New Rules for California Large Deductible Programs

In a move aimed to curb carrier insolvencies in the State of California, there is a proposed rule up for discussion in August to change the carriers able to offer these types of programs as well as the way they are administered by those less then an AM Best straight “A” rating.  Specifically…

The draft rules would require that carriers writing large-deductible policies maintain a minimum credit rating of “A” with A.M. Best Co., a rating of “A” or “A” with Standard and Poor’s, a rating of “A1” or “A2” with Moody’s Investment Services, or a Fitch Ratings Inc. rating of “A” or “A.”

The other oddity is that they think carriers do not already collateralize large deductible programs…

“Carriers that do not meet both the credit rating and capital requirements would be required to collateralize the amount they expect an insured to pay as reimbursement for claim costs. Carriers could satisfy the security requirements by ensuring that an employer sets aside money for the exclusive purpose of collateralizing the large-deductible policy.

That happens every day?

I find this rule shortsighted as it is not the rating of the carrier that is as important as the way the carriers manage these programs.  Institutionalizing minimum financial ratings for large deductibles in my opinion is just a “cya” for regulators, hurts the open market and limits this product to the “big boys”.  The regulators  need to pay more attention to the process, the carriers and filings that govern them and they would continue in a business-friendly atmosphere and not suffer the hits to the guaranty fund.

Finance Department Projects Millions in Savings From Large-Deductible Rules

Soon-to-be-proposed rules that would increase capital and credit requirements for carriers writing large-deductible workers’ compensation policies in California could prevent insolvencies and save tens of millions of dollars a year, according to the Department of Finance.

The Department of Insurance plans to start the formal rule-making process Friday by opening up a public comment period on proposed regulations intended to ensure that insurers writing policies with deductibles of $100,000 or more are able to handle the risk of a covered employer becoming insolvent or failing to reimburse the carrier for claim costs, according to an agency official who spoke on the condition that he not be identified.

The department plans to hold a public hearing on the proposed rules in August.

Although officials were not ready Friday to speak about the rules publicly, the department submitted draft rules to the Finance Department. That is required when state agencies estimate that the impact of a regulatory proposal may exceed $50 million in costs.

The draft rules would require that carriers writing large-deductible policies maintain a minimum credit rating of “A” with A.M. Best Co., a rating of “A” or “A” with Standard and Poor’s, a rating of “A1” or “A2” with Moody’s Investment Services, or a Fitch Ratings Inc. rating of “A” or “A.”

Additionally, the rules would require carriers to maintain a sum of paid-in-capital — the amount of money invested in a company used to represent earnings from selling equity — of at least $500 million.

Carriers could also satisfy the requirement by being part of a holding company group that maintains a qualifying credit rating and has sufficient equity.

Carriers that do not meet both the credit rating and capital requirements would be required to collateralize the amount they expect an insured to pay as reimbursement for claim costs. Carriers could satisfy the security requirements by ensuring that an employer sets aside money for the exclusive purpose of collateralizing the large-deductible policy.

Irena Asmundson, chief economist for the Department of Finance, said in a May 21 letter to the Insurance Department that the proposed rules are estimated to increase costs to employers by about $20 million per year. However, the rules are expected to prevent one insurer insolvency every four years, and fewer insolvencies are expected to save about $42 million a year.

Asmundson said the projections were based on the department’s representations in a standardized regulatory impact assessment submitted in April.

An impact assessment summary, signed by Deputy Insurance Commissioner Geoffrey Margolis, says four insurance carriers have become insolvent over the last 15 years “largely because of their involvement with high-deductible workers’ compensation insurance policies.”

Nationally, the four companies had an estimated $624 million in combined incurred losses, $360 million of which arose from the Golden State and were passed on to the California Insurance Guarantee Association.

Margolis said mitigating the risk of insurer insolvencies would shield CIGA from incurring liability for some claims and reduce assessments the guaranty association charges to carriers.

The Department of Insurance has reviewed data for all work comp carriers in California and determined only nine that are writing large-deductible policies would fall short of the proposed credit risk requirements, according to the impact assessment.

The full impact assessment says the nine insurers could pursue mergers or acquisitions, start writing different lines of insurance or phase out large-deductible policies to raise capital to meet the $500 million threshold. But the “most reasonable plan of action” would be for the nine carriers, who are not identified by name in the assessment, to collateralize their deductible receivables.

The carriers have an aggregate $200 million in deductible premium for work comp policies in California. The Insurance Department estimates that the total amount that would need to be collateralized to protect against the risk of potential unpaid future deductibles is about $800 million.

“By requiring that employers obtain additional collateral that is set aside specifically for paying workers’ compensation deductibles, an insurer may protect its obligations without significantly alienating its client employers who might otherwise have to alter their business operations,” the assessment says.

Margolis said during a telephone interview Friday that he wouldn’t discuss specific provisions until regulatory language is proposed at the start of formal rule-making process. Speaking generally about the pending rules, he said, “Insurance Commissioner (Dave) Jones’ goal is to provide reasonable, tailored guides for insurers writing high deductible policies and reduce the risk of insolvency associated with them.”

It’s not clear how carriers view the proposal.

Jeremy Merz, western region vice president of state affairs for the American Insurance Association, said he had not seen the copy of the draft rules posted to the Department of Finance website and could not comment on them.

Rules on the Finance Department’s website are different from an earlier draft that the Insurance Department released before holding a stakeholder meeting to discuss the proposal in March.

Mark Sektnan, vice president of state government relations for Property Casualty Insurers Association of America, was not available for comment on Friday.

 

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