Texas Register
(31 TexReg 8335).
The amendments are necessary to prescribe the requirements for a workers'
compensation self-insurance group to obtain excess insurance coverage from
an eligible surplus lines insurer. The Department of Insurance received a
petition from Montlake Holdings LLC proposing to amend 28 TAC §5.6405(b).
In the petition, the petitioner states that the proposed rule amendment would
allow self-insurance groups in Texas to purchase excess insurance coverage
from an accredited and trusteed reinsurer that posts letters of credit to
secure the self-insurance groups for excess losses recoverable. The petitioner
further states that the proposed rule amendment would significantly increase
market availability of excess insurance for self-insurance groups in Texas.
The amendments to §5.6405(b) as adopted modify the petitioner's proposed
rule amendment by clarifying and augmenting the requirements necessary for
obtaining excess insurance from eligible surplus lines insurers. Labor Code
§407A.054 requires each self-insurance group to obtain specific excess
insurance coverage for losses that exceed the self-insurance group's retention.
The amendments are necessary to provide greater availability of the excess
insurance coverage required for self-insurance groups so that more Texas employers
would be able to participate in the workers' compensation system. The amendments
to §5.6405(b) provide an option for obtaining the required excess insurance
from an eligible surplus lines insurer in compliance with Chapter 981 of the
Texas Insurance Code and related provisions of the Texas Administrative Code,
provided certain requirements are met. The Department has added these requirements
so that when a self-insurance group accesses the surplus lines market, a similar
level of protection is in place to ensure that the financial objectives of
the act are met. The Department does not contemplate or expect that the adoption
of these rules will benefit any self-insurance group that is in hazardous
financial condition. To exercise the option of surplus lines excess insurance
required by the Labor Code, the self-insurance group must comply with the
provisions of Chapter 981 of the Insurance Code. These requirements will provide
security that the Department believes is reasonable to fulfill the requirements
of Chapter 407A.
Following publication of the proposed amendments in the
Texas Register,
the Department held a hearing on October 23, 2006,
to invite public input. In response to written comments received from interested
parties both prior to and after the hearing as well as comments made at the
hearing, the Department has changed some of the proposed language in the text
of the rule amendments as adopted. The Department also changed some of the
text in the amendments, as adopted, to correct or clarify the language in
the text. The changes, however, do not introduce new subject matter or affect
persons in addition to those subject to the proposal as published. The Department
has revised subsection (b) as adopted to add the phrase ''and maintain'' to
clarify that the self-insurance group shall obtain and maintain the required
excess insurance in a manner that complies with the requirements specified
in this section. In response to comments requesting clarification of the holder
of the letter of credit, the Department has changed the proposed text in subsection
(b)(3) as adopted by substituting the word ''maintains'' with ''provides''
to make it clear that the surplus lines insurer provides the letter or credit.
One commenter inquired whether under proposed subsection (b)(3) the surplus
lines insurer would be required to pay for losses and provide a letter of
credit under the attachment point in the event the self-insurance group was
unable to pay the losses under the attachment point. Labor Code §407A.054(b)
requires only specific excess insurance for losses that exceed the self-insurance
group's retention. However, for clarification purposes, the Department has
revised subsection (b)(3) by inserting the phrase ''the terms and conditions
of'' before ''the excess insurance'' and replacing the term ''coverage'' with
the term ''policy.'' The adopted subsection (b)(3) requirement reads: ''the
surplus lines insurer provides a clean, irrevocable, and unconditional letter
of credit in favor of the group as beneficiary and held by the group, subject
to withdrawal solely by and under the exclusive control of the group, to secure
the payment of losses, including losses, loss adjustment expenses, incurred
but not reported losses, and any other obligation of the surplus lines insurer
under the terms and conditions of the excess insurance policy, whether paid
or unpaid by the group: . . . .'' One commenter suggests deleting subsection
(b)(4) in its entirety because, according to the commenter, the word ''timely''
is so vague that enforcement would be difficult; it is unclear what receivables
and recoverables are subject to the proposed subsection; and the proposed
subsection (b)(4) is an unreasonable requirement on surplus lines insurers.
