Texas Retrospective Rating Plan Manual-PARTS I AND II
Related Bulletin B-0028-97
The Commissioner of Insurance at a public hearing under Docket No. 2294, held June 30, 1997 at 9:00 a.m., reconvened on July 8, 1997 at 10:00 a.m., and reconvened on July 11, 1997 at 9:30 a.m. in Room 100 of the Texas Department of Insurance, William P. Hobby Building, 333 Guadalupe Street in Austin, Texas, adopted a staff proposal, with changes to the rules as proposed, of amendments to Part One Section I. A. 13. and Part Two Section I. E. and F. of the Texas Retrospective Rating Plan Manual - Workers' Compensation and Employers' Liability Insurance (Manual). These amendments are necessary in order to establish the only allowable method for calculating the Residual Market Premium (RMP). Notice of the proposed rules (Reference Number W-0597-14-I) was published in the May 23, 1997 issue of the Texas Register (22 TexReg 4543). The date and time of the hearing was changed as published in the June 24, 1997 issue of the Texas Register (22 TexReg 6076).
Statutory Authority
The Commissioner has jurisdiction over this matter pursuant to Insurance Code, Articles 5.76-2 4.04 (d) and (e), 5.77 and 5.96. Under Article 5.77 the Commissioner has the authority to make or approve and promulgate premium rating plans designed to encourage the prevention of accidents, to recognize the peculiar hazards of individual risks, and to give due consideration to interstate as well as intrastate experience of such risks for Workers' Compensation (WC) and other lines of insurance. Article 5.77 further provides that such plans may be approved on an optional basis to apply prospectively, or retrospectively, and may include premium discounts, retrospective rating plans or other systems, plans or formulas, however named, if the rates thereby provided are not excessive, inadequate or unfairly discriminatory.
Article 5.96 (a) authorizes the Commissioner to prescribe, promulgate, adopt, approve, amend or repeal standard and uniform manual rules, rating plans, classification plans, statistical plans and policy and endorsement forms for workers' compensation insurance and other lines of insurance. Article 5.96 (f) provides that the Texas Department of Insurance (TDI) may initiate a proceeding with respect to any matter specified in Article 5.96 (a).
Article 5.76-2 4.04 (d) mandates that the TDI establish an appropriate pass-through allowance for the Texas Workers' Compensation Insurance Facility's (Facility) assessments or rebates to the insurers for claims with an accident date before January 1, 1992 so that each retrospectively rated risk written during the calendar year shall pay a proportion of the assessment or receive a proportion of the rebate. Section 4.04 (d) further provides that the pass-through allowance shall be based on the premium paid by the retrospectively rated risk as a proportion of the total voluntary writings by the insurer in the calendar year. It also provides that December 31, 1993 (the last available date prior to January 1, 1994) is the end point for the accounting periods to be used as a basis for the pass-through allowance for claims with an accident date before January 1, 1992. Operating results for 1994 and subsequent years may not be considered in establishing the pass-through allowance for 1991 retrospectively rated policies.
Article 5.76-2 4.04 (e) mandates that the TDI establish an appropriate pass-through allowance for the Facility's assessments or rebates to the insurers for claims with an accident date after January 1, 1992 so that each retrospectively rated risk written during the calendar year shall pay a proportion of the assessment or receive a proportion of the rebate. It also provides that the pass-through allowance shall be based on the premium paid by the retrospectively rated risk as a proportion of the total voluntary writings by the insurer or the state fund in the calendar year. Since the Facility stopped writing policies after December 31, 1993, the calendar years which are the subject of the pass-through allowance under this section end December 31, 1994.
Description of Rules, As Amended
The amendments to Part One Section I. A. 13. change the General Explanation of RMP to be consistent with the changes proposed in Part Two Section I. E.
The amendments to Part Two Section I. E. establish the only allowable method for calculating RMP. RMP is a proportionate share of either the deficit assessed or the surplus rebated to the member companies of the Facility based on the Facility's operating results. The WC retrospective premium for certain retrospectively rated policies with policy effective dates on or after May 1, 1991 through December 31, 1994 is the basis for determining RMP to be returned to or collected from those retrospectively rated policyholders. For the purposes of this rule, an assessment results in an additional premium charge to the policyholder and a surplus results in a refund to the policyholder.
