HB-5722, As Passed Senate, December 4, 2008

SENATE SUBSTITUTE FOR

HOUSE BILL NO. 5722

A bill to amend 1956 PA 218, entitled

"The insurance code of 1956,"

by amending sections 1001, 1005, 1007, 1010, 1015, 1017, and 1125

(MCL 500.1001, 500.1005, 500.1007, 500.1010, 500.1015, 500.1017,

and 500.1125), sections 1001, 1005, 1007, 1010, 1015, and 1017 as

added by 1992 PA 182 and section 1125 as amended by 2000 PA 283,

and by adding sections 1027, 1029, 1031, and 1033.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 1001. As used in this chapter:

(a) "Audited financial report" means the report required in

section 1005 and furnished pursuant to section 1007.

(b) "Audit committee" means a committee or equivalent body

established by the board of directors of an entity to oversee the

accounting and financial reporting processes and audits of the

financial statements of an insurer or group of insurers. The audit

committee of an entity that controls a group of insurers may be the

audit committee for 1 or more of these controlled insurers solely

for the purposes of compliance with this chapter at the election of

the controlling person as permitted in section 1027(6). If an audit

committee is not designated by an insurer, the insurer's entire

board of directors shall constitute the audit committee.

in the reporting requirements of chapter 13, or a set of insurers

as identified by management, for the purpose of assessing the

effectiveness of internal control over financial reporting.

(d) "Indemnification agreement" 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

knowing of other misrepresentations made by the insurer or its

representatives.

(e) "Independent board member" has the same meaning as

described in section 1027(4).

(f) ~~(b)~~ "Independent public accountant" means an independent

certified public accountant or accounting firm in good standing

with the American institute of certified public accountants and in

good standing in all states in which they are licensed to practice.

For Canadian and British companies, "independent public accountant"

means a Canadian-chartered or British-chartered accountant.

(g) "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 filed with the

commissioner, and includes the following:

(i) Policies and procedures pertaining to the maintenance of

records that, in reasonable detail, accurately and fairly reflect

the transactions and dispositions of assets.

(ii) Policies and procedures providing reasonable assurance

that transactions are recorded as necessary to permit preparation

of the financial statements filed with the commissioner and that

receipts and expenditures are being made only in accordance with

authorizations of management and directors.

(iii) Policies and procedures providing 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 filed with the

commissioner.

(h) "SEC" means the United States securities and exchange

commission.

(i) "Section 404" means section 404 of the Sarbanes-Oxley act

of 2002 and the SEC's rules and regulations promulgated thereunder.

(j) "Section 404 report" means management's report on

"internal control over financial reporting" as defined by the SEC

and the related attestation report of the independent certified

public accountant.

(k) "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:

(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.

(iii) The internal control over financial reporting requirements

of section 404, item 308 of SEC regulation S-K.

Sec. 1005. (1) Each insurer authorized to do business in this

state shall have an annual audit by an independent public

accountant and shall file an audited financial report with the

commissioner on or before June 1 for the immediately preceding

calendar year. With 90 days' advance notice to the insurer, the

commissioner may require an insurer to file an audited financial

report earlier than June 1.

(2) Extensions of the June 1 filing date under subsection (1)

may be granted by the commissioner for 30-day periods upon a

showing by the insurer and its independent public accountant of the

reasons for requesting the extension and upon a determination by

the commissioner of good cause for an extension. The extension

request shall be submitted in writing not less than 10 days prior

to the due date and in sufficient detail to permit the commissioner

to make an informed decision on the requested extension. An

extension granted under this subsection shall include a 30-day

extension to the filing of management's report of internal control

over financial reporting.

(3) Each insurer required to file an annual audited financial

report under this chapter shall designate a group of individuals as

constituting its audit committee. The audit committee of an entity

that controls an insurer may be the insurer's audit committee for

purposes of this chapter at the election of the controlling person.

Sec. 1007. (1) The annual audited financial report shall

report the insurer's financial condition 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 year then ended in

conformity with accounting practices prescribed, or otherwise

permitted, by the commissioner and shall include all of the

following:

(a) The report of an independent public accountant.

