803 KAR 25:026. Group self-insurers.

RELATES TO: KRS 342.0011(7), 342.340, 342.345, 342.347, 342.350

STATUTORY AUTHORITY: KRS 342.260(1), 342.340, 342.345, 342.350

NECESSITY, FUNCTION, AND CONFORMITY: KRS 342.260(1) provides that the Commissioner of the Department of Workers' Claims shall promulgate administrative regulations necessary to carry on the work of the Department of Workers' Claims and to implement the provisions of KRS Chapter 342. KRS 342.340, 342.345 and 342.350 require the commissioner to establish requirements for group self-insurers. This administrative regulation establishes the procedure and minimum requirements through which groups of employers may join together to self-insure their workers' compensation liability.

Section 1. Definitions. (1) "Administrator" means an individual or legal entity engaged by a group self-insurance fund board of trustees to carry out the policies established by the group self-insurance fund's board of trustees and provide day-to-day management of the self-insurance fund.

(2) "Aggregate excess insurance" means an insurance policy written on a claims incurred basis which insures claims to a stated limit in excess of a specified percentage of the earned premium.

(3) "Bona fide trade association" means an association of employers created for a noninsurance trade purpose and which has been operating in the state of Kentucky for at least two (2) years prior to its sponsorship of a group self-insurance fund.

(4) "Commissioner" is defined by KRS 342.0011(9).

(5) "Common interests" means that employers are engaged in similar activities, share common standard industrial classification codes and common risk factors.

(6) "Dividends" mean disbursements from surplus funds to group members pursuant to a plan filed with the commissioner.

(7) "Earned premium" means the pro rated portion of the full, actual premium charged to the group members that is applicable to the group's accounting period or fiscal year.

(8) "Fiscal agent" means a person, or legal entity, other than a service organization or employees or agents of a service organization, designated by the trustees to receive, invest and disburse the self-insurance group's funds.

(9) "Group members" means employers who have joined a group self-insurance fund.

(10) "Group self-insurance fund" means the total contractual arrangement whereby eleven (11) or more employers or two (2) or more city, county, municipal or urban-county employers or their agencies associate to jointly self-insure their workers' compensation liability.

(11) "Insolvent" or "insolvency" means the inability of a group self-insurance fund to pay its outstanding lawful obligations as they mature in the regular course of business, or which holds insufficient assets to prospectively pay all incurred workers' compensation benefits when due.

(12) "Loss fund" means the total amount of the group self-insurance fund's retained liability for claims against the group members.

(13) "Premium" means the amount of money charged each member to fund the obligations and expenses of the group self-insurance fund.

(14) "Qualified actuary" means a member or fellow of the Casualty Actuarial Society.

(15) "Service organization" means a person or entity which provides services which include claims adjustment, safety engineering, statistical compilation, preparation of premium charges, loss and tax reports, or other required self-insurance reports, administration of the fund, marketing services, placement of excess insurance, development of member payroll audits, administration of investments, or legal assistance.

(16) "Specific excess insurance" means an insurance policy which insures the amount of a claim from one (1) occurrence involving one (1) or more employees or employers in the same occurrence or incident of exposure in excess of a specified dollar amount.

(17) "Surplus funds" means the excess of the group self-insurer's assets over its liabilities.

(18) "Trustees" means persons elected by the group members or appointed by the board of directors of the sponsoring trade association or association of governmental entities to oversee the administration of the group self-insurance fund.

Section 2. Certification. Except for an activity arising in the creation of a group self-insurance fund, a person or entity shall not issue a binder or certificate of insurance for workers' compensation coverage unless the group self-insurance fund has been certified to do so by the commissioner. A certification issued by the commissioner shall remain in effect until revoked or modified by the commissioner pursuant to Section 11 of this administrative regulation.

Section 3. Initial Application. (1) An application for certification as a workers' compensation group self-insurance fund shall be filed on form SI-06 with the commissioner by:

(a) A group of eleven (11) or more employers having common interests or membership in a bona fide trade association. Any group members having more than fifty (50) percent common ownership shall constitute one (1) group member; or

(b) Two (2) or more city, county, municipal or urban-county employers or their agencies.

