Virginia Law

Chapter 270. Rules Governing Annual Financial Reporting

14VAC5-270-10. Purpose.

The purpose of this chapter is to improve the commission's surveillance of the financial condition of licensed companies by requiring (i) an annual audit of financial statements reporting the financial position and the results of operations of insurers by an independent certified public accountant, (ii) Communicating Internal Control Related Matters Identified in an Audit, and (iii) Management's Report of Internal Control over Financial Reporting.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 2, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-20. Applicability.

This chapter shall apply to all life, accident and sickness, and property and casualty insurers licensed to transact the business of insurance in this Commonwealth under Chapter 10 (§ 38.2-1000 et seq.) of Title 38.2 of the Code of Virginia and all other entities licensed to do business under any one or more of the following chapters of Title 38.2 of the Code of Virginia, subject to the limitations and/or exemptions as further stated in this chapter:

1. Chapter 11 - Captive Insurers.

2. Chapter 12 - Reciprocal Insurance.

3. Chapter 25 - Mutual Assessment Property and Casualty Insurers.

4. Chapter 26 (Article 1) - Home Protection Companies.

5. Chapter 40 - Burial Societies.

6. Chapter 41 - Fraternal Benefit Societies.

7. Chapter 42 - Health Services Plans.

8. Chapter 43 - Health Maintenance Organizations.

9. Chapter 44 - Legal Services Plans.

10. Chapter 45 - Dental or Optometric Services Plans.

11. Chapter 46 - Title Insurance.

12. Chapter 61 - Dental Plan Organizations.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 3, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-30. Scope.

This chapter shall apply to all entities listed in 14VAC5-270-20, hereinafter referred to as "insurers." Insurers having direct premiums written of less than $1 million in any calendar year and having less than 1,000 policyholders or certificate holders of direct written policies at the end of such calendar year are exempt from the requirements of this chapter for such year unless the commission deems that compliance with the reporting requirements of this chapter is necessary to establish the financial condition of an insurer. Insurers having assumed premiums of $1 million or more pursuant to contracts and/or treaties of reinsurance will not be so exempt.

Foreign or alien insurers filing the Audited Financial Report in another state, pursuant to that state's requirements for filing Audited Financial Reports and where the requirements have been found by the commission to be substantially similar to the requirements herein, are exempt from 14VAC5-270-50 through 14VAC5-270-140 if:

1. A copy of the Audited Financial Report, the Communicating Internal Control Related Matters Identified in an Audit, and the Accountant's Letter of Qualifications, which are filed with the other state, are filed with the commission in accordance with the filing dates specified in 14VAC5-270-50, 14VAC5-270-120, and 14VAC5-270-130, respectively (Canadian insurers may submit accountants' reports as filed with the Canadian Office of the Superintendent of Financial Institutions).

2. A copy of any Notification of Adverse Financial Condition Report filed with the other state is filed with the commission within the time specified in 14VAC5-270-110.

Foreign or alien insurers required to file Management's Report of Internal Control over Financial Reporting in another state are exempt from filing the report in this Commonwealth provided the other state has substantially similar reporting requirements and the report is filed with the commissioner of the other state within the time specified.

This provision shall not prohibit, preclude or in any way limit the commission's rights with respect to workpapers described in 14VAC5-270-140 or its rights concerning the ordering and/or conducting and/or performing of examinations of insurers under Title 38.2 of the Code of Virginia.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 4, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-40. Definitions.

The following words and terms when used in this chapter shall have the following meanings, unless the context clearly indicates otherwise:

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

"Affiliate" of a specific person or a person "affiliated" with a specific person means a person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the specific person.

"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, the internal audit function of an insurer or group of insurers (if applicable), and external audits of financial statements of the insurer or group of insurers. The Audit Committee of an 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 chapter at the election of the controlling person. If an Audit Committee is not designated by the insurer, the insurer's entire board of directors shall constitute the Audit Committee.

"Audited Financial Report" means and includes those items specified in 14VAC5-270-60.

"Commission" means the State Corporation Commission when acting pursuant to or in accordance with Title 38.2 of the Code of Virginia.

