[31 PA. CODE CH. 116] Discounting Workers' Compensation Loss Reserves [31 Pa.B. 4423] The Insurance Department (Department) hereby amends Chapter 116 (relating to discounting of worker's compensation loss reserves) to read as set forth in Annex A.
Statutory Authority
The final-form amendments are adopted under the authority of The Insurance Company Law of 1921 (law) (40 P. S. §§ 341--999); The Insurance Department Act of 1921 (act) (40 P. S. §§ 1--321); and sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412).
Comments and Response
Notice of proposed rulemaking was published at 29 Pa.B. 4353 (August 14, 1999) with a 30-day comment period. During the 30-day comment period, comments were received from the Pennsylvania AFL-CIO (PA AFL-CIO) and the Insurance Federation of Pennsylvania, Inc. (IFP). During its regulatory review, the Independent Regulatory Review Commission (IRRC) submitted comments to the Department. The following is a response to those comments.
The PA AFL-CIO stated that there would be an adverse fiscal impact as a result of the proposed amendments. Specifically, they believe that the rate at which Workers' Compensation Loss Reserves are discounted will have a direct and significant impact on the cost of workers' compensation insurance to employers and significantly impact the revenue of insurers.
The Department believes that the final-form amendments will have a positive impact on workers compensation insurers' financial solvency and help to keep rates stable. The final-form amendments allow workers compensation insurers to discount loss reserves according to the current yield to maturity on United States Treasury debt instruments. The interest rate of United States Treasury debt instruments is an indicator of prevailing economic and financial conditions. In general, interest rates on United States Treasury debt instruments rise in unfavorable economic conditions. This would increase the amount an insurer can discount its loss reserves, requiring less capital to fund those reserves, and making a rate increase less likely. Interest rates on United States Treasury debt instruments generally fall in favorable economic conditions. While the discount rate could also fall under these circumstances, the impact on rates should be slight because of insurers' ability to earn a greater return on their investments. While it is theoretically possible that changes in the discount rate could adversely affect insurance companies in marginal financial condition, this risk is mitigated by the fact that only insurance companies with sufficient assets to fund the discounting are permitted to do so. See 40 P. S. § 112.
The PA AFL-CIO also had a concern that § 116.2 (relating to reporting and data collection requirements) eliminates the insurer's responsibility to simultaneously file ''. . . an annual certification of its Workers' Compensation Loss Reserves with the Department simultaneously with the filing of the company's annual statement.'' They believe that this change impedes the ability of the Department to meet its legal responsibility.
The Department does not believe that eliminating the requirement of an actuarial certification will impede its ability to meet its legal responsibilities. The Department eliminated the requirement because it is duplicative of the actuarial statement of opinion required by § 116.5 (relating to actuarial statement of opinion) and by the Annual Statement Instructions of the National Association of Insurance Commissioners (NAIC). Section 320(a)(2) of the law (40 P. S. § 443(a)(2)) requires insurance companies to adhere to those instructions. Since insurance companies are already required to submit an actuarial statement of opinion, the Department sees no point in requiring a separate actuarial certification. In addition, the requirements of existing § 116.2 are preserved as part of § 116.5. Section 116.5 has been revised to require that the actuarial opinions required as part of the § 116.2 actuarial certification are included in the § 116.5 actuarial statement of opinion. For the same reasons, the § 116.2 requirement that insurers provide notice of their intent to maintain data regarding workers compensation loss payment patterns has been eliminated as duplicative. Insurers are required to maintain actuarial work papers containing this type of information by the annual and quarterly statement instructions prescribed by NAIC.
PA AFL-CIO also expressed concerns with § 116.3 (relating to table), specifically the rate at which loss reserves can be discounted. They believe that ''. . . the current yield to maturity on a U. S. Treasury debt instrument with maturities consistent with the expected pay out of the liabilities . . .'' is vague because the term ''current'' varies from moment to moment and day to day. PA AFL-CIO also believes that United States Treasury debt instruments are too many in number, citing T-Bills, T-Bonds, Fannie Mae, Ginnie Mae or other United States Treasury debt instruments. They believe that all these United States Treasury debt instruments could rise above the existing 6% ceiling. IFP also wanted the Department to clarify the date on which the ''current yield'' in § 116.4 (relating to restrictions on discounting loss reserves) is determined. IFP believes that this is the date that the actuarial statement of opinion in § 116.5 is filed. IRRC during its review also stated that the term ''current yield'' was vague and questioned why it is reasonable to permit the use of a broad range of debt instruments, rather than specific debt instruments.
The Department understands the confusion and the following should clarify its intent. The only instruments which can be considered ''U. S. Treasury debt instruments'' are Treasury Bills, Treasury Notes and Treasury Bonds. These instruments raise the money needed to operate the Federal government and to pay off maturing obligation. The other types of instruments mentioned by PA AFL-CIO, Ginnie Maes and Fannie Maes, are not United States Treasury debt instruments. These instruments, usually based on portfolios of mortgages, are issued by quasigovernmental agencies, not the United States Treasury. The Department recognizes PA AFL-CIO's concern that the interest rates on United States Treasury debt instruments could exceed the existing 6% ceiling. While this could be the case, the Department decided against a fixed ceiling to allow insurers added flexibility to adapt to changing economic and financial conditions.
