Current through September 24, 2024
(1)
(a) Each
captive insurance company shall be thoroughly examined at least once every
three (3) years by the commissioner. The three year period may be extended up
to a five (5) year period provided that the company is subject to comprehensive
annual financial audits as provided for in T.C.A. §
56-13-109(a). To
qualify for this extension, the comprehensive audits shall be conducted by an
independent certified public accountant authorized by the commissioner. The
authorized accountant shall prepare and sign an audited annual financial report
in a format specified by the commissioner. This report is hereinafter referred
to in this rule as the "audited annual financial report." To qualify for the
extension provided for in T.C.A. §
56-13-109(a), the
audited annual financial report shall be filed on or before June 30th of each
year or 180 days after the end of the fiscal year. The audited annual financial
report shall be considered part of the company's annual report of financial
condition except with respect to the date by which it must be filed with the
commissioner.
(b) To be eligible
for an extension up to a five (5) year period between thorough examinations,
the captive insurance company must have filed timely audited annual financial
reports covering all periods of operation from the later of the date of
formation or the end date of the previous examination. For good cause shown in
exceptional circumstances, the commissioner may allow the late filing of the
audited annual financial report to preserve a captive insurance company's
eligibility for a thorough examination extension.
(c) A newly formed captive insurance company
or a newly formed protected cell or incorporated protected cell of a captive
insurance company that is in operation for less than ninety (90) days before
the end of its fiscal year may elect to defer conducting a comprehensive annual
audit under this Chapter so long as the first filed audited annual financial
report includes audit data from the date of formation to the end of the first
complete fiscal year that the captive insurance company or protected cell was
in operation.
(d) A protected cell
or incorporated protected cell captive insurance company may elect to omit from
its audited annual financial report one or more individual cells that collected
no premium and wrote no policies during the calendar or fiscal year and was
under no liability or potential liability for any policies issued in prior
years. This action is hereinafter referred to in this rule as an "omission
election." The omission election shall be made on a form prescribed by the
commissioner and signed under oath by the captive manager and at least one
officer of the company and filed with the audited annual financial report. No
omission election may be made in the calendar or fiscal year in which occurs
the fifth anniversary of the company's formation or fifth anniversary of the
final date covered by the company's last T.C.A. §
56-13-109 thorough examination. In
the next year subsequent to the taking of an omission election where no
omission election is made or following after a year in which no omission
election may be made, the filed audited annual financial report shall include a
cumulative report on the protected cell's activity during all preceding years
for which an omission election was made. No omission election may be made on a
protected cell or incorporated protected cell's core or general account. The
commissioner, in his or her sole discretion, may disallow a protected cell or
incorporated protected cell captive insurance company from taking any future
omission elections on one or more cells upon notice.
(e) A captive insurance company that has been
issued a letter of dormancy may elect to defer conducting a comprehensive
annual audit under this Chapter and maintain eligibility for a five (5) year
period between thorough examinations. To maintain this eligibility, the captive
insurance company must file a cumulative audited financial report that includes
audit data from the preceding years since the last filed audited annual
financial report. Such filing shall be due with the first audited annual
financial report filed subsequent to the rescission or expiration of the letter
of dormancy.
(2)
Designation of Independent Certified Public Accountant.
Companies, after becoming subject to this rule, shall within
ninety days report to the commissioner in writing, the name and address of the
independent certified public accountant retained to conduct the annual audit
set forth in this rule. The certified public accountant that is retained to
conduct the annual audit may only be appointed from the list of approved
certified public accounting firms or individual certified public accountants
maintained by the commissioner. The independent certified public accountant
retained to conduct the annual audit shall apply, on a form adopted by the
commissioner, for approval by the commissioner.
(3) Notification of Adverse Financial
Condition.
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 T.C.A. §
56-13-108. The company shall
furnish such notification to the commissioner within five (5) working days of
receipt thereof.
(4) Availability and
Maintenance of Working Papers of the Independent Certified Public Accountant.
(a) Each company shall require the
independent certified public accountant to make available for review by the
commissioner or the commissioner's appointed agent the work papers prepared in
the conduct of the audit of the company. 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.
