ADOPTED RULES An agency may take final action on a section 30 days after a proposal has been published in the Texas Register. The section becomes effective 20 days after the agency files the correct document with the Texas Register, unless a later date is specified or unless a federal statute or regulation requires implementation of the action on shorter notice. If an agency adopts the section without any changes to the proposed text, only the preamble of the notice and statement of legal authority will be published. If an agency adopts the section with changes to the proposed text, the proposal will be republished with the changes. TITLE 4. AGRICULTURE Part I. Texas Department of Agriculture Chapter 5. Quarantines Sweet Potato Weevil Quarantine 4 TAC sec.5.62, sec.5.63 The Texas Department of Agriculture (the department) adopts amendments to sec.5.62 and sec.5.63, concerning the sweet potato weevil quarantine, without changes to the proposed text as published in the July 18, 1995, issue of the Texas Register (20 TexReg 5117). The amendments are adopted to clarify the designated weevil-free areas of Texas and to update the list of sweet potato weevil regulated areas. The amendments will define the Texas weevil-free area as those areas not designated in sec.5.63 of this title, remove Merced and Stanislaus counties located in the state of California from the list of sweet potato weevil regulated areas, add the sweet potato weevil regulated areas within the state of Texas, and add Bienville, Grant, and Webster counties to the list of quarantined counties in Louisiana. No comments were received regarding adoption of the amendments. The amendments are adopted under the Texas Agriculture Code, sec.71.003, which provides the Texas Department of Agriculture with the authority to establish quarantines in areas surrounding pest free zones, and sec.71.001, which provides the Texas Department of Agriculture with the authority to establish quarantines against out-of-state diseases and pests. This agency hereby certifies that the rules as adopted have been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas on September 28, 1995. TRD-9512392 Dolores Alvarado Hibbs Chief Administrative Law Judge Texas Department of Agriculture Effective date: October 19, 1995 Proposal publication date: July 18, 1995 For further information, please call: (512) 463-7583 TITLE 22. EXAMINING BOARDS Part X. Texas Funeral Service Commission Chapter 203. Licensing and Enforcement Specific Substantive Rules 22 TAC sec.203.13 The Texas Funeral Commission adopts an amendment to sec.203.13 concerning the minimum standards for embalming, without changes to the proposed text as published in the August 25, 1995, issue of the Texas Register (20 TexReg 6580). The amendments are necessary to enlarge the variety of embalming fluids that can be used by licensed funeral establishments. The amendments will function by allowing funeral establishments to use new chemicals in embalming after approval by the commission as such chemicals are commercially available. No comments were received regarding adoption of the amended rule. The amendments are adopted under Texas Civil Statutes, Article 4582b, sec.5 which provide the Texas Funeral Service Commission with the authority to adopt rules and prescribe forms necessary to administer the statute. The section is cited in 22 TAC sec.203.6 (relating to Provisional Licensees) and 22 TAC sec.203.20 (relating to the location of retained records). Texas Civil Statutes Article 4582b is affected by the amendment. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on September 27, 1995. TRD-9512474 Marc Allen Connelly General Counsel Texas Funeral Service Commission Effective date: October 23, 1995 Proposal publication date: September 25, 1995 For further information, please call: (512) 834-9992 TITLE 28. INSURANCE Part I. Texas Department of Insurance Chapter 5. Property and Casualty Insurance Subchapter R. Temporary Rate Reduction for Certain Lines of Insurance 28 TAC sec.sec.5.14000-5.14010 The Commissioner of Insurance of the Texas Department of Insurance adopts new sec.sec.5.14000-5.14010, concerning temporary rate reductions for certain lines of insurance, with changes to the proposed text as published in the July 28, 1995, issue of the Texas Register (20 TexReg 5598). Sections 5.14000-5.14010 concern the temporary rate reductions for certain lines of insurance which are required by new Article 5.131. The sections set forth the calculation and application of the amount of the rate reduction for certain lines of insurance for insurers to pass through to policyholders, on a prospective basis, the reduction in loss and allocated loss adjustment expense anticipated from recent tort reform legislation. The adoption includes changes to the proposed text for the reasons stated in this paragraph. All references to sec.5.14004(1)-(9) were changed to sec.5.14004(c)(1)-(13) to correct the reference. Changes were made to sec.sec.5.14000, 5,14003(c), 5.14004 and 5. 14005(b) to clarify that the subchapter applies to those policies with an effective date on and after January 1, 1996, based on comments received. Changes were made to sec.5.14001, Rate reduction factor, to conform the definition to the methodology to be used. A definition for loss and ALAE reduction percentage was added to this section to change and clarify the method of calculation and application of the rate reductions. Changes were made to sec.5.14001, Large risk, to conform the definition to other provisions of the Code, based on comments received. Changes were made to sec.5.14001, Tort reform legislation, for clarification in response to comments. The word "other" was inserted prior to "insurers" in subsection (b) of sec.5.14002 to clarify the subsection. Changes were made to sec.5.14003 to include the adjusted benchmark rate. Changes were made throughout the subchapter to reference loss and ALAE reduction percentage rather than rate reduction factor, where appropriate, in accordance with the changed methodology. The title of sec.5.14004 was changed to "Loss and ALAE Reduction Percentages by Line" to reflect the changed methodology described in sec.5.14005. New subsections (a) and (b) were added in sec.5.14004 to clarify the language and to describe the fact that a single loss and ALAE reduction percentage is required in the case of policies written on an occurrence basis while three percentages are necessary in the case of policies written on a claims made basis. The use of three such percentages in the latter case recognizes the different effective dates of the various reforms and the manner in which they apply to claims covered by the average claims made policy to which the loss and ALAE reduction percentages effective on January 1, 1996 will apply. Subsection (c) was added to display the loss and ALAE reduction percentages. The order of the lines and sublines was rearranged in sec.5.14004 to group together those lines subject to benchmark rating and those subject to file and use. Subparagraphs (A) and (B) were deleted from sec.5.14004 (3) and (4) regarding the factor for uninsured underinsured motorist bodily injury under private passenger automobile and commercial automobile liability insurance because, as noted by a commentor, the legislature did not include UM and UIM in the liability lines of insurance to be covered by the rate reduction. Commercial excess liability was separated from commercial umbrella in sec.5.14004(c)(10) since it is rated on an individual line and subline basis. It now appears as sec.5.14004(c)(11). The remaining paragraphs were renumbered accordingly and those lines with claims made policies and occurrence policies were further differentiated as appropriate. The title of sec.5.14005 was changed to Calculation and Application of Rate Reduction Factor. Changes were made to sec.5.14005 to provide for calculation and application of the rate reduction factor using the loss and ALAE reduction percentage in accordance with the methodology adopted. Subsection (c) was changed to subsection (a). New subsection (a) clarifies application of the loss and ALAE reduction percentages to the benchmark rate. Subsections (b) and (c) were added to describe the calculation of rate reduction factors from the loss and ALAE reduction percentages in subsection (c) of sec.5.14004 for occurrence and claims made policies, respectively, as well as the method of their application to rates. Subsection (d) was changed to include reference to professional liability, as requested by a commentor. The references to Methods 2 and 3 were deleted in the adoption. Subsection (f) was added in response to comments to clarify the method of application of rate reduction factors in the case of retrospective rating plans. The new subsection requires that the rate reduction factors be applied to the rates used to determine the minimum premiums, maximum premiums and other rating values under the plans. Subsection (g) was added in response to comments that where rates or premiums for excess or umbrella policies were determined as ratios or percentages of the rates or premiums of the underlying primary policies, applying the anticipated loss and ALAE reduction percentages to both would double count savings. The new subsection provides a method to calculate an adjusted excess or umbrella rate reduction factor. Changes were made to sec.5.14008(a) to permit the department to notify an insurer of its intention to disapprove a rate which has not been implemented and give the insurer the opportunity to withdraw and amend the rate rather than go through an administrative hearing. Changes were made to sec.5.14008 to delete inclusion of staff in each subsection and one reference to staff's participation is made in subsection (d) since staff's participation applies to the entire subchapter. After review of the comments, sec.5.14010 was deleted. Implementation of Article 5.131 does not require provision of a notice to policyholders and it appears the cost would outweigh the benefit. Section 5.14011 has been renumbered to sec.5.14010. Form TR95, which is adopted by reference, has been changed to show the pricing components for exemplary damages, DTPA, and all other reforms, rather than being divided by each reform, since the reforms other than exemplary damages and DTPA usually cannot be excluded from coverage. The other changes to the Form are consistent with the changes to sec.5.14004 and sec.5.14005. The agency is adopting by reference Form TR-3A, Calculation of Tort Reform Impact, Claims Made Policies, and Form TR-3B, Calculation of Rating Values, Claims Made Policies, which will be used to calculate the rate reduction factor for the line or subline in sec.5.14004(c)(1)-(13), as appropriate. New Subchapter R is necessary to implement amendments to the Insurance Code, Article 5.131, occasioned by passage of House Bill 1988, 74th Legislature, Regular Session. The new sections define certain terms used in this subchapter, explain the purpose of the sections, and set out rulemaking procedures. The new sections establish the loss and ALAE reduction percentages, which will be used to determine the rate reduction factor for certain lines of insurance, set forth the procedures to be followed for calculation and application of the rate reduction, and provide for filing requirements and monitoring of compliance. The new sections establish the mechanism for insurers to obtain administrative relief from disapproval of rates which do not reflect the required reduction and provide that the commissioner can grant an insurer relief from application of the required reduction in rate in certain limited situations. The sections provide that the rate reduction factor remains in effect during the term of the policy and provide that any policy or endorsement effective after the determination of a new factor will apply the new factor in effect on the date of renewal or issuance of the endorsement, unless a department approved manual requires otherwise. The sections provide for the commissioner to exempt lines or sublines from the application of the rate reduction when and as credible actuarial evidence indicates that the rates in the specific line or subline reflect the actual experience resulting from the tort reform legislation. Section 5.14005 provides the methods used for calculation and application of the rate reduction factors. Separate methods are provided for those lines of insurance subject to Article 5.101 and for all other lines. Separate methods are provided for occurrence policies and for claims made policies. Instructions are provided for multi-peril and/or package coverages whose premiums are based upon the premiums for each of the component monoline coverages. A separate method is provided for policies containing certain exclusions which are affected by the tort reform legislation. Instructions are provided for coverages subject to retrospective rating plans. A separate method is provided for umbrella and excess policies whose rate is determined as a factor of the underlying basic policy. Section 5. 14005 and sec.5.14007 describe forms to be used by insurers for calculating rate reduction factors, for certifying compliance with the subchapter and for reporting information necessary for the department to monitor compliance with the subchapter. Separate instructions are provided for non rate regulated insurers and for all other insurers. The section also makes provision for commercial liability and professional liability policies or large risks which may not be affected by specific components of the tort reform legislation because of specific exclusions in the policy. In such cases, the insurer will not be required to apply the full rate reduction factor, but may reduce the factor by the pricing components in Form TR95 which identifies the anticipated savings by exemplary damages, DTPA and all other tort reforms. Insurers will comply with certain filing requirements if any factor is reduced. General Several commentors expressed the opinion that overall the proposed rule is well balanced and is a commendable effort to establish a workable solution to the mandated reductions. Several commentors recommend adoption of the proposal with some suggested changes. Numerous commentors complimented the agency on the open and inclusive process used in developing the proposed sections and believe the process resulted in a significant increase in the practicality of the proposed regulation. Several commentors understand the complicated nature of implementation of the statute. These commentors applaud staff's efforts and appreciate inclusion of insurance consumers with industry in discussions regarding implementation of rate reductions for liability insurance lines. A commentor believes it is important to maintain the open process used in the development of these rules for future amendments to the rules as the data base grows and changes occur in the methodology considered. It is suggested that TDI continue the existing working groups on this process. Agency Response: The agency appreciates the assistance provided by the working groups on the proposal and the comments received. The agency intends to maintain an open process, and include interested consumer and industry representatives in working groups. A commentor understands that quantifying savings is not easy and that the early numbers will be less than precise, but emphasizes that it is essential that savings be passed on to Texas consumers. He indicates that tort reform was passed to create jobs, stimulate economic development and benefit consumers. This commentor wants to see the full amount of savings go to the intended beneficiaries. He doesn't want the commissioner to be conservative, but to be right on the money and give policyholders what is theirs. Other commentors expressed concern that if the reductions are too high there will be an adverse impact on market availability. These commentors believe that the process used by the agency will result in a meaningful reduction in rates and that there is a delicate balance between availability and affordability. They believe the purpose of the legislation is clear and consumers should enjoy the savings from tort reform and also still have insurance available. A brief history of the rationale for rate reduction legislation was provided. The workers compensation law changed substantially in 1991 with a reduction in losses that same year. Insurance companies did not lower workers compensation rates until 1993. These commentors believe that the lag time between the decrease in losses and the lower premiums paid by policyholders resulted in a windfall for insurers. As a result, the legislature wanted to ensure that insurance consumers would immediately experience lower rates as insurance companies costs and losses dropped due to savings resulting from tort reform legislation and Article 5.131 was passed. These commentors urge TDI to implement rules that assure Texas consumers receive the full benefit of the legislative directive. Another commentor suggests that a primary goal of the rulemaking process should be implementing a method to achieve the statutory goals without increasing insurer costs and possibly exceeding anticipated savings from tort reform. Some of the commentors also believe that any reduction which varies from that stated in Article 5.131 should be based on evidence supporting this variation. A commentor believes there are two major collateral benefits from tort reform. Consumers benefit from lower prices on goods and services and the state's economy will benefit by developing an excellent environment in which to operate, build or expand a business, encourage new businesses and stimulate innovation. The proposed rule is the first tangible evidence of the savings to the consumers. Other savings will be experienced over time as the reforms take effect. A commentor suggests that in assessing the impact of tort reform on insurance rates, the agency needs to remember that there was no insurance reform and no fundamental change to the insurance system. This commentor does not believe the tort reform changes were revolutionary or that it is reasonable to expect dramatic changes in the short term. Agency Response: The agency agrees that projecting the reductions in insured loss and loss settlement costs as a result of the tort reform legislation is not easy, but notes that pricing the impact of legislative changes on prospective insurance rates is a common and necessary activity of insurers, regulators and policymakers. Several witnesses testified regarding their experience in pricing the impact of legislative changes and major judicial decisions. The agency has considered the issues of availability and affordability in determining the appropriate factors to reflect reductions in future loss and loss settlement costs resulting from the tort reform legislation. As long as the rate reductions are fair to insurers, there should be no decrease in insurance availability. Rather, fair rate reductions combined with the greater certainty of the costs of doing business in Texas resulting from the tort reform legislation should encourage insurers to increase their activity in Texas and improve insurance availability. Fair rate reductions are those which do not exceed the anticipated reductions in future loss and loss settlement costs resulting from the tort reform legislation. The agency believes that the selected reduction percentages meet this standard and are fair to insurers. At the same time, the tort reform rate reductions must be fair to consumers. The agency believes this subchapter demonstrates the commitment to the goal that insurance consumers realize all the savings generated by reductions in loss and loss settlement costs resulting from the tort reform legislation. The agency agrees the tort reform legislation is not insurance reform but the agency believes (as does the legislature) that this legislation will affect what insurers will have to pay on claims. Article 5.131 directs the commissioner to set a percent of rate reduction which prospectively passes on the insurance savings which is expected to occur from the tort reform legislation, and that the rates which result from the rate reduction are reasonable, adequate, not unfairly discriminatory, nonconfiscatory and not excessive. Sections 5.14000, 5.14002(d), 5.14003, 5.14004, 5.14005(a), and 5.14006 Commentors suggest changing the language to clarify that the subchapter applies only to policies with the liability coverages enumerated in sec.5.14004. Agency Response: Disagree. The agency believes the proposed language is clear and has adopted the language proposed. The subchapter applies to all insurers that are authorized to write the coverages, whether or not they currently have policies issued which include the coverages, and the agency needs to be able to monitor all insurers. Sections 5.14000, 5.14004, and 5.14005(b) Commentors suggest changing the phrase "issued, issued for delivery, or renewed" to "effective" since the statutory language expresses two different dates which may precede or follow the effective date of the policy. These commentors believe the ambiguity can be resolved by changing to the word effective. Agency Response: Agree. The agency believes that the statutory language means the effective date of the policy and has made the change to avoid any possible confusion. Sections 5.14002, 5.14003, 5.14005, and 5.14006 A commentor suggested that all references to sec.5.14004(1)-(9) be changed to sec.5.14004(1)-(12). Agency Response: Agree. The agency has changed the references to correctly reflect the number of paragraphs. Section 5.14000 Commentors expressed concern that the proposal inadvertently includes surplus lines insurers and suggest that language be added to clarify that surplus lines insurers are not subject to this subchapter. It is recommended that the word "authorized" in the definition of non rate regulated insurers be changed to "licensed" where appropriate throughout the sections. Concern is expressed that since the 73rd Legislature amended Article 1.14-2 to clarify that eligible surplus lines insurers are not unauthorized insurers that a court could construe the use of the term authorized to include those types of insurers. Agency Response: Disagree. There is no intention by the agency to include surplus lines insurers in this subchapter. The subchapter applies only to authorized insurers and it is the long standing position of the department that the word "authorized" means "licensed". Surplus lines insurers are not licensed insurers and thus are not included as an authorized insurer in this subchapter. Section 5.14001-Large Risk Commentors requested deletion of this definition or suggest that the definition be amended to conform with Article 5. 