The Department does not believe that the term ''current yield to maturity'' is vague. While the current yield of United States Treasury debt instruments does fluctuate from day to day, workers' compensation loss reserves are reported for a date certain. Insurers file their annual statements on March 1 for the preceding year. When an insurer is preparing its annual statements, the insurer knows the ''current yield to maturity'' of the United States Treasury debt instruments it was holding as of December 31st of the preceding year. Therefore, the ''current yield to maturity'' is known at the time that discounting is reported.
In addition, PA AFL-CIO believed that § 116.5 downgrades the type of actuarial statement that must accompany the filings and that it is a move away from accountability. PA AFL-CIO stated that the actuarial certification should be retained rather than substituting ''. . . a statement of opinion. . . .'' PA AFL-CIO believes that if this move is being done to avoid duplication, and does not appear valid if certified statements are already required, the current requirement is easily complied with. They stated that ''if this is to cover different time periods and that is the rationale, the Insurance Department is lowering its standards at risk to the employers and the workers.''
The Department believes that the § 116.2 requirement of a separate actuarial certification is redundant because insurance companies are currently required to file an actuarial statement of opinion with their annual statements by the annual statement instructions of NAIC. The requirement of a separate certification was eliminated to avoid unnecessary duplication. To ensure that there was no downgrading of the type of actuarial statement required, § 116.5 was revised to require that the actuarial opinions currently required as part of the § 116.2 actuarial certification are included in the § 116.5 actuarial statement of opinion.
IFP stated that the amendments should clarify that its application is prospective only because much business has already been reserved at the 6% interest rate cap currently allowed in § 116.4. IFP stated that insurers would have to recalculate loss reserves for business already issued, which translates into the premiums already charged and collected for that business as being inadequate. IRRC agreed with IFP and asked that the Department state the effective date for compliance with the new requirements and if it will be applied to existing reserves, then the Department should also explain the effect, if any, the adoption of this rulemaking will have on existing reserves.
Existing workers compensation business which has been discounted at the 6% rate should not be impacted by the amendment of the section. In order for discounting to occur, the investment yield on an insurance company's business must be sufficient to support the discount. If the discount is supported by a portfolio of United States Treasury debt instruments with a current yield to maturity of 6%, then the discount would be allowed to continue. For new business, any discounting must be supported by United States Treasury debt instruments available in the marketplace.
IRRC also expressed concerns about § 116.9 (relating to suspension of use of the table). This section as proposed would allow the Commissioner to suspend this chapter ''upon the publication of reasonable notice.'' IRRC questioned whether the Commissioner had that statutory authority. IRRC noted that the Commissioner does have the authority under section 316 of the act (40 P. S. § 115) to require an individual insurer to maintain greater reserves if that insurer's current reserves are inadequate. IRRC's other concern was that if the Department had the statutory authority to suspend the chapter, then the Department needed to define ''reasonable notice.''
The Department agrees that under section 316 of the act, the Commissioner may require any individual insurer to maintain greater reserves. Upon consideration of the comments of IRRC, the Department believes that its statutory authority under section 315 of the act is sufficient to allow Department oversight of the loss reserves of workers compensation insurers. The final-form amendments delete § 116.9.
Subsequent to the comment period, and after the final-form amendments had been submitted to IRRC and the Committees, IFP submitted an additional comment concerning retroactive application of the amendments. After considering IFP's comment, the Department withdrew the final-form amendments from Committee and IRRC consideration to make clarifications to the rulemaking.
A new § 116.4(4) has been added to permit insurers that have sufficient assets the ability to discount at the previously allowed 6% maximum discount using the factors previously allowed for accident years 2001 and prior, and pertaining to policies issued on or before the effective date of the amendments. This will be allowed as long as the insurers can demonstrate that they hold sufficient assets to support the 6% interest rate assumption.
Affected Parties
The final-form amendments apply to insurance companies doing the business of workers' compensation insurance in this Commonwealth.
Fiscal Impact
State Government
There will be no increase in cost to the Department due to the amendment of Chapter 116.
General Public
There will be no fiscal impact to the public.
Political Subdivisions
The final-form amendments will not impose additional costs on political subdivisions.
Private Sector
The final-form amendments will not impose additional costs on insurance companies doing the business of workers' compensation insurance in this Commonwealth.
Paperwork
The adoption of the final-form amendments will not impose additional paperwork on the Department or the insurance industry.
Effectiveness/Sunset Date
These final-form amendments become effective upon publication in the Pennsylvania Bulletin. No sunset date has been assigned.
