DENIAL OF AMENDMENTS TO THE TEXAS BASIC MANUAL OF RULES, CLASSIFICATIONS AND EXPERIENCE RATING PLAN FOR WORKERS´ COMPENSATION AND EMPLOYERS LIABILITY INSURANCE
The Commissioner of Insurance ("Commissioner") held a public hearing under Docket No. 2578 on December 2, 2003 at 9:30 a.m. , in Room 100 of the William Hobby, Jr. State Office Building, 333 Guadalupe Street in Austin , Texas to consider the petition of American International Companies (AIG). The petition sought the adoption of amendments to various rules pertaining to terrorism premium in the Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers´ Compensation and Employers´ Liability Insurance (Manual) and in the Texas Workers´ Compensation Statistical Plan (Stat Plan Manual). AIG´s petition proposing the amendments was filed with the Texas Department of Insurance (TDI) Chief Clerk on October 14, 2003 , and the notice of hearing was published in the November 14, 2003 issue of the Texas Register (28 TexReg 10291).
On February 24, 2003 , a petition was filed by Staff proposing that terrorism premium be calculated based on total payroll for the policyholder. The methodology proposed by Staff was very similar to the methodology proposed by the National Council on Compensation Insurance (NCCI) for the states in which NCCI is the rating authority. Public notice of the staff´s proposal was published in the March 7, 2003 issue of the Texas Register (28 TexReg 2127). No hearing was requested nor comments received concerning the proposal during the 30 days following the publication. On April 16, 2003 , the Commissioner´s Order No. 03-0273 was signed adopting the proposed amendments made by staff in its petition requiring that for Workers Compensation, terrorism premium be calculated based on total payroll for the policyholder. The effective date of the regulation was May 10, 2003 , which is 15 days after the notice of the adoption was published in the Texas Register (28 TexReg 3529).
AIG originally filed its petition on July 17, 2003 and amended its request on September 2, 2003 and October 14, 2003 . AIG proposed 4 amendments to the Manual and one amendment to the Stat Plan Manual, all of which pertain to adding an alternate method of calculating terrorism premium. This alternate method allows terrorism premium to be calculated as a percentage of premium.
The first proposed amendment modifies Rule III E., Calculation of Total Estimated Policy Cost Item 4, of the Manual by amending the algorithm used to calculate workers´ compensation premium to include the alternate method of calculating terrorism premium as a percentage of premium. The method of calculating terrorism premium proposed by the petitioner requires that the Premium Subject to Experience Modifier be multiplied by the terrorism rate filed with TDI by the insurance company and then the Estimated Standard Premium is increased by the results of such multiplication. The Premium Subject to Experience Modifier includes the Premium Incentive for Small Employers which is affected by the employer´s claims experience. By applying the terrorism rate to the premium after it has been adjusted by the Premium Incentive for Small Employers, some small employers with the same or similar circumstances and conditions will be paying more terrorism premium due solely to prior claims experience. The petitioner presented no arguments for its application of the terrorism rate to the Premium Subject to Experience Modifier.
The second proposed amendment modifies Rule VI J., Terrorism Premium, of the Manual by adding the option of calculating terrorism premium based on premium rather than payroll. This proposed amendment indicates that the carrier will select the methodology used to calculate terrorism premium and file that selection with TDI. As discussed in the preceding paragraph, the proposed amendment to the rule contemplates that if terrorism premium is calculated on premium rather than payroll, then the terrorism premium is determined after the application of the Premium Incentive for Small Employers, if applicable. In addition, the proposed amendment to Rule VI J. of the Manual indicates that if terrorism premium is based on the petitioner´s methodology rather than the current rule, then terrorism premium would include premium developed under Code 0913 Domestic Workers Residences Per Capita Basis. Code 0913 is a per capita classification, meaning that the premium is calculated on the number of employees working under that classification, rather than on a payroll basis. Under the current rule, terrorism premium does not apply to premium developed under Code 0913 because the basis of terrorism premium is payroll. In support of its amendment, the petitioner argued that its premium-based methodology is specifically permitted by the United States Department of the Treasury Interim Rule dated April 15, 2003 , is consistent with standard business practice relating to the application of surcharges, assessments and taxes and is consistent with the recoupment provisions of the Terrorism Risk Insurance Act of 2002 (TRIA). The petitioner offered no support for applying the terrorism premium to Code 0913 workers if the alternate methodology is used.
The third proposed amendment offered by the Petitioner modifies Rule XV Domestic Workers Residences, Section D. of the Manual. This rule currently states that premium developed under Code 0913 is not included in the calculation of terrorism premium. The petitioner´s methodology includes premium developed under Code 0913 in the calculation of terrorism premium. Using the petitioner´s methodology increases the amount of terrorism premium for a policyholder, even though there has been no increase in the risk of a terrorism loss. This increase in premium is unjustified and excessive considering that the risk of a terrorism loss is not increased. The petitioner offered no support for applying the terrorism premium to Code 0913 workers if the alternate methodology is used.
