Legislature(2021 - 2022)SENATE FINANCE 532
04/21/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB20 | |
| SB71 | |
| SB88 | |
| SB10 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 88 | TELECONFERENCED | |
| += | SB 10 | TELECONFERENCED | |
| += | SB 71 | TELECONFERENCED | |
| += | SB 20 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 88
"An Act relating to the state insurance catastrophe
reserve account; and providing for an effective date."
9:12:57 AM
AT EASE
9:13:57 AM
RECONVENED
SCOTT JORDAN, DIVISION OF RISK MANAGEMENT, DEPARTMENT OF
ADMINISTRATION (via teleconference), discussed a
presentation "Senate Bill No 88" (copy on file).
Mr. Jordan spoke to slide 2, "History of the Catastrophic
Reserve Account (CATFund)". He detailed that the purpose of
the bill was to allow a change of the CAT fund from an
unencumbered balance of $5 million to $50 million, which
would allow the state to self-insure for property coverage.
He shared that the state currently had two lines of
business that it self-insured for: Worker's Compensation
(1992) and General Liability (2002). He stated that the
global property insurance markets had hardened over the
last 3 years, resulting in a 30 percent increase in the
previous year's premium costs, with an additional 15 to 20
percent increase in FY22. He relayed that the current limit
that could be purchased for catastrophic coverage was $50
million for annual premium, which would be saved through
self-insuring.
9:15:52 AM
Mr. Jordan discussed slide 3, "Expenditures from the
CATFund since inception," which showed a data table.
9:17:53 AM
Senator von Imhof noted that the title of the slide
differed from what was before the committee.
[It was determined that the presentation being viewed was
old and a new presentation was uploaded.]
9:19:04 AM
AT EASE
9:19:54 AM
RECONVENED
9:19:56 AM
RECESSED
9:30:53 AM
RECONVENED
Co-Chair Bishop asked Mr. Jordan to restart his
presentation.
Mr. Jordan spoke to slide 1, "Purpose":
[paste in ]
Mr. Jordan discussed slide 2, "What other states are
doing?":
9:32:48 AM
Co-Chair Stedman asked whether a "sinking fund" would be
included set up as a result of not being required to pay
the previous premiums.
Mr. Jordan was not familiar with the term "sinking fund,"
and explained that the state would not be paying any
premiums to excess insurance for property loss, which would
result in a reduction to agencies and rates.
Co-Chair Stedman asked where the savings from reduction of
premiums in agencies would go.
Mr. Jordan replied that he was not sure what every agency
would do to offset the reductions.
9:34:01 AM
Senator von Imhof asked about the amount of annual savings
with unpaid premiums. She wondered whether it would make
sense to set aside part of the savings for catastrophic
losses.
Mr. Jordan anticipated that the savings in the first year
would be approximately $3 million; $6 million by FY25. The
set-aside amount would be the catastrophic fund, with the
maximum amount being $50 million.
Senator von Imhof understood that the fund would start at
zero, and eventually increase to $50 million over 8 years.
Mr. Jordan replied that there was currently $5 million in
the fund, which was the maximum amount allowed. He said
that the annual sweep done by the Division of Finance would
allow the fund to increase to $50 million. He hoped most of
the increase would occur in the coming year.
9:36:15 AM
Co-Chair Stedman thought his question had not been
answered. He wanted to track the cash flow. He asked
whether agencies would still be billed $5 million. He asked
for history on the state's losses. He wanted a conversation
concerning risk exposure to the state and why the state
differed from the broader marketplace.
Mr. Jordan stated that the anticipated reduction was $3
million and would be passed to agencies. He thought someone
from the Office of Management and Budget (OMB) could
address what agencies would do with the savings.
9:38:40 AM
PALOMA HARBOUR, FISCAL MANAGEMENT PRACTICES ANALYST, OFFICE
OF MANAGEMENT AND BUDGET (via teleconference), explained
that any savings would be spread out across agencies, who
would be billed less in their rates.
9:39:14 AM
Senator Wielechowski asked for an explanation of the legal
obligation of the CAT Fund.
