TEXAS DEPARTMENT OF INSURANCE Notification Pursuant to the Insurance Code, Chapter 5, Subchapter L As required by the Insurance Code, Article 5.96 and 5.97, the Texas Register publishes notice of proposed actions by the Texas Board of Insurance. Notice of action proposed under Article 5.96 must be published in the Texas Register not later than the 30th day before the board adopts the proposal. Notice of action proposed under Article 5.97 must be published in the Texas Register not later than the 10th day before the Board of Insurance adopts the proposal. The Administrative Procedure Act, the Government Code, Chapters 2001 and 2002, does not apply to board action under Articles 5.96 and 5.97. The complete text of the proposal summarized here may be examined in the offices of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas 78714- 9104.) This notification is made pursuant to the Insurance Code, Article 5.96, which exempts it from the requirements of the Administrative Procedure Act. Texas Department of Insurance Adopted Action The Commissioner of Insurance has adopted amendments to classifications contained in the TEXAS BASIC MANUAL OF RULES, CLASSIFICATIONS AND EXPERIENCE RATING PLAN FOR WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE (Manual). The Manual provides insurers licensed to write workers' compensation insurance in Texas with rules, classifications and experience rating plan applicable to Texas workers' compensation policies. The revisions were proposed by the Texas Department of Insurance staff (TDI staff) in a petition filed on July 2, 1998. Notice of the proposal (Reference No. W-0798-16-I) was published in the July 17, 1998 issue of the Texas Register (23 TexReg 7446). The revisions were considered at a public hearing held on August 18, 1998 at 9:00 a.m., under Docket No. 2371 in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas. The Commissioner adopted the amendments to the workers' compensation classifications without changes to the proposal as notice in the Texas Register. One set of comments was received concerning Docket No. 2371 and it came from State Farm Insurance Companies. The comments expressed concern about possible effects of the deletion of "clerical" and "salespersons" from various classifications. The first concern was that the recommended changes would cause Texas to have classification wordings different from the workers' compensation insurance industry in other states. In response to this concern, the department points out that Texas workers' compensation classifications have been significantly different from the classifications in other states since at least January 1, 1994. At that time Texas condensed the number of its workers' compensation classifications from about 656 classifications to about 351 classifications. In addition, the recommended deletions of "clerical" from the classifications is consistent with the earlier removal of "clerical" from eight (8) classifications effective January 1, 1994. Consequently, the additional deletions would not significantly increase the differences in the classifications between Texas and other states. Another comment was that these changes would increase the possibility of misclassification, either intentionally or unintentionally. The department disagrees based on its experience with the earlier deletions of "clerical" effective January 1, 1994. The TDI staff did not see an increase in misclassifications or possible fraud as a result of removing "clerical" from those eight (8) classifications effective January 1, 1994. Although the department recognizes that in some situations it may be difficult to distinguish which classification may apply to a particular employee, Manual rule IV. E. 2. provides guidance as to how to handle such situations. The rule requires all of the payroll of an employee operating under more than one classification during a policy year to be included under the highest rated classification. In addition. Manual Rule IV. b. 2. a. and d. set forth definitions for "clerical" and "salespersons". In order for an employee to be eligible for either of these classifications, an employee must meet those definitions Otherwise, the employee's payroll must be included under the governing classification. Another comment was that the insurers may have difficulty explaining to a policyholder why the rates for a classification are not the same from state to state and why the classification code might not be the same. The department's response is that this difficulty already exists since there presently are differences from state to state in the rates charged for the same classification as well as a difference in the actual classification code. Insurers have the continuing responsibility to inform their policyholders of in the rules and rates for the various states in which that employer has operations. The commentor expressed concern about having to "re-underwrite" at renewal risks that may be eligible to have "clerical" and "salespersons" removed from the governing classification. TDI staff believes that the re-classification of some of the clerical and salespersons is worth the underwriting effort because the premium will be more reflective of the hazards of the work being performed. However, the TDI staff will monitor the effects of these changes on the rates being charged and if there are adverse effects, TDI staff will recommended changes to resolve them. Lastly, the commentor expressed concern that if the clerical and salesperson payroll is being deleted from the recommended classifications there should be a corresponding rate adjustment. The department disagrees that a rate adjustment is warranted at this time. In response to this concern, TDI staff reviewed the pure premium level for three (3) of those classifications that removed "clerical" effective January 1, 1994. TDI staff's review revealed no significant empirical difference in the premium level for those three classifications after clerical was removed. If an insurance company feels that a rate adjustment is necessary because of "clerical" being removed, the company could adjust either its rate filing or the amount of schedule rating applied to a specific policy to arrive at the appropriate premium level. The Commissioner has determined that the revisions to the classifications contained in the Manual are necessary to combine certain classifications with like or similar hazards, to eliminate clerical and outside salespersons from the classification wordings for several classifications, to eliminate conflicting language within the classification wordings and footnotes, and to provide clarification to some of the classification wordings by amending the language. The amendments to the classifications contained in the Manual are shown in exhibits on file with the Chief Clerk's Office of the Texas Department of Insurance under Reference No. W-0798-16-I and are incorporated by reference into Commissioner's Order No. 98-1012. The Commissioner has jurisdiction of this matter pursuant to Articles 5.60 and 5.96 of the Texas Insurance Code. This notification is made pursuant to the Insurance Code, Article 5.96, which exempts it from the requirements of the Government Code, Title 10, Chapter 2001 (Administrative Procedure Act). Consistent with the Insurance Code, Article 5.96 (h), prior to the effective date of this action, the Texas Department of Insurance will notify all insurers affected by this action. The agency hereby certifies that the adopted amendments to the classifications contained in the Manual have been reviewed by the legal counsel and found to be a valid exercise of the agency's legal authority. IT IS THEREFORE THE ORDER of the Commissioner of Insurance that the amendments to the classifications contained in the Texas Manual of Rules, Classifications and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance, which are attached and incorporated hereto are hereby adopted to be effective for workers' compensation policies written with an effective date on and after January 1, 1999. TRD-9814033 Lynda H. Nesenholtz General Counsel and Chief Clerk Texas Department of Insurance Filed: September 3, 1998