The fourth proposed amendment offered by Petitioner modifies Rule XVII - Premium Incentive for Small Employers, Section F. of the Manual indicating that if terrorism premium is calculated on the basis of premium rather than payroll, then the terrorism premium is determined after the application of the premium incentive for small employers, if applicable. As stated in the discussion of amendment one, t he petitioner presented no arguments for its application of the terrorism rate to Premium Subject to Experience Modifier.
The fifth proposed amendment offered by Petitioner, modifies Part III 16 of the Stat Plan Manual to match the changes proposed to Rule III E., Rule VI J., Rule XV D. and Rule XVII. F of the Manual.
The petitioner testified that AIG selected the premium methodology for calculating terrorism premium rather than the payroll methodology because the premium methodology is consistent with the definition of a contingency factor. The definition of a contingency factor, referenced by the petitioner was taken from the Casualty Actuarial Society´s (CAS) publication Foundations of Casualty Actuarial Sciences and is described as "a cushion in rate levels for events that could not be accurately forecast, such as severe economic conditions, unusual loss occurrences, or other "unpredictable" developments." The CAS´s Statement of Principles Regarding Property and Casualty Insurance Ratemaking describes a contingency factor as a charge for any systemic variation of the estimated costs from the expected costs. The Commissioner does not find the petitioner´s arguments persuasive. The methodology selected by the petitioner to determine terrorism premium is not akin to a contingency factor. Terrorism losses or exposure can be identified and built into the ratemaking process through the same means as other catastrophic loss exposures, such as including hurricanes in the ratemaking process for homeowners insurance. Loss exposures that are difficult to quantify by traditional actuarial methods are often measured or priced by the use of models.
As further support of its proposed methodology, the petitioner cites Section 50.12(b) of the United States Treasury Interim Final Rule (final rule) dated April 15, 2003 . The Commissioner does not find this argument to be sufficiently persuasive. Section 50.12 addresses the type of disclosure an insurer must give its insured and does not address the methodology of calculating premiums. Further, this section states "An insurer may describe the premium charged for insured losses covered by the Program as a percentage of annual premium, if consistent with standard business practice. An insurer may not describe the premium in a manner that is misleading in the context of the Program, such as characterizing the premium as a ´surcharge."
Although the proposed methodology may be commonly used for other lines of property and casualty insurance, it is inconsistent with the standard business practice of determining workers´ compensation premiums in this state. The standard business practice for calculating workers´ compensation premium is to multiply the total amount of payroll for the policyholder, expressed in hundreds of dollars, by a rate. A surcharge is normally determined by multiplying premium by a factor. The specific language of the final rule clearly states that the terrorism premium for a workers´ compensation policy is not a surcharge and to describe it as such violates TRIA. The petitioner stated that its methodology is consistent with TRIA´s recoupment provisions. The Treasury´s Final Rule dated July 7, 2003 states that the amount of federal payment for an insured loss resulting from an act of terrorism is to be determined based upon the insurance company deductibles and excess loss sharing with the federal government. Section 103(e)(8) of TRIA provides the treasury with the authority to recoup federal payments made under TRIA through policyholder surcharges, up to a maximum annual amount. Clearly, there is a difference between the terrorism premium paid by policyholders when workers´ compensation coverage is purchased and the recoupment mandated by the federal government from policyholders that will be required in the event of a terrorism loss. Lastly, the petitioner stated that the proposed methodology is understandable to the policyholder since the most understandable articulation of a surcharge is as a percentage of premium. However, as described above, Section 50.12 of the final rule is very specific in stating that the disclosure notice must not describe the terrorism premium in a manner that is misleading, such as characterizing it as a surcharge.
The Commissioner does not find the Petitioner´s arguments to be persuasive. The Commissioner finds that the proposed alternative method would disrupt the standard method for determining workers´ compensation terrorism premium, allows insureds with the same classification to pay premium at a different rate without justification or support, does not adequately provide suitable justification for the application of a terrorism rate to the Premium Subject to Experience Modifier and allows the insurance company to choose a methodology in calculating terrorism premium that may increase the amount of terrorism premium for a policyholder when there has been no increase in the risk of a terrorism loss, nor an acceptable criteria established for selecting the methodology of calculation by the insurer. Based upon the foregoing, the Commissioner is of the opinion that the petition should be denied.
The Commissioner has jurisdiction of this matter pursuant to the Insurance Code, Article 5.96, which authorizes the Commissioner to promulgate standard and uniform manual rules for workers´ compensation.
This notification is made pursuant to the Insurance Code Article 5.96, which exempts action taken under this article from the requirements of the Administrative Procedure Act (Government Code, §2001).
IT IS THEREFORE THE ORDER of the Commissioner of Insurance that the petition filed by American International Companies for amendments under Reference No. W-0703-14 and heard under Docket No. 2578 be denied.