03/13/1996 03:16 PM House L&C

 HB 524 - INSURANCE POOLING BY EMPLOYER ASS'N.                               
                                                                               
 Number 1856                                                                   
                                                                               
 CHAIRMAN KOTT announced the next order of business would be HB 524,           
 "An Act relating to insurance pooling."                                       
 GEORGE DOZIER, Committee Aid, House Labor and Commerce Committee,             
 explained HB 524 would permit employer associations to form joint             
 insurance arrangements (JIA).  The purpose of the JIAs is to permit           
 a greater number of individuals to collectively assume risk and/or            
 to purchase group coverage.  Mr. Dozier explained the bill defines            
 an "employer association" as consisting of at least five employers            
 who are in the same or similar business.  Each employer association           
 would have to be in existence at least five years.  Pursuant to the           
 bill, any type of insurance could be purchased except for four                
 types.  Those are disability, health, life and title insurance.  If           
 a JIA is formed, it would not be subject to regulation under Title            
 21, but the JIA would have to file an annual report with                      
 Legislative Audit.                                                            
                                                                               
 Number 1930                                                                   
                                                                               
 MARIANNE BURKE, Director, Division of Insurance, Department of                
 Commerce and Economic Development, was next to testify on HB 524.             
 She indicated the division is against the bill and their concern is           
 one of solvency.  The division, by statute, is precluded from                 
 oversight of the JIAs.  They have no way of assuring that they have           
 adequate reserves and surplus to meet their claims as they come               
 due, and that their claimants are treated in a fair,                          
 nondiscriminatory way and that if their claimants have problems,              
 the division doesn't have a statutory authority to assist them in             
 resolving these problems.                                                     
                                                                               
 MS. BURKE said the solvency issue is their primary concern.  She              
 said the one JIA currently in the state has not ran into any                  
 problems with solvency.  She believes this is due to a combination            
 of good management and good luck.  They have not reached a                    
 situation where they have had to make assessments against their               
 members to cover catastrophic occurrences.  However, if they do               
 reach that situation, they all have a taxing base; they can raise             
 additional monies.                                                            
                                                                               
 An unidentified speaker questioned who "they" is.                             
                                                                               
 MS. BURKE answered municipalities, governmental entities.  She said           
 they can raise additional funds.  She referred to the group that is           
 considered in the bill and said if they ran into a catastrophic               
 situation where they had claims that were in excess of whatever               
 reserves they had set aside, assuming they had set aside reserves,            
 they could easily face an assessment that would exceed their                  
 available assets.  In that case there would be no money to pay the            
 (indisc.) and there is no safety net because they are not protected           
 by guarantee funds.  There have some been some very notable                   
 successes with JIAs, again it was because of a combination of                 
 really good management and good fortune.  On the other side of the            
 coin, there have been some very notable disasters.  Ms. Burke said            
 in preparation for her testimony, the division did query other                
 states to see what their experience has been.  There was one that             
 was a group of small businesses.  They consisted of the "mom and              
 pop" type business that joined into a JIA arrangement in Florida in           
 January, 1991.  By May, 1995, they had a $4 million deficit.  There           
 was legislation enacted in Florida to give their department the               
 authority to oversee them and to insist on solvency.  Currently,              
 their deficit is at $20 million and growing.  On the other extreme,           
 there is a hospital association that also joined together to form             
 a JIA.  They have been taken over by the Department of Insurance in           
 Florida because they are insolvent.  The only way the department              
 has of trying to assist them in raising money to pay the legitimate           
 claims of these people who are relying on this association is to              
 consider assessing every hospital in the state for a pro rata                 
 share.  Ms. Burke said the feedback they've gotten is that's not              
 very popular down there.                                                      
                                                                               
 MS. BURKE pointed out insurance companies can become insolvent and            
 that happens, but at least we minimize that risk by insisting that            
 they have adequate reserves, that they adhere to a set of statutes            
 as far as nondiscrimination is concerned, as far as claims                    
 handling, and that they all play by the rules.  If they still go              
 under, there is the guarantee association, whereby all the                    
 remaining insurance companies have to put money in to make good on            
 the claims of the insurance company that failed.  A JIA doesn't               
 have that type of protection.  She said that is a concern to the              
 Department, as its primary mission is to protect the insurance                
 consumers in the state of Alaska.  A JIA arrangement is totally               
 outside of the Department's ability to assist them or have any                
 oversight.                                                                    
                                                                               