Although the Department disagrees with the comment and declines to delete
subsection (b)(4), the Department agrees that some clarification would be
helpful and thus has added the phrase ''from the surplus lines insurer, in
no event, later than 90 days.'' The adopted subsection (b)(4) requirement
reads: ''the group timely collects recoverables and receivables from the surplus
lines insurer, but in no event, later than 90 days, including, if needed,
drawing down on the letter of credit; . . . .'' In response to several comments
that the Department require all agreements between the self-insurance group
and the surplus lines insurer be submitted to the Department prior to use
and require that the policy contain any and all agreements, the Department
has modified proposed subsection (b)(5) to state that ''the group submits
all surplus lines policy forms, renewal forms, certificates, endorsements
and amendments applicable thereto, and any agreements between the surplus
lines insurer and the group to the Texas Department of Insurance for review
prior to use and the group may not accept or enter into any agreement or arrangement
with the surplus lines insurer that has not been reviewed by the Texas Department
of Insurance.'' In response to comments and as part of its review of the surplus
lines policy forms, the Department has added subsection (b)(7) to the proposed
text, which requires the group to notify ''the Commissioner in writing no
less than five calendar days after receiving notice of cancellation or nonrenewal
of the excess insurance policy and no less than 30 days prior to the effective
date of any proposed change in the excess insurance policy, by endorsement
or otherwise.''
Additionally, for clarification, proposed §5.6405(b)(3)(C) is revised
to add the phrase ''is in a form acceptable to the Texas Department of Insurance
and''. The adopted subsection (b)(3)(C) requirement reads: ''provided the
letter of credit is in a form acceptable to the Texas Department of Insurance
and meets the requirements in 28 TAC §7.610, except for those requirements
that apply solely to reinsurance agreements; . . . .'' The Department also
added the phrase ''and in order to maintain'' to proposed subsection (b)(6)
to make it clear that the Department expects the group to comply fully with
all the requirements in subsection (b) in order to maintain its excess insurance
coverage with a surplus lines insurer. The Department also has made minor
changes to correct grammatical and typographical errors.
Adopted §5.6405(b) provides that in order for a self-insurance group
providing workers' compensation coverage to obtain and to maintain excess
insurance from an eligible surplus lines insurer, it must be procured in compliance
with Chapter 981 of the Insurance Code. Adopted §5.6405(b)(1) establishes
the requirement that the surplus lines insurer must be certified as a trusteed
reinsurer by the Texas Department of Insurance. Adopted §5.6405(b)(2)
prescribes the financial strength rating the eligible surplus lines insurer
must maintain. Adopted §5.6405(b)(3) requires the eligible surplus lines
insurer to provide a letter of credit to secure the payment of losses under
the terms and conditions of the excess insurance policy and describes the
letter of credit requirements. Adopted §5.6405(b)(4) specifies that a
self-insurance group must timely collect recoverables and receivables from
the surplus lines insurer, in no event, later than 90 days, including, if
needed, drawing down on the letter of credit. Adopted §5.6405(b)(5) requires
a self-insurance group to submit the surplus lines policy form, renewal forms,
certificates, endorsements and any amendments thereto, and any agreements
between the self-insurance group and the surplus lines insurer to the Department
for review prior to use and prohibits a self-insurance group from accepting
or entering into a policy or agreement with a surplus lines insurer without
prior Department review. Adopted §5.6405(b)(6) provides that a self-insurance
group must demonstrate to the satisfaction of the Department that it meets
all the requirements in adopted §5.6405(b) before it can obtain and in
order to maintain the excess insurance from an eligible surplus lines insurer.
Adopted §5.6405(b)(7) requires the self-insurance group to notify the
Commissioner in writing no later than five calendar days from receiving notice
of any cancellation or notice of nonrenewal, or no later than 30 calendar
days prior to the effective date of any proposed change in the excess insurance
policy.
SUMMARY OF COMMENTS AND AGENCY RESPONSE.
§5.6405(b)
Comment: A few commenters object to the adoption of the proposed amendments
to subsection (b) because they state that the admitted market affords more
security and provides a greater level of comfort to the self-insurance groups.
Several commenters state that surplus lines carriers have no guaranty fund
coverage and are not as heavily regulated as admitted carriers, resulting
in increased financial exposure for injured workers, employer members, the
Texas Self-Insurance Group Guaranty Fund (TSIGGF), and other certified self-insurance
groups due to their participation in TSIGGF, which is currently un-financed.