(2) Each initial application submitted under subsection (1) of this section shall set forth or be accompanied by:

(a) The fund's name, location of principal office, date of organization, name and address of each member, and the dates of the fiscal year for accounting purposes;

(b) A description of the group members' common interest or a description of the bona fide trade association including date of organization, articles of incorporation, and a history of the association's activities;

(c) A copy of the articles of association, articles of incorporation, trust agreement or bylaws of the proposed group self-insured fund. The group self-insurance fund's enabling documents shall describe the time and methodology by which premiums shall be determined, assessed and collected during regular operations and in the event of insolvency of the group self-insurance fund;

(d) The managed care and utilization review plans, if any, for the group self-insurance fund;

(e) A copy of each instrument by which the applicant or its agent has made a commitment to pay for a past or future good or service;

(f) An executed copy of the indemnity agreement by which group members jointly and severally bind themselves to pay their workers' compensation liability;

(g) Identification by name, address, and term of the initial board of trustees, administrator, and service organization together with a statement that a pecuniary or personal conflict does not exist between the official duties of the trustees, administrators and service organizations and the interests of the members;

(h) The name of the custodian and the address where the group self-insurance fund's books and records will be kept;

(i) Specimen of the proposed policy and certificate of insurance for the specific and aggregate excess coverage;

(j) Copies of surety deposits and fidelity bonds as required by Section 10 of this administrative regulation;

(k) A proposed schedule of premium rates and the plan by which rates will be modified. If employment classifications are to vary from those utilized by the National Council on Compensation Insurance, a description of each classification shall be presented;

(l) A schedule of projected annual premiums and expenses; and

(m) Financial statements for initial group members prepared by a certified public accountant and signed by an owner or officer of each member demonstrating a combined net worth of no less than $5,000,000 for the group and the financial stability of each member.

(3)(a) Except as provided in paragraph (b) of this section, the premium of one (1) group member shall not exceed forty (40) percent of the estimated total premium for the group self-insurance fund.

(b) If the group consists of two (2) city, county, municipal, or urban-county employers or their agencies, the premium of one (1) group member shall not exceed sixty (60) percent of the estimated total premium for the group self-insurance fund.

(4) The first year's premium for the initial membership of the group self-insurance fund shall not be less than $750,000. Verification shall be presented that twenty-five (25) percent of the initial estimated premium has been paid and deposited with the group's fiscal agent.

(5) The initial application shall be filed no later than sixty (60) days prior to the proposed inception date of the group self-insurance fund.

(6) Certification as a group self-insurance fund shall be granted if the commissioner finds the following:

(a) The applicant has complied with all requirements of this administrative regulation;

(b) The persons responsible for the affairs of the group self-insurance fund are financially stable, competent and experienced in the administration of workers' compensation self-insurance; and

(c) The proposed group self-insurance fund has demonstrated the ability to meet all of its obligations.

(7) Before granting certification, the commissioner shall consider the following:

(a) The adequacy of the funding mechanisms;

(b) The presence of excess insurance;

(c) The financial strength of the participating members;

(d) The stability of the membership; and

(e) The risks of the industry.

Section 4. Annual Filing. The information and reports required by this section shall be filed by the group self-insurance fund with the commissioner on an annual basis.

(1) Within thirty (30) days prior to the expiration of each self-insurance year, the group self-insurance fund shall file:

(a) Copies of all fidelity and surety bonds or surety deposits;

(b) A current listing of the group members of the fund;

(c) A schedule of proposed premiums by employment classifications;

(d) A material change in administration or the service organization;

(e) A plan by which premiums shall be determined, assessed, and collected if there is an insolvency or liquidation of the group self-insurance fund, unless a plan has been previously submitted; and

(f) A statement relating to conflicts as described in Section 3(2)(g) of this administrative regulation.

(2) Within ten (10) days prior to the expiration of each self-insurance year, the group self-insurance fund shall file proof of excess insurance coverage for the ensuing year.

(3) Within 120 days from the end of the group self-insurer's fiscal year, the group self-insurance fund shall file the statement of financial condition required by KRS 342.347(2) and any other relevant financial information requested by the commissioner.

(4) If the statement of financial condition reveals a fund deficit or inadequate reserves, the trustees shall prepare and file a plan of remedial action within thirty (30) days of the receipt of the statement of financial condition.

(5) Within 150 days after the end of each self-insurance year, the group self-insurance fund shall file a statement setting forth all premiums, losses, expenses and distributions for the group self-insurance fund. The trustees shall furnish a copy of this statement to the group members.

