• Increase Text Icon
  • Decrease Text Icon
  • Email Icon
  • Print this page
You are here: Home . rules . 2006 . 0302-059

SUBCHAPTER G. Workers' Compensation Insurance Division 2. Group Self-Insurance Coverage

28 TAC §5.6405

1. INTRODUCTION. The Commissioner of Insurance adopts amendments to §5.6405(b), concerning the excess insurance requirements for self-insurance groups providing workers' compensation coverage. Section 5.6405(b) is adopted with changes to the proposed text published in the October 6, 2006 issue of the Texas Register (31 TexReg 8335).

2. REASONED JUSTIFICATION. The amendments are necessary to prescribe the requirements for a workers' compensation self-insurance group to obtain excess insurance coverage from an eligible surplus lines insurer. The Department of Insurance received a petition from Montlake Holdings LLC proposing to amend 28 TAC §5.6405(b). In the petition, the petitioner states that the proposed rule amendment would allow self-insurance groups in Texas to purchase excess insurance coverage from an accredited and trusteed reinsurer that posts letters of credit to secure the self-insurance groups for excess losses recoverable. The petitioner further states that the proposed rule amendment would significantly increase market availability of excess insurance for self-insurance groups in Texas.

The amendments to §5.6405(b) as adopted modify the petitioner's proposed rule amendment by clarifying and augmenting the requirements necessary for obtaining excess insurance from eligible surplus lines insurers. Labor Code §407A.054 requires each self-insurance group to obtain specific excess insurance coverage for losses that exceed the self-insurance group's retention. The amendments are necessary to provide greater availability of the excess insurance coverage required for self-insurance groups so that more Texas employers would be able to participate in the workers' compensation system. The amendments to §5.6405(b) provide an option for obtaining the required excess insurance from an eligible surplus lines insurer in compliance with Chapter 981 of the Texas Insurance Code and related provisions of the Texas Administrative Code, provided certain requirements are met. The Department has added these requirements so that when a self-insurance group accesses the surplus lines market, a similar level of protection is in place to ensure that the financial objectives of the act are met. The Department does not contemplate or expect that the adoption of these rules will benefit any self-insurance group that is in hazardous financial condition. To exercise the option of surplus lines excess insurance required by the Labor Code, the self-insurance group must comply with the provisions of Chapter 981 of the Insurance Code. These requirements will provide security that the Department believes is reasonable to fulfill the requirements of Chapter 407A.

Following publication of the proposed amendments in the Texas Register, the Department held a hearing on October 23, 2006, to invite public input. In response to written comments received from interested parties both prior to and after the hearing as well as comments made at the hearing, the Department has changed some of the proposed language in the text of the rule amendments as adopted. The Department also changed some of the text in the amendments, as adopted, to correct or clarify the language in the text. The changes, however, do not introduce new subject matter or affect persons in addition to those subject to the proposal as published. The Department has revised subsection (b) as adopted to add the phrase "and maintain" to clarify that the self-insurance group shall obtain and maintain the required excess insurance in a manner that complies with the requirements specified in this section. In response to comments requesting clarification of the holder of the letter of credit, the Department has changed the proposed text in subsection (b)(3) as adopted by substituting the word "maintains" with "provides" to make it clear that the surplus lines insurer provides the letter or credit. One commenter inquired whether under proposed subsection (b)(3) the surplus lines insurer would be required to pay for losses and provide a letter of credit under the attachment point in the event the self-insurance group was unable to pay the losses under the attachment point. Labor Code §407A.054(b) requires only specific excess insurance for losses that exceed the self-insurance group's retention. However, for clarification purposes, the Department has revised subsection (b)(3) by inserting the phrase "the terms and conditions of" before "the excess insurance" and replacing the term "coverage" with the term "policy." The adopted subsection (b)(3) requirement reads: "the surplus lines insurer provides a clean, irrevocable, and unconditional letter of credit in favor of the group as beneficiary and held by the group, subject to withdrawal solely by and under the exclusive control of the group, to secure the payment of losses, including losses, loss adjustment expenses, incurred but not reported losses, and any other obligation of the surplus lines insurer under the terms and conditions of the excess insurance policy, whether paid or unpaid by the group: . . . ." One commenter suggests deleting subsection (b)(4) in its entirety because, according to the commenter, the word "timely" is so vague that enforcement would be difficult; it is unclear what receivables and recoverables are subject to the proposed subsection; and the proposed subsection (b)(4) is an unreasonable requirement on surplus lines insurers. Although the Department disagrees with the comment and declines to delete subsection (b)(4), the Department agrees that some clarification would be helpful and thus has added the phrase "from the surplus lines insurer, in no event, later than 90 days." The adopted subsection (b)(4) requirement reads: "the group timely collects recoverables and receivables from the surplus lines insurer, but in no event, later than 90 days, including, if needed, drawing down on the letter of credit; . . . ." In response to several comments that the Department require all agreements between the self-insurance group and the surplus lines insurer be submitted to the Department prior to use and require that the policy contain any and all agreements, the Department has modified proposed subsection (b)(5) to state that "the group submits all surplus lines policy forms, renewal forms, certificates, endorsements and amendments applicable thereto, and any agreements between the surplus lines insurer and the group to the Texas Department of Insurance for review prior to use and the group may not accept or enter into any agreement or arrangement with the surplus lines insurer that has not been reviewed by the Texas Department of Insurance." In response to comments and as part of its review of the surplus lines policy forms, the Department has added subsection (b)(7) to the proposed text, which requires the group to notify "the Commissioner in writing no less than five calendar days after receiving notice of cancellation or nonrenewal of the excess insurance policy and no less than 30 days prior to the effective date of any proposed change in the excess insurance policy, by endorsement or otherwise."

