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PA Bulletin, Doc. No. 09-832

PROPOSED RULEMAKING

DEPARTMENT OF
LABOR AND INDUSTRY

[ 34 PA. CODE CH. 125 ]

Workers' Compensation; Individual Self-Insurance

[39 Pa.B. 2293]
[Saturday, May 2, 2009]

   The Department of Labor and Industry (Department), Bureau of Workers' Compensation (Bureau), proposes the following amendments to Chapter 125, Subchapter A (relating to individual self-insurance), to read as set forth in Annex A. This rulemaking updates and clarifies the standards and procedures which govern the processing of applications for and the administration of self-insurance for individual employers under the Workers' Compensation Act (act) (77 P. S. §§ 1--1041.4, 2501--2506 and 2701--2708) and the Pennsylvania Occupational Disease Act (Occupational Disease Act) (77 P. S. §§ 1201--1603).

Statutory Authority

   This proposed rulemaking is published under the authority in sections 305(a) and 435(a) of the act (77 P. S. §§ 501 and 991(a)) and section 2205 of The Administrative Code of 1929 (71 P. S. § 565).

Background

   Under section 305(a) of the act (77 P. S. § 501(a)) and under section 305 of the Occupational Disease Act (77 P. S. § 1405), an employer liable for the payment of benefits under those acts may be granted an exemption from the necessity of insuring the payment of its liability with an authorized insurer. The grant of an exemption, which is commonly referred to as self-insurance status, is based on the employer demonstrating to the Department that it has the financial ability to pay the compensation provided under the acts. Subchapter A addresses technical issues such as the application procedures for self-insurance by individual employers, the materials and information that must be provided with the application, minimum requirements to be considered for self-insurance, factors used in assessing the financial ability to self-insure, financial security and excess insurance requirements and requirements to service a self-insurer's claims.

   These regulations were adopted on October 13, 1995, and have seen only very limited regulatory amendments in the last 13 years. The most recent regulatory amendments followed the act of June 24, 1996 (P. L. 350, No. 57), which among other things amended sections 305 and 802 of the act (77 P. S. §§ 501 and 1036.2) and added section 819 of the act (77 P. S. § 1036.19) affecting matters relating to the requirements for self-insurance. The Department then amended, in pertinent part, §§ 125.2 and 125.9 (relating to definitions; and security requirements) at 28 Pa.B. 5459 (October 24, 1998).

   By this proposed rulemaking, the Department seeks to increase clarity and consistency through the introduction of new standard terms that may be used throughout the regulations, to provide more objective standards for qualifying for and maintaining self-insurance status, and to improve and strengthen the Department's ability to efficiently and effectively monitor and regulate workers' compensation self-insurance in this Commonwealth.

   On November 14, 2005, the Department held a stakeholder meeting to discuss this proposed rulemaking. All 791 employers self-insured in this Commonwealth as well as the 335 employers in runoff status were invited to the meeting. Subsequently, the Department received written comments from Henry L. Martin, of National Fuel Gas Distribution and Richard White, of Wegman's Food Markets, Inc.

   Additionally, the following individuals made presentations at the meeting: Gregory Gross, of Whirley Industries; Kimberly Rzomp, of Summit Health; Patrick Larkin, of Brokerage Professionals, Inc.; Jonathan H. Rudd, Esquire, on behalf of Royal Ahold; and Lou Ann Kauffman, of the Pennsylvania State System of Higher Education.

   All comments and suggestions have been reviewed and considered.

Summary of Proposed Regulations

   The Department proposes to amend § 125.1 (relating to purpose) to clarify existing language.

   The Department proposes to amend § 125.2 (relating to definitions) to clarify existing language, to delete the existing definition of ''excess insurer,'' and to include definitions of the following terms:  ''active self-insurer,'' ''adequate accident and illness prevention program,'' ''authorized retention amount,'' ''catastrophic loss estimation,'' ''default multiplier,'' ''default multiplier-calculated security factor,'' ''excess indemnity insurance,'' ''excess insurance,'' ''financial ability to self-insure,'' ''investment grade long-term credit or debit rating,'' ''liability limit,'' ''long-term credit or debit rating,'' ''maximum quick asset exposure amount,'' ''minimum funding amount,'' ''minimum security amount,'' ''nonprocurement registration number,'' ''nonworkers' compensation insurer,'' ''NRSRO,'' ''self-insurance loss portfolio transfer policy,'' ''special retention amount,'' ''standard retention amount,'' ''workers' compensation excess insurance,'' ''workers' compensation excess insurance recoveries'' and ''workers' compensation insurer.''

   The Department proposes to amend § 125.3 (relating to application) so that the section better reflects the application requirements. The Department proposes to replace the existing affidavit requirement with a verified statement. Under § 125.3(b), the Department proposes to allow renewal applicants to file their application 3 months before the expiration of the current permit, which is 1 month earlier than under the current language. Under § 125.3(c)(1), the Department specifies the application fees required for affiliates or subsidiaries who file a consolidated application under § 125.4 (relating to application for affiliates and subsidiaries). The Department proposes to amend § 125.3(c)(2)(i) to require that the monetary values presented in the financial statements must be in United States dollars and that the text must be in English, as well as to require that parent companies provide consolidated financial statements for both themselves and their subsidiaries. The Department proposes to amend § 125.3(c)(5) and (6) to require that loss information must be filed on each employer requesting self-insurance for an initial application, and that a report on incurred loss must be filed on each self-insurer for a renewal application. Also, proposed § 125.3(c)(6) allows applicants that have retained an actuary to submit that actuary's report with the application.

