CHAPTER 401. AUDITS AND EXAMINATIONS

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INSURANCE CODE

TITLE 4. REGULATION OF SOLVENCY

SUBTITLE A. GENERAL PROVISIONS

CHAPTER 401. AUDITS AND EXAMINATIONS

SUBCHAPTER A. INDEPENDENT AUDIT OF FINANCIAL STATEMENTS

Sec. 401.001. DEFINITIONS. In this subchapter:

(1) "Accountant" means an independent certified public

accountant or accounting firm that meets the requirements of

Section 401.011.

(2) "Affiliate" has the meaning assigned by Section 823.003.

(3) "Health maintenance organization" means a health maintenance

organization authorized to engage in business in this state.

(4) "Insurer" means an insurer authorized to engage in business

in this state, including:

(A) a life, health, or accident insurance company;

(B) a fire and marine insurance company;

(D) a title insurance company;

(E) a fraternal benefit society;

(F) a mutual life insurance company;

(G) a local mutual aid association;

(H) a statewide mutual assessment company;

(I) a mutual insurance company other than a mutual life

insurance company;

(J) a farm mutual insurance company;

(K) a county mutual insurance company;

(L) a Lloyd's plan;

(M) a reciprocal or interinsurance exchange;

(N) a group hospital service corporation;

(O) a stipulated premium company; and

(P) a nonprofit legal services corporation.

(5) "Subsidiary" has the meaning assigned by Section 823.003.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.002. PURPOSE OF SUBCHAPTER. The purpose of this

subchapter is to require an annual audit by an independent

certified public accountant of the financial statements reporting

the financial condition and the results of operations of each

insurer or health maintenance organization.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.003. EFFECT OF SUBCHAPTER ON AUTHORITY TO EXAMINE.

This subchapter does not limit the commissioner's authority to

order or the department's authority to conduct an examination of

an insurer or health maintenance organization under this code or

the commissioner's rules.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.004. FILING AND EXTENSIONS FOR FILING OF AUDITED

FINANCIAL REPORT. (a) Unless exempt under Section 401.006,

401.007, or 401.008 and except as otherwise provided by Sections

401.005 and 401.016, an insurer or health maintenance

organization shall:

(1) have an annual audit performed by an accountant; and

(2) file with the commissioner on or before June 30 an audited

financial report for the preceding calendar year.

(b) The commissioner may require an insurer or health

maintenance organization to file an audited financial report on a

date that precedes June 30. The commissioner must notify the

insurer or health maintenance organization of the filing date not

later than the 90th day before that date.

extension of the filing date by submitting the request in writing

before the 10th day preceding the filing date. The request must

include sufficient detail for the commissioner to make an

informed decision on the requested extension. The commissioner

may extend the filing date for one or more 30-day periods if the

commissioner determines that there is good cause for the

extension based on a showing by the insurer or health maintenance

organization and the insurer's or health maintenance

organization's accountant of the reasons for requesting the

extension.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.005. ALTERNATIVE FILING FOR CANADIAN OR BRITISH

INSURERS OR HEALTH MAINTENANCE ORGANIZATIONS. (a) Instead of

the audited financial report required by Section 401.004, an

insurer or health maintenance organization domiciled in Canada or

the United Kingdom may file the insurer's or health maintenance

organization's annual statement of total business on the form

filed by the insurer or health maintenance organization with the

appropriate regulatory authority in the country of domicile. The

statement must be audited by an independent accountant chartered

in the country of domicile.

(b) The chartered accountant must be registered with the

commissioner under Section 401.014(a). The registration must be

accompanied by a statement, signed by the accountant, indicating

that the accountant is aware of the requirements of this

subchapter and affirming that the accountant will express the

accountant's opinion in conformity with those requirements.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.006. EXEMPTION FOR CERTAIN SMALL INSURERS AND HEALTH

MAINTENANCE ORGANIZATIONS. (a) An insurer or health maintenance

organization that has less than $1 million in direct premiums

written in this state during a calendar year is exempt from the

requirement to file an audited financial report if the insurer or

health maintenance organization submits an affidavit, made under

oath by one of the insurer's or health maintenance organization's

officers, that specifies the amount of direct premiums written in

this state during that period.

(b) Notwithstanding Subsection (a), the commissioner may require

an insurer or health maintenance organization, other than a

fraternal benefit society that does not have any direct premiums

written in this state for accident and health insurance during a

calendar year, to comply with this subchapter if the commissioner

finds that the insurer's or health maintenance organization's

compliance is necessary for the commissioner to fulfill the

commissioner's statutory responsibilities.

assumed premiums of at least $1 million under reinsurance

agreements is not exempt under Subsection (a).