Section 5. Withdrawals and Terminations. (1) A member may withdraw from a group self-insurance fund upon sixty (60) days notice to the commissioner and the trustees.

(2) If a group self-insurance fund determines to terminate its self-insurance program, the trustees:

(a) Shall give thirty (30) days advance written notice by certified mail to the commissioner and each group member;

(b) Shall not pay dividends without the written approval of the commissioner for five (5) years following the close of the last year in which it operated; and

(c) Shall demonstrate to the commissioner that satisfactory arrangements have been made for the continued payment and servicing of all outstanding claims.

Section 6. Trustees; Duties. (1) The Board of Trustees of the group self-insurance fund shall consist of between three (3) and eleven (11) persons, who shall not:

(a) Be an owner, officer, employee or agent of a service organization; or

(b) Have a direct or indirect pecuniary interest in a service organization.

(2) The trustees on behalf of the group members shall be responsible for the following:

(a) Administration of the group self-insurance fund;

(b) The assessment and collection of premium;

(c) Disbursements from the group self-insurance fund; and

(d) Investment of the fund's monies.

(3) The trustees may contract with a service organization, an administrator, or a fiscal agent to carry out the administration of the group self-insurance fund.

(a) A service organization, its employees and agents shall be duly licensed to perform those functions for which a license is required under Kentucky law.

(b) A contract with a service organization that includes the adjustment or settlement of claims shall include a requirement that the service organization shall adjust to final conclusion each claim that results from an occurrence during the period for which the contract is effective.

(c) A revolving fund of not more than twenty (20) percent of estimated premiums may be established for use by a service organization for the payment of claims.

Section 7. Excess Insurance. (1) Except for a group self-insurance fund qualifying under subsection (2) of this section, the trustees shall purchase aggregate excess insurance.

(a) The retained liability and other fixed costs of the fund shall not exceed 100 percent of the annual assessment of the group members, unless the amount over 100 percent is secured by unencumbered surplus funds.

(b) In the computation of the retained liabilities of the group self-insurance fund, reserves for claims or projected reserves for claims may be discounted for their present value, if the discounting is based upon the computation of a qualified actuary.

(c) The limit of liability of the aggregate excess insurance coverage shall not be less than $2,000,000 or fifty (50) percent of the earned premium, whichever is greater.

(2) A group self-insurance fund meeting all of the following conditions may annually seek a waiver from the commissioner of the requirement to purchase aggregate excess insurance:

(a) The fund has been in continuous operation for at least five (5) years;

(b) The fund's annual premium has exceeded $5,000,000 in each of the three (3) preceding years; and

(c) Reserves and premium structure have been established so as to secure adequately all predictable losses.

(3) The trustees shall purchase specific excess insurance coverage with a limit of at least $25,000,000 per occurrence.

(4) To be eligible to write excess liability coverage for group self-insurance funds, a casualty insurance company shall at all times maintain on file with the Commissioner of the Kentucky Department of Insurance financial statements demonstrating assets, including surplus to policyholders, at least equal to the Department of Insurance requirements of a carrier to do business in the state. The latest financial statement shall reflect a minimum policyholder surplus of not less than $25,000,000 and the carrier shall have demonstrated excellent overall performance and a strong ability to meet its obligations to policyholders over a long period of time.

Section 8. Fund Balances. (1) Prior to inception of each group member's self-insurance year, the trustees shall collect from that member at least twenty-five (25) percent of the estimated premium for the ensuing year. The balance of the estimated premium shall be collected in either quarterly or monthly installments. Each group member's payroll shall be audited and an adjustment to premium shall be made accordingly.

(2) A disbursement from the fund shall be for a purpose related to the group self-insurance fund. A dividend shall not be paid until at least twenty-four (24) months after the expiration of the self-insurance year and shall be paid from surplus funds not required for payment of claims or other liabilities. The dividends shall be paid or credited to members according to the reasonable classifications as the directors may establish. A dividend shall not be paid which unfairly discriminates between members of the same classifications.

(3) The formula to be used for collection of assessments and for the distribution of dividends shall be determined by the trustees and approved by the commissioner. A dividend plan shall specify whether past fund members are eligible for the dividend.

(4)(a) A trustee, fiscal agent or service organization shall not utilize an asset of the group self-insurance fund for a purpose unrelated to workers' compensation. The trustees shall maintain cash or cash equivalent accounts as may be prudently necessary to pay expenses without having to liquidate long-term investments.

