Legislature(2021 - 2022)ADAMS 519
05/12/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB102 | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HJR 1 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | HB 102 | TELECONFERENCED | |
HOUSE BILL NO. 102
"An Act relating to the state insurance catastrophe
reserve account; and providing for an effective date."
9:05:31 AM
SCOTT JORDAN, DIRECTOR, DIVISION OF RISK MANAGEMENT,
DEPARTMENT OF ADMINISTRATION, introduced the PowerPoint
presentation: "HB 102." He began with slide 2 titled
Purpose:
The assets of the Catastrophe Reserve Account
(CATFund) may be used to obtain insurance, to
establish reserves for the self-insurance program, and
to satisfy claims or judgments arising under the
program.
• HB102 will save the state $3M in the first year
and $25M over the next 5 years (est.)
• The purpose is to allow the State to self-insure
for property coverage.
• We currently self-insure for Workers' Comp (since
FY1992) and General Liability (since FY 2002)
• Due to global property insurance markets hardening
we had a 30% increase in insurance costs from FY20
($5.1M) to FY 21 ($6.6M) and were being told to
expect another 15% to 20% for FY22 ($7.6M-$7.9M).
• HB 102 is a request to change the Catastrophe
Reserve Account (CATFund) limit from $5,000,000
to $50,000,000 unencumbered.
• Currently the limit on catastrophe coverage that
can be purchased is $50,000,000 for an annual
premium. We can save that annual premium by self-
insuring.
Mr. Jordan informed the committee that HB 102 was
introduced as a cost saving measure.
9:07:37 AM
Mr. Jordan continued to slide 3 titled What Other States
are Doing?:
Through the State Risk and Insurance Management
Association (STRIMA) we asked other states what they
were doing to combat the rising premiums in property
coverages.
Just pay the higher premiums. Some states are
forced to maintain excess coverage due to
benefits paid by FEMA which requires Obtain and
Maintain" agreements when FEMA pays for a
catastrophic loss.
Set up Captive Plans-similar to self-insured
plan.
Increase Self-Insured Retentions (SIR), in some
states $40M to $50M retention.
Some states are coming off multi-year premium
price guarantees.
Mr. Jordan elaborated that a captive plan was like the
self-insured plan the state was proposing. He explained
that in captive plans a separate insurance entity was set-
up and the entity managed the assets of the self-insured
plan. He did not believe the state needed the captive plan
model because of the states 25 year experience with self-
insured plans. He offered that a self-insured retention was
essentially a deductible that some states chose to
increase. He noted that some states entered into premium
price guarantees with insurers but will face large
increases when the guarantee period ends.
9:10:11 AM
Mr. Jordan advanced to the graph on slide 4 titled 10-
Year History of Property Premiums/Losses. He pointed to
the blue graph and explained that the blue line represented
what the state paid in property premiums from FY 10 ($2
million) to FY 20 ($5.1 million). The department had
experienced premiums increases in the past; in FY 11
premiums increased by $700 thousand. He articulated that
the division responded by self-insuring all buildings under
$5 million in value using the CAT fund. The current
increase began in FY 18. He directed attention to the other
graph in orange that portrayed what the state paid out from
appropriations or from the CAT fund for property losses. In
FY 15 there was a large spike due to the Crystal Lake
Hatchery fire in March 2014 that paid just over $4 million
in losses. In FY 20, the state had two significant losses;
one was due to the claims from the November 2018 earthquake
in Anchorage and the other was a $1 million retention paid
for the Department of Transportation and Public Facilities
(DOT) maintenance shop snow collapse in McGrath.
9:12:44 AM
Co-Chair Merrick indicated Representative Edgmon, and
Representative Johnson had joined the meeting.
Representative Wool observed that in every year but one,
the states premiums were higher than the property losses.
He queried what would happen with significant damage from a
widespread catastrophic occurrence. He thought the coverage
seemed low. Mr. Jordan explained that excess insurance
covered two types of losses: fire losses and catastrophic
losses. Currently, the states cap for non-catastrophic
losses was $150 million and the cap for catastrophic losses
was $50 million. His concern was focused on catastrophic
losses, which were hard to predict. The Crystal Lake loss
was the second highest loss except for the Alaska Aerospace
incident in 2014. Presently, the state could only purchase
$50 million in insurance and was why the balance was
unencumbered. The savings on premiums from being self-
insured left a higher excess balance. Representative Wool
asked whether the state was covered under a different pool
if the excess balance was expended. Mr. Jordan responded in
the negative. He added that $50 million was the maximum
insurance companies would pay. However, with catastrophic
losses the Federal Emergency Management Agency (FEMA)
typically covered some losses. He noted that FEMA covered
some of the costs for bridges and roads after the 2018
Anchorage earthquake.
