Legislature(2005 - 2006)CAPITOL 17

03/17/2006 03:15 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Scheduled But Not Heard
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 51(L&C) Out of Committee
<Bill Hearing Rescheduled from 3/15/06>
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                                                               
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                                                               
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                                                               
REPRESENTATIVE  ROKEBERG,  referring  to  Ms.  Hall's  testimony,                                                               
asked  if the  amount  would be  twice as  much  if adjusted  for                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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.                                                                                    

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