93-03: Deductible Plans for Workers' Compensation Policies
* This bulletin was repealed by 08-05
To: All Workers Compensation Insurers
From: Jay Angoff, Director
Re: Deductible Plans for Workers' Compensation Policies
Date: February 9, 1993
Due to the increased desire of insurers to offer "large" deductible plans, our Department has reviewed its position regarding "allocated loss adjustment expenses" (ALAE). We have decided to allow -- but not require -- ALAE, as that term is defined in section 375.1152, RSMo, to be included as part of the deductible of a "large" deductible plan. However, the Department will not allow a separate fee for ALAE to be charged to the insured outside of the deductible, nor shall we allow a separate fee to be charged to the insured for any adjustment of claims.
The Department shall consider a "large" deductible plan to be one where the standard premium exceeds $500,000, 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 exp. mod.). In addition, the deductible amount shall not be less than $100,000 and shall not exceed 40% of the standard premium for the risk. Plans that do not meet this definition of a "large" deductible plan should not be filed until further notice.
Insurers should adhere to the following additional guidelines for large deductible plans, which in some cases differ from those set forth in the Department's 92-11 Bulletin:
- The decision to offer a deductible plan for 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.
- 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.
- We 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.
- 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.
- The policy must clearly define allocated loss adjustment expense, as stated in section 375.1152, RSMo.
- 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 carrier and negotiations between the carrier 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.
- 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 WC240601A, to the degree necessary.
- Any provisions designed to settle the long-term payment obligations of an employer under the deductible plan for a loss 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 amended section 287.310, RSMo, in order to avoid any shortfall in revenue for the operation of the Division of Workers' Compensation.
- Assessments for purposes of satisfying an insurance company's "pool burden" shall be determined by the pool's administrators, not the Department of Insurance.
- Filings 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."
Those companies which have filed a large deductible program with our Department shall be notified in the near future whether their filing is acceptable. Insurers with questions should telephone Susan Schulte at (314) 751-3365.