Additional NAIC Accreditation Standards on Corporate Governance, Annual Disclosure Models Open For Comment Until November 7, 2014
Oct 9, 2014
The National Association of Insurance Commissioners (“NAIC”) is seeking comments by November 7, 2014 on two draft documents that will be considered for discussion and adoption at the NAIC’s 2014 Fall Annual Meeting from November 16-19 in Washington D.C.
Both entail the incorporation of accreditation standards into the Annual Financial Reporting Model Regulation (“#205”), and the Corporate Governance Annual Disclosure Model Act (#305) and Regulation (#306), respectively.
A subject of contention during 2014, the requirement for individual insurers writing more than $500 million, or insurance groups writing more than $1 billion in annual premium to maintain an internal audit function was adopted by the NAIC as a revision to the Annual Financial Reporting Model on August 19, 2014. However, while all states have adopted Model #205 in some format, the NAIC is not yet aware of any states that have adopted its new internal audit function revision. Since the amendment was made only recently, the various jurisdictions are expected to begin taking action as soon as next year to incorporate it.
Enforcement of the new internal audit function requirement has been determined to amount to a simple addition to insurers’ existing work plans. According to the NAIC, all publicly-held insurers are already required to maintain an internal audit function through stock exchange listing requirements. In addition, it is considered to be a standard industry practice for large insurers to maintain internal audit functions of their own volition. Thus, the NAIC has concluded that the costs for companies to meet the new requirement will be nominal. Insofar as the impact on state agencies to enforce this requirement, the internal audit functions of insurers are already reviewed as part of each full-scope financial condition examination, the NAIC explained.
To view the draft memorandum on Model #205, click here.
The second draft document open for public comment indicates that NAIC Executive Committee and Plenary adoption of the revised Corporate Governance models is expected in November. The state-by-state revision process is expected to begin during early 2015 since none are known to have yet adopted the models, even in their original format.
Once legislative and regulatory action on corporate governance standards ensues, the NAIC suggests that these efforts should include a requirement for insurers to provide a confidential annual disclosure of their own practices that is substantially similar to the NAIC’s Corporate Governance models. This includes:
- A requirement for insurers or insurance groups to submit a Corporate Governance Annual Disclosure (“CGAD”) by June 1 of each year, similar to Section 3 of Model #305.
- A requirement that the CGAD contain the material information necessary to permit an insurance commissioner to gain an understanding of the insurer or group’s corporate governance structure, policies and practices, similar to Section 5a of Model #305.
- A requirement that the CGAD be prepared consistently with the Corporate Governance Annual Disclosure Model Regulation, similar to Section 5b of Model #305.
- A provision of confidentiality protection for the CGAD, including provisions maintaining confidentiality for information shared with state, federal and international regulators, similar to Section 6 of Model #305.
- An effective date no earlier than January 1, 2016, similar to Section 10 of Model #305.
- Prescribed filing procedures for the CGAD, including required signatures, rationale for the level at which information is reported, filing with the Lead State, the ability to reference other documents and processes for describing changes from the prior year’s disclosure, similar to Section 5 of Model #306.
- Prescribed general content for the CGAD, including a description of corporate governance framework and structure, a description of policies and practices of the board of directors, a description of policies and practices for directing senior management and a description of oversight provided to critical risk areas impacting the insurer’s business activities, similar to Section 6 of Model #306.
To view the draft Corporate Governance adoption document, click here.
Should you have any questions or comments, please contact Colodny Fass& Webb.
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