Contact person
Any questions regarding these amendments should be directed to Peter J. Salvatore, Regulatory Coordinator, Special Projects Office, 1326 Strawberry Square, Harrisburg, PA 17120, (717) 787-4429. In addition, questions or comments may be e-mailed to psalvatore@state.pa.us or faxed to (717) 772-1969.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on August 3, 1999, the Department submitted a copy of the notice of proposed rulemaking, published at 29 Pa.B. 4353, to IRRC and to the Chairpersons of the Senate Committee on Banking and Insurance and the House Committee on Insurance for review and comment.
Under section 5(c) of the Regulatory Review Act, IRRC and the Committees were provided with copies of the comments received during the public comment period. A copy of that material is available to the public upon request.
Under section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)), on July 5, 2001, these final-form amendments were deemed approved by the Senate and House Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on July 12, 2001, and approved these final-form amendments.
Findings
The Department finds that:
(1) Public notice of intention to adopt these final-form amendments as amended by this order has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The adoption of these final-form amendments in the manner provided in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.
Order
The Department, acting under the authorizing statutes, orders that:
(1) The regulations of the Department, 31 Pa. Code Chapter 116, are amended by amending §§ 116.4--116.6 and 116.8; and by deleting §§ 116.2, 116.3, 116.7 and 116.9, to read as set forth in Annex A.
(2) The Commissioner shall submit this order and Annex A to the Office of General Counsel and Office of Attorney General for approval as to form and legality as required by law.
(3) The Commissioner shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(4) The amendments adopted by this order shall take effect upon final publication in the Pennsylvania Bulletin.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: Fiscal Note 11-186 remains valid for the final adoption of the subject regulations.
(Editor's Note: For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 31 Pa.B. 4136 (July 28, 2001).)
Annex A TITLE 31. INSURANCE PART VII. PROPERTY, FIRE AND CASUALTY INSURANCE CHAPTER 116. DISCOUNTING OF WORKER'S COMPENSATION LOSS RESERVES § 116.2. (Reserved).
§ 116.3. (Reserved).
§ 116.4. Restrictions on discounting loss reserves.
The discounting of workers' compensation loss reserves is subject to the following limitations:
(1) The loss reserves on the insurance company's annual statement calculated under this section may not be less than those required in section 313 of The Insurance Department Act of 1921 (40 P. S. § 112).
(2) Unless otherwise permitted by paragraphs (3) and (4), an insurance company is not permitted to assume an interest rate greater than the current yield to maturity on a United States Treasury debt instrument with maturities consistent with the expected payout of the liabilities.
(3) An insurance company may request an exception to the maximum interest rate in paragraph (2) if the insurance company can demonstrate to the satisfaction of the Commissioner that its investment yield justifies a higher interest rate assumption. The Commissioner may require the insurance company to submit additional documentation to support its request for approval of a higher interest rate assumption. The Commissioner will act upon requests for exceptions made under this paragraph within 90 days of the date the request is received by the Department.
(4) Insurers having used the previous allowed maximum discount of 6% may continue to use the discount factors previously allowed for accident years 2001 and prior, pertaining to policies issued on or prior to August 11, 2001, as long as they continue to demonstrate that they hold sufficient assets to support the 6% interest rate assumption.
§ 116.5. Actuarial statement of opinion.
(a) The actuarial statement of opinion required to be submitted with the annual statement shall include the opinion of an actuary with respect to the following:
(1) The adequacy of workers compensation loss reserves on an undiscounted basis.
(2) The sufficiency of the investment yield on invested assets to fund the discount.
(3) The reasonableness of the matching of the invested assets and loss reserves attributable to the workers' compensation business to provide an adequate income stream to fund the discount.
(b) The actuarial statement of opinion, as it pertains to discounting, shall be determined in accordance with Actuarial Standard of Practice No. 20, Discounting of Property and Casualty Loss and Loss Adjustment Expense.
§ 116.6. Reserves for loss adjustment expenses.
(a) Loss adjustment expense reserves shall be calculated with the following standards:
(1) Insurance companies are not permitted to discount loss adjustment expense reserves which are not applicable to specific claims.
(2) Insurance companies are permitted to discount loss adjustment expense reserves which are allocable to specific claims if they can demonstrate, to the satisfaction of the Commissioner, the validity of their assumptions underlying the calculation of the reserves. The insurance company shall provide an actuarial statement of opinion which includes the opinion of the actuary with respect to the criteria in § 116.5 (relating to actuarial statement of opinion).
(b) In evaluating an insurance company's request to discount allocated loss adjustment expense reserves, the Commissioner will consider the company's specific loss adjustment expense pattern and the interest rate assumption.
§ 116.7. (Reserved).
§ 116.8. Increased loss reserves and loss adjustment expense reserves.
The Commissioner may require an insurance company to maintain loss reserves at a greater level than those which result from the application of this chapter, and allocated loss adjustment expense reserves at a level greater than those calculated under § 116.6 (relating to reserves for loss adjustment expenses) when the Com-missioner determines it is necessary to insure that reserves are established at an adequate level.
§ 116.9. (Reserved).
[Pa.B. Doc. No. 01-1456. Filed for public inspection August 10, 2001, 9:00 a.m.]