"Due date" means (i) June 1 for all domestic insurers; (ii) June 30 for all foreign or alien companies domiciled or entered through a state in which similar law, regulation, or administrative practice provides for a June 30 filing date; and (iii) for all other insurers, the earlier of June 30 or the date established by the insurer's state of domicile or entry for filing similar audited financial reports.

"Group of insurers" means those licensed insurers included in the reporting requirements of Article 5 (§ 38.2-1322 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia, or a set of insurers as identified by an entity's management, for the purpose of assessing the effectiveness of internal control over financial reporting.

"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 or other misrepresentations made by the insurer or its representatives.

"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.

"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 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 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.

"NAIC" means the National Association of Insurance Commissioners.

"RBC" means risk-based capital.

"RBC Level" means a licensee's Company Action Level RBC, Regulatory Action Level RBC, Authorized Control Level RBC, or Mandatory Control Level RBC where:

1. "Company Action Level RBC" means, with respect to any licensee, the product of 2.0 and its Authorized Control Level RBC;

2. "Regulatory Action Level RBC" means the product of 1.5 and its Authorized Control Level RBC;

3. "Authorized Control Level RBC" means the number determined under the risk-based capital formula in accordance with the RBC Instructions; and

4. "Mandatory Control Level RBC" means the product of 0.70 and the Authorized Control Level RBC.

"SEC" means the U.S. Securities and Exchange Commission.

"Section 404" means Section 404 of the Sarbanes-Oxley Act of 2002 (15 USC § 7201 et seq.) and the SEC's rules and regulations promulgated thereunder.

"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.

"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 (15 USC § 7201 et seq.): (i) the preapproval requirements of Section 201 (Section 10A(i) of the Securities Exchange Act of 1934 (15 USC § 78a et seq.)); (ii) the Audit Committee independence requirements of Section 301 (Section 10A(m)(3) of the Securities Exchange Act of 1934 (15 USC § 78a et seq.)); and (iii) the internal control over financial reporting requirements of Section 404 (Item 308 of SEC Regulation S-K).

"Workpapers" means the records kept by the accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to the accountant's examination of the financial statements of an insurer. Workpapers, accordingly, may include work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the accountant in the course of the examination of the financial statements of an insurer and which support the accountant's opinion thereof.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 5, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 19, Issue 21, eff. July 1, 2003; Volume 24, Issue 12, eff. January 1, 2010; Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-50. General requirements related to filing and extensions for filing of annual Audited Financial Reports and Audit Committee appointment.

A. All insurers shall have an annual audit by an accountant and shall file an Audited Financial Report with the commission on or before the applicable due date for the year ending the immediately preceding December 31.

The commission may require an insurer to file an Audited Financial Report earlier than the due date with 90 days advance notice to the insurer.

B. An extension of the due date filing date may be granted by the commission for periods of up to 30 days upon a showing by the insurer and its accountant of the reasons for requesting an extension and upon determination by the commission of good cause for an extension. The request for extension shall be submitted in writing not less than 10 days prior to the due date in sufficient detail to permit the commission to make an informed decision with respect to the requested extension.

C. If an extension is granted in accordance with the provisions of subsection B of this section, an extension of 30 days also is granted to the filing of Management's Reports of Internal Control over Financial Reporting.

D. An insurer required to file an annual Audited Financial Report pursuant to this chapter shall designate a group of individuals as constituting its Audit Committee. The Audit Committee of an entity that controls an insurer may be deemed to be the insurer's Audit Committee for purposes of this chapter at the election of the controlling person.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 6, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-60. Contents of annual Audited Financial Report.

The annual Audited Financial Report shall report the financial position of the insurer as of the end of the most recent calendar year and the results of its operations, cash flow, and changes in capital and surplus for the year then ended in conformity with statutory accounting practices prescribed, or otherwise permitted, by the insurer's state of domicile. The annual Audited Financial Report shall include the following:

1. Report of independent certified public accountant.

2. Balance sheet reporting admitted assets, liabilities, capital, and surplus.

3. Statement of operations.

4. Statement of cash flow.

5. Statement of changes in capital and surplus.

6. Notes to financial statements. These notes shall be those required by the appropriate annual statement and NAIC accounting practices and procedures manual. The notes shall include a reconciliation of differences, if any, between the audited statutory financial statements and the annual statement filed pursuant to §§ 38.2-1300, 38.2-4126 or 38.2-4307 of the Code of Virginia with a written description of the nature of these differences.

