Current through Reg. 50, No. 13; March 28, 2025
(a) Purpose. The purpose of this section is
to improve the Texas Department of Insurance's surveillance of the financial
condition of insurers and HMOs by:
(1)
specifying the requirements of an annual audit by an accountant of the
financial statements reporting the financial condition and the results of
operations of each insurer or HMO;
(2) requiring communication of internal
control related matters noted in an audit;
(3) requiring an insurer or HMO that is
required to file an annual audited financial report under Insurance Code
Chapter 401, Subchapter A, to have an audit committee; and
(4) requiring certain insurer or HMO
management to report on internal control over financial reporting.
(b) Applicability.
(1) Except as otherwise specified in this
section and in Insurance Code Chapter 401, Subchapter A, this section applies
to insurers and HMOs and takes effect beginning with the annual reporting
period ending December 31, 2010, which period is reflected in reports and
communications required to be filed with the Commissioner during calendar year
2011, and continues in effect each year thereafter.
(2) Subsection (h)(1) of this section,
relating to lead audit partner limitation, is in effect for audits of the year
beginning January 1, 2010, which audits are reflected in reports and
communications required to be filed with the Commissioner during calendar year
2011, and continues in effect each year thereafter.
(3) Subsection (k) of this section, relating
to audit committee requirements, takes effect on September 1, 2010.
(4) Subsection (l) of this section, relating
to internal audit committee requirements, is applicable beginning January 1,
2021.
(c) Definitions.
The following words and terms, when used in this section, have the following
meanings, unless the context clearly indicates otherwise.
(1) Accountant--An independent certified
public accountant or accounting firm that meets the requirements of Insurance
Code §
401.011.
(2) Affiliate--Has the meaning assigned by
Insurance Code §
823.003.
(3) Audit committee--A committee established
by the board of directors of an entity for the purpose of overseeing the
accounting and financial reporting processes of an insurer or HMO or group of
insurers or HMOs and audits of financial statements of the insurer or HMO or
group of insurers or HMOs. At the election of the controlling person, the audit
committee of an entity that controls a group of insurers or HMOs may be the
audit committee for one or more of the controlled insurers or HMOs solely for
the purposes of this section. If an audit committee is not designated by the
insurer or HMO, the insurer's or HMO's entire board of directors constitutes
the audit committee.
(4) Audited
financial report--The annual audit report required by Insurance Code Chapter
401, Subchapter A.
(5) Group of
insurers or HMOs--Those authorized insurers or HMOs included in the reporting
requirements of Insurance Code Chapter 823, or a set of insurers or HMOs as
identified by management, for the purpose of assessing the effectiveness of
internal control over financial reporting.
(6) Health maintenance organization (HMO)--A
health maintenance organization authorized to engage in business in this
state.
(7) Insurer--An insurer
authorized to engage in business in this state, including:
(A) a life, health, or accident insurance
company;
(B) a fire and marine
insurance company;
(C) a general
casualty company;
(D) a title
insurance company;
(E) a fraternal
benefit society;
(F) a mutual life
insurance company;
(G) a local
mutual aid association;
(H) a
statewide mutual assessment company;
(I) a mutual insurance company other than a
mutual life insurance company;
(J)
a farm mutual insurance company;
(K) a county mutual insurance
company;
(M) a reciprocal or
interinsurance exchange;
(N) a
group hospital service corporation; and
(O) a stipulated premium company.
(8) Internal control over
financial reporting--A process implemented by an entity's board of directors,
management, and other personnel designed to provide reasonable assurance
regarding the reliability of the entity's financial statements. The term
includes policies and procedures that:
(A)
relate to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of assets;
(B) provide reasonable assurance that:
(i) transactions are recorded as necessary to
permit preparation of the financial statements; and
(ii) receipts and expenditures are 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.
(9)
Management--The management of an insurer or HMO or group of insurers or HMOs
subject to this section.
(10)
SEC--The United States Securities and Exchange Commission.
(11) Section 404--Section 404, Sarbanes-Oxley
Act of 2002 (15 U.S.C. §
7262), and rules adopted under that
section.