13-2(8) as well as change sec.5.14005 to limit the exception to risks defined in Article 5.13-2(8) and provide certification to the policyholder. The commentors recommend deleting subparagraph (C) as it relates to rates and not coverage and do not believe that it is applicable to this section. One of the commentors suggested that the proposed definition exceeds the agency's statutory authority. A commentor recognizes that the agency defined large risk to allow tort reform adjustments using Form TR95. This commentor contends that use of this form will be very costly. The commentor is also uncertain how the impact of loss settlements will be addressed by this subchapter. Agency Response: The agency agrees that the definition should conform to the definition in the Code and the definition has been changed to be consistent; however the agency disagrees that subparagraph (C) should be deleted. The agency has expanded the definition to maintain consistency of the application of the Code and other rules to large risks. The Code and existing rules of the agency permit the use of a Large Risk Alternate Rating Option and it would not be fair and equitable to delete this option for large risks in this subchapter. The agency recognizes that other provisions of the Code permit a different application to large risks and the agency believes that it is consistent with the various statutes to recognize that difference in this subchapter. The agency disagrees with the provision of a certification form to the policyholder as not required by the statute and an unnecessary administrative cost to be borne by an insurer which would ultimately be borne by the policyholder. The agency will be providing the components of Form TR95 and an insurer will only use it if a potential coverage area such as exemplary damages is to be specifically excluded from the insurance contract. Section 5.14001-Rate A commentor recommends that there be a clear distinction between "rate" used as a basis for determining premium and the "minimum premium" pricing approach. Since expected losses are not a part of the calculation to determine the minimum premium, the commentor believes it inappropriate to reduce a minimum premium by a percentage as he believes the sections propose. Agency Response: The agency recognizes that there is a difference between a rate used as a basis for determining premium and the minimum premium pricing approach used in some situations. However, the statute requires application of rate reduction to specific liability lines and to the extent that a "minimum premium" reflects a rate in any way or a provision for loss and ALAE, it is subject to the reduction factor for that portion of the premium. Section 5.14001-Rate Reduction Factor Commentors recommend that the definition of rate reduction factor not include a reference to the amount of premium dollar. They believe the reference is extraneous. They request that the definition be more specific as to whether it applies only to allocated loss adjustment expenses (ALAE) or all loss adjustment expenses (LAE). Agency Response: The agency agrees that the definition should be tied to the methodology used and has changed the definition to be specific. Section 5.14001-Tort Reform Legislation Commentors suggest that the agency revise and expand the definition of tort reform legislation. It was suggested that the language be changed to include the following language: "assure fairness and equity to all parties and which may or may not result in reductions in the cost of litigation and the risk of losses associated with judgments." It was also suggested that the following bills be included in the definition: 73rd Legislature: House Bill 1368, a comprehensive security devices statute which mandates installation of keyless deadbolt locks, peep holes, window latches and pinlocks on sliding glass doors which should result in a reduction in the number of assaults and thefts at apartment complexes, thus reducing rates for apartment owners and management companies, as well as renter's insurance; Senate Bill 170, which relates to the installation of pool yard enclosures for swimming pools and spas owned by homeowner associations and multi-unit residential rental companies, which should reduce the number of wrongful death and bodily injury lawsuits due to swimming pool accidents; and Senate Bill 536, which allows apartment owners and managers to do criminal history checks on prospective employees. The commentors believe that this legislation will make premises safer for residents and reduce the risk of loss, thus reducing the number of claims. It is thought that this statute will reduce professional negligence claims and losses. 74th Legislature: House Bill 383, the public servant liability law which limits the amount of damages for which certain employees or officers of the state or local government may be personally liable. They also believe that these statutes qualify as "tort reform legislation" since violation of a duty will give rise to a tort. Another commentor proposes a revision to the definition of "tort reform legislation" by changing the reference to size of judgments to cost of claims as a more accurate reflection of the possible impact of tort reform. Agency Response: The agency agrees in part and the definition has been changed. The agency disagrees that the definition should be expanded. The statute references legislation that ".. is intended to meaningfully reform the civil justice system and [which] will result in reduction in the cost of litigation and in the size of judgments..." House Bill 383 had been considered by the agency prior to publication of the proposal and the agency does not believe that it will result in savings for the lines addressed in this subchapter. Although the agency agrees the other suggested legislation could be beneficial in reducing loss costs, it is not considered to be "tort reform legislation", as set forth in the Act, and Article 5.131 requires the consideration of the impact of "tort reform legislation". The suggested legislation may have an impact on insurance losses, which may impact insurance rates. Section 5.14002(b) A few commentors indicated that this paragraph limits the application of the subchapter to county mutuals and other insurers whose rates are not regulated. The commentors point out that there is no provision included in the subchapter to hold non rate regulated insurers accountable and ensure that these insurers comply with the directive to pass through savings. They believe that since county mutuals write about one-fifth of the auto premiums in the state, the subchapter should include a mechanism for meaningful review that county mutuals have passed through savings; a guidepost to measure the savings passed through by non rate regulated companies; and application of a penalty when a company fails to fully pass through savings as directed by the legislature. Another commentor urges TDI to monitor savings passed through by non rate regulated insurers using all means statutorily available. Another commentor believes that the proposed section correctly excludes non rate regulated insurers from the mandatory rate reductions required in other sections of the subchapter. This commentor believes it is clearly the legislature's intent to exclude non rate regulated insurers and that TDI has the authority to monitor and report to the legislature on compliance with the legislative directive to pass through tort reform savings. The commentor does not believe that TDI has the authority to impose or enforce rate regulation on non rate regulated insurers. Agency Response: The agency disagrees that it can require county mutuals or other non rate regulated insurers to meet the same requirements as rate regulated insurers under this statute. The agency agrees that the statute specifically excludes the application of the rate reduction factor to county mutuals and non rate regulated insurers. In addition, when Amendment #1 to House Bill 1988 was offered by Senator Shapiro on the floor of the senate, the following statement was made: "Amendment Number 1, all parties have agreed to. It was never the intention for these rollback requirements to apply to non rate regulated lines and sublines of insurance." The agency believes there are express limitations on the application of Article 5.131 to county mutuals and other non rate regulated insurers and has only applied this subchapter to those insurers as is permissible within the language of the statute. The agency conducts reviews of rate filings and will perform meaningful reviews of companies to ensure that savings have been passed through to policyholders. The agency will be monitoring the non rate regulated insurers and these insurers must file a certification form and other necessary information to document the amount of savings due to tort reform which they have passed through to policyholders. Section 5.14002 A commentor urges TDI to not allow anything to hinder the updating of rates to reflect the latest experience for non-affected sublines. This commentor does not believe that it is necessary to wait for fully-credible experience under tort reform to update affected sublines. Agency Response: Agree. Nothing in this subchapter prevents insurers from making rate filings in accordance with the applicable provisions of the law. Section 5.14002(b) A commentor believes the last part of the sentence in this subsection regarding "insurers, whether rate regulated or not, for those lines which are not rate regulated" is vague and somewhat confusing and suggests replacement language. Agency Response: Disagree. Some lines are non rate regulated because the insurer is; some lines are non rate regulated even though the insurer is rate regulated; and some non rate regulated insurers are rate regulated for specific lines. The language is intended to clarify that the limited application of Article 5.131 is only available when an insurer is writing a non rate regulated line. Section 5.14002 Commentors suggest clarification of the section as to its application to TAIPA policies. Agency Response: The statute clearly sets forth the requirement that the commissioner consider the effect of tort reform legislation in determining TAIPA rates. Since TAIPA rates are not filed or determined by an individual insurer, but are set by the commissioner, it is not necessary to provide for application to TAIPA policies in this subchapter. Section 5.14002(d) Commentors have complimented the commissioner's practice of conducting information gathering meetings prior to issuing special data calls and believe that this approach has been effective and allowed insurers to explain what data is available without the insurers, and ultimately the policyholders, incurring substantial cost. The commissioner is commended for utilizing this process and commentors urge him to continue process. Another commentor requests that future data calls be reasonable and use existing mechanisms to the extent possible to keep down costs. A commentor provided examples of possible information to be obtained in future data calls while Article 5.131 is in effect. Agency Response: The agency appreciates the comment and plans to use existing mechanisms for the collection of data to the extent possible. The agency will consider the suggestions in future data calls, and anticipates it will continue to hold meetings in the future as may be appropriate. Section 5.14002-Umbrella Policies Commentors believe that those insurers writing umbrella policies with premium based on a percentage of the primary underlying coverage should be exempt from the subchapter since the primary underlying coverage reflects a reduction for tort reform and application of the percent reduction to the primary coverage as well as the umbrella coverage would be redundant and result in inadequate pricing for the umbrella policy. They recommend exclusion of these types of coverages from the subchapter. In the alternative, they recommend an exclusion for those policies having premiums determined as a factor of the underlying primary coverage. A commentor suggested that an alternative method of treatment for these lines would be comparable to non rate regulated lines and provided suggested language changes to sec.5.14002(b) and sec.5.14007(b). Agency Response: Disagree that an exemption or exclusion should be included. Based on comments received, the agency has added new subsection (g) to sec.5. 14005 which contains a specific procedure for rating such policies. The procedure will avoid redundancy and allow for adequate pricing while taking into account the statutorily mandated rate reductions. Section 5.14003 Commentors explain that insurers need a minimum of 30 days notice of a new rate to prepare to issue renewal notices to policyholders, and the length of renewal notice varies by line from 30 to 75 days. Concern is expressed over any delay in the release of the rate reduction factors and the possible disruption of the renewal process if the determination is not made and issued by October 1, 1995. They believe it is imperative that the proposed sections be adopted and in place by October 1. They recommend that an expedited effective date be established if necessary to meet the October 1 deadline and suggest that a procedure is available under sec.2001.036(a)(2), Government Code. Agency Response: The agency is aware of insurers' time needs for providing adequate notice to policyholders of rates and processing policies and believes the legislature took this into account by directing the commissioner to issue an order by October 1 to be effective for rates January 1, thereby providing a 90 day cycle time. The order adopting the rate reduction factors and this subchapter will be issued no later than October 1, 1995. The agency does not believe that an expedited effective date is available under the cited Government Code reference, because there is no imminent peril to the public health, safety, or welfare for the agency to adopt this subchapter. Section 5.14004 and sec.5.14005 A commentor was unclear as to what percentages will be used in this section. This commentor asserts that if an option is to be provided to insurers then additional columns need to be added and the percentages for all 3 methods need to be shown since each method will result in a different percentage. A commentor believes that this section uses rate and premium interchangeably and is unclear how the methodologies will be applied to these two distinct pricing approaches. Agency Response: The commissioner has set forth in the subchapter which methodology will be followed for the lines of insurance. Section 5.14004 clearly sets out the relevant loss and ALAE reduction percentages for each affected line of insurance and coverage. Section 5.14005 describes the calculation and application of rate reduction factors, based upon the reduction percentages specified in sec.5.14004, for each affected line of insurance and coverage. Section 5.14004-Uninsured/Underinsured Motorist Commentors believe that it is erroneous to include uninsured motorist and underinsured motorist in the proposal. They argue that these types of coverages are not specified in Article 5.131 sec.2(c) and that the Texas Supreme Court has concluded that uninsured motorist coverage does not constitute public liability insurance for purposes of article 5506a, Texas Civil Statutes. They contend that this type of coverage is not affected by tort reform since it is first-party rather than third party coverage. They also contend that if uninsured motorist/underinsured motorist is included then it should only be applied to per person limits in excess of $25,000, because no material savings will be realized on policies below this threshold and a rate reduction applied to coverage below this threshold will result in rate inadequacy and affect financial stability. Another commentor believes that the largest increases in auto liability premiums has occurred in UM and UIM and that these increases are directly related to tort action. Agency Response: The agency has deleted uninsured motorist and underinsured motorist lines since the legislature did not specifically include these coverages in Article 5.131 for application of the rate reduction. The agency believes that had the legislature intended uninsured motorist bodily injury to be one of the lines of insurance subject to tort reform reductions, the statute would have specifically mentioned uninsured motorist bodily injury and not simply made reference to private passenger bodily injury liability. Section 5.14004-Private Passenger Auto Commentors urge adoption of separate rate reduction factors for each of a range of limits for private passenger auto bodily injury. They believe that the benefits from tort reform will be primarily experienced by those persons with increased limits coverage and those with increased limits will not realize the full effect of tort reform savings if the separation is not made. Similarly, those with only basic limits coverage will receive too much of a tort reform savings. Commentors provided an analysis of the various tort reform changes and the potential impact on private passenger automobile liability coverage and the minimal, if any, effect that tort reform will have. The