 Number 2166                                                                   
                                                                               
 REPRESENTATIVE ELTON referred to the experiences in Florida and               
 said he is curious as to why there is a zero fiscal note.                     
                                                                               
 MS. BURKE said the effect on the state of Alaska would be zero.               
 She said they would have no regulatory authority.                             
                                                                               
 REPRESENTATIVE ELTON referred to Alaska Troller's Association,                
 Alaska Forest Products Association, Pacific Seafood Processors                
 Association, Alaska Miners Association and asked if those groups              
 would be eligible to form a JIA if the bill were to become law.               
                                                                               
 MS. BURKE said if it is an employer group as defined in the bill,             
 they would be eligible.                                                       
                                                                               
 Number 2209                                                                   
                                                                               
 REPRESENTATIVE ELTON said those associations have different                   
 businesses that have been members of the associations for a long              
 time.  He said he would think that if "employer association" were             
 defined to mean "An unincorporated association that had been in               
 existence for at least five years and that consists of at least               
 five employers who are engaged in the same or similar types of                
 trade, business or profession."  He said he is a little bit                   
 bothered because he is not sure that any of the groups should be              
 involved in a JIA and yet it seems they would qualify under the               
 definition in the bill.                                                       
                                                                               
 MS. BURKE said she is most concerned of any group forming a JIA               
 that does not have any statutory requirements to have proper                  
 reserves.  She noted that in Title 21 there are provisions for                
 reciprocal arrangements and joint purchasing, but they're all tied            
 to having adequate solvencies that is available to move the claims.           
 Not all groups have to have what we think of as traditional                   
 insurance.  In fact even in the worker's compensation statutes, if            
 you have adequate collateral, security and assets it is her                   
 understanding that you could self-insure worker's comp, for                   
 example.  But it is regulated.                                                
                                                                               
 Number 2313                                                                   
                                                                               
 REPRESENTATIVE BRIAN PORTER said it is his understanding that                 
 insurance rates have a fee that goes to the state.                            
                                                                               
 MS. BURKE said there is a premium tax.  All the property casualty             
 insurance companies pay 2.7 percent of the premium in the form of             
 a premium tax.  Title insurance, for example, is 1 percent.  They             
 do vary, but all insurers that do business in the state of Alaska             
 pay totally into the general fund.                                            
                                                                               
 REPRESENTATIVE PORTER said this is general state revenue.  He said            
 if a number of these people pooled up and formed a JIA, wouldn't              
 that fee revenue decrease.                                                    
                                                                               
 MS. BURKE said if the department had some way of knowing who they             
 are going to be and what their insurance needs are that would no              
 longer be covered.  It could be done if she knew who was planning             
 to be a part of the JIA and what their current premium base is.               
                                                                               
 Number 2351                                                                   
                                                                               
 REPRESENTATIVE ROKEBERG questioned what worker's compensation                 
 insurers pay.                                                                 
                                                                               
 MS. BURKE said they pay 2.7 percent.                                          
                                                                               
 REPRESENTATIVE ROKEBERG asked who the one JIA is.                             
                                                                               
 MS. BURKE said the Municipal League.                                          
                                                                               
 Number 2383                                                                   
                                                                               
 PAUL GROSSI, Director, Division of Workers' Compensation,                     
 Department of Labor, was next to address HB 524.  He told the                 
 committee Ms. Burke has said many of the things he wanted to say.             
 Basically the department is concerned about the Workers'                      
 Compensation aspect and the association's ability to pay their                
 obligations under the Workers' Compensation Act.  Currently,                  
 employers either purchase a workers' compensation insurance policy            
 or they self insure.  They purchase a workers' compensation policy            
 and Ms. Burke's division regulates those people or they come to his           
 division and certify to self-insure.  The Division of Workers'                
 Compensation regulates them directly.  Mr. Grossi said a JIA is               
 neither one of those things.  There would be no regulatory                    
 authority over them for the workers' compensation coverage.  He               
 said they would still be required to pay according to the act but             
 the department doesn't have any way of knowing whether they will              
 have an ability to do that and if something happens, there is no              
 safety net to cover these.  Mr. Grossi said there is no requirement           
 that there be funds to start out and there is no security deposit             
 required.  There is no requirement even to have joint and several             
 liability.  If something happens to an individual employer, what              
 happens in that event?  Mr. Grossi said there are a number of                 
 things the department is worried about, but primarily injured                 
 workers not being compensated.                                                
                                                                               
