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| Montana Administrative Register Notice 6-186 | No. 24 12/24/2009 | |
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BEFORE THE STATE AUDITOR AND COMMISSIONER OF INSURANCE OF THE STATE OF
TO: All Concerned Persons 1. On January 21, 2010, at 10:00 a.m., the Commissioner of Insurance, Office of the State Auditor, Monica Lindeen, will hold a public hearing in the 2nd floor conference room of the State Auditor's Office, 2. The Commissioner of Insurance, Office of the State Auditor, Monica Lindeen, will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing, or need an alternative accessible format of this notice. If you require an accommodation, contact the department no later than 5:00 p.m., January 14, 2010, to advise us of the nature of the accommodation that you need. Please contact Darla Sautter, State Auditor's Office, 3. The rules as proposed to be amended provide as follows, stricken matter interlined, new matter underlined: 6.6.3501 DEFINITIONS For the purposes of this subchapter, the following terms shall have the following meanings: (1) (2) (3) (4) "Audited financial report" means and includes those items specified in ARM 6.6.3504. (5) "Indemnification" means an agreement of indemnity, or a release from liability, where the intent or effect is to shift, or limit, in any manner the potential liability of the person, or firm, for failure to adhere to applicable auditing or professional standards, whether or not resulting in part from knowing of other misrepresentations made by the insurer, or its representatives. (6) "Independent board member" has the same meaning as described in [NEW RULE I(4)]. (7) "Insurer" means an insurer as defined in 33-1-201 and 33-2-1501, MCA, or an authorized insurer as defined in 33-1-201, MCA. (8) "Group of insurers" means those licensed insurers included in the reporting requirements of 33-2-1101, MCA, et seq., or a subset of such insurers as identified by management for the purpose of assessing the effectiveness of internal controls over financial reporting. (9) "Internal control over financial reporting" means a process effected by an entity's board of directors, management ,and other personnel designed to provide reasonable assurance regarding the reliability of the financial statements, i.e., those items specified in ARM 6.6.3504(2)(b) through 6.6.3504(3), and includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements, i.e., those items specified in ARM 6.6.3504(2)(b) through 6.6.3504(3), and that receipts and expenditures are being 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, i.e., those items specified in ARM 6.6.3504(2)(b) through 6.6.3504(3). (10) "SEC" means the (11) "Section 404" means Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC's rules and regulations promulgated thereunder. (12) "Section 404 Report" means management's report on "internal control over financial reporting" as defined by the SEC, and the related attestation report of the independent certified public accountant as described in ARM 6.6.3501. (13) "SOX compliant entity" means an entity that either is required to be compliant with, or voluntarily is compliant with, all of the following provisions of the Sarbanes-Oxley Act of 2002: (a) the preapproval requirements of Section 201 (Section 10A(i) of the Securities Exchange Act of 1934); (b) the audit committee independence requirements of Section 301 (Section 10A(m)(3) of the Securities Exchange Act of 1934); and (c) the internal control over financial reporting requirements of Section 404 (Item 308 of SEC Regulation S-K). AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3502 PURPOSE AND SCOPE (1) The purpose of this rule is to improve the surveillance of the financial condition of insurers by the department of insurance of the state of (a) an annual audit of financial statements reporting the financial position, and the results of operations of insurers (b) communication of internal control related matters noted in an audit; and (c) management's report of internal control over financial reporting. (2) Except as specifically provided herein, every insurer shall be subject to these rules. Insurers having direct premiums written in this state of less than $1,000,000 in any calendar year and less than 1,000 policyholders or certificateholders of direct (3) Foreign or alien insurers filing the audited financial report (a) a copy of the audited financial report, communication of internal control related matters noted in an audit, (b) A copy of any notification of adverse financial condition report filed with such other state is filed with the commissioner within the time specified in ARM (4) Foreign or alien insurers required to file Management's Report of Internal Control over Financial Reporting in another state are exempt from filing the report in this state provided the other state has substantially similar reporting requirements, and the report is filed with the commissioner of the other state within the time specified. (5) This rule does not prohibit, preclude, or in any way limit the commissioner from ordering and/or conducting and/or performing examinations of insurers under the rules, regulations, practices, and procedures of the department. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3503 GENERAL REQUIREMENTS RELATED TO FILING AND EXTENSIONS FOR FILING OF ANNUAL AUDITED FINANCIAL REPORTS AND AUDIT COMMITTEE APPOINTMENT (1) and (2) remain the same. (3) If an extension is granted in accordance with the provisions in ARM 6.6.3503(2), a similar extension of 30 days is granted to the filing of management's report of internal control over financial reporting. (4) Every insurer required to file an annual audited financial report pursuant to this subchapter shall designate a group of individuals as constituting its audit committee, as defined in ARM 6.6.3501. The audit committee of an entity that controls an insurer may be deemed to be the insurer's audit committee for purposes of this subchapter at the election of the controlling person.
AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3504 CONTENTS OF ANNUAL AUDITED FINANCIAL REPORT (1) through (2)(c) remain the same. (d) statement of cash flow (e) remains the same. (f) notes to financial statements; (i) These notes shall be those required by the appropriate 200 (3) remains the same. AUTH: 33-1-313, 33-2-1517, IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3505 DESIGNATION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT (1) Each insurer required by these rules to file an annual audited financial report must, within 60 days after becoming subject to such requirement, register with the commissioner in writing the name and address of the independent certified public accountant or accounting firm retained to conduct the annual audit required by these rules. Insurers not retaining an independent certified public accountant on the effective date of this rule shall register the name and address of their retained independent certified public accountant not less than six months before the date when the first audited financial report is to be filed. (2) and (3) remain the same. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3506 QUALIFICATIONS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT (1) The commissioner shall not recognize any person or firm as a qualified independent certified public accountant if the person, or firm: (a) (b) has either directly or indirectly entered into an agreement of indemnity or release from liability (collectively referred to as "indemnification") with respect to the audit of the insurer. (2) remains the same. (3)
(4) (a) number of partners, expertise of the partners, or the number of insurance clients in the currently registered firm; (b) premium volume of the insurer; and (c) number of jurisdictions in which the insurer transacts business. (5)
(6) (a) has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961-1968, or any dishonest conduct or practices under federal or state law; (b) has been found to have violated the insurance laws of this state with respect to any previous reports submitted under this rule; or (c) has demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this rule. (7) The commissioner may hold a hearing pursuant to 33-1-701, MCA, to determine whether an independent certified public accountant is qualified and, after considering the evidence and arguments presented, may decide whether the accountant is qualified to express his opinion on the financial statements in the annual audited financial report filed pursuant to these rules, and may require the insurer to replace the accountant with another whose relationship with the insurer is qualified within the meaning of these rules. (8) In general, the principles of independence with respect to services provided by the qualified independent certified public accountant are largely predicated on three basic principles, violations of which would impair the accountant's independence. The principles are that the accountant cannot function in the role of management, cannot audit his or her own work, and cannot serve in an advocacy role for the insurer. (9) The commissioner shall not recognize as a qualified independent certified public accountant, nor accept an annual audited financial report, prepared in whole, or in part, by an accountant who provides to an insurer, contemporaneously with the audit, the following nonaudit services: (a) bookkeeping, or other services, related to the accounting records, or financial statements of the insurer; (b) 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. The accountant may assist an insurer in understanding the methods, assumptions, and inputs used in the determination of amounts recorded in the financial statement only if it is reasonable to conclude that the services provided will not be subject to audit procedures during an audit of the insurer's financial statements. An accountant's actuary may also issue an actuarial opinion or certification ("opinion") on an insurer's reserves if the following conditions have been met: (i) neither the accountant nor the accountant's actuary has performed any management functions, or made any management decisions; (ii) the insurer has competent personnel (or engages a third party actuary) to estimate the reserves for which management takes responsibility; and (iii) the accountant's actuary tests the reasonableness of the reserves after the insurer's management has determined the amount of the reserves. (e) internal audit outsourcing services; (f) management functions, or human resources; (g) broker or dealer, investment adviser, or investment banking services; (h) legal services, or expert services unrelated to the audit; or (i) any other services that the commissioner determines, by regulation, are impermissible. (10) Insurers having direct written and assumed premiums of less than $100,000,000 in any calendar year may request an exemption from (9). The insurer shall file with the commissioner