commentors do not believe that tort reform changes directed at the general commercial liability, professional liability, products liability lines will have the same impact on private passenger auto bodily injury liability since the same basic remedies are still available. Another commentor anticipates that the recent tort reforms will have a smaller effect on the incurred losses and ALAE for private passenger auto than for commercial auto, since private passenger auto has significantly lower average policy limits than commercial auto. The commentor does not dispute staff's estimate of savings from the joint and several liability tort reforms. He believes that a reduction in exemplary damages on account of the malice standard of 10 to 20% is more reasonable until data is available. He believes that staff's use of a 15% reduction in exemplary damages based on the change from the "preponderance of the evidence" standard of proof to the "clear and convincing" standard of proof is too optimistic. The commentor believes that the effect of the new provision regarding willful acts, intoxication assault and intoxication manslaughter may have a greater effect on the private passenger auto losses and ALAE than on commercial auto losses and ALAE due to the greater frequency of DUI convictions for private passenger auto. The commentor recommends that the commissioner use smaller assumptions regarding the expected effects of these two changes. The commentor does not dispute staff's estimate of 0.1% of the losses for the total effect of the change in venue. He recommends that the estimate of 1.8% savings for ALAE be tempered since it seems out of line with the estimate for losses. The commentor doesn't expect changes in DTPA to produce savings in private passenger auto rates. He anticipates no reductions due to changes in DTPA because DTPA has had no effect on rates or ratemaking since these types of damages have not been included in ratemaking in the past. The commentor does not believe that changes in frivolous lawsuits will have a measurable impact on loss costs in the short term and believes that there is no data to support an impact. He believes that for changes in this law to have any effect it will require behavioral changes in lawyers and judges, which is uncertain as to whether it will occur. He believes that the changes to this law will probably result in additional litigation expenses and thus loss adjustment expenses. He believes that it is reasonable to assume a 0% reduction for the first year. A commentor believes that including factors for behavior modification is not consistent with the approaches she has previously employed in pricing tort changes, and states that the behavior modification factors proposed by staff are very large when compared to the actuarial pricing based on historic experience. She indicated that in the case of private passenger auto it increased the projected savings by 150%. This is larger than she has heard anyone ever suggest. Several commentors demand that the commissioner implement a 15% auto rate reduction as they claim House Bill 1988 mandates, or do nothing and let the 15% reductions go into effect as a result of the legislation. A few of these commentors also express concern that replacement cost coverage for roofs and foundation coverage not be removed from homeowners policies. A commentor raised several concerns and questions regarding whether the methods used by the agency to arrive at the rate reduction for private passenger auto liability insurance reflect savings which are comparable to or in line with the "hundreds of millions of dollars" insurance industry spokespersons insisted the lack of tort reform cost those insurers. This commentor does not believe that auto liability policyholders should be penalized for an insurer's inefficiency and questions whether the method used by the agency will be equally reflective of the rate reduction for the less efficient/more efficient insurer. Agency Response: There is insufficient data to perform a scaling of savings by limit for purposes of this section. The agency will consider this in next year's rate reduction proceedings, and if the evidence so warrants, consider changes to the rules. In the case of the exemplary damages reform, a commentor feels that staff's anticipated savings are too high, but does not offer specific evidence to support alternatives. Staff relied heavily on research, reviews of literature and discussions with attorneys and other experts to form a judgment as to likely outcomes. Staff presented a range of savings: in the case of exemplary damages, the range of savings was 35% to 85% for the changes in the gross negligence/standard of proof changes, not the 50% cited. The agency agrees with the testimony regarding impact of venue. These changes would tend to moderately reduce staff's estimate of impact for this line. The agency agrees that there were no direct DTPA savings indicated by the data and none were included in staff's recommendations. The agency agrees that private passenger auto is different. The loss and ALAE reduction percentages determined in sec.5. 1004 reflect this difference. The agency believes staff's recommendations understated the tort reform savings for private passenger automobile liability. Evidence at the hearing indicated that there have been substantial increases in bodily injury claim frequency over the past several years. There are indications that such increases were due in large part to increased lawyer involvement in bodily injury claims. This is supported by the fact that average claim costs were virtually flat. The significant increase in the bodily injury benchmark rate over the past few years confirms that the ultimate effect has been to drive up bodily injury costs. The agency believes that this is precisely the type of situation that tort reform legislation was designed to address and believes there is substantial opportunity for prospective bodily injury liability savings over and above what historical data analysis might suggest. The statute clearly directs the commissioner to establish an amount of reduction either above or below the 15% stated in sec.3(e) of the statute and the amount of the reduction must be based on the evidence adduced at the rule making hearing. The evidence does not support the 15% reduction demanded by these commentors. The comments concerning replacement coverage for roofs are not applicable to this subchapter. The agency considered the impact of the various legislative changes to arrive at the rate reduction factor for all lines and sublines. The agency considered all the comments submitted and agrees with some. The agency believes that the different operating methods of insurers have been taken into account in determining the applicable factor. Section 5.14004-Professional Liability A commentor believes that to the extent the commissioner determines that a line or subline does not benefit substantially from tort reform the rate reduction should be minimal at most and that certain lines of professional liability insurance are largely unaffected by the recent tort reform legislation, such as Directors' and Officers' Liability and investment advisors' errors and omissions insurance. This commentor indicates that this is due to the fact that the most frequent and serious exposure for these professionals is under federal, not state, law, and the benefits from the tort reform legislation are not within the coverage afforded for these types of policies and therefore there will be little or no savings to justify a rate reduction for these sublines. A commentor recommends adding language to account for the variations in types of businesses and professions and using a different percent reduction factor rather than a uniform factor. Agency Response: The agency believes that the cost to insurers of implementing and effectuating the reduction required by this section should not be such that it outweighs the benefits. The agency recognizes that in certain circumstances that tort reform may not apply and to the extent that a tort reform is not applicable, the agency has developed Form TR95 and included professional liability lines in sec.5.14005(e), so that those tort reforms that are not applicable can be excluded. Section 5.14004(1) and (11) Commentors recommend that the claims made factor reflect the different reporting patterns of the various types of coverages and insureds covered by this line. They believe this can be accomplished by adding a subsection to sec.5.14005 which would permit each insurer to apply its own experience to the reduction factor and include the result in the certification form or other report. An alternative suggestion is the establishment of claims made adjustment factors by major lines or classifications, based upon the unique pattern of each line or class. Agency Response: Agree that the different reporting patterns can be dramatically different for different types of coverages and insureds. The calculation and application provisions in sec.5.14005 have been changed to include subsection (c) to provide claims made factors. Section 5.14004-Non Texas Experience Some commentors stated that certain lines of coverage such as product liability and trucking lines include experience data from claims which are adjusted and adjudicated in states other than Texas but which are reported as Texas experience for a Texas insured. These commentors believe that Texas' tort reform will have no impact on these claims and suggest that adjustments should be made to exclude this non Texas experience. One commentor suggests that the department should reduce its savings estimates so as to recognize that the tort reform savings will not impact on the portion of the Texas insured losses which arise from out-of-state claims. Agency Response: Disagree. Data clearly indicate that there are a large number of claims from out of state accidents that are tried or settled in Texas under Texas law. In addition, the agency feels that the settlement of many out of state claims in Texas, many of which are likely against Texas defendants, dilutes the effect of the phenomenon described, and any adjustment on this account would have very little overall effect. Section 5.14004-Texas Experience Commentors expressed concern that if only individual state experience is used when it is not statistically credible, large variations in rates from year to year may result. The commentors believe that it is standard practice to introduce a degree of rate stability and this can be maintained by credibility weighting the experience for similar classes of risks from outside the state with state experience. Agency Response: Even though Texas experience may be credibility weighted with regional or countrywide data, the resulting rates are intended to apply to Texas insureds and provide coverage for Texas losses. It is therefore appropriate to apply the loss and ALAE reduction percentage to the entire permissible loss and ALAE ratio. Section 5.14004-Data Completeness Concern was expressed over the incompleteness of some of the data obtained through the closed claim study used to develop the proposed rate reduction factors. The commentor believes that the credibility of the reduction factors is less certain that this commentor would like to see. It is suggested that this fact be taken into consideration in the final determination of the appropriate factor. Another commentor suggests that consideration be given to the differences between lines with a longer loss development period than those with losses which develop over a shorter period. The belief is that a data call over a one year period yields little credible data to determine the impact of tort reform for the long tail lines. Agency Response: Disagree. The number of claims sampled by the agency were sufficiently credible for that aspect of the pricing. Further, the data was sufficiently credible to measure what information past claims could have on savings implications. The agency believes the closed claim sampling employed adequately addresses the concern of long tail versus short tail lines, in that the use of claims closed in a year as opposed to claims arising out of incidents in a given year, provides a broad sample of characteristic claims for a long tail line. Section 5.14004-Graduated Limits A commentor proposes that the rate reduction factors be graduated by policy limit, or specified separately for low, medium, and high limits insurance policies, since the benefits and savings anticipated from much of the tort reform will affect the small number of very large losses more than they affect the large number of small losses. It is believed that the application of an average rate reduction factor on an unadjusted basis to full primary insurance premiums will result in an overstatement of tort reform savings for primary policies and an understatement of tort reform savings for excess limits policies. The commentor does not believe that this is a desirable market mechanism to implement and is not in the best interest of insurers or their customers. Agency Response: Disagree. The average rate reduction factor is reasonable for commercial lines as it causes only minimal distortion, if any, because most commercial insureds carry high limits of coverage. Although rate reduction factors graduated according to limits purchased may be more appropriate in personal lines, insufficient data did not permit the agency to accomplish this distinction. The agency will consider this in next year's rate reduction proceedings, and if the evidence so warrants, consider changes to the rules. Section 5.14004-Commercial Auto Some commentors agree that the data used by staff is appropriate for this line and the level of detail in the short and long forms regarding recent Texas claims allows detailed calculations for several of the expected effects of the tort reform legislation. The commentors do not dispute staff's expected effect for joint and several liability reform. A commentor does not believe that the Texas closed claim report provides data to estimate the effect of replacing the "gross negligence" test with the "fraud, malice or a willful act" test. They are unaware of any data to support staff's assumption of 50%. They believe that a reduction of 10 to 20% is more reasonable. They believe that staff's use of a 15% reduction in exemplary damages based on the change from the "preponderance of the evidence" standard of proof to the "clear and convincing" standard of proof is too optimistic. They believe that related losses will not be reduced and recommend the commissioner use less optimistic assumptions regarding the expected effects of these two changes on the otherwise expected incurred losses and ALAE since alcohol is involved in a substantial number of automobile accidents. They believe an expected reduction of less than 2.0% is reasonable for exemplary damages. On venue reform they recommend the use of a tempering factor significantly less than one to account for the likely distortion due to possible other processes taking place to cause the disparities between the various counties, which the new venue laws will not affect. They recommend using 2.0% for the rate change for venue reform rather that the 2.8% used by staff. Several commentors believe there is a serious flaw in staff's estimates for DTPA because DTPA is not an issue in commercial auto claims. These commentors believe the tort reform changes in this area actually increase an insurer's liability in this area. A factor of at least zero is recommended. Another commentor doesn't expect changes in DTPA to produce savings in commercial auto rates. He believes there is no data that DTPA claims are part of claims against policyholders and no basis to conclude that changes in DTPA will have any impact on auto claims or personal lines of insurance. A commentor does not believe that changes in frivolous lawsuits will have a measurable impact on loss costs in the short term and contends there is no data to support a measurable impact. He believes that for changes in this law to have any effect it will require behavioral changes in lawyers and judges, which is uncertain as to whether it will occur. He believes that the changes to this law will probably result in additional litigation expenses and thus loss adjustment expenses. He believes that it is reasonable to assume a 0% reduction for the first year. Agency Response: The agency considered all the comments submitted and agrees with some of the comments. The agency notes, however, that staff submitted a range of values at the hearing, including those for the exemplary damages savings and for venue reform which were not reflected in some of the comments. The staff's Special Call for DTPA and Venue Information did reveal at least one instance out of a limited sample where there has been a commercial auto bodily injury claim that included a DTPA allegation, indicating DTPA does affect such claims. The approaches utilized by most of the commenting actuaries to analyze the data were virtually identical to that used by the staff; only the assumptions differed. Various technical corrections were made to the staff's actuarial pricing as a result of testimony and comments. In two areas, adjustments in the ULAE and for biases resulting from the use of calendar year closed claim data, especially in potentially understating large claims, the believes the evidence was insufficient to support any changes. In normal circumstances, not adjusting for these last two areas would tend to understate potential savings. The agency will consider this in next year's rate reduction proceedings, and if the evidence so warrants, consider changes. Section 5.14004-Employers Liability A commentor suggests that the rate reduction factor for this line be 0% since the study of the closed claims for this line shows that there will be negligible savings. Other commentors believe that staff's estimates are too low. They believe that the majority of losses for employer's liability are on the job fatalities brought by the beneficiaries. They believe that the bulk of these cases will be for exemplary damages and will be directly affected by tort reform in a significant way. Agency Response: Agree that it should be 0%. The indicated effect on overall workers' compensation rates is quite small, and the agency believes that the costs to insurers of implementing and effectuating the change (which ultimately would be passed on to consumers) mitigates against implementing any reduction at this time. Section 5.14004-Medical Liability A commentor believes that the savings derived from the tort reforms should be passed on to policyholders and that liability carriers should be treated fairly and not fiscally compromised. This commentor believes that the tort reform legislation could reduce the frequency and severity of claims against physicians. An analysis of the various tort reforms was performed by this commentor and how the reforms would impact this line of insurance. In the evaluation the commentor adopted TDI's original analysis on impact of joint and several liability and frivolous lawsuits reforms. The commentor developed assumptions and methodology on the impact of House Bill 971 (Medical Liability), House Bill 668 (DTPA) and Senate Bill 25 (Punitive Damages). Based on various assumptions and data, a commentor believes that a range of savings for policy years 1991-1993 for medical liability would be 26% to 29% before including the effect of venue reform. The commentor believes that the requirement of cost bonds and filing of expert reports will reduce the frequency of claims and consideration should be given to savings in both paid losses and ALAE for the nuisance cases as well as claims closed without payment. The commentor believes that consideration should have been given to the tort reform on who may serve as experts. This commentor believes that staff's initial estimate of 1.0% impact for frivolous lawsuit reform is more appropriate than the 0.0% to 0.1% presented. He also