 Number 2455                                                                   
                                                                               
 REPRESENTATIVE ROKEBERG asked what the regulatory or statutory                
 requirements are to become certified self-insured.                            
                                                                               
 MR. GROSSI said it requires the company to show a certain amount of           
 assets and they may be required to have a security deposit of                 
 $250,000 or $300,000.  He noted he isn't sure of the exact number.            
 There are a number of requirements to show they have the capacity             
 to pay the claims.                                                            
                                                                               
 TAPE 96-21, SIDE B                                                            
 Number 001                                                                    
                                                                               
 MR. GROSSI said, "...the one - the big thing, in fact, is this                
 would be a problem under this current legislation, they have to               
 basically show us their financial statements so that we know that             
 they're solvent and they have to do that yearly.  Under this, we              
 would have no way of looking at the individual employers to look at           
 their financial statement to see what their abilities are to pay              
 these things and what kind of assets they have."                              
                                                                               
 MR. GROSSI said there is a requirement for a yearly audit, which he           
 believes the JIAs have, but that wouldn't tell him what the                   
 individual employers ability is to pay and what assets they have.             
                                                                               
 Number 051                                                                    
                                                                               
 ROBIN WARD, Alaska State Home Builders' Association, was next to              
 testify via teleconference from Anchorage.  Ms. Ward read a                   
 position statement into the record:                                           
                                                                               
 "The Alaska State Home Builders' Association is supporting a change           
 in the insurance laws of Alaska.  Alaska has the second highest               
 workers' comp rate in the United States for home builders.  The               
 result of a study performed by the National Association of Home               
 Builders' Economic Mortgage Finance and Housing Division revealed           
 that the workers' comp cost to a new home in Alaska, usually                  
 calculated in dollars per $100 in wages, was a whopping $6,312.               
 That's based on sub-suppliers and the general contractors work comp           
 fees through the entire house building.  With the national average            
 cost being approximately $4,321, Alaska has the distinction of                
 having rates 40 percent higher in the nation, second only to                  
 Hawaii.                                                                       
                                                                               
 "The State Home Builders' Association is proposing a change in the            
 insurance law that would allow employer associations to form a self           
 insured fund.  This allows a preselected, and I do want to                    
 reiterate a preselected group of employers to pool their money to             
 pay workers' compensation claims.  In almost all cases, the fund              
 would be managed (indisc.--coughing) association called the third             
 party administrator.  These firms bill the premiums, pay the                  
 claims, audit the plan, underwrite clients, service risk managers,            
 select a reinsurance company and assist the agents in marketing the           
 insurance.  The advantage is in forming groups such (indisc.--                
 coughing) are potential for significant work comp premium savings,            
 more direct control over the insurance costs, a higher degree of              
 control over claims (indisc.--coughing), self audits can be done              
 without negative repercussions and most of the (indisc.) self                 
 insured fund can be more readily adapted to suit the needs of the             
 association.  We're hoping by some changes that we can have more              
 control over managing our claims.  We feel that we could do a                 
 better job of getting our people back to work in a short amount of            
 time with less claims."                                                       
                                                                               
 MS. WARD indicated she has visited with the Department of Labor and           
 it was her understanding they would oversee this.  She said her               
 organization is looking at doing substantial reserves along with              
 reinsurance for major claims.                                                 
                                                                               
 Number 155                                                                    
                                                                               
 REPRESENTATIVE PORTER said, "Robin, your statement in conclusion              
 there that you thought that the Department of Labor would oversee             
 it was kind of the basis for the question that I was going to ask             
 regarding putting a pencil, I guess, to what you would expect if              
 there was kind of a hybrid of what this bill is which would be the            
 ability to pool, but the ability also of the department to set                
 reasonable criteria for available assets, and it sounds like the              
 kinds of things that you're talking about.                                    
                                                                               
