Bill Text: MI HB5243 | 2019-2020 | 100th Legislature | Engrossed
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-Engrossed.html
Substitute For
HOUSE BILL NO. 5243
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.
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 of an insurer or group of insurers, the internal audit function
of an insurer or group of insurers, if applicable, and the 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 premiums 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 premium, but excluding premiums reinsured with the Federal Crop Insurance
Corporation and National Flood Insurance 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)
General and specific audits performed under this section are not considered an
insurance compliance self-evaluative audit under section 221. Documents
prepared or produced as a result of or in connection with audits performed
under this section must be disclosed to the director on written request. Except
as otherwise provided in this subsection, the director shall withhold from
public inspection all information and documents submitted to the department
under this section and these items are confidential, are not subject to
subpoena, are not subject to disclosure under the freedom of information act,
1976 PA 442, MCL 15.231 to 15.246, and must not be divulged to any person. However,
the director may divulge the information and documents described in this
subsection to a relevant state or federal agency, or to the National
Association of Insurance Commissioners, if the director receives assurances
that the information and documents will be kept confidential. The director shall
not use the information and documents submitted under this section to form the
sole basis for an examination under section 222.
(4)
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.
(5)
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.
(6)
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.
(7) 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.
