Legislature(2007 - 2008)CAPITOL 17
03/23/2007 03:00 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB170 | |
| HB162 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 170 | TELECONFERENCED | |
| *+ | HB 162 | TELECONFERENCED | |
HB 170-INSURANCE CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 170, "An Act relating to annual audit reports by insurers, to custodians of insurer assets, to writing workers' compensation insurance by surplus lines insurers, to reports by surplus lines insurers, to the definition of 'wet marine and transportation insurance,' to false or misleading financial statements concerning insurance audits, and to the membership of the Alaska Life and Health Insurance Guaranty Association; and providing for an effective date." 3:05:04 PM LINDA HALL, Director, Division of Insurance ("the Division"), Department of Commerce, Community, & Economic Development (DCCED), stated that HB 170 was introduced at the request of the Division. Sections 1,2, and 3 of the bill address solvency oversight. The general purpose of these sections is to provide authorization to adopt in regulation the model financial reporting regulations of the National Association of Insurance Commissioners (NAIC). The Division intends to adopt the entire financial reporting model, which has been in place for several years. In 2006, several revisions were made, which have been adopted by the NAIC. She explained that the basic model regulation is an accreditation standard. The Division is accredited by the NAIC, which is a mechanism to review each states financial examinations of the insurance companies for which it is the primary regulator. States rely on other states for quality financial reviews and financial oversight. The accreditation process ensures that the states are doing an adequate job of the financial review. MS. HALL went on to say that in August of 2007, the Division will undergo its accreditation review. A team of three financial examiners will review the Division's financial exams, to determine whether or not the Division should maintain its accreditation. She stressed the importance of recognizing that the Division's financial exams are "taken to be good, and [are] accepted by other states." Referring to Sections 1 and 2, she explained that these deal with annual audited financial reports. She stated that Section 1 applies to audits that are currently required, yet are not in statute, adding that AS 21.09.200 includes a statement requirement that the Division is attempting to codify, adding that this statement requirement is being removed from the statement instructions. She explained that this does not change any requirements, and insurance companies will still be required to have annual audits done by a certified public accountant (CPA). These audits must still report significant deficiencies in internal controls, and misstated financial conditions, in addition to non-compliance with capital and surplus. She explained that HB 170 codifies these requirements. HB 170 also allows the director of the Division to require a report describing internal control over financial controls. She stated that the Division needs to ensure adequate internal controls are in place. Additionally, HB 170 requires the insurer to have an internal audit committee. A CPA must forward a report of misstatement of financial condition or non- compliance with capital and surplus requirements, if the insurer does not. Insurers are also prohibited from making false or misleading statements to a CPA. This annual report requirement provides an annual review of financial reports, along with the reporting of poor internal controls. The Division feels that the audit committee is a factor in "good corporate management." She stated that the detailed rules will keep with the NAIC model regulations, which will be adopted in every state. 3:10:00 PM MS. HALL went on to discuss Section 3. She explained that this section is an updated requirement for entities and the custodial agreements. Current statute has a number of restrictions on where insurance companies can keep money, and Section 3 restates this, and specifies that only banks, trust companies, security firms, or clearing corporations may be used. It requires that custodial agreements be in writing, properly authorized by the insurer, and comply with regulatory requirements. She stated that financial examinations have shown that the custodial agreements between an insurer and its bank may or may not meet the Division's requirements. The bank is required to sign an indemnity agreement, which some banks are not willing to sign. She explained that part of the financial oversight is being sure that when a claim is filed, there is money to pay it. MS. HALL then referred to Sections 4,5, and 6, which deal with surplus lines. She stated that this area of insurance is not as highly regulated. Section 4 replaces "directive" with "order." She said that the Division issues orders as a part of its process, adding that "directive" is not a term typically used by the division, and does not have a statutory definition. She explained that the intention is to ensure that this reflects the work done by the Division. Section 5 removes the notarization requirement for monthly surplus lines broker reports. The Division has found that this is not necessary, and is moving toward electronic filings. Section 6 changes the definition of "wet marine and transportation insurance." Ms. Hall went on to say that Section 7 prohibits any false or misleading statements. She explained that Sections 8 and 9 apply to the Alaska Life and Health Insurance Guaranty Association. These sections clarify that a "member" is an insurer who has the authority to issue a policy, and does not need to write a policy to help pay the administration costs of the guaranty association. 