Legislature(2005 - 2006)CAPITOL 17
03/17/2006 03:15 PM LABOR & COMMERCE
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
HB 51-EMPLOYER ASSN FOR WORKERS' COMP INS ACTING CHAIR KOTT announced that the final order of business would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 51, "An Act relating to modifying the qualifications required for workers' compensation self-insurance and permitting employers in the same trade or industry to form an employer association for self- insured workers' compensation coverage; and providing for an effective date." MIKE PAWLOWSKI, Staff to Representative Kevin Meyer, Sponsor, noted that during the last bill hearing, the members adopted committee substitute (CS) 24-LS0233\S, Bailey, 3/3/06, as the working document and the members were waiting for testimony from the director of the Division of Insurance. He said that letters of support from the State Chamber of Commerce and the Alaska Chapter of the National Electrical Contractors Association had been added to members' packets. 4:47:07 PM LINDA HALL, Director, Division of Insurance, Department of Commerce, Community, & Economic Development, said that one of the basic principles of insurance regulation is financial oversight to ensure that claims are paid. She stated that while [Version S] includes more detailed requirements, she still has concerns regarding the bottom line repercussions of insolvency. She said that Mr. Pawlowski had indicated adding a new term "tangible net worth," and she stated that there is no definition [in current statute]. She explained that insurance regulation limits the types and value of assets in determining an insurer's financial position, adding that the quality of assets and liquidity is a concern. 4:49:13 PM MS. HALL said that she feels the $5 million net worth aggregate is "excessively low." She noted that the Department of Labor & Workforce Development's projection, which is adjusted for inflation, is approximately $10 million. She said that the CS also requires a solvency bond, which she is not sure is practical. She noted that she has spoken to a bond underwriter who is active in the Alaska bond market, and was informed that this would be very difficult to obtain because the individual employers who would be members of the association have not been required to provide audited financial statements in the past. She stated that requiring the association to be the principle on the bond would require a corporate signer who is willing to indemnify the bonding company, and she opined that it would be difficult to find an employer in the association willing to take on this responsibility. 4:50:41 PM MS. HALL expressed concern that the bill places primary financial responsibility on the association, and added that in general, trade associations do not have the financial assets to provide the workers' compensation benefits. In regard to the termination of membership, she said that Version S does not address what happens to the liabilities for the time the employer was a member of the association. She said that there is a section which deals with insufficient assets and the circumstances in which an association would be considered insolvent; however, there is no provision dealing with what happens afterward. She stated that the 36-month time period for retention of the security deposit is not a sufficient length of time, as some workers' compensation claims can take up to 20 years to close. She suggested that it may be more appropriate to condition the release of the deposit upon termination of liabilities as determined by actuarial analysis. 4:52:45 PM MS. HALL went on to say that Version S would not allow the statutes controlling unfair discrimination, misrepresentation and false advertising, and unfair claims settlement practices to apply to the self-insured associations. She stated that while the division currently licenses adjusters who handle workers' compensation claims, Version S does not require the third party administrator be licensed as an adjuster, and therefore would not provide any oversight of the claims handling practices. She added that there is no complaint process or authority to require accountability for the handling of claims. 4:54:16 PM MS. HALL noted that the majority of the bill is based on Nevada statute and regulation, although some significant provisions have not been included. These include: The indemnity agreement includes the association; annual assessments must be at least $300,000 or an amount determined by the director to be satisfactory based on an annual review of actuarial solvency; each member of the association must have a tangible net worth of at least $250,000 and a minimum premium for workers' compensation insurance of at least $10,000; the director would approve annual assessments; provisions are made to assess other self-insured associations for the claims obligations of an insolvent association. She noted that in the Nevada regulations, there are provisions regarding the assessment of other self-insured associations for claims obligations once a member becomes insolvent. She said "I'm still concerned, if one of these self-insured groups becomes insolvent, somebody's going to have to pay, and I think we ... need to talk about who that is." 4:55:56 PM MS. HALL stated that AS 21.75 provides for the formation of reciprocal insurers, which she feels would achieve the objectives of the proposed self-insured association program. In conclusion, she stated that while she is pleased to see the efforts to include more accountability, she continues to have reservations about the viability of the small plans when there is potential to have insufficient funds with which to pay the claims of injured workers. She urged the committee to consider the possible effects of the bill. She said that the bill has been crafted by an Alaska trade group in an attempt to find a viable alternative and remain responsible; however, the bill would apply to any group who decided to participate. She added that other groups may not have the same principals of accountability that may be looking for a way to "skimp" on workers' compensation costs. 