Legislature(1995 - 1996)
03/16/1995 01:05 PM House CRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HCRA - 03/16/95 HB 223 - JOINT INSURANCE ARRANGEMENTS Co-Chair Ivan invited his staff aide, Tom Wright to introduce HB 223. Number 034 TOM WRIGHT, Legislative Assistant to Representative Ivan, read the sponsor statement for HB 223. He said the bill was a response to needs of quasi-governmental entities such as Native tribal councils, port authorities and others who either can't obtain insurance or find the cost of insurance prohibitively expensive. HB 223 gives these entities an option to obtain affordable liability coverage they currently don't have under current statutes. The current joint insurance statute limits participation to municipalities and their public corporations, school districts and Rural Education Attendance Areas (REAA). This bill expands the scope of poolings so that pools, either those in existence or additional pools, can serve the unmet needs of tribal councils and other quasi-governmental entities. Those that would be eligible for coverage must perform at least two of the general municipal powers described in Alaska Statute 29.35.101. Number 062 CO-CHAIR IVAN welcomed any questions from committee members. Number 065 REPRESENTATIVE PETE KOTT asked if Mr. Wright could list some examples of the duties the entities would have to perform. Number 074 MR. WRIGHT stated some of the requirements are to establish prescribed salaries for an elected or appointed municipal official or employee, to combine two or more appointive or administrative offices, to sue and be sued, to regulate the operational use of a municipal right of way facility or service. He said there were 14 different powers that were in statute regarding this. Number 086 REPRESENTATIVE KOTT stated he wanted to ensure those that would be eligible could perform at least two of those functions. Number 091 CO-CHAIR IVAN again welcomed comments from the committee. He invited Mr. Dan Koch from the Division of Insurance to testify. Number 097 DAN KOCH, Chief of Market Surveillance, Division of Insurance, Department of Commerce and Economic Development, said the bill before the committee was one the division did not favor. In 1986, AS 21.76 was formed to allow municipalities, REAAs and school districts to form joint insurance arrangements (JIA). Up until that point, the division had argued the insurance code had within it, the ability to permit entities to group together to form a mutual insurance company or a reciprocal insurance exchange. The latter is probably the appropriate vehicle for most entities that would like to do the kinds of things spoken to in this bill. The reason why the division shifted position when the municipalities wanted to form a JIA, was because of the statute that is referred to in the bill, AS 29.35.101, which listed the general powers of a municipality. In those 14 items, there are 2 the division thought were particularly pertinent and removed some of the concerns the division had as to solvency issues. The first of those was item 6 which levies a tax or special assessment and imposes a lien for its enforcement. They have a tax base that takes the place of the capitalization and surplus requirements you would normally want to see for the formation of any sharing of liabilities. The second was to enforce an ordinance and prescribe a penalty for violation of an ordinance so they had some policing authority as well. The JIA indicated they didn't want to be considered an insurance entity even though that particular chapter had been placed within the insurance code. At that time, there was careful drafting to ensure anything the JIA did was not subject to any oversight or regulation by the division. The division's concern was if additional entities without a tax base were permitted to form JIAs, there was nothing to say they would join the same arrangement already existing for municipalities. There would be concern about the solvency of those entities and their ability to meet any obligations they may have. In effect, they are acting as an insurer and they are sharing each other's liabilities. This is the division's biggest concern. This, coupled with the fact the division believes the existing statutes already make a provision for forming something that will do what an entity wants, was the division's biggest concern. Number 172 CO-CHAIR IVAN welcomed comments and questions from committee members. Number 175 REPRESENTATIVE KOTT asked if there was a potential recommendation or change that would bring the Division of Insurance in on this. Number 183 MR. KOCH replied the division contended the statute in the insurance code which deals with reciprocal exchanges is their best vehicle. That has reduced capital on surplus requirements so they wouldn't have to come up with the same kind of money you would normally have with a stock insurer, for example, or a mutual insurer. The owners of a reciprocal exchange are the members of a reciprocal exchange. There are reduced costs for operating a reciprocal exchange that don't exist with insurance companies because they don't have the same kind of management you would have with a stock company. Typically, the management of