Rule 73: Self-Insurance — Security

A. Security Requirement. As a condition for approval to self-insure and continue to self-insure, the employer shall deposit an acceptable security to secure the payment of compensation liabilities under the Nebraska Workers’ Compensation Act as they are incurred. Political subdivisions with either unlimited rate making authority or having taxing authority with a tax base of at least $2,500,000,000 and a general obligation bond rating from Standard & Poor or Moody’s Investor Service of “A” or better may, at the discretion of the court, be excluded from this requirement.

B. Form of Security. Security shall be in the form of a surety bond or irrevocable workers’ compensation trust agreement. Forms for bonds and trust agreements must be approved by the court.

C. Amount of Security.

1. The amount of security required, regardless of the method used for determining the amount, will be calculated using Nebraska specific payroll, paid losses, or reserve. The reserve is the actual and present value of the determined and estimated future compensation payments under the Act.

2. One of two methods will be used by the court to calculate the amount of security required if the employer is able to provide paid loss totals for each of the last three complete calendar years. The formula method, as set out in Rule 73,D, will be used to determine the amount required unless the employer chooses to have the amount calculated based on an actuarial statement of reserve, as set out in Rule 73,F. If the employer is unable to provide paid loss totals for each of the last three complete calendar years, the court will determine the amount of security required based on actual and projected payroll by job classification code. The amount required may be periodically adjusted, at the court’s discretion, until such time as the employer qualifies to have the amount of security determined by the formula or actuarial method.

3. The amount of security required will be determined when the application to self-insure is reviewed and at other times at the court’s discretion.

4. Any change to the amount of security shall extend to all compensation liabilities of the employer as a self-insurer, including those liabilities already present, whether known or yet to be discovered.

5. Except in accordance with Rule 73,G the amount of security shall, in no case, be less than $500,000 or the reserve, whichever is greater.

D. Formula Method. The formula for determining the amount of security is the average of the employer’s paid losses for the last three complete calendar years preceding the date the amount of security is determined, multiplied by 2.5. The product is increased by 40 percent or $500,000, whichever is greater. The result is the amount of the security required under the formula method.

E. Adjustments to the Formula Method. The amount of security required under the formula method may, at the discretion of the court, be adjusted based on the financial condition of the employer. For purposes of determining eligibility for such an adjustment self-insurers will be assigned to one of three classes. Assignment to a given class shall be in accordance with the criteria set forth in Rule 73,E,1 through Rule 73,E,3, based on the periodic review of financial and other records of the self-insured employer. The self-insurer and its parent, if applicable, must furnish annual audited financial statements to the court within a time frame established by the court. To ascertain continued eligibility for a Class II or Class III designation, the court may periodically request financial statements and other information. Failure to comply with court requests for financial statements and other information will result in assignment to Class I.

1. Class I: Employers in Class I shall be required to deposit security in the full amount calculated according to the formula method as set out in Rule 73,D. Employers assigned to Class I are:

a. Employers with a net worth of less than $100,000,000, excluding goodwill and restricted assets, or;

b. Employers not showing a net profit in four out of the last five years, or:

c. Employers not showing a positive operational cash flow in four out of the last five years regardless of net worth, or;

d. Employers with a total reduction of net worth of 50 percent or more over the last five years, or;

e. Employers with a reduction in net worth of 25 percent or more in the most recent year, or;

f. Employers with a net worth between $100,000,000 and $250,000,000, excluding goodwill and restricted assets, and a net worth to asset ratio of less than 20 percent (i.e. net worth as a percent of assets) excluding goodwill and restricted assets from both net worth and assets, or;

g. Employers terminating self-insurance for any reason, without regard to eligibility for another class.