7. The financial statements included in the annual Audited Financial Report shall be prepared in a form and using language and groupings substantially the same as the relevant sections of the annual statement the insurer filed with the commission, and the financial statements shall be comparative, presenting the amounts as of December 31 of the current year and the amounts as of the immediately preceding December 31. However, in the first year in which an insurer is required to file an Audited Financial Report, the comparative data may be omitted.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 7, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-70. Designation of independent certified public accountant.

A. Each insurer required by this chapter to file an annual Audited Financial Report, within 60 days after becoming subject to the requirement, shall register with the commission in writing the name and address of the independent certified public accountant retained to conduct the annual audit set forth in this chapter.

B. As part of this registration, the insurer shall obtain a letter from the accountant and file a copy with the commission stating that the accountant is aware of the provisions of the insurance code and the rules and regulations of the insurance department of the state of domicile that relate to accounting and financial matters, and affirming that the accountant will express an opinion on the financial statements in terms of their conformity to the statutory accounting practices prescribed or otherwise permitted by that department, specifying such exceptions as the accountant may believe appropriate.

C. If the accountant who was the insurer's accountant for the immediately preceding filed Audited Financial Report is dismissed or resigns, the insurer shall notify the commission within five business days of this event. The insurer also shall furnish the commission with a separate letter within 10 business days of the above notification stating whether in the 24 months preceding the event there were any disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to the satisfaction of the former accountant, would have caused the accountant to make reference to the subject matter of the disagreement in the opinion. The disagreements required to be reported in response to this subsection include those resolved to the former accountant's satisfaction and those not resolved to the former accountant's satisfaction. Disagreements contemplated by this subsection are those that occur at the decision-making level, i.e., between personnel of the insurer responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report. The insurer also in writing shall request the former accountant to furnish a letter addressed to the insurer stating whether the accountant agrees with the statements contained in the insurer's letter and, if not, stating the reasons for disagreement; and the insurer shall furnish a responsive letter from the former accountant to the commission together with its own letter.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 8, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-80. Qualifications of accountant.

A. The commission shall not recognize a person or firm as a qualified accountant if that person or firm:

1. Is not in good standing with the AICPA and in all states in which the accountant is licensed to practice, or, for a Canadian or British company, that is not a chartered accountant; or

2. Has either directly or indirectly entered into an agreement of indemnity or release from liability, collectively referred to as indemnification, with respect to the audit of the insurer.

B. Except as otherwise provided in this chapter, the commission shall recognize an independent certified public accountant as qualified as long as the accountant conforms to the standards of the profession, as contained in the AICPA Code of Professional Conduct and the regulations of the Virginia Board of Accountancy (18VAC5-21) or similar code.

C. A qualified independent certified public accountant may enter into an agreement with an insurer to have disputes relating to an audit resolved by mediation or arbitration. However, in the event of a delinquency proceeding commenced against the insurer under Chapter 15 (§ 38.2-1500 et seq.) of Title 38.2 of the Code of Virginia, the mediation or arbitration provisions shall operate at the option of the statutory successor.

D. The lead (or coordinating) audit partner (having primary responsibility for the audit) may not act in that capacity for more than five consecutive years. The person shall be disqualified from acting in that or a similar capacity for the same company or its insurance subsidiaries or affiliates for a period of five consecutive years. An insurer may make application to the commission for relief from the above rotation requirement on the basis of unusual circumstances. This application shall be made at least 30 days before the end of the calendar year. The commission may consider the following factors in determining if the relief should be granted:

1. Number of partners, expertise of the partners or the number of insurance clients in the currently registered firm;

2. Premium volume of the insurer; or

3. Number of jurisdictions in which the insurer transacts business.

The insurer shall file, with its annual statement filing, the commission's letter granting relief from this subsection with the states in which it is licensed or doing business and with the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the letter granting relief in an electronic format acceptable to the NAIC.