(b) The aforementioned review by the
commissioner shall be considered examinations and all working papers obtained
during the course of such examinations shall be confidential. The company shall
require that the independent certified public accountant provide photocopies or
equivalent copy of any of the working papers which the Department considers
relevant. Such working papers may be retained by the Department.
(c) "Work Papers" or "Working Papers" as
referred to in this rule include, but are not necessarily limited to,
schedules, analyses, reconciliations, abstracts, memoranda, narratives, flow
charts, copies of company records or other documents prepared or obtained by
the accountant and the accountant's employees in the conduct of their
examination of the company.
(d) The
lead (or coordinating) audit partner (having primary responsibility for the
audit) may not act in that capacity for more than five (5) consecutive years.
The person shall be disqualified from acting in that or similar capacity for
the same company or its insurance subsidiaries or affiliates for a period of
five (5) consecutive years. An insurer may make application to the commissioner
for relief from the above rotation requirement on the basis of unusual
circumstances. This application should 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.
(5) The audited annual financial
report shall consist of the following:
(a)
Opinion of Independent Certified Public Accountant.
Financial statements furnished pursuant to this rule shall be
examined by independent certified public accountants in accordance with
generally accepted auditing standards as determined by the American Institute
of Certified Public Accountants or statutory accounting principles in
accordance with the National Association of Insurance Commissioners' Accounting
Practices and Procedures Manual in effect for the period covered by the report.
The opinion of the independent certified public accountant shall cover all
years presented. The opinion shall be addressed to the company on stationery of
the accountant showing the address of issuance, shall bear original manual
signatures, and shall be dated.
(b) Report of Evaluation of Internal
Controls.
Every company that has annual direct written and assumed
premiums of five hundred million dollars ($500,000,000) or more 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 but not limited to such controls as the system of
authorization and approval and the separation of duties. The review shall be
conducted in accordance with generally accepted auditing standards or statutory
accounting principles and the report shall be filed with the commissioner. An
exemption from this evaluation may be granted on a case by case basis upon
written request to the Commissioner.
(c) Accountant's Letter.
The accountant shall furnish the company, for inclusion in
the filing of the audited annual financial report, a letter stating:
1. That the accountant is independent with
respect to the company and conforms to the standards of the accountant's
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 the accountant's
opinions thereon will be filed in compliance with this Chapter with the
Tennessee Department of Commerce and Insurance.
4. That the accountant consents to the
requirements of Rule 0780-01-41-.03(4) of this Chapter and that the accountant
consents and agrees to make available for review by the commissioner, the
commissioner's designee or the commissioner's appointed agent, the work papers
as defined therein.
5. That the
accountant is properly licensed by an appropriate state licensing authority and
that the accountant is a member in good standing in the American Institute of
Certified Public Accountants.
(d) Financial Statements as required under
Rule 0780-01-41-.02, Annual Reporting
Requirements.
(e) Certification of
Loss Reserves and Loss Expense Reserves.
The audited annual financial report shall include an opinion
as to the reasonableness of the company's loss reserves and loss expense
reserves. The individual who certifies as to the reasonableness of reserves
shall apply, on a form adopted by the commissioner, for approval by the
commissioner, and shall be a Fellow of the Casualty Actuarial Society, a member
in good standing of the American Academy of Actuaries, or an individual who has
demonstrated his or her competence in loss reserve evaluation to the
commissioner. Certification shall be in such form as the commissioner deems
appropriate. For protected cell captive insurance companies, this opinion shall
also include a statement identifying any one or more protected cells for which
the carried reserves are either inadequate (i.e. - below the minimum amount the
actuary believes is reasonable) or redundant (i.e. - greater than the maximum
amount the actuary believes is reasonable). For exceptional cause shown, the
commissioner may waive the requirement of filing an opinion as to
reasonableness of loss reserves and loss expense reserves by a
company.
Authority: T.C.A. §§
56-13-101 through
56-13-418,
56-13-108,
56-13-109,
56-13-115, and
56-13-121; 2011 Public Acts,
Chapter 468; and 2017 Public Acts, Chapter 354, § 3.