4:58:00 PM REPRESENTATIVE ROKEBERG asked if Ms. Hall could provide her written concerns to the members. MS. HALL said yes and added that her office would also provide a comparison of the current and previous versions. REPRESENTATIVE ROKEBERG asked if the net worth requirement would remain at $5 million if a reciprocal was formed. MS. HALL replied that there is no net worth requirement. She said that there are capital and surplus requirements for reciprocal, which begin at $1.5 million and are required to have $1,375,000 in capital and surplus. 5:00:18 PM REPRESENTATIVE ROKEBERG asked where the $5 million figure came from. MS. HALL replied that this amount is from the current workers' compensation statutes and is the minimum requirement for an individual employer to be considered for a self-insurance certificate. REPRESENTATIVE ROKEBERG, referring to Ms. Hall's testimony, asked if the amount would be twice as much if adjusted for inflation. MS. HALL replied that her testimony was based on information received from Director Lisankie. She expressed her understanding that this was promulgated in 1983. 5:01:21 PM REPRESENTATIVE ROKEBERG, in regard to the issue of insolvency, asked if there is any link between this and the guaranty funds. MS. HALL said no, and added that she does not think there should be. She suggested implementing a method for determining what would occur in case of an insolvency, as someone would be required to pay. She stated that when the guaranty fund runs out of money to pay for claims, the responsibility is then placed on the individual employer; however, if the individual employer is bankrupt, there is little course of action for the injured employee. 5:03:01 PM REPRESENTATIVE ROKEBERG asked if there are currently other provisions under certified self-insured or reciprocal. MS. HALL replied that there are no provisions under Title 23 for certified self-insured, and she added that the reciprocals fall under the guaranty association. REPRESENTATIVE ROKEBERG asked if the reciprocals pay into the guaranty fund. MS. HALL said yes. 5:03:35 PM REPRESENTATIVE ROKEBERG asked if there are any provisions in the bill that provide for assessments of the guaranty fund. MS. HALL said no, and opined that unless the division is dealing with a "level playing field", it would be unfair to include self-insurers in the same guaranty fund as the insured market. REPRESENTATIVE ROKEBERG agreed with this and asked about the joint and several liability. MS. HALL explained that in the CS, the joint and several liability agreement is between the members and does not extend to the association; however, the association is required to pay for the workers' compensation benefits for the members' employees. She noted that in the Nevada statutes and regulations, the association is included in the joint and several liability agreement. 5:05:15 PM REPRESENTATIVE ROKEBERG asked for an example to further clarify how this works. MS. HALL offered her understanding that joint and several liability means that, if an association has five employers and one employer files for bankruptcy, the remaining employers must then take over the bankrupt employer's obligations to the group, in addition to their own. She said that one of the "prime concepts" of this type of arrangement is that each member agrees to be responsible for the other members and take on the financial responsibility of the other members. She stated that if the association is not included and yet is responsible for payment, the five members are not required to pay for the obligations of the association. 5:06:27 PM REPRESENTATIVE ROKEBERG asked if the bill is written to make association responsible. MS. HALL replied that she is not sure how the financial responsibility would take place. 5:07:01 PM REPRESENTATIVE CRAWFORD asked if the bill contains a provision to protect the group against individual bankruptcy. MS. HALL surmised that this was the intent of the solvency bond; however, this may not be practical. She stated that bankruptcy is a financial risk and not an insurance risk, therefore it is not typically the subject of insurance. She said that the self- insured association can purchase excess insurance, which is required by the bill. 5:08:36 PM REPRESENTATIVE ROKEBERG asked if there is a way to prove with documentation that solvency bonds are available. MS. HALL replied that she does not know. 5:09:50 PM ACTING CHAIR KOTT asked how "the director may issue a self- insurance certificate" as specified on page 1 of the CS versus page 5, which reads "the director shall issue a self-insurance certificate." MS. HALL expressed her understanding that the sponsor would like to change the "shall" on page 5 of the CS to "may." ACTING CHAIR KOTT asked if Ms. Hall would prefer "may" to "shall." MS. HALL replied that "may" would allow some discretion, which would be preferable. She added that the discretion would need to be based on factual information. 5:11:51 PM PAUL F. LISANKIE, Director, Central Office, Division of Workers' Compensation, Department of Labor & Workforce Development, in regard to an earlier question, said that the $5 million net worth amount is in the current board regulations. He stated that the board requested that the regulations be updated, and in response to this, he plans to suggest raising this amount to $10 million to reflect the passage of time and inflation. He said that current regulations require security bonds to be a minimum of $300,000 and this would change to $600,000 if adjusted for inflation. ACTING CHAIR KOTT asked if there is a definition of "tangible net worth" in the current regulations or statutes. MR. LISANKIE replied that there is a definition of "net tangible assets." 