§ 125.9. Security requirements.
(a) A private employer shall provide security in an amount as set forth in subsection (d). The security required in this section is not a substitute for the applicant demonstrating its financial ability to self-insure. A self-insurer’s security may be adjusted annually or more frequently as determined by the Bureau.
(b) The following forms of security are acceptable:
(1) A surety bond on a form prescribed by and available upon request from the Bureau issued by a company authorized to transact surety business in this Commonwealth by the Insurance Department.
(i) At the time of the issuance of the bond, the surety company shall possess a current A. M. Best Rating of A- or better or a Standard & Poor’s insurer’s financial strength rating of A or better or a comparable rating by another NRSRO.
(ii) The self-insurer shall replace the bond with a new bond issued by a surety company with an acceptable rating or with another acceptable form of security if the surety company’s highest rating falls below an A. M. Best Rating of B+, a Standard & Poor’s insurer’s financial strength rating of A- or a comparable rating by another NRSRO after the bond is issued. If the bond is not replaced within 45 days of the self-insurer’s receipt of written notification of the rating decline from the Bureau, the Bureau will have discretion to draw on the surety bond and deposit the proceeds with the State Treasurer to secure the self-insurer’s liability and to revoke the current permit if the bond exclusively secures claims currently being incurred against the self-insurer.
(iii) An active self-insurer that does not post another bond or another acceptable form of security to cover claims currently being incurred against the self-insurer, after the surety of a bond that exclusively secures the claims provides notification of its intention to terminate the bond, shall obtain workers’ compensation insurance coverage effective the bond’s termination date. The self-insurer shall provide evidence of the coverage, such as a certificate of insurance, to the Bureau no later than the coverage’s effective date.
(2) A security deposit held under a trust agreement prescribed by and available upon request from the Bureau and maintained for the benefit of employees of the self-insurer:
(i) The deposit must consist of cash; bonds or other evidence of indebtedness issued, assumed or guaranteed by the United States of America, or by an agency or instrumentality of the United States; investments in common funds or regulated investment companies which invest primarily in United States Government or Government agency obligations; or bonds or other security issued by the Commonwealth and backed by the Commonwealth’s full faith and credit.
(ii) The securities must be held in a Commonwealth chartered bank and trust company or trust company as defined in section 102 of the Banking Code of 1965 (7 P. S. § 102) or a Federally-chartered bank or foreign bank with a branch office and trust powers in this Commonwealth.
(3) An irrevocable letter of credit using language required by the Bureau issued by and payable at a branch office of a commercial bank located in the continental United States. The letter of credit must state that the terms of the letter of credit automatically renew annually unless the letter of credit is specifically nonrenewed by the issuing bank 60 days or more prior to the anniversary date of its issuance.
(i) At the time of issuance of the letter of credit, the issuing bank or its holding company shall have a B/C or better rating or 2.5 or better credit evaluation score by Fitch Ratings, as successor to the rating services of Thomson BankWatch, or the issuing bank shall have a CD or long-term issuer credit rating of BBB or better or a short-term issuer credit rating of A-2 or better by Standard & Poor’s or a comparable rating by another NRSRO.
(ii) The self-insurer shall replace the letter of credit with a new letter of credit issued by a bank with an acceptable credit rating or with another acceptable form of security if the issuing bank’s highest rating falls below the acceptable rating outlined in subparagraph (i) after the letter of credit is issued. If the letter of credit is not replaced within 45 days, the Bureau will draw on the letter of credit and will deposit the proceeds to secure the self-insurer’s liability.
(c) Affiliates included under a consolidated permit under § 125.4(a) (relating to application for affiliates and subsidiaries) must be included together under the forms of security provided. For purposes of this section, affiliates that are runoff self-insurers are considered to be active self-insurers if they were included under a consolidated permit with affiliates that remain active self-insurers.
(d) The amount of security required of private employers is determined as set forth in paragraphs (1)—(6).