3:14:24 PM REPRESENTATIVE NEUMAN offered his understanding that HB 170 helps to ensure that the companies writing insurance in Alaska have the funds to pay for claims. MS. HALL agreed, adding that the bill focuses on solvency oversight. This section deals with the annual audited statements. She stated that the Division does statutory examinations every three years, for those companies that it is the primary regulator for. These standards keep the state in line with the rest of the country. In response to an additional question, she said that some financial statements are public record, and requests for this information can be made to the Division. 3:17:05 PM REPRESENTATIVE BUCH asked if the state has ever had an insurance company declare insolvency. MS. HALL replied yes. She noted domestic insolvencies in 1998 and 1988, and more recent insolvencies involving Fremont Insurance (Fremont) and Reliance Insurance Company (Reliance), whose primary regulators were out-of-state. In response to an additional question, she agreed that HB 170 is intended to protect against insolvency. In response to a question from Representative Neuman, she clarified that the Division must approve the financial institutions that are used for deposits. There are also specific types of instruments that money can be deposited in. This is addressed in regulation. The types of assets are also monitored closely. She pointed out that bonds are the largest class of assets kept by insurance companies. The Division can send securities to the NAIC Securities Evaluation Office for evaluation. REPRESENTATIVE NEUMAN, referring to Page 4, line 21, pointed out that "and" is changed to "or". He questioned whether the intention with this change is to create more flexibility for insurance companies. MS. HALL explained that this defines a specific type of insurance. She stated that the word "and" may imply that all components must be included to be considered. She said that "wet marine" is defined as "things that are transported on water." This change clarifies that [all four components do not need to be present]. REPRESENTATIVE NEUMAN, referring to Section 8, asked if the Alaska Life and Health Insurance Guaranty Association is mandatory for all insurance companies in Alaska. MS. HALL replied that the aforementioned guaranty association is mandatory for all life and health insurance companies. Property and casualty insurance companies have a separate guaranty association, which is also mandatory. She said that this is the "backstop" for insolvent insurers. 3:21:59 PM REPRESENTATIVE GARDNER asked for clarification regarding the changes made by HB 170. MS. HALL explained that the only new requirement is for all insurance companies to have an internal audit committee. She reiterated that the Division intends to adopt the model regulations from the [NAIC]. 3:23:07 PM REPRESENTATIVE LEDOUX, referring to Page 5, lines 13-14, inquired as to why the language was changed to "Each member insurer". MS. HALL replied that this changes who must pay the administrative assessment. She explained that each company that writes insurance in Alaska must pay a portion of the administrative costs associated with the guaranty fund. If the company does not issue a policy, it will not pay an insolvency assessment; however, it would pay a portion of the administrative fees, which may be up to $250. REPRESENTATIVE LEDOUX shared her understanding that this would be all insurers in Alaska, and would not be limited to life and health insurance companies. MS. HALL replied no. She clarified that this would only apply to each member insurer of the Alaska Life and Health Insurance Guaranty Association. She reiterated that there is a separate guaranty association for property and casualty insurance companies. 3:25:01 PM MS. HALL, in response to questions from Representative Gatto regarding the language in Section 7(d), explained that the audit committee hires a CPA, and this section states that no member of management can coerce or manipulate the CPA. If a member of management were to manipulate the CPA by providing false information, he or she would be held accountable to the Division. She stated that the Division would not hold the CPA accountable, although the CPA would be registered with the Division. 3:27:22 PM REPRESENTATIVE BUCH indicated that he met with Ms. Hall previously regarding this bill and expressed appreciation for her efforts to explain the bill. REPRESENTATIVE NEUMAN inquired as to whether the number of insurance companies in Alaska has increased or decreased, noting that previously, legislation was passed in an attempt to create a better environment for insurance companies in the state. MS. HALL replied that the insurance industry has grown. In September of 2006 a new health insurance company began selling group insurance in Alaska. Additionally, she recently received official notification from a property and casualty insurer that is going to begin writing homeowners and auto insurance in addition to the insurance it currently writes. She stated that this is a "huge move" in the insurance industry. However, she recently received notice of an insurance company that is leaving the state. While this is distressing, she sees this as an overall gain for the industry. She stated that this is a "delicate marketplace," and the Division "walks a fine line" to encourage companies to do business in the state. She opined that the best consumer protection is consumer choice, and a competitive marketplace. While she is not sure this will ever be available to