(b) The trustees may invest surplus funds or reserves not needed for current obligations in:

1.a. U.S. government bonds, U.S. Treasury notes, Treasury bills, or other direct obligations guaranteed by the full faith and credit of the United States Government and its agencies;

b. Tax exempt obligations issued by the Commonwealth of Kentucky or its agencies with a minimum rating of "A" by Standard & Poor;

c. Obligations issued by a county, district, municipality or other legal authority within Kentucky with a minimum rating of "AA" by Standard & Poor;

d. Investment share accounts in a savings and loan association in Kentucky whose deposits are insured by a federal agency; or

e. Certificates of deposit if issued by a duly chartered commercial bank in Kentucky;

2. Individual equity securities actively traded on the New York or NASDAQ Stock Exchanges with no individual equity holding comprising greater than ten (10) percent of the equity portion of the portfolio at the time of purchase.

a. An investment in an individual equity holding shall not represent at the time of purchase more than five (5) percent of the total market value of the security.

b. Investments in equity securities shall not exceed twenty (20) percent of the total market value of the investment portfolio of the self-insurance group at the time of purchase;

3. Corporate bonds if:

a. The bond is issued, assumed, or guaranteed by a solvent institution created or existing under the laws of the United States, or a state, province, district, or territory;

b. The corporate bond investments do not exceed fifteen (15) percent of the total market value of the investment portfolio at the time of purchase; and

c. The bond has a minimum rating of "A" by Standard and Poor; or

4. Mutual funds that are registered investment advisors licensed by the Security and Exchange Commission and Commonwealth of Kentucky to perform investment services. Investments in mutual funds shall not exceed twenty (20) percent of the total market value of the investment portfolio at the time of purchase.

(c) Of the aggregate investments made by the self-insurance group under paragraph (a) or (b) of this subsection:

1. Not less than seventy-five (75) percent of the total market value of the entire investment portfolio shall be held in cash, cash equivalents, or securities described in paragraph (b)1 of this subsection; and

2. A minimum of fifteen (15) percent of the total investment portfolio value shall be maintained in cash or cash equivalent accounts or U.S. Treasury and Federal Agency Securities with a remaining maturity of one (1) year or less.

(d) Variation from the requirements of this section for good cause shown may be sought by application to the commissioner.

Section 9. Group Members. (1) The trustees shall not accept as a member of the group, an employer that does not have a net worth of at least two (2) times its estimated annual premium, unless the employer pays its full estimated annual premium in advance. The trustees shall not accept as a member of the group an employer that does not meet all other qualifications for being a member of the group as set forth in the bylaws of the group.

(2) At the discretion of the trustees, the group self-insurance fund may include the Kentucky employees of foreign (out-of-state) employers.

(3) The trustees may suspend or expel a member from the group due to adverse claims experience or lack of cooperation with safety and loss prevention policies by giving the member and the commissioner thirty (30) days advance written notice.

(4) The trustees shall report to the commissioner an attempt by a person as defined in KRS 342.0011 who knowingly, as defined in KRS 501.020, makes a false representation, including misrepresentation of a hazard, classification, payroll, or other fact of an employer or its agent that is designed to cause a reduction in the employer's premium. The trustees shall secure from each member an agreement to report payroll in accordance with the rules and rating plan of the fund. Willful failure to properly report in accordance with the rules and rating plan shall be grounds for expulsion pursuant to subsection (3) of this section.

(5) At least thirty (30) days prior to due date, the trustees shall notify each group member of all premium due, including adjustments. Failure by a member to pay the premium due prior to the due date may result in immediate suspension or expulsion from the group by the trustees. Ten (10) days advance written notice shall be given to the member and the commissioner.

(6) The group self-insurance fund shall be considered as an individual employer for all purposes of taxation and the individual members of the group shall not be exposed to tax liability other than liability existing as a result of the indemnity agreement with the other group members and the group self-insurance fund.

Section 10. Bonds. (1) The trustees and fund administrators shall provide a fidelity bond to the commissioner in the amount of not less than $300,000, which may be subject to a deductible not exceeding $10,000 for each trustee, each fund administrator and the administrator's employees.

(2) The fiscal agent shall provide a fidelity bond to the trustees of not less than fifty (50) percent or $1,000,000, whichever is lower, of the funds to be handled by the fiscal agent. This requirement shall be waived if the fiscal agent is a national bank.

