SF 2313

as introduced - 91st Legislature (2019 - 2020) Posted on 03/20/2019 11:26am

A bill for an act
relating to insurance; making changes to conform with certain model regulations;
amending Minnesota Statutes 2018, section 60A.1291, subdivisions 1, 15, 18, by
adding a subdivision.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

Minnesota Statutes 2018, section 60A.1291, subdivision 1, is amended to read:

Subdivision 1.

Definitions.

The definitions in this subdivision apply to this section.

(a) "Accountant" and "independent public accountant" mean an independent certified
public accountant or accounting firm in good standing with the American Institute of Certified
Public Accountants and in all states in which the accountant or firm is licensed or is required
to be licensed to practice. For Canadian and British companies, the term means a
Canadian-chartered or British-chartered accountant.

(b) "Audit committee" means a committee or equivalent body established by the board
of directors of an entity for the purpose of overseeing the accounting and financial reporting
processes of an insurer or group of insurers, and audits of financial statements of the insurer
or group of insurers. The audit committee of any entity that controls a group of insurers
may be deemed to be the audit committee for one or more of these controlled insurers solely
for the purposes of this section at the election of the controlling person under subdivision
15, paragraph (e). If an audit committee is not designated by the insurer, the insurer's entire
board of directors constitutes the audit committee.

(c) "Indemnification" means an agreement of indemnity or a release from liability where
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.

(d) "Independent board member" has the same meaning as described in subdivision 15,
paragraph (c).

new text begin (e) "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.
new text end

deleted text begin (e) deleted text end new text begin (f) new text end "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, for example, those items
specified in subdivision 4, paragraphs (a), clauses (2) to (6), (b), and (c), and includes those
policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements, for example, those items specified in subdivision 4,
paragraphs (a), clauses (2) to (6), (b), and (c), and that receipts and expenditures are being
made only in accordance with authorizations of management and directors; and

(3) provide 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, for example, those items specified in subdivision 4, paragraphs (a), clauses (2)
to (6), (b), and (c).

deleted text begin (f) deleted text end new text begin (g) new text end "SEC" means the United States Securities and Exchange Commission.

deleted text begin (g) deleted text end new text begin (h) new text end "Section 404" means Section 404 of the Sarbanes-Oxley Act of 2002 and the
SEC's rules and regulations promulgated under it.

deleted text begin (h) deleted text end new text begin (i) new text end "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 as described in paragraph (a).

deleted text begin (i) deleted text end new text begin (j) new text end "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: (i) the preapproval requirements of Section 201 (section 10A(i) of the Securities
Exchange Act of 1934); (ii) the audit committee independence requirements of Section 301
(section 10A(m)(3) of the Securities Exchange Act of 1934); and (iii) the internal control
over financial reporting requirements of Section 404 (Item 308 of SEC Regulation S-K).

Sec. 2.

Minnesota Statutes 2018, section 60A.1291, subdivision 15, is amended to read:

Subd. 15.

Requirements for audit committee.

(a) The audit committee must be 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 this section. Each accountant shall report directly to the audit
committee.

new text begin (b) The audit committee of an insurer or group of insurers is responsible for overseeing
the insurer's internal audit function and granting the person or persons performing the
function suitable authority and resources to fulfill their responsibilities if required by
subdivision 15a.
new text end

deleted text begin (b) deleted text end new text begin (c) new text end Each member of the audit committee 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 paragraph
deleted text begin (e) deleted text end new text begin (f) new text end and subdivision 1, paragraph (b).

deleted text begin (c) deleted text end new text begin (d) new text end In order to be considered independent for purposes of this section, a member of
the audit committee may 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 or be an affiliated person of the entity
or any subsidiary of the entity. However, if law requires board participation by otherwise
nonindependent members, that law shall prevail and such members may participate in the
audit committee and be designated as independent for audit committee purposes, unless
they are an officer or employee of the insurer or one of its affiliates.

deleted text begin (d) deleted text end new text begin (e) new text end 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 one year from the occurrence of the
event that caused the member to be no longer independent.

deleted text begin (e) deleted text end new text begin (f) new text end 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 commissioners of the affected insurers. Notification must be made timely 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 by the insurer, which shall
include a description of the basis for the change. The election remains in effect for perpetuity,
until rescinded.

deleted text begin (f) deleted text end new text begin (g) new text end The audit committee shall require the accountant that performs for an insurer any
audit required by this section to timely report to the audit committee in accordance with the
requirements of SAS No. 114, The Auditor's Communication with Those Charged with
Governance, or its replacement, including:

