Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
304.13-057,
304.13-167,
304.13-400-304.13-420
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.
STATUTORY AUTHORITY:
KRS
304.2-110,
304.13-410
