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You are here: Home . rules . 2006 . 0925-059

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

28 TAC §5.6405

1. INTRODUCTION. The Texas Department of Insurance proposes amendments to §5.6405(b) concerning excess insurance. The proposal addresses the excess insurance requirements for self-insurance groups providing workers' compensation coverage. These amendments are necessary to prescribe the requirements for obtaining excess insurance coverage from eligible surplus lines insurers. 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 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 proposed amendments to §5.6405(b) modify the petitioner's proposal by clarifying and augmenting the requirements necessary for obtaining excess insurance from eligible surplus lines insurers. Labor Code §407A.054 requires self-insurance groups to obtain excess insurance coverage for workers' compensation coverage. The proposed amendments are necessary to provide greater availability of the excess insurance coverage required for these groups, provided the requirements specified in the proposal are met, so that more Texas employers would be able to participate in the workers' compensation system. The proposed amendment to §5.6405(b) provides 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. These requirements will provide security that the Department believes is reasonable to fulfill the requirements of Chapter 407A. Proposed §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. Proposed §5.6405(b)(2) prescribes the financial strength rating the surplus lines insurer must maintain. Proposed §5.6405(b)(3) sets forth the letter of credit requirements a surplus lines insurer must maintain to secure the payment of losses under the excess insurance coverage. Proposed §5.6405(b)(4) specifies that a self-insurance group must timely collect recoverables and receivables. Proposed §5.6405(b)(5) requires a self-insurance group to submit the surplus lines policy form for review prior to use. Proposed §5.6405(b)(6) provides that a self-insurance group must demonstrate to the satisfaction of the Department that it meets all the requirements for obtaining excess insurance from an eligible surplus lines insurer.

2. FISCAL NOTE. Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed amendments will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the proposal. There will be no measurable effect on local employment or the local economy as a result of the proposal.

3. PUBLIC BENEFIT/COST NOTE. Ms. Patterson also has determined that for each year of the first five years the proposed amendments are in effect, the public benefit anticipated as a result of the proposal is greater availability of the excess insurance coverage required for self-insurance groups that provide workers' compensation coverage, provided the requirements specified in the proposal are met. Labor Code §407A.054 requires self-insurance groups to obtain excess insurance coverage. The proposal provides an option for obtaining the required excess insurance from an eligible surplus lines insurer that is also a trusteed reinsurer. There is no anticipated cost of compliance, and therefore, no anticipated difference in cost for compliance between the smallest and largest businesses. Even if the proposal may have an adverse effect on small and micro-businesses, the proposal is optional for small and micro-businesses. The Department has considered the purpose of the applicable statutes, which is to establish the minimum requirements for excess insurance for self-insurance groups, and has determined that it is neither legal nor feasible to waive the provisions of the proposed amendments for members of groups or groups that qualify as small or micro-businesses under Government Code §2006.001 and that opt to obtain the required excess insurance from an eligible surplus lines insurer that is also a trusteed reinsurer. Additionally, it is the Department's position that to waive or modify the requirements of the proposed amendments for small and micro businesses would result in a disparate effect on policyholders and other persons affected by the proposed amendments.

4. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on November 6, 2006 to Gene C. Jarmon, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104.

The Commissioner will consider the adoption of the proposed amendments to §5.6405(b) in a public hearing under Docket No. 2659 scheduled for October 23, 2006, at 10:00 a.m. in Room 100 of the William P. Hobby, Jr. State Office Building, 333 Guadalupe Street, Austin, Texas. Written and oral comments presented at the hearing will be considered.

5. STATUTORY AUTHORITY. The amendments are proposed pursuant to the Labor Code §§407A.008, 407A.051(c)(3) (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) provides that the Commissioner shall evaluate the financial information provided with the application as necessary to ensure that the funding is sufficient to cover expected losses and expense and 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.

6. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal:

Rule Statute

§5.6405(b) Labor Code Chapter 407A

7. TEXT

§5.6405. Excess Insurance.

(a) (No change.)

(b) The group shall obtain 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 maintains a clean, irrevocable, and unconditional letter of credit 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 excess insurance coverage, 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 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, including, if needed, drawing down on the letter of credit;

(5) the group submits the policy form to the Texas Department of Insurance for review prior to use; and

(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 excess insurance coverage from an eligible surplus lines insurer.

(c) - (d) (No change.)



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