One commenter states that requiring the purchase of excess insurance in the
admitted marketplace provides a more ''level playing field'' for self-insurance
groups and that to remove the protection of this requirement increases the
exposure of participating self-insurance groups, their members and covered
employees to the financial impact of potential insolvency of another self-insurance
group. Several commenters assert that only a few states allow self-insurance
groups to obtain excess insurance coverage outside the admitted market, with
some of these markets having dramatic failures, and they suggest that the
Department inquire of other states regarding those states' experience with
excess insurance and specifically whether these states have allowed surplus
lines insurers to provide the excess insurance, and if not, why not. One commenter
notes that admitted insurers specializing in excess insurance provide additional
oversight on the operations, underwriting, risk and member selection of certified
self-insurance groups, helping to ensure self-insurance groups operate in
a financially sound and responsible manner. One commenter states that participation
in the surplus lines market assumes a more sophisticated insured than most
self-insurance groups are in a position to be. One commenter states the proposed
amendments could allow an offer of ''cheaper'' coverage due to less regulation
of the surplus lines market in order to allow a self-insurance group to compete
on price with the commercial insurers and that this reason is not a sound
basis for a self-insurance group to seek excess insurance in the surplus lines
market.
Agency Response: The Department disagrees that the proposed amendments
should not be adopted. Under current regulations, there is no ability for
a self-insurance group to access the surplus lines market. Under the adoption,
access to the surplus lines market is acceptable conditioned upon strict compliance
by the self-insurance group with the requirements specified in subsection
(b). The ability to provide excess insurance coverage is not open to the majority
of eligible surplus lines insurers but rather only to a select few eligible
alien surplus lines insurers that possess very high financial wherewithal,
as exhibited by their status as trusteed reinsurers and by their financial
strength rating of A- or better, as determined by A.M. Best Company. Applying
the criteria in subsection (b)(1) and (2), as adopted, currently 59 out of
a total of 103 eligible alien surplus lines insurers meet these requirements.
Pursuant to subsection (b)(3) as adopted, the arrangement between the self-insurance
group and the surplus lines insurer must be secured by a letter of credit
to protect against the credit risk of the insurer. The trust accounts of these
certified trusteed reinsurers are subject to examination pursuant to the Insurance
Code Article 5.75-1(b)(3), which is usually handled by the New York State
Insurance Department because that is where the trust funds are typically located.
Other states' laws generally differ significantly from the laws in Texas with
regard to group self-insurance regulation, including allowing reinsurance
by admitted and non-admitted insurers, and the commenters have not provided
evidence that problems arose in other states based upon allowing self-insurer
groups to obtain excess insurance from non-admitted insurers. In 2003, the
Legislature specifically amended the definition of a ''covered claim'' in
the Insurance Code Article 21.28-C §5(8) to add ''self-insurers'' to
the list of excluded claims. TPCIGA is responsible for determining whether
a claim is covered, including a claim submitted by a self-insurance group
under an excess insurance policy issued by an admitted insurer. As previously
noted, the arrangement between a self-insurance group and an eligible surplus
lines insurer must be secured by a letter of credit. Prudent business practices
in both the admitted and surplus lines excess insurance market will address
the operations, underwriting risk and member selection of self-insurance groups.
The Legislature, in enacting Chapter 407A of the Labor Code, authorized a
board of trustees composed of member employers to operate a self-insurance
group and required the board of trustees to engage an administrator to implement
the policies established by the board of trustees and to provide day-to-day
management of the self-insurance group. The amendments, as adopted, require
a self-insurance group to file any surplus lines policy forms and other agreements
for review prior to use to address the concern of side agreements. Additionally,
pursuant to the Insurance Code §981.004, an eligible surplus lines insurer
may provide surplus lines insurance only if the full amount of required insurance
cannot be obtained, after a diligent effort, from an insurer authorized to
write and actually writing that kind and class of insurance in this state,
and an eligible surplus lines insurer may provide surplus lines insurance
only in the amount that exceeds the amount of insurance obtainable from authorized
insurers.
Comment: One commenter states that if the security of payment is decreased
by use of a non-admitted insurer that is not covered by the TPCIGA, then the
self-insurance group using the non-admitted insurer should provide additional
security to the Department. The commenter requests the following language
be added to proposed subsection (b): ''(7) the group shall post security,
in addition to that required under Section 407A.053(c), Texas Labor Code,
in the form and amount required by the commissioner.'' Another commenter recommends
adding similar language to require any self-insurance group that purchases
excess insurance with a surplus lines insurer to post additional security,
beyond that required by the Texas Labor Code, if it is deemed necessary by
the Commissioner.
Agency Response: The Department declines to make the changes. The requirements
in the amendments place reasonable safeguards on obtaining the required excess
insurance from an eligible surplus lines insurer, including requiring the
surplus lines insurer to provide a clean, irrevocable, and unconditional letter
of credit. Self-insurance groups must post the security required under Chapter
407A of the Labor Code before the Department can grant a certificate of approval.
