28 TAC §8.4
The Texas Department of Insurance adopts new §8.4 concerning hazardous conditions related to the issuance of workers' compensation policies with negotiated deductibles and adopts by reference the Texas Negotiated Deductible Workers' Compensation Form . The section is adopted with changes to the proposed text as published in the October 29, 2004 issue of the Texas Register (29 TexReg 10068).
This section is necessary to identify the conditions that may pose extraordinary risk to the solvency of insurers issuing negotiated deductible workers' compensation policies and assure the integrity of insurer's financial statements filed with the Department. Negotiated deductible policies are designed to give policyholders that are willing to assume more risk an option that results in a premium credit which is applied against the workers' compensation policy premium without depriving the employees of benefits. If workers' compensation policies with a negotiated deductible operate as intended, they may be advantageous to policyholders. Policyholders can obtain full insurance coverage at a lower cost by assuming the financial responsibility to reimburse the insurer for amounts paid by the insurer that are within the deductible amount. A workers' compensation policy with the deductible options binds the insurer to the same unconditional obligation made by insurers issuing all other workers' compensation policies. That unconditional obligation is that all valid injured employee claims arising out of injuries occurring during the policy period and while in the course and scope of employment will be paid by a licensed insurance company pursuant to the workers' compensation law. After the payment of a claim by the insurer, the insurer may seek reimbursement from the policyholder for amounts payable up to the deductible amount. However, an insurer's failure to take steps to ensure that the policyholder can meet its financial obligations under the policy may indicate a hazardous financial condition. The identification of an insurer issuing negotiated deductible workers' compensation policies and exhibiting conditions that may indicate a hazardous condition will permit the Department to seek corrective action to provide greater protection to the public from the risk of an insurer that might be operating in a hazardous condition. This adopted section will also provide safeguards against insurer insolvency and for the General Revenue Fund of the State of Texas since the costs of insurer insolvencies are ultimately recouped via credits against premium taxes that would have otherwise been paid to the state. The adopted section consists of minimum guidelines that the Department believes are reasonable safeguards for financial integrity, prudent financial standards, and reflect current industry standards for insurers issuing workers' compensation policies with negotiated deductibles.
The section, along with conditions set out in §8.3 of the Texas Administrative Code, sets forth the various conditions that the Department will consider to determine whether an insurer issuing workers' compensation policies with a negotiated deductible might be operating in hazardous financial condition. Some of the conditions the Department will consider include an insurer's failure to maintain security for any asset or credit taken against reserves or the insurer's failure to maintain or produce upon the Department's request, gross premium data and first-dollar loss data for each negotiated deductible policy on a quarterly basis in accordance with the Texas Negotiated Deductible Workers' Compensation Form. The existence of one or more of the conditions does not mean that an insurer issuing workers' compensation policies with a negotiated deductible is necessarily in hazardous condition. When one or more of the conditions are considered in the context of the state of affairs of an insurer, they operate as an early warning that the insurer might be hazardous to its policyholders, creditors, and the general public . In response to public comment, subsection (a) was changed to emphasize the discretionary nature of the section as it functions as an early warning system. Also, subsections (e)(1) and (2) have been changed to reduce the insurer's requirement from performing a credit analysis on a quarterly basis to performing a credit analysis as a part of the insurer's initial underwriting function and thereafter on an annual basis. Subsection (e)(2) has also been changed to require an insurer to perform a quarterly review of the sufficiency of the security maintained by the insurer to secure the policyholder's obligations to reimburse the insurer for claims paid and credit taken against reserves up to the negotiated deductible amount. An editorial clarification was made t o subsection (c) to avoid potential confusion. This clarification did not result in a substantive change to the meaning or effect of the section.
Comment: A commenter supports the general purpose of the rule but was opposed to one section. The commenter suggests changing the rule to permit alternative approaches to securing deductibles. This change would specifically express that alternative approaches to securing deductibles is dependent upon the Commissioner's discretion.
Agency Response: The Department notes that the text of the rule coupled with existing §8.1 and §8.3 already provides for the Department's exercise of discretion. The Department believes that adding additional discretion to a rule that already provides for discretion would be confusing. However, additional clarification has been added to subsection (a) in response to the comment. Additionally, the Department believes that the types of security referenced in subsection (e)(6) provide a list of approaches to secure negotiated deductible workers' compensation business in a prudent and conservative manner, which is in the best interest for the insurer, the policyholder, and the Texas taxpayer.
