Chapter
240
2007 -- S 368 SUBSTITUTE A AS AMENDED
Enacted 07/03/07
A N A C T
RELATING
TO INSURANCE -- DOMESTIC INSURANCE CARRIERS
Introduced
By: Senator David E. Bates
Date
Introduced: February 13, 2007
It is enacted by the General Assembly as
follows:
SECTION 1. Chapter
27-1 of the General Laws entitled "Domestic Insurance
Companies" is hereby amended by adding
thereto the following section:
27-1-2.1.
Corporate governance standards. – (a) The importance of good
corporate
governance is crucial in promoting integrity in
an insurance company's business practices and in
maintaining public confidence and policyholder
trust. The size and ownership structure of a
company often determines the corporate
governance standards employed by the company. All
Rhode Island domestic insurers, regardless of
their size or ownership structure, shall establish the
following minimum corporate governance
standards:
(1) The board of
directors must be comprised of a minimum of five (5) and a maximum
of twenty-one (21) members.
(2) The board
must meet at least two (2) times per year, however, four (4) times per year
is encouraged.
(3) The board
must establish a written attendance policy.
(4) The board
shall have authority to meet in executive session.
(5) There must
be an audit committee established by and amongst the board of directors
for the purpose of overseeing the accounting and
financial reporting processes of the insurer and
audits of the financial statement of the
insurer. If no such committee exists, the entire board of
directors shall act as the audit committee.
(6) The board
must review the minutes of the audit committee.
(7) The audit
committee must meet at least two (2) times per year.
(8) There must
be a written audit committee charter.
(9) At least
one member of the audit committee must have knowledge of statutory
accounting principles or generally accepted
accounting principles.
(10) The
internal audit function should have a direct reporting relationship to the
audit
committee for critical matters such as the audit
plan, resources and budgets.
(11) The audit
committee must approve the selection of the independent auditor that
performs any audit required by the Rhode Island
regulation governing annual audited financial
reports.
(12) The audit
committee shall require the independent accountant that performs any
audit required by Rhode Island regulation governing
annual audited financial reports, to timely
report to the audit committee in accordance with
the requirements of Statement of Auditing
Standards No. 61, communications with audit
committee, or its replacement, including:
(i) All
significant accounting policies and material permitted practices;
(ii) 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
(iii) Other
material written communications between the accountant and the management
of the insurer, such as any management letter or
schedule of unadjusted differences.
(13) There must
be a written code of ethics covering directors and officers that includes
the insurer's conflict of interest policy.
(14) There
should be a written policy encouraging employees to come forward with
observations of improprieties or other
malfeasance.
(15) On or
after the effective date of this act no domestic insurer or any affiliate
member
of its holding company system (as defined in
section 27-35-1 et seq.) may extend or maintain
credit, arrange for the extension of credit, or
renew an extension of credit in the form of a
personal loan to or for any director or officer
of a domestic insurer. The terms and purpose of any
such existing extensions of credit made to any
director or officer of a domestic insurer must be
disclosed to the director. For purposes of this
subsection, benefits that are offered to directors or
officers as policyholders of a domestic insurer,
or benefits that are offered to the general public in
the insurer's normal course of business, shall
not be considered a violation of this subsection.
(b) In addition
to the standards enumerated in subsection (a) of this section, the following
corporate governance standards must be employed
by all Rhode Island domestic mutual insurance
companies and all domestic insurance companies
writing more than one hundred million dollars
($100,000,000) in premium, in any jurisdiction,
on a direct and/or assumed basis, as determined
at the end of the previous calendar year:
(1) The board
must have an independent majority of members.
(2) The audit
committee must have an independent majority of members.
(3) The audit
committee must approve all related party transactions, which include,
transaction between the company and its
affiliates and those between the company and its officers
and directors. The company may establish
materiality thresholds, however, they must be clearly
stated in its audit committee charter as
required by subdivision (a)(8), but in no event shall the
materiality thresholds exceed those established
in chapter 35 of title 27.
(c) For
purposes of this section, an independent board or audit committee member is
defined as an individual: (1) who is not being
compensated by the domestic insurer or any
company within its holding company system
("organization"), other than any reasonable
compensation and benefits for services as a
director, and has not been compensated within the
past twelve (12) months including full-time and part-time
compensation as an employee or an
independent contractor, except for reasonable
compensation as a director; (2) whose own
compensation is not determined by individuals
who are compensated by the organization, except
for reasonable compensation paid to the
director; (3) who does not receive material financial
benefits; (i.e. service contracts, grants or
other payments) from the organization; or (4) who is not
related to (as a spouse, sibling, parent, or child)
or the domestic partner of an individual
compensated by or who receives material
financial benefits from the organization. Policyholders
of a domestic insurer may be considered
independent providing they meet the requirements as
defined in this subsection.
(d) Any Rhode
Island domestic insurer that does not currently employ one or more of the
standards enumerated in subsections (a) and (b)
of this section, must submit a plan of corrective
action to the director for his or her approval.
The director, at his or her discretion, may waive
any of the requirements in this section for a
period not exceeding thirty-six (36) months. The
director's refusal to approve a plan of
corrective action after reviewing such plan of corrective
action for a period of sixty (60) days shall,
constitute a final order for purposes of the Rhode
Island administrative procedures act allowing
the party to appeal to the superior court.
(e) Nothing
contained in the company's by-laws shall conflict with the corporate
governance standards set forth in this act. Any
amendments to a domestic insurance company's
by-laws shall be submitted in writing to the
department.
(f) A domestic
insurer that is a member of an insurance holding company system as
defined in chapter 35 of title 27, is exempt
from this section if it can demonstrate that it is
controlled by 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; (i) the preapproval
requirements of section 201 (Section 10A(i) of
the Securities Exchange Act of 1934); (ii) the
audit committee independence requirements of
section 301 (Section 10A(m)(3) of the Securities
Exchange Act of 1934); and (iii) the internal
control over financial reporting requirements of
Section 404 (Item 308 of SEC regulation S-K) –
("SOX Compliant Entity"). If the department
makes a determination, as a result of its
statutory examination or financial analysis, that the
domestic insurer is not controlled by a SOX
Compliant entity or that the insurer's interests and
affairs are not adequately considered and
evaluated by the SOX Compliant Entity, the domestic
insurer must take steps to comply with this act.
(g) A Rhode
Island domestic insurer that is a wholly-owned subsidiary of another Rhode
Island domestic insurer that is compliant with
the provisions of subsection A, and if applicable
the requirements of subsection B, shall be
exempt from compliance with any other requirements
of this act.
(h) The
requirements of this section, 27-1-2.1, shall not apply to entities regulated
pursuant to chapters 19, 20, 20.1, 20.2, 20.3
and 41 of title 27 and shall not supercede or replace
any specific statutory corporate governance
standards otherwise applicable to domestic insurance
companies.
SECTION 2. This
act shall take effect on July 1, 2008.
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LC01449/SUB A
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