Mr. Jordan noted that there was a slide that spoke to the
question. He summarized that the CAT Fund could be used for
catastrophic losses, claim settlements, and paying
insurance premiums. He added that if the fund were not
increased, and current premiums were paid, there would be
no funds left to pay for catastrophic losses.
Senator Wielechowski asked what was considered a
"catastrophic loss".
Mr. Jordan thought a typical catastrophic loss within the
State of Alaska was property driven and usually involved an
earthquake or a flood. He said the fund had been used to
pay settlement claims but was typically used for first-
party losses to the state, such as vessels or aircraft. He
noted that a future slide addressed what the fund had been
previously used for.
Senator Wielechowski understood the fund only covered state
assests.
Mr. Jordan answered in the affirmative.
Senator Wielechowski noted that Per- and polyfluoroalkyl
substances (PFAS) claims were listed in an upcoming slide.
He asked whether those payments were to private individuals
or corporations.
Mr. Jordan stated that those claims were paid out to
individuals and were considered state claims because they
were liabilities to the state.
9:42:08 AM
Senator von Imhof referenced slide 7 and confirmed that the
discussion pertained to property only and not liability
associated with property.
Mr. Jordan responded that the fund could pay a property or
a liability claim. He explained that the intent of the
legislation was to insure for property claims.
Senator von Imhof expressed concern with the wide-ranging
coverage. She referenced the November 2018 Anchorage
earthquake and recalled that repairs cost the state over
$35 million in undesignated general funds (UGF). She
referenced wildfires in Southcentral Alaska that had cost
the state hundreds of millions of dollars. She wondered
whether this fund would help to pay for events similar to
the earthquake and wildfires.
Mr. Jordan stated that currently the fund was used to pay
what the state would pay on insurance claims. He said that
property losses due to the earthquake had been paid;
however, coverage for things like collapsed roads and
bridges would not have been paid out of the fund.
9:44:38 AM
Co-Chair Stedman asked people to avoid acronyms in the
conversation.
9:45:00 AM
Senator Wilson asked about the space center in Kodiak. He
wondered whether the fund would pay out the claim made due
to an explosion.
Mr. Jordan shared that the state had paid about $1.5
million out of the CAT fund and the insurance company had
paid the balance of the claim while collecting against the
customer who had owned the rocket that exploded.
9:46:11 AM
Senator Wielechowski asked whether the proposed bill was
like increasing the state's deductible.
Mr. Jordan thought it was possible to look at the proposed
change that way, currently the state's excess property
coverage had a $1 million retention, which was essentially
a deductible. He detailed that the legislation would self-
insure the state; a deductible would not be paid, there
would simply be a fund available to cover claims.
9:47:01 AM
Senator von Imhof had concerns about the fund being
depleted from one or two catastrophic events. She wondered
if it made sense to pay a higher deductible and maintain
insurance for catastrophic events with insurance companies.
Mr. Jordan noted that some other states were raising the
deductible up to $40 million or $50 million. In 2012 the
state had self-insured property under $5 million and those
properties were not on the state's insurance property
schedule. He said that insurance markets had suggested that
it was better to lower total insured values than to raise
deductibles.
9:48:47 AM
Senator Wielechowski asked if the raising from $5 million
to $50 million meant that the maximum liability was $50
million. He wondered whether the bill would cap the state's
maximum liability for catastrophic events.
Mr. Jordan stated that the bill did not cap the state's
liability.
9:49:56 AM
Co-Chair Bishop mentioned premiums increases and asked
whether states went to the same insurance pool for
purchasing insurance. He asked whether Mr. Jordan had
spoken with other states to for a coalition in order to
keep insurance premiums down.
Mr. Jordan did not believe that states had tried to form a
coalition. He affirmed that states went to the London
market, the Bermuda market, and the domestic market. It was
typical for the insurance amounts to be so high that it
took five or six companies, and two and three layers, to
insure states.