(b) A balance sheet reporting admitted assets, liabilities,

capital, and surplus.

(d) A statement of cash flows.

(e) A statement of changes in capital and surplus.

(f) Notes to financial statements. These notes shall be those

required by the commissioner's annual statement instructions and

~~any other notes required by generally accepted accounting~~

~~principles and shall include both of the following:~~

(i~~) A~~ accounting practices prescribed by the commissioner. The

notes shall include a reconciliation of differences, if any,

between the audited financial statements and the annual statement

filed pursuant to section 438 with a written description of the

nature of these differences.

(ii~~) A summary of ownership and relationships of the insurer~~

~~and all affiliated companies, including a disclosure of all~~

~~significant intercompany transactions and balances.~~

(2) The financial statements included in the audited financial

report shall be prepared in a form and using language and groupings

substantially the same as the relevant sections of the insurer's

annual statement filed with the commissioner, may be rounded to the

nearest thousand dollars, may combine insignificant amounts, and,

except for the first year the insurer is required to file an

audited financial report, shall be comparative, presenting the

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

the immediately preceding December 31.

(3) The independent public accountant shall conduct the

examination in accordance with generally accepted auditing

standards. Consideration shall be given, as the independent public

accountant considers necessary, to the procedures illustrated in

the "Financial Conditions Examiners Handbook" prepared by the

national association of insurance commissioners.

Sec. 1010. (1) The commissioner shall not recognize a person

or firm as an independent public accountant unless that person or

firm is meets both of the following:

(a) Is in good standing with the American institute of

certified public accountants and in good standing in all states in

which the independent public accountant is licensed to practice,

or, for a Canadian or British company, unless that person or firm

is a chartered accountant.

(b) Has not either directly or indirectly entered into an

indemnification agreement, whether an agreement of indemnity or

release from liability, with respect to the insurer's audit.

(2) Except as otherwise provided, a certified public

accountant shall be recognized as independent as long as he or she

conforms to the standards of his or her profession, as contained in

the code of professional ethics of the American institute of

certified public accountants, its rules and regulations, and this

state's board of accountancy's code of ethics and rules of

professional conduct.

(3) A qualified independent accountant may enter into an

agreement with an insurer to have disputes relating to an audit

resolved by mediation or arbitration. However, if a delinquency

proceeding is commenced against the insurer under chapter 81, the

mediation or arbitration provision shall operate at the option of

the statutory successor.

(4) ~~(3)~~ An individual independent public accountant or a lead

partner having primary responsibility for an annual audit or other

person responsible for rendering a report by an independent public

accounting firm retained to conduct an annual audit under this

chapter shall not act in that capacity for the same insurer for

more than 7 5 consecutive years. Following such a ~~7-year~~ 5-year

period of service, the individual independent public accountant or

partner or other responsible person for the accounting firm shall

not conduct an annual audit under this chapter for the same insurer

or its insurance subsidiaries or affiliates for a period of 2 5

years. An insurer may apply for relief from the commissioner from

this rotation requirement on the basis of unusual circumstances.

This application shall be made at least 30 days before the end of

the calendar year. The commissioner may consider the following

factors in determining if relief should be granted:

(a) Number of partners, expertise of the partners, or the

number of insurance clients in the independent public accounting

firm.

(b) The insurer's premium volume.

business.

(5) An approval for relief granted under subsection (4) shall

be filed by the insurer with its annual statement filing with the

states that it is licensed in or doing business in and with the

national association of insurance commissioners. If the nondomestic

state accepts electronic filing with the national association of

insurance commissioners, the insurer shall file the approval in an

electronic format acceptable to the national association of

insurance commissioners.

(6) ~~(4)~~ The commissioner shall not recognize as a qualified

independent public accountant, or accept an annual audited

financial report, prepared in whole or in part by an individual who

has done any of the following:

(a) Been convicted of fraud, bribery, a violation of chapter

96 of title 18 of the United States Code, 18 ~~U.S.C.~~ USC 1961 to

1968, or any dishonest conduct or practices under federal or state

law.

(b) Been found to have violated the insurance laws of this

state with respect to any previous reports submitted under this

chapter.

or more previous reports filed under this chapter.

