2007 -- S 368 SUBSTITUTE A AS AMENDED
A N A C T
RELATING TO INSURANCE -- DOMESTIC INSURANCE CARRIERS
Introduced By: Senator David E. Bates
Date Introduced: February 13, 2007
It is enacted by the General Assembly as follows:
SECTION 1. Chapter 27-1 of the General Laws entitled "Domestic Insurance
Companies" is hereby amended by adding thereto the following section:
27-1-2.1. Corporate governance standards. – (a) The importance of good corporate
governance is crucial in promoting integrity in an insurance company's business practices and in
maintaining public confidence and policyholder trust. The size and ownership structure of a
company often determines the corporate governance standards employed by the company. All
Rhode Island domestic insurers, regardless of their size or ownership structure, shall establish the
following minimum corporate governance standards:
(1) The board of directors must be comprised of a minimum of five (5) and a maximum
of twenty-one (21) members.
(2) The board must meet at least two (2) times per year, however, four (4) times per year
(3) The board must establish a written attendance policy.
(4) The board shall have authority to meet in executive session.
(5) There must be an audit committee established by and amongst the board of directors
for the purpose of overseeing the accounting and financial reporting processes of the insurer and
audits of the financial statement of the insurer. If no such committee exists, the entire board of
directors shall act as the audit committee.
(6) The board must review the minutes of the audit committee.
(7) The audit committee must meet at least two (2) times per year.
(8) There must be a written audit committee charter.
(9) At least one member of the audit committee must have knowledge of statutory
accounting principles or generally accepted accounting principles.
(10) The internal audit function should have a direct reporting relationship to the audit
committee for critical matters such as the audit plan, resources and budgets.
(11) The audit committee must approve the selection of the independent auditor that
performs any audit required by the Rhode Island regulation governing annual audited financial
(12) The audit committee shall require the independent accountant that performs any
audit required by Rhode Island regulation governing annual audited financial reports, to timely
report to the audit committee in accordance with the requirements of Statement of Auditing
Standards No. 61, communications with audit committee, or its replacement, including:
(i) All significant accounting policies and material permitted practices;
(ii) All material alternative treatments of financial information within statutory
accounting principles that have been discussed with management officials of the insurer,
ramifications of the use of the alternative disclosures and treatments, and the treatment preferred
by the accountant; and
(iii) Other material written communications between the accountant and the management
of the insurer, such as any management letter or schedule of unadjusted differences.
(13) There must be a written code of ethics covering directors and officers that includes
the insurer's conflict of interest policy.
(14) There should be a written policy encouraging employees to come forward with
observations of improprieties or other malfeasance.
(15) On or after the effective date of this act no domestic insurer or any affiliate member
of its holding company system (as defined in section 27-35-1 et seq.) may extend or maintain
credit, arrange for the extension of credit, or renew an extension of credit in the form of a
personal loan to or for any director or officer of a domestic insurer. The terms and purpose of any
such existing extensions of credit made to any director or officer of a domestic insurer must be
disclosed to the director. For purposes of this subsection, benefits that are offered to directors or
officers as policyholders of a domestic insurer, or benefits that are offered to the general public in
the insurer's normal course of business, shall not be considered a violation of this subsection.
(b) In addition to the standards enumerated in subsection (a) of this section, the following
corporate governance standards must be employed by all Rhode Island domestic mutual insurance
companies and all domestic insurance companies writing more than one hundred million dollars
($100,000,000) in premium, in any jurisdiction, on a direct and/or assumed basis, as determined
at the end of the previous calendar year:
(1) The board must have an independent majority of members.
(2) The audit committee must have an independent majority of members.
(3) The audit committee must approve all related party transactions, which include,
transaction between the company and its affiliates and those between the company and its officers
and directors. The company may establish materiality thresholds, however, they must be clearly
stated in its audit committee charter as required by subdivision (a)(8), but in no event shall the
materiality thresholds exceed those established in chapter 35 of title 27.
(c) For purposes of this section, an independent board or audit committee member is
defined as an individual: (1) who is not being compensated by the domestic insurer or any
company within its holding company system ("organization"), other than any reasonable
compensation and benefits for services as a director, and has not been compensated within the
past twelve (12) months including full-time and part-time compensation as an employee or an
independent contractor, except for reasonable compensation as a director; (2) whose own
compensation is not determined by individuals who are compensated by the organization, except
for reasonable compensation paid to the director; (3) who does not receive material financial
benefits; (i.e. service contracts, grants or other payments) from the organization; or (4) who is not
related to (as a spouse, sibling, parent, or child) or the domestic partner of an individual
compensated by or who receives material financial benefits from the organization. Policyholders
of a domestic insurer may be considered independent providing they meet the requirements as
defined in this subsection.
(d) Any Rhode Island domestic insurer that does not currently employ one or more of the
standards enumerated in subsections (a) and (b) of this section, must submit a plan of corrective
action to the director for his or her approval. The director, at his or her discretion, may waive
any of the requirements in this section for a period not exceeding thirty-six (36) months. The
director's refusal to approve a plan of corrective action after reviewing such plan of corrective
action for a period of sixty (60) days shall, constitute a final order for purposes of the Rhode
Island administrative procedures act allowing the party to appeal to the superior court.
(e) Nothing contained in the company's by-laws shall conflict with the corporate
governance standards set forth in this act. Any amendments to a domestic insurance company's
by-laws shall be submitted in writing to the department.
(f) A domestic insurer that is a member of an insurance holding company system as
defined in chapter 35 of title 27, is exempt from this section if it can demonstrate that it is
controlled by an entity that either is required to be compliant with, or voluntarily is compliant
with, all of the following provisions of the Sarbanes-Oxley Act of 2002; (i) the preapproval
requirements of section 201 (Section 10A(i) of the Securities Exchange Act of 1934); (ii) the
audit committee independence requirements of section 301 (Section 10A(m)(3) of the Securities
Exchange Act of 1934); and (iii) the internal control over financial reporting requirements of
Section 404 (Item 308 of SEC regulation S-K) – ("SOX Compliant Entity"). If the department
makes a determination, as a result of its statutory examination or financial analysis, that the
domestic insurer is not controlled by a SOX Compliant entity or that the insurer's interests and
affairs are not adequately considered and evaluated by the SOX Compliant Entity, the domestic
insurer must take steps to comply with this act.
(g) A Rhode Island domestic insurer that is a wholly-owned subsidiary of another Rhode
Island domestic insurer that is compliant with the provisions of subsection A, and if applicable
the requirements of subsection B, shall be exempt from compliance with any other requirements
of this act.
(h) The requirements of this section, 27-1-2.1, shall not apply to entities regulated
pursuant to chapters 19, 20, 20.1, 20.2, 20.3 and 41 of title 27 and shall not supercede or replace
any specific statutory corporate governance standards otherwise applicable to domestic insurance
SECTION 2. This act shall take effect on July 1, 2008.