Legislature(2003 - 2004)
04/16/2004 01:20 PM House JUD
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SB 276 - ALASKA INSURANCE GUARANTY ASSOCIATION [Contains mention that HB 403, companion bill to SB 276, has been heard briefly by the committee; contains mention of support for HB 540.] Number 1739 CHAIR McGUIRE announced that the final order of business would be CS FOR SENATE BILL NO. 276(FIN), "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." CHAIR McGUIRE reminded members that the committee briefly heard the companion bill, HB 403, at a prior meeting. Number 1758 LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development (DCED), in presenting SB 276, relayed: The [Alaska Insurance Guaranty Association] has a purpose to minimize financial loss to claimants and policyholders. The [Alaska Insurance Guaranty Association Fund], due to the insolvency of four workers' compensation [insurance] carriers, has run out of ... money. ... The next step, when there are no funds available, is to prorate claims, and in that process we would see lost wages and medical benefits to injured workers prorated. ... Workers' compensation is an obligation of the employer; [when the Alaska Insurance Guaranty Association runs out of money], the employer would then inherit the financial obligations for workers' compensation benefits. I put in your packet a ... spreadsheet ... [that] shows a projection of the monies needed to fund the [Alaska Insurance Guaranty Association]. The most controversial provision of this bill has been the assessment on other lines. [The] first provision of the bill would be to increase the assessment on the line in which the insolvency occurred, which, in this case, is workers' compensation. That would raise, from 2 percent that [is the] current statutory cap, to 4 [percent] in times of need. These assessments are only made when there is a need for cash; they do not accumulate money, they do not keep balances. Number 1839 [For] the year 2004, the assessment on the other lines of business would be [.19 percent] .... To put that into some perspective, on a $650 premium, ... that [.19 percent] ... would generate [a] $1.24 assessment. So we're talking, really, a fairly minimal amount of money and impact. In 2005, because there's no carry- forward money, that assessment on the other lines would be .47 percent - less than half a percent; [the] same policy premium of $650 would generate a $3.06 assessment. At that point, that assessment on the other lines would go away, as you can see, when you go down to 2006. There would no longer be a need for that assessment. In fact, in 2006, the assessment on the workers' compensation account would begin to drop to 3.37 [percent], [to] 2.48 [percent in 2007], and ultimately that will also go back down. MS. HALL continued: And I would emphasize again that there are no assessments unless there is an analysis by an actuary determining there is a cash need projected for the upcoming year. The only other thing I'd like to show you, and it's not something I can pass out because it's quite confidential, ... is this list. I have eight pages here, double columns, of employers who will get back $20 million in [workers' compensation] benefit obligations. ... We have a wide range of employers who will, if we don't do something to fund this, get this obligation back. I think this could put people out of business. I think the financial obligation will be overwhelming to Alaskan businesses. Today there are ... 370 [businesses] and 579 injured workers who have claims .... Some of these employers no longer exist; there will be no place for those employees to go for their benefits. But I think when we have 370 employers who do not anticipate getting back a $20 million [obligation], we need to look at that. ... The bill in front of you is the identical bill that you saw in HB 403 .... Number 1985 CHAIR McGUIRE surmised that SB 276 attempts to address a current crises, and that in subsequent years, it is anticipated that the assessment on other lines will not be necessary though would still be available. MS. HALL concurred, adding that statute requires an actuarial analysis and determination of the projected cash needs of the upcoming year before an assessment is allowed. On the bill's proposed statutory increase of the workers' compensation line assessment to 4 percent, she said that it would provide a mechanism by which to deal with future similar crises should any arise. She predicted that there will be insolvencies in the future, though hopefully not of the magnitude of the current four insurance carriers' insolvencies. She detailed the present market share and aspects of some companies currently writing workers' compensation insurance policies in Alaska, and said she has no reason to believe that they face insolvency in the future. Nonetheless, she remarked, she is hesitant to say that those companies would never become insolvent, and SB 276 will provide the tools to ensure that claims are paid under the mission of the Alaska Insurance Guaranty Association. REPRESENTATIVE OGG asked Ms. Hall to elaborate on the list she referred to. MS. HALL said: These are people who, in good faith, purchased an insurance policy from a carrier who's now insolvent. The [Alaska Insurance