(1) all significant accounting policies and material permitted practices;

(2) 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; and

(3) other material written communications between the accountant and the management
of the insurer, such as any management letter or schedule of unadjusted differences.

deleted text begin (g) deleted text end new text begin (h) new text end If an insurer is a member of an insurance holding company system, the reports
required by paragraph deleted text begin (f) deleted text end new text begin (g) new text end 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.

deleted text begin (h) deleted text end new text begin (i) new text end The proportion of independent audit committee members shall meet or exceed
the following criteria:

(1) for companies with prior calendar year direct written and assumed premiums $0 to
$300,000,000, no minimum requirements;

(2) for companies with prior calendar year direct written and assumed premiums over
$300,000,000 to $500,000,000, majority of members must be independent; and

(3) for companies with prior calendar year direct written and assumed premiums over
$500,000,000, 75 percent or more must be independent.

deleted text begin (i) deleted text end new text begin (j) new text end An insurer with direct written and assumed premium, excluding premiums reinsured
with the Federal Crop Insurance Corporation and Federal Flood Program, less than
$500,000,000 may make application to the commissioner for a waiver from the requirements
of this subdivision based upon hardship. The insurer shall file, with its annual statement
filing, the approval for relief from this subdivision with the states that it is licensed in or
doing business in and the NAIC. If the nondomestic state accepts electronic filing with the
NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

This subdivision does not apply to foreign or alien insurers licensed in this state or an
insurer that is a SOX compliant entity or a direct or indirect wholly owned subsidiary of a
SOX compliant entity.

Sec. 3.

Minnesota Statutes 2018, section 60A.1291, is amended by adding a subdivision
to read:

new text begin Subd. 15a. new text end

new text begin Internal audit function requirements. new text end

new text begin (a) An insurer is exempt from the
requirements of this section if:
new text end

new text begin (1) 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 Federal Flood Program, less than $500,000,000; and
new text end

new text begin (2) the insurer is a member of a group of insurers, the group 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 Federal
Flood Program, less than $1,000,000,000.
new text end

new text begin (b) The insurer or group of insurers shall establish an internal audit function providing
independent, objective, and reasonable assurance to the audit committee and insurer
management regarding the insurer's governance, risk management, and internal controls.
This assurance shall be provided by performing general and specific audits, reviews, and
tests and by employing other techniques deemed necessary to protect assets, evaluate control
effectiveness and efficiency, and evaluate compliance with policies and regulations.
new text end

new text begin (c) In order to ensure that internal auditors remain objective, the internal audit function
must be organizationally independent. Specifically, the internal audit function will not defer
ultimate judgment on audit matters to others, and shall 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.
new text end

new text begin (d) The head of the 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.
new text end

new text begin (e) 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.
new text end

Sec. 4.

Minnesota Statutes 2018, section 60A.1291, subdivision 18, is amended to read:

Subd. 18.

Exemptions.

(a) Upon written application of any insurer, the commissioner
may grant an exemption from compliance with the provisions of this section. In order to
receive an exemption, an insurer must demonstrate to the satisfaction of the commissioner
that compliance would constitute a financial or organizational hardship upon the insurer.
An exemption may be granted at any time and from time to time for specified periods.
Within ten days from the denial of an insurer's written request for an exemption, the insurer
may request in writing a hearing on its application for an exemption. This hearing must be
held in accordance with chapter 14. Upon written application of any insurer, the
commissioner may permit an insurer to file annual audited financial reports on some basis
other than a calendar year basis for a specified period. An exemption may not be granted
until the insurer presents an alternative method satisfying the purposes of this section. Within
ten days from a denial of a written request for an exemption, the insurer may request in
writing a hearing on its application. The hearing must be held in accordance with chapter
14.

(b) This section applies to all insurers, unless otherwise indicated, required to file an
annual audit by subdivision 2, except insurers having less than $1,000,000 of direct written
premiums in this state in any calendar year and fewer than 1,000 policyholders or certificate
holders of directly written policies nationwide at the end of the calendar year, are exempt
from this section for that year, unless the commissioner makes a specific finding that
compliance is necessary for the commissioner to carry out statutory responsibilities, except
that insurers having assumed premiums from reinsurance contracts or treaties of $1,000,000
or more are not exempt.

new text begin (c) The requirements of subdivision 15a are effective January 1, 2020. If an insurer or
group of insurers that is exempt from the subdivision 15a requirements no longer qualifies
for that exemption, it shall have one year after the year the threshold is exceeded to comply
with the requirements of this article.
new text end