a written statement discussing the reasons why the insurer should be exempt from these provisions. If the commissioner finds, upon review of this statement, that compliance with this regulation would constitute a financial or organizational hardship upon the insurer, an exemption may be granted. (11) A qualified independent certified public accountant who performs the audit may engage in other nonaudit services, including tax services, that are not described in (9) or that do not conflict with (8), only if the activity is approved in advance by the audit committee, in accordance with (12). (12) All auditing services and nonaudit services provided to an insurer by the qualified independent certified public accountant of the insurer shall be preapproved by the audit committee. The preapproval requirement is waived with respect to nonaudit services if the insurer 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 such nonaudit services provided to the insurer constitutes not more than five percent of the total amount of fees paid by the insurer to its qualified independent certified public accountant during the fiscal year in which the nonaudit services are provided; (b) the services were not recognized by the insurer at the time of the engagement to be nonaudit services; and (c) the services are promptly brought to the attention of the audit committee and approved prior to 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 authority to grant such approvals has been delegated by the audit committee. (13) The audit committee may delegate to one or more designated members of the audit committee the authority to grant the preapprovals required by (12). 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. (14) The commissioner shall not recognize an independent certified public accountant as qualified for a particular insurer if a member of the board, president, chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for that insurer, was employed by the independent certified public accountant, and participated in the audit of that insurer during the one year period preceding the date that the most current statutory opinion is due. Section (14) shall only apply to partners and senior managers involved in the audit. (15) An insurer may make application to the commissioner for relief from (14) on the basis of unusual circumstances. The insurer shall file, with its annual statement filing, the approval for relief from (14) with the states that it is licensed in, doing business in, and with the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-1-701, 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3507 CONSOLIDATED OR COMBINED AUDITS (1) remains the same. (a) A (b) A (c) N (d) E (e) A AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3508 SCOPE OF AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3509 NOTIFICATION OF ADVERSE FINANCIAL CONDITION (1) The insurer required to furnish the annual audited financial report shall require the independent certified public accountant to report, in writing, within five business days to the board of directors or its audit committee any determination by the independent certified public accountant that the insurer has materially misstated its financial condition as reported to the commissioner, as of the balance sheet date currently under audit (2) An independent certified public accountant shall not be liable in any manner to any person for any statement made in connection with (3) remains the same. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3510 (2) The insurer shall provide a description of remedial actions taken or proposed to correct unremediated material weaknesses AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3511 ACCOUNTANT'S LETTER OF QUALIFICATIONS (1) remains the same. (a) that the accountant is independent with respect to the insurer and conforms to the standards of his or her profession as contained in the code of professional ethics and pronouncements of the AICPA and the rules of professional conduct of the Montana board of public accountants or its applicable counterpart in a sister state (b) the background and experience in general, and the experience in audits of insurers of the staff assigned to the engagement, and whether each is an independent certified public accountant. Nothing within these rules shall be construed as prohibiting the accountant from utilizing such staff as he or she deems appropriate where use is consistent with the standards prescribed by generally accepted auditing standards (c) that the accountant understands the annual audited financial report and his or her opinion thereon will be filed in compliance with these rules and that the commissioner will be relying on this information in the monitoring and regulation of the financial position of insurers; (d) that the accountant consents to the requirements of ARM 6.6.3512 and that the accountant consents and agrees to make available for review by the commissioner, his designee or his appointed agent, the workpapers, as defined in ARM 6.6.3512 (e) a representation that the accountant is properly licensed by an appropriate state licensing authority and is a member in good standing in the AICPA (f) remains the same. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3512 DEFINITION, AVAILABILITY, AND MAINTENANCE OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' (1) Workpapers are the records kept by the independent certified public accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to his/her (2) Every insurer required to file an audited financial report pursuant to these rules shall require the accountant to make available for review by department examiners, all workpapers prepared in the conduct of his/her (3) remains the same. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 4. The rules proposed to be amended and transferred provide as follows, stricken matter interlined, new matter underlined: 6.6.3513 (6.6.3520) EXEMPTIONS AND EFFECTIVE DATES (1) Upon written application of any insurer, the commissioner may grant an exemption from compliance with any and all provisions of these rules if the commissioner finds, upon review of the application, that compliance (2) Domestic insurers retaining certified public accountants on the effective date of this rule who qualify as independent shall comply with these rules for the year ending December 31, (3) remains the same. (a) as of December 31,
(b) for the year ending December 31, (4) Foreign insurers shall comply with these rules for the year ending December 31, (5) The requirements of ARM 6.6.3506(4) shall be in effect for audits of the year beginning January 1, 2010, and thereafter. (6) The requirements of [NEW RULE I] are to be in effect January 1, 2010. An insurer, or group of insurers, that is not required to have independent audit committee members, or only a majority of independent audit committee members (as opposed to a supermajority), because the total written and assumed premium is below the threshold, and subsequently becomes subject to one of the independence requirements due to changes in premium shall have one year following the year the threshold is exceeded (but not earlier than January 1, 2010) to comply with the independence requirements. Likewise, an insurer that becomes subject to one of the independence requirements as a result of a business combination shall have one calendar year following the date. (7) The requirements of [NEW RULE III] and ARM 6.6.3510 are effective beginning with the reporting period ending December 31, 2010, and each year thereafter. An insurer, or group of insurers, that is not required to file a report because the total written premium is below the threshold, and subsequently becomes subject to the reporting requirements, shall have two years following the year the threshold is exceeded (but not earlier than December 31, 2010) to file a report. Likewise, an insurer acquired in a business combination shall have two calendar years following the date of acquisition or combination to comply with the reporting requirements. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-1-701, 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 6.6.3514 (6.6.3521) CANADIAN AND BRITISH COMPANIES (1) In the case of Canadian and British insurers, the annual audited financial report must be defined as the annual statement of total business on the form filed by such companies with their (2) For such insurers, the letter required in ARM 6.6.3505 must state that the accountant is aware of the requirements relating to the annual audited AUTH: 33-2-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA 5. The new rules proposed to be adopted provide as follows:
NEW RULE I Requirements for Audit Committees (1) This rule shall not apply to foreign or alien insurers licensed in this state, an insurer that is a SOX compliant entity, or an insurer that is a direct or indirect wholly-owned subsidiary of a SOX compliant entity. (2) The audit committee shall be directly responsible for the appointment, compensation, and oversight of the work of any accountant (including resolution of disagreements between management and the accountant regarding financial reporting) for the purpose of preparing or issuing the audited financial report or related work pursuant to this subchapter. Each accountant shall report directly to the audit committee. (3) Each member of the audit committee shall be a member of the board of directors of the insurer or a member of the board of directors of an entity elected pursuant to [NEW RULE I(6)], and ARM 6.6.3501(3). (4) In order to be considered independent for purposes of this rule, 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 affiliated person of the entity, or any subsidiary thereof. However, if law requires board participation by otherwise nonindependent members, that law shall prevail, and such members may participate in the audit committee and be