Final Action on Rules
EXEMPT FILING NOTIFICATION PURSUANT TO THE INSURANCE CODE CHAPTER 5, SUBCHAPTER
L, ARTICLE 5.96 DENIAL OF AMENDMENTS TO THE TEXAS BASIC MANUAL OF RULES, CLASSIFICATIONS
AND EXPERIENCE RATING PLAN FOR WORKERS’ COMPENSATION AND EMPLOYERS LIABILITY
INSURANCE
The Commissioner of Insurance (“Commissioner”) held a public
hearing under Docket No. 2578 on December 2, 2003 at 9:30 a.m., in Room 100
of the William Hobby, Jr. State Office Building, 333 Guadalupe Street in Austin,
Texas to consider the petition of American International Companies (AIG).
The petition sought the adoption of amendments to various rules pertaining
to terrorism premium in the Texas Basic Manual of Rules, Classifications and
Experience Rating Plan for Workers’ Compensation and Employers’
Liability Insurance (Manual) and in the Texas Workers’ Compensation
Statistical Plan (Stat Plan Manual). AIG’s petition proposing the amendments
was filed with the Texas Department of Insurance (TDI) Chief Clerk on October
14, 2003, and the notice of hearing was published in the November 14, 2003
issue of the
Texas Register
(28 TexReg 10291).
On February 24, 2003, a petition was filed by Staff proposing that terrorism
premium be calculated based on total payroll for the policyholder. The methodology
proposed by Staff was very similar to the methodology proposed by the National
Council on Compensation Insurance (NCCI) for the states in which NCCI is the
rating authority. Public notice of the staff’s proposal was published
in the March 7, 2003 issue of the Texas Register (28 TexReg 2127). No hearing
was requested nor comments received concerning the proposal during the 30
days following the publication. On April 16, 2003, the Commissioner’s
Order No. 03-0273 was signed adopting the proposed amendments made by staff
in its petition requiring that for Workers Compensation, terrorism premium
be calculated based on total payroll for the policyholder. The effective date
of the regulation was May 10, 2003, which is 15 days after the notice of the
adoption was published in the
Texas Register
(28
TexReg 3529).
AIG originally filed its petition on July 17, 2003 and amended its request
on September 2, 2003 and October 14, 2003. AIG proposed 4 amendments to the
Manual and one amendment to the Stat Plan Manual, all of which pertain to
adding an alternate method of calculating terrorism premium. This alternate
method allows terrorism premium to be calculated as a percentage of premium.
The first proposed amendment modifies Rule III E., Calculation of Total
Estimated Policy Cost - Item 4, of the Manual by amending the algorithm
used to calculate workers’ compensation premium to include the alternate
method of calculating terrorism premium as a percentage of premium. The method
of calculating terrorism premium proposed by the petitioner requires that
the Premium Subject to Experience Modifier be multiplied by the terrorism
rate filed with TDI by the insurance company and then the Estimated Standard
Premium is increased by the results of such multiplication. The Premium Subject
to Experience Modifier includes the Premium Incentive for Small Employers
which is affected by the employer’s claims experience. By applying the
terrorism rate to the premium after it has been adjusted by the Premium Incentive
for Small Employers, some small employers with the same or similar circumstances
and conditions will be paying more terrorism premium due solely to prior claims
experience. The petitioner presented no arguments for its application of the
terrorism rate to the Premium Subject to Experience Modifier.
The second proposed amendment modifies Rule VI J., Terrorism Premium, of
the Manual by adding the option of calculating terrorism premium based on
premium rather than payroll. This proposed amendment indicates that the carrier
will select the methodology used to calculate terrorism premium and file that
selection with TDI. As discussed in the preceding paragraph, the proposed
amendment to the rule contemplates that if terrorism premium is calculated
on premium rather than payroll, then the terrorism premium is determined after
the application of the Premium Incentive for Small Employers, if applicable.
In addition, the proposed amendment to Rule VI J. of the Manual indicates
that if terrorism premium is based on the petitioner’s methodology rather
than the current rule, then terrorism premium would include premium developed
under Code 0913 - Domestic Workers - Residences Per Capita Basis.
Code 0913 is a per capita classification, meaning that the premium is calculated
on the number of employees working under that classification, rather than
on a payroll basis. Under the current rule, terrorism premium does not apply
to premium developed under Code 0913 because the basis of terrorism premium
is payroll. In support of its amendment, the petitioner argued that its premium-based
methodology is specifically permitted by the United States Department of the
Treasury Interim Rule dated April 15, 2003, is consistent with standard business
practice relating to the application of surcharges, assessments and taxes
and is consistent with the recoupment provisions of the Terrorism Risk Insurance
Act of 2002 (TRIA). The petitioner offered no support for applying the terrorism
premium to Code 0913 workers if the alternate methodology is used.
The third proposed amendment offered by the Petitioner modifies Rule XV -
Domestic Workers - Residences, Section D. of the Manual. This rule currently
states that premium developed under Code 0913 is not included in the calculation
of terrorism premium. The petitioner’s methodology includes premium
developed under Code 0913 in the calculation of terrorism premium. Using the
petitioner’s methodology increases the amount of terrorism premium for
a policyholder, even though there has been no increase in the risk of a terrorism
loss. This increase in premium is unjustified and excessive considering that
the risk of a terrorism loss is not increased. The petitioner offered no support
for applying the terrorism premium to Code 0913 workers if the alternate methodology
is used.
