SEP-27-S9 03=10 FROM=INS FEDERATION ID;121B6B50540

D P C rPHiJ[CPurance Federation of Pennsylvania, Inc.

^^nc»4T REGUUTOR^ Philadelphia,PA 19103lMDlPeEwiEW C O H E S I O N Tel: (215) 665^500 Fax: (21S) 665-0540

Original: 2050

cc: Sandusky

REVIEW

Sarah H. LawhorneChairmanRobert W.KJossVice ChairmanHenry G.HagerPresident EmeritusSamuel R. MarshallPresident &Ch ief Executive OfficerJohnR.DoubmanSecretory & CounselMsrybethH-DobTreasurerBirchard T. ClothierInvestment Officer &Assistant TreasurerDanielle WitwerDirector ofGovernment Affairs

September 27, 1999

Peter J. SalvatoreRegulatory Coordinator1326 Strawberry SquareHarrisburg, PA 17120

Re: Chapter 116 - Discounting of worker'scompensation loss reserves

Dear Mr. Salvatore:

The Insurance Federation supports the Department'sproposed revisions to Chapter 116, regarding thediscounting of worker's compensation loss reserves,subject to two clarifications.

First, the regulation should clarify that itsapplication is prospective only. Much business hasalready been reserved at the 6% interest rate capallowed in the current Section 116.4(2). The capproposed in this regulation, namely the currentyield to maturity on United States Treasury debtinstruments, is currently less than 6%.

Absent clarification that this regulation isprospective only, insurers who lawfully arediscounting their loss reserves at 6% would have torecalculate those reserves for business alreadyissued - which would then translate into thepremiums already charged and collected for thatbusiness being inadequate.

Second, the regulation should clarify the date onwhich the "current" yield in Section 116.4(2) isdetermined. This would seem to be the date onwhich the actuarial statement of opinion in Section116.5 is filed.

SEP-27-33 0S=10 FROM=INS FEDERATION ID=X2156650540 PAGE 3/3

September 27, 2999Page two

As always, please call me with any questions on this. Weappreciate the opportunity to have worked with theDepartment in developing this proposed regulation.

Sincerely,

Samuel R. Marshall

c: Robert E, Nyce, Executive DirectorIndependent Regulatory Review Commission

Gregory S. MartinoDeputy Insurance CommissionerOffice of Regulation of Rates and PoliciesPennsylvania Insurance Department

SEP-27-99 09=10 FROM;INS FEDERATION

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ID=12156650540

1600 MARKET STREETSUITE 1520

PHILADELPHIA, PA 19103

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QC ss

S@p-14-W 09:38am Fron-PAr AFL-CIO 7172388541 T-304 P.02/04 F-736

J R S E T 7 PENNSYLVANIA AFL-CIOWILLIAM M GEORGE RICHARD W. BtOOMINGOALE

September 13, 1999ORIGINAL: 2050

MIZNER

Orig. faxed to: McGinely l'.i>

Peter O. Salvatore Bush, Coccodrilli S% •Regulatory Coordinator Harbison, Mizner, %Insurance Department Sandusky, Nyce -1326 Strawberry Square C0PIES: fwe"Harrisburg, PA 17120 g% S

Re: Regulation 11-186 (#2050) : SDiscounting Workers' Compensation Loss Reserves -Insurance Department

Dear Mr. Salvatore:

I am writing regarding the purposed rule making a "discounting Workers' CompensationLoss Reserves.*

First, we disagree strongly that there will be no fiscal impact as a result of the proposedregulations. The rate at which Workers' Compensation Loss Reserves are discounted willhave a direct and significant impact on the cost of Workers' Compensation to employers;and significantly impact the revenues of insurers. This is perhaps the single mostimportant area in calculating Workers' Compensation premiums that impacts on ratesother than specific losses.

These changes also significantly impact "compromise and release" or settlements inWorkers' Compensation cases. I believe a complete fiscal impact statement should becompleted.