Residual Market Factors (RMF) to be used for calculating RMP will be published by the TDI. The formula for determining RMF's is provided in Article 5.76-2 4.04 (d) and (e). TDI shall determine the RMF for accident year 1991 by dividing the Total Assessed or Rebated Texas WC Residual Market Deficit or Surplus for the Accident Year based on operating results of the Facility as of December 31, 1993 (the last available date prior to January 1, 1994) by the Total Assessable Texas WC Voluntary Written Premium for 1991. The RMF's for accident years 1992, 1993 and 1994 shall be determined by dividing the Total Assessed or Rebated Texas WC Residual Market Deficit or Surplus for the Accident Year by the Total Assessable Texas WC Voluntary Written Premium for the year to which the deficit or surplus relate. Insurers shall then calculate each policyholder's RMP by applying the appropriate RMF for each year to the policyholder's Texas WC retrospective premium for that year. The TDI expects to publish updated RMF's for 1991, 1992, 1993 and 1994 in July, 1997.
In 1991 the State Board of Insurance adopted rules to allow insurers to pass-through to retrospectively rated policyholders a proportion of the deficits of the Facility. These rules anticipated a pass-through of deficits only because during the 1980's the predecessor to the Facility continued to incur increasing deficits. Effective January 1, 1992, the legislature mandated insurers to pass-through a proportion of any deficit or any surplus to retrospectively rated policyholders. The 1991 rules provided a mechanism to pass-through deficits, but until now were not amended to address a pass-through of surpluses even though the Facility actually achieved surpluses in 1991 and subsequent years.
W. C. Circular Letter No. 651 (Circular) dated July 23, 1993, was issued to address charges being made to policyholders by insurers on 1991 and 1992 policies for non-existent deficits. The Circular in no way implied that surpluses did not have to be rebated to retrospectively rated policyholders as mandated in Article 5.76-2 4.04. The Circular further indicated that future adjustments of the RMF's would be made. The rules adopted under this order fully implement the legislative mandate in Article 5.76-2 4.04 (d) and (e) requiring pass-throughs of a proportion of the deficit or the surplus to retrospectively rated policyholders.
The amended rules set forth the process to determine the proportionate share of the rebated surplus for policyholders with retrospectively rated policies effective from May 1, 1991 through December 31, 1991 that elected to pay the RMP as an elective element in addition to the retrospective premium. In addition, the rules set forth the process to determine the proportionate share of the rebated surplus for policyholders with retrospectively rated policies effective in calendar years 1992, 1993 and 1994.
RMP for each policyholder entitled to a proportionate share of the rebate shall be recalculated after the TDI publishes the updated factors in July, 1997. If the insurer and insured have agreed that a retrospective premium computation is a final adjustment of premium, then a one-time recalculation of RMP will be required. The insurer shall make no further revision of the retrospective premium or the RMP, except as permitted in the Manual for clerical error. If the latest retrospective premium computation is being held open for further adjustment, the insurer shall recalculate RMP after each computation of retrospective premium. If the RMP is different than previously calculated, the insurer shall return the difference to or collect the difference from the policyholder accordingly. In a three-year Plan or Long Term Construction Project plan, the RMF shall apply separately to each annual period as if the plan was written on one-year plans.
The rules are amended to include a severability provision.
The amendments to Part Two Section I. F. are editorial in nature to delete unnecessary wording.
Commenters
The following submitted comments in support of the rule: Cash America International, Inc.; J. C. Pace, Ltd.; Thompson & Knight on behalf of Johnson & Higgins; Tandycrafts; Stephanie Ertel on behalf of The Coca-Cola Bottling Group (Southwest), Inc.; Frances Oliver on behalf of Centex Corporation; Jim Green on behalf of Justin Industries, Inc. and Texas Association of Business and Chambers of Commerce; McClanahan & Clearman, L.L.P. on behalf of Wall Street Deli, Inc. and Ramex Construction Company, Inc.; and Rod Bordelon on behalf of Office of Public Insurance Counsel.
The following submitted comments in opposition to the rule: DeLeon, Boggins, and Icenogle on behalf of American International Group; CNA Group; Highlands Insurance Group; Baker & Botts on behalf of Reliance Insurance Co., Reliance National Indemnity Co., and United Pacific Insurance Co.; Vinson & Elkins on behalf of Liberty Mutual Insurance Co.; Roan & Autrey on behalf of American Insurance Association, David Healey on behalf of The Hartford; and John Lennes on behalf of Alliance of American Insurers.