If through an examination or other review of a self-insurance group's financial
condition, the Department determines that a self-insurance group needs additional
oversight or an increase in the security required under Chapter 407A based
upon a change in membership or other factors that affect the self-insurance
group's ability to pay its workers' compensation obligations, the Commissioner
may take any regulatory action authorized by law, including increasing the
amount of required specific excess insurance under §407A.054(b) and ultimately
determining whether a self-insurance group can continue to operate.
Comment: Several commenters state that the excess insurance market for
self-insurance groups has not undergone any significant underwriting or economic
change to diminish capacity in the admitted market. Several commenters state
that self-insurance groups currently holding certificates of approval have
obtained excess insurance in the admitted market from three admitted insurers
since the Department first granted a self-insurance group a certificate of
approval and that currently eight admitted insurers provide excess insurance
generally in Texas. These commenters state that excess insurance coverage
for certified self-insurers (large individual private employers) has been
available continuously in the admitted market since 1991, with periods of
constricted availability and relatively higher pricing in ''hard markets.''
One commenter states that there will be advanced indications if the excess
market is narrowing to allow the Department to change the rule if necessary
before an availability issue is present. One commenter opposes the proposed
amendments arguing there is no apparent need at this time for access to the
non-admitted marketplace since all self-insurance groups currently have excess
insurance from admitted insurers, and there appears to be an adequate number
of participants in the admitted marketplace to meet the needs of self-insurance
groups. Another commenter argues that the need of one self-insurance group
to access the surplus lines market does not justify the rule change, given
the fund-to-fund crossover liability and a self-insurance group guaranty fund
which remains un-financed. Instead, the commenter suggests a rule change should
be considered if there is a market-wide problem with obtaining excess insurance
in the admitted market. Several commenters add that if the admitted market
is not comfortable insuring a potential self-insurance group (e.g., due to
particular risks of a self-insurance group or certain members of a self-insurance
group, such as federal exposure to United States Longshore and Harbor Worker
Act type claims), the self-insurance group may not be a good candidate for
certification as a self-insurance group or may signal problems the regulator
should consider.
Agency Response: The Department disagrees that the proposed amendments
should not be adopted. The Department has received two requests from an interested
party who asserts that there are availability problems currently in the workers'
compensation excess insurance market, and that there are only three admitted
insurers in Texas that specialize in providing excess coverage for self-insurance
groups. The Department is taking steps to provide for increased participation
of self-insurance groups in the workers' compensation market. Several commenters
state that the proposed amendment is needed to improve the availability of
excess insurance for self-insurance groups in Texas. Based upon information
filed with the Department and representations made to the Department, all
of the self-insurance groups holding certificates of approval from the Department
have obtained excess insurance coverage from a limited group of four admitted
insurers. In general, shallow markets are believed to be more susceptible
to potential market swings and resulting capacity issues. The Department is
taking a proactive stance in the event of future problems for self-insurance
groups in satisfying the excess insurance requirements. The alternative is
to adopt requirements in a reactive fashion in response to market capacity
problems, which would be complicated by the length of time necessary for the
administrative rule-making process. Under Texas law, coverage must not be
available from the admitted market before it is eligible for placement to
the surplus lines market. Additionally, there is an overriding public policy
to encourage the means by which employers and employees can participate in
the workers' compensation system. As noted by several commenters, allowing
a self-insurance group to obtain excess insurance in the non-admitted market
is designed to facilitate greater involvement of employers and their employees
in the system, by allowing more self-insurance groups to be certified and
allowing more options to employers for workers' compensation insurance. Additionally,
the amendments as adopted limit significantly the pool of eligible surplus
lines insurers to those insurers with substantial financial resources that
collateralize their obligations with letters of credit.
Comment: One commenter applauds the Department for taking action that will
allow authorized group self-insurers that are not able to find excess insurance
coverage from an admitted insurer to seek coverage from a trusteed reinsurer
on a surplus lines basis.
Agency Response. The Department appreciates the comment.
Comment: One commenter states that some of the reasons set forth by the
Legislature in passing HB 2095, which added Labor Code Chapter 407A in 2003,
was to give small and mid-sized employers the same option as large employers
to self-insure for workers' compensation, to provide a stable market in terms
of availability and rates, and to bring more employers into the workers' compensation
system by self-insurance groups providing an affordable option to an industry
as a whole during a tight market. The commenter recognizes the Department
has to balance between affordable options for workers' compensation coverage
and the security of payment of workers' compensation benefits and commends
Department staff for doing an excellent job in proposing additional requirements
if a self-insurance group is to be allowed to use a surplus lines insurer
for its excess insurance. The commenter commends the Commissioner and Department
staff for their diligent efforts in ensuring that group self-insurance remains
an affordable but reliable source of workers' compensation insurance.
