Section 925.10   Authority (Repealed)

 

(Source:  Repealed at 27 Ill. Reg. 16121, effective October 6, 2003)

 

Section 925.20  Purpose and Scope

 

a)         The purpose of this Part is to improve the Director's surveillance of the financial condition of insurers by requiring:

 

1)         An annual audit of financial statements reporting the financial position and the results of operations of insurers by independent certified public accountants;

 

2)         Communication of Internal Control Related Matters Noted in an Audit; and

 

3)         Management's Report of Internal Control over Financial Reporting.

 

b)         Foreign or alien insurers filing the audited financial reports in another state, pursuant to that state's requirement for filing of audited financial reports, which has been found by the Director to be substantially similar to the requirements of this Part, are exempt from Sections 925.40 through 925.130 if:

 

1)         A copy of the audited financial report, Communication of Internal Control Related Matters Noted in an Audit, and Accountant's Letter of Qualifications that are filed with the other state are filed with the Director of the other state in accordance with the filing dates specified in Sections 925.40, 925.110 and 925.120, respectively (Canadian insurers may submit accountants' reports as filed with the Office of the Superintendent of Financial Institutions, Canada).

 

2)         A copy of any Notification of Adverse Financial Condition Report filed with the other state is filed with the Director within the time specified in Section 925.100.

 

c)         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 State provided the other state has substantially similar reporting requirements and the Report is filed with the Director of the other state within the time specified.

 

d)         This Part shall not prohibit, preclude or in any way limit the Director from ordering and/or conducting and/or performing examinations of insurers under his or her jurisdiction in the operations, practices, procedures, or other matters, including financial condition and operations of the insurers. Such examinations shall be conducted as currently established and/or performed or to be established and/or performed under the Statutes of the State of Illinois, the Rules of the Illinois Department of Insurance and the practices and procedures of the Illinois Department of Insurance.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.30  Definitions

 

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

 

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

 

"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 any 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 Part at the election of the controlling person. Refer to Section 925.140(f) for exercising this election. 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 Section 925.50 of this Part.

 

"Code" means the Illinois Insurance Code [215 ILCS 5].

 

"Dental Service Plan Act" means 215 ILCS 110.

 

"Department" means the Illinois Department of Insurance.

 

"Director" means the Director of the Illinois Department of Insurance.

 

"Group of Insurers" means those licensed insurers included in the reporting requirements of Article VIII½ of the Code, or a set of insurers as identified by management, for the purpose of assessing the effectiveness of internal control over financial reporting.

 

"Health Maintenance Organization Act" means 215 ILCS 125.

 

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

 

"Independent Board Member" has the same meaning as described in Section 925.140(c).

 

"Insurer", for purposes of this Part, means a licensed insurer or accredited reinsurer as defined in Sections 2(f), (g) and (h) and 173.1 of the Code or a Health Maintenance Organization as defined in Section 1-2(9) of the Health Maintenance Organization Act, Dental Service Plan as defined in Section 4 of the Dental Service Plan Act, or a Limited Health Service Organization as defined in Section 1002 of the Limited Health Service Organization Act.

 

"Internal Audit Function" means a function by which a person or persons 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, i.e., those items specified in Section 925.50(b)(2) through (8), and includes those policies and procedures that:

 

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements, i.e., those items specified in Section 925.50(b)(2) through (9), and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and

 

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, i.e., those items specified in Section 925.50(b)(2) through (9).

 

"Limited Health Service Organization Act" means 215 ILCS 130.

 

"SEC" means the United States Securities and Exchange Commission.

 

"Section 404" means Section 404 of the Sarbanes-Oxley Act of 2002 (15 USC 7262).

 

"Section 404 Report" means Management's Report of Internal Control over Financial Reporting as defined by the SEC (17 CFR 240.13a-15(f)) and the related attestation report of the independent certified public accountant as described in Section 925.160.

