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 to 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 The 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).
This agency hereby certifies that the adoption has been
reviewed by legal counsel and found to be a valid exercise of the agency's
legal authority.
Filed with the Office of
the Secretary of State on January 10, 2005.
TRD-200500110
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: January 30, 2005
Proposal publication date: October 29, 2004
For further information, please call: (512) 463-6327