Legislature(1993 - 1994)

04/18/1994 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  SB 342 - RISK BASED CAPITAL FOR INSURERS                                     
                                                                               
  Number 370                                                                   
                                                                               
  CHAIRMAN VEZEY opened CSSB 342 for discussion.                               
                                                                               
  DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF                  
  COMMERCE & ECONOMIC DEVELOPMENT (CED), addressed CSSB 342.                   
  He began CSSB 342 is a companion bill to HB 514, which State                 
  Affairs has already heard.  He said CSSB 342 provides a new                  
  system for calculating the solvency of insurance companies.                  
  The old law is a "one size fits all" template that is used                   
  on companies as large as Allstate and as small as the Alaska                 
  Timber Exchange.  With the sophistication of financial                       
  products and the diversification of assets of all financial                  
  institutions over the last 10 years arises the need for a                    
  new system.                                                                  
                                                                               
  MR. WALSH explained the new formula calculates the various                   
  risk, (e.g., asset, underwriting, etc...) that an individual                 
  insurance company undertakes.  Insurance companies insure                    
  different types of people and things, therefore the                          
  reserving each company must do is different based upon their                 
  asset risk.  Likewise their investment risk.  Alaskan                        
  domestic companies are conservative and tend to invest in T                  
  bills, which are very safe with low risk.  Other companies                   
  tend to invest in higher risk items.  Under the old system,                  
  each type of company got equal credit on their financial                     
  statement for the value of those assets, regardless of where                 
  they were invested.  Risk based capital would weight them.                   
                                                                               
  MR. WALSH stated risk based capital has been worked out on a                 
  national basis for the last 5-6 years.  Contributors were                    
  insurance commissioners with input from consumer groups and                  
  also from the industry.  CED is very pleased with CSSB 342.                  
                                                                               
  MR. WALSH expressed Alaskan companies would be able to                       
  expand their distribution of money, and hopefully provide                    
  better coverage at lower cost.  At 100 percent of risk based                 
  capital CED must take the company over, at 150 percent they                  
  must have a rehabilitation plan, at 200 CED works out a                      
  voluntary way to bring the company back into good health.                    
  He said the average solid company in the U.S. has a risk                     
  based capital number around 485-500.  The 10 Alaska domestic                 
  companies range from 934-24,000.  Therewith, Alaska has very                 
  small conservatively run companies.  This value has not been                 
  apparent under the old system, however, it would be under                    
  the new.  He noted CSSB 342 would hopefully result in                        
  premium decrease which will make Alaskan companies much more                 
  competitive with outside companies who are competing for the                 
  same risk.                                                                   
                                                                               
  MR. WALSH stated CSSB 342 passed the Senate, 19-1.  CED                      
  noticed as it passed through there was one additional change                 
  they wanted to make.  He referred to page 2 where it states                  
  whatever system is passed must be substantially similar to                   
  that passed by the National Association Insurance                            
  Commissioners.  He recommended the committee delete this                     
  sentence because the sentence is redundant, and they have                    
  jealously guarded both the legislative and administrative                    
  prerogative to tailor the national models for what is best                   
  for the Alaskan marketplace.  With its removal, the emphasis                 
  would be put on the establishment of risk based capital                      
  instructions by regulation in the state, and for the state.                  
                                                                               
  Number 445                                                                   
                                                                               
  CHAIRMAN VEZEY mentioned he was surprised because he had                     
  only received one letter of support from an insurance                        
  company on this issue.                                                       
                                                                               
  MR. WALSH said he felt likewise.  He said he talked with the                 
  CEOs or the representatives of probably a half dozen of                      
  Alaska's domestic companies and they all said they were in                   
  support and would contact the committee.                                     
                                                                               
  CHAIRMAN VEZEY explained he did not solicit their input.  He                 
  said he thought SB 342 was an "absolutely outstanding idea"                  
  for encouraging competition to come into Alaska and improve                  
  the options available to customers.  He noted it would be                    
  the most major change in insurance since statehood.                          
                                                                               
  MR. WALSH agreed, one of them.                                               
                                                                               
  CHAIRMAN VEZEY further stated he thought they should use a                   
  slow approach.  He reiterated his concern for little input                   
  even from those outside Alaska.                                              
                                                                               