their insurance arrangement is done through an attorney and that person conducts operations for them, usually under some form of contract. There are currently two such organizations existing in the state and both have been fairly successful. One is the Alaska Timber Insurance Exchange which was initially formed by the Alaska Loggers Association. This has operated smoothly for at least 15 years. They are able to offer rates to their members less than the going market rate for other insurers. The other organization is the Alaska Rural Electrification Co-op Association (ARECA). They insure around 15-16 power plants around the state that are members of that particular exchange. They have been operating successfully for the last ten years. The division is pleased with the operation of both of those exchanges. The division also amended the section of law this reciprocal exchange appears to allow other cooperative kinds of ventures at reduced levels of capital and surplus. One doesn't have to have large numbers of participants to do it. One of the ingredients one would typically find in these arrangements is they have insurance and there is a very careful review of what they are capable of bearing. If there is no oversight on one of these things, the division is very much concerned that people will view it as insurance and not have the financial capability of withstanding a large loss. Another concern the division has is nonprofit corporations, who often enter into contracts with the state, would present this as being their insurance coverage. If that vehicle were not sufficiently capitalized, one may find that on audit, it won't hold up to the scrutiny of what the Feds think ought to be an insurer and could lose any of those grants or kinds of funds. Mr. Koch believed it placed some things into real question. The division would prefer to see something that has financial oversight. The division has examination teams and are in often enough to ensure the entities are able to meet their obligations. Mr. Koch said insurance is an agreement on paper to pay some money at some future point given certain contingencies. If that entity isn't sufficiently well healed to meet those kinds of obligations, it has a problem. He wanted to know who this would fall back to. If the state effectively creates this mechanism and says `Do it,' who do they look to if the arrangement fails? Other insurers have guarantee funds to back them to make sure if one does go down, one has some mechanism to support it. The JIA doesn't have this and relies on the participants. This doesn't mean this arrangement can't purchase insurance or excess insurance, but the division is concerned with the solvency and structure of one of those arrangements. Number 288 CO-CHAIR IVAN recognized the attendance of Representative Al Vezey. Number 292 CO-CHAIR ALAN AUSTERMAN asked if the division was concerned about entities other than a municipality entering an arrangement without being secure or solvent. Number 300 MR. KOCH said a municipality was more secure in the sense if the entity had a demand on cash they had a tax base to fall back on. This was the division's view when this issue was originally thought up. The argument presented at that time was if there was a deficiency, either in the insurance mechanism they had for themselves or in the sharing of liabilities, there was always a tax base to go back to. Number 313 CO-CHAIR IVAN asked if there had been requests by local municipalities in Alaska and/or tribal governments for the division's assistance or direction on how to address their insurance needs. Number 320 MR. KOCH replied the division occasionally received questions, but not typically from municipalities or Native corporations. The division has had questions arise from nonprofit corporations and the common complaint is it costs too much. The legislature made some revisions to the tort system to provide some level of immunity for the officers of nonprofit corporations so they are not as exposed as they used to be. To some degree it alleviates the problem, being it is almost inherent in a nonprofit corporation, they are not going to be sufficiently well-healed to meet the kinds of liabilities they may be exposed to in doing what they do. The division tries to tell them ways to go about buying insurance and will provide what help they can. The division can generally find a broker where they might be able to find the kinds of coverage they want. The cost of that coverage is a problem as the cost of that insurance has to cover the losses that arise out of it. Number 345 REPRESENTATIVE AL VEZEY asked where the risk is. This isn't referring to pooling together to buy insurance. Number 348 MR. KOCH replied this was pooling together to cover each other's liabilities and the entity could either do this through purchase of insurance or by insuring themselves. Number 351 REPRESENTATIVE VEZEY said if they insure themselves, then they have to meet the requirements of a self-insured entity. Number 353 MR. KOCH stated that under this arrangement they don't. The JIA doesn't have to meet the standards of self-insurance requirements. The way this statute is structured, the entity is considered to be the insurer, but