designated as independent for audit committee purposes, unless they are an officer, or employee of the insurer, or one of its affiliates. (5) If a member of the audit committee ceases to be independent for reasons outside the member's reasonable control, that person, with notice by the responsible entity to the state, may remain an audit committee member of the responsible entity until the earlier of the next annual meeting of the responsible entity, or one year from the occurrence of the event that caused the member to be no longer independent. (6) To exercise the election of the controlling person to designate the audit committee for purposes of this subchapter, the ultimate controlling person shall provide written notice to the commissioners of the affected insurers. Notification shall be made timely prior to the issuance of the statutory audit report and shall include a description of the basis for the election. The election can be changed through notice to the commissioner by the insurer, which shall include a description of the basis for the change. The election shall remain in effect for perpetuity, until rescinded. (7) The audit committee shall require the accountant that performs for an insurer any audit required by this subchapter to timely report to the audit committee in accordance with the requirements of SAS 61, Communication with Audit Committees, or its replacement, including: (a) all significant accounting policies and material permitted practices; (b) all material alternative treatments of financial information within statutory accounting principles that have been discussed with management officials of the insurer, ramifications of the use of the alternative disclosures and treatments, and the treatment preferred by the accountant; and (c) other material written communications between the accountant and the management of the insurer, such as any management letter, or schedule of unadjusted differences. (8) If an insurer is a member of an insurance holding company system, the reports required by (7) may be provided to the audit committee on an aggregate basis for insurers in the holding company system, provided that any substantial differences among insurers in the system are identified to the audit committee. (9) The proportion of independent audit committee members shall meet or exceed the following criteria:
Note A: The commissioner has authority afforded by state law to require the entity's board to enact improvements to the independence of the audit committee membership if the insurer is in a RBC action level event, meets one or more of the standards of an insurer deemed to be in hazardous financial condition, or otherwise exhibits qualities of a troubled insurer. Note B: All insurers with less than $500,000,000 in prior year direct written and assumed premiums are encouraged to structure their audit committees with at least a supermajority of independent audit committee members. Note C: Prior calendar year direct written and assumed premiums shall be the combined total of direct premiums and assumed premiums from nonaffiliates for the reporting entities. (10) An insurer with direct written and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, less than $500,000,000 may make application to the commissioner for a waiver from the [NEW RULE I] requirements based upon hardship. The insurer shall file, with its annual statement filing, the approval for relief from [NEW RULE I] with the states that it is licensed in, doing business in, and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA NEW RULE II Conduct of Insurer in Connection with the Preparation of Required Reports and Documents (1) No director or officer of an insurer shall, directly or indirectly: (a) make or cause to be made a materially false or misleading statement to an accountant in connection with any audit, review, or communication required under this subchapter; 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 this subchapter. (2) No officer, or director of an insurer, or any other person acting under the direction thereof, shall directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence any accountant engaged in the performance of an audit pursuant to this subchapter if that person knew, or should have known, that the action, if successful, could result in rendering the insurer's financial statements materially misleading. (3) For purposes of (2), actions that, "if successful, could result in rendering the insurer's financial statements materially misleading" include, but are not limited to, 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 financial statements that is not warranted in the circumstances (due to material violations of statutory accounting principles prescribed by the commissioner, generally accepted auditing standards, or other professional or regulatory standards); (b) not to perform audit, review, or other procedures 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 audit committee.
AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA NEW RULE III MANAGEMENT'S REPORT OF INTERNAL CONTROL OVER FINANCIAL REPORTING (1) Every insurer required to file an audited financial report pursuant to this subchapter that has annual direct written and assumed premiums, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of $500,000,000 or more shall prepare a report of the insurer's or group of insurers' internal control over financial reporting, as these terms are defined in ARM 6.6.3501. The report shall be filed with the commissioner along with the communication of internal control related matters noted in an audit described under ARM 6.6.3510. Management's report of internal control over financial reporting shall be as of December 31 immediately preceding. (2) Notwithstanding the premium threshold in (1), the commissioner may require an insurer to file management's report of internal control over financial reporting if the insurer is in any RBC level event, or meets any one or more of the standards of an insurer deemed to be in hazardous financial condition pursuant to ARM 6.6.3401 and 6.6.3402. (3) An insurer or a group of insurers that is directly subject to Section 404; part of a holding company system whose parent is directly subject to Section 404; not directly subject to Section 404, but is a SOX compliant entity; or a member of a holding company system whose parent that is not directly subject to Section 404, but is a SOX compliant entity, may file its, or its parent's Section 404 Report and an addendum in satisfaction of this rule requirement provided that those internal controls of the insurer or group of insurers having a material impact on the preparation of the insurer's or group of insurers' audited statutory financial statements (those items included in ARM 6.6.3504(2)(b) through 6.6.3504(3)) were included in the scope of the Section 404 Report. The addendum shall be a positive statement by management that there are no material processes with respect to the preparation of the insurer's or group of insurers' audited statutory financial statements (those items included in ARM 6.6.3504(2)(b) through 6.6.3504(3) of this subsection) excluded from the Section 404 Report. If there are internal controls of the insurer or group of insurers that have a material impact on the preparation of the insurer's or group of insurers' audited statutory financial statements, and those internal controls were not included in the scope of the Section 404 Report, the insurer or group of insurers may file: (a) a [NEW RULE III] report; or (b) the Section 404 Report and [NEW RULE III] report for those internal controls that have a material impact on the preparation of the insurer's or group of insurers' audited statutory financial statements not covered by the Section 404 Report. (4) Management's report of internal control over financial reporting shall 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 assertion, to the best of management's knowledge and belief, after diligent inquiry, as to whether 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 evaluated 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 December 31 immediately preceding. Management is not permitted to 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; (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 equivalent position/title). (5) Management shall document and make available upon financial condition examination the basis upon which its assertions, required in (4), are made. Management may base its assertions, in part, upon its review, monitoring, and testing of internal controls undertaken in the normal course of its activities. Management shall have discretion as to the nature of the internal control framework used, and the nature and extent of documentation, in order to make its assertion in a cost effective manner and, as such, may include assembly of, or reference to, existing documentation. Management's report on internal control over financial reporting, required by (1), and any documentation provided in support thereof during the course of a financial condition examination, shall be kept confidential by the state insurance department. AUTH: 33-1-313, 33-2-1517, MCA IMP: 33-2-701, 33-2-1517, 33-4-313, 33-5-413, MCA STATEMENT OF REASONABLE NECESSITY: The Commissioner of Securities and Insurance - Office of the State Auditor, Monica J. Lindeen, (commissioner) is the state-wide elected official responsible for administering the Montana Insurance Department and regulating insurers. The commissioner is a member of the National Association of Insurance Commissioners (NAIC). The NAIC is an organization of insurance regulators from the 50 states, the Insurer solvency and financial reporting is a principal area in which uniformity is efficient and effective for insurers and regulators. Multi-state insurers are able to use the same financial reporting in all jurisdictions and avoid the additional expense of tailoring their financial reporting to different requirements in each jurisdiction. Regulators across jurisdictions are able to have the same understanding of the financial reporting and terminology which aids them in monitoring the financial condition of insurers to protect insurance consumers. The NAIC has promulgated model regulations regarding financial reporting for insurers which promote uniformity and also increase the transparency and reliability of the financial reporting. The commissioner is proposing to amend existing administrative rules regarding insurer annual financial reporting, and to adopt new rules based on the NAIC Annual Financial Report Model Regulation, adopted in 2006. These rule changes are reasonably necessary to increase the transparency