believes that the changes in DTPA, exemplary damages and article 21.21 provide insurers a greater ability to defend suits which previously they may have settled and will result in savings. He also believes that behavior modifications caused by liability reform and other significant trends in the courts should be calculated in the savings. A reduction of 1.5% for joint and several liability is recommended by a commentor as a reasonable best estimate. The commentor believes that staff's calculations for this reform are reasonable, but contain some basic averaging and selection techniques where the data suggest significant variability. He believes the tempering and some selected values are unsupported. Another insurer's experience indicates 0.4% reduction and he recommends that the point estimate for this reform be 1.2%, or less. The commentor agrees with staff's value of 0.0% for exemplary damages since this element of damage is specifically excluded from this type of coverage. The commentor agrees with staff that a reasonable estimate of venue reform would be approximately 0.5% of loss and ALAE costs. The commentor believes a 0.0% reduction should be used for frivolous pleadings and motions since this insurer's data suggests that an extremely small percentage of the loss and ALAE costs that underlie the rates are affected. According to a commentor, the experience reflects that DTPA allegations are rarely alleged in medical malpractice cases and rarely affect the pay out in a case. The commentor agrees with a reduction in loss and ALAE for this reform of approximately 0.2%. Another commentor suggests setting this factor at 0.0%. Commentors believe that the additional costs to the plaintiff for health care liability are insignificant when compared to reaching a settlement or winning a lawsuit. They believe that staff's methodology is reasonable but that modification needs to occur to the underlying assumptions and recommend a reduction in loss and ALAE of 0.7% to 1.0%. Another commentor believes that both areas are overstated and should be reconsidered. Some commentors don't believe that this line should be more affected that other lines by an understatement of data due to behavior modification. The commentors urge the agency to recognize the unique characteristics of this line and reduce the behavior modification factors and that there may be some double counting due to use of a behavior modification. The commentors also suggest there will be increased costs due to reforms as well as savings and this should be taken into account. Agency Response: The agency agrees that savings from the tort reforms should be passed on to policyholders. It does not believe that the savings would be as large as the 26% to 29% before venue reform suggested by the commentor. The agency believes these percentages were calculated incorrectly and percentage savings cited are technically incorrect. The savings figures include both loss and ALAE elements. The denominator is losses only. This last should be the sum loss and ALAE. Since ALAE is 35% of losses, this reduces the savings percentages to about 20%. The agency agrees that the bond and expert witness reforms will likely produce savings. The bulk of the savings percentages cited by the commentor are based in large part on the assumption that private insurers can bring their claims closed with indemnity payment (CWIP) ratio down to 30%, a ten percentage point improvement after other adjustments made in the pricing. The agency does not believe that insurers can close 40% of the difference between their CWIP ratio and that of Texas medical schools and that such an assumption is unreasonable. While it is agreed that insureds' pressures, such as Stowers letters, might cause insurers to settle claims rather than risk the uncertainty of a trial outcome, it seems very doubtful that they would willingly settle a full quarter of the claims they pay if they were reasonably defensible. A much more likely reason for the difference in the CWIP ratios is the inherent differences in the kinds of practice between teaching institutions and main-line medical practice. Section 5.14004 A commentor appreciates the inclusion of claims made adjustments for medical malpractice and other professional liability lines and recommends that these adjustments need to be provided for the excess policies in these lines. This commentor also urges the recalculation of the factor for joint and several liability on other professional liability since this reform has no effect on this line. Agency Response: Excess policy claims made factors have been included. Joint and several liability calculations have been based directly on the data. This clearly indicates that joint and several will have an impact. Section 5.14004-Products Liability, General Liability, Commercial Umbrella A commentor believes that reforms in joint and several liability will favorably impact these lines from an ultimate claim standpoint, but will increase ALAE due to new litigation expenses. It is recommended that the rate reduction factor for joint and several liability be scaled back to allow for higher ALAE costs. A commentor believes that TDI may have overstated the savings for venue reform in its analysis. It is suggested that the rate reduction factors be adjusted to reduce the proposed impact of this reform initially, subject to continued scrutiny and analysis by TDI and in coming years it be based on actual claims savings incurred due to this reform. Agency Response: Disagree. The agency believes that the loss and ALAE percentages are reasonable. Any increases in ALAE for joint and several liability will be offset by savings from suits not brought against marginally liable defendants. For venue, the agency believes the tempering applied to the final results reasonably reflects likely results. It was the clear intent of the legislature that the effect of the reforms be reflected prospectively in rates and that the commissioner not defer action until the ratemaking statistics actually reflect the effect. Section 5.14004-Commercial General Liability, Commercial Umbrella and Excess Liability A commentor believes that if a reduction of less than 15% is adopted, public perception will be that tort reform was an expensive hoax on Texas businesses and consumers. The commentor contends that the legislature expects substantial rate reductions to occur because of tort reform. The commentor believes that premiums for commercial general liability should be reduced by 25% and premiums for commercial umbrella and excess liability should be reduced by 30%. The commentor has no statistics to support these percentages. Agency Response: Disagree. The legislature clearly indicated that the commissioner should set percentages higher or lower than those contained in the bill based on the evidence. The evidence does not support the percentages recommended by this commentor. Section 5.14004-Other Professional Liability, Products Liability A commentor believes that the estimated loss savings of the agency from the joint and several reforms for the Other Professional Liability (non-bodily injury) and the Products Liability (non-bodily injury) exceed the calculated effects for the other lines of insurance by a margin which is so wide that the margin itself proves the unreliability of the calculations. This commentor recommends that the loss savings from the joint and several reforms for Other Professional Liability (Non-BI) and Products Liability (Non-BI) should be limited to 4.0% so as to be generally consistent with the savings for other lines of insurance. Agency Response: Disagree. These two lines, particularly Other Professional, have disproportionate non-bodily injury loss potential which is to some extent different from the exposure in the other lines such as lawyers, professional liability, accountants, insurance agency, and real estate brokers. Different margins of savings are reasonable. Section 5.14004-Behavior Change Several commentors are disappointed with TDI apparently only considering how changes in behavior will increase savings and not the potential increase in costs that may occur. They believe that behavioral changes have already been taken into consideration without including a separate factor for change in behavior. They believe that the ranges used by TDI adequately address behavioral reactions to tort reform and the frequency and severity of claims. They recommend the behavioral modification factors be set at zero or eliminated since it is impossible to determine if the value should be positive or negative. They believe that selecting a value for behavior change that has not been clearly identified, described or characterized is arbitrary and has no basis in fact. Several commentors believe that the tort reform changes in the last session will change the way a claim is viewed and reduce the amount an insurer will pay to settle a claim as well as reduce the number of claims or suits filed. These commentors believe that the change in behavior will cause a significant decrease in costs and acknowledge that change in behavior is not easily quantifiable. They suggest that history has indicated that statutory changes result in changes in behavior and will have a significant and immediate impact on reducing costs. A commentor believes that staff's estimates are conservative and that major changes in legislation will result in behavioral changes. Other commentors presume that staff has relied totally on a panel discussion with attorneys for the adjustments made for projected behavior modification. These commentors believe that the adjustments made for behavioral modification are speculation and not based on information which is part of the record. A commentor believes that due to the possibility of the defendant losing all insurance coverage if an act is shown to be intentional, plaintiffs may choose not to ask for punitive damages, because that could result in the defendant not having insurance coverage for economic and non-economic damages. This commentor believes not only would an insurer not pay punitive damages but also no compensatory damages and no loss adjustment expenses would have been paid. The commentor believes that the projected savings impact of the changes regarding punitive damages are understated. As a result of the various changes regarding punitive damages, a commentor believes that both the frequency and magnitude of punitive damages will decrease. This commentor believes that it is plausible that insurance company settlements for compensatory damages will also decrease since the supposed specter of punitive damages will be greatly decreased. A commentor believes the projected savings impact of staff of the changes regarding punitive damages are understated. One commentor suggests that behavioral changes could have additional impact from plus to minus 10%. A commentor believes that the inclusion of a savings estimate for "behavioral changes" is completely subjective and arbitrary. This commentor believes behavioral changes could result in both positive and negative savings to the insurance system. This commentor believes the estimated savings are unrealistic. A commentor disagrees with the agency that more aggressive claim settlement practices by insurers, due to behavioral changes, will increase the actuarially determined expected savings. He believes that more aggressive claim settlement practices bring higher allocated loss adjustment expenses. Other commentors believe that there could be situations that changes in behavior could serve both to increase as well as to decrease the losses and LAE. Because there are reasons to conclude that behavior could affect the loss and LAE costs in both directions, they recommend that there be a zero adjustment for behavior modification, which permits the actual effects, whether positive or negative, to be reflected in the experience and, hence, in future rates. A commentor believes that including factors for behavior modification is not consistent with the approaches she has previously employed in pricing tort changes, and states that the behavior modification factors proposed by staff are very large when compared to the actuarial pricing based on historic experience. She indicated that in the case of private passenger auto it increases the projected savings by 150%. This is larger than she has heard anyone ever suggest. She also suggest there may be differences between the intent of reform legislation and what actually emerges as savings. Agency Response: The intent of the legislature in enacting tort reform legislation was to effect changes in behavior. The agency has done a careful study of the probable behavioral impact of each such change and the numbers in sec.5.14004 reflect such. Future changes in behavior cannot be measured or predicted from historical data. Since much of the intent of tort reform was to change the behavior and actions of claimants and settlement practices, it is reasonable to conclude that such behavioral changes will account for the greatest impact. The evaluation of the impact of such behavioral changes is primarily informed by information other than historical claims experience. Historical experience is of limited value in describing what happens under the new system. Claims filed under the old system may not be filed under a new cause since the potential benefits for plaintiffs may not be great enough. Claims that were settled in the past may now be contested or denied by insurers. Claims adjusters may take a more aggressive approach with plaintiffs over claims. Thus the effect of the reforms will extend beyond historical claims where the impact of the reforms can be readily identified. It will ripple through to all claims. The commissioner believes that the analytical approach based on historical data is used to identify the potential order of magnitude of the impact of tort reform. Historical data cannot fully measure the impact on tort reform because it reflects the environment and practices under a tort system that is different from what will exist after the reforms go into effect. The agency believes that a major impact of tort reform will be on the behavior of lawyers and insurers regarding filing of lawsuits and claims settlement practices. The agency believes these will have a significant impact on costs and has selected loss and ALAE factors accordingly. The agency decision starts with staff's recommendations presented at the August 30th hearing and modifies those recommendations to reflect evidence and testimony received. For example, the agency believes staff recommendations understated the tort reform savings for private passenger automobile liability. Evidence at the hearing indicated that there have been substantial increases in bodily injury claim frequency over the past several years. There are indications that such increases were due in large part to increased lawyer involvement in bodily injury claims. This is supported by the fact that average claim costs were virtually flat. The significant increase in the bodily injury benchmark rate over the past few years confirms that the ultimate effect has been to dive up bodily injury costs. The agency believes that this is precisely the type of situation that tort reform legislation was designed to address and believes there is substantial opportunity for prospective bodily injury liability savings over and above what historical data analysis might suggest. The staff actuarial analysis is viewed as providing a useful starting point in assessing future savings. It provides an order of their magnitude. The agency believes that the precision of estimation implied by the various recommendations, where answers were carried to a tenth of a percentage point, is unrealistic. The agency has therefore selected loss and ALAE reduction percentages rounded to the nearest 1/2 percentage point as a more appropriate method portraying the accuracy of estimates. The agency has considered a range of information in the setting of the factors. Staff performed extensive research, had numerous discussions with various individuals as well as used its own experience in projecting rates based on changes in statutes or judicial decisions. All of these factors were utilized in developing the rate reduction factors for all lines and sublines affected, including the behavioral modification factors. Article 5.131 requires that rates which result from the rate reduction be reasonable and adequate and the agency believes that the process and factors promulgated meet the requirements of the statute. The agency did not ignore the fact that more aggressive claims handling could bring higher LAE. The question addressed by the agency is what is the overall net effect, taking into consideration both loss and LAE. Companies may spend more to fight claims, but common sense tells one that this will not be done unless there is a net gain anticipated in the outcome. Moreover, the additional tools provided to the defense provide a reinforcement to the existing shifting of advantage to the defense apparent in declining jury awards across the state, and favorable court verdicts. While the agency agrees that there may be increases in LAE in some instances, there will also be decreases if claims are not brought or if plaintiffs are willing to settle earlier, both being possibilities frequently mentioned. It is strongly felt that these will be more than off-set by savings in indemnity. The legislature clearly indicated that it was not willing to defer the recognition of savings in rates until they are reflected in the experience. The agency therefore believes that it is appropriate to make the best possible estimates of savings from the evidence at hand. The question of whether or not an adjustment is large depends on how it is viewed. The Chief Actuary of TDI was a member of the four person actuary team that priced the original Massachusetts, first in the nation, no fault law for that state's legislature on behalf of the insurance industry. The team calculated the anticipated cost of the new no-fault system down to (literally) four decimal places. At the end, however, because of anticipated changes in behavior, the anticipated cost was increased by 20%. Further, even a small absolute from a small base may produce a large percentage change. The agency disagrees that the staff's quantitive analysis represents the standard against which all changes will be evaluated as reasonable. In the case of private passenger auto, the quantitive analysis suggested small impact. Even a modest behavioral modification adjustment would produce a large percentage change compared to the base number. The reasonableness of the agency's factors is more appropriately judged by the overall rationale for the selection. Section 5.14004-Tempering Factors A commentor believes that the numerical range of answers derived from the TDI calculations most likely understate the savings since their analyses contains a number of instances where the results were "tempered" in a manner that reduces the indicated savings. A commentor believes that the projected savings are significantly lower than the unadjusted indicated savings because the TDI indicated results are tempered downward to reflect possible behavioral changes. This commentor believes that the tempering downward of the indicated savings in this area (as well as in others) by the TDI provides support for the use of an explicit behavioral modification savings impact elsewhere in the calculation of the overall tort change savings. That is, the savings figure used by the TDI for behavioral modifications provides an offset to some extent for the places where the TDI calculation of the savings was tempered downward. This commentor believes that the savings values derived by the TDI with regard to the issues of venue are on the low side in relation to the possible savings reported by insurers and also because the TDI tempered the results downward. A commentor notes that the estimated savings on losses due to joint and several reform is a