28 TAC § 8.4
The Texas Department of Insurance proposes 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 . This proposed section is necessary to identify the conditions that may pose extraordinary risk to the solvency of insurers issuing these types of policies and assure the integrity of such 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 negotiated deductible policies operate as intended, they may be advantageous to both policyholders and employees. 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. In return, the employees are provided a full spectrum of workers´ compensation benefits. This protection is a unique feature of workers´ compensation negotiated deductible policies. 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´s 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 from the deductible amount. However, an insurer´s failure to take steps to ensure that the po licyholder can meet its financial obligations under the policy may indicate a hazardous financial condition. The proposed section, along with conditions set out in section 8.3 of the Texas Administrative Code, sets forth the various conditions that the Department will consider to determine whether an insurer issuing negotiated deductible policies is in hazardous financial condition. Some of the proposed 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 report gross premium data and first-dollar loss data for each negotiated deductible policy required to be filed with quarterly and annual financial statement filings in accordance with The Texas Negotiated Deductible Workers´ Compensation Form , herein adopted by reference. 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.
The Department will consider the adoption of proposed new §8.4 in a public hearing under Docket Number 2598, scheduled for 9:30 a.m. on November 15, 2004, in Room 100 of the William P. Hobby, Jr. State Office Building, 333 Guadalupe Street, Austin, Texas.
Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed section 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 rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.
Ms. Patterson has determined that for each year of the first five years this section is in effect, the public benefits anticipated as a result of the proposed section will be a more efficient process for identifying insurers issuing negotiated deductible policies that may be operating in a hazardous condition. The identification of an insurer in a hazardous condition will permit the Department to seek corrective action to address the hazardous condition and provide greater protection to the public from the risk of an insurer operating in a hazardous condition. This proposed 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 proposal consists of minimum guidelines that the Department believes are reasonable safeguards for financial integrity, prudent financial standards, and reflect current industry standard. Insurers that have already implemented these safeguards as part of their financial integrity structure will experience no additional costs of compliance. Affected insurers that have not implemented these practices may experience additional costs. Insurance Code Article 5.55C requires the adoption of rules related to maintaining adequate security for negotiated deductible policies, and the cost of complying with this article is the cost of maintaining security. The costs of maintaining security will typically be passed along to the policyholder and will be based upon the absolute dollar amount of the security. This cost, which is passed through to the policyholder, is indeterminable because of the variable factors in which it is based, such as the terms and conditions of the particular policy. These costs are believed to be temporary in nature for the insurer because the security will be returned or released to the policyhol der upon the expiration of the contract. If the security is used to satisfy an obligation that the policyholder has to reimburse an insurer, no additional cost is anticipated on a net basis as this satisfaction will lower the amount the policyholder would otherwise have owed. Also, this section contemplates that insurers will perform a credit analysis on a proposed policyholder to assure that the proposed policyholder has the financial ability to assume the obligation to make payments for amounts related to the deductible reimbursements. This credit analysis will vary in scope and length of time based on factors including the size and complexity of the proposed policyholder and whether audited financial statements exist. The analysis will also vary based upon the amount of the obligations that the policyholder intends to assume. Subsequently, insurers will perform a quarterly review. Based on discussions with industry representatives, it is estimated that this analysis will take between 2 and 8 hours per policyholder. It is further estimated that this analysis will be performed by staff whose salaries range from $25 to $50 per hour. On the basis of cost per hour of labor, there is no expected difference in cost of compliance between micro, small and larger businesses affected by this section. Further, it is neither legal nor feasible to exempt small or micro-businesses or to waive compliance with the rule considering the purpose of the efficient regulation of insurers offering optional deductible plans, and because the financial risk of these policies will likely be more material to small or micro businesses.
To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on November 15, 2004 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 Nancy Moore, Workers´ Compensation Program, Mail Code 105-2A, Texas Department of Insurance, P.O. Box 149104 , Austin , Texas 78714-9104 and 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 new section is proposed under the Insurance Code Articles 1.32, 5.55C, 21.28-A, 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 to adopt 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. 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.
The following statutes are affected by this proposal: Insurance Code Articles 1.32, 5.55C, and 21.28-A.
§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 Policyholders´ Liability Insurance.
(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 negotiated deductible policy as referenced in Rule XIXDeductible Programs of T he Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers Compensation and Policyholders´ 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 pay 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) Negotiated deductible workers´ compensation policy--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 negotiated deductible workers´ compensation policy 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 to determine the proposed policyholder´s ability to pay the obligations under the policy;
(2) the insurer fails to perform a quarterly review of the policyholder´s ability to perform in accordance with the policyholder´s obligations to reimburse the insurer for claims paid up to the negotiated deductible amount;
(3) the insurer issues a policy that contains a negotiated deductible that does not state a specific dollar amount;
(4) the insurer issues a per occurrence 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 amounts owed 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:
(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 lacks gross premium data and first-dollar loss data for each negotiated deductible policy to be reported in accordance with the Texas Negotiated Deductible Workers´ Compensation Form required to be filed with the annual and quarterly financial statement filings, which is available from the Department, 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).