Comment: A commenter suggests adding language expressly granting the Department discretion regarding quarterly reviews for carriers that do not take credit against reserves for negotiated policies. The commenter believes it would be appropriate for the carriers to perform an annual versus a quarterly review of the insurer's security.
Agency Response: It is the Department's position that a fundamental purpose of the rule is to ensure that sufficient assets are maintained to secure obligations owed to injured Texas workers whether such obligations are due now or in the future. If the Department encounters a company that has taken no reserve credit, as suggested by the commenter, the Department would review the type and sufficiency of the company's assets in considering whether to take administrative action. The scenario described by the commenter is not likely to result in a finding of hazardous condition. Changes to subsections (a) and (e)(1) and (2) have been made to address the commenter's concern. Additional language has been added to subsection (a) to emphasize the discretionary nature of the rule. Subsection (e)(1) has been changed to require a credit analysis as a part of the insurer's initial underwriting function and annually thereafter. Subsection (e)(2) has been changed to require a quarterly review of the sufficiency of the security maintained by the insurer to secure the policyholder's obligations to reimburse the insurer for claims paid and credit taken against reserves up to the negotiated deductible amount. The Department believes such information should be readily available by companies writing negotiated deductible workers' compensation business and that maintaining such information is not unduly burdensome.
Comment: A commenter supports the rule and provided a substantial amount of technical information on this specific market. The commenter feels the rule is beneficial to the policyholder and the industry.
Agency Response: The Department appreciates the comment and the technical information provided.
Commenter: A commenter generally agrees with an early warning system but suggests that the financial stability of the insurer must be examined in the aggregate. The commenter suggests that one cannot assume a single policyholder's failure to perform its obligations in a single contract will lead to a financially hazardous condition for the insurer, but rather it is a single factor. Its relevance is relative to the size and financial stability of the insurer as a whole. The commenter suggests a way to address the issue is to determine a threshold at which point an insurer's aggregate exposure is sufficient to merit a review of each policyholder relationship as addressed in subsection (e). Additionally, the commenter suggests that subsection (e)(6) should also be expanded to give the Department more flexibility.
Agency Response: The Department agrees in part with the commenter but again notes the discretionary nature of the rule, which has been modeled after §8.3 that has worked effectively since 1989. The conditions of subsection (e) operate as an early warning system and simply notify the staff of the Financial Program that further evaluation is necessary. The Department would then typically begin to ask questions of the insurer. The rule does not contemplate a simple "pass or fail test." In application, the Department would consider the magnitude of a policyholder's failure to perform its payment obligations relative to the insurer's circumstances to determine whether or not it was substantively significant to the insurer's ability to meet its financial obligations. Clarifying language has been added to subsection (a) in response to the comment. However, it is the Department's opinion that adding language to the rule basing subsection (e) factors on the relative size of the insurer would discriminate against smaller insurers. In addition, the Department is of the opinion that subsection (e)(6) lists the forms of security necessary to adequately secure negotiated deductible workers' compensation policies in a conservative and prudent manner.
Commenter: A commenter suggests that the proposed rule would not achieve any benefits, and noted five concerns: First, the commenter asserts that §8.4 would conflict with accounting, financial statement, and adjuster licensing laws. The commenter suggests the rule is unnecessary because statutory accounting guidelines (SSAP 55 & 65) are in existence that cover the issues the Department wishes to resolve with proposed §8.4. Therefore, the cost of compliance is unnecessary. Second, Article 21.07-4 of the Insurance Code already mandates adjusters to be licensed and contains statutory remedies for unlicensed adjusters and should not be addressed in subsection (e)(10). The commenter feels subsection (e)(10) should be omitted because it allows the Department to declare that a carrier is in hazardous financial condition because it used an unlicensed adjuster. Third, the commenter suggests if the Department believes that the accounting standards need to be modified, a more appropriate forum to address such proposed amendments would be through the NAIC statutory accounting principles working group. Fourth, the commenter recommends that surety bonds be included as an acceptable form of collateral. Finally, the commenter believes the section would subject carriers to hazardous status due solely to minor technical infractions of the stated conditions.