 

"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:

 

the preapproval requirements of 15 USC 78j-l(i);

 

the audit committee independence requirements of 15 USC 78j-l(m)(3); and

 

the internal control over financial reporting requirements of 17 CFR 229.308.

 

(Source:  Amended at 43 Ill. Reg. 14121, effective January 1, 2020)

 

Section 925.40  General Requirements Related to Filing and Extensions for Filing of Annual Audited Financial Report and Audit Committee Appointment

 

a)         All insurers shall have an annual audit performed by an independent certified public accountant and shall file an annual audited financial report with the Director on or before June 1 for the year ended December 31 immediately preceding.  The Director may require an insurer to file an annual audited financial report earlier than June 1 with 90 days advance notice to the insurer.

 

b)         Extensions of the June 1 filing date may be granted by the Director for 30 day periods upon a showing by the insurer and its independent certified public accountant of the reasons for requesting such extension and a determination by the Director of good cause for an extension.  Examples of "good cause" include, but are not limited to, an Act of God or fortuitous or unintentional destruction of documents. The request for extension must be submitted in writing not less than 10 days prior to the due date and must provide sufficient detail to permit the Director to make an informed decision with respect to the requested extension.

 

c)         If an extension is granted in accordance with the provisions in Section 925.40(b), a similar extension of 30 days is granted to the filing of Management's Report of Internal Control over Financial Reporting.

 

d)         Every insurer required to file an annual audited financial report pursuant to this Part shall designate a group of individuals as constituting its audit committee, as defined in Section 925.30. The audit committee of an entity that controls an insurer may be deemed to be the insurer's audit committee for purposes of this Part at the election of the controlling person.

 

(Source:  Amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.50  Contents of Annual Audited Financial Report

 

a)         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 flows and changes in capital and surplus for the report year in conformity with statutory accounting practices for preparation of the annual statement as described in Section 136 of the Code, or as otherwise permitted by the insurance regulatory authority of the insurer's state of domicile.

 

b)         The annual audited financial report shall include the following:

 

1)         Report of the independent certified public accountant.

 

2)         Balance sheet reporting admitted assets, liabilities, capital and surplus or net worth.

 

3)         Statement of operations or statement of revenues and expenses and net worth.

 

4)         Statement of cash flows.

 

5)         Statement of changes in capital and surplus or net worth.

 

6)         Notes to financial statements.  These notes shall be those required by the appropriate NAIC Annual Statement Instructions and the NAIC Accounting Practices and Procedures Manual, pursuant to Section 136 of the Code.

The notes shall include a reconciliation with a written description of differences, if any, between the annual audited financial report and the annual statement filed pursuant to Section 136 of the Code.

 

7)         The financial statements included in the annual audited financial report shall be prepared in a format using language and groupings substantially the same as the relevant sections of the annual statement of the insurer filed with the Director and:

 

A)        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 annual audited financial report, the comparative data may be omitted.)

 

B)        Amounts may be rounded to the nearest thousand dollars.

 

8)         Supplementary Data and Information.  This shall include any additional clarifying information or data which the Director may require to be disclosed.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.60  Designation of Independent Certified Public Accountant

 

a)         Each insurer required by this Part to file an annual audited financial report must, within 60 days after becoming subject to such requirement, register with the Director in writing the name and address of the independent certified public accountant retained to conduct the annual audit set forth in this Part.  Insurers not retaining an independent certified public accountant on the effective date of this Part (July 9, 1975) shall register the name and address of their retained independent certified public accountant not less than 6 months before the date when the first audited financial report is to be filed.

 

b)         If the independent certified public accountant, who was not the accountant for the immediately preceding filed annual audited financial report, is engaged to audit the insurer's financial statements, the insurer shall within 30 days after the date the independent certified public accountant is engaged notify the Director of this event. The insurer shall obtain a letter from the accountant and file a copy with the Director stating that the accountant is aware of the provisions of the Code and/or Health Maintenance Organization Act and/or the Limited Health Service Organization Act and the Rules and Regulations of the insurance regulatory authority of the state of domicile that relate to accounting and financial matters and affirming that the accountant will express its opinion on the financial statements in terms of their conformity to the statutory accounting practices prescribed or otherwise permitted by that insurance regulatory authority, specifying such exceptions as the accountant may believe appropriate.