(12) Section 404
report--Management's report on internal control over financial reporting as
determined by the SEC and the related attestation report of an
accountant.
(13) SOX-compliant
entity--An entity that is required to comply with or voluntarily complies with:
(A) the preapproval requirements provided by
15 U.S.C. §
78j-1(i);
(B) the audit committee independence
requirements provided by
15 U.S.C. §
78j-1(m)(3); and
(C) the internal control over financial
reporting requirements provided by
15 U.S.C. §
7262(b) and Item 308, SEC
Regulation S-K.
(14)
Subsidiary--Has the meaning assigned by Insurance Code §
823.003.
(d) Filing and extensions for filing of
audited financial report.
(1) Except as
provided in paragraphs (2), (3), and (4) of this subsection, an insurer or HMO
that is required to have an annual audit performed by an accountant and to file
an audited financial report with the Commissioner under Insurance Code Chapter
401, Subchapter A, shall file the audited financial report with the
Commissioner on or before June 1 for the preceding calendar year.
(2) Except as provided in paragraphs (3) and
(4) of this subsection, an insurer or HMO that, along with any affiliated
insurers or HMOs, is licensed in and does business only in Texas shall file the
audited financial report with the Commissioner on or before June 30 for the
preceding calendar year. This paragraph does not apply to an insurer or HMO
that is a member of a group comprised of one or more insurers or HMOs
authorized and actually doing the business of insurance in another state that
requires that an audited financial report be filed on or before June 1 for the
preceding calendar year.
(3) In
accordance with Insurance Code §
401.004(b),
the Commissioner may require an insurer or HMO to file an audited financial
report on a date that precedes the June 1 deadline in paragraph (1) of this
subsection or the June 30 deadline in paragraph (2) of this subsection. The
Commissioner must notify the insurer or HMO of the filing date not later than
the 90th day before that date.
(4)
The Commissioner may grant an extension of the filing date in accordance with
Insurance Code §
401.004(c).
An extension granted under Insurance Code §
401.004(c),
relating to the filing date for an audited financial report, also applies to
the filing of management's report on internal control over financial reporting
required under subsection (n) of this section.
(5) An insurer or HMO required to file an
annual audited financial report under Insurance Code Chapter 401, Subchapter A,
and this section must designate a group of individuals to serve as its audit
committee. The audit committee of an entity that controls an insurer or HMO
may, at the election of the controlling person, be the insurer's or HMO's audit
committee for purposes of this section.
(e) Exemption for certain foreign or alien
insurers or HMOs.
(1) A foreign or alien
insurer or HMO exempt under Insurance Code §
401.007(a)
must file with the commissioner a copy of:
(A) the audited financial report and the
accountant's letter of qualifications filed with the insurer's or HMO's state
of domicile at the same time these documents are filed with the state of
domicile;
(B) the communication of
internal control-related matters noted in the audit that is substantially
similar to the communication required under subsection (j) of this section, not
later than the 60th day after the date the copy of the audited financial report
and accountant's letter of qualifications are filed with the commissioner;
and
(C) any notification of adverse
financial conditions report filed with the other state, in accordance with the
filing date prescribed by Insurance Code §
401.017.
(2) A foreign or alien insurer or
HMO required to file management's report of internal control over financial
reporting in another state is exempt from filing the report in this state under
subsection (n)(1) of this section if the other state has substantially similar
reporting requirements and the report is filed with the commissioner in that
state in the time specified.
(f) Requirements for financial statements in
audited financial report. The financial statements included in the audited
financial report must be prepared in a form and use language and groupings
substantially the same as the relevant sections of the annual statement of the
insurer or HMO filed with the Commissioner. The financial statements must be
comparative, including amounts on December 31 of the current year and amounts
as of the immediately preceding December 31, except for the first year in which
an insurer or HMO is required to file the report.
(g) Scope of audit and report of accountant.