  MR. WALSH responded everyone on a nationwide basis is                        
  "delighted" with CSSB 342.  CSSB 342 provides regulators                     
  with a much better tool to identify a company as they start                  
  to descend and to intervene.  He noted the overwhelming                      
  majority of the 6,000 insurance companies in the U.S. are                    
  not in any trouble at all.  The new formula would merely                     
  allow everyone to see how strong the companies are.                          
                                                                               
  Number 481                                                                   
                                                                               
  JOHN GEORGE, AMERICAN COUNCIL OF LIFE INSURANCE, NATIONAL                    
  ASSOCIATION OF INDEPENDENT INSURERS, answered questions on                   
  CSSB 342.  He explained he had not signed up to testify                      
  because he wanted to stay out of the way, thereby expediting                 
  CSSB 342 from committee faster.  He stated they feel CSSB
  342 is good solid regulation and urge its passage.                           
                                                                               
  CHAIRMAN VEZEY reiterated his concern about the lack of                      
  input because he felt CSSB 342 to be a major piece of                        
  legislation.                                                                 
                                                                               
  MR. GEORGE agreed.  They were trying to stay out of the way                  
  because the director was tending to it.  He said if they had                 
  opposed CSSB 342, they would have made efforts to make                       
  amendments or kill it.                                                       
                                                                               
  CHAIRMAN VEZEY observed people think CSSB 342 is more                        
  positive than negative.  He would like both sides of the                     
  story.                                                                       
                                                                               
  MR. GEORGE commented the companies he represents are not                     
  Alaska domestic companies, they do business on a national                    
  basis and are basically domiciled in another state.  He                      
  believed CSSB 342 would have the greatest impact on Alaska                   
  domestics.  He has not heard any opposition.                                 
                                                                               
  CHAIRMAN VEZEY noted CSSB 342 came up fairly late in the                     
  session, therefore he was not sure if they should rush into                  
  it.  He considered waiting for the next legislative session                  
  to move it through then.                                                     
                                                                               
  REPRESENTATIVE ULMER questioned if CSSB 342 had another                      
  referral.                                                                    
                                                                               
  MR. WALSH answered CSSB 342 would be referred to Judiciary                   
  next; however, they have indicated they will waive it.  He                   
  noted REPRESENTATIVE GENE THERRIAULT had heard HB 514 in                     
  Labor & Commerce and was supportive.                                         
                                                                               
  REPRESENTATIVE ULMER noted if CSSB 342 passed with 19 `yes'                  
  votes in the Senate it was a fairly good indication there is                 
  not a problem it.  She stated the packet does not show                       
  opposition and there is potential for significant benefit                    
  for Alaskans, therefore, she was ready to pass CSSB 342 out                  
  of committee.                                                                
                                                                               
  CHAIRMAN VEZEY replied significant risk comes with                           
  significant benefits.                                                        
                                                                               
  Number 528                                                                   
                                                                               
  REPRESENTATIVE OLBERG moved to delete on page 2, lines 18,                   
  19 and 20 of CSSB 342(L&C), as recommended by MR. WALSH.                     
                                                                               
  CHAIRMAN VEZEY stated a another committee substitute had                     
  been prepared reflecting the proposed amendment.                             
                                                                               
  REPRESENTATIVE OLBERG, therefore, moved to adopt the House                   
  CS for CSSB 342(STA), version J, for purposes of discussion.                 
                                                                               
  CHAIRMAN VEZEY, hearing no objection, adopted the HCS for                    
  CSSB 342(STA).  He recalled MR. WALSH to the table for                       
  questions.  He questioned MR. WALSH'S reference to the state                 
  taking over at 100 percent, whereby he had thought the bill                  
  mentioned 70 percent.                                                        
                                                                               
  Number 565                                                                   
                                                                               
  KATIE CAMPBELL, LIFE & HEALTH ACTUARY, DIVISION OF                           
  INSURANCE, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT,                    
  answered CHAIRMAN VEZEY.  She clarified 70 percent was the                   
  mandatory control event.                                                     
                                                                               
  MR. WALSH corrected himself and said the formula is based                    
  upon 100 percent calculation of risk based capital and 70                    
  percent is the mandatory takeover.                                           
                                                                               
  CHAIRMAN VEZEY clarified the mandatory control level is 70                   
  percent.                                                                     
                                                                               
