Legislature(2005 - 2006)HOUSE FINANCE 519
04/07/2006 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB51 | |
| HB271 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 271 | TELECONFERENCED | |
| *+ | HB 362 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 51 | TELECONFERENCED | |
HOUSE BILL NO. 51
"An Act relating to permitting employers in the same
trade to form joint insurance arrangements for self-
insured workers' compensation coverage."
Co-Chair Chenault MOVED to ADOPT the work draft to HB 51,
labeled 24-LS0233\C, Bailey, 4/4/06. There being NO
OBJECTION, it was so ordered.
MIKE PAWLOWSKI, STAFF, REPRESENTATIVE KEVIN MEYER, related
that in the state of Alaska, a single employer can self-
insure their workers, compensation obligations if they have
at least 100 employees and a net worth of $5 million.
Twenty-six percent of Alaska's employees work for an
employer that self-insures their workers' compensation
obligations. CSSSHB 51 will allow a group of businesses,
that bind themselves together through joint and several
liability and in the aggregate meet the requirements a
single employer must, to self-insure their workers'
compensation obligations.
Mr. Pawlowski reported that 37 states allow small groups to
form to self-insure and each state takes a different
approach.
Mr. Pawlowski referred to a handout (copy on file) that
compares the requirements of a single self-insured employer
to a group self-insured. In Alaska a single self-insured
employer is regulated by the Department of Labor. Under HB
51, it would be a blend of regulations from the Department
of Labor and the Division of Insurance. Both would have to
meet the minimum of 100 employees before they can be granted
a certificate. The net-worth requirements are the same,
although there is a pending amendment that would raise the
limits for single self-insured. He noted the intent of the
sponsor for a level playing field.
Mr. Pawlowski addressed requirements of single self-insured
employers and group self-insured: number of employees, net
worth, minimum assessment, liability, excess or reinsurance,
surety bond, guarantee fund, and premium taxes.
9:22:17 AM
Mr. Pawlowski noted that in members' packets are more than a
dozen letters of support from small businesses and trade
groups expressing their support for HB 51. A self-insured
group is not an answer for everyone, but it should be an
option. Alaska has the second highest workers' compensation
rates in the country and this body has done a lot to try to
address the issue. HB 51 does nothing to deal with the
system - what it does is give businesses another way to pay
for the cost.
Co-Chair Meyer commented that the bill was initiated at the
request of a number of small businesses. Mr. Pawlowski
listed the agencies in support of the bill: Anchorage Home
Builders Association, the Alaska State Home Builders
Association, the Associated Builders and Contractors, the
Associated General Contractors of Alaska, the Alaska
Trucking Association, Remax of Eagle River, the Anchorage
Board of Realtors, Northern Trust Real Estate Incorporated,
the National Electrical Contractors Association, Anchorage
Char, the State Chamber of Commerce, the Anchorage Chamber
of Commerce, and Spenali Homes.
Co-Chair Meyer requested that Mr. Pawlowski relate the
evolution of the bill. Mr. Pawlowski explained that the
bill began as a vehicle for self-insurance. It developed
into a larger bill because of financial oversights of these
groups.
9:25:35 AM
Mr. Pawlowski referred to a chart, "How Workers'
Compensation Claims Are Paid" (copy on file). He went
through the steps depicted in the handout. The CS provides
financial oversight structures to give the director of the
Division of Insurance the ability to oversee these small
groups.
9:27:43 AM
Representative Weyhrauch noted that all of the letters of
support say the same thing. Mr. Pawlowski thought it was
the Anchorage Home Builders that organized the letters.
Representative Weyhrauch asked about Section 1 where the
Director of Insurance can issue a self-insurance certificate
to associations only if they file applications that
demonstrate that the employers have a tangible net worth of
at least $5 million in the aggregate. He wondered about the
definition of net worth. Mr. Pawlowski deferred to the
Division of Insurance.
Representative Kelly noted the amendments and asked if they
are included in the new CS. Co-Chair Meyer said they are
not included. Representative Kelly asked that the sponsors
state an opinion on the amendments. Mr. Pawlowski responded
that the amendments were not put into the CS in order that
they could be discussed.
9:30:54 AM
LINDA HALL, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT, commented that it is a
public policy decision. She testified in opposition to the
bill. She stated appreciation of the work done on the bill.
Ms. Hall spoke to financial oversight. The basic principle
of insurance regulation is financial oversight to ensure
that claims get paid. The CS does include far more detailed
requirements than prior versions, but she voiced concerns
about the adequacy of the requirements in the bill. She
addressed tangible net worth, which has no definition, and
does not require any liquidity. Insurance regulation
requires certain types of assets. The quality of the assets
is the primary regulatory oversight.
Ms. Hall maintained that the $5 million aggregate is too
low. She reported that standardized financial statements
need to be filed and reviewed by the Division of Insurance.