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.007. EXEMPTION FOR CERTAIN FOREIGN OR ALIEN INSURERS OR

HEALTH MAINTENANCE ORGANIZATIONS. (a) A foreign or alien

insurer or health maintenance organization that files an audited

financial report in another state in accordance with that state's

requirements for audited financial reports may be exempt from

filing a report under this subchapter if the commissioner finds

that the other state's requirements are substantially similar to

the requirements prescribed by this subchapter.

(b) An insurer or health maintenance organization exempt under

this section shall file with the commissioner a copy of:

(1) the audited financial report, the report on significant

deficiencies in internal controls, and the accountant's letter of

qualifications filed with the other state; and

(2) any notification of adverse financial conditions report

filed with the other state.

filed in accordance with the filing dates prescribed by Sections

401.004 and 401.019. The report required by Subsection (b)(2)

must be filed in accordance with the filing date prescribed by

Section 401.017.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.008. HARDSHIP EXEMPTION. (a) An insurer or health

maintenance organization that is not eligible for an exemption

under Section 401.006 or 401.007 may apply to the commissioner

for a hardship exemption.

(b) Subject to Subsection (c), the commissioner may grant an

exemption under this section if the commissioner finds, after

reviewing the application, that compliance with this subchapter

would constitute a severe financial or organizational hardship

for the insurer or health maintenance organization. The

commissioner may grant the exemption at any time for one or more

specified periods.

section if:

(1) the exemption would diminish the department's ability to

monitor the financial condition of the insurer or health

maintenance organization; or

(2) the insurer or health maintenance organization:

(A) during the five-year period preceding the date the

application for the exemption is made:

(i) has been placed under supervision, conservatorship, or

receivership;

(ii) has undergone a change in control, as described by Section

823.005; or

(iii) has been subject to a significant number of complaints, as

determined by the commissioner;

(B) has been identified by the department as troubled;

department; or

(D) is not complying with the law or with a rule adopted by the

commissioner.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.009. CONTENTS OF AUDITED FINANCIAL REPORT. (a) An

audited financial report required under Section 401.004 must:

(1) describe the financial condition of the insurer or health

maintenance organization as of the end of the most recent

calendar year and the results of the insurer's or health

maintenance organization's operations, changes in financial

position, and changes in capital and surplus for that year;

(2) conform to the statutory accounting practices prescribed or

otherwise permitted by the insurance regulator in the insurer's

or health maintenance organization's state of domicile; and

(3) include:

(A) the report of an accountant;

(B) a balance sheet that reports admitted assets, liabilities,

capital, and surplus;

(D) a statement of cash flows;

(E) a statement of changes in capital and surplus;

(F) any notes to financial statements;

(G) supplementary data and information, including any additional

data or information required by the commissioner; and

(H) information required by the department to conduct the

insurer's or health maintenance organization's examination under

Subchapter B.

(b) The notes to financial statements required by Subsection

(a)(3)(F) must include:

(1) a reconciliation of any differences between the audited

statutory financial statements and the annual statements filed

under this code, with a written description of the nature of

those differences;

(2) any notes required by the appropriate National Association

of Insurance Commissioners annual statement instructions or by

generally accepted accounting principles; and

(3) a summary of the ownership of the insurer or health

maintenance organization and that entity's relationship to any

affiliated company.

Section 401.004 to file an audited financial report that does not

retain an independent certified public accountant to perform an

annual audit for the previous year may not be required to include

in the report audited statements of operations, cash flows, or

changes in capital and surplus for the first year. The insurer

or health maintenance organization must include those statements

in the first-year report and label the statements as unaudited.

The insurer or health maintenance organization must include in

the first-year report all other reports described by Section

401.004.

(d) The commissioner shall adopt rules governing the information

to be included in the audited financial report under Subsection

(a)(3)(H).

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.010. REQUIREMENTS FOR FINANCIAL STATEMENTS IN AUDITED

FINANCIAL REPORT. (a) An accountant must audit the financial

reports provided by an insurer or health maintenance organization

for purposes of an audit under this subchapter. The accountant

who audits the reports must conduct the audit in accordance with

generally accepted auditing standards or with standards adopted

by the Public Company Accounting Oversight Board, as applicable,

and must consider the standards specified in the Financial

Condition Examiner's Handbook adopted by the National Association

of Insurance Commissioners or other analogous nationally

recognized standards adopted by commissioner rule.

(b) The financial statements included in the audited financial

report must be prepared in a form and using language and

groupings substantially the same as those of the relevant

sections of the insurer's or health maintenance organization's

annual statement filed with the commissioner. Beginning in the

second year in which an insurer or health maintenance

organization is required to file an audited financial report, the

financial statements must also be comparative, presenting the

amounts as of December 31 of the reported year and the amounts as

of December 31 of the preceding year.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

730, Sec. 3B.001(a), eff. September 1, 2007.