An accountant must audit the financial reports provided by an insurer or HMO
for purposes of an audit conducted under Insurance Code Chapter 401, Subchapter
A. In addition to complying with the requirements of the Insurance Code §
401.010, the
accountant shall obtain an understanding of internal control sufficient to plan
the audit, in accordance with "Consideration of Internal Control in a Financial
Statement Audit," AU Section 319, Professional Standards of the American
Institute of Certified Public Accountants. To the extent required by AU Section
319, for those insurers or HMOs required to file a management's report of
internal control over financial reporting under subsection (n) of this section,
the accountant shall consider the most recently available report in planning
and performing the audit of the statutory financial statements. In this
subsection, "consider" has the meaning assigned by Statement on Auditing
Standards No. 102, "Defining Professional Requirements in Statements on
Auditing Standards," or a successor document.
(h) Qualifications and independence of
accountant; acceptance of audited financial report. Except as provided by
Insurance Code §
401.011(b) and
(d), and paragraphs (1), (3), (4), (5), and
(10) of this subsection, the Commissioner will accept an audited financial
report from an independent certified public accountant or accounting firm that
is a member in good standing of the American Institute of Certified Public
Accountants; is in good standing with all states in which the accountant or
firm is licensed to practice, as applicable; and conforms to the American
Institute of Certified Public Accountants Code of Professional Conduct and to
the rules of professional conduct and other rules of the Texas State Board of
Public Accountancy or a similar code.
(1) A
lead partner or other person responsible for rendering an audited financial
report for an insurer or HMO may not act in that capacity for more than five
consecutive years and may not, during the five-year period after that fifth
year, render an audited financial report for the insurer or HMO or for a
subsidiary or affiliate of the insurer or HMO that is engaged in the business
of insurance. On application made at least 30 days before the end of the
calendar year, the Commissioner may determine that the limitation provided by
this paragraph does not apply to an accountant for a particular insurer or HMO
if the insurer or HMO demonstrates to the satisfaction of the Commissioner that
the limitation's application to the insurer or HMO would be unfair because of
unusual circumstances. In making the determination, the Commissioner may
consider:
(A) the number of partners or
individuals the accountant employs, the expertise of the partners or
individuals the accountant employs, or the number of the accountant's insurance
clients;
(B) the premium volume of
the insurer or HMO; and
(C) the
number of jurisdictions in which the insurer or HMO engages in
business.
(2) On filing
its annual statement, an insurer or HMO for which the Commissioner has approved
an exemption under paragraph (1) of this subsection must file the approval with
the states in which it is doing business or is authorized to do business and
with the National Association of Insurance Commissioners. If a state other than
this state accepts electronic filing with the National Association of Insurance
Commissioners, the insurer or HMO must file the approval in an electronic
format acceptable to the National Association of Insurance
Commissioners.
(3) In providing
services, the accountant may not:
(A) function
in the role of management, audit the accountant's own work, or serve in an
advocacy role for the insurer or HMO; or
(B) directly or indirectly enter into an
agreement of indemnity or release from liability regarding the audit of the
insurer or HMO.
(4) The
Commissioner may not recognize as qualified or independent an accountant, or
accept an annual audited financial report that was prepared wholly or partly by
an accountant, who provides an insurer or HMO at the time of the audit:
(A) bookkeeping or other services related to
the accounting records or financial statements of the insurer or HMO;
(B) services related to financial information
systems design and implementation;
(C) appraisal or valuation services, fairness
opinions, or contribution-in-kind reports;
(D) actuarially oriented advisory services
involving the determination of amounts recorded in the financial
statements;
(E) internal audit
outsourcing services;
(F)
management or human resources services;
(G) broker or dealer, investment adviser, or
investment banking services;
(H)
legal services or other expert services unrelated to the audit; or
(I) any other service that the Commissioner
determines to be inappropriate.
(5) Notwithstanding paragraph (4)(D) of this
subsection, an accountant may assist an insurer or HMO in understanding the
methods, assumptions, and inputs used in the determination of amounts recorded
in the financial statement if it is reasonable to believe that the advisory
service will not be the subject of audit procedures during an audit of the
insurer's or HMO's financial statements. An accountant's actuary may also issue
an actuarial opinion or certification on an insurer's or HMO's reserves if:
(A) the accountant or the accountant's
actuary has not performed management functions or made any management
decisions;
(B) the insurer or HMO
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 or HMO's management has
determined the amount of the reserves.