(7) The commissioner shall not recognize as a qualified

independent public accountant, or accept an annual audited

financial report prepared in whole or in part by, an individual who

provides to an insurer, contemporaneously with the audit, any of

the following nonaudit services:

(a) Bookkeeping or other services related to the accounting

records or financial statements of the insurer.

(b) Financial information systems design and implementation.

contribution-in-kind reports.

(d) Actuarially oriented advisory services involving the

determination of amounts recorded in the financial statements. The

accountants may assist an insurer in understanding the methods,

assumptions, and inputs used in the determination of amounts

recorded in the financial statements 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 on an insurer's reserves if all of 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.

(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.

(i) Any other services that the commissioner determines, by

order or regulation, are impermissible.

(8) To be a qualified independent public accountant, the

accountant shall not function in the role of management, shall not

audit his or her own work, and shall not serve in an advocacy role

for the insurer.

(9) ~~(5)~~ The commissioner may hold a public hearing pursuant to

the administrative procedures act of 1969, ~~Act No. 306 of the~~

~~Public Acts of 1969, being sections 24.201 to 24.328 of the~~

~~Michigan Compiled Laws~~ 1969 PA 306, MCL 24.201 to 24.328, to

determine whether a certified public accountant is qualified. After

considering the evidence presented, the commissioner may rule that

the accountant is not qualified for purposes of expressing his or

her opinion on the financial statements in the annual audited

financial report made pursuant to this chapter and may require the

insurer to replace the accountant with another whose relationship

with the insurer is qualified within the meaning of this chapter.

(10) Insurers having direct written and assumed premiums of

less than $100,000,000.00 in any calendar year may request an

exemption from subsection (7). An insurer requesting an exemption

shall file with the commissioner a written statement discussing the

reasons why the insurer should be exempt. The commissioner shall

grant the exemption if after review of the statement the

commissioner finds that compliance with subsection (7) would

constitute a financial or organizational hardship upon the insurer.

(11) A qualified independent public accountant who performs an

audit under this chapter may engage in other nonaudit services,

including tax services, that are not described in subsection (7)

and that do not conflict with subsection (8), only if the activity

is approved in advance by the audit committee as provided in

subsection (12).

(12) All auditing services and nonaudit services provided to

an insurer by a qualified independent public accountant of the

insurer shall be preapproved by the audit committee. The

preapproval requirement is waived with respect to nonaudit services

in either of the following cases:

(a) If the insurer is a SOX compliant entity or a direct or

indirect wholly-owned subsidiary of a SOX compliant entity.

(b) If the aggregate amount of all such nonaudit services

provided to the insurer constitutes not more than 5% of the total

amount of fees paid by the insurer to its qualified independent

public accountant during the fiscal year in which the nonaudit

services are provided, the services were not recognized by the

insurer at the time of the engagement to be nonaudit services, and

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 1 or more members of the audit committee who

are the members of the board of directors to whom authority to

grant such approvals has been delegated by the audit committee.

(13) The audit committee may delegate to 1 or more designated

members of the audit committee the authority to grant the

preapprovals required by subsection (12). 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.

(14) The commissioner shall not recognize an independent

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 public accountant and participated in the audit of that

insurer during the 1-year period preceding the date that the most

current statutory opinion is due. This subsection only applies to

partners and senior managers involved in the audit. An insurer may

request relief from this subsection by filing a request with the

commissioner 30 days prior to the end of the calendar year for the

audit in a manner prescribed by the commissioner showing the

unusual circumstances that support the need for relief from this

subsection. An approval for relief granted by the commissioner

under this subsection shall be filed by the insurer with its annual

statement filing with the states that it is licensed in or doing

business in and with the national association of insurance

commissioners. If the nondomestic state accepts electronic filing

with the national association of insurance commissioners, the

insurer shall file the approval in an electronic format acceptable

to the national association of insurance commissioners.