 

c)         If an accountant who was the accountant for the immediately preceding filed annual audited financial report is dismissed or resigns, the insurer shall within 5 business days notify the Director of this event.  The insurer shall also furnish the Director with a separate letter within 10 business days after the above notification stating whether in the 24 months preceding such 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 disagreements, 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 connection with the accountant's opinion.  The disagreements required to be reported in response to this subsection include both 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 decisionmaking level, between personnel of the insurer responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering the accountant's report.  The insurer shall also in writing request such former accountant to furnish it 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 which the accountant does not agree; and the insurer shall furnish such responsive letter from the former accountant to the Director together with its own.

 

(Source:  Amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.70  Qualifications of Independent Certified Public Accountant

 

a)         The Director shall not recognize any person or firm as a qualified independent certified public accountant if the 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; or

 

3)         Has repeatedly failed to timely comply with the written requests of the Director's examiners for copies of the workpapers as required pursuant to Sections 925.120 and 925.130 of this Part.

 

b)         Except as otherwise provided in this Section, the Director 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 Code of Professional Ethics of the AICPA 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 Article XIII½ of the Code, the mediation or arbitration provisions shall operate at the option of the statutory successor.

 

d)         The requirements for use of an independent certified accountant shall become effective for years beginning after December 31, 2009.

 

1)         The lead (or coordinating) audit partner (having primary responsibility for the audit) may not act in that capacity for more than 5 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 5 consecutive years.  An insurer may make application to the Director for relief from this rotation requirement on the basis of unusual circumstances.  This application should be made at least 30 days before the end of the calendar year.  The Director may consider the following factors in determining if the relief should be granted:

 

A)        Number of partners, expertise of the partners or the number of insurance clients in the currently registered firm;

 

B)        Premium volume of the insurer; or

 

C)        Number of jurisdictions in which the insurer transacts business.

 

2)         The insurer shall file, with its annual statement filing, the approval for relief from subsection (d)(1) of this Section with the states that it is licensed in or doing business in and with the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

 

e)         The Director shall not recognize as a qualified independent certified public accountant, nor accept any annual audited financial report prepared in whole or in part by any natural person who:

 

1)         Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act (18 USC 1961-1968), or any dishonest conduct or practices under federal or state law;

 

2)         Has been found to have violated the insurance laws of this State with respect to any previous reports submitted under this Part; 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 Part.

 

f)         The Director, as provided in Section 401 of the Code, may, as provided in Administrative Hearing Procedures (50 Ill. Adm. Code 2402), hold a hearing to determine whether an independent certified public accountant is qualified and, considering the evidence presented, may rule that the accountant is not qualified for purposes of expressing an opinion on the financial statements in the annual audited financial report made pursuant to this Part and require the insurer to replace the accountant with another whose relationship with the insurer is qualified within the meaning of this Part.

 

g)         Qualified Independent Certified Public Accountant

 

1)         The Director shall not recognize as a qualified independent certified public accountant, nor 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 non-audit services:

 

A)        Bookkeeping or other services related to the accounting records or financial statements of the insurer;

 

B)        Financial information systems design and implementation;

 

C)        Appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

 

D)        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:

 

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

 

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

 

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

 

E)        Internal audit outsourcing services;

 

F)         Management functions or human resources;

 

G)        Broker or dealer, investment adviser, or investment banking services;

 

H)        Legal services or expert services unrelated to the audit; or

 

I)         Any other services that the Director determines, are impermissible. In determining whether other services are impermissible, the Director shall consider utilizing the guidance provided in 17 CFR 210.2-01 in order to evaluate whether the provision of the services impairs the independence of the accountant.

