Legislature(2001 - 2002)
05/08/2002 03:25 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
SB 191-INSURANCE POOLING BY AIR CARRIERS CHAIR MURKOWSKI announced that the final order of business would be CS FOR SENATE BILL NO. 191(JUD), "An Act relating to insurance pooling by air carriers." Number 1826 CAROLYN THOMAS, Staff to Senator Robin Taylor, Alaska State Legislature, read the following portions of the sponsor statement: SB 191 would allow Alaska's air carriers to pool for property/casualty insurance. This is not a new concept. Since 1988, the pooling concept has been working effectively for the majority of Alaska's local governments and school districts, and has reduced insurance costs and increased loss control and safety. The effects of the September 11th attacks threaten the viability of many of Alaska's air carriers as aviation insurance rates have risen even further than previously predicted. Although the aviation insurance market has been hardening for many years, the cost of insurance has reached a crisis point since last fall, increasing 20-300 percent depending on a company's claims. Many insurance companies have left the Alaska market, making the purchase of aviation insurance even more difficult. Increased insurance costs mean higher costs of transportation for all goods and services in the majority of Alaska's communities. SB 191 permits air carriers to group together to self- insure, purchasing reinsurance of a large self-insured retention. With this large "deductible", air carriers share a financial stake in each other's claims. This motivates the industry to police itself, with more focus on loss prevention, safety, and training. Pools produce not only cost relief, but also increased passenger and pilot safety. Patterned after the very successful statute which allows cities, boroughs, school districts and REAA's to pool, this bill imposes stricter financial requirements on a joint aviation insurance arrangement to further protect Alaskans and ensure the financial strength of the pool. SB 191 is a necessary tool for keeping Alaska's transportation network safe and viable while positively affecting the economy. REPRESENTATIVE HALCRO inquired as to how much money will be required to capitalize this pool. He also asked from where the money is going to come. MS. THOMAS answered that statutorily SB 191 will require $1.5 million. However, it is believed that [the pool] would be better capitalized with at least $5 million. She reminded the committee that last year Congressman Don Young pledged support for funding this pool and until the funding source is in place the pool won't happen. She informed the committee that it has never been the intent to fund the pool with state funds. Number 1965 REPRESENTATIVE HALCRO clarified that last year Congressman Young clearly said that it's the state's responsibility to find the money to fund this pool. Congressman Young further said that Alaska shouldn't look to him to find federal funds to fund this pool. Representative Halcro turned to reinsurance and asked if there have been any discussions with the industry regarding the availability of reinsurance if the pool came to fruition. He pointed out that the committee packet doesn't include any letters of support from the air carriers or any background information with regard to how the pool would work. Representative Halcro related his understanding that the legislation establishes a structure and leaves several unanswered questions. MS. THOMAS confirmed that the legislation does establish a structure so that this option is available. She noted that the air carriers are in support of the legislation. Number 2021 REPRESENTATIVE ROKEBERG inquired as to Senator Taylor's understanding of Congressman Young's commitment [to this pool]. Representative Rokeberg related his understanding that Congressman Young would work to obtain funding [for this pool]. MS. THOMAS agreed with Representative Rokeberg's understanding and added that Congressman Young hasn't withdrawn that commitment. REPRESENTATIVE ROKEBERG related his further understanding that there was an endeavor to lobby support in Congress to establish this. MS. THOMAS informed the committee the funding for this first came up in February 2001 in Ketchikan and it was discussed again when Congressman Young was in Juneau. REPRESENTATIVE HALCRO said that he remembered the conversation, which was held in the House caucus room, very clearly. He recalled bringing up the subject of obtaining federal money for improvements at rural airports. The aforementioned subject dovetailed into the availability of insurance for air carriers. Representative Halcro reiterated that he clearly remembered Congressman Young saying that he found it difficult to find $20- $30 million to put into a pool for private aviation companies and it should be the state's responsibility to find the money. He pointed out that Congressman Young repeated the aforementioned sentiment in a recent closed caucus. Representative Halcro expressed concern with passing this legislation with some expectation [that the federal government will provide the funds]. He reminded the committee that last year there was significant research on pooling, which found that there would need to be a capitalized pool of at least $20 million. A $1.5 million capitalized pool doesn't provide very much, when the average payout of an aircraft accident can be upwards of $10 million. He expressed concern with passing legislation that's a hollow statement. CHAIR MURKOWSKI inquired as to whether the air carriers can do this presently. MS. THOMAS related her understanding that without legislation