Sec. 1015. (1) An insurer required to furnish the annual

audited financial report shall require the independent public

accountant to report in writing within 5 business days to the board

of directors or its audit committee any determination by that

independent public accountant that the insurer has materially

misstated its financial condition as reported to the commissioner

as of the balance sheet date currently under examination or that

the insurer does not meet the requirements of section 408 or 410 as

of that date. The insurer shall furnish a copy of this report to

the commissioner within 5 business days of receipt of the report

and shall provide the independent public accountant making the

report with evidence of the report being furnished to the

commissioner. If the independent public accountant fails to receive

the evidence within the required 5-business day period, the

independent public accountant shall furnish a copy of its report to

the commissioner within the next 5 business days.

(2) An independent public accountant is not liable to any

person for a statement or report made in connection with this

section if the statement or report is made in good faith in

compliance with subsection (1).

(3) If after the date of the audited financial report filed

pursuant to this chapter the accountant becomes aware of facts that

might have affected his or her report, the accountant shall take

action as prescribed by the professional standards of the American

institute of certified public accountants.

Sec. 1017. (1) ~~The independent public accountant shall~~

~~communicate significant deficiencies~~ In addition to the annual

audited financial report, each insurer shall furnish the

commissioner with a written communication as to any unremediated

material weaknesses in the insurer's internal ~~control structure,~~

~~known as reportable conditions, noted during a financial statement~~

~~audit to the appropriate parties within an insurer. If the~~

~~independent public accountant does not identify significant~~

~~deficiencies in the insurer's internal control structure, a report~~

~~shall not be issued.~~ controls over financial reporting noted during

the audit. This communication shall be prepared by the accountant

within 60 days after the filing of the annual audited financial

report and shall contain a description of any unremediated material

weaknesses, as of the December 31 immediately preceding, in the

insurer's internal control over financial reporting noted by the

accountant during the course of his or her audit of the financial

statements. The communication shall also state if no unremediated

material weaknesses were noted.

~~(2) In addition to the annual audited financial statements,~~

~~each insurer shall furnish the commissioner with the written report~~

~~prepared by the independent public accountant describing~~

~~significant deficiencies in the insurer's internal control~~

~~structure noted by the independent public accountant during the~~

~~audit. If significant deficiencies are noted, the written report~~

~~shall be filed by the insurer with the commissioner within 60 days~~

~~after the filing of the annual audited financial statements. The~~

~~insurer shall provide a description of remedial actions taken or~~

~~proposed to correct significant deficiencies, if such actions are~~

~~not described in the independent public accountant's report.~~

(2) The insurer shall provide to the commissioner a

description of remedial actions taken or proposed to correct

unremediated material weaknesses, if the actions taken or proposed

are not described in the accountant's communication.

Sec. 1027. (1) This section applies to a domestic insurer that

is not a SOX compliant entity. A domestic insurer that is a direct

or indirect subsidiary of a SOX compliant entity is considered to

be a SOX compliant entity for purposes of this section.

(2) 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 chapter. Each accountant shall report

directly to the audit committee.

(3) 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 subsection (6).

(4) To be considered independent for purposes of this section,

a member of the audit committee shall 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 audited or be

an affiliated person of the entity or subsidiary audited, unless

the individual serves on the board to meet another statutory

requirement related to the composition of the board. However, in no

case can the independent audit committee member be an officer or

employee of the insurer or 1 of its affiliates.

(5) 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 1 year from the occurrence of the event that caused the

member to be no longer independent.

(6) To exercise the election of the controlling person to

designate the audit committee for purposes of this section, the

ultimate controlling person shall provide written notice to the

commissioner. 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 commissioner by the insurer, which shall include a

description of the basis for the change. The election shall remain

in effect until rescinded.

(7) The audit committee shall require the accountant that

performs for an insurer any audit required by this chapter to

timely report to the audit committee in accordance with the

requirements of SAS 61, communication with audit committees, or a

substantially similar replacement publication as required by the

commissioner, including all of the following:

(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.

accountant and the management of the insurer, such as any

management letter or schedule of unadjusted differences.