  MS. CAMPBELL stated the first level where the director is                    
  required to take action is at the regulatory action level.                   
  This means the company action the company has to take.                       
                                                                               
  CHAIRMAN VEZEY clarified the regulatory action event was at                  
  150 percent.                                                                 
                                                                               
  MS. CAMPBELL said correct.  She noted 200 percent is where                   
  the company has to file a financial plan of action.                          
                                                                               
  MR. WALSH explained one of the problems with the current                     
  formula is that it is subject to varying interpretations.                    
  He gave the example of Executive Life, whereby there was                     
  serious debate as to whether or not the company was                          
  "underwater" when it was taken over.  Some argue it was                      
  "underwater" a year earlier.                                                 
                                                                               
  MR. WALSH expressed risk based capital sets up a fair and                    
  more certain formula.  There is no question that at 200                      
  percent of risk based capital the company must come into the                 
  regulator with a plan.  This plan is then shared with all                    
  the regulators from the states in which that company writes.                 
  If the company continues descent to 150 percent, some                        
  regulatory action is required.  CED would put in a plan.                     
  When the company reaches the mandatory 70 percent level, CED                 
  shuts the company down.  There would be no debate as there                   
  has been with Executive Life.  He noted the failure of the                   
  old system with Executive Life provided the impetus to                       
  resolve a better system.                                                     
                                                                               
  Number 609                                                                   
                                                                               
  CHAIRMAN VEZEY observed the formula, which was not before                    
  him, was a rather complex algorithm of accounting                            
  evaluation.                                                                  
                                                                               
  MR. WALSH affirmed CHAIRMAN VEZEY.  He had attended numerous                 
  meetings with experts and has confidence in the formula.  He                 
  said he does not have the educational background or                          
  capability to explain in any form other than the most                        
  general policy terms.                                                        
                                                                               
  CHAIRMAN VEZEY asked MR. GEORGE to join the table again.  He                 
  inquired who MR. GEORGE was representing.                                    
                                                                               
  MR. GEORGE answered the American Council of Life Insurance                   
  (ACLI), a trade association of life insurance companies, and                 
  the National Association of Independent Insurers (NAII), a                   
  property/casualty insurance company trade association.  He                   
  noted Allstate, USAA, Progressive and Nationwide.                            
                                                                               
  CHAIRMAN VEZEY clarified he did not represent major carriers                 
  such as Great Northwest, Aetna, Blue Cross and Willis                        
  Corroon, within the state.                                                   
                                                                               
  MR. GEORGE replied Aetna is a member of the ACLI.  Major                     
  property/ casualty insurance companies such as the Firemen's                 
  Fund, Aetna Property & Casualty and Continental Casualty,                    
  are not members of the NAII.  He noted a large portion of                    
  the property insurance in the state is written by the NAII.                  
  Members of the ACLI write virtually all of the life and                      
  health insurance in Alaska.                                                  
                                                                               
  CHAIRMAN VEZEY explained there is an imposed deadline of                     
  April 20 for moving Senate Bills, therefore, he would hold                   
  HCSCSSB 342 in committee because he did not feel comfortable                 
  with it yet.  He would like assurance from the industry.                     
                                                                               
  Number 643                                                                   
                                                                               
  REPRESENTATIVE ULMER asked CHAIRMAN VEZEY to identify which                  
  companies he would like to hear from.                                        
                                                                               
  MR. GEORGE stated he did not represent any of the domestic                   
  companies such as Alaska National, and others formed in the                  
  state of Alaska.                                                             
                                                                               
  CHAIRMAN VEZEY asked if MR. GEORGE was referring to the                      
  underwriters as opposed to the brokers.                                      
                                                                               
  MR. GEORGE clarified he did not represent the brokers.                       
                                                                               
  CHAIRMAN VEZEY asked for names of the some of the                            
  underwriters he did not represent.                                           
                                                                               
  MR. GEORGE answered Firemen's Fund, Industrial Indemnity and                 
  Aetna Property & Casualty.  He noted there are major                         
  companies on the national basis he did represent, however,                   
  he had not heard opposition from them.  Those companies                      
  would be members of the American Insurance Association,                      
  which does have a lobbyist.  He assumed if they were in                      
  opposition they would have been present.                                     
                                                                               
  CHAIRMAN VEZEY stated he believed the committee should move                  
  with due deliberation because of the complex subject matter.                 

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