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 website.
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 website.
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.
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