The fourth proposed amendment offered by Petitioner modifies Rule XVII
- Premium Incentive for Small Employers, Section F. of the Manual indicating
that if terrorism premium is calculated on the basis of premium rather than
payroll, then the terrorism premium is determined after the application of
the premium incentive for small employers, if applicable. As stated in the
discussion of amendment one, the petitioner presented no arguments for its
application of the terrorism rate to Premium Subject to Experience Modifier.
The fifth proposed amendment offered by Petitioner, modifies Part III 16
of the Stat Plan Manual to match the changes proposed to Rule III E., Rule
VI J., Rule XV D. and Rule XVII. F of the Manual.
The petitioner testified that AIG selected the premium methodology for
calculating terrorism premium rather than the payroll methodology because
the premium methodology is consistent with the definition of a contingency
factor. The definition of a contingency factor, referenced by the petitioner
was taken from the Casualty Actuarial Society’s (CAS) publication Foundations
of Casualty Actuarial Sciences and is described as “a cushion in rate
levels for events that could not be accurately forecast, such as severe economic
conditions, unusual loss occurrences, or other ‘unpredictable’
developments.” The CAS’s Statement of Principles Regarding Property
and Casualty Insurance Ratemaking describes a contingency factor as a charge
for any systemic variation of the estimated costs from the expected costs.
The Commissioner does not find the petitioner’s arguments persuasive.
The methodology selected by the petitioner to determine terrorism premium
is not akin to a contingency factor. Terrorism losses or exposure can be identified
and built into the ratemaking process through the same means as other catastrophic
loss exposures, such as including hurricanes in the ratemaking process for
homeowners insurance. Loss exposures that are difficult to quantify by traditional
actuarial methods are often measured or priced by the use of models.
As further support of its proposed methodology, the petitioner cites Section
50.12(b) of the United States Treasury Interim Final Rule (final rule) dated
April 15, 2003. The Commissioner does not find this argument to be sufficiently
persuasive. Section 50.12 addresses the type of disclosure an insurer must
give its insured and does not address the methodology of calculating premiums.
Further, this section states “An insurer may describe the premium charged
for insured losses covered by the Program as a percentage of annual premium,
if consistent with standard business practice. An insurer may not describe
the premium in a manner that is misleading in the context of the Program,
such as characterizing the premium as a ’surcharge.’”
Although the proposed methodology may be commonly used for other lines
of property and casualty insurance, it is inconsistent with the standard business
practice of determining workers’ compensation premiums in this state.
The standard business practice for calculating workers’ compensation
premium is to multiply the total amount of payroll for the policyholder, expressed
in hundreds of dollars, by a rate. A surcharge is normally determined by multiplying
premium by a factor. The specific language of the final rule clearly states
that the terrorism premium for a workers’ compensation policy is not
a surcharge and to describe it as such violates TRIA. The petitioner stated
that its methodology is consistent with TRIA’s recoupment provisions.
The Treasury’s Final Rule dated July 7, 2003 states that the amount
of federal payment for an insured loss resulting from an act of terrorism
is to be determined based upon the insurance company deductibles and excess
loss sharing with the federal government. Section 103(e)(8) of TRIA provides
the treasury with the authority to recoup federal payments made under TRIA
through policyholder surcharges, up to a maximum annual amount. Clearly, there
is a difference between the terrorism premium paid by policyholders when workers’
compensation coverage is purchased and the recoupment mandated by the federal
government from policyholders that will be required in the event of a terrorism
loss. Lastly, the petitioner stated that the proposed methodology is understandable
to the policyholder since the most understandable articulation of a surcharge
is as a percentage of premium. However, as described above, Section 50.12
of the final rule is very specific in stating that the disclosure notice must
not describe the terrorism premium in a manner that is misleading, such as
characterizing it as a surcharge.
The Commissioner does not find the Petitioner’s arguments to be persuasive.
The Commissioner finds that the proposed alternative method would disrupt
the standard method for determining workers’ compensation terrorism
premium, allows insureds with the same classification to pay premium at a
different rate without justification or support, does not adequately provide
suitable justification for the application of a terrorism rate to the Premium
Subject to Experience Modifier and allows the insurance company to choose
a methodology in calculating terrorism premium that may increase the amount
of terrorism premium for a policyholder when there has been no increase in
the risk of a terrorism loss, nor an acceptable criteria established for selecting
the methodology of calculation by the insurer. Based upon the foregoing, the
Commissioner is of the opinion that the petition should be denied.
The Commissioner has jurisdiction of this matter pursuant to the Insurance
Code, Article 5.96, which authorizes the Commissioner to promulgate standard
and uniform manual rules for workers’ compensation.
This notification is made pursuant to the Insurance Code Article 5.96,
which exempts action taken under this article from the requirements of the
Administrative Procedure Act (Government Code, §2001).
IT IS THEREFORE THE ORDER of the Commissioner of Insurance that the petition
filed by American International Companies for amendments under Reference No.
W-0703-14 and heard under Docket No. 2578 be denied.
TRD-200400481
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Filed: January 23, 2004