E. The commission shall not recognize as a qualified accountant or accept any annual Audited Financial Report prepared in whole or in part by any person who:

1. Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act (18 USC § 1961 et seq.) or any dishonest conduct or practices under federal or state law;

2. Has violated the insurance laws of this Commonwealth with respect to any previous reports submitted under this chapter; or

3. Has demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this chapter.

F. The commission may: (i) make a determination as to whether an accountant is qualified and may, based upon the facts considered, determine that such accountant is not qualified for purposes of expressing an opinion on the financial statements in the annual Audited Financial Report made pursuant to this chapter; and (ii) require the insurer to replace such accountant with another whose relationship with the insurer is qualified within the meaning of this chapter.

G. The commission shall not recognize as a qualified independent certified public accountant or accept an annual Audited Financial Report prepared in whole or in part by an accountant who provides to an insurer, contemporaneously with the audit, the following nonaudit services:

1. Bookkeeping or other services related to the accounting records or financial statements of the insurer;

2. Financial information systems design and implementation;

3. Appraisal or valuation services, fairness opinions or contribution-in-kind reports;

4. Actuarially oriented advisory services involving the determination of amounts recorded in the financial statements. The accountant may assist an insurer in understanding the methods, assumptions and inputs used in the determination of amounts recorded in the financial statement only if it is reasonable to conclude that the services provided will not be subject to audit procedures during an audit of the insurer's financial statements. An accountant's actuary may also issue an actuarial opinion or certification (opinion) on an insurer's reserves if the following conditions have been met:

a. Neither the accountant nor the accountant's actuary has performed any management functions or made any management decisions;

b. The insurer has competent personnel (or engages a third-party actuary) to estimate the reserves for which management takes responsibility; and

c. The accountant's actuary tests the reasonableness of the reserves after the insurer's management has determined the amount of the reserves;

5. Internal audit outsourcing services;

6. Management functions or human resources;

7. Broker or dealer, investment adviser, or investment banking services;

8. Legal services or expert services unrelated to the audit; or

9. Any other services that the commission determines, by regulation, are impermissible.

(In general, the principles of independence with respect to services provided by the accountant are largely predicated on three basic principles, violations of which would impair the accountant's independence. These principles are that the accountant cannot function in the role of management, cannot audit his own work, and cannot serve in an advocacy role for the insurer.)

H. Insurers having direct written and assumed premiums of less than $100 million in any calendar year may request an exemption from subsection G of this section. The insurer shall file with the commission a written statement discussing the reasons why the insurer should be exempt from these provisions. An exemption may be granted if the commission finds, upon review of this statement, that compliance with this chapter would constitute a financial or organizational hardship upon the insurer.

I. An accountant who performs the audit may engage in other nonaudit services, including tax services, that are not described in or that do not conflict with subsection G of this section, only if the activity is approved in advance by the Audit Committee, in accordance with subsection J of this section.

J. All auditing services and nonaudit services provided to an insurer by the accountant of the insurer shall be preapproved by the Audit Committee. The preapproval requirement is waived with respect to nonaudit services if the insurer is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity or:

1. The aggregate amount of all nonaudit services provided to the insurer constitutes not more than 5.0% of the total amount of fees paid by the insurer to its accountant during the fiscal year in which the nonaudit services are provided;

2. The services were not recognized by the insurer at the time of the engagement to be nonaudit services; and

3. The services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are the members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee.

K. The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant the preapprovals required by subsection J of this section. The decisions of any member to whom this authority is delegated shall be presented to the full Audit Committee at each of its scheduled meetings.

L. The commission shall not recognize an accountant as qualified for a particular insurer if a member of the board, president, chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for that insurer was employed by the accountant and participated in the audit of that insurer during the one-year period preceding the date that the most current statutory opinion is due. This subsection shall only apply to partners and senior managers involved in the audit. An insurer may make application to the commission for relief from the above requirement on the basis of unusual circumstances.

The insurer shall file, with its Annual Statement filing, the commission's letter granting relief from this subsection with the states in which it is licensed or doing business and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the letter granting relief in an electronic format acceptable to the NAIC.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 9, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 19, Issue 21, eff. July 1, 2003; Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-90. Consolidated or combined audits.

