Model Audit Rule

Nov 7th, 08

Model Audit Rule (MAR) Update

Now Retitled:  Annual Financial Reporting Model Regulation (AFRMR)

 

Besides renaming the Model Audit Rule, there has been little recent change to the rule and the new Model Regulation draft has been finalized by the NAIC, set to be adopted by the various states in whatever manner each state adopts such regulation – by legislative action, regulatory adoption, or other means.  Many states will adopt the Model as written – others may choose to modify the Model in some way.

 

The primary components of the AFRMR include the following:

 

Exemption from the AFRMR - small insurers are exempt (less than $1 million in annual premiums written and 1,000 policyholders) from the AFRMR.

 

Audit Committees - must be designated by every insurer filing an audited financial report.   The entire Board can serve as the audit committee if a subset is not designated.  The audit committee must approve all audit and non-audit services (if more than 5% of total fees) from the independent auditor.  The audit committee must have a certain number of “independent” members dependent on the amount of direct written and assumed premiums as follows:

s  $0 to $300 million – No minimum requirements

s  $300 million to $500 million – majority (>50%) must be independent

s  Over $500 million – supermajority (75% or more) must be independent

An “independent” audit committee member is one who receives no compensation or fees from the insurer other than for acting in his/her capacity as a director or audit committee member.

 

Audit Partner Rotation – there is a change to the rotation requirement for the lead audit partner on each audit engagement.  Previously, the lead partner could serve on the engagement for 7 years before being required to rotate off for 2 years.  Under the AFRMR, the lead partner can serve on an engagement for 5 years, then must rotate off the engagement for 5 years before returning as the lead partner.

 

Non-audit Service Limitations – the audit firm providing the audit opinion on the financial statements is precluded from performing a number of other services contemporaneously for the insurer; such as bookkeeping, financial systems design, actuarial services in certain circumstances, internal audit services, management or human resource functions or legal services.  Income tax services are excluded from this limitation (an exemption can be requested for other mentioned services for insurers with less than $100 million in annual written premiums).

 

Auditor Communication of Internal Control Matters – the independent auditor shall issue a communication regarding any internal control matters noted in the audit and the insurer is required to provide a description of remedial actions taken or proposed to correct these matters.

 

Management’s Report of Internal Controls over Financial Reporting – every insurer required to file an audited financial report with annual direct and assumed premiums of $500 million or more must prepare a report.  The report on internal controls filed can be just for the insurer itself or for the entire group of companies if the group has similar controls over financial reporting.  The report must be signed by the CEO and CFO and no independent auditor attestation is required.

 

The effective date for the AFRMR is January 1, 2010.  States are currently in the process of adopting the Regulation as part of their insurance regulatory system.