insurer or controlling
person or 1 year from the occurrence of the event that caused the member to be
no longer independent, if the insurer or ultimate controlling person provides
the Department with written notice within 15 days of the occurrence of the
event.
(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.
The provisions of this §147.3a issued and amended under
the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of
1929 (71 P.S. §§
66,
186,
411 and
412); sections 320, 630, 1007
and 2452 of The Insurance Company Law of 1921 (40 P.S. §§
443,
764a,
967 and
991.2452); sections 205 and
206 of The Pennsylvania Fair Plan Act (40 P.S. §§ 1600.205-1600.206); 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; 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).