 

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

 

h)         Insurers having direct written and assumed premiums of less than $100,000,000 in any calendar year may request an exemption from subsection (g). The insurer shall file with the Director a written statement discussing the reasons why the insurer should be exempt from these provisions. If the Director finds, upon review of this statement, that compliance with this Part would constitute a financial or organizational hardship upon the insurer, an exemption may be granted.

 

i)          A qualified independent certified public accountant who performs the audit may engage in other non-audit services, including tax services, that are not described in subsection (g) or that do not conflict with subsection (g)(2), only if the activity is approved in advance by the audit committee, in accordance with subsection (j).

 

j)          All auditing services and non-audit services provided to an insurer by the qualified independent certified public accountant of the insurer shall be preapproved by the audit committee. The preapproval requirement is waived with respect to non-audit 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 such non-audit services provided to the insurer constitutes not more than 5% of the total amount of fees paid by the insurer to its qualified independent certified public accountant during the fiscal year in which the non-audit services are provided, or

 

2)         The services were not recognized by the insurer at the time of the engagement to be non-audit 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 this approval 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). 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 Director shall not recognize an independent certified public 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 independent certified public 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 Director for relief from the requirement of this subsection on the basis of unusual circumstances.

 

m)        The insurer shall file, with its annual statement filing, the approval for relief from subsection (l) with the states that it is licensed in or doing business in and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

 

(Source:  Amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.80  Consolidated or Combined Audits

 

a)         An insurer may make written application to the Director for approval to file a consolidated or combined annual audited financial report in lieu of separate annual audited financial reports if the insurer is part of a group of insurance companies which 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 these cases, a columnar consolidating or combining worksheet shall be bound into and filed with the report as follows:

 

1)         Amounts shown on the consolidated or combined annual 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; and

 

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.

 

b)         The Director shall require any insurer to file separate annual audited financial reports although permission had previously been given to file on a consolidated or combined basis if the Director determines the reasons and/or circumstances given for approval of the consolidated audit, pursuant to subsection (a), no longer exist.

 

(Source:  Amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.90  Scope of Audit and Report of Independent Certified Public Accountant

 

a)         Financial statements furnished pursuant to Section 925.50 of this Part shall be examined by an independent certified public accountant.  The audit of the insurer's financial statements shall be conducted in accordance with generally accepted auditing standards.  In accordance with AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and AU Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, AICPA Professional Standards (as of June 1, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org) the independent certified public accountant should obtain an understanding of internal control sufficient to plan the audit. To the extent required by AU-C 315 and 330, for those insurers required to file a Management's Report of Internal Control over Financial Reporting pursuant to Section 925.160 of this Part, the independent certified public accountant (as that term is defined in AU-C Section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards AICPA Professional Standards (as of June 1, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org)). Statement on Auditing Standards (SAS) No. 102, Defining Professional Requirements in Statements on Auditing Standards should consider the most recently available report in planning and performing the audit of the statutory financial statements.  Consideration should also be given to other procedures illustrated in the Financial Condition Examiners' Handbook promulgated by the National Association of Insurance Commissioners as the independent certified public accountant deems necessary.

 

b)         Property and casualty insurers shall require the independent certified public accountant to subject the current Schedule P – Part 1 (excluding those amounts related to bulk and incurred but not reported reserves and claims counts) to the auditing procedures applied in the audit of the current statutory financial statements to determine whether Schedule P – Part 1 is fairly stated in all material respects in relation to the basic statutory financial statements taken as a whole.  It is expected that the auditing procedures applied by the independent certified public accountant to the claim loss and loss adjustment expense data from which Schedule P – Part 1 is prepared would be applied to activity that occurred in the current calendar year (e.g., tests of payments on claims for all accident years that were paid during the current calendar year).