 MS. WARD said absolutely.  She indicated they have no problem.  Ms.           
 Ward said her organization assumed they would either be under the             
 preview of the Department of Labor or under the Division of                   
 Insurance.  Most builders are fiscally conservative and there is no           
 problem following the same rules that the work comp companies do              
 today.  Ms. Ward said referred to the committee substitute and said           
 she doesn't believe that the word "unincorporated" should be                  
 included.  Most of their nonprofit associations and trade                     
 associations are incorporated nonprofits.                                     
                                                                               
 Number 289                                                                    
                                                                               
 RON PRICE, Interior Builders' Association, State Alaska Home                  
 Builders' Association, testified via teleconference from Fairbanks            
 in support of HB 524.  He said they want to control their own                 
 destiny.  Mr. Price pointed out that North Carolina has been a                
 model state.  In their years of existence, they've had $27 million            
 worth of savings.  He said he believes there is $95 million in                
 reserves.  Mr. Price said, "Granted, they are a much larger                   
 membership than we are, and that was a concern of ours, but they              
 help us to identify with the state of New Mexico that just recently           
 enacted self insurance for themselves."                                       
                                                                               
 MR. PRICE referred to the question about having a catastrophe early           
 on without any reserves is taken care of by the reinsurance out               
 there.  North Carolina, in its first year of having this program,             
 got a major claim.  A person fell off of a scaffold and was in a              
 coma for five years.  Their responsibility was $125,000 which was             
 taken care of by reinsurance.  That was a premium paid on                     
 insurance.  Mr. Price said his organizations are very concerned               
 about the (indisc.) numbers and the membership that is available.             
 There are 13 or 14 other states that have had it in existence.  He            
 said his organizations are industry based and includes not only               
 builders, but suppliers, architects, appraisers, etc.  Mr. Price              
 said half the risk among those different professions is to allow              
 them to realize some savings.  By being a member of his association           
 does not automatically qualify a person for their workmans' comp              
 program.  He said they will be selective on that.                             
                                                                               
 MR. PRICE explained they will also, in controlling their own                  
 destiny, initiate safety programs.  The other states have found               
 claim reductions are down by 50 percent by pursuing the safety                
 programs actively.  Mr. Price said again, the program would be                
 handled by a third party administrator and can meet any standards             
 that the state wants to put out there.  He stated strong support              
 for the bill.                                                                 
                                                                               
 Number 412                                                                    
                                                                               
 MS. BURKE came back before the committee.  She said a number of               
 things have been brought up and she would like to address the                 
 workers' comp premiums.  She explained those are by industry and              
 are industry specific, based on costs incurred.  In other words, if           
 you are in a state that has higher wages, higher costs of                     
 rehabilitation, higher costs of training and the whole series of              
 costs incurred, your premiums will be higher.  They're based on               
 severity and frequency.  So if you are in an industry that has high           
 frequency, lots of small claims, it will force up the premiums.  If           
 you you're in an industry that has a few very severe claims, it               
 will force up premiums.  Ms. Burke pointed out reinsurance might              
 help in a situation where there were a few large dollar claims, but           
 if you are in an industry that has a lot of smaller claims, claims            
 below this umbrella, you're absorbing all those costs.                        
                                                                               
 MS. BURKE referred to the issue of safety programs and said that is           
 a good issue.  It is a very direct way that any industry can reduce           
 their cost of workers' comp.  She noted it has happened in the                
 state of Alaska.  Those industries that have put in safety programs           
 benefit from them, because again, what is applied to your premium             
 is an experience factor.  If you don't have a lot of claims, you              
 have a reduction in you premiums.                                             
                                                                               
 MS. BURKE referred to discussion on whether or not it would be                
 regulated and explained that JIAs, by statute, are outside the                
 Division of Insurance's ability to regulate.  If the bill did pass,           
 there would be an additional need for legislation to provide for              
 whatever regulation or oversight would be proposed.                           
                                                                               
 Number  525                                                                   
                                                                               
 CHAIRMAN KOTT questioned whether the department has any authority             
 over Title 21.                                                                
                                                                               
 MS. BURKE said none whatsoever with JIAs.  She pointed out it                 
 specifically says not regulated by the department.                            
                                                                               
 Number 637                                                                    
                                                                               
 REPRESENTATIVE JERRY SANDERS questioned whether there are any                 
 changes the legislature could make that would give the department             
 authority over the JIAs.                                                      
                                                                               