Insurance financial oversight is based on Statutory
Accounting not GAAP. Investments are highly regulated -
NAIC even has an entire office dedicated to the valuation of
securities.
9:34:22 AM
Ms. Hall spoke of the section regarding insufficient assets
and the circumstances in which an association is considered
insolvent. She said there is no follow up and no provision
for receivership or wrap-up of the affairs.
Ms. Hall referred to a section that deals with the retention
of security deposits in the event of termination. She
maintained that 36 months is not enough time. Workers'
compensation claims can take 20 years or more to close. She
suggested it would be more appropriate to conditionally
release a deposit upon termination of liabilities as
determined by actuarial analysis.
Ms. Hall noted that the regulatory authority to penalize for
violations has been added to the bill. It is limited to
$100,000. She gave an examples both nationally and locally
of major settlements to resolve allegations of deceptive
accounting practices. She maintained that there are
substantial deficiencies and there has to be an ability of a
regulator to have penalties to enforce statutory provisions.
Ms. Hall addressed another area of concern in HB 51,
regulatory oversight. Chapter 36 of the Insurance Title
provides the statutes controlling trade practices and
frauds. It includes such things as oversight of marketing,
misrepresentation and false advertising, unfair
discrimination, and unfair claims settlement practices.
None of these provisions would be allowed in the oversight
of the self-insured group associations. The bill
specifically provides that no other insurance law can apply.
9:37:24 AM
Ms. Hall noted that the CS also provides for a third-party
administrator to administer claims. Today, the Division of
Insurance licenses adjusters who handle workers'
compensation claims. Title 23 provides that an individual
self-insured employer may have either their own staff
approved by the Department of Labor or independent licensed
third parties to adjust claims. She explained that third
party administrators are not allowed to adjust workers'
compensation claims or property casualty claims. The bill
does not require licensing of third-party administrators and
therefore would not provide any oversight of the claims
handling practices.
Ms. Hall reported that today the Division of Insurance (DOI)
is performing a market conduct review of a claims adjusting
company after receiving complaints from injured workers
about the handling of their claims. This bill would not
allow for that type of authority if claims adjustors are not
licensed. There is no complaint process and no
accountability for the handling of claims.
9:38:46 AM
Ms. Hall spoke to the issue of fiscal impact. She addressed
fees for those regulated. The DOI operates as a receipts-
based entity as fees are charged to those regulated to cover
the costs of that regulation. In general, a fee is required
upon application for authority to operate, and then renewal
fees are collected. These are in addition to the
examination costs. There is no provision for renewal fees
to provide revenue for oversight.
Ms. Hall explained the premium tax issue. Once there is no
longer premium collected on insurance policies, there will
be a loss of revenue to the general fund. In 2004 the
premium tax was the second largest source of revenue to the
general fund. The 2004 premium tax for workers'
compensation alone was approximately $8.1 million. If these
groups were to expand, it is not unrealistic to estimate
that 25 percent of the current premium would no longer
provide taxes to the general fund for a revenue loss of over
$2 million. The bill does make provision for payment to the
Division of Workers' Compensation on the same basis as
individual self-insureds, but represents a loss to the
general fund.
Ms. Hall related that there are provisions in other states
that allow self-insured associations. Both Nevada and
Oregon have significant provisions that are missing in this
bill. There are provisions to access other self-insured
associations in cases of insolvency, provisions for excess
insurance, for working capital requirements, for improving
accident prevention, and for disclosure for employers
joining self-insured groups.
9:41:31 AM
Ms. Hall addressed Alaska statute AS 21.75, which provides
for the formation of reciprocal insurers. It allows the
formation of a regulated entity to provide various lines of
insurance for the members of the reciprocals. It requires
$1.5 million in capital and surplus for an entity to provide
coverage for workers' compensation claims. She opined that
that amount is not at all far-reaching. Reciprocal insurers
are regulated in much the same way as a traditional insurer,
which is intended to protect the public. The Timber
Exchange and Alaska Rural Energy Authority (ARECA) are
examples of trade groups that are operating successfully.
She maintained that a different vehicle is not needed
because the reciprocal, as provided in Alaska statute, is a
viable entity for trade associations to form their own
programs.
Ms. Hall concluded that she is pleased to see the efforts to
include more accountability in the CS. She continued to
have serious reservations about the viability of these small
plans when the down side potential of there not being
sufficient monies to pay the claims of injured workers
exists. She expressed sympathy about the high costs of
workers' compensation insurance today. Many are looking for
less expensive ways to provide the mandatory coverage. As
long as the benefit system continues to be expensive, the
cost of providing benefits will not change regardless of the
source of payments. She referred to a California study,
which showed reforms that reduced insurance rates by 46
percent from July 1, 2003, to January 2, 2006. Alaska's
system costs continue to escalate. Just changing the entity
paying for the system will not change the cost.