such as SB 191, the air carriers can't pool for insurance. CHAIR MURKOWSKI recalled that when this issue was discussed in the aviation subcommittee, the Division of Insurance clearly stated that this is not insurance and not subject to regulation by the director. The aviation subcommittee recommended a reinsurance pool as opposed to the joint pool being suggested in SB 191. Number 2220 KIP KNUDSON, Alaska Air Carrier's Association, testified via teleconference. Mr. Knudson announced that the association does support the legislation with a few caveats. Currently, the aviation industry can form a reciprocal insurance arrangement. Although a reciprocal insurance arrangement is similar to the proposal embodied in SB 191, a reciprocal insurance arrangement would require the pool's group to register with the state's Division of Insurance as an insurance company. Under SB 191, the risk pool wouldn't have to register which would probably result in a little less paperwork and a smaller overhead requirement. Mr. Knudson explained that although [the air carriers] do have the option to pool their risk, it hasn't been done because of the reserve requirements for the pool to work adequately. From discussions with the Division of Insurance, Mr. Knudson related his understanding that reserves should match losses. The Division of Insurance [reported that] in 2001 the aviation industry statewide caused insurance companies to payout a total of $45 million. Therefore, the air carriers pool would want to have a minimum of $45 million [in reserves]. He questioned whether the $45 million figure included air carriers operating in Alaska that insure all of the fleet outside. MR. KNUDSON turned to Congressman Young's position and noted that the association has contacted his office with regard to his support for feeding this money into the insurance pool. To date, there has been no response. This legislation is enabling legislation which the industry will review closely. He noted that since no one in the [aviation industry] is familiar with running an insurance company [such pooling] will require quite a bit of leg work. TAPE 02-73, SIDE B REPRESENTATIVE ROKEBERG recalled another meeting in which Mr. Knudson discussed the Medallion Program. Representative Rokeberg asked if creating a pool that isn't regulated by the Division of Insurance would allow the adoption, as part of the standards in underwriting criteria for that pool, of some provisions of conformance to the Medallion Program. MR. KNUDSON answered that under SB 191 that would be possible. However, he wasn't sure whether that isn't possible under the reciprocal arrangement. In forming an aviation pool, having a higher standard of operation through the Medallion Program would be required. REPRESENTATIVE ROKEBERG asked if there has been any change in Mr. Knudson's testimony regarding availability of insurance. MR. KNUDSON answered that he continues to hear from operators that are about to go through the renewal process. Apparently, aviation insurance companies had a conference recently and the word was "we ain't seen nothing yet." The problem brewing is that a host of carriers haven't had to renew since the September 11th tragedy. Number 2250 VICKI TURNER MALONE, testifying via teleconference, informed the committee that she is a lifelong Alaskan who has had ownership interest in an air taxi operation in Bethel during the 1970s. She also informed the committee that since 1983 she has owned and is the president of Malone Company, an independent property/casualty insurance agency. She said that she doesn't currently write any air taxi accounts nor is she courting them. Ms. Malone announced her opposition to SB 191 because the insurance industry already provides one of the largest incentives for air carriers to maintain a good safety record. Ms. Malone related that she had spoken with a gentleman in Bethel who purchased a small air taxi company a year ago because the company was going under due to several fatalities. This gentleman said that his insurance premium decreased by half due to a good safety record over the last year. Ms. Malone said that she had a lot of sympathy for the post-September 11th insurance environment, however she didn't believe that SB 191 will provide a long-term fix to the problem. Furthermore, Ms. Malone expressed concern that this risk retention association will fail. Unlike other public entities, air carriers don't have to exist and the losses the aviation industry experience are generally catastrophic. While it's predictable that the losses will be catastrophic, she didn't believe that the number of losses are predictable. She said that she didn't believe there is enough actuarial data, which is what provides an insurance company with its ability to predict losses and that results in its success or demise. Ms. Malone related her belief that the joint insurance association will fail because the well- managed carriers will leave and the premiums for those left will be too high due to their adverse loss records. Meanwhile, there will be more serious disruption in the marketplace. Ms. Malone mentioned that she believes the Alaska Independent Insurance Brokers Association has gone on record opposing SB 191 because it's severely undercapitalized and it doesn't come under the same form of regulation that other insurance companies do. In conclusion, Ms. Malone said that she didn't believe SB 191 is in the best interest of the public at this time. REPRESENTATIVE ROKEBERG inquired as to the impact the September 11th tragedy has had on property and casualty line premiums. MS. MALONE answered that in general Alaska