Insurance Industry Model Audit Rule
The National Association of Insurance Commissioners (NAIC) adopted revisions to the Annual Financial Reporting Model Regulation (Model Audit Rule or MAR). As a result, states either have adopted MAR or are currently considering adoption of the new provisions. The purpose of MAR is to improve the state insurance departments' oversight of the financial condition of insurers; similar to what the Sarbanes-Oxley Act of 2002 (SOX) did for public companies, but not as burdensome. This impacts insurance companies, captive insurance companies, nonprofit insurers or health plans that file an annual statement with their domiciliary state regulator.
The revisions relate to auditor independence, corporate governance, and internal control over financial reporting. The following is a summary of the MAR revisions:
- Reduce the number of consecutive years an audit partner may participate on the audit of an insurer and also lists various non-audit services that auditors may not provide to an insurer in order to maintain its independence. Realizing that it may be difficult for small insurers to comply with the prohibited services requirement, a small company exemption is included that indicates that those insurance companies with less than $100 million in direct written and assumed premium may request an exemption from this requirement.
- Require that insurance companies have an audit committee that is solely responsible for the appointment, compensation and oversight of the company's auditor. The guidance also indicates that some audit committees, based on the insurer's premium volume, would need to be comprised of a certain percentage of individuals that are independent from company management. Companies meeting certain requirements may request an exemption from its domiciliary commissioner based on hardship. The effective date in the model is January 1, 2010.
- Require that insurance companies with $500 million or more in direct and assumed premium file a report with the state insurance department regarding its assessment of internal control over financial reporting. This report will include a statement by management whether these controls are effective to provide reasonable assurance regarding the reliability of the statutory financial statements and disclosure of any unremediated material weaknesses in internal control over financial reporting. The independent certified public accountant should consider this report during the planning and performance of the annual audit. In addition, the proposed revisions require the insurer to file with the state insurance department the independent certified public accountant's communication regarding any unremediated material weaknesses noted during the course of an audit. The effective date in the model is December 31, 2010.
The MAR now calls for a series of SOX-like provisions. Once adopted by the states, the first management's report of internal control over financial reporting (similar to the report required by Section 404 of Sarbanes-Oxley) will be due in 2011 for the 2010 reporting period. Insurance companies must act now to prepare. Candela Solutions brings a wealth of lessons learned from SOX Section 404 to help organizations design, document, test and conclude on the effectiveness of financial reporting controls. While this effort is significant in terms of time, effort, resources and costs; Candela Solutions provides the advice, training, tools and resources to help with the burden.
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