Bill Text: MI HB5243 | 2019-2020 | 100th Legislature | Introduced
Bill Title: Insurance: other; annual audited financial requirements; modify. Amends secs. 1001 & 1027 of 1956 PA 218 (MCL 500.1001 & 500.1027) & adds sec. 1028.
Spectrum: Slight Partisan Bill (Republican 2-1)
Status: (Passed) 2020-01-28 - Assigned Pa 17'20 With Immediate Effect [HB5243 Detail]
Download: Michigan-2019-HB5243-Introduced.html
HOUSE BILL NO. 5243
November 13, 2019, Introduced by Reps.
Paquette, Rendon and Wittenberg and referred to the Committee on Insurance.
A bill to amend 1956 PA 218, entitled
"The insurance code of 1956,"
by amending sections 1001 and 1027 (MCL 500.1001 and 500.1027), section 1001 as amended by 2016 PA 276 and section 1027 as added by 2008 PA 342, and by adding section 1028; and to repeal acts and parts of acts.
the people of the state of michigan enact:
Sec. 1001. As used in this chapter:
(a) "Audited
financial report" means the report required in section 1005 and furnished pursuant to under section 1007.
(b) "Audit
committee" means a committee or equivalent body established by the board
of directors of an entity to oversee the accounting and financial reporting
processes, the internal audit function of an
insurer or group of insurers, if applicable, and external audits of the financial
statements of an insurer or group of insurers. The audit committee of an entity
that controls a group of insurers may be the audit committee for 1 or more of
these controlled insurers solely for the purposes of compliance with this chapter
at the election of the controlling person as permitted in section 1027(6). 1027(7). If an audit committee is not
designated by an insurer, the insurer's entire board of directors will
constitute the audit committee.
(c) "Group of
insurers" means those licensed insurers included in the reporting
requirements of chapter 13, or a set of insurers as identified by management,
for the purpose of assessing the effectiveness of internal control over
financial reporting.
(d) "Indemnification
agreement" means an agreement of indemnity or a release from liability as
to which 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.
(e) "Independent
board member" has the same meaning as described in section 1027(4).1027(5).
(f) "Independent
public accountant" means an independent certified public accountant or
accounting firm in good standing with the American Institute of Certified
Public Accountants and in good standing in all states in which the accountant
or accounting firm is licensed to practice. For Canadian and British companies,
"independent public accountant" means a Canadian-chartered or
British-chartered accountant.
(g) "Insurer"
means that term as defined in section 106 and includes a nonprofit dental care
corporation operating under 1963 PA 125, MCL 550.351 to 550.373.
(h)
"Internal audit function" means a person or persons that provide
independent, objective, and reasonable assurance designed to add value and
improve an organization's operations and accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and improve the effectiveness of
risk management, control, and governance processes.
(i)
(h) "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 filed with the director, and includes
the following:
(i) Policies and procedures pertaining to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets.
(ii) Policies and
procedures providing reasonable assurance that transactions are recorded as
necessary to permit preparation of the financial statements filed with the
director and that receipts and expenditures are being made only in accordance
with authorizations of management and directors.
(iii) Policies and
procedures providing 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 filed with the director.
(j) (i) "SEC" means the United States
Securities and Exchange Commission.
(k) (j) "Section 404" means section 404 of
the Sarbanes-Oxley act of 2002, 15 USC 7262, and the SEC's rules and
regulations promulgated under that section.
(l) (k) "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.
(m) (l) "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 and the regulations promulgated under that act:
(i) The preapproval
requirements of section 201, section 10A(i) of the securities exchange act of
1934, 15 USC 78j-1.
(ii) The audit
committee independence requirements of section 301, section 10A(m)(3) of the
securities exchange act of 1934, 15 USC 78j-1.
(iii) The internal
control over financial reporting requirements of section 404, 15 USC 7262, as
prescribed by item 308 of SEC regulation S-K, 17 CFR 229.308.
Sec. 1027. (1) This section applies to a domestic
insurer that is not a SOX compliant entity. A domestic insurer that is a direct
or indirect subsidiary of a SOX compliant entity is considered to be a SOX
compliant entity for purposes of this section.
(2) The audit committee shall be is 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 under this chapter. Each accountant shall report
directly to the audit committee.
(3)
The audit committee of an insurer or group of insurers is responsible for
overseeing the insurer's internal audit function and granting the person and
persons performing the function suitable authority and resources to fulfill
their responsibilities if required under section 1028.
(4)
(3) Each member of the audit committee shall must 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 under subsection (6).(7).
(5)
(4) To be considered independent for purposes of this
section, a member of the audit committee shall must 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 audited or be an affiliated person of
the entity or subsidiary audited, unless the individual serves on the board to
meet another statutory requirement related to the composition of the board.
However, in no case can the
independent audit committee member must not be an officer or employee of the insurer or
1 of its affiliates.
(6)
(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 1 year from the occurrence of the event
that caused the member to be no longer independent.