(6) An insurer or HMO that has direct written
and assumed premiums of less than $100 million in any calendar year may request
an exemption from the requirements of paragraph (4) of this subsection by
filing with the Commissioner a written statement explaining why the insurer or
HMO should be exempt. The Commissioner may grant the exemption if the
Commissioner finds that compliance with paragraph (4) of this subsection would
impose an undue financial or organizational hardship on the insurer or
HMO.
(7) An accountant who performs
an audit may perform non-audit services, including tax services, that are not
described in paragraph (4) of this subsection or that do not conflict with
paragraph (3) of this subsection, only if the activity is approved in advance
by the audit committee in accordance with paragraph (8) of this
subsection.
(8) The audit committee
must approve in advance all auditing services and non-audit services that an
accountant provides to the insurer or HMO. The prior approval requirement is
waived with respect to non-audit services if the insurer or HMO is a
SOX-compliant entity or a direct or indirect wholly owned subsidiary of a
SOX-compliant entity or:
(A) the aggregate
amount of all non-audit services provided to the insurer or HMO is not more
than five percent of the total amount of fees paid by the insurer or HMO to its
accountant during the fiscal year in which the non-audit services are
provided;
(B) the services were not
recognized by the insurer or HMO at the time of the engagement to be non-audit
services; and
(C) the services are
promptly brought to the attention of the audit committee and approved before
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 the
audit committee has delegated authority to grant approvals.
(9) The audit committee may
delegate to one or more designated members of the audit committee the authority
to grant the prior approval required by paragraph (7) of this subsection. 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) The Commissioner may not recognize an
accountant as qualified or independent for a particular insurer or HMO if a
member of the board, the president, chief executive officer, controller, chief
financial officer, chief accounting officer, or any individual serving in an
equivalent position for the insurer or HMO, was employed by the accountant and
participated in the audit of that insurer or HMO during the one-year period
preceding the date on which the most current statutory opinion is due. This
paragraph applies only to partners and senior managers involved in the audit.
An insurer or HMO may apply to the Commissioner for an exemption from the
requirements of this paragraph on the basis of unusual circumstances.
(11) The Commissioner will not accept an
audited financial report prepared wholly or partly by an individual or firm who
the commissioner finds:
(A) has been
convicted of fraud, bribery, a violation of the Racketeer Influenced and
Corrupt Organizations Act (18 U.S.C. §
1961
et seq.), or a state or federal criminal offense involving dishonest
conduct;
(B) has violated the
insurance laws of this state with respect to a report filed under Insurance
Code Chapter 401, Subchapter A, or this section;
(C) has demonstrated a pattern or practice of
failing to detect or disclose material information in reports filed under
Insurance Code Chapter 401, Subchapter A, or this section; or
(D) has directly or indirectly entered into
an agreement of indemnity or release of liability regarding an audit of an
insurer.
(12) The insurer
or HMO must file, with its annual statement filing, the approval of an
exemption granted under paragraph (6) or (10) of this subsection with the
states in which it does business or is authorized to do business and with the
National Association of Insurance Commissioners. If a state, other than this
state, in which the insurer or HMO does business or is authorized to do
business accepts electronic filing, the insurer or HMO must file the approval
in an electronic format acceptable to the National Association of Insurance
Commissioners.
(i)
Accountant's letter of qualifications. The audited financial report required
under Insurance Code §
401.004 must be
accompanied by a letter, provided by the accountant who performed the audit,
that includes the representations and statements required under Insurance Code
§
401.013, and a
representation that the accountant is in compliance with the requirements
specified in subsection (h) of this section.
(j) Communication of internal control matters
noted in audit.