Additionally, for clarification, proposed §5.6405(b)(3)(C) is revised to add the phrase "is in a form acceptable to the Texas Department of Insurance and". The adopted subsection (b)(3)(C) requirement reads: "provided the letter of credit is in a form acceptable to the Texas Department of Insurance and meets the requirements in 28 TAC §7.610, except for those requirements that apply solely to reinsurance agreements; . . . ." The Department also added the phrase "and in order to maintain" to proposed subsection (b)(6) to make it clear that the Department expects the group to comply fully with all the requirements in subsection (b) in order to maintain its excess insurance coverage with a surplus lines insurer. The Department also has made minor changes to correct grammatical and typographical errors.

3. HOW THE SECTION WILL FUNCTION. Adopted §5.6405(b) provides that in order for a self-insurance group providing workers' compensation coverage to obtain and to maintain excess insurance from an eligible surplus lines insurer, it must be procured in compliance with Chapter 981 of the Insurance Code. Adopted §5.6405(b)(1) establishes the requirement that the surplus lines insurer must be certified as a trusteed reinsurer by the Texas Department of Insurance. Adopted §5.6405(b)(2) prescribes the financial strength rating the eligible surplus lines insurer must maintain. Adopted §5.6405(b)(3) requires the eligible surplus lines insurer to provide a letter of credit to secure the payment of losses under the terms and conditions of the excess insurance policy and describes the letter of credit requirements. Adopted §5.6405(b)(4) specifies that a self-insurance group must timely collect recoverables and receivables from the surplus lines insurer, in no event, later than 90 days, including, if needed, drawing down on the letter of credit. Adopted §5.6405(b)(5) requires a self-insurance group to submit the surplus lines policy form, renewal forms, certificates, endorsements and any amendments thereto, and any agreements between the self-insurance group and the surplus lines insurer to the Department for review prior to use and prohibits a self-insurance group from accepting or entering into a policy or agreement with a surplus lines insurer without prior Department review. Adopted §5.6405(b)(6) provides that a self-insurance group must demonstrate to the satisfaction of the Department that it meets all the requirements in adopted §5.6405(b) before it can obtain and in order to maintain the excess insurance from an eligible surplus lines insurer. Adopted §5.6405(b)(7) requires the self-insurance group to notify the Commissioner in writing no later than five calendar days from receiving notice of any cancellation or notice of nonrenewal, or no later than 30 calendar days prior to the effective date of any proposed change in the excess insurance policy.