Agency Response: The Department appreciates the comment.
Comment: One commenter states that the modifications made by the Department
with respect to a prior request by Montlake Holdings, LLC appear to have comfortably
allayed the concerns previously contemplated by the commenter. The commenter
states that the proposed amendments create a new, reasonably safe way for
workers' compensation self-insurance groups in Texas to protect themselves
from catastrophic claims and unusually bad claims years and commends those
participating in producing the proposed amendments since it is clear a great
deal of time and effort has been expended to produce the proposal. The commenter
states that its opinion is that the proposed amendments would not place the
workers' compensation self-insurance groups in Texas in any greater jeopardy,
and will in fact provide another market for self-insurance groups under the
rigorous standards delineated in the proposed amendments
Agency Response: The Department appreciates the comment.
Comment: One commenter recommends that the Department adopt a formal acknowledgement
form to be completed by each member of a self-insurance group that obtains
its excess insurance from a surplus lines insurer. The commenter recommends
the form state that the surplus lines insurer is not protected by the TPCIGA
or the TSIGGF and that the self-insurance group members can be held responsible
for the ultimate losses of the entire self-insurance group and not solely
the retained portion of their particular self-insurance group. Another commenter
recommends adding the following subsection to the proposal to require self-insurance
groups that purchase excess insurance from a surplus lines insurer to notify
their members: ''Each member of the group shall annually be notified in writing
that the group has purchased excess insurance from an eligible surplus lines
insurer and not an insurer that has a certificate of authority from the Texas
Department of Insurance and that surplus lines insurers are not regulated
by the Texas Department of Insurance or covered by the Texas Property and
Casualty Insurance Guaranty Association.''
Agency Response: The Department declines to make these changes at this
time. It appears that the purpose of the commenter's recommendation is to
make sure employers are aware of the risks of joining a self-insurance group
that obtains excess insurance from a surplus lines insurer. However, each
self-insurance group is governed by a board of trustees, which can provide
its current members and future members with proper disclosures. Section 5.6405(b)(5)
as adopted requires the self-insurance group to prefile the proposed arrangement
between the self-insurance group and the surplus lines insurer with the Department
for the Department to conduct a due diligence review. As part of its consideration
to certify a self-insurance group and to allow it to obtain excess insurance
from an eligible surplus lines insurer, the Department will review the notice
and acknowledgement forms that the self-insurance group intends to use, and
encourage the self-insurance group to notify all members of regulations affecting
the purchase of excess insurance coverage from surplus lines insurers. Surplus
lines documents are required to have the disclosure specified in Insurance
Code §981.101, which includes a disclosure of non-participation in the
guaranty fund.
§5.6405(b)(1) - (3)
Comment: One commenter contends that to impose the three additional requirements
in proposed subsections (b)(1) - (3) on a ''Texas approved'' surplus lines
insurer seems unreasonably stringent, redundant, unwarranted, and unreasonable
and recommends that §5.6405(b) be revised so that meeting any one of
the three requirements in subsections (b)(1) - (3) would be sufficient. The
commenter argues that the proposed amendments require losses to be secured
twice--once by the letter of credit requirement and second by the trusteed
reinsurer requirement. The commenter contends that it is redundant to require
a surplus lines insurer to be a certified trusteed reinsurer and to maintain
an A- rating or better because each is an indicator of financial strength.
Agency Response: The Department disagrees that the requirements are unreasonably
stringent, redundant, unwarranted, and unreasonable, and therefore, disagrees
with the need for the suggested text revisions. Under current regulations,
there is no ability for a self-insurance group to access the surplus lines
market. Under the adopted amendments, access to the surplus lines market is
acceptable conditioned upon compliance by the self-insurance group with certain
financial security requirements. The goal of the amendments is not to hold
the surplus lines insurer to a higher standard but to place parameters on
how a self-insurance group engages the non-admitted market for the required
excess insurance, considering the joint and several liability of self-insurance
group members. The Department disagrees that the losses would be secured twice.
The trust related to the reinsurance obligations secures reinsurance exposures,
not surplus lines obligations. The letter of credit is specific to the losses
of that self-insurance group and is a requirement for the self-insurance group
to hold a certificate of approval from the Department. The Department also
disagrees that the requirements are redundant. In the administration of the
Department's solvency regulation functions, it is the Department's practice
to utilize multiple ways to determine the financial strength and sufficiency
of a regulated entity and its arrangements with other entities.