9:16:33 AM
Vice-Chair Ortiz referred to slide 2 and the bullet point
regarding the hardening of global property insurance
markets. He asked him to discuss what caused the global
insurance market to harden. He provided some potential
examples. Mr. Jordan replied that it was an increase in
property losses and not property values. The increase was
driven by the amount paid in property claims in the prior
year. He noted that there were many catastrophic events
worldwide in the previous year that drove the premium
increase. Many large insurers went out of business
therefore, the capacity to insure was non-existent. The
state insured $7.6 billion in property value and when
presented to the insurance market many insurers claim they
lacked the capacity to insure that amount.
9:17:55 AM
Representative Thompson asked if the self-insured fund was
a sweepable fund.
LESLIE ISAACS, ADMINISTRATIVE SERVICES DIRECTOR, DEPARTMENT
OF ADMINISTRATION, responded in the negative but expressed
some doubt.
9:18:45 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
interjected that because the fund was expended without
further appropriation it was not subject to the sweep.
Representative Josephson asked how the division intended to
capitalize the fund to $50 million. Mr. Jordan indicated
that the division did not expect to see a full
capitalization in the first year. However, the Office of
Management and Budget (OMB) provided projections that it
might be possible. Representative Josephson asked if the
bill authorized for the collection of that much lapsing
money. Mr. Jordan responded that the current sweep
authorized up to $5 million, all the bill did was change
the amount from $5 million to $50 million leaving the
authority in place. Representative Josephson commented that
the $45 million could be spent in some other way. Mr.
Jordan deferred to Mr. Isaacs.
Mr. Isaacs responded that Representative Josephson was
entirely correct. The fund was replenished using lapsed
funds. He anticipated that in two or three years, using
lapsed funds they would attain the $50 million balance.
9:21:43 AM
Representative Rasmussen requested clarification that the
premium would increase to 7.6 percent. Mr. Jordan replied
that the cost would increase to $7.6 million.
Representative Rasmussen asked whether that was per annum.
Mr. Jordan replied, "That's correct." Representative
Rasmussen deduced that the money in the fund would be
saving at least 15 percent of the value that could be
collected over a ten year period. She calculated that the
state would pay a $7.6 million premium for up to only $50
million in coverage, so the state would save $76 million
over 10 years to hold $50 million in an account for a
catastrophe. She asked if she was correct. Mr. Jordan
responded in the affirmative. The department anticipated
that once the fund was fully capitalized to $50 million any
leftover unexpended funds would be given back to the
agencies to be used as needed. Representative Rasmussen
clarified that the state had $7.6 billion in state building
assets. Mr. Jordan responded in the affirmative.
Representative Rasmussen asked if it was typical of other
states to maintain such low coverage for a very high value
of assets. Mr. Jordan answered in the affirmative. He
related that some states had a high limit of $300 million
to $400 million. He reminded the committee that the states
non-catastrophic loss limit was $150 million. He elucidated
that public entities and states typically did not insure
for the total of all its assets because it was unlikely
they would be lost at the same time.
Representative LeBon observed that the state was insured up
to $150 million for insurance loss and self-insured up to
$50 million and anything over $150 million the state was
relying on FEMA for a significant catastrophic event. He
wondered if he was understanding the information correctly.
Mr. Jordan responded that the $50 million would be used to
off-set the catastrophic limit that the state currently
purchased at the same amount. The non-catastrophic limit of
$150 million reflected the risk the state was taking by
self-insuring. He indicated that the non-catastrophic
losses the state had experienced were well below $50
million.
9:26:09 AM
Mr. Jordan advanced to slide 5:"10-Year History of Property
Payments Compared to All Lines of Business." He
communicated that the table demonstrated what the state
paid for property insurance versus all loss payments. He
provided the example that almost 50 percent of all premiums
were property insurance premiums.
9:27:17 AM
Mr. Jordan turned to slide 6 titled Comparison of Premiums
Paid, Property Losses Paid, And Recovery (Excess Insurance)
From FY 95-2020. He relayed that the state paid $59
million in property premiums and paid out $26 million in
property losses. The recovery from excess insurance was
$17 million from only three claims:
FY2014 Kodiak Launch Facility loss $15,931,131
FY2007 DOT-Girdwood Fire $835,136
FY2000 Court Plaza Building $1,176,547
Mr. Jordan explained that the Kodiak loss was a $34 million
loss. The state paid its $1 million retention, and the
excess carrier paid the additional $34 million. The
insurance carrier was able to subrogate or collect some
funds from the launch customer who caused the damage.