Guaranty Association] steps in, in the case of an insolvency - it's the safety net; that safety net has now also failed and, while there would likely be an interruption of benefits to injured workers, the financial responsibility will go back to these 370 employers who may or may not ... have a lot of extra money laying around to take on that obligation. Number 2150 MS. HALL, in response to question, said she didn't know how many of the companies on the list are no longer in business nor how many of their employees are now left without benefits. In response to further questions, she said that the "assigned risk pool" is considered the market of last resort; that there are two servicing carriers who handle the claims in this pool just as if those claims came from their regular clients; that there is a direct obligation, in this pool, that insurance companies pay loses; and that this pool is totally separate from the Alaska Insurance Guaranty Association, which comes into play only in the case of insolvencies of an admitted insurance company. She went on to say: We have today, in the workers' compensation arena, four insolvent insurers; we have in ... one of the other accounts a company who wrote predominantly medical practice who's insolvent. So when there's an insolvency, then the [Alaska Insurance Guaranty Association] steps in and stands in the place of that insolvent carrier to pay claims. REPRESENTATIVE HOLM asked what happens in situations where a business buys its own insurance policy that has nothing to do with "the pool." MS. HALL pointed out that the pool is not an entity of the State of Alaska, and that there are 200 insurance companies listed that write workers' compensation, though 6 or 8 of those are active in the state and are called voluntary companies. She noted that sometimes a group of businesses in a similar industry will join together and purchase an association policy that will ultimately pay dividends; in such instances, the rates are set, and any deviation from those rates has to be filed with the Division of Insurance, which must approve that rate to ensure it is actuarially sound. The assigned risk pool, however, has a surcharge rate for people who, typically, either because of size of loss experience, are unable to obtain insurance in the voluntary market whether its an association plan or through another company that writes workers' compensation insurance policies. Regardless, there will be base rates and the Division of Insurance approves all of those rates. MS. HALL, in response to further questions, relayed that Alaska's workers' compensation statutes make the responsibility for workers' compensation benefits the obligation of the employer. This is normally satisfied via purchase of a workers' compensation insurance policy, though when the insurance company becomes insolvent, the Alaska Insurance Guaranty Association becomes the safety net; however, if the Alaska Insurance Guaranty Association fails, the obligation of paying workers' compensation benefits comes back to the employer who would be contacted by [the state]. TAPE 04-68, SIDE B Number 2354 MS. HALL, in response to questions regarding the accounts that would be assessed under SB 276, explained that there are three accounts in the Alaska Insurance Guaranty Association Fund: workers' compensation; auto, both personal and commercial; and "other." She relayed that 18 states have a single account and so any assessments in those states automatically come from all types of insurance. In Alaska, the "other" account - which is currently being assessed at about .5 percent predominately for the failure of a medical malpractice insurance carrier - includes homeowners' insurance, commercial property insurance, liability insurance, and medical malpractice insurance. Under SB 276, the assessment would be done through the insurer, and the insurer may pass the assessment on to the policyholder but is not required to do so. MS. HALL, in response to a request, reiterated the information she provided earlier regarding the current and anticipated future assessments to each account. She noted that if claims are settled for amounts less than what is currently anticipated, it will change the percentage that might be assessed. She offered her hope that the crises which SB 276 addresses will be temporary, and reiterated her comments regarding the likelihood of having to address a similar situation again. CHAIR McGUIRE surmised that everyone will end up paying, one way or another, for the insolvencies of workers' compensation insurance carriers, and raised the issue of perhaps including a sunset provision in SB 276 in order to give the legislature the opportunity to see whether the solution proposed by SB 276 is actually working and whether the higher assessments are still needed. MS. HALL relayed that a sunset provision has not yet been discussed within the administration, but agreed to give it consideration. She reiterated that there are safeguards in the Alaska Insurance Guaranty Association Fund statutes that require an actuarial analysis to determine need before any assessment can be done. Because the Alaska Insurance Guaranty Association does not do assessments for the purpose of keeping a pot of money, the assessments are called