The purpose of this Bulletin is to inform insurers and health maintenance organizations (HMOs) authorized to engage in business in Texas, that the Commissioner of Insurance (Commissioner) has adopted a new model audit rule, 28 Texas Administrative Code §7.88, which will affect filings and other requirements concerning independent annual audits of insurer and HMO financial statements. Section 7.88 of the Texas Administrative Code (TAC) clarifies, implements, and augments the existing independent audit requirements in Chapter 401, Subchapter A, of the Texas Insurance Code (TIC) by adopting the 2006 updates to the NAIC's Annual Financial Reporting Model Regulation. These adopted updates address new requirements relating to auditor independence and qualifications, corporate governance, and internal control over financial reporting.
Section 7.88 was adopted to be effective on August 31, 2010. Except as otherwise provided in Chapter 401, Subchapter A , insurers and HMOs must comply with 28 TAC §7.88 for each annual independent audited financial report filed with the Commissioner, beginning with the audited financial reports for the reporting period ending December 31, 2010. The rule text of the new regulations and the Commissioner's Order adopting 28 TAC §7.88 can be found at http://www.tdi.state.tx.us/rules/2010/documents/7-88.pdf.
Please read below for an overview of 28 TAC §7.88:
1. Audited Financial Report Filing Deadlines:
28 TAC §7.88(d)(1) - (4) establishes June 1 as the due date for an insurer or HMO to file the annual audited financial report with the Commissioner for the preceding calendar year, except as otherwise provided (June 30 is the due date for an insurer or HMO that, along with any affiliated insurers or HMOs, is licensed in and does business only in Texas.).
2. Audit Committee Requirements:
28 TAC §7.88(b)(3), (c)(3), (d)(5), (h)(7) - (9), (k), and (n)(1) address the new audit committee requirements. Each insurer or HMO that is required to file an annual audited financial report under the TIC Chapter 401, Subchapter A, must designate a group of individuals to serve as an audit committee charged with (1) the appointment, compensation, and supervision of the insurer's or HMO's independent accountant; (2) overseeing the accounting and financial reporting processes of an insurer or HMO or group of insurers or HMOs; and (3) overseeing the audits of financial statements of the insurer or HMO or group of insurers or HMOs. If an audit committee is not designated, the insurer's or HMO's entire board of directors will constitute the audit committee.
28 TAC §7.88(d)(5) also provides that the audit committee of an entity that controls an insurer or HMO may, at the election of the controlling person, be deemed to be the insurer's or HMO's audit committee for purposes of §7.88. To exercise the election of the controlling person to designate the audit committee under §7.88, the ultimate controlling person must provide written notice of the affected insurers or HMOs to the Commissioner in accordance with §7.88(k)(10).
Also, there are independence requirements for audit committee membership for an insurer or HMO with $300 million or greater in direct and assumed premiums - 28 TAC §7.88(k)(1) - (3), (5), and (8) - (9), and (n)(2). An insurer or HMO with less than $500 million in direct and assumed premiums (excluding premiums reinsured by the Federal Crop Insurance Corporation and the National Flood Insurance Program) may request from the Commissioner an exemption from the independence requirement based on hardship - 28 TAC §7.88(k)(4).
Each member of the audit committee must be a member of the board of directors - 28 TAC § 7.88(k)(7). The audit committee must pre-approve all audit and non-audit services provided by the accountant, unless a waiver is available - 28 TAC § 7.88(h)(7) - (9). In addition, each external accountant is required to report directly to the audit committee - 28 TAC §7.88(k)(11).
3. New External Accountant Independence and Qualification Standards and Requirements:
Section 7.88(h) specifies new accountant independent and qualification requirements that insurers and HMOs must meet, unless they apply for in writing and receive written exemptions from the Department. These requirements include new minimum lead audit partner rotation requirements.
4. Management Report of Internal Control Over Financial Reporting:
This applies to an insurer or HMO with $500 million or more in direct written and assumed premiums (excluding premiums reinsured with the Federal Crop Insurance Program and the National Flood Insurance Program), and must be filed by the 60th day after the audited financial report is filed each year. These requirements are not applicable to a foreign or alien insurer or HMO that timely files a Management Report of Internal Control in another state that has substantially similar reporting requirements. Certain insurers or HMOs, or groups of insurers or HMOs, have the option of filing the insurer's or HMO's or the insurer's or HMO's parent's Section 404 report as filed with the SEC, and an addendum, under certain specified circumstances - 28 TAC §7.88(e)(2) and (m) and (n)(2) and (3).
5. Communication of Internal Control Matters Noted in an Audit:
Due by the 60th day after the Audited Financial Report is filed each year - 28 TAC §7.88(j).
6. Accountant's Letter of Qualifications:
Due each year by June 1, or June 30 for insurers or HMOs that, along with their affiliates, are licensed in and doing business in Texas only. The letter must include the representations and statements required under the TIC §401.013 and a representation that the accountant is in compliance with the requirements specified in 28 TAC §7.88(i) - 28 TAC §7.88(i).
7. Designation or Change of Audit Committee Notification Letter:
Written notice must be provided to the Commissioner - 28 TAC §7.88(k)(10).
The NAIC has adopted an "Implementation Guide" in Appendix G of the NAIC's Accounting Practices and Procedures Manual. The Implementation Guide is designed to assist insurers and HMOs in planning and preparing for compliance with the new model audit requirements. A copy of the "Implementation Guide" can be found here:
http://www.naic.org/documents/committees_e_naic_aicpa_implementation_guide_exposed-Final_0314.pdf
All notices, filings, or requests for extensions or exemptions must be made in accordance with the applicable provisions of the TIC Chapter 401, Subchapter A, and/or 28 TAC §7.88 and unless otherwise noted, submitted in writing to:
Doug Slape, CFE, CISA
Chief Analyst,
Financial Analysis, MC 303-1A
Texas Department of Insurance
PO Box 149104
Austin, Texas 78714-9104
Questions regarding this notice should be directed to Lorna Allbritain, Information and Technology Supervisor, 512-305-7254.
For more information regarding the new model audit requirements, please contact Doug Slape, Financial Analysis, Texas Department of Insurance by email at FACPAFilings@tdi.state.tx.us.
Mike Geeslin
Commissioner of Insurance