| (a) Definitions. The following words and terms, when
used in this section, will 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 §401.014.
(2) Audited Financial Report--The annual audit report
required by Insurance Code Chapter 401, Subchapter A.
(3) Commissioner--The commissioner of insurance.
(4) TDI--The Texas Department of Insurance.
(5) Examiner--Staff appointed by the commissioner under
Insurance Code Chapter 401, Subchapter C.
(6) GAAS--Generally Accepted Auditing Standards. The
standards adopted by the American Institute of Certified Public Accountants
or Public Company Accounting Oversight Board to conduct an audit and
to ensure the quality of the performance by accountants who are engaged
in an audit of financial statements.
(7) Material--As defined in the NAIC's Accounting Practices and Procedures Manual under §7.18
of this title.
(8) NAIC--The National Association of Insurance Commissioners.
(9) Statutory Examination--An examination performed
by TDI's examiners or other persons or firms retained by TDI specifically
for examination of insurers, corporations, or associations.
(10) Work Papers--The records kept by the accountant
supporting that accountant's audit opinion, including the audit records
and the accountant's audit planning records; and any record of communications
related to the audit between the accountant and the insurer under
Insurance Code §401.020.
(b) Priority of Accounting Guidance. The priority for
determining accounting standards is set out in §7.18 of this
title.
(c) Applicability. This section applies only to audited
financial reports with audit dates as of December 31, 1995, or later.
A foreign or alien insurer may be exempt from this rule if the foreign
or alien insurer files an audited financial report in another state
and the requirements for that state's audited financial reports are
determined by the commissioner under Insurance Code §401.007
to be substantially similar to the requirements in Insurance Code
Chapter 401. A foreign or alien insurer is exempt from this rule if
the foreign or alien insurer files an audited financial report in
another state and the requirements for that state's audited financial
reports have already been determined by the commissioner under Insurance
Code §401.007 to be substantially similar to the requirements
in Insurance Code Chapter 401.
(d) Purpose. Insurance Code Chapter 401 requires audited
financial reports to be prepared, and that statutory examinations
are periodically conducted under the Insurance Code. To improve coordination
between the audited financial reports and statutory examinations,
and to promote the utilization of work papers to the fullest extent
during the conduct of statutory examinations, certain minimum standards,
guidelines, and procedures must be incorporated by the accountant
during the preparation of the work papers and the audited financial
report. The purpose of this section is to establish those requirements.
(e) Conduct of audit. The annual audit required by
Insurance Code Chapter 401 must be conducted in accord with GAAS.
It is not TDI's intent to expand audit testing beyond the requirements
of GAAS. The accountant conducting the audit must consider the procedures
and conventions set out in paragraphs (1) - (4) of this subsection,
as follows:
(1) audit procedures and format contained in the NAIC
Examiners Handbook;
(2) accounting treatments for the particular line(s)
of insurance contained in §7.18 of this title and the NAIC Annual
Statement Instructions adopted by the commissioner under §7.68
of this title;
(3) valuation procedures contained in the NAIC Investment
Analysis Office's Purposes and Procedures
Manual and §7.18 of this title; and
(4) any orders of the commissioner issued to a particular
company.
(f) Contents of audited financial reports. In addition
to the contents specified in Insurance Code §401.009, audited
financial reports must contain the statements and reports set out
in paragraphs (1) - (3) of this subsection.
(1) Audit procedures and format contained in the NAIC
Examiners Handbook.
(2) The balance sheet, statement of gain or loss from
operations, statement of changes in capital and surplus, and statement
of cash flow prepared in accord with the Texas Administrative Code,
including the NAIC Annual Statement Instructions adopted by the commissioner
in §7.68 of this title.