Acts 2007, 80th Leg., R.S., Ch.

921, Sec. 9.001(a), eff. September 1, 2007.

Sec. 401.011. QUALIFICATIONS OF ACCOUNTANT; ACCEPTANCE OF

AUDITED FINANCIAL REPORT. (a) Except as provided by Subsections

report from an independent certified public accountant or

accounting firm that:

(1) is a member in good standing of the American Institute of

Certified Public Accountants and is in good standing with all

states in which the accountant or firm is licensed to practice,

as applicable; and

(2) conforms to the American Institute of Certified Public

Accountants Code of Professional Conduct and to the rules of

professional conduct and other rules of the Texas State Board of

Public Accountancy or a similar code.

(b) If the insurer or health maintenance organization is

domiciled in Canada, the commissioner shall accept an audited

financial report from an accountant chartered in Canada. If the

insurer or health maintenance organization is domiciled in Great

Britain, the commissioner shall accept an audited financial

report from an accountant chartered in Great Britain.

for an insurer or health maintenance organization for seven

consecutive years may not, during the two-year period after that

seventh year, render a report for the insurer or health

maintenance organization or for a subsidiary or affiliate of the

insurer or health maintenance organization that is engaged in the

business of insurance. The commissioner may determine that the

limitation provided by this subsection does not apply to an

accountant for a particular insurer or health maintenance

organization if the insurer or health maintenance organization

demonstrates to the satisfaction of the commissioner that the

limitation's application to the insurer or health maintenance

organization would be unfair because of unusual circumstances.

In making the determination, the commissioner may consider:

(1) the number of partners or individuals the accountant

employs, the expertise of the partners or individuals the

accountant employs, or the number of the accountant's insurance

clients;

(2) the premium volume of the insurer or health maintenance

organization; and

(3) the number of jurisdictions in which the insurer or health

maintenance organization engages in business.

(d) The commissioner may not accept an audited financial report

prepared wholly or partly by an individual or firm who the

commissioner finds:

(1) has been convicted of fraud, bribery, a violation of the

Racketeer Influenced and Corrupt Organizations Act (18 U.S.C.

Section 1961 et seq.), or a state or federal criminal offense

involving dishonest conduct;

(2) has violated the insurance laws of this state with respect

to a report filed under this subchapter;

(3) has demonstrated a pattern or practice of failing to detect

or disclose material information in reports filed under this

subchapter; or

(4) has directly or indirectly entered into an agreement of

indemnity or release of liability regarding an audit of an

insurer.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

730, Sec. 3B.002(a), eff. September 1, 2007.

Acts 2007, 80th Leg., R.S., Ch.

921, Sec. 9.002(a), eff. September 1, 2007.

Sec. 401.012. HEARING ON ACCOUNTANT QUALIFICATIONS; REPLACEMENT

OF ACCOUNTANT. The commissioner may hold a hearing to determine

if an accountant is qualified and independent. If, after

considering the evidence presented, the commissioner determines

that an accountant is not qualified and independent for purposes

of expressing an opinion on the financial statements in an

audited financial report filed under this subchapter, the

commissioner shall issue an order directing the insurer or health

maintenance organization to replace the accountant with a

qualified and independent accountant.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.013. ACCOUNTANT'S LETTER OF QUALIFICATIONS. (a) The

audited financial report required under Section 401.004 must be

accompanied by a letter provided by the accountant who performed

the audit stating:

(1) the accountant's general background and experience;

(2) the experience of each individual assigned to prepare the

audit in auditing insurers or health maintenance organizations

and whether the individual is an independent certified public

accountant; and

(3) that the accountant:

(A) is properly licensed by an appropriate state licensing

authority, is a member in good standing of the American Institute

of Certified Public Accountants, and is otherwise qualified under

Section 401.011;

(B) is independent from the insurer or health maintenance

organization and conforms to the standards of the profession

contained in the American Institute of Certified Public

Accountants Code of Professional Conduct, the statements of that

institute, and the rules of professional conduct adopted by the

Texas State Board of Public Accountancy, or a similar code;

(i) the audited financial report and the accountant's opinion on

the report will be filed in compliance with this subchapter; and

(ii) the commissioner will rely on the report and opinion in

monitoring and regulating the insurer's or health maintenance

organization's financial position; and

(D) consents to the requirements of Section 401.020 and agrees

to make the accountant's work papers available for review by the

department or the department's designee.

(b) Subsection (a)(2) does not prohibit an accountant from using

any staff the accountant considers appropriate if use of that

staff is consistent with generally accepted auditing standards.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.014. REGISTRATION OF ACCOUNTANT. (a) Not later than

December 31 of the calendar year to be covered by an audited

financial report required by this subchapter, an insurer or

health maintenance organization must register in writing with the

commissioner the name and address of the accountant retained to

prepare the report.