Section 116.2 eliminates the insurer's responsibility to simultaneously file "...an annualcertification of its Workers' Compensation Loss Reserves with the Departmentsimultaneously with the filing of the company's annual statement.* The rationale fordeleting this requirement is the requirements of the NAIC,

The difference between these two requirements appears to be that the current regulationrequires simultaneous filing, while the NAIC requirement is based on quarterly or annualreports. This could be of great significance if rhe Department is faced with two timeperiods that are not identical and are therefore unable to assure proper calculations.

Although this change avoids "duplication," it fails to address the ability of the InsuranceDepartment to meet their legal responsibility.

2 3 5 S T A T E S T R E E T , H A R R I S B U R G . P E N N S Y L V A N I A 1 7 1 0 1 * 1 1 4 7 « 7 1 7 - 2 3 8 - 9 3 5 % - f A X : 7 I 7 - 2 3 B - 8 5 4 1

Sip-U-99 09:38am FronrPA, AFL-CIO 7172388541 T-304 P.03/04 F-736

The Department has a specific accident year schedule, which does not conform exactly tothe NAIC schedule. Without the requirement for identical time periods proper analysis ofthe data can not be done.

Section 116.3Although the rationale of changing economic circumstance requires a more flexiblediscounting regulation, I believe the current regulation under Section 116,4 alreadyallows for this flexibility.

Specifically, Subsection 116.4(2) currendy provides: "An insurance company is notpermitted to assume an interest rate greater then 6% in calculating its loss reserves/

This Subsection allows an insurer to discount at a rate lower then those provided for xnSubsection 116.3, which is exactly the flexibility that the Insurance Commission isproposing. Second, the current regulations allow for discounting variations if approvedby the Commissioner - see Sections 116,5 and Section 116.7.

The substitution in the proposed new Subsection 116.3 is unnecessarily vague inproviding \ . . the current yield to maturity on a LLS, Treasury debt instrument withmaturities consistent with the expected pay out of the liabilities/

There are a number of problems here. First, "what does "current* mean? Rates varyfrom moment to moment and day to day.

Next, what U.S. Treasury debt instrument is appropriate? It would be a T-Bill; T-Bond;Fannie May; Qinny May or other Treasury debt instruments. There is a lack of specificitydue to the variety of Treasury debt instruments.

In addition, Treasury debt instruments could rise above the existing 6% ceiling, theeconomic impact of which must be examined (as well as going below).

Finally, the changes in 116,6 which downgrade the type of actuarial statement thatmust accompany the filings is a move away from accountability.

Given the Insurance Departments lack of capacity to drill down through reports, it isessential that actuarial certification be retained rather than substituting \ . . astatement of opinion/ The rationale of avoiding duplication does not appear valid ifcertified statements are already required then the current requirement is easily compliedwith. If this is to cover different time periods and that is the rationale, then theInsurance Department is lowering its standards at risk to the employers and workers.

Reserving practices are at the root of Workers' Compensation costs. The current systemis in need of repair, but not in the direction proposed by these regulations.

Sip-14-99 09:38am From-PA, AFL-CIO 7172388541 T-304 P.04/04 F-736

We large you to review our comments and we will be glad to meet and discuss anyproposed changes.

Sincerely,

dWJnDavid H. Wilderman

Assistant to the President/Director of Legislation

jS/UFCW-1776

cc: William M. George, President, PA AFL-CIORichard W. Bioomingdale, Secretary-Treasurer, PA AFL-CIOM. Diane Koken, Insurance CommissionerRobert Nyce, Executive Director, IRRCJohn R. McGinley, Jr., Chairman, IRRCArthur Coecodrilli, CommissionerRobert Harbison III, CommissionerJohn Mizner, CommissionerAlvin Bush, CommissionerRichard Sandusky, Director of Regulatory AnalysisRichard Himier, Director, Bureau of Workers' CompensationHon. Nicholas Micozzie, Chairman, PA House Insurance CommitteeHon, Anthony Dctuca, Minority ChairmanHon. Edwin Holl, Chairman, Senate Banking & Insurance CommitteeHon. Jay Costa, Minority Chairman, Senate Banking & Insurance

