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You are here: Home . rules . 2006 . 1023-059

EXEMPT FILING NOTIFICATION PURSUANT TO THE INSURANCE CODE

CHAPTER 5, SUBCHAPTER L, ARTICLE 5.96

Notice is given that the Commissioner of Insurance (Commissioner) will 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. 05-0906 dated October 18, 2005; and the adoption of a revised table to amend the Texas Basic Manual of Rules, Classifications, and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance (Basic Manual) concerning the Expected Loss Rates and Discount Ratios by class used in experience rating. Staff's petition (Ref. No. W-1006-21-I) was filed on October 20, 2006. Article 5.96(d) provides that any interested person may request the Commissioner to hold a hearing before acting on a pending petition. Except as provided by Article 5.96A, the Commissioner has discretion on whether to hold the hearing and a hearing will not be held unless requested. Any request for a public hearing should be submitted separately by 5:00 p.m. on December 4, 2006 to Gene Jarmon, General Counsel and Chief Clerk, Texas Department of Insurance, P.O. Box 149104, Mail Code 113-2A, Austin, Texas 78714-9104. If a hearing is held, written and oral comments presented at the hearing will be considered.

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 05-0906 effective January 1, 2006. 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 March 1, 2007 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 March 1, 2007.

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 (d) provides that the Commissioner revise the classification system 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 1998 through 2002. The proposed classification relativities are based on the analysis of experience data from policies with effective dates in 1999 through 2003. The staff's proposed classification relativities reflect changes in experience that occur over time, due to factors such as technological advances and improvements in safety programs. The indicated resulting relativities were balanced to the level of the current relativities through the application of off-balance factors. This provides for a revenue neutral set of relativities in relation to the current relativities. The staff proposes to limit changes in the classification relativities to +25% and -25%. These limited relativities have been balanced overall to the level of the current relativities. This would help to minimize possible rate shock due to large indicated changes in the relativities.

Modifications to the classification relativities require concurrent changes in Table II of the Basic Manual concerning the Expected Loss Rates and Discount Ratios. The current Table II, which became effective on January 1, 2006, 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, 2006 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 2007, 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 (512) 512-463-6327 (refer to Ref. No. W-1006-21-I).

Comments on the proposed changes may be submitted in writing by December 4, 2006 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 to Philip 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).

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PETITIONER: § BEFORE THE TDI

STAFF OF THE TEXAS § COMMISSIONER OF

DEPARTMENT OF INSURANCE § INSURANCE

PETITION FOR ADOPTION OF REVISED WORKERS' COMPENSATION CLASSIFICATION RELATIVITIES AND AMENDMENTS TO THE TEXAS

BASIC MANUAL OF RULES, CLASSIFICATIONS AND EXPERIENCE RATING PLAN FOR WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE UPDATING THE EXPECTED LOSS RATE AND DISCOUNT RATIO TABLE

The staff of the Texas Department of Insurance (TDI) files this petition concerning two proposals. The staff proposes the adoption of revised Texas Workers' Compensation Classification Relativities (classification relativities) to replace those adopted in Commissioner's Order 05-0906 dated October 18, 2005. In addition, the staff proposes the adoption of a revised table concerning the Expected Loss Rates and Discount Ratios by classification used in experience rating, which is contained in the Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance (Basic Manual).

Articles 5.60 and 5.96 of the Texas Insurance Code authorize the filing of this petition and the action requested of the Commissioner. Article 5.60(a) authorizes TDI to determine hazards by class and to 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 and Article 5.60(d) requires TDI to revise the classification system and rating plans at least once every five years. Article 5.96 authorizes TDI to prescribe, promulgate, adopt, approve, amend, or repeal standard and uniform manual rules, rating plans, classification plans, statistical plans, and policy and endorsement forms for various lines of insurance, including workers' compensation insurance.

I. Proposal for Consideration and Adoption

A. Staff proposes the consideration and adoption of revised classification relativities to replace those adopted by TDI in Commissioner's Order No.

05-0906. A schedule of the revised classification relativities is attached as Exhibit A.

B. Staff proposes the consideration and adoption of a revised table concerning the expected loss rates and discount ratios used in experience rating. The proposed revised table will replace Table II, pages ER-21 through ER-24 of the Basic Manual and is attached as Exhibit B.

C. Staff proposes that the 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 March 1, 2007 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 March 1, 2007.

II. Background and Justification

A. Classification Relativities

Classification relativities compare the anticipated level of costs of each classification to the anticipated level of costs of other classifications. These relativities define likely cost relationships among classifications. For example, if one class has a relativity of ten and another has a relativity of five; one would expect the former to produce twice the dollars of loss per $100 of payroll than the latter. Workers' compensation insurers generally express the rates they file with TDI as a multiplier to be applied to the class relativities.