Discussion of Comments
Some commenters expressed their support of the rules and encouraged the Commissioner to adopt them as proposed. After considering all of the comments, the Commissioner adopts the rules with changes.
As a result of comments received from insurers that 90 days was not adequate time to implement the rules, the Commissioner amended the requirement of each insurer to calculate and return the appropriate RMP for each retrospectively rated policyholder from 90 days to no later than 180 days after the effective date of this rule. In addition, each insurer is required to file with the Deputy Commissioner of Workers' Compensation of the TDI a report indicating the names of all retrospectively rated risks entitled to a surplus refund, the amount of the surplus refund each received and the date the surplus refund was sent to each policyholder. The administrative convenience granted to the insurers of 180 days in no way alters or extends the effective date of these rules past the 15th day after notice of this action is published in the Texas Register.
A commenter suggested that if the Commissioner decided that the amendments to the rule should not apply for the 1991 year, the prior rule could be used with a negative number to calculate a pass-through allowance for that year. The Commissioner has decided that it is unnecessary to use the prior rule to calculate a pass-through allowance for 1991. Instead he has decided to adopt the present amendments to the rule which will apply to the 1991 year.
One commenter suggested that the investment income of the Facility be excluded from the "surplus from operations" which are subject to the pass-through to the retrospectively rated policyholders. The Commissioner believes that the term "surplus from operations" includes investment income because the Facility includes investment income as income in its annual report submitted to TDI and its annual report conforms with accounting practices prescribed or permitted by the TDI. The Facility's by-laws, which are approved by TDI, require the allocation of all income, including investment income, to its Operating Fund to offset administrative expenses of the Facility. The operating results of the Facility include investment income in determining deficits assessed to or surpluses returned to insurers. This all occurs pursuant to Article 5.76-2. It is a portion of those same operating results that is mandated by Article 5.76-2 4.04 to be returned to retrospectively rated policyholders.
Some commenters recommended that the (1-Z) portion of the prior rule be included in the adopted rule because it was part of the prior rule to pass-through the policyholders' portion of the deficits. The commenters asserted that since it was fair to include it when deficits were anticipated, it is fair to include it in the formula to pass-through the policyholders' portion of the surplus. Another commenter suggested that if the (1-Z) factor continued to be included in the formula for deficits, a factor of (1+Z) should be included in the formula for surpluses. The (1-Z) was originally included in the formula because promulgated rates included a loading of 1.8% for the residual market. The basic theory was that it would be inappropriate to assess retrospectively rated policyholders on premiums that already reflected a load to subsidize the residual market. Now that companies file their own rates, it is not known how much of the rate, if any, is a loading for the residual market. In file and use rates, the load for residual market has more than likely been eliminated by most insurers. In addition, the entire rationale behind (1-Z) does not apply in a surplus environment because a double charge is not occurring. The Commissioner does not agree that in a surplus situation the factor should be (1+Z) because that would give policyholders a pass-through greater than authorized by Article 5.76-2 4.04.
Some commenters suggested that, considering the passage of HB 976, which repeals Article 5.76-2, the rules must be in place prior to either the effective date of the bill or the closing date of the sale of the Facility, to give the rightful rebates to the policyholders even though there is a savings clause in HB 976. The Commissioner believes that the vested rights pursuant to contract and Article 5.76-2 as adopted in 1991 cannot be extinguished by the repeal of Article 5.76-2. Some may believe, however, that the Commissioner lacks authority to adopt rules to implement Article 5.76-2 once the repeal is effective. In any event, that argument is moot since the rules adopted here will take effect prior to repeal.
Some commenters have suggested that the Commissioner require the insurers to also rebate an appropriate amount of interest to account for the investment income the insurers have made on the surpluses. The Commissioner has not included interest in the rules because Article 5.76-2 does not authorize interest income on the surpluses rebated to retrospectively rated policyholders.
