| (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.
Cont'd... |
