The Impact of TRIA on Workers Compensation Insurance
February 2003
With the passage of the Terrorism Risk Insurance
Act of 2002, the landscape of workers compensation insurance has been forever
altered. IRMI assesses the ramifications.
by
Christine Fuge
IRMI
The
Terrorism Risk Insurance Act of 2002 (TRIA), signed into law by President
George W. Bush on November 26, 2002, will have a significant impact on workers
compensation insurance. The TRIA requires property and casualty insurers to
offer policyholders insurance for losses resulting from acts of foreign terrorism.
Workers compensation insurers are additionally required to provide coverage
for war-related injuries and fatalities. In both instances, insurers are backstopped
by the U.S. government for a certain percentage of losses under the TRIA.
This article will deal with the specific effects of the TRIA on the workers
compensation system and its participants. For an overview of the Act, see "The
Terrorism Risk Insurance Act of 2002" by Jeff Woodward.
Notice Requirements
A key component of the TRIA is a requirement that the policyholder be notified
in a "clear and conspicuous" manner as to the premium charge associated with
the terrorism coverage provided by insurer and the government. Workers compensation
policies are divided into three categories for the purpose of determining when
notice must be provided to the policyholder.
- For policies issued before the enactment of the TRIA, disclosure of
the charges associated with the Act must be made within 90 days of Act's
effective date (November 26, 2002).
- For policies issued within 90 days of the enactment of the TRIA, disclosure
must be made at the time the policy is offered, renewed, or purchased.
- Policies issued more than 90 days after the TRIA's enactment are required
to contain a separate line item disclosing the premium charge at the time
the policy is offered, renewed, or purchased.
The National Association
of Insurance Commissioners (NAIC) has drafted and adopted a disclosure form
that may be used to satisfy the notice requirements for workers compensation.
The notice may be edited to remove the need for an acknowledgement of the coverage
by the insured and will still satisfy the notice requirements contained in the
Act. Insurers are also free to draft and file with the appropriate regulatory
body their own notices to policyholders that convey the same information. The
deadline for compliance with the notice provisions of the Act is February 24,
2003.
WC Policy Wording Changes
The Act's requirement that terrorism coverage be disclosed as a separate
line item necessitates a change to the standard workers compensation policy.
National Council on Compensation Insurance (NCCI)
has drafted an endorsement, Terrorism Risk Insurance Endorsement WC 00 04 20
( Exhibit 8 of its Item
Filing B-1383) that not only provides a schedule to evidence the rate for
terrorism coverage, but also contains definitions based on the TRIA that delineate
what is considered terrorism and what insurer deductible applies. There is also
a clause contained in the endorsement that limits the insurer's liability in
the event that losses exceed $100 billion in any program year.
Effect on Rates and Premium Calculation
The most obvious impact on workers compensation resulting from passage of
the TRIA is the premium charge associated with the provision of coverage for
foreign terrorism and war risk losses. As we reported in "As
the Workers Compensation World Turns," shortly after the September 11 events,
NCCI proposed a 4 percent rate increase be applied to loss costs/rates for all
workers compensation class codes as a provision for catastrophes. This rate
increase was not approved by the various state regulators.
Since then, NCCI has contracted with
EQECAT in an
effort to develop workers compensation catastrophic terrorism forecasts for
specific states that could be translated in loss costs. Details of the methodology
employed to develop the state specific loss forecasts can be found in Appendix
A of the NCCI's Item Filing
B-1383. So far, 13 states and the District of Columbia have been modeled.
The forecasts for the modeled states have been extrapolated using characteristics
shared with other states to develop forecasts and applicable rates for all of
the NCCI managed states. The loss costs range from .01 (Indiana) to .05 (DC)
for voluntary market risks and .02 (Indiana) to .07 (DC) for assigned market
risks. The terrorism rate is to be applied per $100 of total payroll and is
added in after the standard premium is calculated. The resulting terrorism premium
is not subject to experience rating, premium discount, schedule rating, or retrospective
rating.