   The Department proposes to add requirements that applicants include evidence of long-term credit or debt ratings, if any, in § 125.3(c)(9), as well as a listing of all Pennsylvania workers' compensation claims previously incurred as a self-insurer in § 125.3(c)(8). This will replace existing language related to the OSHA No. 200 report, which has not been utilized since the promulgation of Chapter 129 (relating to workers' compensation health and safety). The Department proposes to amend § 125.3(d) to require applicants to provide all data, information, explanations, corrections and missing items regarding an application within the time period prescribed in writing by the Bureau. Otherwise the application will be deemed withdrawn and a renewal applicant will have to obtain insurance coverage by the expiration of such time period. The Department proposes to amend § 125.3(e) to clarify that the Bureau will not issue a decision on an application until all data, information, explanations, corrections and missing items have been submitted. The Department also proposes to clarify existing language and reference currently recognized auditing standards where applicable.

   The Department proposes to amend § 125.4 to allow for a variation in the submission of audit reports and financial information for applicants that are subsidiaries of a foreign parent company. The Department proposes to delete the provision in subsection (a) requiring that a parent company of a consolidated program be incorporated under the laws of a state of the United States, because this incorporation requirement is extended to all applicants in § 125.5 (relating to preliminary requirements). The Department also proposes to delete the requirement that a Bureau form be used by an applicant to delete an affiliate or subsidiary from a consolidated permit, because a specific form for this purpose is unnecessary.

   The Department proposes to amend § 125.5 to require, for enforcement purposes, that an applicant must be incorporated or organized under the laws of a state of the United States, as well as to require that the applicant must have an adequate accident and illness prevention program under Chapter 129. The Department proposes to delete existing language in § 125.5(b)--(d), because this information is addressed in § 125.6 (relating to decision on application).

   The Department proposes to amend § 125.6(a) to add new paragraphs which set forth objective standards that an applicant must satisfy to demonstrate its financial ability to self-insure, including that the applicant has adequate financial capacity and adequate financial health. The criteria for adequate financial health depends upon whether the applicant is a public or private employer. For a private employer, the Department proposes to require an investment grade long-term credit or debt rating, or a long-term credit or debt rating that it is one grade below investment grade as issued by a rating organization or estimated by the Bureau. This will ensure that a private employer applicant which is approved to self-insure will have adequate, current financial health to meet its obligations, including its self-insurance liability, into the reasonably foreseeable future. The Department also proposes to add language in § 125.6(a) to grandfather existing self-insurers who do not meet the rating requirements under certain conditions.

   The Department also proposes to amend § 125.6(a) to streamline the factors to be considered in assessing an application. The Department further proposes to clarify the information, standards and procedures pertaining to initial decisions, compliance with conditional approvals, issuance of permits, reconsideration requests and decisions, and appeals from reconsideration decisions to standardize and streamline the process and identify the necessary time frames involved.

   The Department proposes to reduce the time period for compliance with conditional approvals in § 125.6 from 60 to 45 days. The Department proposes to modify the hearing procedures following a reconsideration decision to replace the de novo hearing process with an appeal hearing process that will be conducted according to these regulations and 1 Pa. Code Part II (relating to General Rules of Administrative Practice and Procedure) to the extent not specifically superseded by these regulations.

   The Department proposes to amend § 125.7 (relating to permit) to clarify the nature and applicability of the automatic extension of an existing permit, providing safeguards for renewal applicants where the Bureau fails to issue an initial decision on a renewal application before the permit's expiration, or where a renewal applicant is in the process of timely satisfying conditions set forth in the Bureau's decision at the time an existing permit is set to expire.

   The Department proposes to rescind § 125.8 (relating to denial of renewal application) because it currently contains information that is duplicated in § 125.6.

   The Department proposes to amend § 125.9 (relating to security requirements) to clarify existing language and to replace the use of the outdated security constant with the new term, minimum security amount. The Department will also modify the requirements relating to the forms of acceptable security, the procedures for posting and replacing security and the methods for calculating security amounts. The Department also proposes to add requirements for stand-by arrangements with claims service companies in the event of a default.

   The Department proposes to amend § 125.9(b)(3) to delete Alaska and Hawaii as states in which a bank's branch office may issue a securing letter of credit to the Bureau, because time zone differences hamper the Bureau's ability to promptly draw down a letter of credit with a bank located in these states. The Department proposes to amend § 125.9(b)(3)(iii) to require a trustee of a letter of credit trust to obtain a Commonwealth of Pennsylvania Nonprocurement registration number to facilitate the transfer of the proceeds of a letter of credit from the Commonwealth to a trustee, and to allow the Bureau to draw down on a letter of credit and use the proceeds to finance the maintenance of a letter of credit trust arrangement should a self-insurer fail to do so. The Department proposes to amend the various methods for calculating the required amount of security for private employers under § 125.9(d) to set forth in detail the factors for calculating security depending upon the status and duration of the private employer's self-insurance program.

   The Department also proposes to add a specific security discount table in § 125.9(l), based on the self-insurer's investment grade long-term credit or debt rating, if any, pursuant to which all security amounts calculated under subsection (d) may be discounted. The Department further proposes to replace the language in § 125.9(f) permitting present value discounting of liability projected in an actuary's report, which may result in an inadequate security amount, with language allowing the Bureau to use the overall experience of all self-insurers or of self-insurers in the self-insurer's industry in its selection of loss development factors under certain circumstances. The Department also proposes to amend § 125.9(g) to clarify that the Bureau may make adjustments and use alternative methods other than loss development for calculating a self-insurer's required security amount in certain situations, and to amend § 125.9(j) to allow for a phase-in of any increased security requirements under subsection (d) over a period of up to 2 years. It also amends § 125.9(k) to specify the circumstances under which the Bureau may release a runoff self-insurer of the obligation to provide security.