4. SUMMARY OF COMMENTS AND AGENCY RESPONSE.

§5.6405(b)

Comment: A few commenters object to the adoption of the proposed amendments to subsection (b) because they state that the admitted market affords more security and provides a greater level of comfort to the self-insurance groups. Several commenters state that surplus lines carriers have no guaranty fund coverage and are not as heavily regulated as admitted carriers, resulting in increased financial exposure for injured workers, employer members, the Texas Self-Insurance Group Guaranty Fund (TSIGGF), and other certified self-insurance groups due to their participation in TSIGGF, which is currently un-financed. One commenter states that requiring the purchase of excess insurance in the admitted marketplace provides a more "level playing field" for self-insurance groups and that to remove the protection of this requirement increases the exposure of participating self-insurance groups, their members and covered employees to the financial impact of potential insolvency of another self-insurance group. Several commenters assert that only a few states allow self-insurance groups to obtain excess insurance coverage outside the admitted market, with some of these markets having dramatic failures, and they suggest that the Department inquire of other states regarding those states' experience with excess insurance and specifically whether these states have allowed surplus lines insurers to provide the excess insurance, and if not, why not. One commenter notes that admitted insurers specializing in excess insurance provide additional oversight on the operations, underwriting, risk and member selection of certified self-insurance groups, helping to ensure self-insurance groups operate in a financially sound and responsible manner. One commenter states that participation in the surplus lines market assumes a more sophisticated insured than most self-insurance groups are in a position to be. One commenter states the proposed amendments could allow an offer of "cheaper" coverage due to less regulation of the surplus lines market in order to allow a self-insurance group to compete on price with the commercial insurers and that this reason is not a sound basis for a self-insurance group to seek excess insurance in the surplus lines market.

Agency Response: The Department disagrees that the proposed amendments should not be adopted. Under current regulations, there is no ability for a self-insurance group to access the surplus lines market. Under the adoption, access to the surplus lines market is acceptable conditioned upon strict compliance by the self-insurance group with the requirements specified in subsection (b). The ability to provide excess insurance coverage is not open to the majority of eligible surplus lines insurers but rather only to a select few eligible alien surplus lines insurers that possess very high financial wherewithal, as exhibited by their status as trusteed reinsurers and by their financial strength rating of A- or better, as determined by A.M. Best Company. Applying the criteria in subsection (b)(1) and (2), as adopted, currently 59 out of a total of 103 eligible alien surplus lines insurers meet these requirements. Pursuant to subsection (b)(3) as adopted, the arrangement between the self-insurance group and the surplus lines insurer must be secured by a letter of credit to protect against the credit risk of the insurer. The trust accounts of these certified trusteed reinsurers are subject to examination pursuant to the Insurance Code Article 5.75-1 (b)(3), which is usually handled by the New York State Insurance Department because that is where the trust funds are typically located. Other states' laws generally differ significantly from the laws in Texas with regard to group self-insurance regulation, including allowing reinsurance by admitted and non-admitted insurers, and the commenters have not provided evidence that problems arose in other states based upon allowing self-insurer groups to obtain excess insurance from non-admitted insurers. In 2003, the Legislature specifically amended the definition of a "covered claim" in the Insurance Code Article 21.28-C §5(8) to add "self-insurers" to the list of excluded claims. TPCIGA is responsible for determining whether a claim is covered, including a claim submitted by a self-insurance group under an excess insurance policy issued by an admitted insurer. As previously noted, the arrangement between a self-insurance group and an eligible surplus lines insurer must be secured by a letter of credit. Prudent business practices in both the admitted and surplus lines excess insurance market will address the operations, underwriting risk and member selection of self-insurance groups. The Legislature, in enacting Chapter 407A of the Labor Code, authorized a board of trustees composed of member employers to operate a self-insurance group and required the board of trustees to engage an administrator to implement the policies established by the board of trustees and to provide day-to-day management of the self-insurance group. The amendments, as adopted, require a self-insurance group to file any surplus lines policy forms and other agreements for review prior to use to address the concern of side agreements. Additionally, pursuant to the Insurance Code §981.004, an eligible surplus lines insurer may provide surplus lines insurance only if the full amount of required insurance cannot be obtained, after a diligent effort, from an insurer authorized to write and actually writing that kind and class of insurance in this state, and an eligible surplus lines insurer may provide surplus lines insurance only in the amount that exceeds the amount of insurance obtainable from authorized insurers.

Comment: One commenter states that if the security of payment is decreased by use of a non-admitted insurer that is not covered by the TPCIGA, then the self-insurance group using the non-admitted insurer should provide additional security to the Department. The commenter requests the following language be added to proposed subsection (b): "(7) the group shall post security, in addition to that required under Section 407A.053(c), Texas Labor Code, in the form and amount required by the commissioner." Another commenter recommends adding similar language to require any self-insurance group that purchases excess insurance with a surplus lines insurer to post additional security, beyond that required by the Texas Labor Code, if it is deemed necessary by the Commissioner.

