§ 27-1-2.1 - Corporate governance standards.
SECTION 27-1-2.1
§ 27-1-2.1 Corporate governance standards.– (a) The importance of good corporate governance is crucial in promotingintegrity in an insurance company's business practices and in maintainingpublic confidence and policyholder trust. The size and ownership structure of acompany often determines the corporate governance standards employed by thecompany. All Rhode Island domestic insurers, regardless of their size orownership structure, shall establish the following minimum corporate governancestandards:
(1) The board of directors must be comprised of a minimum offive (5) and a maximum of twenty-one (21) members.
(2) The board must meet at least two (2) times per year,however, four (4) times per year is encouraged.
(3) The board must establish a written attendance policy.
(4) The board shall have authority to meet in executivesession.
(5) There must be an audit committee established by andamongst the board of directors for the purpose of overseeing the accounting andfinancial reporting processes of the insurer and audits of the financialstatement of the insurer. If no such committee exists, the entire board ofdirectors 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 peryear.
(8) There must be a written audit committee charter.
(9) At least one member of the audit committee must haveknowledge of statutory accounting principles or generally accepted accountingprinciples.
(10) The internal audit function should have a directreporting relationship to the audit committee for critical matters such as theaudit plan, resources and budgets.
(11) The audit committee must approve the selection of theindependent auditor that performs any audit required by the Rhode Islandregulation governing annual audited financial reports.
(12) The audit committee shall require the independentaccountant that performs any audit required by Rhode Island regulationgoverning annual audited financial reports, to timely report to the auditcommittee in accordance with the requirements of Statement of AuditingStandards No. 61, communications with audit committee, or its replacement,including:
(i) All significant accounting policies and materialpermitted practices;
(ii) All material alternative treatments of financialinformation within statutory accounting principles that have been discussedwith management officials of the insurer, ramifications of the use of thealternative disclosures and treatments, and the treatment preferred by theaccountant; and
(iii) Other material written communications between theaccountant and the management of the insurer, such as any management letter orschedule of unadjusted differences.
(13) There must be a written code of ethics coveringdirectors and officers that includes the insurer's conflict of interest policy.
(14) There should be a written policy encouraging employeesto come forward with observations of improprieties or other malfeasance.
(15) On or after July 1, 2008 no domestic insurer or anyaffiliate member of its holding company system (as defined in § 27-35-1 etseq.) may extend or maintain credit, arrange for the extension of credit, orrenew an extension of credit in the form of a personal loan to or for anydirector or officer of a domestic insurer. The terms and purpose of any suchexisting extensions of credit made to any director or officer of a domesticinsurer must be disclosed to the director. For purposes of this subsection,benefits that are offered to directors or officers as policyholders of adomestic insurer, or benefits that are offered to the general public in theinsurer's normal course of business, shall not be considered a violation ofthis subsection.
(b) In addition to the standards enumerated in subsection (a)of this section, the following corporate governance standards must be employedby all Rhode Island domestic mutual insurance companies and all domesticinsurance companies writing more than one hundred million dollars($100,000,000) in premium, in any jurisdiction, on a direct and/or assumedbasis, 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 ofmembers.
(3) The audit committee must approve all related partytransactions, which include transaction between the company and its affiliatesand those between the company and its officers and directors. The company mayestablish materiality thresholds, however, they must be clearly stated in itsaudit committee charter as required by subdivision (a)(8), but in no eventshall the materiality thresholds exceed those established in chapter 35 oftitle 27.
(c) For purposes of this section, an independent board oraudit committee member is defined as an individual: (1) who is not beingcompensated by the domestic insurer or any company within its holding companysystem ("organization"), other than any reasonable compensation and benefitsfor 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 anindependent contractor, except for reasonable compensation as a director; (2)whose own compensation is not determined by individuals who are compensated bythe 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 anindividual compensated by or who receives material financial benefits from theorganization. Policyholders of a domestic insurer may be considered independentproviding they meet the requirements as defined in this subsection.
(d) Any Rhode Island domestic insurer that does not currentlyemploy one or more of the standards enumerated in subsections (a) and (b) ofthis section, must submit a plan of corrective action to the director for hisor her approval. The director, at his or her discretion, may waive any of therequirements in this section for a period not exceeding thirty-six (36) months.The director's refusal to approve a plan of corrective action after reviewingsuch plan of corrective action for a period of sixty (60) days shall,constitute a final order for purposes of the Rhode Island administrativeprocedures act allowing the party to appeal to the superior court.
(e) Nothing contained in the company's by-laws shall conflictwith the corporate governance standards set forth in this act. Any amendmentsto a domestic insurance company's by-laws shall be submitted in writing to thedepartment.
(f) A domestic insurer that is a member of an insuranceholding company system as defined in chapter 35 of title 27, is exempt fromthis section if it can demonstrate that it is, or is controlled by an entitythat 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) thepreapproval requirements of § 201 (§ 10A(i) of the SecuritiesExchange Act of 1934); (ii) the audit committee independence requirements of§ 301 (§ 10A(m)(3) of the Securities Exchange Act of 1934); and (iii)the internal control over financial reporting requirements of § 404 (Item308 of SEC regulation S-K) – ("SOX Compliant Entity"). If the departmentmakes a determination, as a result of its statutory examination or financialanalysis, that the domestic insurer is not controlled by a SOX Compliant entityor that the insurer's interests and affairs are not adequately considered andevaluated by the SOX Compliant Entity, the domestic insurer must take steps tocomply with this act.
(g) A Rhode Island domestic insurer that is a wholly-ownedsubsidiary of another Rhode Island domestic insurer that is compliant with theprovisions 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 notapply to entities regulated pursuant to chapters 19, 20, 20.1, 20.2, 20.3 and41 of title 27 and shall not supersede or replace any specific statutorycorporate governance standards otherwise applicable to domestic insurancecompanies.