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EXEMPT FILING NOTIFICATION PURSUANT TO THE INSURANCE CODE

CHAPTER 5, SUBCHAPTER L, ARTICLE 5.96

The Commissioner of Insurance (Commissioner) will hold a public hearing under Docket No. 2597 on October 7, 2004, at 9:30 o’clock a.m., in Room 100 of the William P. Hobby Building, 333 Guadalupe Street in Austin, Texas to consider a petition by the staff of the Texas Department of Insurance (TDI) proposing the adoption of revised Texas Workers' Compensation Classification Relativities (classification relativities) to replace those adopted in Commissioner's Order No. 02-1122 dated October 28, 2002; and the adoption of a revised table to amend the Texas Basic Manual of Rules, Classification, and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance (Basic Manual) concerning the Expected Loss Rates and Discount Ratios used in experience rating. Staff's petition (Ref. No. W-0804-14-I) was filed on August 25, 2004.

In its petition, the staff requests consideration of a schedule of revised classification relativities and tables amending the Basic Manual. The revised classification relativities schedule is proposed to replace the classification relativities schedule adopted in Commissioner's Order No. 02-1122 dated October 28, 2002. The tables amending the Basic Manual concern the Expected Loss Rates and Discount Ratios.

The staff requests that the proposed revised classification relativities be available for adoption by insurers immediately, but that their use be mandatory for all policies with an effective date on or after January 1, 2005 unless the insurer makes an independent filing to justify insurer specific classification relativities. The staff further requests that the revised tables amending the Basic Manual be made effective for workers' compensation experience modifiers with an effective date on or after January 1, 2005.

Article 5.60(a) of the Texas Insurance Code authorizes the Commissioner to determine hazards by classes and fix classification relativities applicable to the payroll in each class for workers' compensation insurance. Article 5.60(b) requires TDI to adopt a uniform experience rating plan. Article 5.60(d) provides that the Commissioner revise the classification system and rating plans at least once every five years.

The classification relativities currently in effect were based on experience data reflecting workers' compensation experience from policies with effective dates in 1995 through 1999. The proposed classification relativities are based on the analysis of experience data from policies with effective dates in 1997 through 2001. The staff's proposed classification relativities reflect changes in experience that occur over time, due to such things as technological advances and improvements in safety programs.

Current classification relativities are 70% of the 1994 classification relativities. This level of classification relativities was adopted in Commissioner’s Order No. 98-0998 dated August 27, 1998 to more accurately reflect changes in experience and changes that occurred with the passage of time due to such things as technological advances and improvement in safety programs. In addition, this level of classification relativities produced numbers that were more in line with what was actually being charged at the time.

Recent projections of Texas loss experience show lower combined ratios, on average, for workers compensation insurers. Therefore, staff proposes that all of the revised classification relativities be multiplied by a factor of 65/70, bringing the relativities to 65% of the 1994 relativities.

Modifications to the classification relativities require concurrent changes in the Table II of the Basic Manual concerning the Expected Loss Rates and Discount Ratios. The current Table II, which became effective on January 1, 2003, contains expected loss rates that were based on the level of losses used to experience rate the average policy that would be subject to the new expected loss rates. Such a policy would be effective on July 1, 2003 and would reflect the current classification relativities. Staff proposes an adjustment to make the expected loss rates more reflective of the level of losses that would be used to experience rate policies that would be effective in 2005, and reflect the proposed classification relativities. Staff also proposes to cap changes in the expected loss rates to +25% and -25%.

Copies of the full text of the staff petition and the proposed revised schedule and table are available for review in the Office of the Chief Clerk of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas, 78714-9104. For further information or to request copies of the petition and proposed revised schedule and table, please contact Sylvia Gutierrez at ChiefClerk@tdi.texas.gov, 512-463-6327 (refer to Ref. No. W-0804-14-I).

Comments on the proposed changes may be submitted in writing within 30 days after publication of the proposal in the Texas Register to the Office of Chief Clerk, P. O. Box 149104, MC 113-2A, Austin, Texas, 78714-9104. An additional copy of the comment should be submitted simultaneously to Philip O. Presley, Chief Property and Casualty Actuary, P. O. Box 149104, MC 105-5F, Austin, Texas, 78714-9104.

This notification is made pursuant to the Texas Insurance Code, Article 5.96, which exempts action taken under this article from the requirements of the Administrative Procedure Act (Government Code, Title 10, Ch. 2001).

For more information, contact: ChiefClerk@tdi.texas.gov