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93-07: Deductible plans for workers' compensation policies: "Large" and "small" deductibles

To:       All Workers Compensation Insurers

From:   Jay Angoff, Director

Date:    June 15, 1993

Re:       Deductible plans for workers' compensation policies: "Large" and "small" deductibles

 Following the circulation of the Department's February 9, 1993 BULLETIN 93-3 on workers' compensation deductible plans, the Department received requests to amend its approval criteria for large deductible plans in the following areas:

1. Allow insurers to use the definition of "allocated loss adjustment expense" (ALAE) currently used by the National Council on Compensation Insurance (NCCI) as specified in the NCCI's "Countrywide Item Filing: Item # U-1292, Allocated Loss Adjustment Expenses," rather than Missouri statute 375.1152, RSMo Supp. 1992.
2. Allow "unallocated loss adjustment expenses" (UALAE) to be charged as a "handling fee" in the same manner as a retro premium "loss conversion factor". Such a system is allowed in other states and would facilitate the ability of insurance companies to write plans or multistate risks.
3. Liberalize the definition of what constitutes a "large deductible" to allow the term to be applied to risks with a minimum countrywide premium of $100,000 and a minimum deductible of $25,000.
4. Subject to a change in Section 287.310.9, RSMo Supp. 1992, allow the calculation of premium taxes on premiums after the deductible credit is applied.

In addition to these recommendations, the Department recognizes that, in adopting Senate Bill 251, the General Assembly has authorized a fundamental change in manner in which workers' compensation rates will be regulated in Missouri. As signed by the Governor on June 21, this bill will move Missouri to a "competitive rating" environment for the voluntary market beginning January 1, 1994. In such an environment, insurers will have greater flexibility in pricing their policies.

Given this major modification to the state's underlying rate-setting mechanism, and in consideration of the above recommendations, the Department has concluded that it can modify its previous deductible policy approval criteria. The Department is generally in support of the recommendations listed above, with certain conditions outlined below. However, the Department takes no position on item "4)," which will necessitate that the General Assembly change the statute in question.

Henceforth, "large" deductible plans shall be deemed to be those with premiums of $100,000 or more, and will be governed by the standards set forth below. "Small" deductible plans will be deemed to be those applicable to any countrywide premium levels below $100,000 in premium; 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.

In addition, insurers should adhere to the following guidelines for deductible plans. These criteria differ in many respects from those set forth in the Department's previous Bulletins, numbered 92-11 and 93-03.

• 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 Supp. 1992, 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 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.
• 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 Supp. 1992, 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.
• 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.
• Policy provisions or endorsement provisions regarding deductible plans should be consistent with the language used in Section 287.310, RSMo Supp. 1992. 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.
• 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."

• 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 Supp. 1992, in order to avoid any shortfall in revenue for the operation of the Missouri 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.
• 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."

Insurance companies with pending applications for approval which meet the above criteria need not refile. An Emergency Rule representing the substance of the above criteria and reporting requirements will be filed by the Department with the Secretary of State.