Impact on Statistical Data Collection
With the implementation of the coverage for losses caused by foreign terrorism
and war, it became necessary to develop a statistical code that could be utilized
to report the premium collected. NCCI—in conjunction with regulators that oversee
the other jurisdictions—developed statistical code 9740 for the reporting of
premium collected under the TRIA. In the event of a loss, it is highly likely
that a catastrophic code similar to the one used for the September 11 occurrences
will be employed.
Regulator Responses
Unlike some of the other lines of casualty insurance, workers compensation
insurance has a regulatory body overseeing each of the 51 jurisdictions. The
majority (34) are managed by NCCI. Another 12 states have a state-specific organization
charged with the oversight of workers compensation insurance in that state.
The remaining 5 states deliver workers compensation insurance to employers through
a monopolistic state fund that also controls rating in the jurisdiction.
Below is a status report on responses to the TRIA by various regulators and
links to the applicable information where available.
NCCI
In response to the TRIA, NCCI has filed its previously mentioned Item
B-1383 in the 35 jurisdictions that it manages. The filing, subject to several
state exceptions, was effective on December 20, 2002, for policies written in
the voluntary market and on January 1, 2003, for those written in the residual
market. The state regulatory bodies that use NCCI's rating and statistical services
must approve the filing.
At this point, one state (Florida) has advised NCCI that it finds the rates
developed for it to be too high. A
status report on individual state regulatory approval can be found on NCCI's
Web site.
Independent Bureaus
California. The
Workers Compensation
Insurance Rating Bureau of California (WCIRB) has issued
Bulletin 2003-04 confirming the approval of the disclosure form formulated
by NAIC and the Terrorism Risk Insurance Endorsement WC 00 04 20 developed by
NCCI, both discussed earlier. Note that California insurers may use these forms
or file their own for use with the WCIRB. Regulators are still working on the
development of suggested pricing for the coverage.
Delaware. The
Delaware
Insurance Department has approved the filing related to the TRIA submitted
to it by the
Delaware Compensation Rating Bureau (DCRB). The DCRB has issued its
Circular No. 768 which details the provisions of the filings. In addition
to adopting the NAIC disclosure form and Terrorism Risk Insurance Endorsement
WC 00 04 20 developed by NCCI, DCRB determined that loss cost charges of .02
per $100 of payroll (voluntary market) and .03 per $100 of payroll (residual
market) would be added to all polices with a normal anniversary date on or after
April 1, 2003. Insurers may also file their own alternate forms and rates for
approval with the Delaware Insurance Department.
Indiana. The
Indiana Bureau
(ICRB) filed
Item B-1383 with the
Indiana Department
of Insurance on December 20, 2002. The filing has been tailored to include
the proposed terrorism/war load lost cost factor (.01) and voluntary rate (.02)
per $100 of payroll for Indiana but otherwise mirrors the NCCI's Item B-1383.
Massachusetts. The
Workers Compensation
Rating and Inspection Bureau of Massachusetts (WCRIB) has issued an overview
of the TRIA and has also announced an anticipated filing of procedures to be
followed regarding the TRIA in its
Circular Letter No. 1908. The
Massachusetts Division of Insurance has also issued its
Bulletin 2002-18 that provides property and casualty insurers with notice
guideline procedures to be followed.
Michigan. The
Compensation Advisory
Organization of Michigan (CAOM) issued
Circular Letter #182 which provides information about workers compensation
policy changes in both the voluntary and residual markets resulting from the
TRIA that become effective February 1, 2003. More information about insurance
filing requirements for both property and casualty (including workers compensation)
can be found on the
Consumer and Industry Web site.
Minnesota. The
Minnesota Department of Commerce has approved the filings made by the
Minnesota Workers
Compensation Insurers Association (MWCIA) related to the TRIA.