Agency Response: The Department declines to make the changes. The requirements in the amendments place reasonable safeguards on obtaining the required excess insurance from an eligible surplus lines insurer, including requiring the surplus lines insurer to provide a clean, irrevocable, and unconditional letter of credit. Self-insurance groups must post the security required under Chapter 407A of the Labor Code before the Department can grant a certificate of approval. If through an examination or other review of a self-insurance group's financial condition, the Department determines that a self-insurance group needs additional oversight or an increase in the security required under Chapter 407A based upon a change in membership or other factors that affect the self-insurance group's ability to pay its workers' compensation obligations, the Commissioner may take any regulatory action authorized by law, including increasing the amount of required specific excess insurance under §407A.054(b) and ultimately determining whether a self-insurance group can continue to operate.

Comment: Several commenters state that the excess insurance market for self-insurance groups has not undergone any significant underwriting or economic change to diminish capacity in the admitted market. Several commenters state that self-insurance groups currently holding certificates of approval have obtained excess insurance in the admitted market from three admitted insurers since the Department first granted a self-insurance group a certificate of approval and that currently eight admitted insurers provide excess insurance generally in Texas. These commenters state that excess insurance coverage for certified self-insurers (large individual private employers) has been available continuously in the admitted market since 1991, with periods of constricted availability and relatively higher pricing in "hard markets." One commenter states that there will be advanced indications if the excess market is narrowing to allow the Department to change the rule if necessary before an availability issue is present. One commenter opposes the proposed amendments arguing there is no apparent need at this time for access to the non-admitted marketplace since all self-insurance groups currently have excess insurance from admitted insurers, and there appears to be an adequate number of participants in the admitted marketplace to meet the needs of self-insurance groups. Another commenter argues that the need of one self-insurance group to access the surplus lines market does not justify the rule change, given the fund-to-fund crossover liability and a self-insurance group guaranty fund which remains un-financed. Instead, the commenter suggests a rule change should be considered if there is a market-wide problem with obtaining excess insurance in the admitted market. Several commenters add that if the admitted market is not comfortable insuring a potential self-insurance group (e.g., due to particular risks of a self-insurance group or certain members of a self-insurance group, such as federal exposure to United States Longshore and Harbor Worker Act type claims), the self-insurance group may not be a good candidate for certification as a self-insurance group or may signal problems the regulator should consider.

Agency Response: The Department disagrees that the proposed amendments should not be adopted. The Department has received two requests from an interested party who asserts that there are availability problems currently in the workers' compensation excess insurance market, and that there are only three admitted insurers in Texas that specialize in providing excess coverage for self-insurance groups. The Department is taking steps to provide for increased participation of self-insurance groups in the workers' compensation market. Several commenters state that the proposed amendment is needed to improve the availability of excess insurance for self-insurance groups in Texas. Based upon information filed with the Department and representations made to the Department, all of the self-insurance groups holding certificates of approval from the Department have obtained excess insurance coverage from a limited group of four admitted insurers. In general, shallow markets are believed to be more susceptible to potential market swings and resulting capacity issues. The Department is taking a proactive stance in the event of future problems for self-insurance groups in satisfying the excess insurance requirements. The alternative is to adopt requirements in a reactive fashion in response to market capacity problems, which would be complicated by the length of time necessary for the administrative rule-making process. Under Texas law, coverage must not be available from the admitted market before it is eligible for placement to the surplus lines market. Additionally, there is an overriding public policy to encourage the means by which employers and employees can participate in the workers' compensation system. As noted by several commenters, allowing a self-insurance group to obtain excess insurance in the non-admitted market is designed to facilitate greater involvement of employers and their employees in the system, by allowing more self-insurance groups to be certified and allowing more options to employers for workers' compensation insurance. Additionally, the amendments as adopted limit significantly the pool of eligible surplus lines insurers to those insurers with substantial financial resources that collateralize their obligations with letters of credit.

Comment: One commenter applauds the Department for taking action that will allow authorized group self-insurers that are not able to find excess insurance coverage from an admitted insurer to seek coverage from a trusteed reinsurer on a surplus lines basis.

Agency Response. The Department appreciates the comment.