§5.6405(b)(3)
Comment: Several commenters state that it is unclear if the self-insurance
group is intended to hold the letter or credit and recommend that language
be added to clarify explicitly that the self-insurance group is the holder
of the letter of credit.
Agency Response: The Department agrees with the comment and has clarified
subsection (b)(3) as adopted to indicate explicitly that the self-insurance
group is the holder of the letter of credit.
Comment: A commenter recommends that each self-insurance group provide
an annual report that includes the recoverables, receivables and draw downs
issued on the letter of credit to both the Department and relevant group members.
Also, the commenter states that a self-insurance group should review annually
the letter of credit amount, as loss development and membership in the group
may change from year to year.
Agency Response: The Department agrees that appropriate monitoring of these
arrangements is warranted, but disagrees that the recommended change is necessary
at this time because the Department can monitor the recoverables, receivables
and draw downs procedurally as part of its annual solvency monitoring and
examinations of self-insurance groups. Self-insurance groups are required
to submit an annual audit report to the Department every year. The Department
expects the self-insurance group's certified public accountant to evaluate
the letter of credit in relation to changes in the loss development and membership
structure as part of the annual audit report.
Comment: One commenter asks if the self-insurance group is unable to pay
the losses would the surplus lines insurer pay for losses and provide a letter
of credit under the attachment point.
Agency Response: The surplus lines insurer's liabilities are limited to
the contractual obligations pursuant to the terms and conditions of the excess
insurance policy that has been submitted to the Department for review prior
to use. The Labor Code §407A.054(b) requires specific excess insurance
for losses that exceed the self-insurance group's retention. In order to address
the comment, the Department has made minor clarifications to subsection (b)(3)
as adopted.
Comment: One commenter recommends that the actuarial analysis for the amount
of the letter of credit include a Probable Maximum Loss analysis for the self-insurance
group and that the annual report and actuarial opinion include a Probable
Maximum Loss analysis.
Agency Response: The Department agrees that an actuarial analysis including
a Probable Maximum Loss analysis is an important component in establishing
the amount of excess insurance coverage needed and the attachment points for
that coverage. Section 5.6405(d) requires an actuarial recommendation of the
appropriate level of specific excess insurance for the self-insurance group
as a prerequisite for obtaining a certificate of approval. Pursuant to Labor
Code §407A.051(d), the self-insurance group is required to notify the
Department if any information filed under the Labor Code §407A.051(c)
has changed or a self-insurance group's manner of compliance with the Labor
Code §407A.051(c) or any regulations adopted thereunder has changed,
such as a change in the amount of excess insurance coverage needed. The Department
plans to develop administrative procedures to ensure that the actuarial opinion
that accompanies the annual financial statements filed by each self-insurance
group includes a Probable Maximum Loss analysis.
§5.6405(b)(4)
Comment: A commenter states that the standard of ''timely'' in proposed
§5.6405(b)(4) is so vague that enforcement will be difficult, that it
is not clear what recoverables and receivables are subject to the proposed
regulation, and that it is not possible to demonstrate ''timely collected''
before obtaining the policy from the surplus lines insurer. The commenter
contends that it is an unreasonable requirement since the Department and the
self-insurance group already have many options at their disposal should a
surplus lines insurer fail to pay losses. The commenter recommends that §5.6405(b)(4)
be deleted in its entirety.
Agency Response: The Department disagrees with the recommendation to delete
this subsection in its entirety. The Department, however, has modified subsection
(b)(4) for clarification to require that the group timely collect recoverables
and receivables ''from the surplus lines insurer, but in no event, later than
90 days, including, if needed, drawing down on the letter of credit.'' The
purpose of this provision is to inform all parties involved in the excess
insurance transaction that the Department expects that any receivables or
recoverables related to the arrangement do not accumulate to a point that
they may or do become hazardous to the financial condition of the self-insurance
group.
§5.6405(b)(5)
Comment: Several commenters state that the Department needs to require
full disclosure of all policy terms, limitations, endorsements, and exclusions
to ensure the transfer of risk to the surplus lines insurer and to ensure
no side agreements exist that would limit the surplus lines insurer's liability
under the policy. Several commenters recommend that the proposed amendments
be changed so that the self-insurance group is required to file with the Department
and TSIGGF any and all agreements not disclosed in the policy for review prior
to use. One commenter requests requiring the policy to contain any and all
agreements between the self-insurance group and the surplus lines insurer
prior to its use and that the policy state that it contains any and all agreements
between the self-insurance group and the surplus lines insurer.