   The Department proposes to amend § 125.10 (relating to funding by public employers) to focus on short-term solvency rather than long-term reserves by requiring public employers to maintain sufficient dedicated cash reserves to meet payments over the next year for benefits and expenses in order to self-insure. The Department proposes to amend § 125.10(a) to provide that a public employer must maintain a dedicated asset account, which no longer needs to be a trust fund, and include the Commonwealth but not certain runoff self-insurer public employers who do not meet the threshold for average annual payout of benefits on self-insurance claims. The Department proposes to delete the current language in § 125.10(b) and (c) regarding long-term reserves and to add new subsections (b) through (e) which set forth in detail the various methods and factors for calculating the required asset level of a public employer's dedicated asset account depending upon the status and duration of the public employer's self-insurance program.

   The Department proposes to amend § 125.11 (relating to excess insurance) to replace the current requirements and limits of excess insurance with new language addressing excess insurance in terms of adequate financial capacity and the coverage of a possible catastrophic loss. Under § 125.11(a), the Department proposes to add the requirement that, where excess insurance is required to demonstrate adequate financial capacity, the applicant's retention amount must at least equal its authorized retention amount and the applicant's liability limit of its insurance must be in an amount acceptable to the Bureau to cover adequately a catastrophic loss. The Department proposes to delete existing requirements for aggregate excess insurance found in § 125.11(b), as these requirements are no longer necessary. The Department also proposes to delete existing language in § 125.11(c)(1), because it currently contains information that is duplicated in the definitions of ''excess indemnity insurance'' and ''workers' compensation excess insurance.''

   The Department proposes to amend § 125.12 (relating to payment, handling and adjusting of claims) to require self-insurers to notify the Bureau when they change claims handling or adjusting arrangements, whether self-administered or administered by a registered claims services company. The insurers will also have to provide a summary of the self-insurer's claims data to the Bureau, upon request, to explain discrepancies or problems that may arise due to the change in claims handling responsibilities.

   The Department proposes to amend § 125.13 (relating to special funds assessments) to include the Uninsured Employers Guaranty Fund as one of the listed special funds for which a self-insurer is liable to pay assessments. That fund was newly established in sections 1601--1608 of the act (77 P. S. §§ 2701--2708) by Act 147 of 2006, which was signed into law on November 9, 2006. The Department also proposes to allow the Bureau to require a self-insurer to retain the services of its certified public accountant to resolve questions about the accuracy of annual compensation payments reported by the self-insurer.

   The Department proposes to amend § 125.15 (relating to workers' compensation liability) to clarify existing language, including specific reference to self-insurance loss portfolio transfer policies.

   The Department proposes to amend § 125.16 (relating to reporting by runoff self-insurer) to clarify existing language regarding the timing, format and contents of the runoff report, and to specify the procedure for a runoff self-insurer to request adjustment of its security amount.

   The Department proposes to amend § 125.17 (relating to claims service companies) to set forth the continuing obligation of claims service companies to assist the self-insurer and the Bureau in providing data and information on the self-insurer's claims serviced by that company.

   The Department proposes to amend § 125.19 (relating to additional powers of Bureau and orders to show cause) to explain the procedures by which the Bureau may address changes in the financial condition of active self-insurers and violations of the act and this subchapter. The Department proposes to add subsection (a) to set forth procedures whereby the Bureau may review the qualifications for self-insurance, and revoke an existing permit, where necessary, for active self-insurers whose financial condition declines before the expiration of an existing permit. Under paragraph (1), the Bureau will issue a letter to the self-insurer outlining its concerns. The Department further proposes to add specific language pertaining to the Bureau's ability to suspend or revoke a permit following the issuance of an order to show cause, which will proceed in the manner set forth in the order to show cause provisions contained within Chapter 121 (relating to general provisions), when a self-insurer unreasonably fails to pay compensation for which it is liable or fails to submit any report or pay any assessment made under the act.

   The Department proposes to amend § 125.20 (relating to computation of time) to adjust the manner in which a period of time will be computed under this chapter to be consistent with the time computation provisions under Chapter 121.

   The Department proposes to add § 125.21 (relating to self-insurance loss portfolio transfer policy) to establish procedures and guidelines for the transfer of a self-insurer's workers' compensation liability to an insurance carrier through the use of a self-insurance loss portfolio transfer policy.

Affected Persons

   Active self-insurers, runoff self-insurers and employers applying for self-insurance in the future will all be affected by this proposed rulemaking in various degrees. The procedural amendments will affect all categories of self-insurers and applicants for self-insurance. A number of the substantive amendments, including those relating to loss development calculations and security discounts, will affect existing private sector self-insurers. New and existing public sector self-insurers also will be affected by the amendments to funding requirements. Self-insurance claims services companies, sureties and trustees will also be impacted by this proposed rulemaking.

Fiscal Impact

   Private employer applicants with a strong financial rating will likely see no significant, direct impact to their overall costs from the current regulations. These applicants could possibly experience reduced costs, due to the greater security discounts proposed for employers having strong financial ratings. Private employer applicants with lesser financial ratings, however, could experience some increase in costs as a result of the changes to security and excess insurance requirements.