 

c)         Life, accident, and health insurers shall require the independent certified public accountant to subject the information included in the Supplemental Schedule of Assets and Liabilities and exhibits of the Schedule to the auditing procedure applied in the audit of the current statutory financial statements to determine whether the information is fairly stated in all material respects in relation to the basic statutory financial statements taken as a whole and agrees to the insurer's annual statement filed with the Department.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.100  Notification of Adverse Financial Condition

 

a)         The insurer required to furnish the annual audited financial report shall require the independent certified public accountant to report, in writing within 5 business days, to the board of directors or its audit committee, any determination by the independent certified public accountant that the insurer has materially misstated its financial condition as reported to the Director as of the balance sheet date currently under audit, or of any other determination that the insurer does not meet the minimum capital and surplus requirements of the Code and the net worth requirements of the Health Maintenance Organization Act, Dental Service Plan Act, or the Limited Health Service Organization Act, as of that date.

 

b)         An insurer who has received a report pursuant to subsection (a) shall forward a copy of the report to the Director within 5 business days after receipt of the report and shall provide the independent certified public accountant making the report with evidence of the report being furnished to the Director.  If the independent certified public accountant fails to receive the evidence within the required 5 business day period, the independent certified public accountant shall furnish to the Director a copy of the accountant's report within the next 5 business days.

 

c)         No independent certified public accountant shall be liable in any manner to any person for any statement made in connection with subsections (a) and (b) if the statement is made in good faith in compliance with subsections (a) and (b).

 

d)         If the accountant, subsequent to the date of the annual audited financial report filed pursuant to this Part, becomes aware of facts that might have affected the accountant's report, the Director notes the obligation of the accountant to take action as prescribed in AU-C Section 560, Subsequent Events and Subsequently Discovered Facts, AICPA Professional Standards (as of June 1, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org).

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.110  Communication of Internal Control Related Matters Noted in an Audit

 

In addition to the annual audited financial report, each insurer shall furnish the Director with a written communication as to any unremediated material weaknesses in its internal control over financial reporting noted 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)         A description of any unremediated material weaknesses (as the term material weakness is defined by AU-C Section 265, Communicating Internal Control Related Matters Identified in an Audit, AICPA Professional Standards (as of June 1, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org), Statement on Auditing Standard 60, Communication of Internal Control Related Matters Noted in an Audit as of December 31 immediately preceding (so as to coincide with the audited financial report discussed in Section 925.40(a)) in the insurer's internal control over financial reporting noted by the accountant during the course of the audit of the financial statements. If no unremediated material weaknesses were noted, 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.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.115  Accountant's Letter of Qualifications (Renumbered)

 

(Source:  Section 925.115 renumbered to Section 925.120 at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.120  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 that:

 

a)         The accountant is independent with respect to the insurer and conforms to the standards of the profession as contained in the AICPA Code of Conduct and Rules of Professional Ethics and pronouncements (September 30, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org) or similar code.

 

b)         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 independent certified public accountant. Nothing within this Part shall be construed as prohibiting the accountant from utilizing such staff as deemed appropriate when that use is consistent with the standards prescribed by generally accepted auditing standards.

 

c)         The accountant understands the annual audited financial report and the accountant's opinion on that report will be filed in compliance with this Part and that the Director will be relying on this information in the monitoring and regulation of the financial position of insurers.

 

d)         The accountant consents to the requirements of Section 925.130 and consents and agrees to make available to the Director, the Director's designee or the Director's appointed agent the workpapers, as defined in Section 925.130, in hard copy or electronic format.

 

e)         A representation that the accountant is properly licensed by an appropriate state licensing authority and is a member in good standing of the AICPA.

 

f)         A representation that the accountant is in compliance with the requirements of Section 925.70.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.130  Definition, Availability and Maintenance of Independent Certified Public Accountant Workpapers

 

a)         Workpapers are the records kept by the independent certified public accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to the accountant's audit of the financial statements of an insurer.  Workpapers, accordingly, may include audit planning documentation, work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules or commentaries prepared or obtained by the independent certified public accountant in the course of its audit of the financial statements of an insurer and that support the accountant's opinion.