An insurer may make written application to the commission for approval to include in its Audited Financial Report audited consolidated or combined financial statements in lieu of separate annual audited financial statements if the insurer is part of a group of insurance companies that utilizes a pooling or 100% reinsurance agreement that affects the solvency and integrity of the insurer's reserves and the insurer cedes all of its direct and assumed business to the pool. In such cases, a columnar consolidating or combining worksheet shall be filed with the report, as follows:

1. Amounts shown on the consolidated or combined Audited Financial Report shall be shown on the worksheet.

2. Amounts for each insurer subject to this section shall be stated separately.

3. Noninsurance operations may be shown on the worksheet on a combined or individual basis.

4. Explanations of consolidating and eliminating entries shall be included.

5. A reconciliation shall be included of any differences between the amounts shown in the individual insurer columns of the worksheet and comparable amounts shown on the Annual Statements of the insurers.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 10, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-100. Scope of audit and report of independent certified public accountant.

Financial statements furnished pursuant to 14VAC5-270-60 shall be examined by an accountant. The audit of the insurer's financial statements shall be conducted in accordance with generally accepted auditing standards. In accordance with U.S. Auditing Standards - AICPA Clarified (AU-C) Section 315 of the AICPA Professional Standards, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, the accountant shall obtain an understanding of internal control sufficient to plan the audit. To the extent required by AU-C Section 315, for those insurers required to file a Management's Report of Internal Control over Financial Reporting pursuant to 14VAC5-270-148, the accountant should consider (as the term should consider is defined in AU-C Section 200 of the AICPA Professional Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards) the most recently available report in planning and performing the audit of the statutory financial statements. Consideration shall be given to the procedures illustrated in the Financial Condition Examiners Handbook promulgated by the NAIC as the accountant deems necessary.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 11, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010; Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-110. Notification of adverse financial condition.

A. The insurer required to furnish the annual Audited Financial Report shall require the accountant to report in writing within five business days to the board of directors or its Audit Committee any determination by the accountant that the insurer has materially misstated its financial condition as reported to the commission as of the balance sheet date under examination or that the insurer does not meet its minimum statutory capital and surplus requirements as of that date pursuant to Virginia law. An insurer that has received a report pursuant to this subsection shall forward a copy of the report to the commission within five business days of receipt of the report and shall provide the accountant making the report with evidence of the report being furnished to the commission. If the accountant fails to receive the evidence within the required five-business-day period, the accountant shall furnish to the commission a copy of its report within the next five business days.

B. No accountant shall be liable in any manner to any person for any statement made in connection with subsection A of this section if the statement is made in good faith in compliance with subsection A of this section.

C. If the accountant, subsequent to the date of the Audited Financial Report filed pursuant to this chapter, becomes aware of facts which might have affected the report, the commission notes the obligation of the accountant to take action as prescribed in AU-C Section 560 of the AICPA Professional Standards, Subsequent Events and Subsequently Discovered Facts.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 12, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010; Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-120. Communicating internal control related matters noted in an audit.

A. In addition to the annual Audited Financial Report, each insurer shall furnish the commission with a written communication as to any unremediated material weaknesses in its internal controls over financial reporting identified during the audit. The communication shall be prepared by the accountant within 60 days after the filing of the annual Audited Financial Report, and shall contain a description of any unremediated material weakness (as the term material weakness is defined in AU-C Section 265 of the AICPA Professional Standards, Communicating Internal Control Related Matters Identified in an Audit) as of the immediately preceding December 31 (so as to coincide with the Audited Financial Report discussed in 14VAC5-270-50 A) in the insurer's internal control over financial reporting identified by the accountant during the course of the audit of the financial statements. If no unremediated material weaknesses were identified, the communication should so state.

B. The insurer is required to provide a description of remedial actions taken or proposed to correct unremediated material weaknesses if the actions are not described in the accountant's communication.

C. The insurer is expected to maintain information about significant deficiencies communicated by the independent certified public accountant. The information should be made available to the examiner conducting a financial condition examination for review and kept in a manner as to remain confidential.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 13, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010; Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-130. Accountant's letter of qualifications.

The accountant shall furnish the insurer in connection with, and for inclusion in, the filing of the annual Audited Financial Report, a letter stating:

1. That the accountant is independent with respect to the insurer and conforms to the standards of his profession as contained in the AICPA's Code of Professional Conduct and pronouncements of its Financial Accounting Standards Board, and the Standards of Practice of the Virginia Board for Accountancy, or similar code.