and reliability of financial reporting by insurers. Additionally, these rule changes will allow the commissioner to achieve more uniformity with insurance regulators in other jurisdictions, and for the agency to be accredited through the NAIC Financial Regulation Standards and Accreditation Program. The Accreditation Program provides a process to monitor and regulate solvency of multi-state insurers. To be accredited, each jurisdiction must demonstrate adequate solvency laws and regulation to protect consumers and guarantee funds, and also effective and efficient financial analysis and examination processes. Amendments to ARM 6.6.3501 are reasonably necessary to define new terms used in the subsequent rule changes. These terms and their definitions are consistent with the NAIC Model. It is reasonably necessary to amend ARM 6.6.3502 to update the purpose and scope in regard to audits by independent certified public accountants by requiring communication of internal control related matters noted in an audit and management's report of internal control of financial reporting. It is reasonably necessary to amend ARM 6.6.3503, regarding possible extensions for insurer reporting, to provide for possible extensions for new reporting requirements in other amendments. The amendments also require insurers to designate an audit committee, responsible for accounting and financial reporting, with the commissioner which will increase effectiveness in financial regulation because the independent certified public accountant will be responsible to the audit committee rather than the management of the insurer. The contents of the annual audited financial report are set out in ARM 6.6.3504. It is reasonably necessary to amend ARM 6.6.3504 to reference and require compliance with the 2009 NAIC Annual Statement Instructions, and the March 2009 NAIC Accounting Practices and Procedures Manual by insurers completing annual audited financial reports. The current rule references and requires compliance with the 2008 versions. It is reasonably necessary to amend ARM 6.6.3505 to clarify that the certified public accountant retained must be independent. The necessary qualifications for an independent certified public accountant are set out in ARM 6.6.3506. Several amendments address the independence of the certified public accountant, and identify circumstances and activities that impair the accountant's independence. The amendments provide that insurers may request exemption from disqualification of an accountant in certain circumstances. The amendments also provide that the commissioner may hold a hearing regarding an accountant's qualifications, including independence, and require the insurer to replace an accountant found to be unqualified (under the subchapter). Further, the amendments provide that the insurer must also preapprove all auditing services, and nonauditing services, provided by the independent certified public accountant. It is reasonably necessary to amend ARM 6.6.3506 to provide guidance to insurers and accountants regarding circumstances and activities that impair the accountant's independence. It is also reasonably necessary to allow insurers to request exemptions in certain circumstances, and to specify that the commissioner may hold a hearing regarding the qualifications of an accountant identified by an insurer. The amendments provide more assurance that the independent certified public accountant used by an insurer is qualified and that the accountant's work is not affected by a conflict of interest or other lack of independence. It is reasonably necessary to amend ARM 6.6.3507 pertaining to consolidated or combined audits to correct punctuation and grammar. The scope of audit and report of the independent certified public accountant are described in ARM 6.6.3508 which requires compliance with generally accepted auditing standards. It is reasonably necessary to amend ARM 6.6.3508 to reference specific professional standards, such as the Professional Standards of the AICPA, to provide guidance for independent certified public accountants in regard to audits of insurer financial statements and to achieve more uniformity in the conduct of the audits provided to the commissioner. It is reasonably necessary to amend ARM 6.6.3509 to correct a reference to a statute, and to clarify that the accountant performing the audit must be a certified public accountant. ARM 6.6.3510 requires insurers to report to the commissioner any material weaknesses in internal controls over financial reporting noted during an audit. It is reasonably necessary to amend ARM 6.6.3510 to clarify the reference to specific professional standards for the independent certified public accountant performing the audit and to use the language from those standards (i.e., amending "significant deficiencies" to "material weaknesses"). Additionally, if no unremediated material weaknesses were noted, the amendments require the independent certified public accounting to specifically so state which will aid the agency in its review. It is reasonably necessary to amend ARM 6.6.3511 pertaining to the accountant's letter of qualifications to correct punctuation and grammar. It is reasonably necessary to amend ARM 6.6.3512 to correct the terminology used from "examination" to "audit" for clarity and uniformity. ARM 6.6.3513 is being transferred, renumbered, and amended. This rule pertains to the effective dates for insurer compliance with the rules in the subchapter or any exemptions therefrom. The changes are reasonably necessary to clarify when (which reporting period) insurers must begin complying with the proposed rule changes and new rules regarding audits. Additionally, the changes provide that insurers