806

KAR 13:120. Workers' compensation deductible policies.

 

      RELATES

TO: KRS 304.13-057, 304.13-167, 304.13-400-304.13-420

      STATUTORY

AUTHORITY: KRS 304.2-110, 304.13-410

NECESSITY, FUNCTION, AND CONFORMITY: KRS

304.2-110 authorizes the commissioner to make reasonable administrative

regulations necessary for or as an aid to the effectuation of any provision of

the Kentucky Insurance Code, KRS 304.1-010. KRS 304.13-410 requires the

commissioner to promulgate administrative regulations concerning calculations

for premium reductions for deductible workers’ compensation insurance policies.

This administrative regulation establishes the method of calculating premium reductions

for workers' compensation insurance policies with deductibles.

 

      Section

1. Definition. "Commissioner" is defined in KRS 304.1-050(1).

 

      Section

2. All insurers authorized to write workers' compensation insurance in

Kentucky, when establishing the premium for a workers' compensation insurance

policy with a deductible ranging from $100 to $10,000 shall use only the

following deductibles: $100, $200, $300, $400, $500, $1,000, $1,500, $2,500,

$5,000, $7,500, $10,000.

 

      Section

3. Application of this Administrative Regulation. (1) General.

      (a)

This administrative regulation shall apply to all insurers and licensed

advisory organizations introducing or revising workers' compensation insurance

deductible discounts for policies with deductibles of $100 to $10,000 or their

application in Kentucky.

      (b)

A licensed advisory organization filing shall be self- contained and fully

documented and shall not simply adopt the deductible plan or factors of another

filing.

      (c)

An insurer may:

      1.

File a self-contained and fully documented deductible discount plan; or

      2.

Adopt the filed deductible plan and discounts of a licensed advisory

organization or another insurer.

      (2)

Form of the deductible. The deductible discounts shall be determined by the

multiplication of the deductible discount factors by the manual premiums.

Separate deductible discounts for each deductible option shall be applicable

for each hazard group as defined by the advisory organization designated by the

commissioner pursuant to KRS 304.13-167.

      (3)

Experience and retrospective rating. Experience rating modifications shall be

based on losses net of deductibles and manual premiums less the deductible

discount. The parameters of the experience rating plan shall also be adjusted

to account for the deductible.

      (4)

Premium discount programs. For insurers that have a premium discount program

based on the standard premium of a policy, the deductible discounts shall be

applied prior to the application of premium discounts. The deductible discount

shall be calculated by multiplying the discount factor by the manual premium.

Premium discounts then are calculated based on the standard premium, after

deductibles.

 

      Section

4. Deductible Discount Provisions. The deductible discount shall recognize the

reduction in losses borne by the insurer as a result of the insured's selection

of a deductible. The deductible discount shall be calculated based on a loss elimination

ratio and shall include the following adjustments:

      (1)

The size of loss distribution including distribution including an analysis of

historical data which shall determine a mathematical function or a discrete

empirical distribution table;

      (2)

Recognition of factors which imply additional costs or savings associated with

the deductible including:

      (a)

Credit risks that the insured will not repay the insurer for the deductible

amount;

      (b)

Changes in insurer cash flow:

      1.

Deductibles paid by an insurer in accordance with KRS 304.13-400(3)(a) shall be

considered a loan, the effects of which may be recognized in the filing; and

      2.

This factor shall be equal to the amount or proportion of dollars that are eliminative

by the deductible times a reasonable interest rate to account for the loss in

investment income

      (c)

Adverse selection and higher levels of risk.

      1.

Loss elimination ratios may be reduced for adverse selection by up to five (5)

percent.

      2.

Filings which include greater reductions shall be clearly supported by actuarial

evidence of higher loss ratios by deductible and class to clearly show that the

deductible discounts are consistently high across classes and time.

      3.

For the initial filing, data from other states with deductibles may be used to

support the selection of this factor; and

      (3)

Recognition that many insurer operating expenses are not reduced by the

introduction of deductibles including:

      (a)

Loss adjustment expenses including allocated and unallocated expenses;

      (b)

Overhead expenses; and

      (c)

General expenses including all expenses incurred other than loss adjustment

expense, commissions, other acquisition expenses, premium taxes, licenses, and

fees.

 

      Section

5. Effect on Rate Making. (1) Data. The designated advisory organization's

statistical plan shall include a field indicating the deductible on the policy.

Financial data calls shall segregate data by deductible.

      (2)

Gross versus net data. Adjustments to net data shall be made in the rate-making

process to account for the presence of deductibles. Losses shall be loaded by

the loss elimination ratio, adjusted for anti-selection to a gross basis prior

to the rate- making process. The loss elimination ratio and antiselection

factor shall be the same as in the current approved filing.

      (3)

Methodology. Rate-making methods shall be modified to account for the presence

of deductibles. An adjustment shall be made in classification rate making for

differences in the distribution of exposures by deductible among classes. in

the trending procedure for the presence of a shift in the distribution by

deductible. (19 Ky.R. 1982; 2260; eff.

5-10-1993; TAm eff. 8-9-2007; 37 Ky.R. 1557; 2007; eff. 3-4-2011.)