Agency Response: The Department agrees that filing all side and other agreements
with the Department is necessary for the proper administration of Chapter
407A of the Labor Code. Labor Code §407.054 directs the Commissioner
to prescribe the form of the specific excess insurance which is to cover losses
that exceed the self-insurance group's retention up to limits required by
the Commissioner. The Department has clarified the requirement by revising
proposed subsection (b)(5) to require the self-insurance group to submit the
policy forms, renewal forms, certificates, endorsements and any amendments
thereto, and any agreements between the self-insurance group and the excess
insurance insurer for the Department's review prior to use. The Department
also has clarified the requirement by revising proposed subsection (b)(5)
to state that ''the group may not accept or enter into any agreement or arrangement
with the surplus lines insurer that has not been reviewed by the Texas Department
of Insurance.'' To further address the concerns raised in the comments, the
Department has changed the amendments as proposed by adding a new paragraph
(7) requirement: ''(7) the group notifies the Commissioner in writing no less
than five calendar days after receiving notice of cancellation or nonrenewal
of the excess insurance policy and no less than 30 calendar days prior to
the effective date of any proposed change in the excess insurance policy,
by endorsement or otherwise.'' The Department declines to make the change
to require that the policy contain any and all agreements between the self-insurance
group and the surplus lines insurer since the amendment, as adopted, will
require the self-insurance group to file any and all agreements, and the Department
can require the policy to contain this provision as part of its review of
the policy form submission. The Department will not recognize any excess insurance
policy or agreements in fulfilling a self-insurance group's financial obligations
unless the policy and agreements have been reviewed by the Department prior
to use. The Department declines to make the change to add ''and to the Texas
Self-Insurance Group Guaranty Fund'' to proposed subsection (b)(5). The review
and approval of a self-insurance group's specific excess insurance is a regulatory
function of the Department. While the Department appreciates the commenter's
concerns, the Department notes that pursuant to Labor Code §407A.055(a),
TSIGGF currently receives reports and other relevant information from the
Department, can access certain information provided by or filed with the Department,
and can provide advisory recommendations to the Commissioner as necessary
regarding an applicant's compliance with Subchapter B relating to application
requirements for certification. The Department will endeavor to provide the
proposed policy information it receives with TSIGGF while the submission is
under review.
Comment: A commenter states that approval of an excess insurance form encroaches
into form regulation and is contradictory to the ability to tailor insurance
solutions to the needs of a particular customer. The commenter suggests deleting
subsection (b)(5) in its entirety.
Agency Response: The Department declines to delete proposed subsection
(b)(5) because it imposes a requirement on the self-insurance group that is
necessary for the Department's proper administration of Chapter 407A. Subsection
(b)(5) is one of the necessary requirements for the self-insurance group to
engage the surplus lines market as provided under Chapter 407A of the Labor
Code. Specifically, this requirement enables the Department to evaluate the
arrangement in terms of a self-insurance group's compliance with the requirements
in the Labor Code Chapter 407A, including §407A.051(e) which requires
the Commissioner to evaluate the financial information provided with the application
as necessary to ensure that the funding is sufficient to cover expected losses
and expenses and that the funds necessary to pay workers' compensation benefits
will be available on a timely basis and §407A.054 which explicitly requires
a self-insurance group to obtain specific excess insurance for losses that
exceed the self-insurance group's retention in a form prescribed by the Commissioner.
NAMES OF THOSE COMMENTING FOR AND AGAINST THE PROPOSAL.
For: Texas Alliance of Energy Producers Self-Insured Group Trust; Montlake
Holdings LLC; BMS Group Limited; C&S Service and Supply Company; Boley-Featherston
Insurance; Cedar Springs Drilling Company, LLC; Burk Royalty Co., LTD; Safety
Services International, Inc.; Sun Coast Resources, Inc.; and ICT Insurance
Agency, Inc.
For with changes: National Association of Professional Surplus Lines Office
Ltd.
Against: Texas Cotton Ginners' Trust and RMS Texas, LLC.
Neither for nor against: Attenta and Texas Auto Dealers Self Insurers Group.
Neither for nor against, with changes: Texas Self-Insurance Group Guaranty
Fund, Office of Public Insurance Counsel, and Texas Mutual Insurance Company.