has been very fortunate to have two carriers, one of which is Alaska National, that are domiciled within the state. These carriers weren't impacted by the September 11th tragedy. REPRESENTATIVE ROKEBERG asked if Alaska National writes property/casualty insurance besides workers' compensation. MS. MALONE replied yes, but noted that Alaska National doesn't write aviation risk. Number 2074 JIM WILSON, Coastal Helicopters, announced that he conceptually supports SB 191. However, without funds he didn't see how it could be successful. He echoed earlier comments that it would take about $50 million to set up a pool adequate to fund an insurance program of this nature. Mr. Wilson agreed that something needs to be done about insurance. The Medallion Program is an important element as is HB 271 and HB 319. The combination of the aforementioned and SB 191 will assist in decreasing insurance rates. Mr. Wilson noted that yesterday testimony was given in the Senate regarding SB 271 and compensatory and punitive damages. He pointed out that most insurance policies today are silent on punitive damages, although those can be covered. The problem is that most insurance companies settle before cases reach a court-awarded settlement and thus there is no knowledge as to what portion of the settlement would be punitive and what portion would be compensatory. Number 1952 REPRESENTATIVE HALCRO acknowledged that Mr. Wilson sat in on yesterday's Senate hearing on HB 271. Representative Halcro ascertained that the sponsor of SB 191 doesn't "think too much of HB 271 that we passed." However, he related his understanding from Mr. Wilson that HB 271 and HB 319 create a better chance for the aviation industry getting through the tough insurance times than SB 191 without a funding mechanism. MR. WILSON agreed with Representative Halcro's understanding taken in the context [it was presented]. However, a combination of any of the earlier mentioned legislation would be of great assistance. A [limit on] punitive damages will also be of great assistance. Number 1876 JOHN GRUMMETT, President, Alaska Independent Insurance Agents & Brokers, Inc. (AIIAB); Shattuck & Grummett Insurance, announced that AIIAB opposes SB 191 as it's currently written. He pointed out that the legislation states that a joint aviation insurance arrangement isn't considered insurance, and therefore wouldn't be regulated by the Division of Insurance. The aforementioned is cause for concern with regard to fair claims and complaints and the recourse for those. Furthermore, joint aviation insurance arrangements don't pay a premium tax and thus wouldn't contribute to the general fund and aren't part of the [Alaska Insurance Guaranty Association Act], which is also specified in the legislation. The [Alaska Insurance Guaranty Association Act] protects the public against insolvencies. MR. GRUMMETT highlighted that over the years there have been attempts, which weren't well thought out, to create various self-funding mechanisms. As has been stated, SB 191 doesn't address the substantial amounts of money to fund the pool let alone pay the aviation losses. He stated that $1.5 million isn't close. The difference between this proposed joint insurance arrangement and municipalities and school districts is that the municipalities and school districts have a tax base on which to rely when reserves are low. He surmised that SB 191 implies that the owners will put up the equity of the fund other than the state contribution. Furthermore, air carriers are competitive while municipalities and school districts aren't inherently competitive with one another. Therefore, Mr. Grummett said that he didn't know the impact of such on the marketplace. Mr. Grummett urged the committee to review some of the above before passing SB 191. He directed attention to page 4, lines 9-12, and urged the committee to establish reserves for losses of the joint aviation insurance arrangement prior to the enactment of SB 191. Number 1701 REPRESENTATIVE HAYES asked if AIIAB has testified on this legislation during the legislative process. MR. GRUMMETT replied no and specified that [AIIAB] has been watching the legislation. In response to Representative Rokeberg, Mr. Grummett noted that [Shattuck & Grummett] does underwrite aviation on a case-by-case basis. He informed the committee that currently he writes a small private noncommercial carrier who hasn't experienced any increase. However, he knew that some people have experienced modest to moderate increases while others have experienced large increases. Still, he submitted that the aforementioned was directly related to loss experience as well as the rate. He deferred to the representative from the air carrier's association for a true assessment. REPRESENTATIVE ROKEBERG recalled that Mr. Grummett thought there are problems with SB 191 with regard to fair claims and the actuarial determinations. However, Representative Rokeberg asked if it would be logical that a third party administrator would be retained if this pool was created. MR. GRUMMETT said that he didn't know. REPRESENTATIVE ROKEBERG turned to the issue of adverse losses and remarked that there have been significant losses in Alaska, which he characterized as a statewide problem. He asked if Mr. Grummett felt that a limit on punitive damages would lower the underwriting premiums. MR. GRUMMETT answered that he believes it would go toward that and is a good start. REPRESENTATIVE ROKEBERG characterized the three bills as measures trying to impose limitations or immunities. The problem with passing these bills is the lack of an answer with regard to the true impact of