Workers’ Compensation in Texas

A Brief History

International Development

18th Century Pirates1

If you survived the injury (no death benefits)

Loss of an eye – 100 pieces of eight2 (Spanish coin)

Loss of a finger – 100 pieces of eight

Loss of left arm – 500 pieces of eight

Loss of right arm – 600 pieces of eight

Loss of left leg – 400 pieces of eight

Loss of right leg – 500 pieces of eight

1Source: Insurance Journal, July 29, 2008.

2Equivalent of about 50 weeks of wages in colonial America

International Development

1881 – Germany enacts first workers’ compensation program

1897 – England enacts Workers’ Compensation Act

Early 20th Century – states in U.S. begin enacting workers’ compensation laws

Texas Workers’ Compensation Development

1913 – Employer’s Liability Act enacted

1989 – Major reform created main elements of current workers’ compensation system

1991 – Legislature creates Texas Workers’ Compensation Insurance Fund (“the

Fund”)

2001 – “The Fund” restructured to become Texas Mutual Insurance Company

2005 - Workers’ compensation healthcare networks authorized

1980’sWorkers’ Compensation System:

Lump sum settlementsTrial de novoMedical inflationAttorney involvementAdministered by IAB

Workers’ Compensation Insurance System:Promulgated ratesRapid rate increase in late 1980’s“Pool” grows rapidly in late 1980’s

1989

Pool writes $850 million

Pool deficit - $550 millionAssessments

SB1 passes in 3rd Special SessionForbids lump sum settlements

Eliminates trial de novo

Controls medical costs through TWCC medical fee guidelines

Creates TWCC, effective 1990

Other reforms take effect 1-1-91

Creates “Facility” out of old “Pool” effective 1-1-91

1990

4-1-90TWCC created to administer system

Pool writes $1.2 billionPool deficit - over $500 million

Assessments

AFL-CIO lawsuit

1991

1-1-91SB1 reforms become law

4-1-91TDI “letter from hell” to insurers

TDI “Letter From Hell”April 1, 1991 letter sent from StateBoard of Insurance to all companieswriting Workers’ CompensationCoverage in Texas.

Activities which have the effect of circumventing the provisions of the InsuranceCode, agency regulations and Orders of StateBoard of Insurance with respect to premiumrates and premium calculations.

Practices which result in an insured paying asurcharge or other fee or charge.

1991April - May

Insurance Commissioner, business interests, and insurers negotiate a bill to:

Deregulate rates

Phase out Facility

Create the Fund

August Special SessionBill passes. Mandates Fund open for business 1-1-92.

November 1First Board of Directors meeting

Fund Creation

April 1991: Legislative discussion of creating a State Fund

1990 Market: 4.2 billion

Fund Capacity: $300 million in bonds

3:1 surplus ratio

3 x $300 million = $900 million

About 25% of total market - to assure competitive impact on the market

1992

1-1-92Fund begins writing policies

Trial court rules SB1 unconstitutional

Written Premium

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

WrittenPremiuminmillions

1 1993 – Court of Appeals upholds trial court ruling that SB1 is unconstitutional.2 1994 – “Fund” spends $100 million for bond defeasance/retirement.3 1995 – Texas Supreme Court rules SB1 constitutional.4 1998 – “Fund” spends $81.6 million for bond defeasance/retirement.5 1999 – “Fund” spends $61.9 million for bond defeasance/retirement.

1 3 4 5

2

Texas Workers’ CompensationMarket Premium

00.5

11.5

22.5

33.5

44.5

199019

9119

9219

9319

9419

9519

9619

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

07

Premium inbillions

11992 – Deductible policies available21993 – Self insurance available

11 22

Market Share

0

0.5

1

1.5

2

2.5

3

Market Premium Paid (billions)

0100200300400500600700800900

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Company Written Premium (millions)

Company %Company %

19921992 7%7%

19931993 17%17%

19941994 32%32%

19951995 30%30%

19961996 22%22%

19971997 14%14%

19981998 13%13%

19991999 13%13%

20002000 15%15%

20012001 18%18%

20022002

20032003

20042004

20052005

20062006

20072007

24%24%

26%26%

28%28%

26%26%

27%27%

26%26%

Texas Workers’ Compensation Insurance Fund Bond and Surcharge

Repayments

1999 - HB3697 filed to appropriate $200-400 million of TWCIF surplus to state’s General Revenue Fund

Concept rejected by key legislators; bill changed to refund all maintenance tax surcharges paid 1992-1997 to policyholders.

1999-2002 - $179 million in maintenance tax surcharge refunds pursuant to HB3697, plus over $800,000 in publication expenses to find policyholders due refunds

October 2000, House Business and Industry Committee study:

“The money held in surplus is for the current and future claims against policies that the Fund has or will write. In effect, this money is held in trust for those employers to cover the needs of their injured workers.”

“Further, …if the Legislature chose to reappropriate monies from the surplus the Fund policyholders would have legitimate standing for a judicial challenge, and based on outcomes of similar cases in other states they would likely win under the current statutory language. This further strengthens the argument that these monies are first and foremost for the benefit of the policyholders.”

December 2000

Texas Comptroller published report recommending TWCIF be sold and proceeds put in state’s “rainy day” fund.

2001: HB3458 - Why? Chairman Brimer:

“Well, it seems…that we’ve had…a Governor and the Comptroller...[try] to grab…surplus and put it in general revenue. …

When you do a mutual company concept, the policy payers get…dividends back on the savings. So, we don’t have to worry about the state keeping the savings, the people that pay the premium will get the savings back in the form of dividends. That’s the reason for the mutual concept.”

2001: HB3458 - Why?

Chairman Brimer:“The Fund will have the same statutory

mandates that the Fund does now acting as the insurer of last resort. The company will continue to serve as a competitive force in the market and will guarantee businesses that comp coverage is available to them.”

2001 – A New Odyssey

Changed name to Texas Mutual Insurance CompanyMandated that we operate as a mutualStronger pledge from State not to touch the moneyRemoved company from Sunset reviewRemoved cumbersome requirementsFour of nine board members to be electedNo changes to mandates to

Be competitive force in marketGuarantee availabilityAct as insurer of last resort

HB 3458

What Have We Done So Far? (Through 2008)

Policies Written - 720,233

Premium Written - $8.6 billion

Claims administered - 572,036

Voluntary bond payments - $243.5 million

Maintenance tax surcharge repayments - 179.8 million

Policyholder dividends* - $649.1 million

$1.072 $1.072 billion Year-end 2008

Policies in force – 47,947Covered employees – 924,000 +Premium in force – $682.7 million Total assets – $3,413,750,028 Total liabilities – $2,478,668,367Policyholders’ surplus – $924,889,431*Includes some purchasing group dividends in all years except 2000.