Some commenters recommended the exclusion of 1991 and 1992 from application of the rules on the basis that the passage of the rules would violate the Contracts Clauses of the state and federal constitutions. The commenters argued that two contract provisions, those concerning the pricing of the coverage and those establishing the periods during which the premiums may be adjusted, would be impaired. They also argued that the rules would retroactively affect their vested rights. The commenters asserted that the policy pricing provisions would be impaired because they relied on the Manual and the Circular in pricing their policies. The Manual contained provisions that only addressed deficits and the Circular established the first RMF for 1991 and 1992. The commenters asserted that the Manual provisions meant that no pass-through of surplus was required. They also asserted that the Circular established the ultimate RMF for 1991 and 1992. The commenters assert that by adopting the Manual provision and issuing the Circular, TDI properly exercised its discretion to provide for no pass-through of the policyholders' portion of the surplus. While the commenters correctly asserted that their retrospectively rated policies are subject to the Manual and the Circular, the Commissioner believes that the commenters could not have relied on them at the time the policies were executed. Moreover, the TDI did not intend for the Manual and the Circular to determine the pass-through allowance for 1991 and 1992 with finality. While Article 5.76-2 4.04 clearly provides for the passing through of a portion of either a deficit or a surplus, both the Manual and the Circular dealt with the pass-through of a deficit only and indicated that future adjustments would be made. Because both the Manual and the Circular did not completely implement Article 5.76-2 4.04 and indicated that future adjustments to the RMF would occur, the insurers could not have had a reasonable expectation that they were entitled to keep the surplus. Moreover, the language in Article 5.76-2 4.04 does not make pass-through of surpluses discretionary. Rather, the legislature mandated that each retrospectively rated policy receive a portion of the rebate. In addition, both the policyholders and the insurers had notice in the policies that the pricing of their coverage was subject to manual changes and the insurance laws of this state. The additional policy language in the Workers Compensation and Employers Liability Insurance Policy, Part 5 Paragraph A, which concerns premium, states:
We may change our manuals and apply the changes to this policy if authorized by law or a governmental agency regulating this insurance.
Additionally, the insurance laws regarding the subject matter of the policies are incorporated into the polices by the following language in the Workers Compensation and Employers Liability Insurance Policy, Part 1 Paragraph H.6. which states:
Terms of this insurance that conflict with the workers compensation laws are changed by this statement to conform to that law.
and Harkins v. Indiana Lumbermens Mut. Ins. Co. of Indianapolis 234 SW2d 430,431 (Tex. Civ. App. - Galveston 1950, no writ) which states:
It is well settled that the familiar principle applied in the construction of contracts - that statutes bearing on the subject matter of the contract become a part of the contract just as though they have been copied therein - applies to construction of insurance contracts.
Consequently, when Article 5.76-2 4.04 (d) and (e) became effective on January 1, 1992, they became part of the policies written in 1992. Regarding the 1991 policies, only those contracts which contained the optional endorsement providing for a pass-through are affected by the enactment of Article 5.76-2 4.04 (d). For the 1991 contracts, the statute assists with interpretation and explains the administrative mechanism for implementation because the contract right already existed. Since Article 5.76-2 4.04 (d) and (e) require a pass-through of a portion of the surplus or deficit to the retrospectively rated policyholders, the rights or obligations of the policyholders to either receive a portion of the surplus or pay a portion of the deficit and the obligations of the insurers to pass either a portion of the surplus or the deficit through to these policyholders were established in 1991 by contract, and from 1992 forward by both contract and statute. The fact that the TDI had not adopted a rule establishing the pass-through allowance for a portion of the surpluses did not abrogate the insurers' statutory obligation to pass-through a portion of the surplus to the retrospectively rated policyholders.
The commenters asserted that the time has elapsed for the fourth annual adjustment contemplated in the prior rule and therefore extinguished the TDI's obligation to establish a pass-through allowance of a portion of the surplus. Further, they argued that to do so now would impair contract rights. On the contrary, it is the statutory language which controls in this situation. Because "an agency may not impose additional burdens, conditions, or restrictions in excess of or inconsistent with the relevant statutory provisions," Railroad Commission v. ARCO Oil & Gas Co., 876 SW2d 473, 481 (Tex. App. - Austin, 1994, writ denied), where a rule and a statute conflict, the statutory language supersedes the rule. The Commissioner recognizes that Article 5.76-2 4.04 (d) and (e) clearly mandate him to establish the pass-through allowance without setting a deadline for doing so. If there was a conflict, which the Commissioner does not believe exists, between the prior rule and Article 5.76-2 4.04 (d) and (e), Article 5.76-2 4.04 (d) and (e) supersede the prior rule. Also, the Commissioner believes that the four annual adjustments to the RMF were included in the rule as an accounting convenience, not as a limitation on recovery. At the time the rule was promulgated, no one knew the appropriate number of years to continue adjusting the RMF. Because regulatory agencies ". . . need room to freshen stale policies, adjust their rules to reflect actual experiences," Kelly v. U. S. Department of the Interior, 339 F. Supp. 1095 (D.C. Cal. 1972), agencies have authority to amend rules after they are adopted. "Regulatory agencies do not establish rules of conduct to last forever; they are supposed, within the limits of the law and of fair and prudent administration, to adapt their rules and practices to the Nation's needs in a volatile, changing economy." American Trucking Association, Inc. v. Atchison, Topeka, and Santa Fe Railway Company, et al., 387 U.S. 367 (1967). In addition, the Commissioner disagrees that the fourth computation of retrospective premium for all 1992 policyholders has occurred. In accordance with the Manual, the fourth computation of retrospective premium for policies with effective dates in 1992 occur throughout 1996 and 1997. Finally, amendment of these rules and the RMF has been widely discussed since 1996 and insurers should have been aware that amendments were contemplated.