(1) In addition to the
audited financial report required by Insurance Code Chapter 401, Subchapter A,
and this section, each insurer or HMO shall provide to the Commissioner a
written communication prepared by an accountant in accordance with the
Professional Standards of the American Institute of Certified Public
Accountants that describes any unremediated material weaknesses in its internal
controls over financial reporting noted during the audit. The insurer or HMO
must annually file with the Commissioner the communication required by this
subsection not later than the 60th day after the date the audited financial
report is filed. The communication must contain a description of any
unremediated material weaknesses, as defined by Statement on Auditing Standards
No. 112, "Communicating Internal Control Related Matters Identified in an
Audit," or a successor document, as of the immediately preceding December 31,
in the insurer's or HMO's internal control over financial reporting that was
noted by the accountant during the course of the audit of the financial
statements. The communication must affirmatively state if unremediated material
weaknesses were not noted by the accountant.
(2) The insurer or HMO shall also provide a
description of remedial actions taken or proposed to be taken to correct
unremediated material weaknesses, if the actions are not described in the
accountant's communication.
(k) Requirements for audit committees.
(1) This subsection does not apply to the
following:
(A) a foreign or alien insurer or
HMO;
(B) an insurer or HMO that is
a SOX-compliant entity;
(C) an
insurer or HMO that is a direct or indirect wholly owned subsidiary of a
SOX-compliant entity; or
(D) a
non-stock insurer that is under the direct or indirect control of a
SOX-compliant entity, including pursuant to the terms of an exclusive
management contract.
(2)
Except as provided in paragraphs (1) and (3) of this subsection, an insurer or
HMO to which Insurance Code Chapter 401, Subchapter A, applies must establish
an audit committee conforming to the following criteria:
(A) an insurer or HMO with over $500 million
in direct written and assumed premiums for the preceding calendar year shall
establish an audit committee with an independent membership of at least 75
percent;
(B) an insurer or HMO with
$300 million to $500 million in direct written and assumed premiums for the
preceding calendar year shall establish an audit committee with an independent
membership of at least 50 percent; and
(C) except as provided in paragraph (3) of
this subsection, an insurer with less than $300 million in direct and assumed
premiums for the preceding calendar year is not required to comply with the
independence requirements in this subsection for its audit committee.
(3) Notwithstanding subsection
(k)(1) and (10) of this section, the Commissioner may require the insurer's or
HMO's board to enact improvements to the independence of the audit committee
membership if the insurer or HMO:
(A) is in a
risk-based capital action level event, as described by or provided in Insurance
Code Chapters 822, 841, 843, or 884 or rules adopted thereunder, including
§
7.402 of this title (relating to
Risk-Based Capital and Surplus Requirements for Insurers and HMOs);
(B) meets one or more of the standards of an
insurer or HMO considered to be in hazardous financial condition as described
by or provided in Insurance Code Chapter 404, 441, or 843 or rules adopted
thereunder, including Chapter 8 of this title (relating to Hazardous Condition)
and §
11.811 of this title (relating to
Action under Insurance Code §
843.157 and Insurance
Code §
843.461); or
(C) otherwise exhibits qualities of a
troubled insurer or HMO.
(4) An insurer or HMO with direct written and
assumed premiums, excluding premiums reinsured with the Federal Crop Insurance
Corporation and the National Flood Insurance Program, of less than $500 million
may apply to the Commissioner for a waiver from the requirements of paragraphs
(1), (2), (5), (6) and (8) - (13) of this subsection based on hardship. The
insurer or HMO shall file, with its annual statement filing, the approval of a
waiver under this paragraph with the states in which it does business or is
authorized to do business and with the National Association of Insurance
Commissioners. If a state other than this state accepts electronic filing, the
insurer or HMO shall file the approval in an electronic format acceptable to
the National Association of Insurance Commissioners.
(5) In this subsection, direct written and
assumed premiums for the preceding calendar year must be the combined total of
direct premiums and assumed premiums from non-affiliates for the reporting
entities.