these proposals. Representative Rokeberg said [the intent] is to establish something that would help [brokers] help underwriters moderate their premiums. MR. GRUMMETT said he was just as frustrated. For example, his office lost the remaining three large air carriers that it wrote. The aviation portion of the package was lost because "we" don't have an effective market to compete for them. Number 1450 KEVIN HAND, Staff to Representative Andrew Halcro, Alaska State Legislature, noted that he was staff to the subcommittee on aviation insurance. He turned to an earlier question regarding what is legally available to these aviation insurance pools. He informed the committee that under current statute the following is available: a risk purchasing group, a joint underwriting association, a state-based joint reinsurance plan, reciprocal insurance arrangements, and risk retention groups. The options requiring new statutorial provisions are as follows: assigned risk plans, risk sharing plans, market assistance plans, and joint insurance arrangements. He noted that assigned risk plans and the joint insurance arrangement are basically what HB 270 and SB 191 propose respectively. REPRESENTATIVE HALCRO noted that Mr. Hand worked with Neil Webster, a private individual attempting to gather participants for a pool similar to that proposed in SB 191. He asked Mr. Hand to share Mr. Webster's experience. MR. HAND informed the committee that in December 2000 there was an informal community meeting in Anchorage and it was highly attended by a number of aviation operators and the Division of Insurance and various insurance interests in the state. This meeting sought to create a grass roots, independent of government, pool situation. This would basically be a joint insurance arrangement in which everyone came together and paid an upfront premium to join a pool and create a capital securitization and pay an annual premium, and therefore it would be a joint self-insurance arrangement. This group actually brought in folks to discuss how these funds would managed. Forms were distributed inquiring of pilot experience, technological advancements, and use of safety programs. This was sent out to all interested parties and the information was correlated and sent to the underwriter that was located out of state. The underwriter said the pool could work but the premiums would have to be double what was originally intended. The premiums being sought were in the range of $260,000, which was the case two to three years ago. Therefore, the cost is the problem. CHAIR MURKOWSKI related her understanding that all the information was gathered before the September 11th tragedy and thus she presumed that the numbers will be higher. MR. HAND replied yes. Mr. Hand related that there is talk that a $40 billion hit on the insurance market will have impacts beyond aviation. Number 1138 MR. HAND, in response to Representative Rokeberg, said that much of the information is anecdotal and difficult to grasp with regard to the hard and fast numbers that can be obtained from actuaries and underwriters regarding the possible impact of any of the proposed legislation. Mr. Hand noted that he inquired as to the numbers and the findings of this particular private pool, however the underwriter is one who would've likely been the administrator of the pool and thus the information was proprietary. One of the main concerns with a pool is that even if one could find a joint insurance arrangement, reinsurance is unlikely to be available at any price. CHAIR MURKOWSKI, upon determining that no one else wished to testify, closed public testimony. REPRESENTATIVE HALCRO noted his support of SB 191, although he expressed the need to be realistic. Certainly pooling is a good tool, however it won't help the aviation industry get its feet on the ground. Number 0953 REPRESENTATIVE KOTT stated his reluctance to move SB 191 from committee. However, since this provides one more tool he said he would move the legislation with the understanding that the two other components, SB 271 and HB 319, should be [moved] to the Senate floor. CHAIR MURKOWSKI echoed the "luke warm endorsement" of SB 191, which is meaningless without the funding. However, she expressed the hope that with the structure being available maybe the money will follow. REPRESENTATIVE MEYER agreed that SB 191 is only as good as the funds that are received from Congressman Young. Number 0758 REPRESENTATIVE ROKEBERG recalled that there was testimony that the legislation fails to require any actuarial review prior to operation. He directed attention to page 4, lines 9-12. He asked if that [annual determination] would occur before operations begin. CHAIR MURKOWSKI pointed out that the language is under the financial provisions of the agreement. She specified that the agreement has to include a provision regarding an annual determination, although the language doesn't specify that it must be done upfront. Number 0639 REPRESENTATIVE ROKEBERG moved that the committee adopt conceptual Amendment 1, which would include a provision requiring what is specified on page 4, lines 9-12, to be determined prior to the commencement of operation [of a joint aviation insurance arrangement]. He explained that this determination will determine the amount of funds required. There being no objection, conceptual Amendment 1 was adopted. Number 0497 REPRESENTATIVE ROKEBERG moved to report CSSB 191(JUD), as amended, out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, HCS CSSB 191(L&C) was reported from the House Labor and Commerce Standing Committee.
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