Legislature(1993 - 1994)

04/07/1994 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HB 514 - RISK BASED CAPITAL FOR INSURERS                                     
                                                                               
  CHAIRMAN VEZEY opened HB 514 sponsored by the House Labor &                  
  Commerce Committee, for discussion.                                          
                                                                               
  (REPRESENTATIVE ULMER left the meeting at 8:15 a.m.)                         
                                                                               
  Number 277                                                                   
                                                                               
  DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF                  
  COMMERCE & ECONOMIC DEVELOPMENT, addressed HB 514.  He noted                 
  the presence of Katie Campbell, Life and Health Actuary, who                 
  had the primary responsibility of composing HB 514.  He                      
  stated HB 514 had a zero fiscal note and the support of                      
  regulators, the industry (particularly domestic), and                        
  national consumer groups.                                                    
                                                                               
  MR. WALSH stated historically, insurance company solvency                    
  has been regulated based upon a template.  This template is                  
  a general outline, whereby it can apply to State Farm, or                    
  the Alaska Timber Exchange.  He noted this template has                      
  proven inadequate as a predictor of insurance company                        
  solvency or as an early warning system for a company nearing                 
  trouble.                                                                     
                                                                               
  MR. WALSH stated risk based capital has been developed over                  
  the last 4-5 years by national insurance regulators, as well                 
  as consumer groups in the industry.  Risk based capital is a                 
  formula based upon the different levels of risk an                           
  individual company may have.  For example, an auto company                   
  that writes drag racing policies would have a higher level                   
  of exposure than a company writing only personal passenger                   
  auto policies.  Risk based capital would set up a formula                    
  for various kinds of risks that results in a number.  The                    
  average number a good solid company would have is around 580                 
  percent of risk based capital.  Alaska domestic companies                    
  are between 900-24,000 percent of risk based capital.                        
  Therefore, Alaska domestic companies are small, but very                     
  well capitalized and strong.  He stated the strength of a                    
  company does not come through in the traditional way of                      
  analyzing solvency.  Therefore, when they seek credit, the                   
  solvency laws do not allow them to present themselves in as                  
  strong of light as the company actually exists.  He pointed                  
  out risk based capital will help Alaskan companies to expand                 
  and grow.  They will be allowed to have an investment policy                 
  which will return a higher yield, thereby resulting in lower                 
  rates and growth in the domestic industry.                                   
                                                                               
  MR. WALSH stated the second feature of risk based capital is                 
  how it works as a warning system if the number decreases.                    
  Number decreases will be easy to detect.  HB 514 requires                    
  when a company reaches 200 percent of risk based capital,                    
  twice the minimum amount it needs to stay solvent, they have                 
  to administer a rehabilitation plan.  At 150 percent the                     
  Division of Insurance has to administer a plan.  At 100                      
  percent the Division of Insurance closes the company.  He                    
  believed these provisions will help insure problems that                     
  have happened outside will not effect Alaskan consumers                      
  again.  He noted the triggers where action is required.                      
                                                                               
  MR. WALSH estimated the standards were presently before 30                   
  states and they would most likely pass.  Risk based capital                  
  will become the national standard as of the end of 1995.  He                 
  emphasized they suggested HB 514 this year because Alaska's                  
  domestic companies are so strong that it is to their                         
  advantage to start operating under risk based capital this                   
  year.  HB 514 has the unanimous support of the Alaska                        
  industry.  The Division of Insurance strongly supports HB
  514.                                                                         
                                                                               
  Number 370                                                                   
                                                                               
  CHAIRMAN VEZEY considered HB 514 to be a major change.  He                   
  asked how long current standards had been in place.                          
                                                                               
  Number 373                                                                   
                                                                               
  MR. WALSH answered since statehood, and in other states                      
  before that.                                                                 
                                                                               
  Number 374                                                                   
                                                                               
  CHAIRMAN VEZEY commented there is good reason for the                        
  change, but HB 514 is a radical departure from current                       
  practice.                                                                    
                                                                               
  Number 378                                                                   
                                                                               
  MR. WALSH agreed.                                                            
                                                                               
  Number 382                                                                   
                                                                               
  CHAIRMAN VEZEY asked if risk based capital had not yet been                  
  adopted by any of the 30 states considering it.  Who                         
  composed the proposal?                                                       
                                                                               
  Number 384                                                                   
                                                                               
  MR. WALSH answered he did not know if the other states had                   
  adopted the proposal yet.  The proposal in HB 514 came from                  
  the National Association of Insurance Commissioners, made up                 
  of the 50 states, plus the five territories and other                        
  jurisdictions in the United States.  The National Conference                 
  of State Legislators and their subgroup, the  National                       
  Committee of Insurance Legislators, also contributed.                        
                                                                               
  Number 394                                                                   
                                                                               
  CHAIRMAN VEZEY asked how many years they had worked on risk                  
  based capital.                                                               
                                                                               
  Number 395                                                                   
                                                                               
  MR. WALSH responded 4-5 years.                                               
                                                                               