(6) The audit committee
is directly responsible for the appointment, compensation, and oversight of the
work of any accountant, including the resolution of disagreements between the
management of the insurer or HMO and the accountant regarding financial
reporting, for the purpose of preparing or issuing the audited financial report
or related work under Insurance Code Chapter 401, Subchapter A, and this
section. Each accountant shall report directly to the audit
committee.
(7) The audit committee
of an insurer or HMO or group of insurers or HMOs must be responsible for
overseeing the insurer's or HMO's internal audit function and granting the
person or persons performing the function suitable authority and resources to
fulfill their responsibilities if required by subsection (l) of this section,
relating to internal audit function requirements.
(8) Each member of the audit committee must
be a member of the board of directors of the insurer or HMO or, at the election
of the controlling person, a member of the board of directors of an entity that
controls the group of insurers or HMOs as provided under paragraph (11) of this
subsection and described under subsection (c)(3) of this section.
(9) To be independent for purposes of this
subsection, a member of the audit committee may not, other than in his or her
capacity as a member of the audit committee, the board of directors, or any
other board committee, accept any consulting, advisory, or other compensatory
fee from the entity or be an affiliate of the entity or an affiliate of any
subsidiary of the entity. To the extent of any conflict with a statute
requiring an otherwise non-independent board member to participate in the audit
committee, the other statute prevails and controls, and the member may
participate in the audit committee unless the member is an officer or employee
of the insurer or HMO or an affiliate of the insurer or HMO.
(10) Except as provided in paragraph (3) of
this subsection, if a member of the audit committee ceases to be independent
for reasons outside the member's reasonable control, the member may remain an
audit committee member of the responsible entity, if the responsible entity
gives notice to the Commissioner, until the earlier of:
(A) the next annual meeting of the
responsible entity; or
(B) the
first anniversary of the occurrence of the event that caused the member to be
no longer independent.
(11) To exercise the election of the
controlling person to designate the audit committee under this section, the
ultimate controlling person must provide written notice of the affected
insurers or HMOs to the Commissioner. Notice must be made before the issuance
of the statutory audit report and must include a description of the basis for
the election. The election may be changed through a notice to the Commissioner
by the insurer or HMO, which must include a description of the basis for the
change. An election remains in effect until changed by later
election.
(12) The audit committee
must require the accountant who performs an audit required by Insurance Code
Chapter 401, Subchapter A, and this section to report to the audit committee in
accordance with the requirements of Statement on Auditing Standards No. 114,
"The Auditor's Communication With Those Charged With Governance," or a
successor document, including:
(A) all
significant accounting policies and material permitted practices;
(B) all material alternative treatments of
financial information in statutory accounting principles that have been
discussed with the insurer's or HMO's management officials;
(C) ramifications of the use of the
alternative disclosures and treatments, if applicable, and the treatment
preferred by the accountant; and
(D) other material written communications
between the accountant and the management of the insurer or HMO, such as any
management letter or schedule of unadjusted differences.
(13) If an insurer or HMO is a member of an
insurance holding company system, the report required by paragraph (12) of this
subsection may be provided to the audit committee on an aggregate basis for
insurers or HMOs in the holding company system if any substantial differences
among insurers or HMOs in the system are identified to the audit
committee.
(l) Internal
audit function requirements.
(1) An insurer
or HMO is exempt from the requirements of this subsection if:
(A) the insurer or HMO has annual direct
written and unaffiliated assumed premium, including international direct and
assumed premium but excluding premiums reinsured with the Federal Crop
Insurance Corporation and Federal Flood Program, less than $500 million; and
(B) the insurer or HMO is a member
of a group of insurers or HMOs, the group has annual direct written and
unaffiliated assumed premium including international direct and assumed
premium, but excluding premiums reinsured with the Federal Crop Insurance
Corporation and Federal Flood Program, less than $1 billion.
(2) An insurer or HMO or group of
insurers or HMOs subject to this subsection must establish an internal audit
function providing independent, objective, and reasonable assurance to the
audit committee and insurer or HMO management regarding the insurer's or HMO's
governance, risk management, and internal controls. This assurance must be
provided by performing general and specific audits, reviews, and tests, and by
employing other techniques deemed necessary to protect assets, evaluate control
effectiveness and efficiency, and evaluate compliance with policies and
regulations.