Commenters asserted that the amendments would substantially impair their vested contract rights in the portion of the rebated funds subject to a pass-through to retrospectively rated policyholders. The Commissioner disagrees with this assertion because the commenters do not have vested rights in the policyholder portion of the rebated funds. "To be vested, a right must be more than a mere expectation based on an anticipation of the continuance of an existing law; it must have become a title, legal or equitable, to the present or future enforcement of a demand, or a legal exemption from the demand of another." Aetna Ins. Co. v Richardelle, 528 SW2d 280, 284 (Tex. App - Corpus Christi 1975, writ ref'd n.r.e). The Commissioner finds that Article 5.76-2 4.04 (d) and (e) establishes the insurers' legal obligation to pass a portion of the surplus through to the retrospectively rated policyholders and that this obligation is not, and legally cannot be, abrogated by either the prior rule or the Circular. Since the insurers do not have a vested right in the policyholder portion of the rebated funds, there can be no impairment of a vested right.
Some commenters cite In re Workers' Compensation Refund, 46 F.3d 813 (8th Cir. 1995) as support for their assertion that they are entitled to retain the policyholders' portion of the surplus. However, the Commissioner finds that this case is not relevant because the insurers' contract rights in In re Workers' Compensation Refund were very different from the insurers' contract rights under Texas law. The insurers in In re Workers' Compensation Refund had an entitlement to certain funds under a prior Minnesota law and under policies with effective dates in the prior thirteen years. The Minnesota contracts did not contain a pass-through provision. In contrast, since 1991, the Texas insurers have had a contractual obligation to pass-through the policyholder portion of the surplus under contracts which they voluntarily issued, and the statute affected only existing contracts already containing the pass-through provision, and mandated the provision for future contracts. In re Workers' Compensation Refund is also distinguishable because the Minnesota legislation unilaterally changed the ownership of the funds which were accumulated over thirteen years from the insurers to insureds with policies effective in only one year while Article 5.76-2 4.04 (d) and (e) requires the pass-through on a year-by-year basis, with operating results from the relevant year going to policyholders for that year.
Commenters asserted that adoption of the amendments would deprive the insurers of their vested rights without due process of law in violation of the Fourteenth Amendment to the Constitution of the United States. The commenters asserted that the insurers have a constitutionally protected property right to retain the policyholders' portion of the surpluses based on their belief that a legitimate claim of entitlement to the policyholders' portion of the surpluses was established by the TDI's issuance of the Circular, the last sentence in Article 5.76-2 4.04 (d), and the provisions of the prior rule concerning the four annual adjustments to the RMF.
Regarding the Circular, the Commissioner finds that the Circular did not confer a legitimate claim of entitlement to the insurers. The Circular was not intended to be the final authority relating to the appropriate method to pass-through the 1991 and 1992 Facility surpluses. Instead, it was intended to inform the insurers that they could not continue to charge the policyholders for a deficit on the 1991 and 1992 policies, when there actually were surpluses reported for those years. The Circular clearly was not intended to establish a 0% RMF for all time since it indicates that the RMF would be recalculated in subsequent years. In addition, Article 5.76-2 4.04, in effect at the time the Circular was issued, extinguishes the insurers' claim of entitlement since it mandates the pass-through of a portion of the surplus to the retrospectively rated policyholders and statutory mandates control over administrative actions such as a circular letter. Railroad Commission v. ARCO Oil & Gas Co., supra.