Comment: One commenter states that some of the reasons set forth by the Legislature in passing HB 2095, which added Labor Code Chapter 407A in 2003, was to give small and mid-sized employers the same option as large employers to self-insure for workers' compensation, to provide a stable market in terms of availability and rates, and to bring more employers into the workers' compensation system by self-insurance groups providing an affordable option to an industry as a whole during a tight market. The commenter recognizes the Department has to balance between affordable options for workers' compensation coverage and the security of payment of workers' compensation benefits and commends Department staff for doing an excellent job in proposing additional requirements if a self-insurance group is to be allowed to use a surplus lines insurer for its excess insurance. The commenter commends the Commissioner and Department staff for their diligent efforts in ensuring that group self-insurance remains an affordable but reliable source of workers' compensation insurance.

Agency Response: The Department appreciates the comment.

Comment: One commenter states that the modifications made by the Department with respect to a prior request by Montlake Holdings, LLC appear to have comfortably allayed the concerns previously contemplated by the commenter. The commenter states that the proposed amendments create a new, reasonably safe way for workers' compensation self-insurance groups in Texas to protect themselves from catastrophic claims and unusually bad claims years and commends those participating in producing the proposed amendments since it is clear a great deal of time and effort has been expended to produce the proposal. The commenter states that its opinion is that the proposed amendments would not place the workers' compensation self-insurance groups in Texas in any greater jeopardy, and will in fact provide another market for self-insurance groups under the rigorous standards delineated in the proposed amendments

Agency Response: The Department appreciates the comment.

Comment: One commenter recommends that the Department adopt a formal acknowledgement form to be completed by each member of a self-insurance group that obtains its excess insurance from a surplus lines insurer. The commenter recommends the form state that the surplus lines insurer is not protected by the TPCIGA or the TSIGGF and that the self-insurance group members can be held responsible for the ultimate losses of the entire self-insurance group and not solely the retained portion of their particular self-insurance group. Another commenter recommends adding the following subsection to the proposal to require self-insurance groups that purchase excess insurance from a surplus lines insurer to notify their members: "Each member of the group shall annually be notified in writing that the group has purchased excess insurance from an eligible surplus lines insurer and not an insurer that has a certificate of authority from the Texas Department of Insurance and that surplus lines insurers are not regulated by the Texas Department of Insurance or covered by the Texas Property and Casualty Insurance Guaranty Association."

Agency Response: The Department declines to make these changes at this time. It appears that the purpose of the commenter's recommendation is to make sure employers are aware of the risks of joining a self-insurance group that obtains excess insurance from a surplus lines insurer. However, each self-insurance group is governed by a board of trustees, which can provide its current members and future members with proper disclosures. Section 5.6405(b)(5) as adopted requires the self-insurance group to prefile the proposed arrangement between the self-insurance group and the surplus lines insurer with the Department for the Department to conduct a due diligence review. As part of its consideration to certify a self-insurance group and to allow it to obtain excess insurance from an eligible surplus lines insurer, the Department will review the notice and acknowledgement forms that the self-insurance group intends to use, and encourage the self-insurance group to notify all members of regulations affecting the purchase of excess insurance coverage from surplus lines insurers. Surplus lines documents are required to have the disclosure specified in Insurance Code §981.101, which includes a disclosure of non-participation in the guaranty fund.

§5.6405(b)(1) - (3)

Comment: One commenter contends that to impose the three additional requirements in proposed subsections (b)(1) - (3) on a "Texas approved" surplus lines insurer seems unreasonably stringent, redundant, unwarranted, and unreasonable and recommends that §5.6405(b) be revised so that meeting any one of the three requirements in subsections (b)(1) - (3) would be sufficient. The commenter argues that the proposed amendments require losses to be secured twice--once by the letter of credit requirement and second by the trusteed reinsurer requirement. The commenter contends that it is redundant to require a surplus lines insurer to be a certified trusteed reinsurer and to maintain an A- rating or better because each is an indicator of financial strength.

Agency Response: The Department disagrees that the requirements are unreasonably stringent, redundant, unwarranted, and unreasonable, and therefore, disagrees with the need for the suggested text revisions. Under current regulations, there is no ability for a self-insurance group to access the surplus lines market. Under the adopted amendments, access to the surplus lines market is acceptable conditioned upon compliance by the self-insurance group with certain financial security requirements. The goal of the amendments is not to hold the surplus lines insurer to a higher standard but to place parameters on how a self-insurance group engages the non-admitted market for the required excess insurance, considering the joint and several liability of self-insurance group members. The Department disagrees that the losses would be secured twice. The trust related to the reinsurance obligations secures reinsurance exposures, not surplus lines obligations. The letter of credit is specific to the losses of that self-insurance group and is a requirement for the self-insurance group to hold a certificate of approval from the Department. The Department also disagrees that the requirements are redundant. In the administration of the Department's solvency regulation functions, it is the Department's practice to utilize multiple ways to determine the financial strength and sufficiency of a regulated entity and its arrangements with other entities.

