Legislature(2003 - 2004)
03/22/2004 09:05 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 276(L&C)
"An Act relating to the Alaska Insurance Guaranty Association;
relating to the powers of the Alaska Industrial Development
and Export Authority concerning the association; and providing
for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this legislation would increase the
Alaska Insurance Guaranty Association's ability to pay Workman's
Compensation claims. He noted that the legislation had been held in
Committee to address funding issues, and he reminded that CS SB
276(L&C) version of the bill specifies that earnings from the
Alaska Permanent Fund would be a funding source.
Co-Chair Green moved to adopt committee substitute, Version 23-
GS2105\Q as the working document.
Co-Chair Wilken objected for further clarification. He stated that
the spreadsheet titled "Alaska Insurance Guaranty Association
Worker's Compensation Account, Cash Flow Projection as of
12/31/2003," provided by the Department of Community and Economic
Development, further explains the bill's funding mechanism. In
addition, he noted that the Version "Q" committee substitute
eliminates language specifying that the Earnings Reserve Account
would be the funding source for the program.
LINDA HALL, Director, Division of Insurance, Department of
Community and Economic Development, noted that the Version "Q"
committee substitute "is identical" to the L&C version of the bill
"with the exception that it does removes self-insurers from the
assessment process." This change, she continued, would result in an
assessment process that would increase the assessments in those
accounts that have "an insolvency" such as the Workers'
Compensation (WC) account. She noted that the aforementioned chart
reflects cash flow projections based on the current two percent
assessment and the projections were the assessment levy increased
to four percent. She specified that the WA account assessments as
well as the other accounts within the Guaranty Fund are depicted on
the spreadsheet.
Ms. Hall pointed out that the Auto Fund Assessment would increase
.19 percent in calendar year 2004. She exampled that on a $600
automobile premium, this would translate to a $1.24 increase, which
she declared, "is not a huge amount of money." She stated that this
low percentage increase was possible because there the Fund had a
positive cash balance at the beginning of calendar year 2004.
Ms. Hall commented that for the full calendar year 2005, the four
percent assessment rate on the WC account would equate to a .47
percent increase. She also noted that for the full calendar year
2005, a $600 automobile premium with the .19 percent increase would
equate to an additional $3.06. She voiced that these minimum
increases would assist the Association in getting out of its
deficit situation.
Ms. Hall noted that the WC rate would reduce to 3.37 percent in
calendar year 2006, and to 2.48 percent in calendar year 2007, and
the Other Funds assessments would be eliminated beginning in 2006.
Senator Bunde asked whether the assessment rate increase would
apply to other insurance premiums such as homeowners insurance.
Ms. Hall affirmed that it would.
Senator Bunde asked whether the Division of Insurance has
calculated the cost to each Alaskan were the excess earnings from
the Permanent Fund reserve account used to fund the program as
specified in the L&C version of the bill.
Co-Chair Wilken noted that the cost might be approximately two
dollars.
Co-Chair Green asked for clarification that while the four percent
assessment would apply to the WC fund, the .19 percent assessment
would be applicable to all other funds.
Ms. Hall concurred.
Co-Chair Green asked whether the funding mechanism being proposed
would have minimal impact on the public and other entities.
Ms. Hall responded that this legislation would affect "the broadest
base" of the insured marketplace and would, she continued, have
"minimal impact on the paying public while raising a substantial
amount of money," even with the elimination of the assessment on
the self-insured entities. She noted that the .19 percent
assessment on such things as automobile, homeowner, and commercial
property is small because they present a much larger premium base
that the WC base. This larger base, she noted, generates more
money, "by far," than the four percent assessment increase on WC
premiums.
Senator Bunde surmised, therefore, that the people who would
directly benefit from this legislation would be in the minority and
the people who would have no direct benefit from it would pay the
majority of the assessments.
Ms. Hall stated that the people who would benefit from this
legislation are those "who pay the smaller amounts of premium." She
noted that currently, the amount assessed from the WC base, which
is less than half the size of the other premium bases, is $4.3
million.
Co-Chair Green asked whether this legislation would enable the
Division to be better situated "to respond, react, and predict"
future claims in order to prevent a reoccurrence of this sort of
financial situation.
Ms. Hall voiced optimism that this legislation would address the
situation. She also noted that separate legislation is being
brought forward that proposes to require deposits from insurance
companies "to provide an additional pocket of money" with which to
address insolvency issues. She noted that the magnitude of this
insolvency "has depleted the resources of the Guaranty
Association."
Co-Chair Wilken removed his objection.
There being no further objection, Version "Q" was ADOPTED as the
working document.
Co-Chair Wilken referenced an Associated Builders and Contractors,
Inc. letter, dated March 1, 2004 and addressed to Senator Bunde
[copy on file] that spoke to their concern regarding a previous
change in the WC rate that had occurred midyear, in July, to the
dismay of those in the construction industry. This timing, he
continued had negatively impacted the industry because previously
bid projects had not factored in the new rate. Therefore, he
requested confirmation that the rate increases proposed in this
legislation would not occur midyear.
