Section 0780-01-41-.03 - AUDITS(1)(a) Each captive insurance company shall be thoroughly examined at least once every three (3) years by the commissioner. The three year period may be extended up to a five (5) year period provided that the company is subject to comprehensive annual financial audits as provided for in T.C.A. § 56-13-109(a). To qualify for this extension, the comprehensive audits shall be conducted by an independent certified public accountant authorized by the commissioner. The authorized accountant shall prepare and sign an audited annual financial report in a format specified by the commissioner. This report is hereinafter referred to in this rule as the "audited annual financial report." To qualify for the extension provided for in T.C.A. § 56-13-109(a), the audited annual financial report shall be filed on or before June 30th of each year or 180 days after the end of the fiscal year. The audited annual financial report shall be considered part of the company's annual report of financial condition except with respect to the date by which it must be filed with the commissioner.(b) To be eligible for an extension up to a five (5) year period between thorough examinations, the captive insurance company must have filed timely audited annual financial reports covering all periods of operation from the later of the date of formation or the end date of the previous examination. For good cause shown in exceptional circumstances, the commissioner may allow the late filing of the audited annual financial report to preserve a captive insurance company's eligibility for a thorough examination extension.(c) A newly formed captive insurance company or a newly formed protected cell or incorporated protected cell of a captive insurance company that is in operation for less than ninety (90) days before the end of its fiscal year may elect to defer conducting a comprehensive annual audit under this Chapter so long as the first filed audited annual financial report includes audit data from the date of formation to the end of the first complete fiscal year that the captive insurance company or protected cell was in operation.(d) A protected cell or incorporated protected cell captive insurance company may elect to omit from its audited annual financial report one or more individual cells that collected no premium and wrote no policies during the calendar or fiscal year and was under no liability or potential liability for any policies issued in prior years. This action is hereinafter referred to in this rule as an "omission election." The omission election shall be made on a form prescribed by the commissioner and signed under oath by the captive manager and at least one officer of the company and filed with the audited annual financial report. No omission election may be made in the calendar or fiscal year in which occurs the fifth anniversary of the company's formation or fifth anniversary of the final date covered by the company's last T.C.A. § 56-13-109 thorough examination. In the next year subsequent to the taking of an omission election where no omission election is made or following after a year in which no omission election may be made, the filed audited annual financial report shall include a cumulative report on the protected cell's activity during all preceding years for which an omission election was made. No omission election may be made on a protected cell or incorporated protected cell's core or general account. The commissioner, in his or her sole discretion, may disallow a protected cell or incorporated protected cell captive insurance company from taking any future omission elections on one or more cells upon notice.(e) A captive insurance company that has been issued a letter of dormancy may elect to defer conducting a comprehensive annual audit under this Chapter and maintain eligibility for a five (5) year period between thorough examinations. To maintain this eligibility, the captive insurance company must file a cumulative audited financial report that includes audit data from the preceding years since the last filed audited annual financial report. Such filing shall be due with the first audited annual financial report filed subsequent to the rescission or expiration of the letter of dormancy.(2) Designation of Independent Certified Public Accountant. Companies, after becoming subject to this rule, shall within ninety days report to the commissioner in writing, the name and address of the independent certified public accountant retained to conduct the annual audit set forth in this rule. The certified public accountant that is retained to conduct the annual audit may only be appointed from the list of approved certified public accounting firms or individual certified public accountants maintained by the commissioner. The independent certified public accountant retained to conduct the annual audit shall apply, on a form adopted by the commissioner, for approval by the commissioner.
(3) Notification of Adverse Financial Condition.A company shall require the certified public accountant to immediately notify in writing an officer and all members of the Board of Directors of the company of any determination by the independent certified public accountant that the company has materially misstated its financial condition in its report to the commissioner as required in T.C.A. § 56-13-108. The company shall furnish such notification to the commissioner within five (5) working days of receipt thereof.
