Accounting Standard Updates
Texas Department of Insurance Proposed Changes to Model Audit Rule and Corporate Governance Disclosures
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Hot Take:
The Texas Department of Insurance (TDI) has initiated proposed changes to the Texas statutes to incorporate the National Association of Insurance Commissioners (NAIC) Model Audit Rule. For those qualifying insurers, the rule would include requirements for audit committee structure and an internal audit function for large insurers and Health Maintenance Organizations. The new rule is necessary for the TDI to maintain its NAIC accreditation credentials, with further intent of improved oversight of the regulated entities under its purview.
Full Article
On August 5, 2020, the Texas Department of Insurance (TDI) filed proposed changes to the Texas Administrative Code (TAC). The proposal was published on August 21, 2020, and written public comments or requests for public hearing were due by September 21, 2020. Forty Texas insurers or Health Maintenance Organizations (HMOs) would be subject to the 28 TAC 7.88 amendments.
This Rule 7.88 of the TAC relates to the National Association of Insurance Commissioners (NAIC) Model Audit Rule (MAR), referencing independent annual audits of the insurer and HMOs financial statements and their related internal control over financial reporting. TDI’s proposed changes update Rule 7.88 to include requirements for audit committees and the internal audit function for large insurers and HMOs to align with best practices and changes to the MAR and are necessary for TDI to maintain its NAIC accreditation.
The proposed amendments require certain large entities to establish an internal audit function that is independent and reports on corporate governance and internal controls to the audit committee of the board of directors. These proposed amendments would improve TDI’s oversight of the financial condition of the regulated entities.
The proposed requirements under 7.88 are applicable beginning January 1, 2021. TDI’s proposed changes would add Rule 7.89 to implement HB 3306, 86th Legislature, Regular Session (2019), which is codified in Texas Insurance Code Chapter 831, requiring certain corporate governance annual disclosures (CGAD). The provisions of the proposed rule are based on the NAIC CGAD Model Act and NAIC CGAD Model Regulation and are necessary for TDI to maintain its NAIC accreditation.
The proposed new Rule 7.89 does not prescribe new governance standards but rather requires an entity to report existing practices. The disclosure would require a description of:
- The governance framework and structure,
- The policies and practices of the most senior governing entity and its significant committees,
- The policies and practices directing senior management, and
- The processes by which an appropriate level of oversight is ensured.
The proposal provides exemptions limiting the requirement for an insurer or HMO to comply with the internal audit function requirements of the subsection. Under §7.88(l)(1), an insurer or HMO is afforded exemption if it has both of the following:
- Annual direct written and unaffiliated assumed premium, including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $500 million,
- And the insurer or HMO is a member of a group with annual direct written and unaffiliated assumed premium, including international direct and assumed premium, but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $1 billion.
The CGAD requirement is effective June 1, 2020, with initial filings by June 1, 2021.
