Legislature(2021 - 2022)GRUENBERG 120
04/08/2021 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB106 | |
| HB102 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 103 | TELECONFERENCED | |
| += | HB 106 | TELECONFERENCED | |
| *+ | HB 102 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 102-STATE INSUR. CATASTROPHE RESERVE ACCT.
3:22:56 PM
CHAIR KREISS-TOMKINS announced that the final order of business
would be HOUSE BILL NO. 102, "An Act relating to the state
insurance catastrophe reserve account; and providing for an
effective date."
3:24:26 PM
SCOTT JORDAN, Director, Division of Risk Management, Department
of Administration (DOA), introduced HB 102 on behalf of the
House Rules Standing Committee, sponsor by request of the
governor. He provided a PowerPoint presentation, titled "House
Bill 102" [hard copy included in the committee packet]. He
began on slide 2, which outlined the purpose of the bill as
follows [original punctuation provided]:
•This legislation would change the Catastrophic
Reserve Account (CATFund) from $5,000,000 to
$50,000,000 unencumbered funds.
•The purpose is to allow the State to self-insure for
property coverage.
•The State currently self-insures for Workers'
Compensation and General Liability.
•Due to the global property insurance markets
hardening, we saw a 30% increase in insurance costs
from FY20 to FY21 and have been told to expect another
15% to 20% for FY22.
•Currently, the limit on catastrophic coverage is
$50,000,000 for an annual premium. By increasing the
statutory cap, the State will be able to fully self-
insure against property losses and in doing so save
the annual premium.
3:26:22 PM
MR. JORDAN addressed statutory language on slide 3, which
highlighted key points in AS 37.05.289 [regarding the state
insurance catastrophe reserve account], including "Assets of the
account may be used to obtain insurance, to establish reserves
for the self-insurance program, and to satisfy claims or
judgments arising under the program." The two other highlighted
phrases indicated that the current cap is not to exceed $5
million unencumbered. He reviewed a list of expenditures from
the CATFund since its inception in 1988 on slide 4. He noted
that the total expended was $149 million, which averaged $4.5
million per year. He acknowledged that the $5 million cap had
been sufficient; however, he reiterated the department's
interest in increasing the statutory cap to $50 million to allow
the state to self-insure against catastrophic property losses.
3:27:50 PM
MR. JORDAN advanced to a graph on slide 5 that showed the 10-
year history of property premiums and losses. The blue line
reflected property premiums, which had increased from $2 million
in fiscal year 2010 (FY 10) to $5.1 million in FY 20. The
orange line reflected property losses paid by the state. Losses
remained fairly low except for three spikes: $4 million in FY
15 due to the Crystal Lake Hatchery fire in March 2014; $1.2
million in FY 20 due to the claims from the earthquake in
Anchorage on November 30, 2018; $1 million in FY 20 due to
retention paid for a Department of Transportation & Public
Facilities (DOT&PF) maintenance shop snow collapse in McGrath.
3:30:11 PM
MR. JORDAN turned to slide 6 and reviewed the history of
property premiums compared to all premiums from FY 10 to FY 20;
property premiums totaled $39 million, and all premiums totaled
$80 million. He said he hoped that HB 102 would create savings
for the department, as increases in property premiums were
expected to continue. He proceeded to slide 7, regarding larger
claims paid out of the CATFund, which read as follows [original
punctuation provided]:
• AMHS LeConte Grounding May 2004; $1,187,330
• F&G Crystal Lake Hatchery fire March 2014;
$4,078,137
• Alaska Aerospace Kodiak Launch Facility rocket
explosion August 2014; $1,513,667
• PFAS claims starting in November 2017; $5,877,555
• Earthquake related claims November 2018;
$1,263,631
3:31:58 PM
MR. JORDAN moved to slide 8, which provided a summary of
undesignated general fund (UGF) lapse appropriations and read as
follows [original punctuation provided]:
•The budget includes lapse appropriations to shore up
certain state accounts up to statutory limits
•The Risk Management lapse appropriation is last to
ensure sufficient lapse for the other accounts
•The total FY2021 projected UGF lapse is $110.7
million
MR. JORDAN noted that slide 8 showed how the catastrophic
reserve account was funded each year.