Article 5.60(a) of the Texas Insurance Code authorizes the Commissioner to determine hazards by classes and to fix classification relativities applicable to the payroll in each class for workers' compensation insurance. 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 adopted by TDI in Commissioner's Order No. 05-0906 dated October 18, 2005. They were based on experience data reflecting workers' compensation experience from policies with effective dates in 1998 through 2002. Since the adoption of Commissioner's Order No. 05-0906, more recent experience has become available. The staff therefore proposes to revise the classification relativities to reflect the more recent experience. The proposed classification relativities are based on the staff's analysis of experience data from policies with effective dates in 1999 through 2003. The staff's proposed classification relativities reflect changes in experience that occur over time, due to such things as technological advances and improvement in safety programs.

The staff's analysis is based on TDI's Workers' Compensation Statistical Plan data summarized by and obtained from the National Council on Compensation Insurance, Inc., TDI's statistical agent. The five most recent policy years of actual loss experience (1999 at fifth report, 2000 at fourth report, 2001 at third report, 2002 at second report, and 2003 at first report) were summarized by kind of injury within each class. Staff reviewed this data for reasonability and consistency. Individual losses used in the experience base were limited to $525,000 in order to reduce possible distortions in individual classification indications due to unusually costly claims. The staff then calculated the ratio of unlimited to limited losses by type of injury separately for all state classifications combined and for all federal classifications combined. The ratios were then applied by type of injury to the limited losses of each classification within the respective state or federal group in order to spread the excess costs over all classes.

The staff then separately developed to an ultimate cost level the actual serious medical, serious indemnity, non-serious medical and non-serious indemnity losses. Staff then adjusted the developed losses to account for changes in the maximum benefits payable to an injured worker and for changes in the medical fee schedule. The staff then divided the resulting losses by payroll to produce the experience pure premiums. Next, the staff at this stage of the process balanced the experience pure premiums to the level of the current relativities through the use of off-balance factors. This procedure provided for a revenue neutral set of relativities in relation to the current relativities.

The staff then credibility weighted the experience pure premiums with the pure premiums underlying the current relativities. The resulting relativities were again balanced to the level of the 2006 relativities so that the indications would be revenue neutral relative to the 2006 relativities.

The staff limited changes in the classification relativities that had been balanced overall to the level of the current relativities to +25% and -25%. The limitations are designed to minimize possible rate shock due to large indicated changes in the relativities. The staff balanced the resulting limited relativities to the level of the current relativities through the application of off-balance factors. This balancing provides for a revenue neutral set of relativities in relation to the current relativities.

B. Expected Loss Rates and Discount Ratios

Modifications to the classification relativities require concurrent changes in the table of Expected Loss Rates and Discount Ratios, Table II of the Basic Manual. Table II is part of the uniform experience rating plan. Article 5.60(b) of the Texas Insurance Code authorizes the Commissioner to adopt a uniform experience rating plan and Article 5.60(d) requires that the classification system and rating plans be revised at least once every five years.

The current Table II concerning Expected Loss Rates and Discount Ratios became effective on January 1, 2006. The current expected loss rates 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, 2006. 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 2007.

Expected loss rates are the expected losses per $100 of payroll for the average insured in a classification. By applying the expected loss rate to an insured's payroll during its experience period, one can determine what the losses would have been at the average level for its classification. By comparing the insured's actual loss experience with these average losses, and applying reasonable credibility standards, one can determine how much better or worse than average that experience was, and how much better or worse the experience is likely to be in the future.

As part of the experience rating formula in the Basic Manual, larger losses are split into so-called primary and excess amounts. The primary portion of a loss is the lesser of the amount of the claim or $5,000. The excess portion is the amount of each loss, if any, in excess of $5,000. Each portion receives a different credibility weight in the experience rating process. The purpose of splitting large losses into their primary and excess components is to prevent one or more large claims from unduly affecting an insured's experience modification.

Discount ratios are ratios of the primary expected losses to the total expected losses for each classification. The staff proposes to revise the discount ratios because the sizes of claims change over time due to modifications in medical schedules, permanent and partial disability ratings, and the amount of maximum benefits payable to injured workers. In addition, normal inflation affects the size of claims. The staff proposal revises the discount ratios to reflect the changes in the size of claims and benefit levels.

Staff proposes to cap changes in the new expected loss rates to +25% and -25% in order to minimize possible rate shock, which could otherwise occur based solely on the changes in the expected loss rates.

III. Requested Action

Staff respectfully requests that:

(1) The proposed revised Texas workers' compensation classification relativities and amendments to the Basic Manual as specified in the attached exhibits be approved by the Commissioner;

(2) The proposed revised classification relativities be available for adoption by insurers immediately after adoption by the Commissioner, but that their use be mandatory for all policies with an effective date on or after March 1, 2007 unless the insurer makes an independent filing to justify insurer specific classification relativities; and

(3) The revised tables amending the Basic Manual apply to all workers' compensation experience modifiers with an effective date on or after March 1, 2007.

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Exhibit A

Exhibit B



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