§5.6405(b)(3)

Comment: Several commenters state that it is unclear if the self-insurance group is intended to hold the letter or credit and recommend that language be added to clarify explicitly that the self-insurance group is the holder of the letter of credit.

Agency Response: The Department agrees with the comment and has clarified subsection(b)(3) as adopted to indicate explicitly that the self-insurance group is the holder of the letter of credit.

Comment: A commenter recommends that each self-insurance group provide an annual report that includes the recoverables, receivables and draw downs issued on the letter of credit to both the Department and relevant group members. Also, the commenter states that a self-insurance group should review annually the letter of credit amount, as loss development and membership in the group may change from year to year.

Agency Response: The Department agrees that appropriate monitoring of these arrangements is warranted, but disagrees that the recommended change is necessary at this time because the Department can monitor the recoverables, receivables and draw downs procedurally as part of its annual solvency monitoring and examinations of self-insurance groups. Self-insurance groups are required to submit an annual audit report to the Department every year. The Department expects the self-insurance group's certified public accountant to evaluate the letter of credit in relation to changes in the loss development and membership structure as part of the annual audit report.

Comment: One commenter asks if the self-insurance group is unable to pay the losses would the surplus lines insurer pay for losses and provide a letter of credit under the attachment point.

Agency Response: The surplus lines insurer's liabilities are limited to the contractual obligations pursuant to the terms and conditions of the excess insurance policy that has been submitted to the Department for review prior to use. The Labor Code §407A.054(b) requires specific excess insurance for losses that exceed the self-insurance group's retention. In order to address the comment, the Department has made minor clarifications to subsection (b)(3) as adopted.

Comment: One commenter recommends that the actuarial analysis for the amount of the letter of credit include a Probable Maximum Loss analysis for the self-insurance group and that the annual report and actuarial opinion include a Probable Maximum Loss analysis.

Agency Response: The Department agrees that an actuarial analysis including a Probable Maximum Loss analysis is an important component in establishing the amount of excess insurance coverage needed and the attachment points for that coverage. Section 5.6405(d) requires an actuarial recommendation of the appropriate level of specific excess insurance for the self-insurance group as a prerequisite for obtaining a certificate of approval. Pursuant to Labor Code §407A.051(d), the self-insurance group is required to notify the Department if any information filed under the Labor Code §407A.051(c) has changed or a self-insurance group's manner of compliance with the Labor Code §407A.051(c) or any regulations adopted thereunder has changed, such as a change in the amount of excess insurance coverage needed. The Department plans to develop administrative procedures to ensure that the actuarial opinion that accompanies the annual financial statements filed by each self-insurance group includes a Probable Maximum Loss analysis.

§5.6405(b)(4)

Comment: A commenter states that the standard of "timely" in proposed §5.6405(b)(4) is so vague that enforcement will be difficult, that it is not clear what recoverables and receivables are subject to the proposed regulation , and that it is not possible to demonstrate "timely collected" before obtaining the policy from the surplus lines insurer. The commenter contends that it is an unreasonable requirement since the Department and the self-insurance group already have many options at their disposal should a surplus lines insurer fail to pay losses. The commenter recommends that §5.6405(b)(4) be deleted in its entirety.

Agency Response: The Department disagrees with the recommendation to delete this subsection in its entirety. The Department, however, has modified subsection (b)(4) for clarification to require that the group timely collect recoverables and receivables "from the surplus lines insurer, but in no event, later than 90 days, including, if needed, drawing down on the letter of credit." The purpose of this provision is to inform all parties involved in the excess insurance transaction that the Department expects that any receivables or recoverables related to the arrangement do not accumulate to a point that they may or do become hazardous to the financial condition of the self-insurance group .

§5.6405(b)(5)

Comment: Several commenters state that the Department needs to require full disclosure of all policy terms, limitations, endorsements, and exclusions to ensure the transfer of risk to the surplus lines insurer and to ensure no side agreements exist that would limit the surplus lines insurer's liability under the policy. Several commenters recommend that the proposed amendments be changed so that the self-insurance group is required to file with the Department and TSIGGF any and all agreements not disclosed in the policy for review prior to use. One commenter requests requiring the policy to contain any and all agreements between the self-insurance group and the surplus lines insurer prior to its use and that the policy state that it contains any and all agreements between the self-insurance group and the surplus lines insurer.