(3) In order to ensure
that internal auditors remain objective, the internal audit function must be
organizationally independent. Specifically, the internal audit function cannot
defer ultimate judgment on audit matters to others and must appoint an
individual to head the internal audit function who has direct and unrestricted
access to the board of directors. Organizational independence does not prevent
dual-reporting relationships.
(4)
The head of the internal audit function must 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.
(5) If an insurer or HMO is a
member of an insurance holding company system or included in a group of
insurers or HMOs, the insurer or HMO may satisfy the internal audit function
requirements set forth in this section at the ultimate controlling parent
level, an intermediate holding company level, or the individual legal entity
level.
(m) Prohibited
conduct in connection with preparation of required reports and documents.
(1) A director or officer of an insurer or
HMO may not, directly or indirectly:
(A) make
or cause to be made a materially false or misleading statement to an accountant
in connection with an audit, review, or communication required by Insurance
Code Chapter 401, Subchapter A, or this section; 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 Insurance Code Chapter 401, Subchapter A, or this
section.
(2) An officer
or director of an insurer or HMO, or another person acting under the direction
of an officer or director of an insurer or HMO, may not directly or indirectly
coerce, manipulate, mislead, or fraudulently influence an accountant performing
an audit under Insurance Code Chapter 401, Subchapter A, or this section if
that person knew or should have known that the action, if successful, could
result in rendering the insurer's or HMO's financial statements materially
misleading. For purposes of this paragraph, actions that could result in
rendering the insurer's or HMO's financial statements materially misleading
include actions taken at any time with respect to the professional engagement
period to coerce, manipulate, mislead, or fraudulently influence an accountant:
(A) to issue or reissue a report on an
insurer's or HMO's financial statements that is not warranted and would result
in material violations of statutory accounting principles prescribed by the
Commissioner, generally accepted auditing standards, or other professional or
regulatory standards;
(B) not to
perform an audit, review, or other procedure 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 or HMO's audit committee.
(n) Report of internal control over financial
reporting.
(1) Each insurer or HMO required
to file an audited financial report under Insurance Code Chapter 401,
Subchapter A, and this section that has annual direct written and assumed
premiums, excluding premiums reinsured with the Federal Crop Insurance
Corporation and the National Flood Insurance Program, of $500 million or more
must prepare a report of the insurer's or HMO's or group of insurers' or HMOs'
internal control over financial reporting. The report must be filed with the
Commissioner with the communication described by subsection (j) of this
section. The report of internal control over financial reporting shall be filed
with the Commissioner as of the immediately preceding December 31.
(2) Notwithstanding the premium threshold
under paragraph (1) of this subsection, the Commissioner may require an insurer
or HMO to file the management's report of internal control over financial
reporting if the insurer or HMO is in any risk-based capital level event or
meets one or more of the standards of an insurer or HMO considered to be in
hazardous financial condition as described by or provided in Insurance Code
Chapter 404, 441, 822, 841, 843, or 884 or rules adopted thereunder, including
§
7.402 of this title, Chapter 8 of
this title, and §
11.811 of this title.
(3) An insurer or HMO or a group of insurers
or HMOs may file the insurer's or HMO's or the insurer's or HMO's parent's
Section 404 report and an addendum if the insurer or HMO or group of insurers
or HMOs is:
(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; or
(D) a
member of a holding company system whose parent is not directly subject to
Section 404 but is a SOX-compliant entity.