9:51:35 AM
Mr. Jordan reviewed slide 3, "What other states are
doing?":
Through the State risk and Insurance Management Association
(STRIMA) we asked other states what they were doing to
combat the rising premiums in property coverages;
• Just pay the higher premiums. Some states, mostly
Southeast states are forced to maintain excess
coverage due to benefits paid by FEMA which requires
"Obtain and Maintain" agreements when FEMS pays for a
catastrophic loss.
• Set up Captive Pans
• Increase self-Insured Retentions (SIR), in some cases
$40mil to $50mil retention
• Some states are coming off multi-year premium price
guarantees.
We received responses from 12 states
9:54:14 AM
Co-Chair Stedman wanted more detail about the Federal
Emergency Management Agency (FEMA). He asked whether states
could be limited by entering into agreements with FEMA.
Mr. Jordan detailed that FEMA had an "obtain and maintain"
provision. He had spoken with FEMA about the state meeting
the "obtain and maintain" requirement if the CAT fund were
increased. He had learned that a new agreement would need
to be submitted to FEMA to maintain the requirement.
Co-Chair Stedman asked whether the FEMA claims had been
from state claims.
Mr. Jordan replied in the affirmative. He said that the
state was requesting that FEMA pay the claims for several
structures that had been damaged in the earthquake. He
added that agencies had requested FEMA funds for things
that were not covered by the state.
Co-Chair Stedman asked whether the state paid premiums to
FEMA.
Mr. Jordan stated there were no premiums paid to FEMA. He
explained that once FEMA made a payment the state agreed to
maintain insurance on the structure into the future. Should
the state fail to maintain the building, FEMA could stop
coverage.
9:57:00 AM
Co-Chair Stedman related that his office, while working on
a FEMA package for the state, had discovered that FEMA
premium payments were structured in classifications
nationwide, which meant that Alaskans were paying premiums
driven out of the Gulf of Mexico and of the East Coast
hurricanes. He lamented that the state was paying premiums
to FEMA and receiving very little in claims. He expressed
concern that, in addition to other states driving up
premiums, FEMA had building restrictions. He worried about
the threat of FEMA refusing assistance to states that did
not pay premiums, while those rates were inordinately high,
higher than any rate the division of insurance would allow
under regulations. He believed the issue was significant.
9:58:44 AM
Co-Chair Bishop wanted to discuss the obtain and maintain
agreements as previously discussed by Mr. Jordan and Co-
Chair Stedman. He understood that the agreement meant that
if FEMA paid for work on a building, in order for the state
to get FEMA payments into the future an obtain and maintain
agreement must be entered into.
Mr. Jordan stated that Co-Chair Bishop was correct. There
was no written agreement. He said that FEMA kept track of
the buildings and could elect to not pay for damages on
buildings outside of the agreement.
10:00:09 AM
Mr. Jordan referenced Co-Chair Stedman's comments and noted
that that the state had seen similar issues within the
global market. He remarked that Alaska did not have large
claims and had to deal with the capacity issues from other
states and countries. He stressed that payments made out on
other catastrophic losses were affecting the state's rates.
10:00:50 AM
Mr. Jordan referenced slide 4, "History of the Catastrophic
Reserve Account (CATFund)," which showed //
[paste ?]
10:01:32 AM
Mr. Jordan turned to slide 5, "Expenditures from the CAT
Fund since inception," which demonstrated expenditures from
the fund since its inception in FY88. A total of $149
million had been expended out of the fund since 1988, or
$4.5 million per year. He believed that this illustrated
the need for a raising of the cap.
Co-Chair Bishop observed the $4.5 million per year average
claims.
10:02:45 AM
Senator Wielechowski wondered whether the amount that was
needed to pay out claims would rise to the amount that was
used from year to year.
Mr. Jordan hoped that was not the case. He had an upcoming
slide that showed claims paid within the previous 10 years.
He noted that, historically, large claims had not been
made. He pointed out that the largest claim was the Crystal
Lake Hatchery in Petersburg for $4.2 million. He did not
believe that there would be an increase in the size of
claims.
Senator Wielechowski looked at FY05 and observed the whole
$5 million was used in that year.
Mr. Jordan answered affirmatively.