Circular Letter 03-1397, effective January 13, 2003, addresses rate filing
and statistical reporting. The advisory loss cost for coverage is .02 per $100
of payroll. Insurers may use this figure or submit their own rate filing. The
approved endorsement form (WC 00 04 20) and disclosure notices are provided
in
Circular Letter 03-1398. The provisions of this circular were effective
December 27, 2002. Again, insurers may use these or file their own with the
Minnesota Department of Commerce for approval.
New Jersey. The
New Jersey Compensation
Rating and inspection Bureau (NJCRIB) issued its
Advisory Bulletin #1 on January 6, 2003. According to the Bulletin, all
New Jersey workers compensation insurers are to apply a .02 rate per $100 of
total payroll for all new and renewal policies effective on or after January
1, 2003, for the TRIA. The use of WC 00 04 02 developed by NCCI will serve as
the disclosure notice for these policyholders. For policies effective November
26, 2001, to January 1, 2003, insurers must provide one of the NAIC disclosure
forms to insureds.
Since the issuance of this Bulletin, the
New Jersey Department of Banking and Commerce has approved these provisions
and NJCRIB
Statistical Circular #100 and
Manual Amendment Bulletin #418 provide additional in-depth detail on the
implementation of the TRIA.
New York. The
New York Compensation
Insurance Rating Board (NYCIRB) has a more complex situation in dealing
with the implementation of the TRIA than other states. Not surprisingly, in
light of the magnitude of the workers compensation losses incurred resulting
from September 11, NYCIRB had already included a .03 load in their October 1,
2002, rates for terrorism. To comply with the requirement of the TRIA that the
premium charge be a separate line item, the NYCIRB has had to remove the terrorism
load from the October 1, 2002, rates and promulgate new rates. These new rates
will be effective for all policies with rating anniversary dates on or after
February 24, 2003.
A separate terrorism rate of .034 per $100 of total payroll will apply to
payroll based classes and a 2.1 percent charge based on manual premium will
be used for non-payroll classes, like volunteer firefighters.
Bulletin R.C. 2023, which has been approved by the
New York Insurance
Department, provides the details of the changes necessitated by the TRIA.
In addition to rating changes, the Bulletin contains information about changes
to the manual including the adoption of endorsement WC 00 04 20, the statistical
plan (adoption of code 9740), and the retrospective manual. These changes will
also be effective on February 24, 2003, for all policies with an anniversary
rating on that date or later.
North Carolina. The
North Carolina
Rate Bureau (NCRB) has filed
Item B-1383 and policy disclosure notices with the
North Carolina Department
of Insurance for approval. The filing has been modified to include a proposed
terrorism/war load lost cost factor (.02) and an assigned risk factor of (.03)
per $100 of payroll for North Carolina, but otherwise follows the provisions
of NCCI's Item B-1383. The proposed effective date for the changes is January
1, 2003, for all new and renewal polices with a normal anniversary rating date
of January 1, 2003, or later.
Pennsylvania. The
Pennsylvania Compensation Rating Bureau (PCRB) submitted a filing related
to implementation of the provisions of the TRIA to the
Pennsylvania Insurance Department. After the filing was approved by the
Insurance Department, the PCRB promulgated its
Bureau Circular No. 1452 to disseminate the provisions of the filing.
In addition to adopting the NAIC disclosure form and Terrorism Risk Insurance
Endorsement WC 00 04 20 developed by NCCI, PCRB determined that a loss cost
charge of .03 per $100 of payroll would be added to all polices with a normal
anniversary date on or after April 1, 2003. Insurers may also file their own
alternate forms and rates for approval with the Pennsylvania Insurance Department.
Since the publication of Bureau Circular No. 1452, the PCRB has issued its Circulars
No.
1455 and
1457 to clarify and expand some of the information contained in the first
TRIA bulletin.
Texas. At this time, the
Texas Department
of Insurance has issued its Commissioner's
Bulletin No. B-0074-02. The document provides information for all eligible
property and casualty insurers (including those writing workers compensation)
regarding implementation of the TRIA. The Bulletin states that the notice requirements
and the duty of insurers to provide coverage for losses resulting from terrorism
and war contained in the Act are applicable to workers compensation insurance.