(4) A Section 404 report described by
paragraph (3) of this subsection must include those internal controls of the
insurer or HMO or group of insurers or HMOs that have a material impact on the
preparation of the insurer's or HMO's or group of insurers' or HMOs' audited
statutory financial statements, including those items listed in Insurance Code
§
401.009(a)(3)(B) - (H) and
(b). The addendum must be a positive
statement by management that there are no material processes excluded from the
Section 404 report with respect to the preparation of the insurer's or HMO's or
group of insurers' or HMOs' audited statutory financial statements, including
those items specified in Insurance Code §
401.009(a)(3)(B) - (H) and
(b). If there are internal controls of the
insurer or HMO or group of insurers or HMOs that have a material impact on the
preparation of the insurer's or HMO's or group of insurers' or HMOs' audited
statutory financial statements and those internal controls are not included in
the Section 404 report, the insurer or HMO or group of insurers or HMOs may
either file:
(A) a report under this
subsection; or
(B) the Section 404
report and a report under this subsection for those internal controls that have
a material impact on the preparation of the insurer's or HMO's or group of
insurers' or HMOs' audited statutory financial statements not covered by the
Section 404 report.
(5)
The insurer's or HMO's management report of internal control over financial
reporting must 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 opinion concerning
whether, to the best of management's knowledge and belief, after diligent
inquiry, 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 evaluates the effectiveness of its
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 the immediately preceding December
31;
(F) a statement regarding the
inherent limitations of internal control systems; and
(G) signatures of the chief executive officer
and the chief financial officer or an equivalent position or title.
(6) For purposes of paragraph
(5)(E) of this subsection, an insurer's or HMO's management may 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.
(7) Management must
document, and make available upon financial condition examination, the basis of
the opinions required by paragraph (5) of this subsection. Management may base
opinions, in part, on its review, monitoring, and testing of internal controls
undertaken in the normal course of its activities.
(8) Management has discretion about the
nature of the internal control framework used, and the nature and extent of the
documentation required by paragraph (7) of this subsection, in order to form
its opinions in a cost-effective manner and may include an assembly of or
reference to existing documentation.
(9) The management's report of internal
control over financial reporting required by this subsection and any supporting
documentation provided in the course of a financial condition examination are
considered examination information pursuant to Insurance Code §
401.058 and
information described by Insurance Code §
401.201.
(o) Transition dates.
(1) An insurer or HMO or group of insurers or
HMOs whose audit committee as of September 1, 2010, is not subject to the
independence requirements of subsection (k) of this section because the total
written and assumed premium is below the threshold specified in subsection
(k)(2)(A) or (B) of this section and that later becomes subject to one of the
independence requirements because of changes in the amount of written and
assumed premium, has one year following the year in which the written and
assumed premium exceeds the threshold amount to comply with the independence
requirements. An insurer or HMO that becomes subject to one of the independence
requirements as a result of a business combination must comply with the
independence requirements not later than the first anniversary of the date of
the acquisition or combination.
(2)
An insurer or HMO required to file an audited financial report under Insurance
Code Chapter 401, Subchapter A, and this section that has annual direct written
and assumed premiums, excluding premiums reinsured with the Federal Crop
Insurance Corporation and the National Flood Insurance Program, of $500 million
or more for the reporting period ending December 31, 2010, and that has not had
total written premium at the $500 million or more premium threshold amount in
any prior calendar year reporting period must comply with the reporting
requirements in subsection (n) of this section no later than two years after
the year in which the written premium exceeds the threshold amount required to
file a report.
(3) An insurer or
HMO or group of insurers or HMOs that is not required by subsection (n)(1) of
this section to file a report beginning with the reporting period ending
December 31, 2010, because the total written premium is below the threshold
amount, and that later becomes subject to the reporting requirements, has two
years after the year in which the written premium exceeds the threshold amount
required to file a report. An insurer or HMO acquired in a business combination
must comply with the reporting requirements not later than the second
anniversary of the date of the acquisition or combination.
(4) An insurer or HMO or group of insurers or
HMOs that no longer qualifies for the exemption in subsection (l)(1) of this
section has one year after the year the threshold is exceeded to comply with
the requirements of subsection (l)(1) of this section.
(p) Severability. If any subsection or
portion of a subsection of this section is held to be invalid for any reason,
all valid parts are severable from the invalid parts and remain in effect. If
any subsection or portion of a subsection is held to be invalid in one or more
of its applications, the part remains in effect in all valid applications that
are severable from the invalid applications. To this end, all provisions of
this section are declared to be severable.