(7)
(6) To exercise the election of the controlling person to
designate the audit committee for purposes of this section, the ultimate
controlling person shall provide written notice to the commissioner. director. Notification shall must be made timely prior to before the issuance of the statutory
audit report and include a description of the basis for the election. The
election can be changed through notice to the commissioner director by the insurer, which shall must include a description of the basis
for the change. The election shall must remain in effect until rescinded.
(8)
(7) The audit committee shall require the accountant that
performs for an insurer any audit required by this chapter to timely report to
the audit committee in accordance with the requirements of SAS 61,
communication with audit committees, or a substantially similar replacement
publication as required by the commissioner, director, including all of the following:
(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.
(c) Other material
written communications between the accountant and the management of the
insurer, such as any management letter or schedule of unadjusted differences.
(9)
(8) If an insurer is a member of an insurance holding
company system, the reports required by subsection (7) (8) 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.
(10)
(9) All insurers are encouraged to structure their audit
committees with at least a supermajority of independent committee members. An
insurer with $300,000,000.01 or less of direct written and assumed premiums in
the prior calendar year is not required to have independent audit committee members.
An insurer with over $300,000,000.00 $300,000,000.01 but less than $500,000,000.00 or less of direct
written and assumed premiums in the prior calendar year shall must have 50% or more of its audit
committee members be independent. An insurer with over $500,000,000.00 of
direct written and assumed premiums in the prior calendar year shall must have 75% or more of its audit
committee members be independent. As used in this section, "direct written and assumed
premiums" is the combined total of direct premiums and assumed premiums
from nonaffiliates for the reporting entities.
(11)
(10) The commissioner director may require an entity's board to
enact improvements to the independence of the audit committee membership if the
insurer is in a risk-based capital action level event, meets 1 or more of the
standards listed in chapter 4 of an insurer considered to be in hazardous
financial condition, or otherwise exhibits signs of a troubled insurer.
(12)
(11) An insurer with direct written and assumed premium,
excluding premiums reinsured with the federal crop insurance corporation Federal Crop Insurance Corporation and federal flood program, National Flood Insurance Program, of less
than $500,000,000.00 may apply to the commissioner director for a waiver from this section based upon on hardship. The insurer shall file, with
its annual statement filing, the approval for relief from this section granted
by the commissioner with the states that it is licensed in or doing business in
and with the national association of insurance
commissioners. National
Association of Insurance Commissioners. If the nondomestic state
accepts electronic filing with the national association of insurance commissioners, National Association of Insurance Commissioners, the
insurer shall file the approval in an electronic format acceptable to the national association of insurance
commissioners.National
Association of Insurance Commissioners.
(13)
(12) This section takes effect January 1, 2010. An insurer
or group of insurers that is not required to have independent audit committee
members or only 50% independent audit committee members because the total
written and assumed premium is below the required threshold in subsection (9) (10) and subsequently becomes subject to
1 of the independence requirements due to changes in premium, whether through
business combination or not, shall have has 1 year after the year the threshold
is exceeded to comply with the independence requirements of subsection (9).(10).
(14) As used in this section, "direct written and assumed premiums" is the combined total of direct premiums and assumed premiums from nonaffiliates for the reporting entities.
Sec. 1028. (1) An insurer is exempt
from the requirements of this section if the insurer has annual direct written
and unaffiliated assumed premium, including international direct and assumed
premium but excluding premium reinsured with the Federal Crop Insurance
Corporation and National Flood Insurance Program less than $500,000,000.00 and
if the insurer is a member of a group of insurers that has annual direct
written and unaffiliated assumed premium including international direct and
assumed, but excluding premiums reinsured with the Federal Crop Insurance Program
and Federal Flood Program less than $1,000,000,000.00.
(2)
An insurer or group of insurers not exempt under subsection (1) shall establish
an internal audit function providing independent, objective, and reasonable
assurance to the audit committee and management regarding the insurer's governance,
risk management, and internal controls. This assurance must be provided by
performing general and specific audits, reviews and tests, and by employing
other techniques considered necessary to protect assets, evaluate control
effectiveness and efficiency, and evaluate compliance with policies and
regulations.
(3)
To ensure that internal auditors remain objective, the internal audit function
must be organizationally independent. Specifically, the internal audit function
must not defer ultimate judgment on audit matters to others, and must appoint
an individual to head the internal audit function who will have direct and
unrestricted access to the board of directors. Organizational independence does
not preclude dual-reporting relationships.
(4)
The head of internal audit function shall report to the audit committee
regularly, but no less than annually, on the periodic audit plan, factors that
may adversely impact the internal audit function's independence or
effectiveness, material findings from completed audits, and the appropriateness
of corrective actions implemented by management as a result of audit findings.
(5)
If an insurer is a member of an insurance holding company system or included in
a group of insurers, the insurer may satisfy the internal audit function
requirements set forth in this section at the ultimate controlling parent
level, an intermediate holding company level, or the individual legal entity
level.
(6)
An insurer that meets the premium thresholds under this section must have an internal
audit function and must have the function in place by no later than January 1,
2021. If an insurer or group of insurers that is exempt no longer qualifies for
the exemption, it has 1 year after the year the threshold is exceeded to comply
with the requirement.
Enacting section 1. Section 221 of the insurance code of 1956, 1956 PA 218, MCL 500.221, is repealed.