a great extent, there has been improvement. REPRESENTATIVE GATTO referred to the insolvency of the Fremont Insurance Company, and asked whether this type of insolvency could occur again. MS. HALL replied that it is possible. She then explained that previously, a series of insolvencies occurred. The Fremont insolvency affected Alaska a great deal; however, the Reliance insolvency was the largest. She explained that Reliance previously wrote a large share of workers' compensation in Alaska, adding that Reliance is no longer actively writing insurance, although it is still paying claims. This company has been in a "runoff state" for three years. While the possibility for insolvency remains, there is a greater awareness. REPRESENTATIVE GATTO expressed concern with school districts and how insurance carriers are chosen. He surmised that because a school district is a state entity, it may be required to go with the cheapest rate, which may result in a future insolvency. He asked whether HB 170 includes a provision that would require audits to ensure solvency, in order to advise customers. He questioned whether this is outside of the parameters of the Division. MS. HALL replied that this is within the parameters of the Division. She explained that during the aforementioned insolvency, the Division examined what financial tools were needed. She opined that HB 170 is a step toward this goal. In response to rate concerns, she explained that the Division also does rate oversight. The Division does market conduct examinations when it receives information that suggests a company is writing business at prices that are "less than it takes to write a risk." She said that in each state, workers' compensation insurance rates have the most regulation. She stated that the Division does not want to discourage competition, adding that the rating standards are set by statute. Rates must not be excessive, inadequate, or unfairly discriminatory. She said "I hope - in my lifetime - we don't see another Fremont." 3:34:34 PM MS. HALL, in response to a request from Representative Neuman, explained that Fremont Insurance Company sold workers' compensation insurance. She stated that at one point, it sold 27 percent of the Alaska workers' compensation market, which was the largest market share. The company was taken under the supervision of the State of California [Department of Insurance], and declared insolvent in July 2003. While there have been various allegations as to what caused the insolvency, the actual reason is unknown. The insolvency was declared when the company's reserves were evaluated. She explained that insurance companies reserve for losses. She explained that this is the future cost of claims. When the reserves were reevaluated, they were placed at twice what had originally been set. When the reserves are increased, surplus must be available to pay for the reserves. The company then went to court to be declared insolvent. Once a company is declared insolvent, it goes into "receivership," which is similar to a bankruptcy. The state's chief regulator then becomes the receiver, and the claims are transferred to a guaranty association, which is the safety net. She stated that when this occurred, the Alaska guaranty association failed, as it did not have adequate ability to raise money to pay for claims. The claims, she said, were being paid at around $1 million per month, which equates to around $12 million in a year. The statutory assessment capability of the guaranty fund only allowed it to raise $4 million. She stated that this was termed a crisis, and the legislature, the Division, and the administration worked to prevent this situation from becoming "a true nightmare." There were over 800 injured workers potentially unable to receive lost wages and claims payments. Additionally, over 400 employers with injured workers stood to take on the responsibility of the aforementioned claims. 3:38:22 PM REPRESENTATIVE NEUMAN asked whether this is the reason behind the Division's desire to ensure that the insurance companies writing claims in Alaska have financially able to cover the claims. MS. HALL replied that this is correct. REPRESENTATIVE LEDOUX asked if the result of the aforementioned insolvency would have been different if HB 170 had been in affect. MS. HALL replied no. REPRESENTATIVE LEDOUX asked what changes would be necessary in order to avoid this in the future. MS. HALL replied that she does not feel additional financial tools are necessary. She shared her belief that no amount of regulation can guarantee that a business will not fail. She opined that Alaska has an "incredibly good" financial examination department. She stated that HB 170 contains models that give the Division greater oversight. She explained that this applies to the annual, CPA audited statements that insurance companies must file. She stressed the importance of internal control, adding that it is a matter of how the tools are used. REPRESENTATIVE LEDOUX asked whether the regulators in California "misused their tools." MS. HALL replied that she does not know. While it has been suggested that the Division take a closer look at this, she opined that California likely "has an excellent staff." She pointed out that reviews are part of the accreditation process. She surmised that there may have been issues during the reserving process, which resulted in the lack of funds. She said that studies are done to discover what causes an insolvency; however, she opined that it is still too soon to be certain of the cause. CHAIR OLSON indicated that HB 170 would be brought up again at a future committee hearing. 3:41:47 PM
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