Agency Response: First, the Department does monitor insurers relative to SSAP 55 and SSAP 65, and the Department disagrees that §8.4 would conflict with these accounting principles. SSAP 55 addresses accounting for unpaid claims and loss and loss adjustment expenses. SSAP 65 addresses accounting for property and casualty contracts. SSAP 65 sets forth accounting rules on when reimbursable amounts may be counted as receivables on paid losses, which is an asset listed on the asset page of the balance sheet. Unlike SSAP 55 and SSAP 65, §8.4 is not an accounting rule but is intended to be used to identify insurers operating in a hazardous condition. In part, §8.4 was designed to address the sufficiency of security related to the reserve credit taken against reserve liabilities, which neither SSAP 55 nor SSAP 65 address. Further, the accounting guidance noted by the commenter does not address the credit analysis of the policyholder contemplated by the section. The Department believes that a credit analysis must be made on a policyholder before an insurer can be in a position to determine the amount and type of security needed. It is the Department's opinion that insurers that elect to offer workers' compensation policies with a negotiated deductible should expect to incur reasonable costs associated with conducting business in a reasonably conservative and prudent manner. The Department further notes that the failure to conduct business in this manner has led to the demise of several large insurers resulting in harm to consumers and negative impacts to the State's General Revenue. Second, subsection (e)(10) is a cross-reference to Article 21.07-4. The Department disagrees that this issue is irrelevant to workers' compensation policies with a negotiated deductible. Rather, it has been the Department's experience that the issue is prevalent with these types of policies. The Department will apply discretion when subsection (e) factors are identified. In the case where an insurer is using an unlicensed adjuster but not in hazardous financial condition, the Department will take appropriate action pursuant to applicable provisions of the rules and regulations of the Department and the Texas Insurance Code. Third, the commenter suggested that a more appropriate remedy would be a national effort at NAIC statutory principles working group. The Department agrees in part with the commenter and has participated on the relevant NAIC accounting committees for many years and is familiar with related NAIC initiatives. A joint working group comprised of the NAIC and the International Association of Industrial Accident Boards called the NAIC/IAIABC working group provided extensive research to the Department, which was used to base the rule. However, it is uncertain when a NAIC model rule will be available, and the Department is of the opinion that a proactive approach to this issue is in the best interest of the insurer, the policyholder, and the Texas taxpayer. Fourth, the Department disagrees that surety bonds should be added as an adequate form of security and notes that the security requirements for §8.4 were based on the security requirements used to secure reinsurance, which do not include surety bonds. Moreover, the Department does not consider surety bonds to be in the same credit category as letters of credit and the other assets listed in subsection (e)(6). The Department is aware of instances in which a failure to pay on surety bonds have led to litigation and has concerns whether surety bonds would be readily available for the purpose intended by the section. The Department feels that a type of security that may result in litigation is counterintuitive to the idea of the intended security and ultimately puts Texas injured workers at risk.
Finally, the Department disagrees that §8.4 would automatically subject carriers to hazardous financial condition status solely due to minor technical infractions of the identified conditions. As stated previously, §8.4 functions as an early warning system. When subsection (e) conditions have been identified, the Department will typically contact the insurer for further investigation.
For: Texas Builders Insurance Company.
Against: Gardere Wynn, Texas Mutual Insurance Company, American Insurance Association, and American International Group.
The new section is adopted under the Insurance Code Articles 1.32, 5.55C, 21.28-A, 1.15B, and § 36.001. Article 1.32 authorizes the commissioner of insurance to adopt rules to fix uniform standards and criteria for early warning that the continued operation of an insurer might be hazardous to its policyholders, creditors, or the general public, and to fix standards for evaluating the financial condition of an insurer. Article 5.55C authorizes the commissioner of insurance to require insurers to offer optional deductible plans and requires the adoption of rules that provide for adequate security for reimbursement of the amount paid by the company which is payable from the deductible. Article 21.28-A authorizes the Department to remedy insurer misconduct. Article 1.15B authorizes the Department to consider any information obtained by the Department's early warning system or information relating to the financial solvency of any organization regulated by the Department as confidential and is not subject to disclosure under the open records laws. Section 36.001 provides that the commissioner of insurance 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.
§8.4 Hazardous Conditions Related to Negotiated Deductible Workers' Compensation Policies .
(a) This section applies to insurers that offer negotiated deductible workers' compensation policies in Texas and is to be followed in conjunction with The Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance. This section, along with conditions set out in §8.3 of this chapter relating to hazardous conditions, sets forth the various conditions that the Department will consider to determine whether an insurer issuing workers' compensation policies with a negotiated deductible is in a hazardous financial condition. The existence of one or more of the following conditions does not necessarily mean that an insurer issuing workers' compensation policies with a negotiated deductible is in hazardous financial condition. When one or more of the conditions are found to exist, they will be considered in the context of the state of affairs of an insurer. If the Department determines that the insurer is in a condition hazardous to policyholders, creditors, and the general public, it will initiate appropriate regulatory action.