The amendments are adopted pursuant to the Labor Code §§407A.008,
407A.051(c)(3) and (10), 407A.051(e), and 407A.054, and the Insurance Code
§36.001. Labor Code §407A.051(c)(3) requires an application for
a certificate of approval to include proof of compliance with the excess insurance
requirements under Labor Code §407A.054. Labor Code §407A.051(c)(10)
requires that an application include a pro forma financial statement, in a
form acceptable to the Commissioner, that shows the financial ability of the
group to pay the workers' compensation obligations of the employers who are
members of the group. Labor Code §407A.051(e) requires the Commissioner
to evaluate the financial information provided with the application as necessary
to ensure that the funding is sufficient to cover expected losses and expenses
and that the funds necessary to pay workers' compensation benefits will be
available on a timely basis. Labor Code §407A.054(b) states that each
group shall obtain specific excess insurance for losses that exceed the group's
retention in a form prescribed by the Commissioner. Labor Code §407A.054(b)
also states that the Commissioner may establish minimum requirements for the
amount of specific excess insurance based on differences among groups in size,
types of employment, and years in existence, and other relevant factors. Labor
Code §407A.054(a) directs that each group must comply with the excess
insurance requirements adopted under this section. Labor Code §407A.008
provides that the Commissioner shall adopt rules as necessary to implement
Labor Code Chapter 407A, Group Self-Insurance Coverage. Insurance Code §36.001
provides that the Commissioner 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.
§5.6405.Excess Insurance.
(a)
The group shall obtain excess insurance in an amount acceptable
to the Commissioner but in no event shall the excess insurance coverage be
less than $5 million per occurrence.
(b)
The group shall obtain and maintain excess insurance coverage
from an insurer that has a certificate of authority from the Texas Department
of Insurance or from an eligible surplus lines insurer in compliance with
Chapter 981 of the Texas Insurance Code and related provisions of the Texas
Administrative Code, provided that:
(1)
the surplus lines insurer is also certified as a trusteed
reinsurer by the Texas Department of Insurance, in accordance with Insurance
Code, Article 5.75-1(b)(3) (effective April 1, 2007, Article 5.75-1(b)(3)
is repealed and re-adopted as Insurance Code §§493.102, 493.152
- 493.155, and 495 157);
(2)
the surplus lines insurer maintains a financial strength
rating of ''A-'' or better, as determined by A.M. Best Company;
(3)
the surplus lines insurer provides a clean, irrevocable,
and unconditional letter of credit in favor of the group as beneficiary and
held by the group, subject to withdrawal solely by and under the exclusive
control of the group, to secure the payment of losses, including losses, loss
adjustment expenses, incurred but not reported losses, and any other obligation
of the surplus lines insurer under the terms and conditions of the excess
insurance policy, whether paid or unpaid by the group:
(A)
in no less than the greater of:
(i)
the amount of actuarially projected losses to ultimate;
or
(ii)
the amount of actual losses to ultimate;
(B)
issued by a qualified United States financial institution
as defined in Insurance Code, Article 5.75-1(e) (effective April 1, 2007,
Article 5.75-1(e) is repealed and re-adopted as Insurance Code §§493.002,
493.102, and 493.104); and
(C)
provided the letter of credit is in a form acceptable to
the Texas Department of Insurance and meets the requirements in 28 TAC §7.610,
except for those requirements that apply solely to reinsurance agreements;
(4)
the group timely collects recoverables and receivables
from the surplus lines insurer, but in no event, later than 90 days, including,
if needed, drawing down on the letter of credit;
(5)
the group submits the surplus lines policy forms, renewal
forms, certificates, endorsements and amendments applicable thereto, and any
agreements between the surplus lines insurer and the group to the Texas Department
of Insurance for review prior to use and the group may not accept or enter
into any agreement or arrangement with the surplus lines insurer that has
not been reviewed by the Texas Department of Insurance;
(6)
the group demonstrates to the satisfaction of the Texas
Department of Insurance that the group meets the requirements of subsection
(b) of this section before obtaining and in order to maintain excess insurance
coverage from an eligible surplus lines insurer; and
(7)
the group notifies the Commissioner in writing no less
than five calendar days after receiving notice of cancellation or nonrenewal
of the excess insurance policy and no less than 30 calendar days prior to
the effective date of any proposed change in the excess insurance policy,
by endorsement or otherwise.
(c)
In determining the group's excess insurance, the Commissioner
shall consider a group's size, types of employment, years in existence and
other relevant factors.
(d)
To assist the Commissioner in making the determination
under subsection (c) of this section, the group shall submit an analysis prepared
by an actuary of the appropriate level of specific excess insurance for the
group.
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 March 2, 2007.
TRD-200700831
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: March 22, 2007
Proposal publication date: October 6, 2006
For further information, please call: (512) 463-6327