   The vast majority of public sector applicants would realize substantially reduced funding requirements under the proposed regulations. The Bureau estimates that required funding amounts would decline by an average of 49% under the proposed regulations for 35 of the 55 public self-insurers. Of the remaining 20, eight public employers with existing funding requirements would be required to increase their workers' compensation funding by an average of 77%, amortized over a 6-year period. Another eight public employers who do not have funding requirements under the existing regulations would have such requirements under the proposal. However, these employers would experience no practical change since they voluntarily maintain funding accounts that meet or exceed the proposed funding requirements. Four additional public employers who do not currently fund any of their outstanding liability would have to make annual deposits into dedicated accounts of up to 5% of their prior year's payment of compensation for up to 6 years.

   Some additional costs resulting from the requirement that the trustee maintain a standby arrangement with a claims service company are likely for those posting a letter of credit as security. Those costs would vary, but could be as much as a few thousand dollars.

   Some one-time additional costs associated with the implementation of the proposed amendments are likely for the Bureau. The costs, which will not be substantial, would mostly result from the reprogramming of the computer system used to monitor self-insurers and to decide applications.

Reporting, Recordkeeping and Paperwork Requirements

   The major reporting, recordkeeping and paperwork requirements resulting from these proposed amendments are as follows:

   *  An active or runoff self-insurer is required to annually file, in electronic format prescribed by the Bureau, a listing of its open and closed claims incurred after the effective date of these amendments.

   *  An active or runoff self-insurer may be required to file with the Bureau summary data on its claims when it changes claims handling arrangements.

   *  A security or letter of credit trustee is required to show that it maintains a standby arrangement with a claims services company.

Effective Date

   These proposed amendments will take effect when published as final-form regulations in the Pennsylvania Bulletin.

Sunset Date

   No sunset date is necessary for the proposed regulatory amendments. The regulations are continuously monitored by the Workers' Compensation Advisory Council and by the Bureau in the day-to-day handling and processing of individual self-insurance applications. If needed, corrections can be initiated based on information obtained by these operations.

Public Comment and Contact Person

   Interested persons may submit written comments to the proposed rulemaking to George Knehr, Chief, Self-Insurance Division, Bureau of Workers' Compensation, Department of Labor and Industry, Chapter 125 Regulations--Comments, P. O. Box 15121, Harrisburg, PA 17105 or gknehr@state.pa.us. Written comments must be received within 30 days of the publication of this proposed rulemaking in the Pennsylvania Bulletin.

Regulatory Review

   Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 20, 2009, the Department submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Committee on Labor and Industry and the House Labor Relations Committee. A copy of this material is available to the public upon request.

   Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Department, the General Assembly and the Governor of comments, recommendations or objections raised.

SANDI VITO,   
Secretary

   Fiscal Note:  12-85. No fiscal impact; (8) recommends adoption.

Annex A

TITLE 34.  LABOR AND INDUSTRY

PART VIII.  BUREAU OF WORKERS' COMPENSATION

CHAPTER 125.  WORKERS' COMPENSATION SELF-INSURANCE

Subchapter A.  INDIVIDUAL SELF-INSURANCE.

§ 125.1.  Purpose.

   This subchapter is promulgated under section 435 of the act (77 P. S. § 991) to provide regulatory guidelines for the uniform and orderly administration of self-insurance for individual employers. This subchapter ensures full payment of compensation when due to [employes] employees of self-insured employers and to their dependents under the act and the Occupational Disease Act.

§ 125.2.  Definitions.

   The following words and terms, when used in this subchapter, have the following meanings, unless the context clearly indicates otherwise:

   Act--The Workers' Compensation Act (77 P. S. §§ 1--[1038.2] 1041.4, 2501--2506 and 2701--2708).

   Active self-insurer--A self-insurer that is not a runoff self-insurer.

*      *      *      *      *

   Adequate accident and illness prevention program--A determination by the Bureau under Chapter 129 (relating to workers' compensation health and safety) that an applicant's accident and illness prevention services fulfill the program and service requirements as stated in that chapter.

*      *      *      *      *

   Aggregate excess insurance--Insurance under which [provides that] the [excess] insurer pays on behalf of or reimburses a self-insurer for its payment of benefits on claims incurred during a policy period in excess of the retention amount to the [excess] insurer's [limit of] liability limit and that meets the requirements of § 125.11(b) (relating to excess insurance).

*      *      *      *      *

   Authorized retention amount--A retention amount that is equal to or is less than a self-insurer's maximum quick assets exposure amount or the current standard retention amount, whichever is less, or the special retention amount approved by the Bureau.

*      *      *      *      *

   Cash flow protection amount--The maximum amount of benefits a self-insurer pays over a 2-year period on an occurrence without reimbursement from [an excess] a nonworkers' compensation insurer or a workers' compensation insurer under a specific excess insurance policy with a per year per occurrence cash protection plan.

   Catastrophic loss estimation--The greater of the following:

   (i)  The largest number of employees usually working at one time at the largest location in this Commonwealth in terms of the applicant's employment, or the employment of any of its affiliates or subsidiaries under a consolidated permit under § 125.4 (relating to application for affiliates and subsidiaries), multiplied by the current Statewide average weekly wage multiplied by 500.

   (ii)  The current Statewide average weekly wage multiplied by 5,000.

*      *      *      *      *

   Default multiplier--A multiplier calculated by the Bureau, and published annually in the Pennsylvania Bulletin, based upon the Bureau's analysis of the total costs and expenses to liquidate defaulted self-insurers' claims compared to those self-insurers' average annual benefits payments in years preceding the defaults, as derived from the experience of the Self-Insurance Guaranty Fund and of sureties and others paying the claims of defaulted self-insurers.

   Default multiplier-calculated security factor--The self-insurer's average annual payout of benefits, net of workers' compensation excess insurance recoveries, over the last 3 completed calendar years multiplied by the default multiplier.

*      *      *      *      *

   Excess indemnity insurance--Aggregate excess insurance or specific excess insurance that does not meet the definition of workers' compensation excess insurance but that is provided by a workers' compensation insurer or a nonworkers' compensation insurer that possesses an A.M. Best rating of A- or better or a Standard & Poor's insurer financial strength rating of A or better or a comparable rating of another NRSRO.

   [Excess insurer--An insurance company authorized to transact the class of insurance listed in section 202(c)(14) of The Insurance Company Law of 1921 (40 P. S. § 382(c)(14)).]

   Excess insurance--Excess indemnity insurance or workers' compensation excess insurance.

   Financial ability to self-insure--Possession of adequate financial capacity and adequate financial health, as specified in § 125.6(a) (relating to decision on application).

*      *      *      *      *

   Investment grade long-term credit or debt rating--A long-term credit or debt rating identified as investment grade by the NRSRO that issued it.

   Liability limit--The maximum amount of benefits for which a nonworkers' compensation insurer or a workers' compensation insurer indemnifies a self-insurer under an excess insurance policy.

   Long-term credit or debt rating--A measurement by a NRSRO of an applicant's willingness and intrinsic capacity to meet its long-term financial commitments as the commitments become due, exclusive of the effects of any guaranties, insurance or other forms of credit enhancements or legal priorities on any of the applicant's financial obligations.

*      *      *      *      *

   Maximum quick assets exposure amount--Five percent of an applicant's average year-end quick assets amount for its last 2 completed fiscal years.

   Minimum funding amount--The lower of the following:

   (i)  The current Statewide average weekly wage multiplied by 1,000.

   (ii)  The retention amount of the applicant's current or any proposed excess insurance, if applicable.

   Minimum security amount--The lower of the following:

   (i)  The current Statewide average weekly wage multiplied by 1,000.

   (ii)  The retention amount of the applicant's current or any proposed excess insurance, if applicable.

   NRSRO--A designated Nationally-recognized statistical rating organization of the United States Securities and Exchange Commission or its successor.

   Nonprocurement registration number--An identification number issued by the Commonwealth, Department of General Services, Central Management Vendor Unit, to entities who may receive payments from the Commonwealth that are not associated with a contract or purchase order.

   Nonworkers' compensation insurer--An insurance company authorized to transact any class of insurance under the Insurance Company Law of 1921 (40 P. S. §§ 341--991.2361) other than the insurance under section 202(c)(14) (40 P. S. § 382(c)(14)), or an insurance company designated as an eligible surplus lines insurer as defined in section 1602 (40 P. S. § 991.1602).

*      *      *      *      *

   Quick assets--The sum of an applicant's cash, cash equivalents, current receivables and marketable securities or, if the applicant is a public employer who uses fund accounting, the total of the applicant's general fund assets.

   Retention amount--

   (i)  The maximum amount of benefits a self-insurer pays without reimbursement from the [excess] nonworkers' compensation insurer or the workers' compensation insurer under an aggregate excess insurance policy or under a specific excess insurance policy which does not include an annual cash flow protection plan.

   (ii)  The term also includes the lower of the maximum amount of benefits a self-insurer pays on each occurrence without reimbursement from the excess insurer[, if any,] or the cash flow protection amount under a specific excess insurance policy which includes an annual cash flow protection plan.

*      *      *      *      *

   [Security constant--The Statewide average weekly wage multiplied by 300.]

   Self-insurance--The privilege granted to an employer which has been exempted by the Bureau from insuring its liability under section 305(a) of the act (77 P. S. § 501(a)) and section 305 of the Occupational Disease Act (77 P. S. § 1405).

   Self-insurance loss portfolio transfer policy--A policy of insurance accepted by the Bureau as meeting the requirements of § 125.21 (relating to self-insurance loss portfolio transfer policy) under which a self-insurer transfers liability incurred as a self-insurer to a workers' compensation insurer.

*      *      *      *      *

   Special retention amount--A retention amount that exceeds the applicant's maximum quick assets exposure amount or the standard retention amount requested by the applicant and approved by the Bureau based on a determination that the applicant has sufficient quick assets to easily liquidate all losses from a catastrophic event at the requested greater retention amount. For an applicant whose self-insurance status began before ____ (Editor's Note:  The blank refers to the effective date of adoption of this proposed rulemaking.), this may also be based on a determination that the requested retention amount is less than or is approximately equal to the retention amount of the applicant's excess insurance in effect on ____  (Editor's Note:  The blank refers to the effective date of adoption of this proprosed rulemaking.).

   Specific excess insurance--Insurance under which [provides that] the [excess] insurer pays on behalf of or reimburses a self-insurer for its payment of benefits on each occurrence in excess of the retention amount to the [excess] insurer's [limit of] liability limit and that meets the requirements of § 125.11(b) (relating to excess insurance).

   Standard retention amount--The retention amount generally required for a self-insurer's excess insurance published annually by the Bureau in the Pennsylvania Bulletin that is based on a retention amount commonly used by current self-insurers and determined appropriate by the Bureau.