post-loss assessments. If there is an insolvency, the Alaska Insurance Guaranty Association Fund board meets, receives actuarial analysis, determines it needs "X" amount of money for the upcoming year, and the assessments are then based on "a percentage of premium." Number 2073 MS. HALL noted that one of the reasons the workers' compensation account generates the smallest amount of premiums is because it is the smallest line, generating approximately $4.3 million to $4.5 million. The auto line and the "other" line, by comparison, generate approximately $7.5 million each. This is why the Alaska Insurance Guaranty Association cannot make up its anticipated shortfall solely through the workers' compensation line unless it were to assess a much larger percentage. REPRESENTATIVE GRUENBERG said he'd received a letter dated 3/1/04 from Eden Larson, President and Chief Executive Officer, Associated Builders and Contractors, Inc., wherein Ms. Larson says in part: "The simple way to avoid this impact is to ensure that the change to the workers' compensation fee structure is a 'new and renewal change' rather than an 'in force' change. If increases are incorporated in workers' compensation fees at renewal, the contractor is already looking ahead to increases or adjustments in that expense as he or she is bidding." MS. HALL relayed that such is what will already occur, noting that she has seen that letter and has reviewed it with the actuary that approves filings. She offered her understanding that the incident that prompted that letter was one in which, approximately three years ago, there was a change in workers' compensation benefits with the effective date being July 1; when a change in benefits is effective, there is also a change in premium, and the premium also became effective July 1, which was in the middle of construction season, and so contractors were not prepared for what turned out to be about a 7 percent increase. MS. HALL relayed that this instance has since made everyone very careful to ensure that rates become effective January 1 and that changes only take place on brand new policies or upon renewal of existing policies. For example, if an assessment is done in January, but a workers' compensation policy renews in September, the policy owner will not get the January assessment until September. She noted that she responded to Ms. Larson's letter, but is not sure whether the general business community is aware that a cure for what happened three years ago is now in effect. Number 1887 MARTIN PIHL, Chairman, Board of Governors, Alaska Timber Insurance Exchange (ATIE), after mentioning that the ATIE does not wish to block passage of SB 276 or HB 403, relayed that the ATIE was formed in 1980 as a reciprocal workers' compensation company, is owned by its policy holders, specializes in logging and other higher-risk "coverages," has been very successful in promoting workplace safety, and returns yearly profit to policy holders in the form of dividends. He said that the ATIE sets it rates conservatively high in order to protect its policyholders' surplus balances, knowing that the dividend reduces the net cost to the policyholders. Over the last ten years, the ATIE's dividend has averaged 66 percent of premium; however, for 2003, the ATIE's profit was wiped out by an assessment of $800,000 for a reallocation of insolvent companies' share of the assigned risk pool loses. This was a severe blow to the ATIE's policy holders, he remarked, particularly given that 2003 was one of the ATIE's best years in terms of accident frequency and severity. MR. PIHL said that the ATIE has other legitimate and serious concerns - which, he posited, are shared by all other insurance companies - regarding fixes that are needed by the workers' compensation insurance system in order to bring fairness to all parties and secure and protect coverage to injured workers. He elaborated: We feel we must find the right bill or platform to advance these needed improvements, and we're trying to work with the director and administration. The [workers' compensation] system has been a shipwreck situation, floundering and awash in losses for a great number of years; [Ms. Hall] inherited a very bad situation. The assigned risk pool has operated at very substantial losses for the last seven consecutive years, aggregating about $60 million. As you know, this loss gets allocated or assessed back against the surviving insurance companies. This has resulted in assessments against our member policyholders of $2.8 million - we're fairly small. Continuation of these hits will impair our capital, and threatens our own solvency. There is another major insolvency pending, and we believe it's fairly near upon us; [Ms. Hall] can advise you. Number 1736 In addition to the funding needs which [SB 276] addresses, the other amendments we feel essential are, number one, to improve the lost cost filing process in rate setting. Rates have been terribly inadequate ... particularly in the assigned risk pool. Insurance companies have been forced to decline coverage in the open commercial market, forcing insurers and people seeking insurers to the assigned risk pool, resulting in a massive expansion of the pool and its huge losses. Fixing the rate structure is addressed