(8) If an insurer is a member of an insurance holding company

system, the reports required by subsection (7) 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) All insurers are encouraged to structure their audit

committees with at least a supermajority of independent committee

members. An insurer with $300,000,000.01 or less of direct written

and assumed premiums in the prior calendar year is not required to

have independent audit committee members. An insurer with over

$300,000,000.00 but $500,000,000.00 or less of direct written and

assumed premiums in the prior calendar year shall have 50% or more

of its audit committee members be independent. An insurer with over

$500,000,000.00 of direct written and assumed premiums in the prior

calendar year shall have 75% or more of its audit committee members

be independent. As used in this section, "direct written and

assumed premiums" is the combined total of direct premiums and

assumed premiums from nonaffiliates for the reporting entities.

(10) The commissioner may require an entity's board to enact

improvements to the independence of the audit committee membership

if the insurer is in a risk-based capital action level event, meets

1 or more of the standards listed in chapter 4 of an insurer

considered to be in hazardous financial condition, or otherwise

exhibits signs of a troubled insurer.

(11) An insurer with direct written and assumed premium,

excluding premiums reinsured with the federal crop insurance

corporation and federal flood program, of less than $500,000,000.00

may apply to the commissioner for a waiver from this section based

upon hardship. The insurer shall file, with its annual statement

filing, the approval for relief from this section granted by the

commissioner with the states that it is licensed in or doing

business in and with the national association of insurance

commissioners. If the nondomestic state accepts electronic filing

with the national association of insurance commissioners, the

insurer shall file the approval in an electronic format acceptable

to the national association of insurance commissioners.

(12) This section takes effect January 1, 2010. An insurer or

group of insurers that is not required to have independent audit

committee members or only 50% independent audit committee members

because the total written and assumed premium is below the required

threshold in subsection (9) and subsequently becomes subject to 1

of the independence requirements due to changes in premium, whether

through business combination or not, shall have 1 year after the

year the threshold is exceeded to comply with the independence

requirements of subsection (9).

Sec. 1029. (1) A director or officer of an insurer shall not

directly or indirectly do either of the following:

(a) 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 chapter.

(b) 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 chapter.

(2) A director or officer of an insurer, or any other person

acting under the direction thereof, shall not directly or

indirectly take any action to coerce, manipulate, mislead, or

fraudulently influence any accountant engaged in the performance of

an audit under this chapter if that person knew or should have

known that the action, if successful, could result in rendering the

insurer's financial statements materially misleading. 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 to do any of the following:

(a) To issue or reissue a report on an insurer's financial

statements that is not warranted under the circumstances due to

material violations of statutory accounting principles prescribed

by the commissioner, generally accepted auditing standards, or

other professional or regulatory standards.

(b) Not to perform audit, review, or other procedures required

by generally accepted auditing standards or other professional

standards.

(d) Not to communicate matters to an insurer's audit

committee.

Sec. 1031. (1) Every insurer required to file an audited

financial report pursuant to this chapter that has annual direct

written and assumed premiums, excluding premiums reinsured with the

federal crop insurance corporation and federal flood program, of

$500,000,000.00 or more shall prepare a report of the insurer's or

group of insurers' internal control over financial reporting, which

shall be as of the immediately preceding December 31. The report

shall be filed with the commissioner along with the communication

of internal control related matters noted in an audit described

under section 1017.

(2) Notwithstanding the premium threshold in subsection (1),

the commissioner may require an insurer to file a report of

internal control over financial reporting if the insurer is in a

risk-based capital level event or meets 1 or more of the standards

listed in chapter 4 of an insurer considered to be in hazardous

financial condition, or otherwise exhibits signs of a troubled

insurer.

(3) 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 the requirements of this

section 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 as required in section 1007 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 as required in section 1007

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 either file a report as specified

in subsection (1), or the section 404 report and a report as

specified in subsection (1) 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.

(4) The report of internal control over financial reporting

shall include all of the following:

(a) A statement that management is responsible for

establishing and maintaining adequate internal control over

financial reporting.

(b) 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.

processes by which management evaluated the effectiveness of its

internal control over financial reporting.

(d) A statement that briefly describes the scope of work that

is included and whether any internal controls were excluded.

(e) Disclosure of any unremediated material weaknesses in the

internal control over financial reporting identified by management

as of the immediately preceding December 31. Management shall not

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 1 or more unremediated material weaknesses

in its internal control over financial reporting.

(f) A statement regarding the inherent limitations of internal

control systems.