(1) For a new self-insurer, the Bureau will determine the initial amount of security, to be calculated as follows:
(i) An amount no less than two times the amount of the applicant’s total greatest annual insured incurred workers’ compensation losses in this Commonwealth during the last 3 completed policy years prior to its application, or the minimum security amount, whichever is greater.
(ii) Discounted by the percentage outlined under subsection (l) for the applicant’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to the nearest hundred thousand.
(2) For those active self-insurers who have been approved to self-insure for more than 1 year but less than 3 years, the amount of security is calculated as follows:
(i) The greater of:
(A) The amount outlined in paragraph (1).
(B) One hundred percent of the Bureau’s calculation of the self-insurer’s undiscounted outstanding liability based on loss development, net of workers’ compensation excess insurance recoveries.
(ii) Discounted by the percentage outlined under subsection (l) for the applicant’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to the nearest hundred thousand.
(3) For those active self-insurers who have been approved to self-insure for 3 or more years, the amount of security is calculated as follows:
(i) One hundred percent of the Bureau’s calculation of the self-insurer’s undiscounted outstanding liability based on loss development, net of workers’ compensation excess insurance recoveries, or the minimum security amount, whichever is greater.
(ii) Discounted by the percentage outlined under subsection (l) for the applicant’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to the nearest hundred thousand.
(4) When multiple affiliates are included under a consolidated permit, the required amount of security for the consolidated program is calculated as follows:
(i) The sum of each individual affiliate’s required amount of security as calculated under the applicable paragraphs above but excluding the effects of any rounding or minimum applicable to the individual affiliates, or the minimum security amount, whichever is greater.
(ii) Discounted by the percentage outlined under subsection (l) for the applicant’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to the nearest hundred thousand.
(5) For runoff self-insurers, the amount of security is calculated as follows:
(i) One hundred percent of the Bureau’s calculation of the runoff self-insurer’s undiscounted outstanding liability based on loss development, net of workers’ compensation excess insurance recoveries.
(ii) Discounted by the percentage outlined under subsection (l) for the runoff self-insurer’s or its guarantor’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to either:
(A) The nearest ten thousand if the Bureau’s calculated undiscounted outstanding liability, net of workers’ compensation excess insurance recoveries, discounted by the percentage outlined under subsection (l) for the runoff self-insurer’s or its guarantor’s highest current long-term credit or debt rating, if any, is $50,000 or less.
(B) The nearest hundred thousand.
(6) When multiple runoff self-insurers are included under one security instrument, the required amount of security is calculated as follows:
(i) The sum of each individual runoff self-insurer’s required amount of security as calculated under paragraph (5) but excluding the effects of any rounding applicable to the individual runoff self-insurers.
(ii) Discounted by the percentage outlined under subsection (l) for the runoff self-insurers’ or their guarantor’s highest current long-term credit or debt rating, if any.
(iii) Rounded upward to either:
(A) The nearest ten thousand if the Bureau’s calculated undiscounted outstanding liability, net of workers’ compensation excess insurance recoveries, discounted by the percentage outlined under subsection (l) for the runoff self-insurers’ or their guarantor’s highest current long-term credit or debt rating, if any, is $50,000 or less.
(B) The nearest hundred thousand.
(e) A self-insurer wishing to refute the Bureau’s adjustment of its outstanding liability by its history of loss development may do so by providing a report prepared by an actuary.
(f) The Bureau will incorporate the overall Pennsylvania workers’ compensation experience of insured or self-insured employers in the self-insurer’s industry or of all insured or self-insured employers in its selection of loss development factors under subsection (d) if the claim volume or experience of the self-insurer is not sufficient to be considered fully credible based on generally accepted actuarial procedures. The loss development factors selected by the Bureau and its other judgments in its calculation of a self-insurer’s outstanding liability will be sufficiently conservative to ensure the adequate provision of security.
(g) The Bureau will make adjustments to the loss development procedures under subsection (d) it deems appropriate under the circumstances if the Bureau believes that a self-insurer has changed its reserving methodology in such a way as to invalidate loss development factors based on past experience.