(b) The insurer or health maintenance organization must include

with the registration a statement signed by the accountant:

(1) indicating that the accountant is aware of the requirements

of this subchapter and of the rules of the insurance department

of the insurer's or health maintenance organization's state of

domicile that relate to accounting and financial matters; and

(2) affirming that the accountant will express the accountant's

opinion on the financial statements in terms of the statements'

conformity to the statutory accounting practices prescribed or

otherwise permitted by the insurance department described by

Subdivision (1) and specifying any exceptions the accountant

believes are appropriate.

prepared by an accountant who is not registered under this

section.

(d) The commissioner may not accept the registration of a person

who does not qualify under Section 401.011 or does not comply

with the other requirements of this subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.015. RESIGNATION OR DISMISSAL OF ACCOUNTANT; STATEMENT

CONCERNING DISAGREEMENTS. (a) If an accountant who signed an

audited financial report for an insurer or health maintenance

organization resigns as accountant for the insurer or health

maintenance organization or is dismissed by the insurer or health

maintenance organization after the report is filed, the insurer

or health maintenance organization shall notify the department

not later than the fifth business day after the date of the

resignation or dismissal.

(b) Not later than the 10th business day after the date the

insurer or health maintenance organization notifies the

department under Subsection (a), the insurer or health

maintenance organization shall file a written statement with the

commissioner advising the commissioner of any disagreements

between the accountant and the insurer's or health maintenance

organization's personnel responsible for presenting the insurer's

or health maintenance organization's financial statements that:

(1) relate to accounting principles or practices, financial

statement disclosure, or auditing scope or procedures;

(2) occurred during the 24 months preceding the date of the

resignation or dismissal; and

(3) would have caused the accountant to note the disagreement in

connection with the audited financial report if the disagreement

were not resolved to the satisfaction of the accountant.

description of disagreements that were resolved to the

accountant's satisfaction and those that were not resolved to the

accountant's satisfaction.

(d) The insurer or health maintenance organization shall file

with the statement required by Subsection (b) a letter signed by

the accountant stating whether the accountant agrees with the

insurer's or health maintenance organization's statement and, if

not, the reasons why the accountant does not agree. If the

accountant fails to provide the letter, the insurer or health

maintenance organization shall file with the commissioner a copy

of a written request to the accountant for the letter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.016. AUDITED COMBINED OR CONSOLIDATED FINANCIAL

STATEMENTS. (a) An insurer or health maintenance organization

described by Section 401.001(3) or (4) that is required to file

an audited financial report under this subchapter may apply in

writing to the commissioner for approval to file audited combined

or consolidated financial statements instead of separate audited

financial reports if the insurer or health maintenance

organization:

(1) is part of a group of insurers or health maintenance

organizations that uses a pooling arrangement or 100 percent

reinsurance agreement that affects the solvency and integrity of

the insurer's or health maintenance organization's reserves; and

(2) cedes all of the insurer's or health maintenance

organization's direct and assumed business to the pool.

(b) An insurer or health maintenance organization must file an

application under Subsection (a) not later than December 31 of

the calendar year for which the audited combined or consolidated

financial statements are to be filed.

approval from the commissioner under this section shall file a

columnar combining or consolidating worksheet for the audited

combined or consolidated financial statements that includes:

(1) the amounts shown on the audited combined or consolidated

financial statements;

(2) the amounts for each insurer or health maintenance

organization stated separately;

(3) the noninsurance operations shown on a combined or

individual basis;

(4) explanations of consolidating and eliminating entries; and

(5) a reconciliation of any differences between the amounts

shown in the individual insurer or health maintenance

organization columns of the worksheet and comparable amounts

shown on the insurer's or health maintenance organization's

annual statements.

(d) An insurer or health maintenance organization that does not

receive approval from the commissioner to file audited combined

or consolidated financial statements for the insurer or health

maintenance organization and any of the insurer's or health

maintenance organization's subsidiaries or affiliates shall file

a separate audited financial report.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.017. NOTICE OF ADVERSE FINANCIAL CONDITION OR

MISSTATEMENT OF FINANCIAL CONDITION. (a) An insurer or health

maintenance organization required to file an audited financial

report under this subchapter shall require the insurer's or

health maintenance organization's accountant to immediately

notify the board of directors of the insurer or health

maintenance organization or the insurer's or health maintenance

organization's audit committee in writing of any determination by

that accountant that:

(1) the insurer or health maintenance organization has

materially misstated the insurer's or health maintenance

organization's financial condition as reported to the

commissioner as of the balance sheet date being audited; or

(2) the insurer or health maintenance organization does not meet

the minimum capital and surplus requirements prescribed by this

code for the insurer or health maintenance organization as of

that date.