Ms. Hall urged members to carefully consider the possible
effects of this legislation. An Alaskan trade group crafted
this bill with great care, time, and expense in an attempt
to find a viable alternative and remain responsible. The
bill, however, would apply to any group that decides to
participate and might not have the same principals of
accountability, but would merely be looking for a way to
skimp on workers' compensation costs. As we research self-
insured groups in other states, it appears that what began
as trade association groups with common interests have
morphed into some very broad groupings of substantially
unrelated types of risks. In New York, while certainly
having a far greater population base, there are 63 such
self-insured trusts. There is a potential for a large
number of groups in Alaska so adequate protections need to
be in place from possible impacts down the road on the
overall insurance market place. Spreading the risk to a
smaller group would impact groups that are left. She voiced
concern that the bill does not contain protections for the
work force.
9:46:41 AM
Co-Chair Meyer noted that the bottom line is that DOC has
the final say in self-insurance certificates. He mentioned
that there is no fiscal note. Ms. Hall stated that she has
submitted an indeterminate fiscal note.
Representative Weyhrauch asked if the required "reserves"
could be cash. Ms. Hall replied that the insurance company
would be required to have cash and approved investment
vehicles for reserves. Representative Weyhrauch asked about
the reference on page 4 to "tangible net worth of at least
$5 million". He asked if Ms. Hall said that $5 million is
not adequate. Ms. Hall replied that it is not adequate
because there is no liquidity requirement. Representative
Weyhrauch asked if any entity has a bond greater than, or
equal to, $5 million on deposit. Ms. Hall replied that
there are no bonds at all today. There are deposits, but
they are not in that amount. Individual financial
statements are analyzed for adequacy; there is no deposit of
that amount. She addressed solvency bonds and bond
underwriters. She did not know if the bond requirement was
feasible.
9:51:23 AM
PAUL LISANKIE, DIRECTOR, DIVISION OF WORKERS' COMPENSATION,
DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, spoke of the
regulation requirement, not statute, regarding self-insurers
and security bonds. Recently, the Division required an
entity to post security because, in the single self-insurer
program, the financial ability to pay is scrutinized. He
spoke to net worth provisions in the current self-insurer
program. He discovered that the regulations were 23 years
old. If $5 million applied in 1984, it would need to be
inflated today. He suggested a $10 million minimum. The
statute does not require a bond for security, but the
regulations do address that issue. When a securing is
required of a single entity self-insurer, the minimum in
regulations is $300,000 and it should be raised to $600,000
in the near future.
9:55:32 AM
Mr. Lisankie addressed excess insurance requirements, which
regulations mandate. He said there are 31 single entities
that are currently authorized to self-insure their workers'
compensation liability. Their average net worth in 2006 was
$4.9 billion. The seven smallest have an average net worth
of $55.6 million. Net value is not an indicator of
financial responsibility. The smallest entity is a
regulated public utility, which is publicly traded, with
transparency requirements, and with capitalization of $250
million. Although it is true that self-insurers operate
under a statute that mentions $5 million as net worth, there
are not many in Alaska.
9:58:00 AM
Representative Weyhrauch inquired if excess insurance is
required by regulation and not by statute. Mr. Lisanke said
that is correct. Representative Weyhrauch asked if the
regulations are authorized by the legislature to require
excess insurance. Mr. Lisanke responded that the touchstone
is that the statutory mandate is to ensure financial ability
to pay, which is broad enough.
9:58:36 AM
Representative Weyhrauch asked about limits on cease and
desist fines and whether they are imposed on other entities.
Mr. Lisankie asked if Representative Weyhrauch is referring
to Title 21. Representative Weyhrauch clarified it is under
the compensation provision on page 13.
Ms. Hall responded that there are different levels of fines
under Title 21 for different entities. There are "per
instance and aggregates". The example previously referred
to was the first time a fine of that size was imposed. It
does not happen on a regular basis. Representative
Weyhrauch summarized that the concern is that there is not
enough transparency to ensure that claims on workers'
compensation can be paid because of undefined parameters.
He asked Ms. Hall if she would be comfortable if the
entities would allow transparency of financial statements.
Ms. Hall responded that the bill does provide for the
Division to receive financial statements from individual
members. There is a provision for those to be kept
confidential. The concern is not transparency, but the
ability to require liquidity. The Division has no authority
to require liquidity to ensure adequate money to pay the
claims.
10:01:46 AM
Representative Kelly asked about protection in the re-
insurance area. Ms. Hall said the requirements for excess
layers are adequate. The concern is what underlies that.
There are some very large retentions in those excess layers.
A multitude of claims would stress the financial resources
for those underlying pieces that the group is responsible
for.