Ultimately, about $16.5 million was paid - $15.5 million of
which was paid by an excess carrier. He furthered that the
court plaza incident in 2000 in Juneau was caused by an oil
leak from a day tank that was located on the top floor of
the building; the state recovered $1.1 million. He shared
that after the accident at the Kodiak Launch Facility
occurred in 2014, the insurance underwriters decided to
impose a 72 hour exclusion around the launch date. Alaska
Aerospace had pushed their risk over to the launch
customers and each customer signed an agreement to cover
any structures damaged during a launch.
9:30:05 AM
Mr. Jordan continued to slide 7 titled History of the
Catastrophe Reserve Account (CATFund)
Sec. 37.05.289. State insurance catastrophe reserve
account.
(a) There is established in the general fund a
state insurance catastrophe reserve account
consisting of assets appropriated to it by
the legislature, assets allocated to the
account by the Department of Administration
as provided in this section, and amounts
deposited into the account as provided in
this section. 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. Interest earned on money in the
account shall be remitted to the Department
of Revenue in accordance with AS 37.10.050.
(b) The Department of Administration may
allocate to the state insurance catastrophe
reserve account, from the appropriations to
all state agencies for insurance-related
purposes, an amount that the commissioner of
administration determines to be necessary to
provide an adequate insurance program for
the operations of state government. Money
remaining in the account at the end of a
fiscal year is not a one-year appropriation
under AS 37.25.010 and does not lapse,
except for amounts determined by the
commissioner of administration to be
unnecessary to maintain this account at an
appropriate level and not to exceed
$5,000,000. If the amount necessary to
satisfy claims or judgments for which
payment may be due under the state insurance
program in a fiscal year exceeds the
unexpended balance of the amounts allocated
to the account, the department may charge an
additional amount from the unencumbered
balance of any appropriation that is
determined by the commissioner of
administration to be available for lapse at
the end of the fiscal year.
(c) The $5,000,000 cap, set in (b) of this
section, on money that may be retained in
the state insurance catastrophe reserve
account applies only to unobligated money in
the account at the end of a fiscal year.
(d) Amounts received in settlement of insurance
claims or as recovery for losses shall be
deposited into the state insurance
catastrophe reserve account.
Mr. Jordan read from portions of the slide:
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.
Mr. Jordan pointed to language in the statute, not to
exceed $5 million and noted that the bill changed the
amount to $50 million.
9:30:44 AM
Mr. Jordan presented Slide 8 titled Lapse Appropriations
Summary:
The State Insurance Catastrophic Reserve Fund, Fund #
3209, (Cat Fund) is part of the General Fund and Other
Non-segregated Investments (GEFONSI). The GEFONSI are
funds that have been pooled together for investment
purposes. The Cat Fund is part of the Non- MOU group,
which allows for the interest earned to be deposited
back into the General Fund.
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 $100.7
million.
Mr. Jordan explained that the lapse appropriation was a
waterfall type sweep of funds and the self-insured
account was the third on the list. He pointed to a chart at
the bottom of the slide that portrayed the last three years
of swept funds and the amount swept. The third bullet in
the middle was the amount OMB was projecting as the
possible UGF lapse that might fully fund the account. He
elaborated that any funds leftover in Risk Management went
into the CATFund first and if it was not fully funded the
remainder was available for the undesignated general fund
(UGF) sweep.
9:32:33 AM
Representative Josephson thought a projected fund lapse of
$100 million was a significant amount. He asked where the
funding was coming from. Mr. Jordan indicated OMB had come
up with the number. He deferred the answer to OMB.
9:33:05 AM
PALOMA HARBOUR, FISCAL MANAGEMENT PRACTICES ANALYST, OFFICE
OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR (via
teleconference), answered that the $100.7 million was the
total of the lapse forecast. She expounded that the
forecast included Medicaid lapsed funds but did account for
lapsed funds the legislature may appropriate. The amount
was reported to the legislature each year. She commented
that the amount cited was simply an informational bullet.
She qualified that if the projected amount lapsed, the
state could potentially capitalize the fund depending on
the will of the legislature. She hoped the fund would be
filled over several years.
9:34:17 AM
Representative Josephson suggested that the projected
amount was based solely on the governors budget. Ms.
Harbour relayed that the governors amended budget
appropriated a portion of lapsed funds to the Disaster
Relief Fund. The remainder of the amount that truly lapsed
would be available to help capitalize the CATFund.
