SECTION 8.4. Hazardous Conditions Related to Negotiated Deductible Workers' Compensation Policies

(a) This section applies to insurers that offer negotiated deductible workers' compensation policies in Texas and is to be followed in conjunction with The Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance. This section, along with conditions set out in §8.3 of this chapter relating to hazardous conditions, sets forth the various conditions that the Department will consider to determine whether an insurer issuing workers' compensation policies with a negotiated deductible is in a hazardous financial condition. The existence of one or more of the following conditions does not necessarily mean that an insurer issuing workers' compensation policies with a negotiated deductible is in hazardous financial condition. When one or more of the conditions are found to exist, they will be considered in the context of the state of affairs of an insurer. If the Department determines that the insurer is in a condition hazardous to policyholders, creditors, and the general public, it will initiate appropriate regulatory action.

(b) The insurer remains liable for all valid claims even if it appears that the insurer will ultimately not be reimbursed as provided in the workers' compensation policy with a negotiated deductible as referenced in Rule XIX - Deductible Programs of The Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers Compensation and Employers' Liability Insurance.

(c) In order to mitigate the risk of being in a potentially hazardous financial condition, this section addresses the insurer's maintenance of the fund of money over and above surplus and premiums to serve as security to protect the workers and the insurer in the event of a policyholder failure to reimburse the insurer for losses. This security shall be used to secure the policyholder's reimbursement of the negotiated deductible amount owed to the insurer.

(d) The following words and terms used in this section shall have the following meanings unless the context clearly indicates otherwise:

(1) Department--Texas Department of Insurance.

(2) Workers' compensation policy with a negotiated deductible--A policy in which the insurer assumes full liability for the statutory obligation of the employer policyholder within the scope of workers' compensation coverage while the policyholder assumes a contractual obligation to the insurer to reimburse the insurer for claims paid up to the deductible amount under Insurance Code Article 5.55C.

(3) First dollar losses--Total losses before applying the negotiated deductible.

(4) Gross premium--Premium calculated before factoring in the negotiated deductible.

(e) An insurer who writes a workers' compensation policy with a negotiated deductible may be found to be in hazardous condition when one or more of the conditions described in paragraphs (1) - (10) of this subsection are found to exist by the Department:

(1) the insurer fails to produce a written report with conclusions that is signed by an authorized insurer representative that is derived from a credit analysis performed as a part of the insurer's initial underwriting function and thereafter annually to determine the policyholder's ability to pay the obligations under the policy;

(2) the insurer fails to perform a quarterly review of the sufficiency of the security maintained by the insurer to secure the policyholder's obligations to reimburse the insurer for claims paid and credit taken against reserves for each policy up to the negotiated deductible amount;

(3) the insurer issues a workers' compensation policy that contains a negotiated deductible that does not state a specific dollar amount;

(4) the insurer issues a per accident negotiated deductible policy and fails to include an actuarially supported calculation of the total amounts owed by the policyholder and credit taken against reserves for all amounts through ultimate loss development;

(5) from the inception of the policy through ultimate loss development, the insurer fails to maintain security for 100% of claims paid and credit taken against reserves for each policy;

(6) the insurer fails to maintain security for any asset or credit taken against reserves in the following forms:

(A) cash;

(B) securities readily marketable over a national exchange with maturity date of not later than one year, listed by the Securities Valuation Office of the National Association of Insurance Commissioners, and qualifying as admitted assets; or

(C) clean, irrevocable, unconditional letters of credit, issued or confirmed by a qualified United States financial institution, as defined in Insurance Code Article 5.75-1. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance or confirmation shall, notwithstanding the issuing or confirming institution's subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification, or amendment, whichever first occurs; provided however, that a letter of credit must be replaced within three months after the date of the institution's failure to meet applicable standards of issuer acceptability;

(7) the insurer fails to provide to the policyholder documentation separate from the workers' compensation policy explaining the financial responsibility of both the insurer's obligation to pay all claims and the policyholder's obligation to reimburse the insurer for any negotiated deductible amounts paid by the insurer;

(8) the insurer fails to maintain or produce upon the Department's request, gross premium data and first-dollar loss data for each workers' compensation policy with a negotiated deductible on a quarterly basis in accordance with, or in a substantially similar format as, the Texas Negotiated Deductible Workers' Compensation Form. Information provided by insurers in accordance with the Texas Negotiated Deductible Workers' Compensation Form is considered confidential under Insurance Code Article 1.15B and is not subject to disclosure under the Texas Public Information Act. The Texas Negotiated Deductible Workers' Compensation Form, herein adopted by reference, is available from the Department at: Financial Analysis and Examinations, Mail Code 303-1A, P.O. Box 149099, Austin, Texas 78714-9099;

(9) the insurer's assets or credits taken against the loss reserves in the financial statements are greater than the deductible amounts that are probable and expected to be recovered; or

(10) the administration or adjustment of claims is performed by a person or entity that is not licensed by the Department in accordance with §65.10(1)(I) and (M) of this title (relating to Actions by Carrier, Claimant's Attorney, or Agent).

Source Note: The provisions of this §8.4 adopted to be effective January 30, 2005, 30 TexReg 401