5:14:08 PM ACTING CHAIR KOTT asked if there is a difference between "tangible net worth" and "net tangible assets." MR. LISANKIE replied that he would hesitate to say no. 5:14:39 PM MR. LISANKIE, in response to a question from Representative Rokeberg, said that the board regulations give the entity that is required to post the security several options regarding what is utilized to post a security. He stated that these options include: a letter of credit, purchasing a security bond, and a certificate of deposit. REPRESENTATIVE ROKEBERG asked if this is this equivalent to what the CS refers to as a "security deposit." 5:16:19 PM MR. LISANKIE said it may be, and added that the CS gives the director a fair amount of leeway to decide what is a sufficient security. He referred to the testimony from Ms. Hall and said that the bonds that are collected are retained to cover liabilities after the employer is no longer a self-insured employer, and he noted that this is not always utilized by the workers' compensation board. He opined that this is a "weakness" in the division. REPRESENTATIVE ROKEBERG asked if this is the $300,000 in current regulation. MR. LISANKIE replied that the $300,000 is the security for an on-going operation. He said that there is a provision that allows the board to retain a similar security bond in the event that the employer ceases to be an independent insurer. He stated that this is not currently required, which he does not believe is a "good" thing. He said that the regulations were developed for large entities, and opined that the belief at that time was that a large entity was not at risk of becoming insolvent. He said that he does not believe this to be correct, and remarked that if a large company loses enough money it can "fall just like anybody else." 5:18:43 PM REPRESENTATIVE ROKEBERG asked if, in regard to the length of time and amount [of the security deposit], the CS is more "forward thinking" than the current regulations. MR. LISANKIE replied that this aspect is an improvement from what is currently being done with large self-insurers. ACTING CHAIR KOTT closed public testimony. 5:19:24 PM ACTING CHAIR KOTT asked if the annual audits are reported back to the division. MS. HALL surmised that the audits are sent to the director of the division, although this is not specifically stated in the CS. REPRESENTATIVE ROKEBERG agreed with this, and remarked that it would be good to specify where the audits are sent. MR. PAWLOWSKI pointed out that the audits are required when the certificate is granted, and added that the CS contains a provision which allows the director to audit the books at the expense of the association. He added that the CS gives the director regulation authority, and said that the sponsor looks forward to working with the director to develop the system correctly. 5:23:06 PM ROBERT VOGAL, Vice President of Operations, Group Manager, Pro Group Management, Inc., said that the annual audits are handled by the group which is subject to the audit. He stated that the CS does not specify this and said that this "could be cleaned up." He explained that the aforementioned audits are intended to ensure that the correct classification, correct payroll, and assessments are collected. He said that if the company is deficient, it will be sent a bill from the association, and if the company has over paid, it will receive a refund. MR. PAWLOWSKI pointed out that page 10, lines 4-25 is the annual statement of financial condition. 5:24:41 PM REPRESENTATIVE ROKEBERG asked Mr. Vogal if he is aware of any provisions from the Nevada structure that are not included in the CS. MR. VOGAL replied that the sections that are not included are part of the Nevada administrative code, not in the regulations. He stated that the CS sets out the framework for the director to adopt regulations to implement the provisions. MR. VOGAL, in response to a question, said that if a self- insured group is insolvent, the director can require the group to assess it's members for the additional assets. He stated that the solvency bonds are generally available through excess carriers. He said that this is an additional protection that is used until the group has enough assets. He stated that currently, of the groups that PGM manages, the highest retention is $750,000. He said that the builders group has a $500,000 retention, adding that most excess carriers will not go below this amount. He explained that the intent of the self-insured group is to grow and add strong, solvent members. He said that this would result in less impact if one member filed for bankruptcy. He added that if there is enough regulatory oversight, there will be enough collected in advance to cover the projected liabilities. 5:29:32 PM REPRESENTATIVE ROKEBERG made a motion to adopt Amendment 1, which read [original punctuation provided]: To page 1 line 14 insert "tangible" following "a" before "net worth." There being no objection, Amendment 1 was adopted. REPRESENTATIVE ROKEBERG made a motion to adopt Amendment 2, which read [original punctuation provided]: To Page 5 line 5 replace "shall" with "may" to make consistent with page 1 line 1. There being no objection, Amendment 2 was adopted. The committee took a brief at-ease. 5:31:22 PM REPRESENTATIVE ROKEBERG moved to report CSSSHB 51, Version 24- LS0233\S, Bailey, 3/3/06, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSSSHB 51(L&C) was reported from the House Labor and Commerce Standing Committee.