2. Class II: Employers in Class II may, at the discretion of the court, be eligible for a 25 percent reduction in the amount of security calculated according to the formula method as set out in Rule 73,D. In no case shall the amount of security be less than $500,000 or the reserve, whichever is greater. Employers eligible for Class II are:

a. Employers with a net worth between $100,000,000 and $250,000,000, excluding goodwill and restricted assets, and;

i. Net profit in four out of the last five years, and;

ii. Positive operational cash flow in four out of the last five years, and;

iii. No reduction of net worth of 25 percent or more in the most recent year, and;

iv. No reduction of net worth of 50 percent or more over the last five years, and;

v. A net worth to asset ratio of between 20 percent and 66.67 percent (i.e. net worth as a percent of assets) excluding goodwill and restricted assets from both net worth and assets;

OR

b. Employers with a net worth of $250,000,000 or more excluding goodwill and restricted assets, and;

i. Net profit in four out of the last five years, and;

ii. Positive operational cash flow in four out of the last five years, and;

iii. No reduction of net worth of 25 percent or more in the most recent year, and;

iv. No reduction of net worth of 50 percent or more over the last five years, and;

v. A net worth to asset ratio of less than 20 percent (i.e. net worth as a percent of assets) excluding goodwill and restricted assets from both net worth and assets.

3. Class III: Employers in Class III may, at the discretion of the court, be eligible for a 50 percent reduction in the amount of security calculated according to the formula method as set out in Rule 73,D. In no case shall the amount of security be less than $500,000 or the reserve, whichever is greater. Employers eligible for Class III are:

a. Employers with a net worth between $100,000,000 and $250,000,000, excluding goodwill and restricted assets, and;

i. Net profit in four out of the last five years, and;

ii. Positive operational cash flow in four out of the last five years, and;

iii. No reduction of net worth of 25 percent or more in the most recent year and;

iv. No reduction of net worth of 50 percent or more over the last five years, and;

v. A net worth to asset ratio of 66.67 percent or more (i.e. net worth as a percentage of assets) excluding goodwill and restricted assets from both net worth and assets.

OR

b. Employers with a net worth of $250,000,000 or more excluding goodwill and restricted assets, and;

i. Net profit in four out of the last five years, and;

ii. Positive operational cash flow in four out of the last five years, and;

iii. No reduction of net worth of 25 percent or more in the most recent year, and;

iv. No reduction of net worth of 50 percent or more over the last five years, and;

v. A net worth to asset ratio of 20 percent or more (i.e. net worth as a percent of assets) excluding goodwill and restricted assets from both net worth and assets.

F. Actuarial Method. As an alternative to the formula method of determining the amount of security required, the court will calculate the amount required based on an actuarial estimate of compensation liabilities. In no case shall the amount of security be less than $500,000.

1. A qualified independent actuary who is a member of the American Academy of Actuaries or Casualty Actuarial Society must perform an analysis of the self-insurer’s workers’ compensation liabilities and provide a certified statement of the reserve. The opinion must include a statement that there is no impediment to the actuary’s ability to provide an unbiased and independent opinion as to the adequacy of the reserve. The report must also include a synopsis of the nature of the actuary’s approach.

2. The self-insurer is responsible for any cost associated with obtaining the statement.

3. The amount of security required is equal to 66.67 percent of the actual reserve amount, increased by 40 percent or $500,000 whichever is greater.

4. An actuarial statement of the reserve must be provided with the application to self-insure. Failure to provide an actuarial statement shall result in the security amount being calculated using the formula method as set out in Rules 73,D and 73,E.

G. Reduction or Release of Security after Termination of Self-Insurance. An employer whose approval to self-insure has been terminated for at least two years may submit a written request to the court to reduce the amount of security. At its discretion, with satisfactory proof of the actual amount of outstanding compensation liabilities, the court may approve a reduction in the amount of security required. Unless an employer provides the court with satisfactory proof of the transfer of all outstanding compensation liabilities, no security will be released for at least two years after the last payment to or on behalf of the claimant on any and all claims arising during the period the employer was approved for self-insurance.