10:03:36 AM
JOHN GRUMMET, ALASKA INDEPENDENT AGENTS AND BROKERS OF
ALASKA, testified against HB 51. He maintained that there
are no safe harbors for the employees. He referred to a
position paper, "Alaska Independent Insurance Agents and
Brokers" (copy on file.) He voiced concern about no
guarantee fund and an unfair claims settlement practice. He
spoke highly of the current director of the Division of
Insurance. He agreed with Ms. Hall's testimony. He
concluded that previous bills have not been successful
because the homebuilders did not have the liquidity or did
not want to secure the liquidity.
10:06:50 AM
Representative Weyhrauch asked for a definition of personal
indemnity. Mr. Grummet said the association is supposed to
provide for the liquidity to its membership. There is no
evidence that the members are tied into that.
Representative Kelly spoke to the liquidity problem and
higher workers' compensation rates. Mr. Grummet maintained
that by going this route, it would cost them more in the
end.
Representative Kelly asked how "Ms. Hall does with cost
control and looking out for the employer". Mr. Grummet said
that she does a good job.
10:09:05 AM
RAY HICKEL, PRESIDENT, ANCHORAGE HOMEBUILDERS ASSOCIATION,
related that his organization took the lead role to support
HB 51. The bill is modeled after 30 other states. He
maintained that the current system is in trouble. He stated
a need to change the way insurance does business, and he
suggested that the committee give the bill a fair hearing.
Mr. Hickel added that self-insurance is a good model to use.
10:11:46 AM
ROBERT VOGEL, PRO GROUP MANAGEMENT, CARSON CITY, NEVADA,
said his company is a plan administrator for self-insured
groups. He related that self-insured groups are not new.
He cautioned not to confuse trade association with self-
insured entities. Trade associations can be sponsors, but
are not responsible for payments. There is no
distinguishing feature between members and the association.
The goal is to grow the liquidity requirements.
Mr. Vogel addressed the solvency bond issue. Other forms of
securing net liquidity are allowed to be posted, such as
certificates for deposit, cash, or letter of credit.
Mr. Vogel clarified the issue of tangible net worth. The
new entity is required to have audited financial statements
under generally accepted accounting principals. The
underlying companies that join these groups may or may not
have audited financials. Trade receivables are generally
included in tangible net worth calculations and unsecured
receivables are generally excluded. He defined tangible net
worth.
10:16:48 AM
Mr. Vogel said the entities are putting their companies on
the line to make sure their claims are paid. If a group
were to have problems, the bill provides ways to solve them.
Section 21.77.230, on page 12, allows for transfer of
surplus funds from previous years to the current year. It
provides for setting aside 65 percent to pay for claims.
The bill provides for the claims administrator to be
licensed and accountable. Mr. Vogel concluded that this is
about businesses taking responsibility and it is different
than insurance. It is about a long-term change. Financing
losses over time will see a savings.
10:21:45 AM
RICHARD CATTANACH, ASSOCIATION OF GENERAL CONTRACTORS (AGC),
spoke to the bill from his organization's perspective of
safety and controlling claims costs. He urged passage of
the bill.
10:23:49 AM
Representative Kelly thought that employers would be
interested in getting involved with the safety aspect. Mr.
Cattanach addressed problems involving lack of a safety
program. He pointed out a concern about financial
liability. He opined that if AGC is a self-insured group,
if one member fails, the others can rely on the rest.
KENTON BRICE, PROPERTY CASUALTY INSURANCE ASSOCIATION OF
AMERICA, spoke to Ms. Hall's comments and echoed her
concerns. He suggested taking a closer look at oversight
requirements in other states. He said an amendment would be
forthcoming from PCIA. He gave an example of the amount set
aside for claims and said $5 million is inadequate. He
maintained that $10 million would also be inadequate. He
voiced concern that entities that form would be operating
under similar rules and regulations that insurance companies
must operate under, in terms of fees, taxes, and
regulations. He agreed with Ms. Hall's idea that
legislation must be drafted toward the lowest standard, both
for solvency and for claims payment.
Mr. Brice expressed concern that there is a difficult
insurance market in Alaska. He observed that an outside
company had come to the state, as a result of recently
passed legislation and the hope that the market place will
improve. He concluded that competition improves the market.
System costs cannot be ignored. He expressed concern that
if individuals are drawn out of the pool into self-insured,
then the market will not be improved.
10:33:23 AM
REBECCA LOGAN, ASSOCIATION OF BUILDERS AND CONTRACTORS OF
ALASKA, testified in support of HB 51. She maintained that
similar programs have done well. They see it as a viable
option for trade associations regarding workers'
compensation. She clarified that accounts receivable are
not included in tangible net worth. It is common to have a
72-month retention rate.
HB 51 was heard and HELD in Committee for further
consideration.
10:36:47 AM
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