Committee

Comments on the regulation listed below have been received from the following:

Reg # Regulation Title

11-186 Discounting Workers' Compensation Loss Reserves

Mr. David H. WidermanPennsylvania AFL-CIO330 State StreetHarrisburgPA 17101-1147

Phone: (717) 238-9351 XOOOOO

Assistant to the President/Director of Legislation

Date Received 9/13/1999

EMail:

Date sent to Committes and IRRC 9/14/1999

ORIGINAL: 2050MIZNERCOPIES: Sandusky

Wyatte

717238854! T-301 P 01/04 F-723

%%W" PENNSYLVANIA AFL-CIO

myWILLIAM M GEORGE

FAXWCHAKD W BLOOMINGIMUE

Stcnrnry-iytuimftr

DATE; September 13, 1999

TO: Peter O Salvatore

PAX NUMBER: 787-8557

FROM: DAVID H. WILPERMAlf. ASSISTANT TOPRESIDENT/DIRECTOR OF LEGISLATION

RECEIVEDSz? I 3 1999

DEPARTMENT: LEGISLATION

*t* See Attached.

WAf AWMWW R T r a n c m i f i c m n

There is/are 3 page(s) following this cover page.

Please call us if you have any questions: ^ J k(717) 238-9351

We can automatically receive transmissions 24 hours a day.

230 STATE STREET. HAJLftiSBURG, PENNSYLVANIA 17101-1147 • 717-238-9351 • FAX 717-2S8-8S4I

te-IMO OMta F™-M. AFL-CIO nnUOWl MO! P 0!/H M »

ST' PENNSYLVANIA AFL-CIOWILLIAM M. GEORGE AiCHAKO W. BLOOMlMGa\LE

Prc*dmV SecnmnrlhctUmfkr

September 13, 1999

Peter O. SalvatoreRegulatory Coordinator p%\ ^ ~ ? W nInsurance Department — u, t J ^ U1326 Strawberry SquareHarrisburg, PA 17120 *r? * 3 %%

Re: Regulation 11-186 (#2050) 0 ? ; , ^Discounting Workers' Compensation Loss Reserves - ^ . v - .>:.-; ^Insurance Department

Dear Mr. Salvatore:

I am writing regarding the purposed rule making a "discounting Workers' CompensationLoss Reserves/

First, we disagree strongly that there will be no fiscal impact as a result of the proposedregulations. The rate at which Workers* Compensation Loss Reserves arc discounted willhave a direct and significant impact on the cost of Workers' Compensation to employers;and significantly impact the revenues of insurers. This is perhaps the single mostimportant area in calculating Workers' Compensation premiums that impacts on ratesother than specific losses.

These changes also significantly impact "compromise and release* or settlements inWorkers' Compensation cases. I believe a complete fiscal impact statement should becompleted.

Section 116.2 eliminates the insurer's responsibility to simultaneously file "...an annualcertification of its Workers' Compensation Loss Reserves with the Departmentsimultaneously with the filing of the company's annual statement," The rationale fordeleting this requirement is the requirements of the NAIC.

The difference between these two requirements appears to be that the current regulationrequires simultaneous filing, while the NAIC requirement is based on quarterly or annualreports. This could be of great significance if the Department is faced with two timeperiods that are not identical and are therefore unable to assure proper calculations.

Although this change avoids "duplication,0 it fails to address the ability of the InsuranceDepartment to meet their legal responsibility.

2 3 0 S T A T E S T R E E T . H A g R I S B U f t G . P E N N S Y L V A N I A 1 7 1 0 1 * 1 1 4 7 « 7 1 7 2 3 8 - 9 3 5 1 • F A X : 7 i 7 - 2 3 8 - « 3 4 l

,„-,,-,, «,». -<-». ««» " " ' " " ' M " ' • " * " "

The Department has a specific accident year schedule, which does not conform exactly tothe NAIC schedule. Without the requirement for identical time periods proper analysis ofthe data can not be done.

