The Office of General Counsel issued the following opinion on March 20, 2003, representing the position of the New York State Insurance Department.
Re: Independent Financial Examination Under Regulation 120
Questions Presented:
1) In regard to the independent financial audit required by N.Y. Comp. Codes R. & Regs. tit. 11, Part 33 (Regulation 120), § 33.6(a), must it be conducted by a certified public accountant (CPA)?
2) Must the audit be certified?
3) What information must the audit contain?
4) Would an insurers annual statement qualify to satisfy the requirement?
Conclusion:
1) The regulation does not specifically require that the audit has to be conducted by a CPA. An insurer that does not use an independent CPA should first find out from the Superintendent if the alternative auditor is acceptable.
2) The examination should be certified or otherwise attested to.
3) At a minimum, the independent audit should contain a balance sheet and income statement (restated if necessary) stating that the independent auditor used generally accepted accounting principles in conducting its review.
4) An insurers annual statement would generally not qualify to satisfy the requirements unless separate independent audits for each managing general agent (MGA) were included as part of the statement. However, an independent audited annual financial statement or report of the MGA would qualify.
Facts:
No specific facts were included. The questions regarding the interpretation of Regulation 120 were general in nature.
Analysis:
Section 33.6(a) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 33 (Regulation 120) states:
(a) The insurer shall have on file an independent financial audit, in a form acceptable to the superintendent, of each MGA [managing general agent] with which the insurer has done business.
This subdivision is a new provision added as part of the First Amendment to Regulation 120 to implement minimum provisions of the National Association of Insurance Commissioners ("NAIC") model law for MGAs, which has been adopted by several other states. Specifically, § 33.6(a) is essentially Section 5(A) of the model. The model law does not specifically address the questions posed. 1
The regulation does not specifically require that the independent audit be done by a CPA. While an audit from an independent CPA would be acceptable, other alternatives may also be acceptable. An insurer that does not use a CPA should first find out from the Superintendent if its alternative is acceptable.
The examination should be certified or otherwise attested to.
At a minimum, the independent audit should contain a balance sheet and income statement (restated if necessary) stating that the independent auditor used generally accepted accounting principles in conducting its review.
An annual statement would generally not qualify to satisfy the requirements unless the annual statement included separate independent audits for each MGA included as part of the statement. However, an independent audited annual financial statement or report of the MGA would qualify.
For further information you may contact Principal Attorney Paul Zuckerman at the New York City Office.
1 The NAIC model uses use the word "examination" instead of "audit", but the Department believes that the word "audit" is clearer. The only other difference in this provision between the NAIC model and the New York version is the substitution of the word "superintendent" for "commissioner".