Regarding the meaning of Article 5.76-2 4.04 (d), the commenters asserted that the last sentence in subsection (d) imposes a January 1, 1994 deadline for the Commissioner to set the pass-through allowance for 1991 policies. They consequently believe that a legitimate claim of entitlement was triggered by the passage of January 1, 1994. The Commissioner disagrees with the commenters' interpretation of the last sentence in subsection (d) because this sentence provides January 1, 1994 as the end point for the accounting period to be used as a basis for the pass-through allowance for claims with an accident date before January 1, 1992, rather than a deadline for him to act. (In actuality, the end point would be December 31, 1993, the last date of the accounting period.) This is the most reasonable interpretation because at the time of the enactment of Article 5.76-2 4.04, the legislature, in anticipation of the passing through of deficits, intended to limit the accounting period for which the insureds would be assessed for deficits attributable to claims with an accident date before January 1, 1992. Moreover, the commenters' interpretation would frustrate the manifest legislative intent that retrospectively rated policyholders shall receive a portion of the rebate from the Facility to the insurers. The insurers received a rebate for the years 1991 and 1992. The policyholders have not yet, as mandated by statute, received their portion of those rebates. To interpret the provision as advocated by the insurers would be to deprive retrospectively rated policyholders, small and large alike, of their statutory right to those rebates.
Regarding the provisions of the prior rule concerning the four annual adjustments to the RMF, the commenters asserted that they attained a legitimate claim of entitlement when the fourth retrospective adjustment occurred. The Commissioner disagrees that a legitimate claim of entitlement was triggered by the prior rule for the same reasons as indicated in the discussion of the four-year retrospective adjustment concerning the commenters' assertions that the policy provision establishing the periods during which the premiums may be adjusted by the RMF would be impaired. First, there is no indication in the prior rule that only four adjustments can be made to the RMF nor that the Commissioner is barred from establishing the pass-through allowance after the fourth retrospective premium adjustment period. Second, the Commissioner believes that his statutory mandate to establish the pass-through allowance would supersede the prior rule, if there was a conflict between the provisions of the statute and the prior rule. Third, the Commissioner believes that the four annual adjustments to the RMF were included in the rule as an accounting convenience, not as a limitation on recovery. Fourth, insurers knew of the Facility's surplus since they received rebates and knew of the statutory provision requiring that a portion of those rebates be passed through to retrospectively rated policyholders. The insurers could not have a legitimate claim of entitlement by rule or otherwise to monies that statutorily never belonged to them in the first place.
Commenters asserted that the adoption of the amendments would retroactively impair the insurers' vested rights in violation of the Texas Constitution, Article I 16. The Commissioner disagrees with this assertion because, as indicated in the discussion concerning the commenters' assertion that the amendments would impair their vested contract rights in the portion of the surplus that is subject to the pass-through to policyholders, the insurers do not have vested rights in the portion of the surpluses which are subject to the pass-through to the policyholders. Since the insurers do not have vested rights in the policyholders' portion of the rebated funds, there can be no impairment of vested rights in violation of the Texas Constitution , Article I 16.
Commenters asserted that the Circular properly resolved pass-throughs for 1991 and 1992. Commenters asserted that by issuing the Circular, the TDI intended to offset the burdens of the residual market of the previous years by not imposing a pass-through of the surplus for those years. The Commissioner disagrees because the Circular was not intended to determine the pass-through allowance for the 1991 and 1992 years with finality. In addition, there is no statutory authority that would have authorized the TDI to offset the surplus for these years with the deficits assessed in the previous years.
Some commenters asserted that the terms "appropriate" and "proportion" in Article 5.76-2 4.04 give the Commissioner discretion so that he may determine the amount of a pass-through from zero to a hundred percent of the surplus considering the circumstances. The Commissioner agrees with the assertion that the legislature intended him to have limited discretion as necessary for implementation. However, he disagrees that he has the option of not establishing a pass-through, because Article 5.76-2 4.04 (d) and (e) clearly mandate that a pass-through allowance be established.
