Legislature(1997 - 1998)
03/12/1997 03:22 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 179 - FRATERNAL BENEFIT SOCIETIES CHAIRMAN ROKEBERG indicated that the committee would consider House Bill 179, "An Act relating to fraternal benefit societies; and providing for an effective date." Number 092 RICHARD KLEVEN, Assistant Vice President, Lutheran Brotherhood of the Fraternal Brotherhood Society, National Fraternal Congress, came forward to testify on HB 179. He stated that this bill was very similar to one that has been passed in approximately 35 other states. Fraternal benefit societies are self-help membership organizations. They are created by people usually of a common religion, ethnic, or national origin. He mentioned the ones operating in the state of Alaska: Knights of Columbus, Independent Order of Foresters, Sons of Norway, Aid Association for Lutherans and Woodman of the World. These are organizations that exist to benefit their members and communities. They are very tightly controlled by the members through a representative form of government. Lodges are required to exist by law. There are 45 of them in the state of Alaska that gather for fellowship, but they also to do volunteer work. Number 218 MR. KLEVEN stated that these organizations offer their members insurance products on a limited basis, usually life and annuity benefits. In Alaska there are about 7,000 fraternals. In 1995 the fraternals provided about a 1/4 of a million dollars in aid to various charitable projects in the state and their members contributed about 58,000 hours of volunteer service. There currently exists a chapter in Alaska law which regulates these organizations, but noted that it's been 30 years since this original law was passed in 1966. There has been a lot of regulatory and legal changes on the federal level since then. Some of what these organizations would like to do under existing law run afoul with some of the IRS regulations, Securities and Exchange Commission Laws, and laws affecting tax and financial planning. They need a code which keeps better pace with what's going on. Number 305 MR. KLEVEN stated that the bill was 28 pages long. Generally, there is nothing in the bill that radically changes anything. It allows fraternals to write variable life and annuity products. These are products written by most life insurers and are primarily regulated by the federal government as well as by the state's Division of Insurance. Variable contracts are regulated by the Securities and Exchange Commission and the way the fraternal laws are written now it is impossible for them to write the types of insurance their members want. This change in law will also allow some flexibility in the law so that when new kinds of insurance products are created, the Director of Insurance will have the authority to approve those if they are appropriate for fraternals to write. It also makes it clear that fraternals can have subsidiaries do things that are in furtherance of their purposes which are required by law to be charitable, fraternal, educational, religious, patriotic or moral. MR. KLEVEN continued that this legislation would also help improve some of the regulatory language in the Alaska code so it's clear that unfair trade practice issues or market conduct apply to the fraternals as they do to the commercials. This is only fair. The fraternals should be bound by these, whether licensing requirements or other. This bill will make it clear that their members are allowed assignments to their policies, issue contracts on a third party basis, or irrevocable beneficiaries, etc. These are all important tools in tax, financial and estate planning. This bill also does a lot of things in updating language. It makes it clearer what the Director of Insurance can do, what the directors' regulatory authority is over the fraternals, reorganizes sections of the code, makes them gender neutral, provides more up-to-date language, but it still maintains their essential character. They are required to be a charitable organization. All the same elements are there and won't change what small place the fraternals have in this market place. This legislation won't affect any of the existing members in the state either, but it should provide them better protection and more flexibility. Number 549 MR. KLEVEN noted two amendments would be considered and his organization supports both of these. One of these amendments is technical in nature to make sure that the changes made in the law today will conform with the Kassenbalm/Kennedy law regarding health insurance which passed at the federal level last year. The other amendment is also technical and makes it clear how fraternals are governed. In most cases, their supreme governing body is not their Board of Directors, but instead, is something called the General Assembly. This amendment makes it clear that anybody at any level running for this General Assembly has to be a member of the society. Number 618 REPRESENTATIVE JOHN COWDERY asked how the Alaska legislation was different from that passed in the other 30 or so states. MR. KLEVEN responded that these differences were very subtle. The basic thrust of this Alaska legislation is very close to the model passed in every other state. There is no substantial difference to speak of at all. Every state has its way to write code and there might be a nuance, for instance, related to agent licensing. A few states have not wanted to take the approach of re-writing the entire code. They've done so piecemeal. Thirty-three of the 37 have taken the broader approach, which in Alaska the Division of Insurance supports. Number 688 REPRESENTATIVE JOE RYAN said that he was interested in what and how they do estate planning. He asked what the extent of this was. MR. KLEVEN responded that their members buy insurance from them. They often buy this product in the context of estate planning. The fraternal organization doesn't do