isn't one in fact. If what the groups are trying to do is combine as a purchasing power, there are ways to do this under existing statute. One of the most common ways is if an entity has an association, they can purchase as a group. If the entity has an association that has a safety plan, they have another purpose other than insurance, they then can under existing statute buy insurance as a group. They have to find a buyer, but they can do it. The division's problem with this proposal is it lets the entity be their own insurer. The JIA is not just a purchasing unit but shares each other's liabilities as well. This is a big difference. Number 375 REPRESENTATIVE VEZEY asked about a section of statute he didn't have in front of him. Number 377 MR. KOCH listed the statute called AS 21.36.190 pertaining to fictitious groups. There are provisions within this statute that describe the conditions under which an entity could purchase as a group. If this isn't clear enough, it's a good point of attack to revise so one could have the purchasing group. There was also a federal law, the Product Liability Act, that set up risk retention and risk purchasing groups. Already existing under federal law is the ability for nonprofit corporations to gather as a purchasing group and buy insurance as a mechanism but not to insure. Number 390 REPRESENTATIVE VEZEY said he didn't understand we had statutes allowing municipalities and certain public corporations to self- insure without meeting insurance requirements. He thought the government would get into a big lawsuit with this. Number 393 MR. KOCH said this was what the JIA did and while they were not required to do it that way, they were enabled to do it this way by statute. Number 396 REPRESENTATIVE VEZEY asked why the city of Fairbanks got in a big dispute with the Department of Labor over not being adequately insured under their self-insurance program. Number 399 MR. KOCH replied he could only assume they weren't part of the JIA and they were depending upon their own resources for their self- insurance application. When a self-insurance application is made to the Department of Labor (DOL), the DOL looks at the resources of that self-insured to see if the entity would meet its obligations. The DOL wants to see enough cash flow and support for the shock loss through excess coverage or insurance to satisfy the entity so they are able to meet their obligations in the future. Number 413 CO-CHAIR IVAN stated he would appreciate knowing the division's position prior to the hearing. He referred to Mr. Koch's statements on these municipalities that have a tax base to fall on. He said that he understood the existing REAAs did not have a tax base to fall on in rural Alaska. He couldn't see how these nonprofit organizations incorporated under the state or Native associations couldn't participate. Insurance fears of the unknown have always been a hinderance to development and activities that could have potential. Some of these organized municipalities try to provide these basic services to citizens in that community and in the area. The committee's interest through this legislation is to give them that opportunity to further expand some of the services they could provide. Number 440 MR. KOCH said his purpose in saying what has been said so far is not to oppose that notion. He said the REAAs are viewed as reliant on the tax base of the state itself. Municipalities obviously have their own. The division did see a distinction, but if what the legislature is intending to do is allow a greater voice in purchase in terms of pooling the entity's resources to buy insurance, it is a very easy thing to accomplish and there is an existing audit that would do this. The division's concern is by placing it in this particular statute, this mechanism not only allows the purchase of the arrangement, it allows an insuring arrangement by those same entities. In effect, with this language, a group of nonprofits could come together and say they were going to insure each other and not go out and buy anything but just insure each other. The argument currently is they don't have the resources to buy it so how are they going to be able to meet the obligations if a suit comes along. They won't take down just the one, but would take down all the participants, too. As far as the purchase mechanism, there is a federal statute that helps and if need be, further revision to 21.36.190. The division could help draft some language that would meet needs in that area. The purpose of the division is not to oppose what is described as the intent of encouraging people to better their lives. Number 471 REPRESENTATIVE KIM ELTON asked what happened to the exposure of those people already participating in the Alaska Municipal League, Joint Insurance Association (AML/JIA). It seemed their exposure increased with the additions made in this legislation. Number 478 MR. KOCH responded if these entities were joined into the same pooling arrangement, they would have their exposures added to whatever else the municipalities were in. This statute says any one of these groups could form a JIA. The JIA isn't a single mechanism of which only one currently exists, but the statute language