reduction of 1.6%. This amount is potentially inflated due to the fact various commentors were unable to accurately reflect the effect of any "dissavings" relative to joint and several liability reform. "Dissavings" could arise in a situation where previously a defendant had paid more than his proportionate share of the settlement, but was less than 50% at fault. Under the new law, this defendant would not be jointly liable, so the savings he experiences could be shifted to another at fault party that remains jointly and severally liable. A commentor requests that recognition be given to the fact that the proposed reductions are only educated guesses on the impact of tort reform. He believes there will be a transition period that will result in some delay before savings are reflected in claims costs. He believes that these factors can be considered by applying tempering factors to the final rate reduction factors. Agency Response: The agency believes that it is inappropriate to use the full indications derived from the historical data in all instances. There will be cases where, for example, a plaintiff will be able to bring suit in a "favored" county even though the data suggests that this would not be possible. In such instances the savings may not be as great as the pricings would seem to indicate. It is actuarially appropriate to use tempering in cases such as these. The behavioral modification factor is not intended as an offset to tempering. It is rather intended as an attempt to measure the impact of changes in claims settlement practices that are likely to result from changes in the tort system that cannot be identified in, or quantified from, available statistical data. Such changes in behavior have commonly been noted when changes in the legal system have occurred. They are normally not susceptible to direct measurement from historical experience; tempering, on the other hand, is a recognition that potential savings that can be identified in the past claims history may not, in fact, be realized in all cases. The agency doubts that "dissavings" would be all that great. It is felt that there is no particular reason for the insurer of a defendant who was 30% at fault to pay, out of the goodness of its heart, 50%, if other defendants have sufficient coverage to pay their "fair" share. They will attempt to minimize their payments, and one obvious way is to attempt to make sure that others pay their "fair" share. If an insurer pays significantly more than what would otherwise be its apparent share, there would seem to be a reasonable presumption that the collectibles from other defendants are limited. The agency therefore feels that the tempering factor proposed by the commentor is not appropriate. Moreover, in a large number of instances where insurers indicated that joint and several liability affected the settlements, it appeared that "fault" had been allocated in proportion to payments, not on the basis of an independent assessment of true fault. To that extent, the staff's, and the commentor's, assessment of savings would be underestimated. The agency has applied appropriate actuarial tempering in the pricing. The legislature mandated prospective savings for policies effective January 1996 and the rate reductions being promulgated by the commissioner are a reasonable determination of prospective savings. To apply additional tempering could result in excessive rates. Section 5.14004-Calculation A commentor noted that the TDI analysis of joint and several liability reform savings contains a technical error. This results in the calculations being inconsistent. The calculations should be changed to be consistent with the description given. A commentor believes that since the TDI's analysis of exemplary damages savings did not reflect the impact of inflation on the fixed dollar value caps, and the amount of punitive damages estimated to be eliminated by the caps is too low. This in turn means that the cost savings impact of the legislation is understated. A commentor noted that the primary loss payments on single defendant claims greater that $25,000 were left out of the denominator when the savings were calculated. This affected all of the commercial lines bodily injury joint and several calculations, except general liability. The commentor recommends that the agency make corrected calculations and recognize the revised figures. A commentor noted that the largest savings from the venue reforms would accrue to the homeowners and farm owners lines of insurance. The commentor believes this is due to reliance on a data sample that is less than fully credible. The commentor recommends limiting the venue savings for homeowners and farm owners to no more that 1.0% to be consistent with the effects on the other lines of insurance. Agency Response: The agency agrees. These have the net effect of increasing the savings from staff's recommendation. Section 5.14004 Some commentors applaud TDI's conservative estimate of anticipated savings which may result from tort reform. They believe this approach will ensure minimal disruption to the insurance market and is in the best interest of a stable, competitive insurance market. Agency Response: Agree. Section 5.14004 A commentor believes that staff's estimate of reduction in insured losses due to changes in frivolous lawsuits and joint and several liability are too low. This commentor recommends that the agency change the estimated impact of frivolous lawsuits from 1.0% to 2.05% of insured losses and change the estimate of joint and several liability from 25% to 30% or greater. Agency Response: Disagree. Discussions with knowledgeable experts in the field indicate that the impact of the frivolous lawsuit legislation will be minimal, while the impact of the change in joint and several liability will be greater. The evidence does not support the range of savings suggested. Section 5.14004-ALAE A commentor believes there is a valid and reasonable basis upon which to anticipate increases in ALAE, at least for the next year or two. There are also reasons provided which suggest the possibility of savings in ALAE. Given these equally likely outcomes, this commentor believes that it is reasonable to expect 0% ALAE savings. Based on discussions of this subject with the various insurance professionals and the fact that the estimated reduction to bodily injury losses is under 5.0%, a commentor does not believe loss adjustment expenses will be impacted to any measurable extent. One area this commentor believes has the potential for ALAE savings is the venue reform law. To the extent this reform is effective, the expense of retaining additional counsel in an inconvenient venue and/or travel expenses to such venue will be eliminated. Offsetting any potential ALAE savings are several situations where loss adjustment expenses might actually increase. The frivolous bill, for example, will require the filing of a motion for sanctions (or answering a motion) and a hearing. This will add to attorney expense. Under the new law concerning joint and several liability, the 50% threshold is expected to encourage defendants to more vigorously defend themselves rather than settle in a multiple defendant case. Statistics show that the less an insured party is at fault, the more they tend to spend on ALAE. Agency Response: The agency disagrees. The evidence pointed to some instances where ALAE might increase. There are others where it might decrease. The fact that there could be movements in both directions does not necessarily mean that the outcomes are equally likely, nor, more importantly, that the net cost- savings outcomes are equally likely. The agency believes that the preponderance of the evidence suggests there will be net savings, and that it has appropriately reflected these. Section 5.14005(a) A commentor suggests adding new language to this section to clarify how the rate reduction factor will be applied on the initial reduction and subsequent reductions. Agency Response: The agency believes that application of the factor is adequately addressed in sec.5.14003(c) and this section. Section 5.14005(a)-Base Date A few commentors suggest that the date for application of the rate reduction factor be changed from January 1, 1996 to April 1, 1995. They believe that Article 5.131 permits or requires TDI to use April 1, 1995, as the base date for application of the rate reduction factor, because the reduction in rates should be applied to the rate developed before tort reform legislation was adopted. They suggest that the proposed sections prevent consumers from receiving the full benefits of tort reform legislation if a base date of April 1, 1995 is not used, because insurance companies will take advantage of the knowledge of the rate reduction and will increase rates to cushion the effect of the reduction. They represent that consumers have seen substantial increases in many lines of insurance and these increases will overshadow any rate reduction ordered. The commentors question how the department will ensure that increased rates that are filed between the effective date of the legislation and implementation of the legislation are justified and not attempts to negate or minimize the rate reduction required by the proposal. Agency Response: The agency disagrees with changing application of the rate reduction factor from January 1, 1996 to April 1, 1995, and further disagrees that the legislature directed TDI to apply the reduction to rates in effect on April 1, 1995. The agency has no authority to freeze rates as this comment recommends. If an insurer can justify a rate increase, then it can file for a rate increase in accordance with other applicable Code provisions. The agency has authority to review and disapprove filed rates which are excessive or otherwise not in compliance. The agency has been closely monitoring the rates that have been and are currently being filed to ensure that they are justified for the insurer. The agency believes it has accomplished the intent of the legislature in determining the applicable factors and this will result in rates resulting from the rate reduction which are reasonable, adequate, not unfairly discriminatory, nonconfiscatory and not excessive. Section 5.14005(a) Several commentors urge adoption of Method 1. They believe that use of a method other than Method 1 will restrict an efficient insurer's ability to compete because of the application of the reduction factor to expenses as well as losses. They believe that this method fosters competition. They suggest that Method 1 is the most accurate, fair and equitable method of arriving at the appropriate rates for the policyholder. The commentors believe the rate reduction factor should be applied to the loss and loss adjustment expenses since it is felt that other methods apply the factor to elements of rate making which are unaffected by tort reform, such as operating expenses. They believe that the adjustment to loss costs can be made by adding a few lines to the currently required filing forms and the loss cost reductions and potential premium reductions can be captured on the same form. It is suggested that this will allow TDI to verify the efforts of individual companies and collect aggregate data for the necessary reporting to the legislature. Using this process will maintain the current file and use system and permit staff to focus on the exceptions. These commentors believe that Method 2 would inappropriately reduce the insurer's expense provision by the same percentage as loss and result in rate inadequacy. They also assert that the data does not support the reduction of insurer expenses in the same proportion as losses as a result of tort reform. They believe that Method 3 fails to recognize the role of customer exposures (revenues, vehicles, payrolls, etc.) in determining the final premium for a policy. A few commentors explained the effect on the profits of a company if there is a 2.0% reduction in premium and there is not a corresponding 2.0% reduction in losses to support not applying the factor to the premium. Several commentors recommend the use of Method 3 for application of the rate reduction factor, since this is the amount that consumers and business insurance policyholders are more likely to understand. They want to see the results reflected in individual premiums. One commentor wants the rate reduction factor shown on the face of the policy as other discounts are shown, such as discounts for passive restraints or security systems. They believe that it is the most direct and easily understood approach for not only consumers but TDI staff. They believe that regulators will have more difficulty monitoring tort reform impact if the rate reduction is applied to loss and loss adjustment expense and that it is easier for an insurer to manipulate data and not provide tort reform savings. Agency Response: The agency has determined that applying the rate reduction to loss and ALAE is the most appropriate and actuarially sound method to use. Savings from tort reform will come from lowering the size of certain insurance claims and expenses directly related to them, such as legal defense cost. This will reduce losses and ALAE, respectively. An advantage of this application method is that it applies the reduction percentage to only those components of a rate that are directly impacted by tort reform. All other options would require the commissioner to use industry-wide factors for rate components not affected by tort reform. Since each insurance company has its own loss, expense, profit structure, and any one of several methods of marketing, the result of using a different application method would be some consumers getting less savings than they deserve, while others get more. Similarly, some companies may receive a windfall profit, while others may end up subsidizing their insureds. Applying the reduction percentage directly to loss and ALAE ensures that every consumer is provided the appropriate savings due to them. In order to translate the reduction in loss and ALAE to its effect on rates, the agency has provided for the calculation of a rate reduction factor in sec.5.14005. This rate reduction factor is applied to the insurers rates to reflect the overall savings appropriately. The forms developed by the agency for the non-benchmark lines apply the loss and ALAE reduction percentages to loss and ALAE, and provide the steps necessary to produce this overall rate reduction factor. This intrinsically recognizes expense differences among carriers and applies the reductions to those rate elements on which they were based. The procedure also recognizes that certain other rate elements such as commissions and taxes will also change to some extent, and these changes are reflected in an actuarially correct manner. Section 5.14005(b)-Benchmark A commentor believes that recalculation of the benchmark rate is the most direct and efficient means to implement the first rate change for benchmark lines, and recommends the following procedure which will not result in undue increases in insurer costs: 1) Rate change-January 1, 1996-staff recalculates the benchmark rates for the affected coverages using the percentages applicable to the losses and ALAE and the permissible loss ratio which underlies the present benchmark rates. The agency releases the new benchmark rates no later than October 1, 1995. 2) All insurers refile flex percents for January 1, 1996, demonstrate they have maintained their present flex percents and applied them to the adjusted benchmark rates. 3) At the next benchmark hearing, the rate reduction rule is provided to the ALJ. All parties presenting evidence regarding rate developments are expected to apply the latest percentages contained in this section to those losses and ALAE that do not already reflect the effect of tort reform. 4) All insurers file flex percents as required. Filings contain actuarial support for the flex percents each insurer has selected. Insurers are required to apply the latest percentages to those losses and ALAE that do not already reflect the effects of tort reform, using sound actuarial procedures. 5) If the commissioner changes the applicable percentages under the rate reduction rules, procedures in 1 & 2 are followed. This rate filing is not considered a rate revision under Article 5.101. 6) To the extent possible, new percentages under the rate reduction rule affecting benchmark lines will be coordinated with the issuance of a new benchmark rate order for those lines to reduce the number of rate filings required of insurers, reduce expenses and promote stability in rates. The commentor believes the above approach will assure the commissioner that individual insurer filings properly reflect the expected effects of tort reform legislation and will permit insurers to respond to variations in their own experience. A commentor believes that for flex lines the rollback percentage should be applied to the benchmark rates (Method 2). If the department cannot or does not wish to actually republish the rates after application of the rollback, then it should specify that filings which change the flex percentage to (existing percentage) times (rollback) would not require justification (and, if the resulting percentage is outside the band, a hearing would be waived), nor would filings which indicate the application of the rollback percentage on the back end of the rate calculation. If the department does republish the benchmark rates including the rollback, then companies filing to maintain their current percentages would not be required to provide justification. All other filings would be treated like 3) above. A commentor suggests that the staff's percentages should not be applied to the benchmark rates until they are adjusted with the appropriate permissible loss ratio, including the ALAE provision in the rates. This commentor also suggests that as more data becomes available, the developed percentages should be applied only to the incurred losses and ALAE that do not already reflect the changes to the tort system. He believes this topic should be addressed at subsequent benchmark rate hearings. He believes the percentages selected for sec.5.14004 should be included in the calculation of the benchmark rates. A commentor provided suggested language for application of the rate reduction factors to benchmark and non-benchmark rates in a manner that the commentator believes is consistent with the statute. Another commentor provided suggested language to clarify how the rate reduction factor is applied to the benchmark rate in subsequent filings. Agency Response: Agree in part. Section 5.14005, Calculation and Application of Rate Reduction Factor, has been changed. The agency will calculate an "adjusted benchmark rate", developed by application of the loss and ALAE reduction percentage to current benchmark rates. However, the new benchmark rates will be developed without reference to tort reform at this time. Any rate filings required solely to reflect tort reform reductions will not be considered a rate revision under Article 5.101. The commissioner will coordinate any new benchmark rate orders and tort reform filings to the extent possible. A commentor expressed confusion over how non rate regulated companies will price their premiums since they don't use a benchmark rate. The commentor suggested correcting this problem by requiring non rate regulated companies to apply the same rate reduction factor which is applied to the benchmark to their current rates. This commentor believes that insurers writing those lines subject to the benchmark flex rate can simply file rate increases to offset the rate reductions required by this subchapter and there are "no teeth" to the sections. Agency Response: Disagree. Article 5.131, sec.2(b) specifically exempts county mutuals and other non rate regulated insurers from application of sec.3, Rate Rollback and sec.4, Administrative Relief. The agency believes that this means that it can not require county mutuals and other non rate regulated