2. The background and experience in general, and the experience in audits of insurers of the staff assigned to the engagement and whether each is an accountant. Nothing within this chapter shall be construed as prohibiting the accountant from utilizing staff as deemed appropriate where such use is consistent with the standards prescribed by generally accepted auditing standards.

3. That the accountant understands the annual Audited Financial Report, and that its opinion thereon will be filed in compliance with this chapter and that the commission will be relying on this information in the monitoring and regulation of the financial position of insurers.

4. That the accountant consents to the requirements of 14VAC5-270-140 and that the accountant consents and agrees to make available for review by the commission, its designee or appointed agent, the workpapers, as defined in 14VAC5-270-40.

5. That the accountant is properly licensed by an appropriate state licensing authority and that he is a member in good standing in the AICPA.

6. That the accountant is in compliance with 14VAC5-270-80.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 14, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-140. Availability and maintenance of independent certified public accountant workpapers.

Every insurer required to file the Audited Financial Report described in this chapter shall require the accountant to make available for review by the commission's examiners, all workpapers prepared in the conduct of the accountant's audit and any communications related to the audit between the accountant and the insurer, at the offices of the insurer, at the commission or at any other reasonable place designated by the commission. The insurer shall require that the accountant retain the workpapers and communications until the commission has filed a Report on Examination covering the period of the audit, but no longer than seven years from the date of the audit report.

In the conduct of the aforementioned periodic review by the commission's examiners, it shall be agreed that photocopies of pertinent workpapers may be made and retained by the commission. Reviews by the commission's examiners shall be considered investigations and all workpapers and communications obtained during the course of investigations shall be confidential.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 15, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-144. Requirements for Audit Committees.

A. This section shall not apply to foreign or alien insurers licensed in Virginia or an insurer that is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity.

B. The Audit Committee shall 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 chapter. Each accountant shall report directly to the Audit Committee.

C. The Audit Committee of an insurer or group of insurers shall be 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 14VAC5-270-145.

D. Each member of the Audit Committee shall 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 subsection G of this section.

E. In order to be considered independent for purposes of this section, a member of the Audit Committee may not, other than in the 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 subsidiary thereof. However, if Virginia 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.

F. If a member of the Audit Committee ceases to be independent for reasons outside the member's reasonable control, that member, with notice by the responsible entity to the commission, 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.

G. To exercise the election of the controlling person to designate the Audit Committee for purposes of this chapter, the ultimate controlling person shall provide written notice to the commission of the affected insurers. Notification shall be made timely prior to 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 commission by the insurer, which shall include a description of the basis for the change. The election shall remain in effect for perpetuity, unless rescinded.

H. The Audit Committee shall require the accountant that conducts for an insurer any audit required by this chapter to timely report to the Audit Committee in accordance with the requirements of AU-C Section 260 of the AICPA Professional Standards, The Auditor's Communication with those Charged with Governance, 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.

If an insurer is a member of an insurance holding company system, the reports required by this subsection 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.

I. The proportion of independent Audit Committee members shall meet or exceed the following criteria:

Note A: The commission has authority afforded by state law to require the entity's board to enact improvements to the independence of the Audit Committee membership if the insurer is in a RBC level event, meets one or more of the standards of an insurer deemed to be in hazardous financial condition, or otherwise exhibits qualities of a troubled insurer.

Note B: All insurers with less than $500 million in prior year direct written and assumed premiums are encouraged to structure their Audit Committees with at least a supermajority of independent Audit Committee members.

Note C: Prior calendar year direct written and assumed premiums shall be the combined total of direct premiums and assumed premiums from nonaffiliates for the reporting entities.

J. An insurer with direct written and assumed premiums, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, less than $500 million may make application to the commission for a waiver from the requirements of this section based upon hardship. The insurer shall file, with its annual statement filing, the commission's letter granting relief from this section with the states in which it is licensed or doing business and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the letter granting relief in an electronic format acceptable to the NAIC.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 24, Issue 12, eff. January 1, 2010; amended, Virginia Register Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-145. Internal audit function requirements.

A. An insurer is exempt from the requirements of this section if:

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 million; and

2. If 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 billion.

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.

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.

D. The head of the internal audit function shall report to the Audit Committee regularly, but no less often 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.

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.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-146. Conduct of insurer in connection with the preparation of required reports and documents.