(b) An insurer or health maintenance organization that receives

a notice described by Subsection (a) shall:

(1) provide to the commissioner a copy of the notice not later

than the fifth business day after the date the insurer or health

maintenance organization receives the notice; and

(2) provide to the accountant evidence that the notice was

provided to the commissioner.

Subsection (b)(2) on or before the fifth business day after the

date the accountant notified the insurer or health maintenance

organization under Subsection (a), the accountant shall file with

the commissioner a copy of the accountant's written notice not

later than the 10th business day after the date the accountant

notified the insurer or health maintenance organization.

(d) An accountant is not liable to an insurer or health

maintenance organization or the insurer's or health maintenance

organization's policyholders, shareholders, officers, employees,

directors, creditors, or affiliates for a statement made under

this section if the statement was made in good faith to comply

with this section.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.018. INFORMATION DISCOVERED AFTER DATE OF AUDITED

FINANCIAL REPORT. If, after the date of an audited financial

report filed under this subchapter, the accountant becomes aware

of facts that might have affected the report, the accountant must

take action as prescribed in Volume 1, AU Section 561,

Professional Standards of the American Institute of Certified

Public Accountants.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.019. REPORT ON SIGNIFICANT DEFICIENCIES IN INTERNAL

CONTROL. (a) In addition to the audited financial report

required by this subchapter, each insurer or health maintenance

organization shall provide to the commissioner a written report

of significant deficiencies required and prepared by an

accountant in accordance with the Professional Standards of the

American Institute of Certified Public Accountants.

(b) The insurer or health maintenance organization shall

annually file with the commissioner the report required by this

section not later than the 60th day after the date the audited

financial report is filed. The insurer or health maintenance

organization shall also provide a description of remedial actions

taken or proposed to be taken to correct significant

deficiencies, if the actions are not described in the

accountant's report.

of internal control structure matters noted in an audit described

in Statement on Auditing Standard (SAS) No. 60, AU Section 325,

Professional Standards of the American Institute of Certified

Public Accountants.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.020. ACCOUNTANT WORK PAPERS. (a) In this section,

"work papers" means the records kept by an accountant of the

procedures followed, the tests performed, the information

obtained, and the conclusions reached that are pertinent to the

accountant's audit of an insurer's or health maintenance

organization's financial statements. The term includes work

programs, analyses, memoranda, letters of confirmation and

representation, abstracts of company documents and schedules, and

commentaries prepared or obtained by the accountant in the course

of auditing the financial statements that support the

accountant's opinion.

(b) An insurer or health maintenance organization required to

file an audited financial report under this subchapter shall

require the insurer's or health maintenance organization's

accountant to make available for review by the department's

examiners the work papers and any record of communications

between the accountant and the insurer or health maintenance

organization relating to the accountant's audit that were

prepared in conducting the audit. The insurer or health

maintenance organization shall require that the accountant retain

the work papers and records of communications until the earlier

of:

(1) the date the department files a report on the examination

covering the audit period; or

(2) the seventh anniversary of the date of the last day of the

audit period.

work papers when the department's examiners conduct a review

under Subsection (b). The review is considered an investigation,

and work papers obtained during that investigation may be made

confidential by the commissioner, unless the work papers are

admitted as evidence in a hearing before a governmental agency or

in a court.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.021. PENALTY FOR FAILURE TO COMPLY. (a) If an insurer

or health maintenance organization fails to comply with this

subchapter, the commissioner shall order that the insurer's or

health maintenance organization's annual audit be performed by a

qualified independent certified public accountant.

(b) The commissioner shall assess against the insurer or health

maintenance organization the cost of auditing the insurer's or

health maintenance organization's financial statement under this

section.

the commissioner the amount of the assessment not later than the

30th day after the date the commissioner issues the notice of

assessment to the insurer or health maintenance organization.

(d) Money collected under this section shall be deposited to the

credit of the Texas Department of Insurance operating account for

use by the commissioner and the department to pay the expenses

incurred under this subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER B. EXAMINATION OF CARRIERS

Sec. 401.051. DUTY TO EXAMINE CARRIERS. (a) The department or

an examiner appointed by the department shall visit at the

carrier's principal office:

(1) each carrier that is organized under the laws of this state;

and

(2) each other carrier that is authorized to engage in business

in this state.