*      *      *      *      *

   Workers' compensation excess insurance--Aggregate excess insurance or specific excess insurance provided by a workers' compensation insurer that includes the premium collected for the insurance in data used by the Workers' Compensation Security Fund set forth in the Workers' Compensation Security Fund Act (77 P. S. §§ 1051--1066) to calculate assessments against workers' compensation insurers to finance the operations of that fund.

   Workers' compensation excess insurance recoveries--Payments made to a self-insurer under a policy of workers' compensation excess insurance or payments receivable under a policy of workers' compensation excess insurance in the future that the insurer has agreed in writing that it is liable to pay.

   Workers' compensation insurer--An insurance company authorized to transact the class of insurance listed in section 202(c)(14) of The Insurance Company Law of 1921.

§ 125.3.  Application.

   (a)  An applicant shall file an application on a form prescribed by the Bureau. [Questions] All questions on the application shall be answered [thoroughly and] completely and accurately with the most recent information available. A rider may be attached if more space is necessary. The application shall be signed by the applicant, or if a corporation, an officer of the corporation[, and attested to]. The application, including any attached riders and applicable forms, shall be verified as set forth on the application[. Attached riders and applicable forms enclosed with the application shall be verified to in the sworn affidavit requested on the application], subject to the penalties of 18 Pa.C.S. § 4904 (relating to unsworn falsification to authorities).

   (b)  Initial applications shall be filed with the Bureau no later than 3 months prior to the requested effective date of self-insurance. Renewal applications shall be filed with the Bureau no later than [2] 3 months prior to the expiration of the current permit.

   (c)  With the application, the applicant shall include:

   (1)  The nonrefundable statutory fee in the amount of $500 for initial applicants or $100 for renewal applicants required [by] under section 305(a) of the act (77 P. S. § 501(a)), payable to the ''Commonwealth of Pennsylvania.'' A statutory fee is required in the amount of $500 [for initial applicants or $100 for renewal applicants is required] for each affiliate or subsidiary [included] being initially added or in the amount of $100 for each affiliate or subsidiary renewing under a consolidated application under § 125.4 (relating to application for affiliates and subsidiaries).

   (2)  Its [Security] Securities and Exchange Commission (SEC) Form 10-K for the last complete fiscal year, if applicable. The SEC Form 10-K does not serve as a substitute for the full completion of the application form.

   (3)  Its latest audit report issued by a licensed certified public accountant or accounting firm. The report [shall] must cover the last complete fiscal-year period immediately prior to the date of application. If the most current audited period precedes the application date by more than 6 months, the applicant's latest SEC Form 10-Q or unaudited interim financial statements [shall] must be submitted. The audit report [shall meet the following criteria] must include the following:

   (i)  [It shall include financial] Financial statements which are presented in conformance with applicable generally accepted accounting principles as promulgated by the Financial Accounting Standards Board or the Government Accounting Standards Board or with international [accounting] financial reporting standards promulgated by the International Accounting Standards Board. The monetary values presented in the financial statements must be in United States dollars and the text of the financial statements and their accompanying notes must be in the English language. If the applicant is a parent company, consolidated financial statements of the applicant and its subsidiaries shall be provided.

   (ii)  [It shall state] A statement that the audit [meets the reporting requirements defined either in the applicable] was conducted in accordance with generally accepted auditing standards [promulgated by the AICPA or the applicable generally accepted governmental auditing standards promulgated by the Comptroller General of the United States in ''Government Auditing Standards,'' referred to as the Yellow Book] in the United States or in accordance with the standards of the Public Company Accounting Oversight Board (United States) or the International Standards on Auditing. An unqualified or qualified opinion shall be stated on the most recent audited financial statements.

   (4)  Audit reports covering the applicant's second and third most recent complete fiscal-year periods prior to the date of the application, if an initial application. If audit reports covering those periods are not available, financial statements reviewed by a certified public accountant in accordance with standards established by the [AICPA] American Institute of Certified Public Accountants covering the second and third most recent complete fiscal year periods will be accepted.

   (5)  A report of the [applicant's] paid and incurred workers' compensation loss experience in this Commonwealth under each of the 3 complete policy years prior to the application of each employer requesting self-insurance, if an initial application. [Affiliates' paid and incurred workers' compensation loss experience shall be submitted if applicable.] The loss information for each policy year shall be valued within 3 months prior to the date of the submission of the application.

   (6)  A report on a form prescribed by the Bureau stating the costs of claims incurred by [the applicant] each employer requesting self-insurance by annual periods and projecting the total value of its outstanding liability under the act and the Occupational Disease Act, if a renewal application. [Applicants are encouraged, but not required, to have their projection of outstanding liability prepared by an actuary] A renewal applicant that has retained the services of an actuary to project the total value of its outstanding liability may submit the actuary's report with its application.

   (7)  A report for each employer requesting self-insurance on a form prescribed by the Bureau summarizing the existence of the accident and illness prevention program required under section 1001(b) of the act (77 P. S. § 1038.1) and regulations promulgated thereunder[, if a renewal applicant].

   (8)  [At the direction of the Bureau, an applicant's annual summaries of occupational injuries and illnesses, OSHA No. 200, if the applicant is required to keep Occupational Safety and Health Administration records.] A listing for each employer requesting self-insurance, in a Bureau-prescribed electronic format, of the employer's Pennsylvania workers' compensation claims incurred as a self-insurer, including claims currently in litigation, and information such as payments and reserves on each claim. The listing must include:

   (i)  All opens claims at the time of submission.