Wisconsin. The
Wisconsin Compensation Rating Bureau (WCRB) has received
approval from the Office of the
Commissioner
of Insurance for its filing of
Item Number 3839. The filing consists of NCCI Item Filing B-1383 as well
as specific changes to the Wisconsin Basic Manual, Retrospective Manual, and
Unit Stat Manual necessitated by the TRIA. Also included is a lost cost of .02
and an overall rate of .03 per $100 to be applied to policies for the provision
of coverage. The components of the filing became effective on January 1, 2003,
for new and renewal business.
Monopolistic States
North Dakota, Ohio, Washington, West Virginia, and Wyoming—the five states
that provide workers compensation insurance through an exclusive state fund—are
also subject to the provisions of the TRIA and therefore must provide terrorism
coverage to their policyholders. At this time, Washington has implemented a
rate increase of 29 percent that became effective January 1, 2003. The rate
increase, the first in 8 years for the state, did include a pricing element
for terrorism coverage.
Three other monopolistic states—North Dakota, Ohio and West Virginia—have
indicated that they too will consider the inclusion of a pricing component for
terrorism when the next review of rates occurs. Additionally, West Virginia
advised that they will be sending terrorism notices to coverage certificate
holders beginning February 9, 2003.
Issues To Consider
There remain several major issues related to workers compensation stemming
from the passage and implementation of the TRIA that are yet to be resolved
or clarified completely. Following are some of the more significant concerns.
Noncovered Losses. Since the TRIA requires
workers compensation insurers to provide coverage only for losses resulting
from foreign acts of terrorism and war, it appears that domestic occurrences
(such as the bombing of the Oklahoma City federal building) would be outside
the scope of the TRIA since it was a case of domestic terrorism. Because this
exposure cannot be excluded by workers compensation insurers from policies,
the insurer would remain responsible for the payment of these losses.
The same is true for losses resulting from terrorism that fail to be "certified"
under the provisions of the TRIA (an example of this would be a property/casualty
loss that in the aggregate does not exceed $5 million). Thus, significant loss
exposures remain for workers compensation insurers that they may not exclude
but are likely to find excluded by their reinsurers when possible.
Capping of Insurer Liability. As discussed
earlier, Endorsement WC 00 04 20 contains a provision that caps the insurer's
limit of liability under the workers compensation policy for losses afforded
coverage by the TRIA when certain conditions are met. Based on the wording of
the TRIA, it would appear that this limitation on insurer liability would supercede
the workers compensation state statutory requirement that the insurer pay all
losses under a workers compensation policy. Consequently, a workers compensation
policyholder now has a potential uninsured exposure when the yearly annual insured
loss aggregate specified by the Act is exceeded that did not exist prior to
the passage of the TRIA.
Applicability to Self-Insurance and Other Risk Retention
Options. Probably one element of workers compensation most in need of
clarification is the impact of the TRIA on self-insurance and other risk retention
options. Section 103(f) of the TRIA makes a provision for the
Treasury Department to consult with the
NAIC or other
appropriate state regulatory body to apply the terms of the Act to captive insurers,
self-insurers, and workers compensation reinsurance pools.
The Treasury issued interim
guidelines on December 18, 2002, in an effort to clarify the scope of the
Act, among other things. Contained within Section II.C.1 of this memorandum
is information indicating that state licensed or admitted entities receiving
and reporting direct earned premiums in accordance with the Act are subject
to Act provisions. This would include self-insurers, excess self-insurance insurers,
captives, and risk retention groups that meet these requirements.
Conclusion
The landscape of workers compensation insurance has been forever altered
by the passage of the TRIA. Regulators have mounted a well-thought through coordinated
effort to implement Act provisions. Hopefully, similar endeavors will be instigated
over the next several months to address the ambiguities that remain.
Note: See other
terrorism articles on IRMI.com.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.