(4) Availability and Maintenance of Working Papers of the Independent Certified Public Accountant. (a) Each company shall require the independent certified public accountant to make available for review by the commissioner or the commissioner's appointed agent the work papers prepared in the conduct of the audit of the company. The company shall require that the accountant retain the audit work papers for a period of not less than five (5) years after the period reported upon.(b) The aforementioned review by the commissioner shall be considered examinations and all working papers obtained during the course of such examinations shall be confidential. The company shall require that the independent certified public accountant provide photocopies or equivalent copy of any of the working papers which the Department considers relevant. Such working papers may be retained by the Department.(c) "Work Papers" or "Working Papers" as referred to in this rule include, but are not necessarily limited to, schedules, analyses, reconciliations, abstracts, memoranda, narratives, flow charts, copies of company records or other documents prepared or obtained by the accountant and the accountant's employees in the conduct of their examination of the company.(d) The lead (or coordinating) audit partner (having primary responsibility for the audit) may not act in that capacity for more than five (5) consecutive years. The person shall be disqualified from acting in that or similar capacity for the same company or its insurance subsidiaries or affiliates for a period of five (5) consecutive years. An insurer may make application to the commissioner for relief from the above rotation requirement on the basis of unusual circumstances. This application should be made at least thirty (30) days before the end of the calendar year. The commissioner 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; or3. Number of jurisdictions in which the insurer transacts business.(5) The audited annual financial report shall consist of the following: (a) Opinion of Independent Certified Public Accountant. Financial statements furnished pursuant to this rule shall be examined by independent certified public accountants in accordance with generally accepted auditing standards as determined by the American Institute of Certified Public Accountants or statutory accounting principles in accordance with the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual in effect for the period covered by the report. The opinion of the independent certified public accountant shall cover all years presented. The opinion shall be addressed to the company on stationery of the accountant showing the address of issuance, shall bear original manual signatures, and shall be dated.
(b) Report of Evaluation of Internal Controls. Every company that has annual direct written and assumed premiums of five hundred million dollars ($500,000,000) or more shall include an evaluation of the internal controls of the company relating to the methods and procedures used in the securing of assets and the reliability of the financial records, including but not limited to such controls as the system of authorization and approval and the separation of duties. The review shall be conducted in accordance with generally accepted auditing standards or statutory accounting principles and the report shall be filed with the commissioner. An exemption from this evaluation may be granted on a case by case basis upon written request to the Commissioner.
(c) Accountant's Letter. The accountant shall furnish the company, for inclusion in the filing of the audited annual financial report, a letter stating:
1. That the accountant is independent with respect to the company and conforms to the standards of the accountant's profession as contained in the Code of Professional Ethics and pronouncements of the American Institute of Certified Public Accountants and pronouncements of the Financial Accounting Standards Board.2. The general background and experience of the staff engaged in audit including the experience in auditing captives or other insurance companies.3. That the accountant understands that the audited annual report and the accountant's opinions thereon will be filed in compliance with this Chapter with the Tennessee Department of Commerce and Insurance.4. That the accountant consents to the requirements of Rule 0780-01-41-.03(4) of this Chapter and that the accountant consents and agrees to make available for review by the commissioner, the commissioner's designee or the commissioner's appointed agent, the work papers as defined therein.5. That the accountant is properly licensed by an appropriate state licensing authority and that the accountant is a member in good standing in the American Institute of Certified Public Accountants.(d) Financial Statements as required under Rule 0780-01-41-.02, Annual Reporting Requirements.(e) Certification of Loss Reserves and Loss Expense Reserves. The audited annual financial report shall include an opinion as to the reasonableness of the company's loss reserves and loss expense reserves. The individual who certifies as to the reasonableness of reserves shall apply, on a form adopted by the commissioner, for approval by the commissioner, and shall be a Fellow of the Casualty Actuarial Society, a member in good standing of the American Academy of Actuaries, or an individual who has demonstrated his or her competence in loss reserve evaluation to the commissioner. Certification shall be in such form as the commissioner deems appropriate. For protected cell captive insurance companies, this opinion shall also include a statement identifying any one or more protected cells for which the carried reserves are either inadequate (i.e. - below the minimum amount the actuary believes is reasonable) or redundant (i.e. - greater than the maximum amount the actuary believes is reasonable). For exceptional cause shown, the commissioner may waive the requirement of filing an opinion as to reasonableness of loss reserves and loss expense reserves by a company.
Tenn. Comp. R. & Regs. 0780-01-41-.03
Original rule filed November 30, 2012; effective February 28, 2013. Repeal and new rule filed September 22, 2017; effective 12/21/2017.Authority: T.C.A. §§ 56-13-101 through 56-13-418, 56-13-108, 56-13-109, 56-13-115, and 56-13-121; 2011 Public Acts, Chapter 468; and 2017 Public Acts, Chapter 354, § 3.