(b) The insurer remains liable for all valid claims even if it appears that the insurer will ultimately not be reimbursed as provided in the workers' compensation policy with a negotiated deductible as referenced in Rule XIX-Deductible Programs of T he Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers Compensation and Employers' Liability Insurance .
(c) In order to mitigate the risk of being in a potentially hazardous financial condition, this section addresses the insurer's maintenance of the fund of money over and above surplus and premiums to serve as security to protect the workers and the insurer in the event of a policyholder failure to reimburse the insurer for losses. This security shall be used to secure the policyholder's reimbursement of the negotiated deductible amount owed to the insurer.
(d) The following words and terms used in this section shall have the following meanings unless the context clearly indicates otherwise:
(1) Department--Texas Department of Insurance.
(2) Workers' compensation policy with a negotiated deductible--A policy in which the insurer assumes full liability for the statutory obligation of the employer policyholder within the scope of workers' compensation coverage while the policyholder assumes a contractual obligation to the insurer to reimburse the insurer for claims paid up to the deductible amount under Insurance Code Article 5.55C.
(3) First dollar losses--Total losses before applying the negotiated deductible.
(4) Gross premium--Premium calculated before factoring in the negotiated deductible.
(e) An insurer who writes a workers' compensation policy with a negotiated deductible may be found to be in hazardous condition when one or more of the conditions described in paragraphs (1) - (10) of this subsection are found to exist by the Department :
(1) the insurer fails to produce a written report with conclusions that is signed by an authorized insurer representative that is derived from a credit analysis performed as a part of the insurer's initial underwriting function and thereafter annually to determine the policyholder's ability to pay the obligations under the policy;
(2) the insurer fails to perform a quarterly review of the sufficiency of the security maintained by the insurer to secure the policyholder's obligations to reimburse the insurer for claims paid and credit taken against reserves for each policy up to the negotiated deductible amount;
(3) the insurer issues a workers' compensation policy that contains a negotiated deductible that does not state a specific dollar amount;
(4) the insurer issues a per accident negotiated deductible policy and fails to include an actuarially supported calculation of the total amounts owed by the policyholder and credit taken against reserves for all amounts through ultimate loss development;
(5) from the inception of the policy through ultimate loss development, the insurer fails to maintain security for 100% of claims paid and credit taken against reserves for each policy;
(6) the insurer fails to maintain security for any asset or credit taken against reserves in the following forms:
(A) cash;
(B) securities readily marketable over a national exchange with maturity date of not later than one year, listed by the Securities Valuation Office of the National Association of Insurance Commissioners, and qualifying as admitted assets; or
(C) clean, irrevocable, unconditional letters of credit, issued or confirmed by a qualified United States financial institution, as defined in Insurance Code Article 5.75-1. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance or confirmation shall, notwithstanding the issuing or confirming institution's subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification, or amendment, whichever first occurs; provided however, that a letter of credit must be replaced within three months after the date of the institution's failure to meet applicable standards of issuer acceptability;
(7) the insurer fails to provide to the policyholder documentation separate from the workers' compensation policy explaining the financial responsibility of both the insurer's obligation to pay all claims and the policyholder's obligation to reimburse the insurer for any negotiated deductible amounts paid by the insurer;
(8) the insurer fails to maintain or produce upon the Department's request, gross premium data and first-dollar loss data for each workers' compensation policy with a negotiated deductible on a quarterly basis in accordance with, or in a substantially similar format as, the Texas Negotiated Deductible Workers' Compensation Form. Information provided by insurers in accordance with the Texas Negotiated Deductible Workers' Compensation Form is considered confidential under Insurance Code Article 1.15B and is not subject to disclosure under the Texas Public Information Act. The Texas Negotiated Deductible Workers' Compensation Form, herein adopted by reference, is available from the Department at: Financial Analysis and Examinations, Mail Code 303-1A, P.O. Box 149099 , Austin , Texas 78714-9099 ;
(9) the insurer's assets or credits taken against the loss reserves in the financial statements are greater than the deductible amounts that are probable and expected to be recovered; or
(10) the administration or adjustment of claims is performed by a person or entity that is not licensed by the Department in accordance with §65.10(1)(I) and (M) of this title (relating to Actions by Carrier, Claimant's Attorney, or Agent).