(b) The department or an examiner appointed by the department

may visit the carrier for the purpose of investigating the

carrier's affairs and condition. The department or an examiner

appointed by the department shall examine the carrier's financial

condition and ability to meet the carrier's liabilities and

compliance with the laws of this state that affect the conduct of

the carrier's business.

may conduct the visit and examination of a carrier described by

Subsection (a)(2) alone or with representatives of the insurance

supervising departments of other states.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.052. FREQUENCY OF EXAMINATION. (a) Subject to

Subsection (b) and except as provided by the rules adopted under

that subsection, the department shall visit and examine a carrier

as frequently as the department considers necessary. At a

minimum, the department shall examine a carrier not less

frequently than once every five years.

(b) The commissioner shall adopt rules governing the frequency

of examinations of carriers that have been organized or

incorporated for less than five years.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

188, Sec. 1, eff. September 1, 2007.

Sec. 401.053. EXAMINATION PERIOD. Unless the department

requests that an examination cover a longer period, the

examination must cover the period beginning on the last day

covered by the most recent examination and ending on December 31

of the year preceding the year in which the examination is being

conducted.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.054. POWERS RELATED TO EXAMINATION. The department or

the examiner appointed by the department:

(1) has free access, and may require the carrier or the

carrier's agent to provide free access, to all books and papers

of the carrier or the carrier's agent that relate to the

carrier's business and affairs; and

(2) has the authority to summon and examine under oath, if

necessary, an officer, agent, or employee of the carrier or any

other person in relation to the carrier's affairs and condition.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.055. EFFECT OF SUBCHAPTER ON AUTHORITY TO USE

INFORMATION. This subchapter does not limit the commissioner's

authority to use a final or preliminary examination report, an

examiner's or company's work papers or other documents, or any

other information discovered or developed during an examination

in connection with a legal or regulatory action that the

commissioner, in the commissioner's sole discretion, considers

appropriate.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.056. RULES RELATED TO REPORTS AND HEARINGS. The

commissioner by rule shall adopt:

(1) procedures governing the filing and adoption of an

examination report;

(2) procedures governing a hearing to be held under this

subchapter; and

(3) guidelines governing an order issued under this subchapter.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.057. USE OF AUDIT AND WORK PAPERS. (a) In this

section, "work papers" has the meaning assigned by Section

401.020(a).

(b) In conducting an examination under this subchapter, the

department shall use audits and work papers that the carrier

makes available to the department and that are prepared by an

accountant or accounting firm meeting the qualifications of

Section 401.011. The department may conduct a separate audit of

the carrier if necessary. Work papers developed in the audit

shall be maintained in the manner provided by Sections 401.020(b)

and (c).

(1) the work papers of an accountant or accounting firm or the

carrier; and

(2) a record of any communications between the accountant or

accounting firm and the carrier that relate to an audit.

(d) The accountant or accounting firm shall deliver the

information described by Subsection (c) to the examiner. The

examiner shall retain the information during the department's

examination of the carrier.

(e) Information obtained under this section is confidential and

may not be disclosed to the public except when introduced as

evidence in a hearing.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.058. CONFIDENTIALITY OF REPORTS AND RELATED

INFORMATION. (a) A final or preliminary examination report and

any information obtained during an examination are confidential

and are not subject to disclosure under Chapter 552, Government

Code.

(b) Subsection (a) applies if the examined carrier is under

supervision or conservatorship. Subsection (a) does not apply to

an examination conducted in connection with a liquidation or

receivership under this code or another insurance law of this

state.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.059. DETERMINATION OF VALUE. In determining the value

or market value of an investment in or on real estate or an

improvement to real estate by a carrier authorized to engage in

business in this state, the department, in administering this

code, may consider any factor or matter that the department

considers proper and material, including:

(1) an appraisal by a real estate board or other qualified

person;

(2) an affidavit by another person familiar with those values;

(3) a tax valuation;

(4) the cost of acquisition after deducting for depreciation and

obsolescence;

(5) the cost of replacement;

(6) sales of other comparable property;

(7) enhancement in value from any cause;

(8) income received or to be received; and

(9) any improvements made.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.060. RIGHT TO INFORMATION RELATING TO DETERMINATION OF

VALUE OR MARKET VALUE. (a) If the department determines the

value or market value of an insurer's investment in or on real

estate or an improvement to real estate, the insurer is entitled

to make a written request for a written finding by the

commissioner in relation to that determination.