3:33:01 PM
CHAIR KREISS-TOMKINS said he was thrilled about legislation that
would save money for the state operating budget.
3:33:11 PM
REPRESENTATIVE CLAMAN questioned how much the insurance
companies were paying.
MR. JORDAN offered to follow up with the requested information.
He believed that during that 10-year period [FY 10 to FY 20],
the only claim of significance was the Alaska Aerospace claim.
REPRESENTATIVE CLAMAN reasoned that if the premiums paid by the
state exceeded the losses paid by the insurance companies, there
would be additional reason to pass HB 102.
MR. JORDAN relayed that there were many years that the state did
not receive payments from the insurance carriers for the Alaska
Aerospace claim.
3:35:19 PM
REPRESENTATIVE KAUFMAN questioned how the CATFund would be
managed if there were no claims and a large cash balance
leftover.
MR. JORDAN explained that the fund had an unencumbered balance
of $5 million which could not be exceeded. If the bill were to
pass, he said, the fund would have a balance of $50 million. He
noted that even with an unencumbered balance of $5 million,
there were still $6.2 million in encumbered claims waiting to
settle. He added that there were years the fund wasn't used at
all and years in which all of it was used.
3:36:44 PM
REPRESENTATIVE KAUFMAN questioned whether the management plan
was optimized for total yield benefit. He remarked
If part of it can be invested in a way if it does
build up and somehow, we know we have float, and how
is that portion of it optimized in a way that's,
maybe, semi-liquid where it could be if you have an
encumbrance that comes upon it where it's liquid
enough where you can get it, but it's being managed
for optimum return rather than just in a cash account.
3:37:25 PM
MR. JORDAN stated that the interest off this account is managed
by the Department of Revenue (DOR). He explained that the state
didn't get any interest from it, later adding that the account
would have a maximum of $50 million. He deferred the question
to DOR.
CHAIR KREISS-TOMKINS sought to confirm that Representative
Kaufman had asked if the bill were to pass, whether the $50
million balance would sit in the bank and collect interest or be
managed for return.
REPRESENTATIVE KAUFMAN confirmed that he was attempting to ask
whether the fund would be managed with an investment profile.
3:38:50 PM
LESLIE ISAACS, Director, Division of Administrative Services,
Department of Administration, said he would have to confer with
DOR to ascertain the investment portfolio and whether it
included the CATFund.
CHAIR KREISS-TOMKINS acknowledged the importance of receiving
maximum return if the fund were to increase from $5 million to
$50 million.
3:39:36 PM
REPRESENTATIVE VANCE asked whether any legislative action was
required to accomplish that adjustment and maximize its
potential. She acknowledged that $50 million is very different
from $5 million, adding that the legislature should ensure that
it has the flexibility that Representative Kaufman spoke of.
CHAIR KREISS-TOMKINS concurred.
3:40:48 PM
REPRESENTATIVE EASTMAN asked what regulations required the money
to be kept on hand.
MR. JORDAN said there was no requirement that it be kept on
hand. He related that in 1988, the fund was originally created
to handle the large fluctuations in claims. He added that the
account was being leveraged to potentially handle the self-
insured aspect of property coverage and allow the state to
retain the current property insurance premium.
3:41:57 PM
REPRESENTATIVE EASTMAN asked Mr. Jordan to contrast the plan in
HB 102 to a competing plan in which costs would be treated
through the annual appropriations process as opposed to setting
aside the $50 million.
MR. JORDAN pointed out that the CATFund was intended to cover
unanticipated catastrophic losses. He conveyed that the annual
actuarial reports anticipated a certain amount of property
claims each year. He further noted that aside from the spikes
in FY 15 and FY 20, the property losses ranged from $200,000 to
$1.5 million in the last 10 years.