insurers to apply a specific factor set by the commissioner to their rates. The agency is trying to blend the requirements of Article 5.131 with other existing requirements of the Code and harmonize the statutes to the extent possible. At the same time, the agency is closely monitoring filings and is taking appropriate action where it feels rates may be excessive. Section 5.14005(a) A commentor expressed concern over how file and use lines not supported by ISO would be handled. He suggests that the "short" filing could include exhibits outline how the company modified its loss costs and then determined its new rates. He suggests that if the loss cost reduction percentage matches the department's percentage and the expenses are unchanged then no further justification would be necessary from the insurer. Agency Response: Disagree. Section 5.14004(a) sets forth the method to be followed by file and use lines, whether or not supported by ISO. Section 5.14005(b) A commentor believes that subsection (b) will not be applicable when subsequent data begins to reflect the effects of tort reforms. He believes the subsection should be clarified to permit insurers to apply sound actuarial principles to the development of rates for the benchmark lines. Agency Response: This is a question most appropriately addressed in future rate reduction hearings when the matter can be studied in more detail. Section 5.14005 A commentor believes that we should not apply the factor to retrospectively rated lines, since premiums are based on losses actually incurred and reduction will occur as fewer losses are incurred. Another commentor wants policies which are subject to a retrospective rating plan excluded since these premiums are based on actual loss experience Agency Response: Disagree. Reductions should be applied to the rates used to establish rating values and the range within which the ultimate retrospective rate is to be set. Otherwise, the plans will not be actuarially "balanced." Section 5.14005(f) has been added to clarify this. Section 5.14005(d) A commentor suggests adding language to specifically reference professional liability. Agency Response: Agree. The suggested language has been added. Section 5.14005(d)-Large Risks Some commentors are disappointed to see the concept of large risks limited to lines which may be excluded by the parties. They believe that large, sophisticated insureds do not need the protection of a specific rate reduction factor and believe that the flexibility provided by an insurer's rating plans allows for specific consideration of a wide range of factors, including tort reform. They prefer the exemption of rates for qualifying large risks and a requirement that insurers certify the savings from tort reform were included in the rate charged. They recommend a blanket exemption for large risks and addition of new language. They assert that the definition of large risks limits them to national companies having multi-state exposures. These policies are commonly negotiated as to coverage and price, have large deductibles or self insured retention. This market is highly competitive and the insureds are sophisticated and knowledgeable. They do not believe that these transactions should be subject to rate reduction factors and would be disruptive of a nationally competitive market. They contend that additional state regulatory measures would hamper competition. Another commentor believes the definition of "large risk" is appropriate and consistent with TDI's definition in other rules but do not believe that the application of the rate reduction factors is consistent with other TDI rules concerning large risks. Under other regulations, TDI allows coverages to be freely negotiated between the insurer and its large risk customers. The commentor suggests that it is more appropriate to allow free negotiation of tort reform reductions with each large commercial customer since: 1) individualized treatment of these insurance programs is expected and sought, 2) these insureds assume varying amounts of risk directly rather than funding all risk through the insurer, 3) these insureds have professional risk management departments or utilize risk management consultants in designing their insurance programs, and 4) these insureds present a wide variety of definable loss exposures and have differing ALAE profiles. Another commentor suggests that the agency distinguish between the more sophisticated insured and those who rely on an agent's input for determination of their insurance needs. He suggests that the agency distinguish between commercial insureds with less than $20 million in gross revenues who purchase policies with a premium below the $50,000 limit and those with $20 million plus operations. He feels that it would be inconsistent and inappropriate if the agency doesn't distinguish between insureds. Another commentor wants language included which would exempt liability policies where tort reform doesn't apply. Agency Response: Disagree. Article 5.131 makes no exception for the application of rate reductions to large risks. In fact, it specifically lists commercial umbrella and excess liability policies as being subject to the reductions. The section makes provision for large risks which may not be affected by specific components of tort reform legislation because of specific exclusions in the policy. Form TR95 allows for the reduction of the rate reduction factor by the pricing components in TR95. Section 5.14006-Endorsements Some commentors want the section clarified to ensure that endorsements receive the benefit of tort reform. They believe that the proposed language could deny tort reform savings to persons who increase coverage. Suggested language has been provided to clarify the application of this section. Agency Response: Disagree. The agency believes that it is important for this new subchapter to meld with current rules of the department which the section as proposed and adopted does. Changing the manner in which a company operates in regards to endorsements and contrary to long-standing rules could be costly and reduce the prospective savings to consumers. Section 5.14007 A commentor believes the filing requirements are impractical, especially for long tail lines, since little data is available on which to base any substantive rate impact. Concern is expressed that the data collected will only address the issues and concerns of the primary insurers and that little differentiation between primary and excess coverage will be made. This commentor is also concerned that additional filings, data reporting, policyholder notices, systems enhancements and rate reductions will increase operating expenses and offset the reduction in loss and loss expense from the tort reform legislation. Agency Response: The agency intends to keep the filing requirements reasonable and adequate to allow TDI to monitor compliance with the statute and rules. The agency doesn't intend to impose burdensome requirements that would increase operating expenses and offset the anticipated rate reduction. Section 5.14007 A commentor believes that increased competition will produce reduced prices and suggests that the TDI publish a summary of the information filings, similar to the consumer rate guide, on the non rate regulated insurers and those insurers writing non rate regulated lines. He believes that public education can potentially produce the same net effect as mandatory rate reductions in the non rate regulated lines. Agency Response: Agree and will consider publishing a summary of those lines whose rates are regulated and information on non rate regulated insurers to the extent permitted by the Code. Section 5.14007 A commentor noted that it is in the process of developing some sample certification forms and would like to assist the department in the development of these forms. Some commentors are concerned about the explanation required in subsection (b) and believe that disclosure of the method used to apply the savings and an estimate of savings should suffice. They recommend changing the last lines of subsection (d) to reflect the required disclosure. Some commentors concur that the requirement for non rate regulated insurers to certify that they have passed through the prospective savings from tort reform is consistent with the statute, but express concern that the requirement of an explanation of the overall rate reduction is not specific enough to require that they inform insureds of their compliance. They do not believe the explanations received will be useful for analysis purposes because each county mutual insurer makes its rate uniquely. They suggest deletion of this requirement and the addition of a requirement that each insurer calculate the overall savings based on its projected premium volume. They believe this will provide TDI with the information it needs. Another commentor suggests additional language for this subsection to ensure the provision of meaningful information. He also suggests an alternative method to measure the selected rate change against the rate change filed for previous years. Agency Response: The agency appreciates the assistance in development of certification forms. The agency intends to keep the certification forms reasonable and obtain meaningful information that allows TDI to monitor compliance and perform its statutory responsibility. However, the legislature clearly intended compliance and the relatively simple forms that have been described are necessary to determine compliance and to monitor the effect of the reductions. Section 5.14007(b) A commentor suggests strengthening this subsection to assure the public that county mutuals and other non rate regulated companies fully pass through savings from tort reform. He recommends that insurers prove that any rate increase fully takes into account the effect of tort reform legislation, by certification when the company files rates at or below the rates in effect on April 1, 1995, minus the rate reduction amount. A non rate regulated company that doesn't file rates at or below rates on the base date would be considered not in compliance with the statute and subchapter and an administrative hearing would be initiated to show cause why the non-complying company should not be sanctioned under Article 1.10E, Insurance Code. The non-complying company has an opportunity at the administrative hearing to demonstrate that it has passed through savings as required by the statute. Agency Response: Disagree. Article 5.131 in combination with other provisions of the Code provide the department with minimal authority to regulate county mutuals. Furthermore, demonstrating that rates are not at or below the level they were at on April 1, 1995, less the rate reduction amount, is not an effective mechanism to determine whether the company has passed through the savings. Section 5.14007(b) A commentor suggests changing subsection (b) to read "rate reduction factor for tort reform legislation" as it reads in (a). She believes that Article 5.131 does not differentiate between rate regulated and non rate regulated insurers. Agency Response: Disagree. It is clear in sec.2(b) of Article 5.131 that the legislature intended there to be a differentiation between rate regulated and non rate regulated insurers. Section 5.14007(b) A few commentors believe there is an inconsistency between Senator Shapiro's statement of intent and the requirement in subsection (b) that the certification form for non rate regulated insurers include information on the premium volume of the insurer and an explanation of the overall rate reduction applied. A commentor expresses concern over the presumption that savings will result from the tort reform legislation. The data of this insurer does not support this presumption. He believes that tort reform will have no immediate impact on legal malpractice claims and if any value is derived from the legislation, it will not be evident for several years. A few commentors believe that the word "explanation" is too vague and doesn't fully address the intent of the statute for non rate regulated insurers. Suggested language is provided to clarify what is to be provided in the explanation. Agency Response: The agency disagrees that there is any inconsistency between Senator Shapiro's statement and the requirement that the department will monitor all insurers to ensure that the legislative intent of prospectively passing on the savings to policyholders occurs. Section 5.14008(a) A commentor suggests changing the subsection to permit the department to notify an insurer of its intention to disapprove a rate which has not been implemented and give the insurer the opportunity to withdraw and amend the rate rather than go through a SOAH hearing if not desired. Suggested language has been provided. Agency Response: Agree and the subsection has been changed. Section 5.14008(a)(3), (b)(1), (d) A commentor suggests that TDI staff should not participate in hearings conducted under this section and recommends striking the language in the section regarding staff's participation. He states that OPIC is charged with representing consumers and has specific authority to represent consumers in insurance rate matters and should do so in these type of proceedings. Agency Response: Disagree. The statute gives specific authority to TDI to participate in these types of proceedings. Section 5.14008(a) A commentor suggests that a company be able to use a filed rate under this subsection until the outcome of the appeal has occurred. If the rates are found to be excessive, then the company would be directed to refund the excess premiums collected. Agency Response: Disagree. This would be inconsistent with other statutes and rules currently in effect which maintain the status quo until an appeal is determined. Article 5.131 sec.4 specifically provides that the procedures established by Article 5.13-2, sec.7 apply. Section 5.14008(c) A commentor recommends revising this subsection to prohibit an insurer from implementing a rate without consideration of tort reform prior to the commissioner's review under this subsection. The commentor also recommends stating in this subsection that using a rate that doesn't apply the appropriate rate reduction factor is subject to sanctions under Article 1.10 of the Code. Agency Response: Agree in part. Article 5.131, sec.4(b) provides that the commissioner is not required to disapprove a filed rate that reflects less than the full rate reduction in certain specific situations. The agency believes the rule applies to filed rates prior to implementation. The agency disagrees that any revision is needed. Section 5.14008(c)(1) A commentor agrees with the proposed language of (c) (1) that premiums and losses are Texas experience and not a company's experience in another state. He believes the insurance market in Texas should be one in which insurers have the ability to compete for business on a profitable basis. Another commentor recommends that the evidence to support granting of administrative relief be limited to only Texas data and results. It is important to ensure the Texas market is competitive and companies can compete on a profitable basis. This commentor reminds the agency that reforms only address reduction on losses for Texas exposure. Agency Response: Agree. Susection (c)(1) includes the language "based on Texas premiums and losses". However, any administrative relief sought under (c)(2) would consider the insurer as a whole, based on the definition of hazardous financial condition in Article 1.32, sec.2 of the Code. Section 5.14009 Commentors provided suggested language that would permit an insurer to request a determination of non application of the subchapter if there is a finding that rates are developed from actuarial evidence that already incorporates tort reform savings. They recommend addition of a new sentence to permit an insurer or association of insurers to petition the commissioner to declare the subchapter inapplicable. Agency Response: Disagree. The agency does not believe that the section of the statute on which sec.5.14009 is based applies to an individual insurer. It applies to the entire line or subline of insurance. As tort reform is implemented, the agency will monitor the impact on lines or sublines of insurance and the commissioner will make a determination when the subchapter no longer is applicable. Section 5.14010 A commentor would like to see the public benefit statement to be as policy specific and consumer friendly as possible. He does not want to see the cost of producing the notice to substantially reduce the savings to consumers. Another commentor suggests modification of both sec.5.14007 and sec.5. 14010 to provide the agency and consumers accurate details on any savings from tort reform legislation. He believes there is wide latitude for a company to certify tort reform savings and not pass through the full amount of those savings, since there is a wide disparity between what a company's actuary says should be the company's rate and the rate the company selects. This commentor does not believe the policyholder notice as proposed will provide meaningful information to consumers. He suggests new language for this section which is designed to provide full, accurate information to consumers regarding any savings resulting from tort reform. He believes that his suggested language will provide policyholders accurate and understandable comparisons which show the effect of tort reform legislation on the amounts a consumer pays for insurance. Other commentors request that the notice show the actual savings from tort reform for each individual policyholder on the declaration page, through an endorsement, or other similar mechanism. Another commentor has no objection in principle to providing a general notice to policyholders of the tort reform legislation and its possible effect on rates. This commentor objects to any individualized notices which detail the precise effect of reductions on each policyholder's premium. He believes that the cost of these individualized notices would substantially, if not completely, negate the expected savings from tort reform. This commentor also objects to the department specifying the language which insurers must use in the notice, but does not object to addressing certain points in the notice requested by the department. Another commentor thinks that the legislature's and public's expectations that something tangible be realized as a result of this statute should be addressed, but separately. For the non-flex lines like general liability, the commentor suggests attaching a policyholder notice to policies rated after the rollback is implemented to indicate that the rates reflect tort reform as required by the statute. A commentor expressed public policy concerns for non-flex lines and flex lines. He suggests that the agency focus on media publication of total dollar savings. If desired, the agency could require companies to develop policyholder notices which indicate that the rates reflect tort reform. He suggest that the agency publicize the change in the benchmark rates as the department's response to the legislation and possibly include the overall estimated savings. Policyholder notices should not be needed for these lines because it should be clear to the public what has occurred. Agency Response: The agency has considered all comments on the policyholder notice and has decided to delete this section. Implementation of Article 5.131 does not require provision of a notice to policyholders and it appears that the cost of a specific notice could outweigh the benefits of the rate reduction for policyholders; a specific notice would be too expensive and is not necessary. The agency believes that requiring the amount of savings to be reflected on the declaration page would even more likely result in excessive costs which would ultimately be passed on to the policyholder. Furthermore, a more general notice would not provide any more information than what the public might learn from the media, and would increase costs to insurers. The agency is more interested in seeing costs to companies and the consumer decrease rather than imposing a requirement that could be overly burdensome and costly, and unnecessary. Sections 5.14005(d), 5.14007, and 5.14010 A commentor contends that requiring insurers to use a specific certification form and a specific notice form is a rulemaking proceeding and requires that when the forms are developed that they be adopted or adopted by reference in accordance with the rulemaking procedures of the APA. Agency Response: The agency disagrees. The agency has stated in the sections what information will be required in the certification form. This proposal provides sufficient notice of the information required, so that additional rulemaking procedures are not necessary to adequately inform the public of the necessary information to comply with the sections. For with changes: CNA Insurance Companies, American Insurance Association, Liberty Mutual Insurance Company, City of Houston, Consumers Union, Texas Association of Builders, Texas Restaurant Association, Texas Retailers Association, Texas Jewelers Association, Texas Federation of Drug Stores, Business Insurance Consumers Association of Texas, State Farm Mutual Automobile Insurance Company, State Farm County Mutual Insurance Company of Texas, State Farm Fire and Casualty Company, Texas Farm Bureau Insurance Companies, Texas Farm Bureau Underwriters, National Association of Independent Insurers, St. Paul Fire and Marine Insurance Company, Citizens Against Lawsuit Abuse, Texas Apartment Association, Sandalwood Management, Firemen's Fund Insurance Companies, Texas County Mutual Association, Texas Lawyers Insurance Exchange, State and County Mutual Insurance Company, American International Group, The Medical Protective Company, Office of Public Insurance Counsel, Alliance of American Insurers, Texas Farmers Insurance Company, Mid-Century Insurance Company, Farmers Texas Company, Mutual Insurance Company, Texas Medical Association, Texas Automobile Insurance Service Office, Texas for Lawsuit Reform, Texas Association of Business & Chambers of Commerce, The Travelers Insurance Companies, and Peterson and Ross. Against: Texas Citizen Action, Individual consumers The sections are adopted under the Insurance Code, Articles 5.131, 5.98, and 1.03A. New Article 5.131 enacted by the 74th Legislature requires the commissioner to issue rules by October 1, 1995, mandating appropriate rate reductions for certain lines of insurance to pass through, on a prospective basis, the savings that accrue from tort reform legislation enacted in the regular sessions of the 73rd and 74th Legislatures. Article 5.131 also provides for the granting of administrative relief and the collection of data to monitor compliance with the statute. Article 5.98 authorizes the commissioner to adopt rules to accomplish the purposes of Chapter 5. Article 1. 