(b) Not later than the 10th day after the date the commissioner

receives a request under Subsection (a), the commissioner shall

enter a written order or finding that:

(1) states separately the department's findings on each factor

or matter on which the department relied in making the

determination; and

(2) includes the name and address of each person who provided

evidence relating to a factor or matter on which the department

relied in making the determination.

a written finding under this section a copy of the finding or

order.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.061. DISCIPLINARY ACTION FOR FAILURE TO COMPLY WITH

SUBCHAPTER. A carrier is subject to disciplinary action under

Chapter 82 if the carrier or the carrier's agent fails or refuses

to comply with:

(1) this subchapter or a rule adopted under this subchapter; or

(2) a request by the department or an appointed examiner to be

examined or to provide information requested as part of an

examination.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.062. STAY OF RULE, ORDER, DECISION, OR FINDING. The

filing of a petition under Subchapter D, Chapter 36, for judicial

review of a rule, order, decision, or finding of the commissioner

or department under this subchapter operates as a stay of the

rule, order, decision, or finding until the court directs

otherwise.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER C. EXAMINERS AND ACTUARIES

Sec. 401.101. USE OF DEPARTMENT EXAMINER OR OTHER QUALIFIED

PERSON OR FIRM. The department may use a salaried department

examiner or may appoint a qualified person or firm to perform an

examination of an insurance organization as provided by law or to

assist in the performance of an examination.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.102. LEGISLATIVE INTENT AS TO APPOINTMENT OR EMPLOYMENT

OF EXAMINERS AND ACTUARIES. (a) The legislature recognizes that

experienced, highly qualified examiners and actuaries are

necessary for the department to effectively monitor and regulate

the solvency of insurers in this state. It is the intent of the

legislature that the department, in appointing or employing an

examiner or actuary, select a person who:

(1) has substantial experience in financial matters relating to

insurance or other areas of financial activity that are

compatible with the business of insurance; and

(2) is recognized for the outstanding quality of the person's

work in relation to areas of responsibility typically assigned to

an examiner or actuary in the insurance field.

(b) The legislature pledges to provide to the department the

necessary funding to implement this section and to support the

department in the department's efforts to attract the highly

qualified persons necessary to fulfill regulatory

responsibilities relating to insurer solvency assigned to those

persons under the insurance laws of this state.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.103. APPOINTMENT OF EXAMINERS AND ACTUARIES. (a) The

department shall appoint:

(1) a chief examiner and the number of assistant examiners the

department considers necessary to conduct examinations of

insurance companies, corporations, and associations at the

expense of the insurance company, corporation, or association as

provided by law; and

(2) the number of actuaries the department considers necessary

to:

(A) advise the department in connection with the performance of

the department's duties; and

(B) otherwise aid and counsel the department in connection with

the examinations.

(b) The department may increase or decrease the number of

examiners or actuaries as needed for examination duties.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.104. APPOINTMENT OF EXAMINERS, ACTUARIES, AND OTHER

PERSONS FOR CERTAIN EXAMINATIONS. (a) The department may

commission a department actuary, the chief examiner, another

department examiner or employee, or any other person to conduct

or assist in the examination of a company that is not organized

under the laws of this state.

(b) The department may compensate a person described by

Subsection (a). If the department compensates the person, the

person may not receive any other compensation while the person is

assigned to the examination.

department actuary or examiner may not continue to serve in that

capacity if the person directly or indirectly accepts employment

or compensation for a service rendered or to be rendered from any

insurance company for any reason.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.105. OATH OF EXAMINERS AND ASSISTANTS. Before entering

into the duties of appointment as an examiner or assistant

examiner, an individual must take and file in the office of the

secretary of state an oath to:

(1) support the constitution of this state;

(2) faithfully conduct the individual's duties of office;

(3) make fair and impartial examinations;

(4) not accept, directly or indirectly, as a gift or emolument

any pay for the discharge of the individual's duty, other than

the compensation to which the individual is entitled by law; and

(5) not reveal the condition of a corporation, firm, or person

or any information secured while examining a corporation, firm,

or person to anyone other than:

(A) the department or an authorized representative of the

department; or

(B) as required when testifying in an administrative hearing

under this code or another insurance law of this state or in

court.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.106. RIGHT OF ACTION ON BOND. If an examiner or

assistant examiner knowingly makes a false report or gives any

information in violation of law that relates to an examination of

a corporation, firm, or person, the corporation, firm, or person

has a right of action on a bond authorized under Chapter 653,

Government Code, for the entity's injuries in a suit brought in

the name of the state at the relation of the entity.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.107. REGISTRATION OF CONTRACT EXAMINERS. (a) A person

with whom another state contracts to perform any examination

initiated by the other state of an insurer domiciled in this

state shall register with and provide the following information

to the department's chief examiner:

(1) the person's name;

(2) if the person is not an individual, the identity of each

examiner or other person who will perform any part of the

examination;

(3) the name of the state that contracted with the person;

(4) the identity of the insurer to be examined; and

(5) a description of each issue that the person has been

contracted to examine.

(b) It is a violation of this code for a person to accept

compensation from multiple states for the same examination, if

doing so results in duplicative costs to the insurer being

examined. It is not a violation of this code for:

(1) an examiner to conduct an examination of an insurer for the

benefit of multiple states in a coordinated examination; and

(2) the examiner to accept compensation from the states

participating in the coordinated examination to reduce the

examination costs to the insurer being examined.

