31 Pa. Code § 147.3a - Requirements for audit committees

Current through Register Vol. 51, No. 52, December 25, 2021

(a) Every insurer required to file an annual audited financial report under this chapter shall establish an audit committee.
(b) An ultimate controlling person may designate an audit committee of a controlling person to be the audit committee for one or more controlled insurers. The designation must:
(1) Be in writing.
(2) Identify the ultimate controlling person.
(3) Explain the basis for the designation in sufficient detail for the Department to determine compliance with this chapter.
(4) Be provided by the ultimate controlling person or the insurer to the Department and the chief insurance regulatory official of each other state in which the controlled insurers are domiciled no later than April 1 of the year in which the insurer's audited financial report is required to be filed under this chapter.
(5) Be effective upon receipt by the Department and remain in effect unless modified or rescinded by subsequent notice provided by the ultimate controlling person or the insurer as required under paragraph (4).
(c) Each member of the audit committee shall be a natural person who is either a member of the board of directors of the insurer or a member of the board of directors of a controlling person whose audit committee has been designated as the insurer's audit committee under subsection (b).
(d) If an audit committee other than the entire board of directors of the insurer has not been established by the insurer or designated by an ultimate controlling person under subsection (b), the insurer's entire board of directors shall constitute the audit committee.
(e) A proportion of an audit committee's members shall be independent in accordance with the following requirements:
(1) The proportion of an audit committee's members who shall be independent shall be calculated as follows:
(i) When an insurer's direct written and assumed premiums are less than or equal to $300,000,000 at the end of the most recent calendar year, 0% of the members are required to be independent.
(ii) When an insurer's direct written and assumed premiums exceed $300,000,000 but are not more than $500,000,000 at the end of the most recent calendar year, at least 50% of members are required to be independent.
(iii) When an insurer's direct written and assumed premiums exceed $500,000,000 at the end of the most recent calendar year, at least 75% of members of the audit committee are required to be independent.
(2) If an audit committee of a controlling person has been designated to be the audit committee for one or more controlled insurers, the proportion of audit committee members who shall be independent shall be based on the insurer in the group with the greatest direct written and assumed premium.
(3) If an insurer's direct written and assumed premiums meet or exceed the direct written and assumed premiums threshold in paragraph (1)(ii) or (iii) as of the end of a calendar year, the insurer shall comply with the required minimum proportion of independent audit committee members by January 1 following the next full calendar year, as described in the NAIC Implementation Guide.
(4) To be considered independent for purposes of this subsection, an audit committee member may not:
(i) Be an affiliate of the insurer.
(ii) Accept any consulting, advisory or other compensatory fee from the insurer or an affiliate of the insurer other than in the member's capacity as a member of the audit committee, board of directors or any other board committee.
(5) If an audit committee member ceases to be independent under this chapter, the person may remain an audit committee member until the earlier of the next annual meeting of the insurer or controlling person or 1 year from the occurrence of the event that caused the member to be no longer independent, if the insurer or ultimate controlling person provides the Department with written notice within 15 days of the occurrence of the event.
(f) The audit committee shall retain an independent certified public accountant to conduct the annual audit and issue an audited financial report under this chapter in accordance with the following requirements:
(1) The audit committee shall be directly responsible for the appointment, compensation and oversight of the work of the independent certified public accountant and resolve disagreements between management and the independent certified public accountant relating to financial reporting for the purpose of preparing or issuing the audited financial report or related work under this chapter.
(2) The independent certified public accountant retained to conduct the annual audit under this chapter shall report directly to the audit committee. The audit committee shall require the independent certified public accountant to report to the audit committee in sufficient time to enable the committee to take appropriate action as required by Statement on Auditing Standards 114 (SAS 114), The Auditor's Communication with Those Charged With Governance, or successor publication and all of the following requirements:
(i) All significant accounting policies and material permitted practices.
(ii) All material alternative treatments of financial information within statutory accounting principles that have been discussed with the management of the insurer, ramifications of the use of alternative disclosures and treatments, and the treatment preferred by the independent certified public accountant.
(iii) Other material written communications between the independent certified public accountant and the management of the insurer, such as any management letter or schedule of unadjusted differences.
(3) The report required under paragraph (2) may be provided to the audit committee on an aggregate basis for

insurers in an insurer group, if the report identifies any substantial differences in reported items among the insurers in the group.

(g) The audit committee is responsible for overseeing the insurer's internal audit function and granting the person or persons performing the function suitable authority and resources to fulfill their responsibilities as required under § 147.8a (relating to internal audit function requirements).
(h) Exemptions are as follows.
(1) The requirements of subsections (b), (c), (e) and (f) do not apply to an insurer with direct written and assumed premiums less than $500,000,000, excluding premiums reinsured with the Federal Crop Insurance Corporation and the Federal Flood Program, which has been granted an exemption by the Department on the basis of financial or organizational hardship under § 147.13(g) (relating to effective date and exemption).
(2) This section does not apply to continuing care providers.
(3) The requirements of subsections (b)-(e) do not apply to insurers subject to section 1405(c)(4) and (5) of The Insurance Company Law of 1921 (40 P.S. § 991.1405(c)(4) and (5)), Sarbanes Oxley compliant entities or direct or indirect wholly owned subsidiaries of Sarbanes Oxley compliant entities.
(i) This section may not be interpreted to limit the Department's authority to require an insurer to take specific corrective action relating to the independence of audit committee members under sections 501-563, 501-A-515-A and 501-B-515-B of The Insurance Department Act of 1921 (40 P.S. §§ 221.1-221.63, 221.1-A- 221.15-A and 221.1-B-221.15-B), regarding suspension of business and risk-based capital requirements, Chapter 160 (relating to standards to define insurers deemed to be in hazardous financial condition) or other provisions of law.

Notes

31 Pa. Code § 147.3a
The provisions of this § 147.3a adopted October 2, 2009, effective October 3, 2009, 39 Pa.B. 5730. Amended by Pennsylvania Bulletin, Vol 46, No. 51. December 17, 2016, effective 1/17/2017

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