03A authorizes the commissioner of insurance to promulgate and adopt rules and regulations for the conduct and execution of the duties and functions of the department. sec.5.14000. Purpose and Scope. The sections in this subchapter establish the methodology to be followed and the loss and ALAE reduction percentages which will be used to determine the rate reduction factors for certain lines or sublines of liability insurance that may be affected by tort reform legislation enacted in the 73rd and 74th Legislatures. The sections also cover the granting of administrative relief from the required rate reduction and provide for the collection of data to monitor compliance with the reduction in rates. These sections apply to insurers authorized to do business in this state and authorized to write any of the specific lines or sublines identified in this subchapter. These sections apply to policies or coverage with an effective date on and after January 1, 1996. sec.5.14001. Definitions. The following words and terms, when used in this subchapter, shall have the following meanings, unless the context indicates otherwise: Benchmark rates -The rates set annually by the commissioner by line as required by the Insurance Code, Article 5.101, relative to which the flexibility bands apply. Large risk-An insured that meets any of the following criteria: (A) has total insured property values of $10 million or more; (B) has total annual gross revenues of $20 million or more; (C) has a total premium of $50,000 or more for property insurance, or $50,000 or more for general liability insurance, or $100,000 or more for multi-peril insurance; or (D) is eligible for a Large Risk Alternate Rating Option (LRARO), large deductible plan, or any other rating plan which is negotiated with an insured as allowed by rules and regulations promulgated by the Texas Department of Insurance. Loss and ALAE reduction percentage-The percentage determined by the commissioner to reduce the loss and allocated loss adjustment expense (ALAE) provisions in rates to reflect the estimated reduction in those provisions anticipated as a result of tort reform legislation. Non rate regulated insurers-Those insurers and companies authorized under the Insurance Code, whose rates are non regulated except as otherwise required pursuant to statute, rules or prior order of the board or commissioner, including county mutuals, Lloyd's plans, and reciprocal or inter-insurance exchanges. Non rate regulated lines-Those lines or sublines of insurance which are not rate regulated by the Texas Department of Insurance pursuant to statute, rules or prior order of the board or commissioner. Rate-The cost of insurance per unit of exposure; used as a means or base for the determination of premiums. Rate reduction factor-The factor determined in accordance with sec.5.14005 (relating to Calculation and Application of Rate Reduction Factor) and applied to rates to reflect loss and ALAE reductions anticipated as a result of tort reform legislation. Tort reform legislation-That legislation enacted by the 73rd and 74th Legislatures, which is intended to meaningfully reform the civil justice system of this state and which is expected to result in reductions in the cost of litigation and the risk of losses associated with judgments, and which includes the following: Senate Bill Number 4 and Senate Bill 1409 (73rd Legislature); House Bill 971, Senate Bill 25, Senate Bill 28, Senate Bill 31, Senate Bill 32, and House Bill 668 (74th Legislature). sec.5.14002. Application to Insurers and Monitoring of Insurers. (a) This subchapter applies to any insurer that is authorized to do business in this state and that is authorized to write any of the liability lines or sublines set forth in sec.5.14004 of this title (relating to Loss and ALAE Reduction Percentages by Line), including capital stock companies, mutual insurance companies, Lloyd's plan insurance companies, and reciprocal or interinsurance exchanges. (b) This subchapter, except for sec.sec.5. 14003, 5.14004, 5.14005, 5.14006, and 5.14008 (relating to Rulemaking Procedures for Reductions in Rates, Loss and ALAE Reduction Percentages by Line, Calculation and Application of Rate Reduction Factor, Duration, and Administrative Relief), also applies, to the limited extent of passing through savings on a prospective basis and monitoring of compliance with the legislative directive, to county mutuals, joint underwriting associations, and other insurers, whether rate regulated or not, for those lines which are not rate regulated. (c) All insurers shall pass through the savings from the tort reform legislation to their policyholders on a prospective basis for the lines or sublines of insurance identified in sec.5.14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line). (d) All insurers that write any of the types of coverages or lines and sublines identified in sec.5.14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line), shall provide information to the department in the form of rate filings, special data calls, informational hearings, and any other means consistent with other provisions of the Insurance Code and determined by the commissioner to be necessary to monitor compliance with the provisions of Article 5.131, Insurance Code, and this subchapter. sec.5.14003. Rulemaking Procedures for Reductions in Rates. (a) On or before September 1 of each year, the commissioner shall hold a rulemaking hearing to determine the loss and ALAE reduction percentages for each line or subline of insurance identified in sec.5.14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line). (b) The commissioner shall amend or adopt rules, as necessary, mandating the use of the loss and ALAE reduction percentage for the lines and sublines identified in sec.5.14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line). (c) The loss and ALAE reduction percentages or the adjusted benchmark rate adopted or determined by the commissioner under this subchapter shall be included in the rate charged for each policy or coverage with an effective date on and after January 1, 1996, and to each policy or coverage effective on and after the 90th day after the date of each subsequent commissioner's order adopting the loss and ALAE reduction percentages or determination of the adjusted benchmark rate under this subchapter. sec.5.14004. Loss and ALAE Reduction Percentages by Line. (a) The rate or charge for each policy containing any of the following coverages with an effective date on and after January 1, 1996, shall, insofar as the subject liability coverage is concerned, be reduced by the application of rate reduction factors calculated as provided in sec.5.14005 (relating to Calculation and Application of Rate Reduction Factor) using the loss and ALAE reduction percentages in subsection (c) of this section. (b) A single loss and ALAE reduction percentage is used for coverages written on an occurrence policy basis. Three loss and ALAE reduction percentages are used for coverages written on a claims made policy basis effective on or after January 1, 1996 but before January 1, 1997: (1) claims made policy percentage 1 is the loss and ALAE reduction percentage that reflects the reduction due to all of the tort reform legislation; (2) claims made policy percentage 2 is the loss and ALAE reduction percentage that reflects only those reductions due to the tort reform legislation applying to claims filed and suits commenced on or after September 1, 1995 and which arise from actions accruing before that date; (3) claims made policy percentage 3 is the loss and ALAE reduction percentage that reflects only the reductions due to the tort reform legislation applying to claims filed and suits commenced on or after September 1, 1996 and which arise from actions accruing before September 1, 1995. (c) The loss and ALAE reduction percentages are: (1) private passenger automobile liability insurance for bodily injury 7.5%; (2) commercial automobile liability insurance for bodily injury 12.0%; (3) the liability portion; (A) of homeowner's insurance-0% (B) of farm and ranch owner's insurance-10.0% (C) of renter's insurance-0% (4) professional liability insurance as defined in the Insurance Code, article 5.15-1 for: (A) physician, other health care provider (i) claims made policy percentage 1-11.5% (ii) claims made policy percentage 2-3.5% (iii) claims made policy percentage 3-8.5% (iv) occurrence policy-11.5% (B) hospital (i) claims made policy percentage 1-15.0% (ii) claims made policy percentage 2-3.5% (iii) claims made policy percentage 3-8.5% (iv) occurrence policy-15.0% (5) commercial liability insurance for damages arising out of the manufacture, design, importation, distribution, packaging, labeling, lease, or sale of a product or for completed operations coverage (products/completed operations)- 12.5% (6) personal umbrella and excess liability insurance -7.5% (7) the liability portion of commercial multi-peril insurance (A) with a divisible premium, refer to sec.5.14005(d) of this title (relating to Calculation and Application of Rate Reduction Factor) (B) with an indivisible premium, including business owner's policies-12.5% (8) the employer's liability portion of workers' compensation insurance -0% (9) commercial general liability, which includes premises medical, fire legal liability, personal advertising injury, contractual liability, and liability for all premises-12.5% (10) commercial umbrella-18.0% (11) commercial excess liability (A) general liability/commercial multiple peril-18.0% (B) commercial automobile-18.0% (C) products liability-18.0% (D) medical professional-physicians, other health care provider (i) claims made policy percentage 1-15.0% (ii) claims made policy percentage 2-4.5% (iii) claims made policy percentage 3-11.5% (iv) occurrence policy-15.0% (E) medical professional-hospitals (i) claims made policy percentage 1-20. 0% (ii) claims made policy percentage 2-4.5% (iii) claims made policy percentage 3-11.5% (iv) occurrence policy-20.0% (F) other professional (i) claims made policy percentage 1-17.5% (ii) claims made policy percentage 2-0.5% (iii) claims made policy percentage 3-17.0% (iv) occurrence policy-17.5% (12) professional liability other than insurance described by paragraph (4) of this section (A) claims made policy percentage 1-12.0% (B) claims made policy percentage 2-1.0% (C) claims made policy percentage 3-11. 0% (D) occurrence policy-12.0% (13) other commercial liability insurance, if not already covered as a part of coverage in paragraph (9) of this section, when written as a monoline coverage or added to another policy, including the following lines and sublines: (A) fire legal liability-12.5% (B) contractual liability-12.5% (C) pollution liability (i) claims made policy percentage 1-6. 0% (ii) claims made policy percentage 2-1.0% (iii) claims made policy percentage 3-5.5% (iv) occurrence policy-6.0% (D) owners and contractors protective liability-12.5% (E) railroad protective liability-12.5% (F) liquor liability (i) claims made policy percentage 1-12.5% (ii) claims made policy percentage 2-2.0% (iii) claims made policy percentage 3-8.0% (iv) occurrence policy-12.5% (G) farm liability-12.5% (H) garage liability-6.0% (I) all other commercial liability lines and sublines -12.5%. sec.5.14005. Calculation and Application of Rate Reduction Factor. (a) For those lines or sublines of insurance that have a benchmark rate, a rate reduction factor will be calculated by the department using the loss and ALAE reduction percentages set forth in sec.5.14004(c)(1)-(3) of this title (relating to Loss and ALAE Reduction Percentages by Line) and relevant industry average expenses for the applicable line or subline. This rate reduction factor shall be applied to the applicable benchmark rate to arrive at an adjusted benchmark rate for purposes of this section. (1) For rates for policies or coverage with an effective date on and after January 1, 1996, the insurer shall apply its flex percent on file with the department to the adjusted benchmark rate. (2) For subsequent filings, the insurer shall apply its flex percent developed without consideration of tort reform to the adjusted benchmark rate then in effect. (b) For those lines and sublines other than those subject to the Insurance Code, article 5.101, the loss and ALAE reduction percentage shall be used by each insurer to calculate the rate reduction factor to be applied to occurrence policy rates in effect on January 1, 1996 for the lines or sublines identified in sec.5.14004(c)(1) -(13) of this title (relating to Loss and ALAE Reduction Percentages by Line) according to the following method: (1) The insurer shall apply the loss and ALAE reduction percentage to the loss and allocated loss adjustment expense (ALAE) portion of the rate. (2) The insurer shall add the provision for other company fixed expenses, including unallocated loss adjustment expenses (ULAE), to the loss and ALAE portion of the rate as adjusted in paragraph (1) of this subsection. (3) The insurer shall add the provision for other company fixed expenses, including ULAE, to the loss and ALAE portion of the rate before the adjustment for the loss and ALAE reduction percentage in paragraph (1) of this subsection. (4) The rate reduction factor is equal to the ratio of the value calculated in paragraph (2) of this subsection to the value calculated in paragraph (3) of this subsection. (5) The insurer shall apply the rate reduction factor directly to the rate. (c) For those lines and sublines other than those subject to the Insurance Code, Article 5.101, the claims made policy loss and ALAE reduction percentages shall be used by each insurer to calculate the rate reduction factor to be applied to claims made policy rates in effect on January 1, 1996 for the lines or sublines identified in sec.5. 14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line) according to the following method: (1) The insurer shall determine in accordance with the instructions in Form TR-3A, Calculation of Tort Reform Impact, Claims Made Policies, and Form TR-3B, Calculation of Rating Values, Claims Made Policies: (A) that part of the loss and ALAE portion of the rate to which claims made policy percentage 1 applies; (B) that part, if any, of the loss and ALAE portion of the rate to which claims made policy percentage 2 applies; and (C) that part, if any, of the loss and ALAE portion of the rate to which claims made policy percentage 3 applies. (2) The insurer shall apply the appropriate claims made policy loss and ALAE reduction percentage to each of the three parts of the loss and ALAE portion of the rate determined in paragraph (1) of this subsection, add the calculated reductions and subtract this sum from the total loss and ALAE portion of the rate. (3) The insurer shall add the provision for other company fixed expenses, including ULAE, to the loss and ALAE portion of the rate as adjusted in paragraph (2) of this subsection. (4) The insurer shall add the provision for other company fixed expenses, including ULAE, to the loss and ALAE portion of the rate before the adjustment for the claims made policy loss and ALAE reduction percentages in paragraph (2) of this subsection. (5) The rate reduction factor is equal to the ratio of the value calculated in paragraph (3) of this subsection to the value calculated in paragraph (4) of this subsection. (6) The insurer shall apply the rate reduction factor directly to the rate. The department adopts and incorporates herein by reference, Form TR-3A, Calculation of Tort Reform Impact, Claims Made Policies, and Form TR-3B, Calculation of Rating Values, Claims Made Policies. These forms are published by the Texas Department of Insurance and may be obtained from the Technical Analysis Division, Mail Code 105-5G, Texas Department of Insurance, 333 Guadalupe, P.O. Box 149104, Austin, Texas 78714-9104. (d) For package coverages, such as commercial multi-peril, where premiums are based on the premiums for each of its component monoline coverages, the rate reduction factor, if any, appropriate to each of the various component monoline coverages shall be applied by the insurer. (e) For insurers writing any commercial liability or professional liability lines or large risk, the rate reduction factor for the specific line identified in sec.5.14004 of this subchapter (relating to Loss and ALAE Reduction Percentages by Line) may be reduced by the individual tort reform component specified in Form TR95, Pricing Components by Tort Reform, if coverage for the specific tort reform identified in Form TR95 is specifically excluded from the policies. Insurers shall be required to file a certification form, developed by the department, that indicates the rate reduction factor used, the specific individual tort reform components used to reduce the factor, the premium volume affected, and such other information determined by the department. The department adopts and incorporates herein by reference Form TR95, Pricing Components by Tort Reform. This form is published by the Texas Department of Insurance and may be obtained from the Technical