| (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 the Insurance Code Chapter 401, Subchapter A, applies shall 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 (9) 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 the Insurance Code Chapters 822, 841, 843, or 884 or rules adopted thereunder, including §7.402 of this chapter (relating 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 the Insurance Code Chapter 404, 441, or 843 or rules adopted thereunder, including Chapter 8 of this title (relating to Early Warning System for Insurers in Hazardous Condition) and §11.810 of this title (relating to Harzardous Conditions for HMOs); 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), and (5) - (12) 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 shall 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 the Insurance Code Chapter 401, Subchapter A, and this section. Each accountant shall report directly to the audit committee. (7) 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 (10) of this subsection and described under subsection (c)(3) of this section. (8) 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. (9) 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. (10) 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. (11) The audit committee shall require the accountant who performs an audit required by the 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. (12) If an insurer or HMO is a member of an insurance holding company system, the report required by paragraph (11) 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) 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 the 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 the 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 the 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; Cont'd... |