the estate planning, but the client works with a local attorney to do so. They do have experts in their home office who will educate the field employees about such things, but they insist that people use their own attorneys or local tax advisors in the overall estate planning. Number 743 REPRESENTATIVE BILL HUDSON asked, in the absence of this legislation, who would provide these services. MR. KLEVEN stated that Alaska has a code on the books now. They could continue to operate under this code, but feel they could do a better job with a new one. Number 764 CHAIRMAN ROKEBERG said it was interesting to note that the term "domestic" in the statute relates to an organization organized in the state of Alaska, that "domestic" equals Alaskan and therefore, "foreign" means an organization from the outside. The fraternal organizations operating in the state of Alaska are of foreign status under this legislation. This bill is set up in large part to deal with any organization that wishes to establish itself in Alaska. MR. KLEVEN responded that this was correct. Number 820 REPRESENTATIVE JERRY SANDERS asked if the fraternals broker insurance for insurance company or do they operate as an insurance company. MR. KLEVEN responded that they have their own insurance operation. Lutheran Brotherhood, for example, issues life and annuity policies and long term care for members on their paper. These fraternal organizations write their own insurance. The Alaska Division of Insurance regulates them. Almost all of the laws governing life and annuity insurance would also apply to the fraternals. They are required to meet financial tests, generate reports, follow restrictions on how they invest, etc. He stated that this code helps to clarify some of these things. Number 880 REPRESENTATIVE TOM BRICE asked if a domestic organization under these new laws discriminates based on age, sex, nationality, etc. MR. KLEVEN responded that a domestic society can be created in Alaska with membership requirements. Usually these are religion based with certain purposes outlined. The Lutheran Brotherhood is religious and all its members are Lutheran. To that extent only those people and their families are eligible. He didn't think whether one could be created based on age or anything like that, he didn't think that has ever been done. He did give a breakdown of age requirements for the Lutheran Brotherhood. REPRESENTATIVE BRICE inquired whether the Lutheran Brotherhood excluded women. MR. KLEVEN responded that no, they did not. Number 974 CHAIRMAN ROKEBERG asked if there was anything in this legislation to restrict the marketing of their product, such as requiring that someone be part of a member's immediate family and asked, if so, was there anything in place where they could step beyond this. MR. KLEVEN noted that societies have their own rules regarding membership which generally regard immediate family members. Number 988 CHAIRMAN ROKEBERG asked what the origin of this insurance service was. MR. KLEVEN responded that these services were organized by immigrants at the turn of the century. These were people who couldn't get insurance or needed to bond together for other reasons, not just for insurance then or now. These organizations are self-help groups who help each other and the cause that they are formed around whether this be a religion or communities in general. The same charitable purposes exist today. Number 1085 DON KOCH, Chief, Market Surveillance, Division of Insurance, came forward to testify in support of HB 179. The Division has been involved from the standpoint of looking at the changes that the fraternals wished to make. They've had a fair amount of input as it has progressed and there are not a lot of areas where they have concern. Mr. Koch reviewed the bill, as well as the Division's financial staff and they've had about four other different areas of the Division that have looked at this legislation in one form or another. MR. KOCH stated that many of the changes can be characterized as reorganization of the code itself into areas of interest; for example, the things which relate to the financial regulation have been put into one area of this chapter, where before some of these were scattered around. A number of those changes have very little difference in the existing text as versus the new text. One of the bigger changes is the ability for fraternals to establish separate accounts for the purpose of supporting variable products, such as life and annuities. The other life insurers have had this opportunity available to them since the late 60's. Number 1218 MR. KOCH responded to the "foreign" versus "domestic" conversation earlier and noted that this was an already existing distinction that's been in the code for a long time. He continued that a domestic insurer has been referred to as "domiciled" in the state and foreign insurers are everyone else. A further distinction is made that an insurer from another country is called an "alien" insurer. MR. KOCH added that the Division proposes an amendment to this legislation. He provided a copy of it to the committee. The fraternal code has a provision in it that lists all of the statutes outside of that particular chapter which applies to a fraternal. This is an area where such things are considered such as the Unfair Trade Practices Act and the licensing statutes, etc. These are all things external to that chapter of law referenced in this particular area. The Department of Law noted that they had neglected to list two chapters of the insurance code that contained provisions affecting group health insurance in this legislation which are also being addressed in the Kassenbalm/Kennedy bill. This new federal law will impose certain things on anyone writing health insurance. That reference was left out of this fraternal bill, but this change is enumerated in this amendment to read as follows: Following Line 7 on Page 18, insert the following: "(15) AS 21.54; (16) AS 21.56;" Renumber existing (15) through (18) accordingly. MR. KOCH continued that the references to these two chapters are references to group health insurance statutes in the code to make sure that those also apply to fraternals should they write this type of insurance. For the most part, fraternals do not write group products, but individual ones. Typically these fraternals write only for their members and their direct family. He noted that he was also a member of a fraternal, the Knights of Columbus, and noted all the charitable activities they are involved in. He noted that insurance was incidental to their activities. Number 1443 REPRESENTATIVE GENE KUBINA noted that this legislation seemed to strengthen some of the provisions in the existing law, for example, increasing the bonding required rather than lowering it. He asked if this was accurate. MR. KOCH responded that this was accurate. The legislation is really an attempt to update the current law which was originally adopted in 1966 when Alaska first accepted the insurance code. There have been a lot of changes since this time, the least of which that some amounts appropriated as standards back then are no longer appropriate now. These have been upgraded. He thought there was a lot to this bill which made language more clear. It's a long piece of legislation, but he stated that it does tend to strengthen the existing law. As a regulator he supports this concept. Number 1516 MR. KOCH shared an additional observation. A few years ago he and Division personnel were concerned about what constituted a fraternal organization and how they operated. With that they looked at the fraternals with insurance ratings in the state. At that time there were five existing that had some level of premium volume written in the state of Alaska. They examined four of these five, one was so small, it wasn't worth bothering with. They sent examiners in to get a good idea of how they operated. These were market conduct exams as opposed to financial exams. They were fairly impressed because the things they might compare with when looking at a life insurer they noted how some big differences existed. Generally, these differences were favorable, things which were done right as compared to how other types of entities conducted business, things they didn't have the same comfort level were working as they should. Number 1580 CHAIRMAN ROKEBERG asked if the fraternals were more conservative in their financial decision making. MR. KOCH said he couldn't speak to the financial aspects of these organizations since he wasn't involved with this aspect of the review. These were market conduct exams which take a look at how they settle claims, how they deal with customers and how they generally conduct themselves. They were fairly impressed. The level of cooperation was greater. Number 1629 REPRESENTATIVE HUDSON asked what positive or negative impact this legislation will have on military fraternal organizations. MR. KOCH stated that these organizations are not fraternals in the sense intended by this chapter of law. These are commercial insurers. This would have no affect on them. These military organizations have product opportunities the fraternals don't have, but hope to gain. They see no reason to bar them from this. Number 1702 REPRESENTATIVE KUBINA made a motion to move amendment number one as outlined. Hearing no objection it was so ordered. Number 1715 CHAIRMAN ROKEBERG introduced amendment number two as follows: Page 1, Line 13 after "body": Insert: ",or any intermediate assembly" Number 1760 MR. KLEVEN offered to explain the reason for this change. Fraternal organizations are membership groups. Their supreme governing body can be organized in two ways. A more common way is to have a group formed called the General Assembly which is the supreme governing body. There is still a Board of Directors, but the General Assembly is elected by the membership and serve as delegates to elect the Board of Directors. In the case of some fraternal benefit societies, there is an intermediate group before the General Assembly is elected which are called intermediate assemblies. These assemblies gather usually in a region to elect delegates. This amendment clarifies that if there is an intermediate assembly the only people eligible for this body would be members, just as there is a membership requirement to be elected to the Board of Directors or the General Assembly. Number 1823 REPRESENTATIVE SANDERS asked if there were organizations in Alaska that are big enough to have or need this intermediate assemblies. MR. KLEVEN noted that there were no domestics in Alaska; however, if there is representation for any society that operates here, there are going to be members in Alaska that are going to vote. He stated that it wasn't a function so much dependent on size, but it's the way societies are structured and how they conduct their voting. There was some further discussion regarding the definition of intermediate assemblies. Number 1897 REPRESENTATIVE HUDSON made a motion to move amendment number two as outlined. Hearing no objection it was so moved. CHAIRMAN ROKEBERG stated that he was reluctant to move this bill out of committee since it was so lengthy. He wanted to make sure that everyone had read the entire text and noted that he had planned to assign it to a subcommittee. The members agreed that they had already read the legislation and felt comfortable moving it from the committee. Number 1936 REPRESENTATIVE RYAN moved and asked unanimous consent to move HB 179 out of committee with individual recommendations and the accompanying fiscal note. Hearing no objection, CSHB 179(L&C) was moved out of the House Labor and Commerce Committee. CHAIRMAN ROKEBERG asked Mr. Koch and Mr. Kleven to provide written explanation of the amendments to the committee as attachments to the CS process.
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