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.
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.
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 acknowledgment 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. 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 (CoreLogic) 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.
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.
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.
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. 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.
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. 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.
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.
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