Analysis Division, Mail Code 105-5G, Texas Department of Insurance, 333 Guadalupe, P.O. Box 149104, Austin, Texas 78714-9104. (f) Insurers shall apply the appropriate rate reduction factor to the rates used to determine minimum premiums, maximum premiums and other rating values under retrospective rating plans. (g) For umbrella or excess policies that are rated as a percentage of the underlying primary policy rates, the insurer may adjust the umbrella or excess policy rate reduction factor to eliminate any duplication in the loss and ALAE reduction percentages as follows: (1) Determine the rate reduction factor appropriate to the umbrella or excess policy as specified in subsections (a) or (b) of this section. (2) Determine the rate reduction factors appropriate to each of the insurer's underlying primary policies as specified in subsections (a) or (b) of this section. (3) Compute a weighted average rate reduction factor for the underlying primary policies using the insurer's statewide average distribution of premiums for the underlying policies at limits corresponding to the retention under the umbrella or excess policy. (4) The adjusted umbrella or excess policy rate reduction factor is equal to the ratio of the value calculated in paragraph (1) of this subsection to the value calculated in paragraph (3) of this subsection. (5) In no event shall the ratio calculated in paragraph (4) of this subsection exceed one (1.000). (6) The insurer shall apply the adjusted rate reduction factor directly to the percentage used to calculate its umbrella or excess policy premiums. sec.5.14006. Duration. The rate reduction factor shall remain in effect as to any policy providing coverage for any of the lines or sublines identified in sec.5.14004(c)(1)-(13) of this title (relating to Loss and ALAE Reduction Percentages by Line) during the term of the policy. Renewal of the policy shall be subject to the rate reduction factor in effect on the effective date of the renewal. Endorsements shall be subject to the rate reduction factor in effect on the effective date of the endorsement, unless otherwise required by the department's promulgated or approved rating manual. sec.5.14007. Filing Requirements. (a) Each insurer which is required to apply the rate reduction factor shall file a certification form, developed by the department, for each line or combination of lines subject to this subchapter, executed by an officer or director of the insurer which indicates what the rate of the insurer would have been without application of the rate reduction factor for tort reform legislation and what the rate is with application of the rate reduction factor. (1) An initial certification form shall be filed with the department, no later than December 1, 1995, for the insurer's rates that are to be effective January 1, 1996. (2) For any rate filing made by an insurer subject to this subchapter, with an effective date on and after January 1, 1996, the insurer shall file the rate filing in accordance with applicable rules currently in effect at the time of the filing regarding justification for the filed rates and the certification form. (b) Each non rate regulated insurer and those insurers writing non rate regulated lines shall file a certification form, developed by the department, for each line or combination of lines subject to this subchapter, executed by an officer or director of the insurer which indicates what the rate of the insurer would have been without application of the prospective savings for tort reform legislation and what the rate is with application of the prospective savings for tort reform legislation. The certification form will include information on the premium volume of the insurer and explanation of the overall rate reduction applied by the insurer. sec.5.14008. Administrative Relief. (a) The procedures that will be followed when a rate that has not been implemented by the insurer has been selected for disapproval by the department because the rate does not reflect the application of the appropriate rate reduction factor are as follows: (1) The insurer will be notified of the intent to disapprove a rate filed to be effective on or after January 1, 1996 when the rate filed does not reflect the appropriate rate reduction factor established by the commissioner either in this subchapter or by commissioner order. The notice of intent to disapprove will specify in what respect the rate fails to meet the requirements of the Insurance Code, Article 5.131 and this subchapter. (2) Upon notification of intent to disapprove a filed rate, the insurer may withdraw the rate or request a hearing. The insurer is entitled to a hearing on written request made to the commissioner not later than the 30th day after the date of the notice of intent to disapprove. If the insurer has neither withdrawn the rate nor requested a hearing by the 30th day, the rate is disapproved effective the 31st day after the date of the notice of intent to disapprove. (3) Pursuant to the written request for hearing, the department will refer the matter to the State Office of Administrative Hearings (SOAH) to be handled as a contested case. (b) The procedures which will be followed for disapproval of a rate to be effective on and after January 1, 1996 which does not reflect application of the appropriate rate reduction factor and which rate has been implemented by the insurer are as follows: (1) The department will schedule a hearing with SOAH for disapproval of the rate and provide at least 20 days' written notice to the insurer of the hearing. (2) Following the provisions of the Insurance Code, Article 5.13-2, sec.7(c), a disapproval order will be issued not later than the 15th day after the close of the hearing on the disapproval and will specify how the rate fails to meet the requirements of the Insurance Code, Article 5.131. The disapproval order will also state the date on which further use of the rate is prohibited, which date will be set not earlier than the 45th day after the date the hearing closes. (c) An insurer may petition the commissioner for relief from application of the full rate reduction factor, in whole or in part, pursuant to the Insurance Code, Article 5.131, sec.4(b). In the petition, the insurer must: (1) present clear and convincing evidence to the commissioner that supports its position that, based on Texas premiums and losses, it is financially unable to continue writing the line of insurance in Texas and implement the rate reduction; or (2) present evidence that supports its position that the reduction will result in placing the insurer in hazardous financial condition, pursuant to the Insurance Code, Article 1.32 or 28 TAC sec.sec.8.1-8.3. (3) If the department decides to disapprove the petition for relief filed by an insurer under this subsection, the department will refer the petition for relief to SOAH to be handled as a contested case. (d) Staff may appear as a party, present evidence, or question witnesses in any proceeding before SOAH under this subchapter. sec.5.14009. Declaration of Inapplicability. When the department has received sufficient credible actuarial data to support that the existing rates reflect actual experience under tort reform and no reduction in rates is necessary for a specific line or subline covered in sec.5.1004 of this subchapter (relating to Loss and ALAE Reduction Percentages by Line), the commissioner will declare this subchapter inapplicable to that line or subline. sec.5.14010. Appeal of Rate Reduction and Severability. (a) If any commissioner order or rule which determines, approves, or sets a rate reduction under the Insurance Code, Article 5.131, sec.3(f) is appealed, the order or rule will remain in effect during the pendency of the appeal. (b) If any provision of this subchapter or the application thereof to any insurer or circumstance is for any reason held to be invalid, the remainder of the provisions of this subchapter and the application of such provisions to other insurers or circumstances shall not be affected thereby. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on September 29, 1995. TRD-9512428 Alicia M. Fechtel General Counsel and Chief Clerk Texas Department of Insurance Effective date: October 20, 1995 Proposal publication date: July 28, 1995 For further information, please call: (512) 463-6327 TITLE 31. NATURAL RESOURCES AND CONSERVATION Part II. Texas Parks and Wildlife Department Chapter 65. Wildlife Subchapter O. Late Season Migratory Game Bird Proclamation 31 TAC sec.sec.65.333-65.335 The Texas Parks and Wildlife Commission adopts amendments to sec.sec.65. 333- 65.335, concerning the Late Season Migratory Game Bird Proclamation, with changes to the proposed text as published in the May 16, 1995, issue of the Texas Register (20 TexReg 3631). The adopted rules set the dates during which ducks, geese, coots, mergansers, sandhill cranes, common snipe and woodcock may be legally hunted in the state; increase the season length and bag limit for ducks; lengthen the white-fronted goose season in eastern Texas; and make minor housekeeping changes. Changes to sec.sec.65.333-65.335 eliminate the proposed realignment of the goose zone boundary to correspond to the duck zone boundary. Additionally, the changes to sec.65.333 adjust season dates and lengths, and the change to sec.65.334 eliminates the proposed decrease in the sandhill crane bag limit in Zone C. Other, nonsubstantive changes to sec.65.333 and sec.65.334 standardize references. The amendments are necessary in order to accommodate calendar-shift differentials for the 1995-1996 hunting season; to simplify waterfowl hunting regulations; and to implement the department policy of maximizing recreational opportunity within the tenets of sound biological practice. The amendments will function by changing hunting season dates and bag limits for some species of migratory game birds. A total of 207 comments were received concerning the proposed rules. Concerning the duck season in High Plains Mallard Management Unit, the department received eight comments in favor of a split season running from October 21-24 and November 4-January 21; and four comments in favor of a split season running from October 28-31 and November 4-January 21. The department opted for a later season in the hope that more ducks would be in the area at that time. Concerning duck season in the remainder of the state, the department received 67 comments in favor of a split season running from November 11-26 and December 9-January 21; 33 comments in favor of a split season running from November 11-December 3 and December 16-January 21; 30 comments in favor of a season running from November 23-January 21; and 13 comments in favor of a split season running from November 4-26 and December 16-January 21. The department opted for a split season running from November 11-26 and December 9-January 21. Concerning the goose season in the western zone, the department received eight comments in favor of a season running from October 28-February 11; and six comments in favor of a season running from November 4-February 18. The department opted for a later season in the hope that more geese would be in the area at that time. The department received 12 comments requesting an increase in the dark goose bag limit. The department responds that bag limits for dark geese are established by the U.S. Fish and Wildlife Service. Nine comments in opposition to the realignment of the goose zone boundary were received. The department agreed with the comments and a change was made accordingly. One commenter requested that a goose season be opened in Anderson and Henderson counties. The department responds that no surveys have been undertaken in those counties, but it will assess the feasibility of opening such a season in the future. One commenter requested that sandhill crane hunting be permitted in Hill, Navarro, and Ellis counties. The department responds that those areas currently are closed by the U.S. Fish and Wildlife Service. Comments were received from several individuals requesting higher bag limits for wood ducks, pintail ducks, mottled ducks, and sandhill cranes. The department responds that the bag limits for those species are the maximum allowed by the United States Fish and Wildlife Service. Three comments opposing the increase in the bag limit for ducks were received. The department responds that it has followed commission policy in setting the most liberal regulations possible under the federal frameworks; no changes were made as a result of the comments. One commenter requested that whistling ducks be made a legal species. The department responds that whistling ducks may not be hunted during teal season. A commenter requested that the duck and goose seasons open at the same time. The department responds that it sets the opening of duck season so as not to conflict with deer season; no changes were made as a result of the comment. One commenter requested that more state and federal land be opened for goose hunting. The department responds that it has followed commission policy in creating the maximum amount of hunter opportunity on department-managed lands, and that it has no control over federal lands in the state. One comment opposing the requirement for steel shot was received. The department responds that the United States Fish and Wildlife Service sets the requirements for legal shot. The amendments are adopted under the authority of Parks and Wildlife Code, Chapter 64, Subchapter C, which provides the Parks and Wildlife Commission with the authority to regulate means, methods, and devices for taking or possessing migratory game bird wildlife resources. sec.65.333. Open Seasons. (a)-(b) (No change.) (c) Statewide hunting hours, including falconry, for all migratory game birds listed herein are one-half hour before sunrise to sunset. (1) Ducks, coots, and mergansers. (A) High Plains Mallard Management Unit (that portion of Texas lying west of a line from the international toll bridge at Del Rio, thence northward following United States Highway 277 through San Angelo to Abilene, thence along State Highway 351 from Abilene to Albany and United States Highway 283 from Albany to Vernon, thence easterly along United States Highway 183 to the point of intersection with the Texas-Oklahoma state line in Wilbarger County): October 28-31, 1995-November 4, 1995-January 21, 1996. (B) Remainder of the state: November 11-26, 1995 and December 9, 1995-January 21, 1996. (2) Geese. (A) Western Zone (that portion of the state lying west of a line from the international toll bridge at Laredo, thence northward following IH 35 and 35W to Fort Worth, thence northwest along United States Highways 81 and 287 to Bowie, thence northward along United States Highway 81 to the Texas-Oklahoma state line): Light geese (snow, blue and Ross' geese) and dark geese (Canada, white- fronted, and all other geese except light geese), November 4, 1995 - February 18, 1996. (B) Eastern Zone (remainder of the state): Light geese (snow, blue and Ross' geese) and dark geese (Canada, white-fronted, and all other geese except light geese), November 4, 1995-January 28, 1996. (C) The season is closed on Canada geese in Anderson and Henderson Counties. (3) Sandhill cranes. (A) Zone A: November 11, 1995-February 11, 1996 in that portion of Texas lying west of a line beginning at the international toll bridge at Laredo, thence northeast along United States Highway 81 to its junction with Interstate Highway 35 in Laredo, thence north along Interstate Highway 35 to its junction with Interstate Highway 10 in San Antonio, thence northwest along Interstate Highway 10 to its junction with United States Highway 83 at Junction, thence north along United States Highway 83 to its junction with United States Highway 62, 16 miles north of Childress, thence east along United States Highway 62 to the Texas- Oklahoma state line. (B) Zone B: December 2, 1995-February 11, 1996 in that portion of Texas lying within boundaries beginning at the junction of Interstate Highway 35 and the Texas-Oklahoma state line, thence south along Interstate Highway 35 (following Interstate Highway 35 West through Fort Worth) to its junction with Interstate Highway 10 in San Antonio thence northwest along Interstate Highway 10 to its junction with United States Highway 83 in Junction, thence north along United States Highway 83 to its junction with United States Highway 62, 16 miles north of Childress, thence east along United States Highway 62 to the Texas-Oklahoma state line, thence eastward along the Texas-Oklahoma state line to Interstate Highway 35. (C) Zone C: January 6, 1996-February 11, 1996 in that portion of Texas lying within boundaries beginning at the international toll bridge at Brownsville, thence north and east along United States Highway 77 to its junction with United States Highway 87 at Victoria, thence eastward along United States Highway 87 to its junction with Farm Road 616 at Placedo, thence north and east along Farm Road 616 to its junction with State Highway 35, thence north and east along State Highway 35 to its junction with State Highway 6 at Alvin, thence west and north along State Highway 6 to its junction with United States Highway 290, thence westward along United States Highway 290 to its junction with Interstate Highway 35 at Austin, thence south along Interstate Highway 35 to its junction with United States Highway 81 in Laredo, thence southwest along United States Highway 81 to the international toll bridge in Laredo, thence south and east along the United States-Mexico international boundary to its junction with the United States Highway 77 international toll bridge at Brownsville. (D) (No change.) (4) Common snipe (Wilson's snipe or jacksnipe). October 21, 1995-February 4, 1996. (5) Woodcock. November 28, 1995-January 31, 1996. sec.65.334. Bag and Possession Limits. (a)-(b) (No change.) (c) The daily bag limits, except falconry, are as follows: (1) Ducks, coots, and mergansers. (A) Ducks: the daily bag limit is the aggregate of five ducks which may include no more than one mallard hen (including Mexican mallard or Mexican duck hens), one mottled duck, one pintail, one redhead, one canvasback, and two wood ducks. (B) Coots: the daily bag limit is 15. (C) Mergansers: the daily bag limit is five, which may include no more than one hooded merganser. (2) Geese. (A) Western Zone: the daily bag limit for light geese (snow, blue, and Ross' geese) is five, and the daily bag limit for dark geese (Canada, white-fronted, and all other geese except light geese) is five, which may not include more than four Canada geese and one white-fronted goose. (B) Eastern Zone: the daily bag limit for light geese (snow, blue, and Ross' geese) is ten, and the daily bag limit for dark geese (Canada, white-fronted,, and all other geese except light geese) is two, which may not include more than one Canada goose and one white-fronted goose. During the period January 22-28, 1996, the daily bag limit for Canada geese is two. (3) Sandhill cranes. The daily bag limit is three. (4)-(5) (No change.) (d)-(g) (No change.) sec.65.335. Extended Falconry Season. (a) (No change.) (b) It is lawful to take migratory game birds by means of falconry during the open seasons prescribed in sec.65.333 of this title (relating to Open Seasons) and during the following Extended Falconry Seasons: (1) Ducks, coots, and mergansers. (A) High Plains Mallard Management Unit. (See description sec.65.333(c) (1)(A)). January 22, 1996-February 5, 1996. (B) Remainder of the state. January 22, 1996-February 28, 1996. (2) Woodcock. November 25-27, 1995 and February 1, 1996-March 10, 1996. (c)-(d) (No change.) This agency hereby certifies that rules as adopted have been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on September 27, 1995 TRD-9512386 Bill Harvey, Ph.D. Regulatory Coordinator Texas Parks and Wildlife Department Effective date: October 19, 1995 Proposal publication date: May 16, 1995 For further information, please call: (512) 389-4642 or 1-800-792-1112, extension 4642