A. No director or officer of an insurer shall, directly or indirectly:

1. Make or cause to be made a materially false or misleading statement to an accountant in connection with any audit, review or communication required under this chapter; or

2. Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which the statements were made, not misleading to an accountant in connection with any audit, review or communication required under this chapter.

B. No officer or director of an insurer, or any other person acting under the direction thereof, shall directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence any accountant engaged in the performance of an audit pursuant to this chapter if that person knew or should have known that the action, if successful, could result in rendering the insurer's financial statements materially misleading.

C. For purposes of subsection B of this section, actions that, "if successful, could result in rendering the insurer's financial statements materially misleading" include, but are not limited to, actions taken at any time with respect to the professional engagement period to coerce, manipulate, mislead or fraudulently influence an accountant:

1. To issue or reissue a report on an insurer's financial statements that is not warranted in the circumstances (due to material violations of statutory accounting principles prescribed by the commission, generally accepted auditing standards, or other professional or regulatory standards);

2. Not to perform audit, review or other procedures required by generally accepted auditing standards or other professional standards;

3. Not to withdraw an issued report; or

4. Not to communicate matters to an insurer's Audit Committee.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-148. Management's Report of Internal Control over Financial Reporting.

A. An insurer required to file an Audited Financial Report pursuant to this chapter that has annual direct written and assumed premiums, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of $500 million or more shall prepare a report of the insurer's or group of insurers' internal control over financial reporting. The report shall be filed with the commission along with the Communicating Internal Control Related Matters Identified in an Audit pursuant to 14VAC5-270-120. Management's Report of Internal Control over Financial Reporting shall be as of the immediately preceding December 31.

B. Notwithstanding the premium threshold in subsection A of this section, the commission may require an insurer to file Management's Report of Internal Control over Financial Reporting if the insurer is in any RBC level event, or meets any one or more of the standards of an insurer deemed to be in hazardous financial condition pursuant to §§ 38.2-1038, 38.2-5505, 38.2-5506 and 38.2-5510 of the Code of Virginia.

C. An insurer or a group of insurers that is (i) directly subject to Section 404; (ii) part of a holding company system whose parent is directly subject to Section 404; (iii) not directly subject to Section 404 but is a SOX compliant entity; or (iv) a member of a holding company system whose parent is not directly subject to Section 404 but is a SOX compliant entity may file its or its parent's Section 404 Report and an addendum in satisfaction of this section's requirement provided that those internal controls of the insurer or group of insurers having a material impact on the preparation of the insurer's or group of insurer's audited statutory financial statements (those items included in 14VAC5-270-60) were included in the scope of the Section 404 Report. The addendum shall be a positive statement by management that there are no material processes with respect to the preparation of the insurer's or group of insurers' audited statutory financial statements (those items included in 14VAC5-270-60) excluded from the Section 404 Report. If there are internal controls of the insurer or group of insurers that have a material impact on the preparation of the insurer's or group of insurer's audited statutory financial statements and those internal controls were not included in the scope of the Section 404 Report, the insurer or group of insurers may file (i) a Management's Report of Internal Control over Financial Reporting pursuant to this section, or (ii) the Section 404 Report and a Management's Report of Internal Control over Financial Reporting pursuant to this section for those internal controls that have a material impact on the preparation of the insurer's or group of insurers' audited statutory financial statements not covered by the Section 404 Report.

D. Management's Report of Internal Control over Financial Reporting shall include:

1. A statement that management is responsible for establishing and maintaining adequate internal control over financial reporting;

2. A statement that management has established internal control over financial reporting and an assertion, to the best of management's knowledge and belief, after diligent inquiry, as to whether its internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial statements in accordance with statutory accounting principles;

3. A statement that briefly describes the approach or processes by which management evaluated the effectiveness of its internal control over financial reporting;

4. A statement that briefly describes the scope of work that is included and whether any internal controls were excluded;

5. Disclosure of any unremediated material weaknesses in the internal control over financial reporting identified by management as of the immediately preceding December 31. Management shall not conclude that the internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial statements in accordance with statutory accounting principles if there is one or more unremediated material weaknesses in its internal control over financial reporting;

6. A statement regarding the inherent limitations of internal control systems; and

7. Signatures of the chief executive officer and the chief financial officer (or equivalent position or title).

E. Management shall document and make available upon financial condition examination the basis upon which its assertions, required in subsection D of this section, are made. Management may base its assertions, in part, upon its review, monitoring, and testing of internal controls undertaken in the normal course of its activities.