(h) The Bureau may reduce the amount of security required of a self-insurer under subsection (d) if the self-insurer confirms that liabilities under the act and the Occupational Disease Act are funded through a Black Lung Benefits Trust established under section 501(c)(21) of the Internal Revenue Code of 1986 (26 U.S.C.A. § 501(c)(21)).
(i) The Bureau may reduce the amount of security required of a self-insurer under subsection (d) to no less than the minimum security amount rounded upward to the nearest hundred thousand if the self-insurer establishes a funding trust to provide a source of funds for the payment of its liability. A self-insurer may elect to establish a funding trust or it may be required by the Bureau to establish a funding trust where the Bureau determines that a dedicated source of funds is needed to further ensure the timely payment of the self-insurer’s liability. In either case, the following conditions shall be met:
(1) The trust agreement must be in a form prescribed by the Bureau.
(2) The trust assets must be held in a Commonwealth chartered bank and trust company or trust company as defined in section 102 of the Banking Code of 1965 or a Federally chartered bank or foreign bank with a branch office and trust powers in this Commonwealth.
(3) The value of the trust fund must be adjusted at least annually to the required funding level as determined by the Bureau.
(j) A self-insurer with security which is less than the level of security required under subsection (d) may be permitted to phase in the level of required security over a maximum of 2 years. The Bureau will determine the terms of the phase-in period, including the length of time and the annual phase-in amounts.
(k) The Bureau may release a runoff self-insurer of its obligation to provide security if either of the following occurs:
(1) The runoff self-insurer provides evidence that its liability was assumed under a self-insurance loss portfolio transfer policy.
(2) If the runoff self-insurer made no payments on its liability over the past 2 years and all claims against the runoff self-insurer are closed.
(l) The following discount percentages shall be applied in calculating a self-insurer’s required amount of security under subsection (d) based on the highest current long-term credit or debt rating of the self-insurer or of its guarantor:
Security Discount Table
Moody’s Investors Service Standard & Poor’s, Fitch Ratings, or Dominion Bond Rating Service Security Discount Aaa AAA 75% Aa1 AA+ 65% Aa2 AA 60% Aa3 AA- 55% A1 A+ 45% A2 A 40% A3 A- 35% Baa1 BBB+ 25% Baa2 BBB 20% Baa3 BBB- 15% Ba1 and lower BB+ and lower 0% (m) The Bureau may revise the table in subsection (l) through publication of a notice in the Pennsylvania Bulletin to assign security discount rates for any organization receiving designation as a NRSRO after September 11, 2010.
Authority The provisions of this § 125.9 amended under sections 305(a) and 435(a) of the Workers’ Compensation Act (77 P. S. § § 501 and 991(a)) and section 2205 of The Administrative Code of 1929 (71 P. S. § 565).
Source The provisions of this § 125.9 amended October 23, 1998; subsections (a) and (b) apply to applicants, self-insurers, runoff self-insurers, group self-insurance funds and runoff funds and become effective upon publication in the Pennsylvania Bulletin; subsections (d), (i) and (l) apply to self-insurers upon commencement of the exemption period subsequent to final publication in the Pennsylvania Bulletin; subsection (m) applies to a runoff self-insurer commencing that status after it has renewed its permit subsequent to final publication in the Pennsylvania Bulletin, 28 Pa.B. 5459; amended September 10, 2010, effective September 11, 2010, 40 Pa.B. 5147. Immediately preceding text appears at serial pages (250128) to (250132).
Cross References This section cited in 34 Pa. Code § 125.6 (relating to decision on application); and 34 Pa. Code § 125.10 (relating to funding by public employers).
No part of the information on this site may be reproduced for profit or sold for profit.
This material has been drawn directly from the official Pennsylvania Code full text database. Due to the limitations of HTML or differences in display capabilities of different browsers, this version may differ slightly from the official printed version.