Some commenters suggested since Article 5.76-2 4.04 (b) specifies that the assessment or rebate shall be based on claims with an accident date before January 1, 1992, that the Commissioner should also consider the years prior to January 1, 1991 in which the predecessor to the Facility had a deficit. The Commissioner disagrees that the years prior to 1991 should be considered because 1991 was the first year that rules contained in the Manual provided for a pass-through of deficits to retrospectively rated policyholders, and even more significantly, 1991 was the first year that an approved contract endorsement permitting pass-throughs was promulgated by the State Board of Insurance.
One commenter asserted the rulemaking proceeding is an improper forum to challenge the constitutionality of both the proposed rules and the underlying statute. The commenter encouraged the Commissioner to take the action that Article 5.76-2 4.04 directs. The Commissioner recognizes that he has a legal duty to uphold both the U.S. and Texas Constitutions as well as to take the action required by Article 5.76-2 4.04. He also believes these rules and the underlying statute are constitutional.
Conclusion
This notification is made pursuant to the Insurance Code, Article 5.96, which exempts it from the requirements of the Government Code, Chapter 2001 (Administrative Procedure Act).
Consistent with Insurance Code, Article 5.96 (h), prior to the effective date of this action, the TDI will notify all insurers affected by this action.
The agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
IT IS THEREFORE THE ORDER of the Commissioner of Insurance that the amendments to Part One Section I. A. 13 and Part Two Section I. E. and F. of the Texas Retrospective Rating Plan Manual- Workers' Compensation and Employers' Liability Insurance which are attached to this Order and incorporated into this Order by reference, are adopted to be effective on the 15th day after notice of this action is published in the Texas Register.
Related link: Commissioner's Bulletin B-0028-97
DESCRIPTION OF THE PLAN
A. GENERAL EXPLANATIONS
13. Residual Market Premium
Residual market premium (RMP) is a proportionate share of either the deficit assessed or the surplus rebated to the member companies of the Texas Workers' Compensation Insurance Facility (Facility) based on its operating results. Refer to I-E in Part Two.
PART TWO
OPERATION OF THE PLAN
I. HOW PREMIUM IS DETERMINED UNDER THE PLAN
E. TEXAS WORKERS COMPENSATION RESIDUAL MARKET PREMIUM
The RMP is a proportionate share of either the deficit assessed or the surplus rebated to the member companies of the Texas Workers' Compensation Insurance Facility (Facility) based on its operating results. For the purposes of this rule, an assessment results in an additional premium charge to the policyholder and a surplus results in a refund to the policyholder. The procedure set forth in this rule is the only allowable method for calculating RMP.
1. 1991
The Texas Workers' Compensation (WC) retrospective premium for certain retrospectively rated policies effective on or after May 1, 1991 through December 31, 1991 is the basis for determining RMP to be returned to or collected from policyholders. For purposes of this rule, "effective on" means the beginning date of the policy term.
a. The Texas Department of Insurance (TDI) shall publish the Residual Market Factor (RMF) for 1991 that each insurance carrier is required to use to calculate RMP.
b. The TDI shall determine the RMF for accident year 1991 by dividing the Total Assessed or Rebated Texas WC Residual Market Deficit or Surplus for the Accident Year based on operating results of the Facility as of December 31, 1993, by the Total Assessable Texas WC Voluntary Written Premium for 1991.
c. The insurance carriers shall calculate each policyholder's RMP by applying the RMF for the appropriate year to the policyholder's Texas WC retrospective premium.
d. The Facility reported a surplus for accident year 1991. Those policyholders with retrospectively rated policies effective from May 1, 1991 through December 31, 1991 that elected to pay the residual market premium as an elective element in addition to the retrospective premium shall be entitled to a proportionate share of the surplus. The insurance carriers shall apply the 1991 RMF to the latest retrospective premium calculated in accordance with the rules set forth in this Manual. The RMF shall apply to the maximum or minimum if either applies.
e. Retrospective Premium Computations Affected RMP for each policyholder entitled to a proportionate share of the rebate shall be recalculated after updated factors are published.
i. If the carrier and insured have agreed that a retrospective premium computation is a final adjustment of premium, then a one-time recalculation of RMP will be required after updated factors are published in July 1997. The carrier shall make no further revision of the retrospective premium or of the RMP, except as permitted in this Manual for clerical error.
ii. If the latest retrospective premium computation is being held open for subsequent adjustment, the carrier shall recalculate RMP based upon the most recent published factor after each computation of retrospective premium. If the RMP is different than previously calculated, the carrier shall return the difference to or collect the difference from the policyholder accordingly.
