NAIC/AICPA Working Group
Financial Condition (E) Committee

The NAIC/AICPA Working Group addresses financial solvency issues and works with the American Institute of Certified Public Accountants (AICPA) on various issues.

2008 Charges

1. Continually review the Annual Financial Reporting Model Regulation and its corresponding Implementation Guide and revise as appropriate.
2. Address financial solvency issues by working with the AICPA and responding to the AICPA exposure drafts. This charge is ongoing.
3. Monitor the Sarbanes-Oxley Act and additional rules and regulations promulgated by the Securities and Exchange Commission and the Public Company Accounting Oversight Board and other financial services regulatory entities.
4. Review annually the premium threshold amount included in Section 16 of the Annual Financial Reporting Model Regulation with the general intent that those insurers subject to the Section 16 requirements would capture at least approximately 90% of industry premium and/or in response to any future regulatory or market developments.

Charges that Represent New Objectives and Goals, Representing New NAIC Programs

• Draft a new annual statement general interrogatory that would prompt the insurer to disclose whether it has been granted any exemptions to the Model Audit Rule as permitted in Section 7H, 14H and 17A of the model.

Model Audit Rule Revisions

The Executive Committee/Plenary has adopted as final the revisions to the Annual Financial Reporting Model Regulation (the Model Audit Rule). The proposed revisions relate to auditor independence, corporate governance, and internal control over financial reporting. The following is a summary of the proposed revisions.

--The adopted 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.

--The adopted revisions 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.

--The adopted revisions 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.