   (ii)  All claims closed in the past if these claims are available. If a listing of all claims closed in the past is not available, the listing must at least include all claims closed on or after ____ (Editor's Note:  The blank refers to the effective date of adoption of this proprosed rulemaking.).

   (iii)  Case reserves provided in the listing must be established according to instructions prescribed by the Bureau.

   (9)  Written verification of the applicant's current long-term credit or debt ratings, if any.

   (d)  The applicant shall provide additional data [and], information and explanation that the Bureau deems pertinent to its review of the application based on the factors enumerated under § 125.6(a) (relating to decision on application), and shall make any corrections determined necessary by the Bureau, and provide any items under subsection (c) determined missing or insufficient by the Bureau. The applicant shall provide the data [and], information, explanation, corrections or missing items within the time period prescribed by the Bureau[, which will be reasonable based on the extent and availability of the data and information required]. If the applicant does not provide the data, information, explanation, corrections or missing items within the time period prescribed in writing by the Bureau, the application will be deemed withdrawn. A renewal applicant that does not provide the data, information, explanation, corrections or missing items within the time period prescribed in writing by the Bureau shall obtain workers' compensation insurance coverage effective the expiration of that time period and shall provide evidence of the coverage to the Bureau no later than the coverage's effective date.

   (e)  The Bureau will not [begin its review of] issue a decision on the application under § 125.6 (relating to decision on application) until the application [and the required supporting materials as outlined in this section], including all items required under subsection (c) and all additional data, information, explanation and corrections under subsection (d), have been submitted.

*      *      *      *      *

§ 125.4.  Application for affiliates and subsidiaries.

   (a)  An affiliate or subsidiary may be included under an application submitted by another affiliate or its parent company [if the parent company or affiliate is incorporated under the laws of a state of the United States] by providing information and data on the affiliate or subsidiary on a form prescribed by the Bureau. The related entities will be included under one consolidated permit if the application is approved. A written request shall be made [on a form prescribed by the Bureau] by the applicant to [add or] delete an affiliate or a subsidiary [to or] from a consolidated permit after its issuance.

*      *      *      *      *

   (d)  If an affiliate or subsidiary not included under a consolidated application as outlined in subsection (a) wishes to self-insure, it shall submit an application in its own name and provide its own audit reports in the manner indicated in § 125.3 (relating to application). The Bureau may require the parent company to furnish appropriate financial information within a [reasonable] time [according to the extent and nature of the requested information] period prescribed by the Bureau.

   (e)  If the applicant is a direct or indirect subsidiary of a parent company that is not incorporated or organized under the laws of a state of the United States, the applicant may submit its parent company's consolidated audit report and an unaudited consolidated balance sheet of the applicant's financial condition, or other financial information on the applicant that the Bureau deems pertinent to its review of the application, to satisfy the financial reporting requirements of § 125.3(c), provided the parent company's audit report complies with the § 125.3(c)(3)(i) and (ii).

§ 125.5.  [Minimum] Preliminary requirements.

   (a)  An [initial] applicant [must] shall have been in business for at least 3 consecutive years prior to application.

   (b)  [A private employer applicant shall demonstrate that 10% of its quick assets or 20% of its cash and cash equivalents at the end of 2 of the last 3 fiscal-year periods exceed a proposed cash flow protection amount or the proposed retention amount of its aggregate excess or specific excess insurance, whichever is less] An applicant shall be incorporated or organized under the laws of a state of the United States.

   (c)  [A public employer applicant shall demonstrate that 10% of its general fund quick assets at the end of 2 of the last 3 fiscal-year periods exceed a proposed cash flow protection amount or the proposed retention amount of its aggregate excess or specific excess insurance, whichever is less] Each employer requesting self-insurance shall have an adequate accident and illness prevention program.

   [(d)  Subsections (b) and (c) do not apply to applicants which are not required to obtain specific excess insurance under § 125.11 (relating to specific excess insurance and aggregate excess insurance) nor to applicants which are self-insured prior to October 14, 1995.]

§ 125.6.  Decision on application.

   (a)  The application of an applicant which meets the requirements of § 125.5 (relating to [minimum] preliminary requirements) will be approved if the Bureau determines that the applicant has demonstrated[, with reasonable certainty, the ability to meet all obligations under the act and the Occupational Disease Act] that it possesses the financial ability to self-insure.

   (1)  An applicant shall demonstrate that it has adequate financial capacity by showing one of the following:

   (i)  The retention amount of the applicant's current or proposed excess insurance equals or is less than its authorized retention amount.

   (ii)  The applicant's catastrophic loss estimation is equal to or is less than its maximum quick assets exposure amount.

   (2)  An applicant shall demonstrate that it has adequate financial health, as follows:

   (i)  If a public employer, the applicant satisfies or will satisfy the requirements established for it under § 125.10 (relating to funding by public employers).

   (ii)  If a private employer, the applicant's level of financial stability, solvency and liquidity is such that it satisfies one of the following:

   (A)  The applicant possesses an investment-grade long-term credit or debt rating, or such a rating that is one generic rating classification below investment grade.

   (B)  For applicants who do not receive a long-term credit or debit rating by an NRSRO, the Bureau estimates that the applicant would merit an investment grade long-term credit or debt rating, or a rating that is one generic rating classification below investment grade, if it were rated.