iii. In a three-year plan or Long Term Construction Project plan, the RMF shall apply separately to each annual period as if the plan was written on one-year plans.
f. 180-Day Requirement
Each insurance carrier shall calculate and return the appropriate RMP to each retrospectively rated policyholder with a policy effective on or after May 1, 1991 through December 31, 1991 that elected to pay the residual market premium as an additional elective element to the retrospective premium no later than 180 days after the effective date of this rule.
g. Notification to TDI
Each insurance carrier is required to file with the Deputy Commissioner of Workers' Compensation of the TDI a report indicating the names of all 1991 retrospectively rated risks entitled to a surplus rebate in accordance with Rule E.1.d. above, the amount of surplus rebate each received, and the date the surplus rebate was sent to each policyholder.
2. 1992, 1993, and 1994
The Texas Workers' Compensation (WC) retrospective premium for retrospectively rated policies effective on or after January 1, 1992 through December 31, 1994 is the basis for determining RMP to be returned to or collected from policyholders. For purposes of this rule, "effective on" means the beginning date of the policy term.
a. The Texas Department of Insurance (TDI) shall publish the Residual Market Factor (RMF) for 1992, 1993 and 1994 that each insurance carrier is required to use to calculate RMP.
b. The TDI shall determine the 1992, 1993 and 1994 RMF's by dividing the Total Assessed or Rebated Texas WC Residual Market Deficit or Surplus for the Accident Year by the Total Assessable Texas WC Voluntary Written Premium for the year to which the deficit or surplus relates.
c. The insurance carriers shall calculate each policyholder's RMP by applying the RMF for the appropriate year to the policyholder's Texas WC retrospective premium.
d. The Facility reported a surplus for accident year 1992. Insurance carriers shall calculate the rebate for retrospectively rated policies effective on or after January 1, 1992 through December 31,1992 by applying the 1992 RMF to the retrospective premium calculated in accordance with the rules set forth in this Manual. The RMF shall apply to the maximum or minimum if either applies.
e. The Facility reported a surplus for accident year 1993. Insurance carriers shall calculate the rebate for retrospectively rated policies effective on or after January 1, 1993 through December 31,1993 by applying the 1993 RMF to the retrospective premium calculated in accordance with the rules set forth in this Manual. The RMF shall apply to the maximum or minimum if either applies.
f. The Facility reported a surplus for accident year 1994. Insurance carriers shall calculate the rebate for retrospectively rated policies effective on or after January 1, 1994 through December 31,1994 by applying the 1994 RMF to the retrospective premium calculated in accordance with the rules set forth in this Manual. The RMF shall apply to the maximum or minimum if either applies.
g. Retrospective Premium Computations Affected
RMP for each policyholder entitled to a proportionate share of the rebate shall be recalculated after updated factors are published.
i. If the carrier and the insured have agreed that a retrospective premium computation is a final adjustment of premium, then a one-time recalculation of RMP will be required after updated factors are published in July 1997. The carrier shall make no further revision of the retrospective premium or of the RMP, except as permitted in this Manual for clerical error.
ii. If the latest retrospective premium computation is being held open for subsequent adjustment, the carrier shall recalculate the RMP based upon the most recent published factor after each computation of retrospective premium. If the RMP is different than previously calculated, the carrier shall return the difference to or collect the difference from the policyholder accordingly.
iii. In a three-year plan or Long Term Construction Project plan, the RMF shall apply separately to each annual period as if the plan was written on one-year plans.
h. 180-Day Requirement
Each insurance carrier shall calculate and return the appropriate RMP to each retrospectively rated policyholder no later than 180 days after the effective date of this rule.
i. Notification to TDI
Each insurance carrier is required to file with the Deputy Commissioner of Workers' Compensation of the TDI a report indicating the names of all 1992, 1993, and 1994 retrospectively rated risks, the amount of surplus rebate each received, and the date the surplus rebate was sent to each policyholder.
3. Severability
If any provision of this rule or its application to any entity or circumstance is held invalid, the invalidity does not effect other provisions or applications of this rule that can be given effect without the invalid provision or application, and to this end the provisions of this rule are declared severable.
F. TEXAS WORKERS COMPENSATION RESIDUAL MARKET PREMIUM FORMULA
Texas WC Residual Market Premium = Texas WC Retrospective Premium multiplied by the Texas WC Residual Market Factor.