 

b)         Every insurer required to file an annual audited financial report pursuant to this Part shall require the accountant to make available for review by the Director'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 offices of the Director, or at any other reasonable place designated by the Director.  The insurer shall require that the accountant retain the audit workpapers and communications until the Director has filed a report on examination covering the period of the audit, but no longer than 7 years from the date of the audit report.

 

c)         In the conduct of the aforementioned periodic review by the Director's examiners, it shall be agreed that photocopies of pertinent audit workpapers may be made and retained by the Director's examiners.  The review by the Director's examiners shall be considered an investigation and all workpapers and communications obtained during the course of the investigation shall be afforded the same confidentiality as other examination workpapers generated by the Director's examiners, pursuant to Section 132.5(e) and (f) of the Code.

 

(Source:  Old Section 925.130 repealed at 19 Ill. Reg. 12229, effective August 14, 1995 and new Section 925.130 renumbered from Section 925.120 and amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.140  Requirements for Audit Committees

 

This Section shall not apply to foreign or alien insurers licensed in this State or an insurer that is a SOX Compliant Entity or a direct or indirect wholly-owned subsidiary of a SOX Compliant Entity.

 

a)         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 Part. Each accountant shall report directly to the audit committee.

 

b)         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 the responsibilities, if required by Section 925.141.

 

c)         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 both subsection (f) and the definition of audit committee found in Section 925.30.

 

d)         In order to be considered independent for purposes of this Section, a member of the audit committee may not, other than in his or her 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 any subsidiary of the entity. However, if law requires board participation by otherwise non-independent members, that law shall prevail and the members may participate in the audit committee and be designated as independent for audit committee purposes, unless they are officers or employees of the insurer or one of its affiliates.

 

e)         If a member of the audit committee ceases to be independent for reasons outside the member's reasonable control, that person, with notice by the responsible entity to the State, 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.

 

f)         To exercise the election of the controlling person to designate the audit committee for purposes of this Part, the ultimate controlling person shall provide written notice to the domiciliary commissioners 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 domiciliary commissioner of the affected insurer, which shall include a description of the basis for the change. The election shall remain in effect for perpetuity, until rescinded.

 

g)         Report to Audit Committee

 

1)         The audit committee shall require the accountant that performs for an insurer any audit required by this Part to timely report to the audit committee in accordance with the requirements of AU-C Section 260, The Auditor's Communication With Those Charged With Governance, AICPA Professional Standards (as of December 15, 2014 (no later amendments or editions), by American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York NY 10036-8775; website www.aicpa.org), including:

 

A)        All significant accounting policies and material permitted practices;

 

B)        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

 

C)        Other material written communications between the accountant and the management of the insurer, such as any management letter or schedule of unadjusted differences.

 

2)         If an insurer is a member of an insurance holding company system, the reports required by subsection (g)(1) 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.

 

h)         The proportion of independent audit committee members shall meet or exceed the following criteria:

 

Prior Calendar Year Direct Written and Assumed Premiums
$0 - $300,000,000	Over $300,000,000 -$500,000,000	Over $500,000,000
No minimum requirements. See also Note A and B.	Majority (50% or more) of members shall be independent. See also Note A and B.	Supermajority of members (75% or more) shall be independent. See also Note A.

 

Note A:  The Director 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 risk based capital (RBC) action level event, as defined in Section 35A-15, 20, 25 or 30 of the Code, 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 $500,000,000 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 non-affiliates for the reporting entities.