Section 116.3Although the rationale of changing economic circumstance requires a more flexiblediscounting regulation, I believe the current regulation under Section 116.4 alreadyallows for this flexibility.

Specifically, Subsection 116.4(2) currently provides: *An insurance company is notpermitted to assume an interest rate greater then 6% in calculating its loss reserves.*

This Subsection allows an insurer to discount at a rate lower then those provided for inSubsection 116.3, which is exactly the flexibility that the Insurance Commission isproposing. Second, the current regulations allow for discounting variations if approvedby the Commissioner - see Sections 116.5 and Section 116.7.

The substitution in the proposed new Subsection 116,3 is unnecessarily vague inproviding ". . . the current yield to maturity on a U.S. Treasury debt instrument withmaturities consistent with the expected pay out of the liabilities/

There are a number of problems here. First, what does -current" mean? Rates varyfrom moment to moment and day to day.

Next, what U.S. Treasury debt instrument is appropriate? It would be a T-Bill; T-Bond;Fannie May; Ginny May or other Treasury debt instruments. There is a lack of specificitydue to the variety of Treasury debt instruments.

In addition, Treasury debt instruments could rise above the existing 6% ceiling, theeconomic impact of which must be examined (as well as going below).

Finally, the changes in 116.6 which downgrade the type of actuarial statement thatmust accompany the filings is a move away from accountability.

Given the Insurance Departments lack of capacity to drill down through reports, it isessential that actuarial certification be retained rather than substituting ". . . astatement of opinion/ The rationale of avoiding duplication does not appear valid ifcertified statements arc already required then the current requirement is easily compliedwith. If this is to cover different time periods and that is the rationale, then theInsurance Department is lowering its standards at risk to the employers and workers.

Reserving practices are at the root of Workers' Compensation costs. The current systemis in need of repair, but not in the direction proposed by these regulations.

S.p-,3-9 02:30* FrorPA. AFl-CIO ^ " 8 8 5 4 , T-30, P 04/04 F-723

We urge you to review our comments and we will be glad to meet and discuss anyproposed changes.

David H. WilderraanAssistant to the President/Director of Legislation

jg/WCW-1776

cc: William M. George, President, PA AFL-CIORichard W. Bloomingdale, Secretary-Treasurer, PA AFL-CIOM Diane Koken, Insurance CommissionerRobert Nyce, Executive Director, IRRCJohn R. McGinley, Jr., Chairman, IRRCArthur Coccodrilli, CommissionerRobert Harbison III, CommissionerJohn Mizner, CommissionerAlvin Bush, CommissionerRichard Sandusky, Director of Regulatory AnalysisRichard Himler, Director, Bureau of Workers' CompensationHon. Nicholas Micozzie, Chairman, PA House Insurance CommitteeHon= Anthony DeLuca, Minority ChairmanHon. Edwin Holl, Chairman, Senate Banking & Insurance CommitteeHon. Jay Costa, Minority Chairman, Senate Banking & Insurance

Committee

COMMONWEALTH OF PENNSYLVANIAINSURANCE DEPARTMENT

OFFICE OF SPECIAL PROJECTS Phone: (717) 787-44291326 Strawberry Square Fax: (717) 705-3873

Harrisburg, PA 17120 E-mail: psalvato@ins.state.pa.us

Mr. Robert NyceExecutive DirectorIndependent Regulatory Review Comm.333 Market StreetHarrisburg, PA 17120

September 14,1999ORIGINAL: 2050MIZNERCOPIES: Sandusky ~-i

%- SmithWyat te

Re: Insurance DepartmentProposed Regulation No.11-186, DiscountingWorkers' Compensation LossReserves

Dear Mr. Nyce:

Pursuant to Section 5(c) of the Regulatory Review Act, the Department is required to submit allcomments on proposed regulations received during the public comment period to theIndependent Regulatory Review Commission and the Legislative Standing Committees within 5

Attached is a list of commentators that have submitted comment on the above-mentionedregulation and the respective comment that was received.

If you have any questions regarding this matter, please contact me at (717) 787-4429.