  Number 396                                                                   
                                                                               
  CHAIRMAN VEZEY stated the proposal must have came together                   
  fairly recently, noticing the filing date.                                   
                                                                               
  Number 397                                                                   
                                                                               
  MR. WALSH stated the final life and health formula was                       
  adopted in December.  They waited to introduce the proposal                  
  to ensure Alaska's domestic industry and other major                         
  companies had an opportunity to comment.  They suggested one                 
  amendment that House Labor & Commerce (L&C) adopted, which                   
  added a public hearing requirement, so as the formula                        
  changes the division is assured of a procedure to Alaskanize                 
  it.  HB 514 was only recently introduced; however, a lot of                  
  work was done on it by the national association, the Alaska                  
  domestic industry, and the Division of Insurance.                            
                                                                               
  Number 412                                                                   
                                                                               
  CHAIRMAN VEZEY noticed the L&C committee substitute.  He                     
  asked the role of a public hearing in the review of an                       
  organization's financial status.                                             
                                                                               
  Number 418                                                                   
                                                                               
  MR. WALSH answered the public hearing would be for any                       
  changes in the formula that were proposed for addition.  HB
  514 states the national formula will be used as the main                     
  solvency tool in Alaska.  He pointed out over the next few                   
  years there will be some minor adjustments to the formula.                   
  A formal public hearing, required by regulation, would be                    
  required before any of the adjustments could be adopted by                   
  the Division of Insurance.  He stated the public hearing                     
  requirement is a very good change and they have sent it to                   
  the national association as a suggestion for the national                    
  model.  Their job is to protect consumers and ensure their                   
  actions are not counter-productive to the development of                     
  Alaska's market.                                                             
                                                                               
  (REPRESENTATIVE ULMER returned at 8:25 a.m.)                                 
                                                                               
  Number 434                                                                   
                                                                               
  CHAIRMAN VEZEY clarified HB 514 would allow Alaskan                          
  companies to issue more policies, recognizing they have a                    
  stronger capital base than current regulations permit.  How                  
  would this help the consumers?                                               
                                                                               
  MR. WALSH responded the biggest problem currently in Alaska                  
  is availability, not affordability.  Over the last few                       
  years, he stated, Alaska has had four carriers with 85                       
  percent of the auto market - Geico, Nationwide, Allstate,                    
  and State Farm.  This market concentration does not lead to                  
  lower prices and product innovation.  They have been working                 
  to bring new companies into the Alaskan market place.                        
  Safeco entered into Alaska as of April 1, 1994, already                      
  causing prices to drop as a result of the competition.                       
  There are three carriers with 80 percent of the market in                    
  health insurance - Great West, Aetna, and Blue Cross.  More                  
  access and more companies are necessary for prices to remain                 
  low for consumers and choices are available.                                 
                                                                               
  MR. WALSH believed HB 514 would help in two ways: 1) non-                    
  Alaskan companies that are writing here will be able to                      
  operate what is going to become the national standard, risk                  
  based capital; 2) the small Alaska domestic industry will                    
  have a better competitive advantage because their strength                   
  will be more apparent.                                                       
                                                                               
  MR. WALSH noted there is only one admitted carrier for taxi                  
  cabs, and virtually no admitted carriers for aviation.                       
                                                                               
  Number 481                                                                   
                                                                               
  CHAIRMAN VEZEY characterized HB 514 as relaxing the                          
  financial standards of the underwriting companies.  How                      
  would it help consumers?                                                     
                                                                               
  MR. WALSH responded HB 514 would not relax any standards.                    
  Those companies who write higher risk insurance and tend to                  
  have an overly aggressive investment policy with their                       
  capital and surplus will be penalized by HB 514.  He noted                   
  HB 514 would provide a more accurate picture of the status                   
  of a company.  The National Insurance Consumers Organization                 
  have examined risk based capital and they are very                           
  supportive of HB 514.                                                        
                                                                               
  Number 509                                                                   
                                                                               
  CHAIRMAN VEZEY inquired why the insurance industry was not                   
  present to express their opinion.                                            
                                                                               
  Number 524                                                                   
                                                                               
  MR. WALSH said, to the division's knowledge, the industry is                 
  very supportive of HB 514.  He stated the Division had met                   
  with or talked on the phone with the management of all the                   
  Alaskan companies and all the legislative lobbyists or                       
  representatives of the other writers in Alaska.                              
                                                                               
  Number 535                                                                   
                                                                               
  CHAIRMAN VEZEY stated he recognized HB 514 would have a                      
  magnitude of impact of great import, therefore it would be                   
  held in committee for further review.  He appreciated the                    
  research done to make the proposal.                                          
                                                                               
  CHAIRMAN VEZEY called a recess at 8:34 a.m.  The meeting                     
  resumed at 8:44 a.m.  Members present were REPRESENTATIVES                   
  KOTT, OLBERG and ULMER.                                                      
                                                                               
  (REPRESENTATIVE G. DAVIS joined the meeting at 8:43 a.m.)                    

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