Ms. Hall clarified that the increases in question pertained "to
increases in benefits which had an immediate affect on rates." She
agreed that, "it was very unfortunate that that occurred midterm."
Continuing, she clarified that Guaranty Fund assessments are
annually assessed at the renewal of a policy and therefore, she
stressed, would not be done midterm. She qualified that while the
Department historically implements rate increases on January first,
they would not apply to an individual policy until that policy
renews. She stressed that this would be the procedure with these
assessments.
Co-Chair Wilken surmised therefore, that there would be no midyear
surprises.
Co-Chair Green moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
Senator Bunde objected. He expressed that to assess businesses
further at this time would be unfortunate, and he specifically
stated that it would be unfortunate to assess people who buy other
types of insurance policies. He preferred that this legislation be
financed via other avenues such as by the excess earnings of the
Permanent Fund, as that would not, he opined, negatively impact
Alaskans.
Senator Olson echoed Senator Bunde's concern. He stated that
numerous businesses have contacted him to voice opposition to
increases in their WC assessment "due to the downturn in their
funding sources ranging from the State to the business climate in
rural Alaska now." He shared the desire that other funding sources
be identified.
Co-Chair Green voiced concern about the fact that other premiums,
such as automobile and homeowner premiums would be increased.
Therefore, she asked Ms. Hall to explain how the Guaranty Fund
functions overall, and how this legislation, as a solution to the
situation, "is not off the mark in solving this temporary problem."
Ms. Hall stated that "the concept of the Guaranty Fund in Alaska",
as in every other state, "is to provide a safety net to protect
policy holders and claimants in the case of a solvent insurer." She
stressed therefore, that the theory is to institute a series of
assessments, which would provide funds in case of an insolvency.
She noted that similar to Alaska's current two percent assessment,
the majority of states have limitations on their assessment, She
shared that, whereas Alaska's Fund is comprised of three accounts
with varying rates of assessment percentages, 18 other states have
a single account within their guaranty association. She noted that
Alaska, being a small State with a small premium base, is
challenged in its endeavor to develop a Guaranty Association to
address emergencies "with the small amount of premiums that it has
to deal with."
Ms. Hall specified that the WC account, the Auto Account and the
Other Account comprise the three accounts of the Guaranty
Association. She stated that the Other Account encompasses such
things as homeowners, commercial property, and commercial
liability. She stated that currently, there is a one half of a one
percent assessment on such things as homeowners and boat owners,
due, "primarily" to the insolvency of a medical malpractice
insurer. She declared that assessing entities to provide sufficient
funds for the situation relating to this legislation is basically
the same as assessing a homeowner for a medical malpractice
insurer.
Ms. Hall, in addressing Senator Olson's comments, also voiced
concern regarding the increases in business WC premiums. However,
she noted that the proposed increase is small in comparison to
previous adjustments. In addition, she stated that the
aforementioned companion bill would propose measures to reduce the
WC premiums as she agreed that small businesses are being over-
burdened with an average assessment of 22 percent.
Co-Chair Wilken voiced agreement.
Senator Olson questioned whether the State is addressing measures
to get self-insured employers to contribute to the Guaranty
Association as, he declared, currently the WC "burden" is placed on
small businesses.
Ms. Hall clarified that the Guaranty Fund does not protect self-
insured employers, and, therefore, she continued, were they to
become insolvent, their employees would receive no benefits from
the Fund. She noted that the 24 self- insurers in the State must
provide financial guarantees and meet other eligibility criteria
established by the Division of Workers' Compensation in order to be
self-insured. She noted that the original proposal did include them
in the assessment base; however, she continued, "there was a
substantial amount of sentiment that because they were not
protected by that that they should not be forced to contribute."
Senator Olson understood that the Guaranty Fund does not protect
the self-insured employers. However, he asked whether inclusion of
them in an assessment might still be a consideration.
Ms. Hall responded no.
Co-Chair Green interjected that the Division of Insurance is not
responsible for nor does not oversee joint insurance arrangements
or self-insurers.
Ms. Hall communicated that while the Division of Insurance could
conduct financial examinations and suspend an "admitted insurance
company's" certificate to operate, it has no oversight ability in
regards to joint insurance arrangements or self-insurers even were
the Division to receive financial information that they were "in
distress."
A roll call was taken on the motion to report the bill from
Committee.
IN FAVOR: Senator Dyson, Senator Hoffman, Senator B. Stevens, Co-
Chair Green, and Co-Chair Wilken
OPPOSED: Senator Bunde and Senator Olson
The motion PASSED (5-2)
The motion to report the bill from Committee PASSED.
CS SB 276 (FIN) was REPORTED from Committee with a zero fiscal
note, dated March 23, 2004 from the Department of Administration,
and two zero fiscal notes, dated March 24, 2004 from the Department
of Community and Economic Development.
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