by House Bill 540, which we support. There should be a statutory mandate that the assigned risk pool operate on a break-even basis. [The] second amendment we would seek is to require collateralization of assigned risk pool [loss] reserves to protect against an insurers insolvency. This can simply be done by requiring the high-grade investments that are controlled by current statute by the director's (indisc.) to be required beyond (indisc.) with a custodian in Alaska, available to the director and (indisc.) insolvency. California and Oregon require collateralization, and if we in Alaska don't, we're accepting the last position in securing protection for the injured worker and the employer. MR. PIHL continued: The third amendment we seek is that since all policies, including the assigned risk pool policies, pay what has been the 2 percent assessment to the ... [Alaska Insurance Guaranty Association] Fund, we feel that ... an insolvent insurer's share of assigned risk pool losses should travel as a part of that insolvent insurers bankruptcy to the [Alaska Insurance Guaranty Association] fund, rather than ... get reassessed to the remaining insurance companies. This has all occurred out of our control, and it's just very unfair. Number 1641 We really look for fairness from the ... government, [but] essentially the insurance companies have been treated as a deep pocket, there to be assessed to cover all losses from (indisc.) mismanagement of the system by the state, and we believe it's time to address it [with] all the needed fixes. These points that I'm outlining are covered by a three-page discussion outline we would be happy to provide to the committee. ... Again, we're not interested in blocking [SB 276], we believe it's part of the fix, but there's a whole lot more. And when it comes to funding, even [SB 276] isn't the preference of anybody, insurance companies or employers; employers are going to pay the increased assessment, and it's been out of the control of insurance companies, at least those that have been operated on [a] sound basis, such as ours. So I thank you for the opportunity to testify; I'd be willing [and] happy to answer any questions. MS. HALL mentioned that she has Mr. Pihl's points, and would be happy to share her thoughts regarding those points at the bill's next hearing. For the most part, though not in total, she remarked, she strongly supports the ideas that Mr. Pihl has put forward, one of which is in another bill. MR. PIHL expressed concern that some of the other bills pertaining to insurance may not pass, and urged that needed changes be brought forth via a vehicle or platform that has a chance of succeeding. CHAIR McGUIRE expressed agreement, and asked Ms. Hall to consider incorporating some of Mr. Pihl's suggestions into SB 276. Number 1494 MS. HALL said she will consider doing so, but feels very strongly about ensuring that SB 276 is kept clean and addresses a single, nonpartisan issue. Currently, SB 276 has strong bipartisan support; therefore, she remarked, she is very hesitant to make changes to SB 276 that could create problems for it as it moves through the process. CHAIR McGUIRE reiterated her suggestion to include a sunset provision in the bill, and relayed that she understands Mr. Pihl's frustration with the current system, particularly in light of all that has been done and proposed thus far to make it better. REPRESENTATIVE HOLM relayed that as an employer, he is very disturbed by the workers' compensation program. He went on to say: It is one of the most frustrating parts of business because it's a ... piece of net profit. When [the terrorist attacks of September 11, 2001] occurred, all of the industry nailed us for it. [It] wasn't something we were charged with, not something we did, not something we caused, not anything, and yet my workers' [compensation insurance] policy went up $16,000 net ... in one year. How does industry recover that? REPRESENTATIVE HOLM expressed frustration with the current workers' compensation system as it relates to what he perceives to be false claims, opining that employers don't get an opportunity to rebut any of those claims. He also expressed dissatisfaction with the cost of workers' compensation insurance premiums for small business in Alaska. MS. HALL said she understands Representative Holm's concerns, and acknowledged that there are some serious problems [with the workers' compensation insurance system], but noted that problems cannot be fixed overnight. She indicated that Alaska businesses should be paying the same workers' compensation rate, and that the state does investigate workers' compensation fraud. Therefore, if members become aware of possible instances of workers' compensation fraud, they should let the department know so that an investigation can be started. "It is a huge problem; it's a huge problem nationally, and I would like very much to work towards solutions .... REPRESENTATIVE HOLM expressed hope that solutions can be found, and made comments regarding the classification of workers. MS. HALL noted that classification of workers must follow the rules pertaining to classification; if such is not done, it constitutes premium fraud. [SB 276 was held over.]
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