Agency Response: The Department agrees that filing all side and other agreements with the Department is necessary for the proper administration of Chapter 407A of the Labor Code. Labor Code §407.054 directs the Commissioner to prescribe the form of the specific excess insurance which is to cover losses that exceed the self-insurance group's retention up to limits required by the Commissioner. The Department has clarified the requirement by revising proposed subsection (b)(5) to require the self-insurance group to submit the policy forms, renewal forms, certificates, endorsements and any amendments thereto, and any agreements between the self-insurance group and the excess insurance insurer for the Department's review prior to use. The Department also has clarified the requirement by revising proposed subsection (b)(5) to state that "the group may not accept or enter into any agreement or arrangement with the surplus lines insurer that has not been reviewed by the Texas Department of Insurance." To further address the concerns raised in the comments, the Department has changed the amendments as proposed by adding a new paragraph (7) requirement: "(7) the group notifies the Commissioner in writing no less than five calendar days after receiving notice of cancellation or nonrenewal of the excess insurance policy and no less than 30 calendar days prior to the effective date of any proposed change in the excess insurance policy, by endorsement or otherwise." The Department declines to make the change to require that the policy contain any and all agreements between the self-insurance group and the surplus lines insurer since the amendment, as adopted, will require the self-insurance group to file any and all agreements, and the Department can require the policy to contain this provision as part of its review of the policy form submission. The Department will not recognize any excess insurance policy or agreements in fulfilling a self-insurance group's financial obligations unless the policy and agreements have been reviewed by the Department prior to use. The Department declines to make the change to add "and to the Texas Self-Insurance Group Guaranty Fund" to proposed subsection (b)(5). The review and approval of a self-insurance group's specific excess insurance is a regulatory function of the Department. While the Department appreciates the commenter's concerns, the Department notes that pursuant to Labor Code §407A.055(a), TSIGGF currently receives reports and other relevant information from the Department, can access certain information provided by or filed with the Department, and can provide advisory recommendations to the Commissioner as necessary regarding an applicant's compliance with Subchapter B relating to application requirements for certification. The Department will endeavor to provide the proposed policy information it receives with TSIGGF while the submission is under review.

Comment: A commenter states that approval of an excess insurance form encroaches into form regulation and is contradictory to the ability to tailor insurance solutions to the needs of a particular customer. The commenter suggests deleting subsection (b)(5) in its entirety.

Agency Response: The Department declines to delete proposed subsection (b)(5) because it imposes a requirement on the self-insurance group that is necessary for the Department's proper administration of Chapter 407A. Subsection (b)(5) is one of the necessary requirements for the self-insurance group to engage the surplus lines market as provided under Chapter 407A of the Labor Code. Specifically, this requirement enables the Department to evaluate the arrangement in terms of a self-insurance group's compliance with the requirements in the Labor Code Chapter 407A, including §407A.051(e) which requires the Commissioner to evaluate the financial information provided with the application as necessary to ensure that the funding is sufficient to cover expected losses and expenses and that the funds necessary to pay workers' compensation benefits will be available on a timely basis and §407A.054 which explicitly requires a self-insurance group to obtain specific excess insurance for losses that exceed the self-insurance group's retention in a form prescribed by the Commissioner.

5. NAMES OF THOSE COMMENTING FOR AND AGAINST THE PROPOSAL.

For: Texas Alliance of Energy Producers Self-Insured Group Trust; Montlake Holdings LLC; BMS Group Limited; C&S Service and Supply Company; Boley-Featherston Insurance; Cedar Springs Drilling Company, LLC; Burk Royalty Co., LTD; Safety Services International, Inc.; Sun Coast Resources, Inc.; and ICT Insurance Agency, Inc.

For with changes: National Association of Professional Surplus Lines Office Ltd .

Against: Texas Cotton Ginners' Trust and RMS Texas, LLC.

Neither for nor against: Attenta and Texas Auto Dealers Self Insurers Group.

Neither for nor against, with changes: Texas Self-Insurance Group Guaranty Fund, Office of Public Insurance Counsel, and Texas Mutual Insurance Company.

6. STATUTORY AUTHORITY. The amendments to §5.6405(b) are adopted pursuant to the Labor Code §§407A.008, 407A.051(c)(3) and (10), 407A.051(e), and 407A.054, and the Insurance Code §36.001. Labor Code §407A.051(c)(3) requires an application for a certificate of approval to include proof of compliance with the excess insurance requirements under Labor Code §407A.054. Labor Code §407A.051(c)(10) requires that an application include a pro forma financial statement, in a form acceptable to the Commissioner, that shows the financial ability of the group to pay the workers' compensation obligations of the employers who are members of the group. Labor Code §407A.051(e) requires the Commissioner to evaluate the financial information provided with the application as necessary to ensure that the funding is sufficient to cover expected losses and expenses and that the funds necessary to pay workers' compensation benefits will be available on a timely basis. Labor Code §407A.054(b) states that each group shall obtain specific excess insurance for losses that exceed the group's retention in a form prescribed by the Commissioner. Labor Code §407A.054(b) also states that the Commissioner may establish minimum requirements for the amount of specific excess insurance based on differences among groups in size, types of employment, and years in existence, and other relevant factors. Labor Code §407A.054(a) directs that each group must comply with the excess insurance requirements adopted under this section. Labor Code §407A.008 provides that the Commissioner shall adopt rules as necessary to implement Labor Code Chapter 407A, Group Self-Insurance Coverage. Insurance Code §36.001 provides that the Commissioner may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

7. TEXT.

§5.6405. Excess Insurance.

(a) The group shall obtain excess insurance in an amount acceptable to the Commissioner but in no event shall the excess insurance coverage be less than $5 million per occurrence.

(b) The group shall obtain and maintain excess insurance coverage from an insurer that has a certificate of authority from the Texas Department of Insurance or from an eligible surplus lines insurer in compliance with Chapter 981 of the Texas Insurance Code and related provisions of the Texas Administrative Code, provided that:

(1) the surplus lines insurer is also certified as a trusteed reinsurer by the Texas Department of Insurance, in accordance with Insurance Code, Article 5.75-1(b)(3) (effective April 1, 2007, Article 5.75-1(b)(3) is repealed and re-adopted as Insurance Code §§493.102, 493.152 - 493.155, and 495 157);

(2) the surplus lines insurer maintains a financial strength rating of "A-" or better, as determined by A.M. Best Company;

(3) the surplus lines insurer provides a clean, irrevocable, and unconditional letter of credit in favor of the group as beneficiary and held by the group, subject to withdrawal solely by and under the exclusive control of the group, to secure the payment of losses, including losses, loss adjustment expenses, incurred but not reported losses, and any other obligation of the surplus lines insurer under the terms and conditions of the excess insurance policy, whether paid or unpaid by the group:

(A) in no less than the greater of:

(i) the amount of actuarially projected losses to ultimate; or

(ii) the amount of actual losses to ultimate;

(B) issued by a qualified United States financial institution as defined in Insurance Code, Article 5.75-1(e) (effective April 1, 2007, Article 5.75-1(e) is repealed and re-adopted as Insurance Code §§493.002, 493.102, and 493.104); and

(C) provided the letter of credit is in a form acceptable to the Texas Department of Insurance and meets the requirements in 28 TAC §7.610, except for those requirements that apply solely to reinsurance agreements;

(4) the group timely collects recoverables and receivables from the surplus lines insurer, but in no event, later than 90 days, including, if needed, drawing down on the letter of credit;

(5) the group submits the surplus lines policy forms, renewal forms, certificates, endorsements and amendments applicable thereto, and any agreements between the surplus lines insurer and the group to the Texas Department of Insurance for review prior to use and the group may not accept or enter into any agreement or arrangement with the surplus lines insurer that has not been reviewed by the Texas Department of Insurance;

(6) the group demonstrates to the satisfaction of the Texas Department of Insurance that the group meets the requirements of subsection (b) of this section before obtaining and in order to maintain excess insurance coverage from an eligible surplus lines insurer; and

(7) the group notifies the Commissioner in writing no less than five calendar days after receiving notice of cancellation or nonrenewal of the excess insurance policy and no less than 30 calendar days prior to the effective date of any proposed change in the excess insurance policy, by endorsement or otherwise.

(c) In determining the group's excess insurance, the Commissioner shall consider a group's size, types of employment, years in existence and other relevant factors.

(d) To assist the Commissioner in making the determination under subsection (c) of this section, the group shall submit an analysis prepared by an actuary of the appropriate level of specific excess insurance for the group.



For more information, contact:

Contact Information and Other Helpful Links