 

i)          An insurer with direct written and assumed premium, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, less than $500,000,000 may make application to the Director for a waiver from the requirements of this Section based upon hardship. The insurer shall file, with its annual statement filing, the approval for relief from this Section with the states that it is licensed in or doing business in and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

 

(Source:  Amended at 43 Ill. Reg. 14121, effective January 1, 2020)

 

Section 925.141  Internal Audit Function Requirements

 

a)         Exemption.  An insurer is exempt from the requirements of this Section if the insurer:

 

1)         has annual direct written and unaffiliated assumed premiums, including international direct and assumed premiums, but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $500,000,000; or

 

2)         is a member of a group of insurers that has annual direct written and unaffiliated assumed premiums, including international direct and assumed premiums, but excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of less than $1,000,000,000.

 

b)         Function.  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)         Independence.  In order to ensure that internal auditors remain objective, the internal audit function must be organizationally independent. Specifically, the internal audit function shall 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)         Reporting.  The head of the internal audit function shall report to the audit committee regularly, but no less 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)         Additional Requirements.  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.

 

(Source:  Added at 43 Ill. Reg. 14121, effective January 1, 2020)

 

Section 925.145  Penalties (Renumbered)

 

(Source:  Section 925.145 renumbered to Section 925.190 at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.150  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 Part; 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 Part.

 

b)         No officer or director of an insurer, or any other person acting under the direction of that person, 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 Part 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 Director, 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.

 

(Source:  Old Section 925.150 renumbered to Section 925.200 and new Section 925.150 added at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.160  Management's Report of Internal Control over Financial Reporting

 

a)         Every insurer required to file an audited financial report pursuant to this Part that has annual direct written and assumed premiums, excluding premiums reinsured with the Federal Crop Insurance Corporation and Federal Flood Program, of $500,000,000 or more shall prepare a report of the insurer's or group of insurers' internal control over financial reporting, as these terms are defined in Section 925.30. The report shall be filed with the Director along with the Communication of Internal Control Related Matters Noted in an Audit described under Section 925.110. Management's Report of Internal Control over Financial Reporting shall be as of December 31 immediately preceding.

 

b)         Notwithstanding the premium threshold in subsection (a), the Director may require an insurer to file a 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 as referenced in Section 186.1 of the Code.

 

c)         An insurer or a group of insurers that is directly subject to Section 404, part of a holding company system whose parent is directly subject to Section 404, not directly subject to Section 404 but is a SOX Compliant Entity, or 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 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 insurers' audited statutory financial statements (those items included in Section 925.50(b)(2) through (8)) 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 Section 925.50(b)(2) through (8)) 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 insurers' 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 either:

 

1)         a Section 925.160 Report; or

 

2)         the Section 404 Report and a Section 925.160 Report 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 December 31 immediately preceding.  Management is not permitted to 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/title).

 

e)         Management shall document and make available upon financial condition examination the basis upon which its assertions, required in subsection (d), 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, as such, may include assembly of or reference to existing documentation.

 

2)         Management's Report of Internal Control over Financial Reporting, required by subsection (a), and any documentation provided in support of that report during the course of a financial condition examination, will be kept confidential by the Department.

 

(Source:  Amended at 39 Ill. Reg. 6485, effective April 24, 2015)

 

Section 925.170  Exemptions and Effective Dates

 

a)         Upon written application of any domestic insurer, the Director may grant an exemption from compliance with any and all provisions of this Part if the Director finds, upon review of the application, that compliance with this Part would constitute a 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. Within 10 days after a denial of an insurer's written request for an exemption from this Part, the insurer may request in writing a hearing on its application for an exemption.  The hearing shall be held in accordance with the rules of the Department pertaining to administrative hearing procedures (50 Ill. Adm. Code 2402).

 

b)         Domestic insurers retaining a certified public accountant who qualifies as independent shall comply with the January 1, 2010 revisions for the year ending December 31, 2010 and each year thereafter, unless the Director permits otherwise.

 

c)         Domestic insurers not retaining a certified public accountant on the effective date of this regulation who qualifies as independent shall meet the following schedule for compliance unless the Director permits otherwise.

 

1)         As of December 31, 2010, file with the Director an audited financial report.

 

2)         For the year ending December 31, 2010 and each year thereafter, these insurers shall file with the Director all reports and communication required by this Part.

 

d)         Foreign insurers shall comply with this regulation for the year ending December 31, 2010, and each year thereafter, unless the Director permits otherwise.

 

e)         The requirements of Section 925.70(d) shall be in effect for audits of the year beginning January 1, 2010 and thereafter.

 

f)         The requirements of Section 925.140 are to be in effect 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 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 1 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.

 

g)         The requirements of this Section and Sections 925.20, 925.30, 925.40, 925.50, 925.60, 925.70, 925.90, 925.100, 925.110, 925.120, 925.130, 925.150, 925.160 and 925.180 are effective beginning with the reporting period ending December 31, 2010 and each year thereafter. An insurer or group of insurers that is not required to file a report because the total written premium is below the threshold and subsequently becomes subject to the reporting requirements shall have 2 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 2 calendar years following the date of acquisition or combination to comply with the reporting requirements.

 

h)         The requirements of Section 925.141 are effective January 1, 2020.  If an insurer or group of insurers that is exempt from the Section 925.141 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 Part.

 

(Source:  Amended at 43 Ill. Reg. 14121, effective January 1, 2020)

 

Section 925.180  Canadian and British Companies 

 

a)         In the case of Canadian and British insurers, the annual audited financial report shall be defined as the annual statement of total business on the form filed by those companies with their supervision authority, duly audited by an independent chartered accountant.

 

b)         For these insurers, the letter required in Section 925.60 shall state that the accountant is aware of the requirements relating to the annual audited financial report filed with the Director pursuant to Section 925.40 and shall affirm that the opinion expressed is in conformity with those requirements.

 

(Source:  Added at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.190  Penalties

 

Failure of a company to meet any provisions of this Part shall subject the company to penalty provisions of Sections 139 and 403A of the Code, or other such action as the Director may deem necessary.

 

(Source:  Section 925.190 renumbered from Section 925.145 and amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.200  Severability Provision

 

If any Section or portion of a Section of this Part or the applicability of that Section or portion of a Section to any person or circumstance is held invalid by a court, the remainder of the Part or the applicability of the provision to other persons or circumstances shall not be affected by that determination of invalidity.

 

(Source:  Section 925.200 renumbered from Section 925.150 and amended at 33 Ill. Reg. 6974, effective May 11, 2009)

 

Section 925.EXHIBIT A   CPA Letter of Representation

 

Upon completion of the review by the Department's examiners, the accountant shall submit a CPA Letter of Representation in this format.

 

CPA LETTER OF REPRESENTATION

 

Date:  ______________

 

Attention:        Illinois Department of Insurance

Financial Examination Section

Attn:  (Examiner-in-Charge)

122 South Michigan Avenue, 19^th FloorChicago, Illinois 60603

(312) 814-2423

 

Re:  Examination of          (Insurance Company Name)

As of December 31, 20__

 

Dear (Examiner-in-Charge)

 

(CPA Firm) confirms the following information related to your review of our 20__ audit workpapers for (Insurance Company Name).

 

(CPA Firm) have made available for review to the Examiners of the Department of Insurance all workpapers prepared during the course of the audit of the financial position of the insurer, and the results of its operations, cash flows and changes in capital and surplus of (Insurance Company Name) for the period ending December 31, 20__.  Workpapers include, but are not limited to, all electronic and paper schedules, analyses, reconciliations, memorandums (including emails), permanent files, budgets, progress reports, engagement letters, audit programs, planning documents, internal audit reports, letters of representation, legal liability correspondence, letters of confirmation, summaries of audit differences, and other supporting audit evidence.

 

The photocopies of workpapers that were requested by the Examiners of the Department are true and complete copies of those workpapers.

 

Sincerely,

 

 

(CPA Partner)

(CPA Firm)

 

(Source:  Amended at 33 Ill. Reg. 6974, effective May 11, 2009)