Sincerely yours,

Peter J. SalvatoreRegulatory Coordinator

- — .^.._,L3O^)*U3^i6l

Sarah H. LawhorneChairmanRobert W.KlossVice ChairmanHenry G. HagerPresident EmeritusSamuel R. MarshallPresident &Chief Executive OfficerJohn R. DoubmanSecretary & CounselMarybcth H. DobTreasure-BirchardT. ClothierInvestment Officer &Assistant TreasurerDanielle WitwerDirector ofGovernment Affairs

The Insurance Federation of Pennsylvania, Inc.

1600 Market StreetSuite 1520

Philadelphia, PA 19103Tel: (215) 665*0500 Fax: (215) 665-0540

Original: 2050Miznercc: Sandusky

September 27, 1999

Peter J. SalvatoreRegulatory Coordinator1326 Strawberry SquareHarrisburg, PA 17120

Re: Chapter 116 - Discounting of worker'scompensation loss reserves

Dear Mr. Salv^tore:

The Insurance Federation supports the Department'sproposed revisions to Chapter 116, regarding thediscounting of worker's compensation loss reserves,subject to two clarifications-

First, the regulation should clarify that itsapplication is prospective only. Much business hasalready been reserved at the 6% interest rate capallowed in the current Section 116.4(2). The capproposed in this regulation, namely the currentyield to maturity on United States Treasury debtinstruments, is currently less than 6%.

Absent clarification that this regulation isprospective only, insurers who lawfully arediscounting their loss reserves at 6% would have torecalculate those reserves for business alreadyissued - which would then translate into thepremiums already charged and collected for thatbusiness being inadequate.

Second, the regulation should clarify the date onwhich the "current" yield in Section 116.4(2) isdetermined. This would seem to be the date onwhich the actuarial statement of opinion in Section116.5 is filed.

rcucKMuuN ID: 1215BS50S40 PAGE 3/3

September 27, 1999Page two

As always, please call me with any questions on this. Weappreciate the opportunity to have worked with theDepartment in developing this proposed regulation.

Sincerely,

Samuel R. Marshall

c: Robert E. Nyce, Executive DirectorIndependent Regulatory Review Commission

Gregory S. MartinoDeputy Insurance CommissionerOffice of Regulation of Rates and PoliciesPennsylvania Insurance Department

Comments on the regulation listed below have been received from the following:

Reg # Regulation Title

11-186 Discounting Workers' Compensation Loss Reserves

Mr. Samuel R. Marshall PresidentInsurance Federation of Pennsylvania, Inc.1600 Market St.Philadelphia PA 19103- Date Received 9/27/1999

Phone: (215) 665-0505 X00000 EMail: sammy 1 @ifpenn.org

Page 1 Date sent to Committes and IRRC 9/27/1999

|ii

SEP-27-93 09:08 FROM:INS FEDERATION ID:12156650540

FAX

Date

Number ef i

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PHILADELPHIA, PA 19103

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COMMONWEALTH OF PENNSYLVANIAINSURANCE DEPARTMENT

OFFICE OF SPECIAL PROJECTS1326 Strawberry SquareHarrisburg, PA 17120 E-mail: psalvato@ins.state.pa.us

imSO>29 W19--22

September 27,1999

Mr. Robert NyceExecutive DirectorIndependent Regulatory Review Comm.333 Market StreetHarrisburg, PA 17120

Re:

Original: 2050

cc: Sandusky

Insurance DepartmentProposed Regulation No.11-186, DiscountingWorkers' Compensation LossReserves

Dear Mr. Nyce:

Pursuant to Section 5(c) of the Regulatory Review Act, the Department is required to submit allcomments on proposed regulations received during the public comment period to theIndependent Regulatory Review Commission and the Legislative Standing Committees within 5

The attached comment was received after the 30-day public comment. However, the Departmentwill take into consideration the comments made by Mr. Samuel R. Marshall of the InsuranceFederation of Pennsylvania, Inc.

If you have any questions regarding this matter, please contact me at (717) 787-4429.

Sincerely yours,

Peter J. SMvatoreRegulatory Coordinator