 MS. BURKE said yes but then they would be subject to all the                  
 solvency requirements that they are asking to not be subject to.              
 She pointed out the legislature could enact legislation that would            
 spell out different criteria for their solvency requirements.  Ms.            
 Burke said her only authority is that she receives a copy of their            
 report.  She can't do anything with it, but she receives it.                  
                                                                               
 CHAIRMAN KOTT asked if she would receive the report directly or if            
 it is through Legislative Budget and Audit.                                   
                                                                               
 MS. BURKE pointed out the statute says they will provide her a                
 copy.  She said the legislature is responsible for the oversight of           
 the JIAs.                                                                     
 Number 588                                                                    
                                                                               
 REPRESENTATIVE ELTON said he has always assumed the size of the               
 pool helps reduce the rates because the more you spread the risk,             
 the better off you are.  He said in one case, the committee heard             
 from a statewide organization of homebuilders and in the second               
 case, the committee heard from a person who was a member of the               
 statewide organization but is also a member of the Interior                   
 Builders' Association.  The way HB 524 is drafted, both of those              
 organizations would probably qualify for establishing a JIA.  He              
 said it would seem to him that the Interior Builders' Association             
 would be a higher risk JIA because they have a smaller number of              
 members in the state group.  He asked if that was a valid                     
 assumption.                                                                   
                                                                               
 MS. BURKE said he is getting to the heart of insurance.  The whole            
 principle behind insurance is spreading the risk over a large                 
 basis, but in a JIA, without solvency requirements you could have             
 five very profitable solvent companies that have lots of assets               
 that would have the ability to meet their obligations to pay                  
 claims.  You could have a very large group that by the simple                 
 nature of the (indisc.) that they have profitable, marginal, not so           
 marginal members that they would not be able to meet their                    
 obligations because the assessment would be spread out among all              
 the members.  Without the joint and several liability, you would              
 not necessarily have sufficient money from the more profitable                
 ones.                                                                         
                                                                               
 REPRESENTATIVE ELTON referred to how and employer association is              
 defined in the bill and said it would seem that the requirement is            
 that the employer association have at least five employers but                
 there is no assumption that all five employers have to participate            
 in the JIA.  They could have two employers that participate.                  
                                                                               
 Number 711                                                                    
                                                                               
 REPRESENTATIVE PORTER said if it had joint and several liability,             
 then if the JIA that had five businesses in it had a claim against            
 it, the joint association would be liable or any individual member            
 could be sued to the extent of their assets also.                             
                                                                               
 MS. BURKE said that is correct.                                               
                                                                               
 REPRESENTATIVE PORTER questioned why anybody would want to sign               
 into an association like that.                                                
                                                                               
 MS. BURKE said there is a very sincere belief that they're not                
 going to have large claims and that they can manage their claims              
 and their claims would be less than what they'd pay in premiums.              
 She said that may be true for several years.  We've all paid fire             
 insurance on our house, but she doubts if there are many people in            
 the room that have had to collect.                                            
 REPRESENTATIVE PORTER said if he has an insurance policy with State           
 Farm and his neighbor has a State Farm policy, he doesn't want to             
 have to pay more because somebody sues him.                                   
                                                                               
 MS. BURKE explained under an insurance contract, you're pooling the           
 total losses and sharing them among all of the people on a more               
 less pro rata basis.  It is not joint and several liability.  She             
 pointed out JIAs normally assess all their members equal, however             
 if there is joint and several liability that is incorporated into             
 their contract or the instrument that brings them together, then it           
 could go to those people who have the dollars to make good on the             
 claims.  Ms. Burke said she is talking about a situation where you            
 might have several builders that are financially well off and can             
 meet these claims, but others are not.                                        
                                                                               
 Number 848                                                                    
                                                                               
 REPRESENTATIVE ELTON referred to the definition on line 12 and said           
 by that definition what you're doing is excluding those groups that           
 are incorporated because in the bill an employer association means            
 an unincorporated association.  So an incorporated association                
 would be excluded under that definition.  He noted it is a small              
 technical thing the committee might want to address.                          
                                                                               
 Number 891                                                                    
                                                                               
 CHAIRMAN KOTT stated it is not his intent to move HB 524.  It is              
 his intent work with the department to see if there is any way to             
 move toward a happy medium and agree on some of the concepts.  He             
 said the bill would be held.