didn't require just one. The JIA would have to react to how they would feel about having other entities join their arrangement. Number 491 CO-CHAIR IVAN asked if committee members had any questions. He invited Steve Wells to testify. Number 496 STEVE WELLS, Director of Risk Management, Alaska Municipal League, Joint Insurance Association (AML/JIA), disagreed with the division's insurance analysis of HB 223. He stated that about 7 percent of cities in the United States self-insure or pool providing they have chosen this mechanism to cover their various losses. The intent is to bring in those intertwined in local governments to join the poolings. Currently, there are about 400 pools nationwide covering a variety of districts and not one failure in the 20 years of pooling existence. Insurance companies can't make this statement proving that pooling is quite successful by creating conservative cohesiveness. He believed having risk retention groups was a good idea. He said the AML/JIA sees a need for small entities to pool together to provide public services but can't because they are too small. The AML/JIA is a $16 million operation, with a $1.1 million budget and was canceled this year due to being too small, so small groups are having a difficult time with insurance. HB 223 brings in small groups allowing them to pool by bringing them into an organization creating stable coverage. Number 550 REPRESENTATIVE VEZEY said this bill talks about a current statute providing for JIA in which municipalities self-insure without meeting the necessary requirements. Number 555 MR. WELLS said current legislation allows the small entity to self- insure and pool and help cover the load of one entity's loss. Pooling takes the place of insurance throughout the nation and not just in Alaska because the program was structured to succeed. Number 570 REPRESENTATIVE VEZEY stated the statutes for municipalities fall under this category aren't the same for any other entity wishing to self-insure. The entity would be required to show assets to cover their insurance exposure, but the Division of Insurance states that municipalities are allowed to use their tax base as an asset. He wondered if municipalities were given a special standard lesser than a poor profit corporation wishing to self-insure. Number 578 MR. WELLS asked if Representative Vezey questioned the operation of a pooling arrangement. Number 579 REPRESENTATIVE VEZEY said there was a variety of arrangements under the statutes, pooling, assuming risks and other options. Number 582 MR. WELLS said requirements for pooling was an annual audit and proof that the program was funded appropriately. These requirements are built into the current statute, but bylaws and cohesive units are necessary to have a pooling. Number 585 REPRESENTATIVE VEZEY stated the operative word was funding. The entity didn't have to fund the program but HB 223 gives the government entity special consideration due to their standing. Number 588 MR. WELLS said pooling arrangements had to fund the program or it can't exist. Upon the creation of a pool, actuaries are hired and a rate is stated that will fund the program. The rate is charged to fund the self-insurance portion and the insurance and administrative costs. The pooling arrangement has to be fully funded before it can be started. Number 596 CO-CHAIR IVAN asked if the committee had any other questions or comments. He asked if there were any other witnesses wishing to testify on HB 223. He asked the desire of the committee concerning HB 223. Number 606 REPRESENTATIVE ELTON made a motion to move the bill out of committee with the attached zero fiscal note and individual recommendations, only because he was on the next committee of referral. It would give him the opportunity to follow up with the Division of Insurance to see their intent. He was willing to concede to the wishes of the bill sponsor. Number 612 CO-CHAIR IVAN asked the Division of Insurance to work with the AML/JIA agency to make an opportunity to further discuss HB 223. He said he would hold the bill until further discussions could be held. Number 619 REPRESENTATIVE KOTT stated he was going to object to the motion posed by Representative Elton. He said he thought he understood the intent of the committee, but after the testimony given by Mr. Wells, he believed there was confusion between the parties. Number 628 CO-CHAIR IVAN said he would hold the bill to allow for more opportunity for coordination between all agencies. Number 629 REPRESENTATIVE VEZEY stated there was a movement across the nation for public entities to turn their operations over to certain segments of their systems to for-profit corporations for management, including schools districts, sanitation, etc. He's heard of cities that have turned their entire management over to for-profit corporations. He suggested instead of considering nonprofit corporations the bill just refer to other persons, following the statute definition of persons. Number 641 CO-CHAIR IVAN again stated the bill would be held over for further consideration. He invited any last minute comments before proceeding to the next item on the agenda, HB 192.
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