(3) In addition to the items that must be recorded
in the notes to the financial statements under Insurance Code §401.009(b),
the notes must include:
(A) any exceptions to compliance with the financial,
investment, and holding company provisions of the Insurance Code or
the Texas Administrative Code noted during the audit;
(B) a schedule and explanation of material nonadmitted
assets;
(C) any and all items required by the NAIC Annual Statement
Instructions and the NAIC Accounting Practices
and Procedures Manual under §7.68 and §7.18 of this
title; and
(D) a reconciliation of any differences between the
audited statutory financial statements and the Annual Statement filed
with TDI, with a written description of the nature of the differences.
(g) Contents of work papers.
(1) For those items subjected to detailed tests by
the accountant during the course of the audit, the work papers must
contain a notation of whether any material exceptions exist for each
of the items set out in subparagraphs (A) and (B) of this paragraph.
(A) For invested assets:
(i) compliance as an authorized investment has been
determined and does not exceed statutory limitations;
(ii) ownership and possession have been verified; and
(iii) securities are valued in accord with the instructions
of the NAIC Investment Analysis Office's Purposes
and Procedures Manual and §7.18 of this title.
(B) For assets other than invested assets:
(i) the assets are admitted in accord with the appropriate
provision of the Insurance Code or Texas Administrative Code; and
(ii) the assets are valued in accord with the Texas
Administrative Code and §7.18 of this title.
(2) If the regulated entity subject to the audit has
any material reinsurance agreement or agreements, the work papers
must contain an outline addressing the items set out in subparagraphs
(A) - (E) of this paragraph as follows:
(A) a summary of the insurer's overall reinsurance
program;
(B) an explanation of relevant provisions by which
liabilities are transferred to the reinsurer and any contingency provisions
by which the reinsurer can cause the ceding insurer to reassume liabilities
previously transferred to the reinsurer;
(C) an explanation about assets held in trust, depositories,
or letters of credit by which any reserve liabilities are collateralized;
(D) a verification of any material reinsurance balance
ceded or assumed; and
(E) an explanation of amounts recoverable from unlicensed
reinsurers that are not collateralized, or disputed reinsurance recoverables.
(3) The work papers of any audited entity must contain:
(A) any letters from the accountant to management commenting
on or explaining internal management operating procedures;
(B) computer-generated work papers;
(C) audit program;
(D) reports prepared by outside consultants;
(E) for policy liabilities, a note that reserves are
established in accord with policy and statutory provisions, and that
required payments were made under any contract provisions;
(F) for all other liabilities, a note that all material
liabilities of the company have been properly recorded; and
(G) internal control work papers.
(4) The work papers of any audited entity must contain
a notation that the accountant has determined that the entity has:
(A) met the filing requirements in Insurance Code Chapter
823 and the Texas Administrative Code, including the requirements
that all shareholder dividends have been reported to TDI within two
business days after declaration and at least 10 days prior to payment
as required under Insurance Code §823.053; and that all other
dividends have been declared and paid in accord with the applicable
provisions of the Insurance Code and the Texas Administrative Code,
including Chapter 403, Chapter 1112, §841.253, and §884.253;
and
(B) maintained unencumbered assets in an amount at
least equal to reserve liabilities as required under Insurance Code
Chapter 422.
(h) Accessibility of work papers. The accountant must
provide all work papers to the examiner, whether during or after the
preparation of the audited financial report. The examiner may obtain,
if necessary, photocopies of work papers, as provided by Insurance
Code §401.020(c), so as not to burden the accountant if a statutory
examination is occurring at the same time as an annual audit. Information
obtained under this section is subject to the confidentiality standards
imposed by Insurance Code §§401.020(c), 401.057, 401.105,
401.106, and 823.011.
(i) Sanction. Failure to comply with this section may
result in the commissioner initiating action under Insurance Code §401.012
and Chapter 82.
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| Source Note: The provisions of this §7.85 adopted to be effective July 13, 1995, 20 TexReg 4689; amended to be effective January 1, 2001, 25 TexReg 12806; amended to be effective February 26, 2006, 31 TexReg 1036; amended to be effective December 2, 2014, 39 TexReg 9358 |