1. Management shall have discretion as to the nature of the internal control framework used and the nature and extent of documentation in order to make its assertion in a cost effective manner and may include assembly of or reference to existing documentation.

2. Management's Report on Internal Control over Financial Reporting, required by subsection A of this section, and any documentation provided in support thereof during the course of a financial condition examination, shall be kept confidential by the commission.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-150. Exemptions.

Upon written application of an insurer, the commission may grant an exemption from any provision and/or requirement of this chapter if the commission finds, upon review of the application, that compliance with this chapter would constitute an undue financial or organizational hardship upon the insurer. An exemption may be granted at any time and from time to time for a specified period or periods. Upon written application of an insurer, the commission may, for a specified period or periods, permit an insurer to file annual Audited Financial Reports on some basis other than a calendar year basis.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 16, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-160. (Repealed.)

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 17, eff. September 1, 1991; repealed, Virginia Register Volume 16, Issue 5, eff. January 1, 2000.

14VAC5-270-170. Canadian and British companies.

A. For Canadian and British insurers, the annual Audited Financial Report shall be defined as the annual statement of total business on the form filed by the companies with their domiciliary regulatory authority duly audited by an independent chartered accountant.

B. For Canadian and British insurers, the letter from the accountant required in 14VAC5-270-70 shall state that the accountant is aware of the requirements relating to the annual Audited Financial Report filed with the commission pursuant to this section and 14VAC5-270-50 and shall affirm that the opinion expressed is in conformity with the requirements.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 18, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

14VAC5-270-174. Retention of independent certified public accountant on or after January 1, 2010, and other effective dates.

A. Unless otherwise noted, the requirements of this chapter shall become effective for the reporting period ending December 31, 2010, and each year thereafter. An insurer or group of insurers not required to file a report because its total written premium is below the threshold that subsequently becomes subject to the reporting requirements shall have two years following the year the threshold is exceeded (but not earlier than December 31, 2010) to file a report. Likewise, an insurer acquired in a business combination shall have two calendar years following the date of acquisition or combination to comply with the reporting requirements.

B. The requirements of 14VAC5-270-80 D shall become effective for audits of the year beginning January 1, 2010, and thereafter.

C. The requirements of 14VAC5-270-144 shall become effective on January 1, 2010. An insurer or group of insurers that is not required to have independent Audit Committee members or only a majority of independent Audit Committee members (as opposed to a supermajority) because the total direct written and assumed premium is below the threshold and subsequently becomes subject to one of the independence requirements due to changes in premium shall have one year following the year the threshold is exceeded (but not earlier than January 1, 2010) to comply with the independence requirements. Likewise, an insurer that becomes subject to one of the independence requirements as a result of a business combination shall have one calendar year following the date of acquisition or combination to comply with the independence requirements.

D. The requirements of 14VAC5-270-145 are to become effective January 1, 2016. If an insurer or group of insurers that is exempt from the 14VAC5-270-145 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 chapter.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 24, Issue 12, eff. January 1, 2010; amended, Virginia Register Volume 32, Issue 9, eff. January 1, 2016.

14VAC5-270-180. Severability.

If any provision of this chapter or the application thereof to any person or circumstance is for any reason held to be invalid, the remainder of the chapter and the application of the provision to other persons or circumstances shall not be affected thereby.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 39, Case No. INS910072, § 19, eff. September 1, 1991; amended, Virginia Register Volume 24, Issue 12, eff. January 1, 2010.

Forms (14VAC5-270)

Audited Financial Statements Exemption Affidavit Year Ended December 31, 2014, R03 (eff. 10/2014)

Documents Incorporated by Reference (14VAC5-270)

AICPA Professional Standards, Volume 1, as of June 1, 2015, American Institute of Certified Public Accountants, New York, New York 10036-8775, http://www.aicpa.org

AICPA Professional Standards, Volume 2, as of June 1, 2015, American Institute of Certified Public Accountants, New York, New York 10036-8775, http://www.aicpa.org