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
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.
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).
- The decision to offer a deductible plan or a workers' compensation policy is at the option of the insurance company. The amended Section 287.310, RSMo provides that a workers' compensation insurer may offer a deductible option. Insurance companies are clearly not required to offer such programs.
- The Department shall consider a "large" deductible plan to be one where the standard premium before deductible credits exceeds $100,000, either in interstate or intrastate premium. "Standard premium" shall be considered payroll multiplied by the rate multiplied by the experience modification factor (payroll x rate x experience modification). In addition, the deductible amount shall not be less than $25,000 and shall not exceed 40% of the standard premium for the risk except where the deductible amount for the policy in question is secured by collateral of the same type and quality required by Missouri statute and the NAIC in connection with credit for unauthorized reinsurance.
- "Small" deductible plans will be deemed to be those applicable to any countrywide premium levels below $100,000 in standard premium before deductible credits; insurers seeking the approval of small deductible plans should set forth in two columns the size of the deductible amount to be offered and the size of the premium reduction to be provided. The NCCI has established reporting code numbers for deductibles of the following amounts: $100, $200, $300, $400, $500, $1,000, $1,500, $2,000, $2,500, $5,000, $10,000, $15,000, and $20,000. Insurers are expected to determine their own percentage of premium reductions for these categories, and provide actuarial justification for these reductions with their filing.
- Data reporting requirements for both "large" and "small" deductible plans shall also conform to approved and published NCCI standards.
- The Department has decided to allow but not require allocated loss adjustment expenses (ALAE) -- as that term is defined in either Section 375.1152, RSMo, or as defined by the NCCI as specified in the NCCI's "Countrywide Item Filing: Item # U-1292, Allocated Loss Adjustment Expenses" -- to be included as part of the deductible of a "large" deductible plan. The definition chosen must be set forth in writing in the policy or endorsement. The Department will also allow a separate fee for ALAE to be charged to the insured outside of the deductible, and will we allow a separate fee to be charged to the insured for any adjustment of claims. The same standards shall apply for unallocated loss adjustment expenses (UALAE).
- As is the case in other states where deductible plans are authorized, the insurance company retains the ultimate responsibility for the payment of compensable claims.
- The Department will allow both "gross" plans and "net" plans. "Gross" plans consider all losses incurred by the employer in the calculation of the employer's experience modification factor, even those losses ultimately paid by the employer because they fall within the amount of the policy's deductible. "Net" plans consider only those losses which the insurance company alone must ultimately pay in the calculation of the experience modification factor. The insurer will need to indicate which type of plan is being used for a particular risk in its reports to the NCCI. (Please note that Section 287.310, RSMo, subsection 4, presumes that a "net" plan will be used unless the employer exercises his option to choose a "gross" plan. An insurer's files should therefore document that it was the employer who exercised the option to choose a "gross" plan whenever such a plan is issued.)
- The deductible shall apply, in the case of accidents, to all bodily injury by accident, and, in the case of disease, to each employee for bodily injury due to disease.
- An annual aggregate limit on the amount to be reimbursed by the employer due to claims arising in any one policy period may be offered by the insurer.
- Payments by the employer under the deductible should be to the insurer or its agent.
- The amount and type of financial security arrangements to assure the employer's payment of his deductible amounts will be left to the judgment of the insurer and negotiations between the insurer and the employer. For purpose of financial statements, however, in order for an insurer to treat as an asset (or reduction to liabilities) receivables owed to it by employers on claims which fall within given deductible amounts, the insurer should require collateral of the same type and quality required by Missouri statute and the NAIC in connection with credit for unauthorized reinsurance. Such collateral shall secure current and ultimate projected claim payments. Please note, however, that if the terms of the deductible policy for a particular employer will allow it to exceed the Department's 40% cap on the deductible amount, then the insurer will be required to have the employer post the type and amount of security necessary to satisfy Missouri statutes and the NAIC standards for credit for unauthorized reinsurance.
- Policy provisions or endorsement provisions regarding deductible plans should be consistent with the language used in Section 287.310, RSMo. Any unique cancellation provisions relating to the deductible plan should be clearly set forth in the deductible provisions. Insurers shall not be allowed to cancel the deductible portion of the plan ex parte. Please be sure to follow the Missouri cancellation provisions as required by Missouri standard mandatory endorsement WC 24 06 01 B, to the degree necessary.
- In addition, no insurer shall issue a workers' compensation insurance policy
with a deductible option unless the policy, or an endorsement thereto, displays
the following notice, or, upon the approval of the director, its substantial
equivalent. The notice shall be in bold type in a type size at least equal
to that used in the rest of the policy.
NOTICE: THIS WORKERS' COMPENSATION POLICY CONTAINS A DEDUCTIBLE OPTION, UNDER WHICH YOU, THE EMPLOYER, ARE REQUIRED TO REIMBURSE CERTAIN LOSSES. PLEASE READ THIS POLICY CAREFULLY AND UNDERSTAND ITS CONDITIONS THOROUGHLY PRIOR TO PURCHASING COVERAGE.
- Insurers may individually rate large deductible, multi-state employers
if the employer agrees to such a rating. The insurer shall make a separate
filing with the Department under Section
287.947, RSMo, documenting each such policy. The filing shall, at a minimum,
include the following information:
- The employer's name, address and telephone number;
- The policy number and policy period of the policy;
- The states for which coverage is being provided;
- The premium charged for the policy and the "Missouri" portion of that premium;
- The "rate" used to calculate the premium;
- The methodology by which the premium was established;
- The names, official titles, signatures and signature dates of representatives of the insurer, the insured employer and the employer's agent, all under a statement reflecting the fact that they are aware the rates charged are not standard and nevertheless accept the non-standard rates.
- Any provisions designed to settle the long-term payment obligations of an employer for a loss under the deductible plan should recognize the time value of money.
- Taxes and Second Injury Fund assessments shall be calculated on a gross basis as if the deductible plan were not being used. This is required under subsection 9 of the Section 287.310, RSMo in order to avoid any shortfall in revenue for the operation of the Missouri Division of Workers' Compensation. Insurers are encouraged to review their premium tax and Second Injury Fund Surcharge calculation methodologies in order to be sure they comply with this requirement.
- Assessments for purposes of satisfying an insurance company's "pool burden" shall be determined by the pool's administrators, not the Department of Insurance.
- The filing of forms shall be made to the Property and Casualty Section of the Missouri Department of Insurance, under the same conditions as with other forms, including the use of TD-2 forms and filing fees. Those insurers seeking approval should clearly label any filing envelopes and documents as relating to "W/C Large Deductible Plan" or "W/C Small Deductible Plan."
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.