   (C)  An applicant that was approved to self-insure as of ____ (Editor's Note:  The blank refers to the effective date of adoption of this proprosed rulemaking.) that possesses an actual or Bureau-estimated long-term credit or debt rating more than one generic rating classification below investment grade shall be deemed to possess adequate financial health if its generic rating does not decline further. This exception will no longer apply if the applicant's actual or Bureau-estimated long-term credit or debt rating increases to one generic rating classification below investment grade or higher.

   (b)  The Bureau will [include] consider the following [factors] information in assessing an applicant's financial ability to [meet those obligations] self-insure:

   (1)  The [audit opinion required under § 125.3(c)(3) (relating to application).] applicant's level of financial health based upon its long-term credit or debt rating, if any, or upon an evaluation by the Bureau of one or more of the following:

   (i)  The applicant's financial statements, which may include comparisons of the applicant's financial ratios to general or to industry ratios and cash flow analysis.

   (ii)  Public documents and reports filed with other state and Federal agencies including the United States Securities and Exchange Commission.

   (iii)  Other financial analysis information provided to or considered by the Bureau.

   (2)  The [length of time that the applicant has been doing business under its present corporate identity] amount of the applicant's quick assets at the end of its last 2 completed fiscal years as shown on the audited financial statements provided to the Bureau under § 125.3 (relating to application).

   (3)  The [applicant's overall solvency, identified as its ability to meet its financial obligations as they come due] terms, conditions and limits of the applicant's existing or proposed excess insurance.

   (4)  [The applicant's organizational structure and management background.] For a public employer, its ability to satisfy or its past history in satisfying the requirements established under § 125.10.

   [(5)  The nature of the applicant's operations and its industry.

   (6)  Financial analysis appropriate for the particular applicant, including for example, industry ratio and cash flow analyses.

   (7)  The applicant's debt ratings from National financial rating agencies, if any.

   (8)  The applicant's workers' compensation loss history and insurance history.

   (9)  The applicant's potential financial workers' compensation obligations, including average expected claims and maximum possible loss as limited by the excess insurance coverage obtained by the applicant, if any.

   (10)  The applicant's claims administration history and compliance with the act, the Occupational Disease Act and this part.

   (11)  The existence and adequacy of the applicant's accident and illness prevention program required under section 1001(b) of the act (77 P. S. § 1038.1(b)) and regulations thereunder.

   (b)] (c)  If the [Bureau's assessment] Bureau finds under subsection (a) [is] that the applicant [can meet its obligations] possesses the financial ability to self-insure, it will send to the applicant [a preliminary approval notice of] an intial decision approving the application and a list of conditions as set forth under subsection [(d)](c)(2) that [shall] must be met before the applicant will be issued a permit. The Bureau [may] will issue a permit to a renewal applicant [subject to] at the time of the initial decision when the renewal applicant [complying] is currently in compliance with the conditions set forth by the Bureau.

   [(c)] (1)  An applicant has [60] 45 days from the receipt of the [preliminary approval notice] initial decision approving the application to comply with the conditions set forth by the Bureau.

   (i)  The applicant may toll the [60] 45-day compliance period by filing a request for a conference or notification of its intent to submit additional written information under subsection [(f)] (e).

   (ii)  An applicant may be granted a 30-day extension to meet the conditions if the applicant requests an extension in writing [to the]. The Bureau must receive the extension request within the initial [60] 45-day compliance period.

   (iii)  [The application of an] Unless a timely reconsideration is initiated under subsection (e), when the applicant [which] does not meet the conditions within this compliance period, the application will be deemed [withdrawn] denied.

   (iv)  A renewal applicant that does not meet the conditions within this compliance period and that has not timely initiated the procedures outlined in subsection (e) shall obtain workers' compensation insurance coverage effective the expiration date of the compliance period and provide evidence of the coverage to the Bureau no later than the coverage's effective date.

   [(d)] (2)  The applicant will be issued a permit [which is effective no sooner than 15 days] after all of the following [has] have been filed with the Bureau:

   [(1)] (i)  Security in an amount as set forth in § 125.9 (relating to security requirements) or funding as set forth in § 125.10 [(relating to funding by public employers)].

   [(2)] (ii)  A certificate providing evidence [of] that the applicant has obtained excess insurance [as required by the Bureau] coverage with limits set forth under § 125.11(a) (relating to excess insurance), if required.

   [(3)] (iii)  A guarantee agreement executed by its parent company or an affiliate as set forth in § 125.4 (relating to application for affiliates and subsidiaries), if required.

   (iv)  Contact information on the claims services company or in-house staff that will be handling the applicant's claims.

   [(4)] (v)  Documents relating to any other requirement set by the Bureau to protect the compensation rights of [employes] employees.

   [(e)] (d)  If an applicant does not meet the requirements of § 125.5 or if upon review [of the pertinent data] under subsection (a) the Bureau finds that the applicant has not demonstrated [its ability to meet its obligations, it will] that it possesses the financial ability to self-insure, [it will] the Bureau will send to the applicant [a preliminary denial notice of] an initial decision denying the application. The [notice] initial decision will state the documents, [evidence and other data] data, information, explanation and corrections received from the applicant or otherwise reviewed or considered by the Bureau in rendering its [preliminary determination] initial decision. A renewal applicant shall obtain workers' compensation insurance coverage effective no later than 30 days after its receipt of an initial decision denying the renewal application and shall provide evidence of the coverage to the Bureau no later than the coverage's effective date, unless the applicant has timely initiated the procedures outlined in subsection (e).

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