Added by Acts 2009, 81st Leg., R.S., Ch.

1030, Sec. 2, eff. June 19, 2009.

SUBCHAPTER D. EXAMINATION EXPENSES

Sec. 401.151. EXPENSES OF EXAMINATION OF DOMESTIC INSURER. (a)

A domestic insurer examined on behalf of this state by the

department or under the department's authority shall pay the

expenses of the examination in an amount the commissioner

certifies as just and reasonable.

(b) The department shall collect an assessment at the time of

the examination to cover all expenses attributable directly to

that examination, including:

(1) the salaries and expenses of department employees; and

(2) expenses described by Section 803.007.

domestic insurers in an amount sufficient to meet all other

expenses and disbursements necessary to comply with the laws of

this state relating to the examination of insurers.

(d) In determining the amount of the assessment under Subsection

(c), the department:

(1) shall consider:

(A) the insurer's annual premium receipts or admitted assets, or

both, that are not attributable to 90 percent of pension plan

contracts as defined by Section 818(a), Internal Revenue Code of

1986; or

(B) the total amount of the insurer's insurance in force; and

(2) may not consider insurance premiums for insurance contracted

for by a state or federal governmental entity to provide welfare

benefits to designated welfare recipients or contracted for in

accordance with or in furtherance of Title 2, Human Resources

Code, or the federal Social Security Act (42 U.S.C. Section 301

et seq.).

(e) The amount of all examination and evaluation fees paid to

the state by an insurer in each taxable year shall be allowed as

a credit on the amount of premium taxes due.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

932, Sec. 17, eff. June 15, 2007.

Sec. 401.152. EXPENSES OF EXAMINATION OF OTHER INSURERS. (a)

An insurer not organized under the laws of this state shall

reimburse the department for the salary and expenses of each

examiner participating in an examination of the insurer and for

other department expenses that are properly allocable to the

department's participation in the examination.

(b) An insurer shall pay the expenses under this section

regardless of whether the examination is made only by the

department or jointly with the insurance supervisory authority of

another state.

department on presentation of an itemized written statement from

the commissioner.

(d) The commissioner shall determine the salary of an examiner

participating in an examination of an insurer's books or records

located in another state based on the salary rate recommended by

the National Association of Insurance Commissioners or the

examiner's regular salary rate.

(e) The limitations provided by Sections 803.007(1) and (2)(B)

for a domestic company apply to a foreign insurer.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.153. REIMBURSEMENT OF EXPENSES OF CERTAIN PERSONS OR

FIRMS. (a) A person or firm appointed by the department to

examine an insurer or to assist in the insurer's examination

shall be paid for those services at the usual and customary rates

charged for those services. The insurer being examined shall pay

the fee for those services.

(b) The commissioner may disapprove the payment of a fee under

Subsection (a) if the fee is excessive in relation to the

services actually performed.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.154. TAX CREDIT AUTHORIZED. An insurer is entitled to

a credit on the amount of premium taxes to be paid by the insurer

for all examination fees paid under Section 401.153. The insurer

may take the credit for the taxable year during which the

examination fees are paid and may take the credit to the same

extent the insurer may take a credit for examination fees paid

when a salaried department examiner conducts the examination.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

932, Sec. 18, eff. June 15, 2007.

Sec. 401.155. ADDITIONAL ASSESSMENTS. (a) The department shall

impose additional assessments against insurers on a pro rata

basis as necessary to:

(1) cover all expenses and disbursements required by law; and

(2) comply with this subchapter and Sections 401.103, 401.104,

401.105, and 401.106.

(b) The department shall use any surplus resulting from an

assessment under this section to reduce the amount of subsequent

assessments.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

Sec. 401.156. DEPOSIT AND USE OF ASSESSMENT AND FEE. (a) The

department shall deposit an assessment or fee collected under

this subchapter to the credit of the Texas Department of

Insurance operating account.

(b) Money deposited under this section shall be used to pay the

salaries and expenses of actuaries and examiners and all other

expenses relating to examinations of insurers.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

SUBCHAPTER E. CONFIDENTIALITY OF CERTAIN INFORMATION

Sec. 401.201. CONFIDENTIALITY OF EARLY WARNING SYSTEM

INFORMATION. Information relating to the financial solvency of

an organization regulated by the department under this code or

another insurance law of this state that is obtained by the

department's early warning system is confidential and is not

subject to disclosure under Chapter 552, Government Code.

Added by Acts 2005, 79th Leg., Ch.

727, Sec. 1, eff. April 1, 2007.

State Codes and Statutes

State Codes and Statutes

State Codes and Statutes

State Codes and Statutes

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