(3) The service organization shall provide a fidelity bond to the trustees of not less than two (2) times the amount of the revolving fund.

(4) In lieu of the bonds required under subsections (1), (2) and (3) of this section, the trustees may secure a fidelity blanket bond in an amount not less than fifty (50) percent of the self-insurance fund or $2,000,000, whichever is lower. The fidelity blanket bond shall include the trustees, the administrator, the service organization, personnel of the service organization and the fiscal agent, unless the fiscal agent is a national bank.

(5) The fund shall provide surety to the commissioner on form SI-03 in an amount no less than $250,000, ten (10) percent of the annual premium or ten (10) percent of the reserve requirement as established in the most recent certified statement of financial condition on file with the commissioner, whichever is greater.

(6) A corporate surety, to be eligible for writing group self-insurance fund bonds in the state of Kentucky, shall be authorized by the Commissioner of the Kentucky Department of Insurance to transact business in the state, and its latest financial statement on file with the insurance commissioner shall at all times show assets, including surplus to policyholders, at least equal to the latest Department of Insurance requirements for admission of a new company to do business in the state. On its latest financial statement, the corporate surety shall reflect a minimum policyholder surplus of not less than $25,000,000. The corporate surety shall have demonstrated excellent overall performance and a strong ability to meet its obligations to policyholders over a long period of time. A surety shall not expose itself to a loss on any one (1) risk in an amount exceeding its current U.S. Treasury limit.

(7) The trustees may file a cash or cash equivalent security deposit on form SI-05 or bank letter of credit on form SI-04 in satisfaction of the surety requirement.

Section 11. Revocation or Modification of Certification. (1) The commissioner may revoke or direct remedial actions regarding a group's certification as a group self-insurance fund if he finds any of the following conditions exist:

(a) The group self-insurance fund is operating significantly in contravention of the basic organizing documents of the group self-insurance fund or is in material violation of this administrative regulation or KRS Chapter 342;

(b) The group self-insurance fund is no longer financially responsible and may reasonably be expected to be unable to meet its current obligation to participants or employees of participants for the payment of workers' compensation medical and indemnity benefits; or

(c) There has been a significant and adverse change in the administration of the group self-insurance fund.

(2) If the commissioner revokes a group self-insurance fund's certification, the commissioner shall immediately notify the Kentucky group self-insurer's guaranty fund.

(3) A group self-insurance fund's certification may be revoked or made subject to remedial action after compliance with the following procedures:

(a) The commissioner shall conduct a hearing upon a written application by a person or group aggrieved by an order of the commissioner or on his own volition. Written request for a hearing shall be filed within thirty (30) days after an order by the commissioner. The application for hearing shall briefly state the grounds on which the aggrieved party is relying and a basis for the relief sought. The hearing shall be held within thirty (30) days after the filing of the application for hearing, unless postponed by mutual consent. The commissioner shall give written notice of the hearing not less than ten (10) days in advance, stating the date, time and place for the hearing, and specify the matters to be considered.

(b) The commissioner, during the pendency of an appeal or request for hearing, may utilize the surety deposit provided by the group self-insurance fund to make a payment of workers' compensation benefits which is currently due.

(c) A hearing shall be conducted in accordance with the provisions of KRS Chapter 13B.

(d) The final order issued by the commissioner may revoke or modify a group self-insurance fund's certification.

(4) The group self-insurer may appeal the ruling of the commissioner to the Franklin Circuit Court in accordance with KRS 13B.140.

Section 12. Incorporation by Reference. (1) The following material is incorporated by reference:

(a) SI-03 (July, 2000 edition);

(b) SI-04 (June, 2000 edition);

(c) SI-05 (June, 2000 edition); and

(d) SI-06 (July, 2001 edition).

(2) This material may be inspected, copied, or obtained, subject to applicable copyright law, at the Department of Workers' Claims, Prevention Park, 657 To Be Announced Avenue, Frankfort, Kentucky 40601, Monday through Friday, 8:30 a.m. to 4:30 p.m. (21 Ky.R. 2585; Am. 3039; 22 Ky.R. 54; eff. 6-15-95; 25 Ky.R. 1176; 1667; 1879; eff. 2-18-99; 28 Ky.R. 2449; 29 Ky.R. 111; eff. 7-15-2002.)