NAIC MODEL RULE

1 GUIDE . 205 NAIC Guide to Compliancewith State audit Requirements2010 Accounting & ReportingAccountants, members of the insurance industry andeducators will find relevant information about statutoryaccounting practices and InformationConsumers, educators and members of the insuranceindustry will find important answers to common questionsin guides about auto, home, health and life Regulation Accountants, financial analysts and lawyers will findhandbooks, compliance guides and reports on financialanalysis, state audit requirements and laws, regulations and guidelines apply to membersof the legal and insurance ActivitiesInsurance industry members will find directories, newsletters and reports affecting NAIC StudiesAccountants, educators, financial analysts, members ofthe insurance industry, lawyers and statisticians will findrelevant products on a variety of special ReportsInsurance industry data directed at regulators, educators,financial analysts, insurance industry members, lawyersand ProductsAccountants, educators, financial analysts, insurers,lawyers and statisticians will find guidelines, handbooks,surveys and NAIC positions on a wide variety of Valuation OfficeProvides insurers with portfolio values and proceduresfor complying with NAIC reporting Papers Accountants.

2 Members of the insurance industry andeducators will find relevant information on a variety ofinsurance topics. 2010 National Association of Insurance Commissioners. All rights : 978-1-59917-352-8 Printed in the United States of AmericaNo part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any storage or retrieval system, without written permission from the NAIC is the authoritative source for insurance industry information. Our expert solutions support the efforts ofregulators, insurers and researchers by providing detailed and comprehensive insurance information. The NAIC offers a wide range of publications in the following categories:For more information about NAIC publications, view our online catalog at: NAIC Central Office2301 McGee Street, Suite 800 Kansas City, MO Securities Valuation Office48 Wall Street, 6th FloorNew York, NY Executive Office444 North Capitol Street NW, Suite 701 Washington, DC 20001 following companion product provides additional information on the same or similar subject matter.

3 Manycustomers who purchase the NAIC s Guide to Compliance with State audit Requirements also purchase thefollowing product:Companion ProductsAnnual Financial Reporting MODEL Regulation ( MODEL audit Rule) Improves the surveillance of the financial condition of insurers by requiring 1) annual audit of financial statements; 2) communication of internal control-related matters noted in an audit ; and 3) management's report of internalcontrol over financial reporting. Commonly referred to as the MODEL audit updates through April 2010 (Update #91). International orders must be prepaid, including shipping charges. Please contact an NAIC Customer Service Representative, Monday - Friday, 8:30 am - 5 pm CT. NAIC s Guide to Compliance STATE audit REQUIREMENTS The NAIC has prepared this publication to assist insurers, certified public accountants, and other interested parties in complying with various state filing requirements for annual audited financial reports.

4 These filing requirements generally provide for, among other things, specific information concerning the filing and content of audited financial reports and other related letters and reports with the state insurance department. All of the guidelines in this area have recently been significantly changed and this publication has been created to summarize these new requirements. On June 11, 2006, the NAIC membership voted to approve amendments to the Annual Financial Reporting MODEL Regulation (#205), commonly known as the MODEL audit Rule. The purpose of this regulation is to improve a state s surveillance of the financial condition of insurers by requiring an independent annual audit of the financial statements by Certified Public Accountants.

5 Significant elements of this regulation are required as an accreditation standard and have been since the creation of the standards. The amendments adopted in 2006 were the result of nearly three years of continued research and discussion by financial regulators, members of industry, public accountants and representatives from trade associations. The revisions deal with primarily three areas: auditor independence, corporate governance and internal control over financial reporting. The critical new requirements associated with these revisions became effective beginning January 1, 2010 and have now been adopted by virtually all member states. Citations providing reference to each state s statute or regulation containing the relevant provisions have been provided within the publication.

6 The publication summarizes requirements placed on insurers and their external auditors by the MODEL audit Rule and compares and contrasts the requirements included within the NAIC MODEL to those ultimately adopted by each NAIC member state. The summaries contained herein are not intended to be all-inclusive and should not be relied on solely in determining state-specific requirements. Where a question exists with respect to any requirement, the state s statute or regulation should be reviewed and, where necessary, the state insurance department should be contacted. Every effort has been made to ensure the contents of this publication are complete and factually correct, but the NAIC makes no warranty as to the completeness or correctness of the information provided.

7 All responsibility for compliance with individual state insurance codes rests solely with the insurance company and its independent auditor. 2010 National Association of Insurance Commissioners NAIC s Guide to Compliance STATE audit REQUIREMENTS TABLE OF CONTENTS Alabama .. 1 Alaska .. 5 9 California ..17 Connecticut ..25 Delaware ..29 District of Columbia ..33 Florida ..37 Hawaii ..45 Idaho ..49 Illinois ..53 Kansas ..65 Kentucky ..69 Maine ..77 Maryland ..81 Massachusetts ..85 Michigan ..89 Mississippi ..97 Missouri ..101 Montana ..105 Nebraska ..109 Nevada ..113 New Hampshire ..117 New Jersey ..121 New 2010 National Association of Insurance Commissioners i NAIC s Guide to Compliance STATE audit REQUIREMENTS ii 2010 National Association of Insurance Commissioners TABLE OF CONTENTS New North Carolina.

8 133 North Oklahoma ..145 Pennsylvania ..153 Puerto Rhode Island ..161 South Carolina ..165 South Tennessee ..173 Texas ..177 Vermont ..185 Virginia ..189 Washington ..193 West Virginia ..197 NAIC s Guide to Compliance STATE audit REQUIREMENTS 2010 National Association of Insurance Commissioners 1 NAIC MODEL RULE ALABAMA Citation MODEL 205 ALA. ADMIN. CODE R. to Applicability All licensed or authorized insurers. All licensed insurers. Size Exemptions Allowed for insurers having direct premiums in domestic state of < $1,000,000 in any calendar year and < 1,000 policyholders nationwide, unless reinsurance premiums assumed exceed $1,000,000. Same as NAIC MODEL audit Rule.

9 Exemption from Filing in Other States Allowed if audited reports required by the domestic state are deemed substantially similar and Audited financial reports, Communication of Internal Control Related Matters Noted in an audit , Qualification Letter, Notification of Adverse Condition, and Management s Report of Internal Control over Financial Reporting are filed within the time specified. Same as NAIC MODEL audit Rule. Partner Rotation Partner limited to five consecutive years after which he/she cannot act in that capacity for five years. An insurer may make application to the commissioner for relief from the rotation requirement on the basis on unusual circumstances. Same as NAIC MODEL audit Rule. Workpaper Requirements Retained until Report of Examination covering period is issued, but no longer than seven years.

10 Same as NAIC MODEL audit Rule. audit Committee Requirements Every insurer required to file an annual Audited financial report shall designate a group of individuals as constituting its audit committee. Ultimate controlling person shall provide written notice describing the basis for electing to designate a parent audit committee to serve in that function for the insurer. audit committees are charged with specific oversight responsibilities. audit committees for insurers with prior calendar year direct written and assumed premiums between $300 million and $500 million shall have a minimum of 50% of its members qualify as independent. audit committees for insurers with prior calendar year direct written and assumed premiums greater than $500 million shall have a minimum of 75% of its members qualify as independent.