previously exempt from certain reporting requirements due to premium volume must come into compliance within a specified time after reaching the threshold premium volume. The grace period for compliance upon reaching the threshold premium volume is reasonably necessary to allow for efficient administration and reporting for insurers. The renumbering is necessary for consistency with the rule sequence in the NAIC Model and for ease in reading and administration. ARM 6.6.3514, pertaining to financial reports for Canadian and British insurers, is being transferred, renumbered, and amended. The changes are reasonably necessary to correct the terminology in the rule. The renumbering is necessary for consistency with the rule sequence in the NAIC Model and for ease in reading and administration. NEW RULE I applies to domestic insurers and establishes the requirements for members of audit committees, including the number of members that must be independent and how independence is determined. Also, NEW RULE I makes audit committees responsible for the selection and oversight of an independent certified public accountant, provides an exemption for SOX compliant entities (Sarbanes-Oxley Act of 2002 compliant entities) and their wholly-owned subsidiaries, and allows insurers to request a waiver from the audit requirements in certain circumstances. NEW RULE I is reasonably necessary for effective solvency and financial regulation of insurers by requiring a certain minimum number of independent audit committee members, depending on the insurer's premium volume, and making the audit committee responsible for the selection of and communication with the independent certified public accountant performing the audit. Additionally, NEW RULE I is consistent with the NAIC Model which will promote uniformity in financial regulation of insurers across jurisdictions, and thereby increase efficiency and effectiveness for insurers and regulators. NEW RULE II governs the conduct of the insurer in regard to the preparation of the financial audit, review, or other communication required by this subchapter, and prohibits any material misstatements or omissions. Also, NEW RULE II prohibits the insurer from directly, or indirectly, engaging in any action that could result in making the insurer's financial statements materially misleading. NEW RULE II is reasonably necessary to ensure the accuracy of the insurer's financial audit and other financial statements. NEW RULE III provides that insurers in certain circumstances must file a report regarding management's internal control over financial reporting. The report includes acknowledgments that management is responsible for establishing and maintaining adequate internal control over financial reporting, has established internal control over financial reporting, and, after diligent inquiry, the internal controls are effective to provide reasonable assurance that the financial statements are reliable and in accordance with statutory accounting principles. The insurer must have supporting documentation (i.e., internal audit work papers) for its assertions in the report and make the supporting documentation available in a financial examination. The report must also disclose any inherent limitations of the internal control system and any unremediated material weaknesses in the internal control exercised. The report and any supporting documentation provided by an insurer during the course of a financial condition examination will be kept confidential by the commissioner and the insurance department. NEW RULE III is reasonably necessary to require effective internal control by management to ensure the accuracy of the insurer's financial audit and other financial statements. All the proposed rule changes are consistent with the NAIC Model and necessary to maintain the current NAIC accreditation of the agency. 6. Concerned persons may submit their data, views, or arguments concerning the proposed actions either orally or in writing at the hearing. Written data, views, or arguments may also be submitted to Jennifer Massman, Staff Attorney, Commissioner of Securities and Insurance, Office of the State Auditor, Monica Lindeen, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2040; fax (406) 444-3497; or e-mail [email protected], and must be received no later than 5:00 p.m., January 28, 2010. 7. Jennifer Massman, Staff Attorney, has been designated to preside over and conduct this hearing. 8. The department maintains a list of concerned persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices and specifies for which program the person wishes to receive notices. Such written request may be mailed or delivered to Darla Sautter, State Auditor's Office, 9. An electronic copy of this Proposal Notice is available through the Secretary of State's web site at http://sos.mt.gov/ARM/Register. The Secretary of State strives to make the electronic copy of the Notice conform to the official version of the Notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the Notice and the electronic version of the Notice, only the official printed text will be considered. In addition, although the Secretary of State works to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems. 10. Pursuant to 2-4-302, MCA, the bill sponsor contact requirements do not apply. /s/ Christina L. Goe /s/ Robert W. Moon Christina L. Goe Robert W. Moon Rule Reviewer Deputy Insurance Commissioner Certified to the Secretary of State December 14, 2009.
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A directory of state agencies is available online at http://www.mt.gov/govt/agencylisting.asp.
For questions about the organization of the ARM or this web site, contact [email protected].
