California REG-2017-0001 Requirements and Impact

California REG-2017-0001 – Actuarial & Financial Implications Regarding Workers’ Compensation High-Deductible Policies

 

The New Requirements:

 REG-2017-0001 is an effort by the California Insurance Commissioner and Department of Insurance to protect California workers by decreasing the risk of insurer insolvency via new regulations concerning workers’ compensation high-deductible policies.

 

The proposed regulation will require the insurer to report uncollateralized Deductible Ultimate Receivables as a loss in its Financial Statements.  The assumption is that “loss” is defined in this case as an impact to the insurer’s income statement rather than specifically as underwriting loss and expense.  The American Academy of Actuaries Committee on Property and Liability Financial Reporting has two recommendations for how this “loss” would flow through the financial statement:

 

  • The Deductible Ultimate Receivables should be separated into the Deductible Recoverable and the Deductible Loss Reserve for reporting purposes
  • The “loss” should be recorded on the write-in line items on the financial statements. This maintains the underwriting loss and expenses in the financial statements on a net of deductible basis not dependent on collateralization

 

The two components recommended for reporting purposes include:

 

Deductible Recoverable

The Committee recommends that non-collateralized Deductible Recoverable be reported as a non-admitted asset.  This is assuming credit risk requirements are not satisfied. This follows the suggestions presented in the SSAP 65 section on high-deductible policies.  The Deductible Recoverable “shall be accrued and recorded as a reduction of paid losses simultaneously with the recording of the paid loss…”  SSAP 65 further defines that the accrual will be either partially or fully reflected as non-admitted to reflect the credit risk of potential non-payment.

 

Deductible Loss Reserves

The Committee recommends insurers report the uncollateralized Deductible Loss Reserves as a write-in liability on the balance sheet.  This is similar accounting treatment to the reinsurance credit risk of losses ceded to reinsurers.  The reported loss reserves are on a net basis while the Provision for Reinsurance Liability line item on the balance sheet is utilized to prevent surplus benefit from amounts ceded to certain reinsurers.  Keeping the credit risk from uncollateralized Deductible Loss Reserves separate from underwriting losses will result in greater transparency for the issue at hand.

 

These recommendations would result in the “loss” being recognized by the insurer.  There would be increased transparency in the financial statements because credit risk and underwriting risk are clearly separated.  It is consistent with SSAP 65, the Statement of Statutory Accounting Principles on high-deductible policies.

 

Impact of REG-2017-0001 and Next Steps

The implementation of this regulation could result in a potentially significant financial impact for certain insurers that would be difficult for them to offset.  These insurers may have more difficulty obtaining sufficient collateral for prior policies that may still have significant Deductible Loss Reserves.  On the other hand, insurers who write future high deductible polices  who in the past have not obtained the collateral requirements specified in the regulation may be able to adopt processes to rectify this situation.

 

Please contact the authors for more information:

James Chang, FCAS, MAAA Email: james.chang@hugginsactuarial.com Phone: 732-881-4663

Kim Piersol, FCAS, MAAA Email: kim.piersol@hugginsactuarial.com Phone: 610-892-1808

Ronald T. Kuehn FCAS, MAAA, CERA, CPCU, ARM, FCA Email: rusty.kuehn@hugginsactuarial.com Phone: 610-892-1823

 

 

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.