REPRESENTATIVE EASTMAN asked for a comparative cost/benefit
analysis between HB 102 and another plan in which annual
expenses were paid on occurrence. He questioned the benefit of
HB 102 as opposed to "the wait-and-see approach."
MR. JORDAN explained that the state was buying coverage for $50
million in catastrophic losses. Referencing slide 5, he
indicated that a varying amount was paid; however, if the state
were to pay $6.5 million for coverage next year without
incurring losses, the $6.5 million would be "out the door." He
continued to explain that if [the $6.5 million] were put into
the account and the state had its own fund "sitting there
waiting for a catastrophic loss," then the premiums would be
saved on a yearly basis; further, the savings would return to
the agencies in a "great reduction."
3:45:20 PM
REPRESENTATIVE EASTMAN asked why it's more effective and cost
efficient for the state to have this fund as opposed to charging
property damages to the state through the appropriations
process.
CHAIR KREISS-TOMKINS sought to clarify that Representative
Eastman was asking why the CATFund existed and if the McGrath
snowshed were to collapse next year, why the state couldn't
simply add that as a line item in the capital budget.
REPRESENTATIVE EASTMAN confirmed that was his question.
MR. JORDAN stated that the Federal Emergency Management Agency
(FEMA) required that the state have catastrophic insurance. He
shared that after the earthquake, several buildings requested a
benefit from FEMA which required proof that the buildings were
insured. He said the fund provided the ability to do that
without buying insurance. He elaborated that without the
CATFund or purchased insurance, FEMA could deny coverage on a
catastrophic loss, such as an earthquake, flood, or tsunami.
3:48:18 PM
REPRESENTATIVE KAUFMAN surmised that the $50 million figure was
derived from analysis. He said, "This seems like a good idea,
but those numbers and the evaluation of those numbers is what
would prove that this is a good idea and there's not an
opportunity being missed."
3:49:35 PM
REPRESENTATIVE CLAMAN sought to clarify the difference between a
limit of $5 million and a limit of $50 million. He construed
that the $5 million limit was utilized for the retention of
purchasing insurance, which meant that the state paid the first
$5 million on a claim and insurance covered the rest.
MR. JORDAN clarified that the retention was $1 million. He
explained that the CATFund was set up to handle large,
unanticipated losses. He added that the fund could handle
losses over $1 million retention.
REPRESENTATIVE CLAMAN sought to confirm that with $50 million in
the fund, the state would not purchase excess coverage for
losses exceeding $1 million.
MR. JORDAN said [DOA] didn't intend on purchasing any excess
coverage and planned for the CATFund to cover unexpectedly large
property losses. He anticipated that aside from a catastrophic
loss, nothing would exceed "something that [the department]
couldn't pay out of [its] yearly appropriations."
REPRESENTATIVE CLAMAN surmised that in areas outside of property
loss, the state had high retentions but still received excess
coverage in other areas of potential exposure. He asked whether
that was accurate.
MR. JORDAN said the state was self-insured for workers'
compensation and general liability. He stated that [should the
bill pass], property coverage would be added to those self-
insurance programs. He noted that excess insurance was
purchased for aviation and marine, both of which had high
retentions and high excess limits.
REPRESENTATIVE CLAMAN sought to verify that Mr. Jordan's
historical analysis was that the state didn't need excess
coverage in the areas it had chosen to self-insure.
MR. JORDAN believed that was an accurate statement for property
coverage. He recalled that there was a cost issue in the early
2000s when the state elected to self-insure for liability. He
explained that it didn't make sense to purchase the coverage
with the high [cost of] premiums; at that time, the state had a
limit of $5 million on liability and the premiums were nearing
$2 million.
3:53:33 PM
REPRESENTATIVE EASTMAN questioned whether the CATFund was
subject to reappropriation by the legislature.
MR. JORDAN deferred to Mr. Isaacs.
MR. ISAACS deferred to Ms. Harbour.
3:54:42 PM
PALOMA HARBOUR, Fiscal Management Analyst, Office of Management
& Budget, Office of the Governor, in response to Representative
Eastman, answered no, it does not require appropriation to
spend.
