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COMMISSIONER'S BULLETIN # B-0073-98

W.C. Circular Letter No. 693

October 08, 1998


To: ALL INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, LLOYDS, OR OTHER INSURERS WRITING WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE IN THE STATE OF TEXAS, THEIR AGENTS AND REPRESENTATIVES, AND TO THE PUBLIC GENERALLY:


Re: Workers' Compensation Classification relativities (Reference: W. C. Circular Letter No. 691)

Retrospective Rating Article No. 186

I. Introduction

On September 14, 1998, the Workers' Compensation Division of the Texas Department of Insurance (the Department) released W. C. Circular Letter No. 691 announcing the adoption of new classification relativities for Texas workers' compensation insurance pursuant to Commissioner´s Order No. 98-0998.

Since that circular was released, the Technical Analysis Division of the Department has received numerous phone calls regarding the implementation of these changes and the associated filing requirements (if any). This circular will address these questions.

II. Action Required by Carriers

A. Mandatory Action

For all policies effective on or after 12:00 A.M. on January 1, 1999, carriers must adhere to the following:

  1. For policy underwriting and premium calculation purposes, you must use rates based on the new class code relativities on all policies effective on or after 1/1/99 unless you make a filing, supported by your experience, of independent relativities. It will not be sufficient to simply reference the 1/1/91, 1/1/94, or 1/1/97 Relativities.
  2. For purposes of reporting financial information under the Texas Workers' Compensation Financial Call, the definition of " Designated Statistical Reporting level" will be changed to reflect the new relativities for policies effective on or after 1/1/99.

All carriers, except as noted in C. below, must file their Notice of Carrier Intent prior to 1/1/99 (see attached). Failure to do so may result in regulatory action and/or penalties. The Department will withdraw prior relativity sets. Companies may not use them for policies effective on or after 1/1/99. Therefore, companies failing to file their Notice of Carrier Intent prior to 1/1/99 will no longer have valid rates filed with the Department.

B. Implementation Before 1/1/99
Companies may implement the 1/1/99 relativities prior to 1/1/99. All carriers that choose to do so must file their Notice of Carrier Intent (including the accompanying rate filing, if required) on or before their selected effective date.

C. Companies that Have Already Submitted Rate Filings Referencing the 1/1/99 Relativities

Companies that have already submitted rate filings to TDI referencing the 1/1/99 relativities need not respond to this bulletin.

III. Rate Level Impact

Companies should be aware that the 1/1/99 Relativities were not balanced back to the 1/1/91 rate level, as were earlier relativity sets (i.e. those effective 1/1/94 and 1/1/97). The 1/1/99 Relativities were balanced to 30% below the 1/1/91 rate level.

The rate level effect on an individual company resulting from this change may be greater than or less than 30%, depending on their distribution of exposures by class code. The expected effect on the industry as a whole is -30%. Companies should take this change into consideration before determining their final selected average deviation from the 1/1/99 relativities.

IV. Experience Rating Impact

The Expected Loss Rates (ELRs) and Discount Ratios (D-Ratios) used in conjunction with the Texas Workers' Compensation Experience Rating Plan have also been revised pursuant to Commissioner´s Order No. 98-0998. These revised ELRs and D-Ratios must be used for all experience modifiers effective on or after 1/1/99 regardless of the company´s selected effective date for the 1/1/99 relativities. In other words, the 1/1/99 ELRs and D-Ratios cannot be implemented prior to 1/1/99. Although changes in the ELRs were capped at +/-25%, the result was still a substantial decrease. The average change in the ELRs was approximately a 23% decrease. This will result in substantial increases in experience rating modifiers for many insureds. For example, for a self-rated risk (one with expected losses of $1,000,000 or more) that is subject to a classification in which the ELR decreased by 25%, the experience modifier would increase by approximately 33%. The Department recommends that each company carefully study the effect of these changes on their overall book of business.

TDI´s analysis of these changes resulted in the following observations:

  • The larger the premium volume of the risk, the larger the change in its experience rating modifier.
  • Increases in experience rating modifiers tend to be greater for risks whose losses are less than expected. Increases in modifiers for risks whose losses are equal to or greater than expected, while still substantial, tended to be less.

Companies should carefully consider these changes before determining their deviations or independently filed relativities.

V. Required Submissions for Companies

The Department has prepared the following guidelines for implementing the change in relativities. Subject to the requirements of Section VI, below, companies may choose the following possible options:

  1. Companies that choose to adopt the 1/1/99 Relativities without changing their overall rate level.
    Note: This does not refer to companies that choose to adopt the 1/1/99 Relativities without changing their current average deviation.
  1. Companies that choose to use the 0.700 industrywide average off-balance from the existing relativities in lieu of determining their own premium off-balance factor based on their own distribution of business by classification:
    Companies must submit a Notice of Carrier Intent and any required up-to-date actuarial support. Companies should check Option 1 of the Notice and follow the corresponding instructions. Companies with resulting deviations from the 1/1/99 relativities greater than 1.000 must provide up-to-date actuarial support. No forms from TDI´s Filings Made Easy are required.
  2. Companies that choose to determine their own premium off-balance factor based on their own distribution of business by classification:
    Companies must submit a Notice of Carrier Intent and any required up-to-date actuarial support. Companies must also provide actuarial support for their premium off-balance factor. Companies should check Option 2 of the Notice and follow the corresponding instructions. Companies with resulting deviations from the 1/1/99 relativities greater than 1.000 must provide up-to-date actuarial support. No forms from TDI´s Filings Made Easy are required.