(g) Signatures of the chief executive officer and the chief

financial officer or his or her equivalent.

(5) Management shall document and make available upon

financial condition examination the basis upon which its

assertions, required in subsection (4), 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. Management has 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.

(6) The office of financial and insurance regulation shall

keep confidential the report on internal control over financial

reporting, required by subsection (1), and any documentation

provided in support thereof during the course of a financial

condition examination.

(7) This section takes effect beginning with the reporting

period that ends December 31, 2010. An insurer or group of insurers

that is not required to file a report because the total written

premium is below the required threshold and subsequently becomes

subject to the reporting requirement, whether through business

combination or not, shall have 2 years after the year the threshold

is exceeded to comply with this section's reporting requirements.

Sec. 1033. Upon written application of any insurer, the

commissioner may grant an exemption from compliance with any or all

provisions of this chapter if the commissioner finds, upon review

of the application, that compliance with this chapter 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. An exemption granted under this

section shall be filed by the insurer with the states that it is

licensed in or doing business in and with the national association

of insurance commissioners. If the nondomestic state accepts

electronic filing with the national association of insurance

commissioners, the insurer shall file the approval in an electronic

format acceptable to the national association of insurance

commissioners. Within 10 days from a denial of an insurer's written

request for an exemption from this chapter, the insurer may request

in writing a hearing on its application for an exemption. The

hearing shall be held pursuant to the administrative procedures act

of 1969, 1969 PA 306, MCL 24.201 to 24.328.

Sec. 1125. (1) Neither a reinsurance agreement nor any

amendment to that agreement shall be used to reduce any liability

or to establish any asset in any financial statement filed with the

commissioner unless the agreement, amendment, or a binding letter

of intent has been duly executed by the appropriate party no later

than the filing date of the financial statement.

(2) ~~For a~~ A letter of intent, a reinsurance agreement, or an

amendment to a reinsurance agreement shall be executed within a

reasonable period of time in order for credit to be granted for the

reinsurance ceded. As used in this subsection, "reasonable period

of time" means that period of time as provided by the national

association of insurance commissioners accounting practices and

procedures manual and as approved by the commissioner.

(3) Except for facultative certificates duly executed by a

property and casualty reinsurer or its duly appointed agent, a

reinsurance agreement shall contain ~~in substance a provision that~~

both of the following:

(a) That the agreement constitutes the entire agreement

between the parties with respect to the business being reinsured

thereunder and that there are no understandings between the parties

other than as expressed in the agreement.

(b) That any change or modification to the agreement is null

and void unless made by amendment to the agreement and signed by

both parties.

(4) A ceding insurer shall not be allowed credit for

reinsurance ceded as either an asset or a reduction from liability

on account of reinsurance ceded, unless the reinsurance contract

provides, in substance, that if the ceding insurer becomes

insolvent, the reinsurance shall be payable pursuant to the terms

of the reinsurance contract by the assuming insurer on the basis of

reported claims allowed by the liquidation court, except as

provided in subsection (6), without diminution because of the

insolvency of the ceding insurer. The payments shall be made

directly to the ceding insurer or its domiciliary liquidator unless

the reinsurance contract requires or an endorsement signed by the

reinsurer to the policies reinsured requires the reinsurer to make

payment to the payees under the policies reinsured if the ceding

insurer becomes insolvent.

(5) The reinsurance agreement may provide that the domiciliary

liquidator of an insolvent ceding insurer shall give written notice

to the assuming insurer of the pendency of a claim against the

ceding insurer on the contract reinsured within a reasonable time

after the claim is filed in the liquidation proceeding.

(6) If a life and health insurance guaranty association or its

designated successor life or health insurer has assumed policy

obligations as direct obligations of the insolvent ceding insurer

and has succeeded to the rights of the insolvent insurer under the

contract of reinsurance, then the reinsurer's liability shall

continue under the contract of reinsurance and shall be payable

pursuant to the direction of the guaranty association or its

designated successor. As a condition to succeeding to the insolvent

insurer's rights under the contract, the guaranty association or

successor life or health insurer shall be responsible for premiums

payable under the reinsurance contract for periods after the date

of liquidation.