REPRESENTATIVE EASTMAN asked whether the legislature could
reappropriate the money in the CATFund.
MS. HARBOUR answered yes, the legislature has the authority to
take money out of designated general funds, otherwise they would
be considered dedicated funds, which she specified "we are not
allowed to have."
REPRESENTATIVE EASTMAN questioned whether the CATFund was
subject to the sweep.
MS. HARBOUR replied in the affirmative.
3:55:40 PM
REPRESENTATIVE STORY asked whether other states pursued similar
practices regarding catastrophic insurance.
MR. JORDAN replied that other states had various levels of self-
insurance. He reported that public entities were moving to
self-insure catastrophic losses because of increasing premiums.
3:56:40 PM
MS. HARBOUR corrected her previous statement, clarifying that
the CATFund was exempt from the sweep because it did not require
further appropriation.
REPRESENTATIVE STORY inquired about the outcome in other states.
MR. JORDAN offered to follow up with the successes or failures
of this self-insurance program in other states.
3:57:28 PM
CHAIR KREISS-TOMKINS asked when the state began self-insuring
for workers' compensation and liability.
MR. JORDAN recalled that worker's compensation was in the mid-
1990s; general liability was switched in 2003.
3:58:00 PM
CHAIR KREISS-TOMKINS questioned whether the division had
explored the possibility of providing risk management coverage
for aviation and marine through the CATFund if the fund grew to
$50 million.
MR. JORDAN confirmed that the idea was considered. More
specifically, he conveyed that the division had considered self-
insuring damages on the hulls [vessels] themselves; however, he
opined that aviation liability would be less feasible because
numerous airports were state-owned, and the state's liability
exposure was $500 million. He said "the marine side" was in the
same situation because of the Alaska Marine Highway System
(AMHS) and its passengers; the liability coverage was $1
billion. He opined that the CATFund wouldn't cover that if
there was catastrophic loss.
CHAIR KREISS-TOMKINS inquired about the premium the state paid
for the marine insurance policy.
MR. JORDAN believed it was $3.8 million for vessels and
liability.
CHAIR KREISS-TOMKINS requested that Mr. Jordan follow up with
information related to the premium for aviation as well.
4:00:53 PM
CHAIR KREISS-TOMKINS conveyed that he was "foggy" on the
different interpretations of what was sweepable. He opined that
it was problematic that there was no definitive interpretation.
He asked whether there was an interpretation from the attorney
general specifying that the CATFund was not sweepable.
MS. HARBOUR stated that according to court case related to
sweepable funds, funds not subject to further appropriation are
not sweepable.
4:02:15 PM
REPRESENTATIVE VANCE requested that the department provide a
list of all the state's insurance policies and identify which
were self-insured along with the dates they became self-insured.
MR. JORDAN agreed to follow up with the requested information.
4:03:04 PM
REPRESENTATIVE KAUFMAN asked for the administrative/management
fees expressed as an expense ratio.
MS. HARBOUR said OMB could work with the Department of Revenue
(DOR) to provide additional information. She noted that the
fund was managed as general fund monies because of its fluidity.
She said OMB and DOR would determine whether there were
alternative options for investment.
4:04:30 PM
CHAIR KREISS-TOMKINS opined that HB 102 was terrific
legislation. He commended the administration for bringing the
proposal forward and identifying possible savings. He said it
made no sense to shovel millions of dollars out to insurance
companies when the state needed every dollar it could get.
CHAIR KREISS-TOMKINS announced that HB 102 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0102 version A.PDF |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |
| HB102 BHR Memo HSTA 2-23-21.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |
| HB102 Sectional Analysis version A 2-23-21.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |
| HB102 Sponsor Statement 2-17-21.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |
| HB102-DOA-DRM Catfund presentation 040121.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |
| HB 106 Amendment A.1 - Vance 4.7.21.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 106 |
| HB 106 Legal Memo re Amendment A.1.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 106 |
| HB 102 Fiscal Note - DOA 4.8.21.pdf |
HSTA 4/8/2021 3:00:00 PM |
HB 102 |