B. Companies that choose to adopt the 1/1/99 Relativities, but maintain their current deviation.

Companies must submit a Notice of Carrier Intent and any required up-to-date actuarial support. Companies that also choose to determine their own premium off-balance factor must provide actuarial support for it. Companies should check Option 3 of the Notice and follow the corresponding instructions. Companies must submit all forms required by TDI´s Filings Made Easy, including up-to-date actuarial support, since this option represents a rate level change. A revised Exhibit WC is provided with this Bulletin. Please use this form in lieu of the 3-98 Edition of Exhibit WC. This form should be inserted into your Filings Made Easy, replacing the 3-98 edition of Exhibit WC.

C. Companies that choose to make a rate level change and revise their current deviation.

Companies must submit a Notice of Carrier Intent and up-to-date actuarial support. Companies that also choose to determine their own premium off-balance factor must provide actuarial support for it. Companies should check Option 4 of the Notice and follow the corresponding instructions. Companies must submit all forms required by TDI´s Filings Made Easy, including up-to-date actuarial support. A revised Exhibit WC is provided with this Bulletin. Please use this form in lieu of the 3-98 Edition of Exhibit WC. This form should be inserted into your Filings Made Easy, replacing the 3-98 edition of Exhibit WC.

D. Companies that choose to file their own independent set of relativities, with or without a change in overall rate level.

D. Companies must submit a Notice of Carrier Intent and up-to-date actuarial support. Companies must also provide support for their premium off-balance factor. Companies should check Option 5 of the Notice and follow the corresponding instructions. Companies must provide up-to-date actuarial support regardless of whether or not the companies are changing their average rate level/deviation or their relativities. Companies changing their average rate level/deviation must also submit all forms required by TDI´s Filings Made Easy. A revised Exhibit WC is provided with this Bulletin. Please use this form in lieu of the 3-98 Edition of Exhibit WC. This form should be inserted into your Filings Made Easy, replacing the 3-98 edition of Exhibit WC.

E. Companies that have already submitted a rate filing referencing the 1/1/99 Relativities.

For companies that have already submitted a filing referencing the 1/1/99 relativities, no response to this bulletin is necessary.

VI. Required Experience-Based Filings for Certain Carriers

Companies with 1997 Texas calendar year direct written premiums in excess of $2,000,000 that have not made rate filings based on their own experience with an effective date on or after January 1, 1997 must provide up-to-date actuarial support for their proposed deviation from the 1/1/99 Relativities. This is required even if there is no resulting change in rate level. Such companies should select and follow the instructions for Option 4 or Option 5, as appropriate, regardless of whether they would otherwise qualify for Options 1 to 3.

VII. Related Topics

A. Rate Expiration: This change only affects policies effective on or after 1/1/99 (or the company´s earlier selected effective date). The rates and relativities in force on the effective date of a policy that is effective prior to 1/1/99 (or the company´s earlier selected effective date) will continue to apply after 1/1/99 until expiration (or cancellation of the policy). In other words, this is not an outstanding policy rate revision.

B. Filing Expiration: Approval of your current filing will be automatically withdrawn if the completed Notice of Carrier Intent is not received in the Department before 1/1/99.

C. Schedule Rating: The maximum allowable aggregate schedule rating debit/credit will be set at +/- 40% beginning on January 1, 1999. This does not apply to involuntary risks written by the Texas Workers' Compensation Insurance Fund. Insurers may elect to file a lower maximum. However, there will no longer exist any special cases for filing in excess of +/-40%.

D. Exhibit WC: A revised Filings Made Easy Exhibit WC has been attached to this bulletin. This form should be inserted into your Filings Made Easy, replacing the 3-98 edition of Exhibit WC.

VIII. Required Notice of Carrier Intent Form

Each insurer which proposes to write workers' compensation insurance on or after January 1, 1999 must complete and return the attached form and certification to the Department before January 1, 1999. The purpose of this form is to relay to the Department the intent of each insurer regarding the changes to the relativity system. You may complete this form on an individual company basis, or on a group basis if the same "action" (see Section V) is being taken for each company in the group. Even if you plan to make a new or amended filing in the near future, you must comply with the requirements of this bulletin.

If you have questions concerning this matter please contact our Technical Analysis Division at (512) 475-3017. The fax number is (512) 463-6122.

Sincerely,

Philip O. Presley
Chief P&C Actuary
Technical Analysis Division

Attachment 1 | Attachment 2 | Attachment 3 | Attachment 4 | Attachment 5



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