9:34:55 AM
Representative Carpenter inquired how the projected savings
were calculated. Mr. Jordan responded that the savings
would be realized every year in premiums. He had not
anticipated to fully fund the CATfund in one year.
Representative Carpenter deemed that money had to be in the
account to be self-insured. He wondered if the fund was not
fully capitalized whether the state was fully self-insured
and still had to pay premiums. Mr. Jordan answered in the
negative. He indicated that the intention was for the state
to be self-insured in the property market. He hoped some of
the increased amount would be appropriated to the fund in
the current year. The CATFund balance was currently $5
million, and that amount had covered the state in all but
one occurrence.
Mr. Isaacs interjected that the cost savings had to do with
the cost avoidance of paying premiums and were not tied to
the balance of the CATFund. The cost savings would be
immediate as the fund continued to grow to the new limit of
$50 million.
Representative Carpenter asked if the designation of being
self-insured really meant the state accepted the risk
regardless of the amount in the fund. Mr. Jordan stated
that to some extent the statement was correct. He noted
that there was a difference between being self-insured and
uninsured. He offered that the division discussed the $5
million amount with FEMA who confirmed that at that level
it considered the state self-insured and met the
requirement of the obtain and maintain clause.
9:38:04 AM
Representative Wool asked if the states premium came out
of the CATFund. Mr. Jordan replied in the negative.
Insurance premiums were paid out of yearly appropriations.
The CATfund was only used for unexpected large losses.
Representative Wool deduced that if $5 million was
maintained in the fund, FEMA considered the state self-
insured even while the state was capitalizing the fund to a
higher amount. Mr. Jordan responded that the statement was
correct.
Mr. Isaacs addressed Representative Rasmussen's earlier
question and added that with the CATfund as part of the
General Fund and Other Non-Segregated Funds (GEFONSI) fund
it collected higher interest earnings than the general fund
(GF). He indicated that the $50 million would be part of
the investment portfolio that would earn interest and would
be deposited into the GF.
9:40:18 AM
Representative Rasmussen asked if a partial premium could
be paid. She hypothesized that $20 million was in the
CATFund fund and the state would insure for the other $30
million. Mr. Jordan replied that it was possible. However,
he had found that there was not a significant cost savings
for insuring catastrophic losses at $25 million or $30
million versus $50 million. He calculated that the $50
million premium was $7.6 million, and it was roughly $6.5
million for $30 million in coverage.
9:41:14 AM
Mr. Jordan concluded the presentation and was open to
questions.
9:41:31 AM
Co-Chair Merrick OPENED public testimony.
9:41:47 AM
CHARLES MCKEE, SELF, ANCHORAGE (via teleconference), stated
that he had submitted written testimony regarding the bill.
He opined about contracts. He mentioned a civil action he
was involved in with the state. He alluded to personal
issues he had with the state and Workers Compensation. The
testimony was not related to the bill topic.
9:44:14 AM
Co-Chair Merrick CLOSED public testimony.
9:44:23 AM
AT EASE
9:45:14 AM
RECONVENED
Representative Rasmussen provided a summary of her
understanding of the bill. She understood that the bill
allowed the state to self-insure for catastrophic coverage
of up to $50 million and the state was working to attain
the $50 million level in the CATFund. The state would only
have catastrophic coverage up to the amount in the account.
Mr. Jordan responded in the affirmative.
Co-Chair Merrick asked for a motion.
9:46:06 AM
Co-Chair Foster MOVED to report HB 102 out of Committee
with individual recommendations and the accompanying fiscal
note.
There being NO OBJECTION, it was so ordered.
HB 102 was REPORTED out of committee with a "do pass"
recommendation and with one previously published fiscal
impact note: FN1(ADM).
9:46:30 AM
AT EASE
9:47:44 AM
RECONVENNED
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 1 Institute of the North HFIN Presentation 051221 .pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 02 HJR 1 Sponsor Statement - H FIN 5.3.21.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 05 HJR 1 Sectional Analysis - H FIN 5.3.21.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 06 HJR 1 Background - APFC POMV Statement.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 08 HJR 1 Background - APFC-Resolution-POMV-2020-01.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 07 HJR 1 Background - 2020_APFC_Trustees-Paper-9.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 09 HJR 1 Background - APFC-Resolution-POMV-2004-09.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 10 HJR 1 Background - APFC-Resolution-POMV-2003-05.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 11 HJR 1 Background - Institue-of-the-North-Position-Paper-Web.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |