1. (a) This section shall not apply to:

   1. (1) Foreign or alien insurers licensed in this state; or
   2. (2) An insurer that is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity.

2. (b)

   1. (1) 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 rule.
   2. (2) Each accountant shall report directly to the audit committee.
3. (c) 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 their responsibilities if required by 23 CAR § 12-114.
4. (d) 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 23 CAR § 12-113(g) and § 12-102(3).

5. (e)

   1. (1) 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 thereof.
   2. (2) However, if the law requires board participation by otherwise nonindependent members, that law shall prevail and such members may participate in the audit committee and be designated as independent for audit committee purposes, unless they are an officer or employee of the insurer or one (1) of its affiliates.

6. (f)

   1. (1) 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 Insurance Commissioner, may remain an audit committee member of the responsible entity until the earlier of:

      1. (A) The next annual meeting of the responsible entity; or
      2. (B) One (1) year from the occurrence of the event that caused the member to no longer be independent.
   2. (2) The responsible entity is the entity whose board of directors established the audit committee.

7. (g)

   1. (1) To exercise the election of the controlling person to designate the audit committee for purposes of this rule, the ultimate controlling person shall provide written notice to the commissioners of the domiciliary states of the affected insurers.
   2. (2) Notification shall be timely made prior to the issuance of the statutory audit report and include a description of the basis for the election.

   3. (3)

      1. (A) The election can be changed through notice to the Insurance Commissioner by the insurer, which shall include a description of the basis for the change.
      2. (B) The election shall remain in effect until rescinded.

8. (h)

   1. (1) The audit committee shall require the accountant that performs an audit required by this rule to timely report to the audit committee in accordance with the requirements of SAS 61, Communication with Audit Committees, or its replacement, including:

      1. (A) All significant accounting policies and material permitted practices;
      2. (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
      3. (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. (2) If an insurer is a member of an insurance holding company system, the reports required by 23 CAR § 12-106(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.

9. (i) The proportion of independent audit committee members shall meet or exceed the following criteria based on prior calendar year direct written and assumed premiums, which shall be the combined total of direct premiums and assumed premiums from nonaffiliates for the reporting entities:

   1. (1) An insurer with prior calendar year direct written and assumed premiums of up to three hundred million dollars ($300,000,000) is not subject to minimum requirements;
   2. (2) A majority, fifty percent (50%) or more, of the members shall be independent with regard to an insurer with prior calendar year direct written and assumed premiums of between three hundred million dollars ($300,000,000) and five hundred million dollars ($500,000,000);
   3. (3) All insurers with less than five hundred million dollars ($500,000,000) in prior year direct written and assumed premiums are encouraged to structure their audit committees with at least a supermajority, seventy-five percent (75%) or more, of independent audit committee members; and
   4. (4) A supermajority of the members, seventy-five percent (75%) or more, shall be independent with regard to an insurer with prior calendar year direct written and assumed premiums in excess of five hundred million dollars ($500,000,000).

10. (j) The commissioner 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:

    1. (1) Is in a RBC action level event;
    2. (2) Meets one (1) or more of the standards of an insurer deemed to be in hazardous financial condition; or
    3. (3) Otherwise exhibits qualities of a troubled insurer.

11. (k)

    1. (1) Excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program, an insurer with direct written and assumed premium of less than five hundred million dollars ($500,000,000) may make application to the commissioner for a waiver from the requirements of this section based upon hardship.
    2. (2) If the waiver is approved, the insurer shall file, with its annual statement filing, the approval for relief from this section with the states in which it is licensed or doing business and the NAIC.
    3. (3) If the nondomestic states accept electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

Codification Notes: "RBC" means risk-based capital. "NAIC" means National Association of Insurance Commissioners.