02-01: Modified Guidelines for Deductible WCs' Policies

To:           All Workers Compensation Insurers

From:      Susan Schulte, Chief, Property and Casualty Section

Re:          Modified Guidelines for Deductible Workers' Compensation Policies

Date:       January 31, 2002

Discussion

The Department's most recent bulletin on the topic of "deductible" workers' compensation policies was Bulletin 93-07, issued in July of 1993. That bulletin updated the guidelines for writing deductible policies that the Department had previously articulated in Bulletins 92-11 and 93-03. As a result of industry suggestions at the P&C Stakeholders' Meeting sponsored by the Department last summer, the Department has reconsidered certain limitations in these guidelines relating to the rating and underwriting of certain large deductible policies. After considering the public policy issues involved, the Department has decided to issue the following bulletin, which liberalizes its previous guidelines in a number of respects.

One insurer asked the Department whether it was necessary, particularly in a period of commercial lines deregulation, to restrict the maximum allowable deductible amount to no more than 40% of standard premium. One problem with such a cap is that the dollar amount of the employer's "retention" fluctuates annually with the yearly changes in the employer's premium. The insurer in question argued that the 40% cap had originally been intended as a method of protecting insurer solvency, since limiting the employer's obligation to reimburse the insurer for the deductible amount also limited the potential for financial harm to the insurer should the employer fail to meet that obligation. The insurer noted that Missouri is one of only five states that maintains this type of limitation and pointed out that Missouri's recommendation that insurers obtain high-quality collateral to secure such payments provided adequate protection for the insurer.

The Department agrees with these arguments, at least in part. From the Department's perspective, putting a cap on the size of the deductible was important not only to protect the insurer but also to protect the insured. Allowing the employer to assume only 40% of the liabilities meant that the insurer was responsible for the majority of the losses. Since the extent of an employer's ultimate liability under the deductible is unknown at the outset, there was a concern that some employers would be willing to accept too high a deductible in return for the immediate benefit of larger premium credits, without fully appreciating the potential future downside should losses exceed expectations. In a sense, the Department saw the 40% cap as one way to help limit the extent to which an employer could "get in over his head."

However, the Department has concluded that the same result can be achieved more flexibly by modifying the guidelines on securing collateral. Please recall that, while Bulletin 93-07 did not mandate the amount and type of collateral an employer would be required to post to secure his payment of the deductible, the bulletin did encourage the posting of high-quality collateral. It did so by saying that insurers would not be allowed to treat as assets on their books those receivables owed by employers for claims falling within the deductible limits of their policies unless the collateral was ". . .of the same type and quality required by Missouri statute and the NAIC in connection with credit for unauthorized reinsurance. . . " (e.g., irrevocable letters of credit).

While this level of collateral was only the Department's "recommendation," its actual use would have the same "moderating" effect on employers as the 40% cap on the deductible. It would have this effect by balancing the temptation of an immediate premium reduction available because of a higher deductible with the immediate, higher cost of obtaining the additional collateral necessary to secure the deductible. As such, "requiring" collateral to secure the deductible would provide employers with a convenient tool to assess the costs and benefits of a higher deductible level, at the time coverage is purchased. Therefore, the Department has concluded that, if an insurance company in fact requires collateral of the same type and quality required by Missouri statute and the NAIC in connection with credit for unauthorized reinsurance for a particular policy, and the employer in fact posts that collateral, then the insurer and the employer need not also adhere to the "40%" limitation on the size of the deductible, so long as the amount of the posted collateral is also reasonable under the circumstances. (The Department recognizes that the amount of the collateral will only represent an estimate of the employer's expected losses under the deductible, and therefore can never be precise. As such, insurers may use whatever proprietary methods they choose to calculate those estimates. However, the Department may from time to time review such calculations as part of its market conduct process.) Conversely, if the insurer does not require the employer in question to secure this type and amount of collateral, then the "40%" limitation on the size of the deductible will continue to apply.

A second insurer asked for the flexibility to "individually rate" large, multi-state deductible policies. It, like many insurers, originally filed a deductible rating plan in Missouri with rating factors borrowed from retrospective rating plans. These deductible filings produced an individual "Missouri" deductible credit for an employer; if the employer had operations in a number of states, the rating plan would produce a different credit for each state. In addition, each credit would be adjusted at audit. In an effort to avoid this complexity, the insurer requested the authority to individually rate large, multi-state risks in order to produce a single credit.

Similar flexibility is already present in the NCCI's retrospective rating plan. That plan contains a Large Risk Alternative Rating Option which allows a non-standard, "mutually agreed upon" premium rating to be used for large-premium employers. Missouri has for some time allowed that option to be utilized by employers with workers' compensation premium of $100,000 or more (or a combination of workers' compensation and several other enumerated lines of $500,000 or more).

The Department is willing to allow a similar, individual-rating option for large deductible plans, but with an number of conditions. First, the employer must have operations in one or more states in addition to Missouri. Second, the employer's standard workers' compensation premium prior to the application of the deductible must be $100,000 or more. Third, the non-standard rating must be mutually agreed to by the insurer and the insured. Forth, the insurer will be required to make a filing with the Department concerning the policy. Insurers should at a minimum report relevant information on the insured policy (e.g, the insured's name, address and telephone number) and the policy (e.g., the policy number and policy period), a brief explanation of the non-standard methodology by which the policy's premium rate was calculated, and the names, official titles, signatures and signature dates of, respectively, the insurer, the insured, and the insured's agent under a statement indicating they are aware the rates charged are not standard and nevertheless accept the non-standard rates. This information is similar to the information required under Missouri's "consent-to-rate" regulation, 20 CSR 500-4.300. The requirement that such information be filed on each such policy is necessary to conform with the comprehensive rate filing requirement for workers' compensation insurance set forth in Sections 287.930 to 287.975, RSMo.

Guidelines

The Department's guidelines on deductible plans, including the topics discussed above, are set forth below. They are the same as the guidelines set forth in Bulletin 93-07, except for clarifications or updates indicated in italics. These standards supercede any contained in the previous Department bulletins (i.e., Bulletins 92-11, 93-03 and 93-07).

If you have any questions or comments regarding this bulletin, please contact the Property & Casualty Section of the Missouri Department of Insurance at (573) 751-3365.