Senator Wielechowski noted that in FY06, and FY07, less
than $100 remained in the account at the end of the fiscal
year. He said that there were years when the payments had
been very close to $5 million and wondered if how much
would have been spent had the fund had been at $50 million
in those previous years.
Mr. Jordan thought that expenditures in previous years had
included claims that could have been paid under Judgement
Claims expenses rather than the CAP fund. His planned
practice was to continue to pay claims that were unexpected
to Risk Management. He did not anticipate paying claims
larger than what had been previously paid. He said that
there had been years (such as FY92) where the fund had
expended $10 million. He related that some funds could be
encumbered and not paid out until several years later.
10:06:22 AM
Co-Chair Stedman considered changes in the fund since its
inception. He asked Mr. Jordan to discuss using inflation-
adjusted numbers.
Mr. Jordan acknowledged there had been inflation since
1988. He said that the Risk Management appropriations had
increased since 1988. He stated that when he started with
the division in 1998, the budget was $32 million and was
currently at $41 million. He felt the budget had increased
to accommodate increase standard costs of claims and not
because of unexpected claims.
10:07:56 AM
Co-Chair Bishop interjected that the state did not follow
the one percent rule on deferred maintenance.
10:08:19 AM
Mr. Jordan showed slide 6, "10-year history of property
premiums/losses," which showed a small table and a line
graph. He pointed to the blue line, which showed the
property premiums that had been paid over the past decade.
He noted that the coverage had doubled over 10 years, with
a substantial increase between FY 11 and FY 12. The orange
line showed property losses paid by the state and did not
include funds from insurance companies. There had been a
spike in FY 15 due to the Crystal Lake Hatchery. Another
spike in FY 20 was due to claims from the earthquake and
retention paid on a Department of Transportation
maintenance shop that had been damaged by snow.
10:11:10 AM
Senator von Imhof thought Mr. Jordan had mentioned it was
getting harder to find insurers. She asked whether
companies were being forced to leave the market due to
excessive payments. She wondered what was happening to the
insurance market.
Mr. Jordan mentioned there had been companies that went out
of business due to catastrophic losses Down South, while
other companies were increasing premiums and becoming more
selective in their coverage. He said that when capacity
went down it raised premiums, which was a problem.
10:12:46 AM
Co-Chair Stedman was curious about the $1 million retention
paid for a DOT maintenance shop snow collapse. He wondered
why the amount was not absorbed within the normal operation
of the agency.
Mr. Jordan affirmed that the state's program covered the
loss. He knew that in some cases the agency requested
additional appropriation if the replacement building
exceeded the amount of the original building.
Co-Chair Bishop added that DOT should know snow load
factors on its buildings.
10:14:27 AM
Senator Wielechowski thought that if the bill passed, the
state could be paying out up to $50 million, per year, and
he wondered whether that was an actual savings over just
paying the insurance premiums.
Mr. Jordan relayed that the $5 million premium was strictly
for property coverage. The CAT Fund had paid for losses
other than property; the bill proposed the increase so that
the state could completely self-insure. He stressed that
savings to the state are anticipated. He acknowledged that
it was difficult to determine if the state was going to
save by self-insuring rather than buying at high excess
limits.
10:16:06 AM
Senator von Imhof queried the payments other than property
payments. She wondered about state workers who might be
killed or injured in the collapse or damaging of a state-
owned building. She asked how the state would pay the
liability claims.
Mr. Jordan noted that worker's compensation claims would
cover the event of employee loss of life or injury. He
related that in the case of the snow collapse, the total
coverage anticipated by the state was $3.8 million. He said
that the state's retention at the time of the collapse was
$1 million and the insurance company would eventually pay
the additional $2.8 million. He felt that the issue was
that the excess insurance was $2.8 million, and a CAT fund
of $50 million would have covered that without the state
having to pay the $5 million premium to get the $2.8
million back.
Senator von Imhof asked whether the graph on slide 5 showed
what the state paid, and what it received from insurance.
She probed the value the state had received from insurance
premium payments since 1988.
Mr. Jordan responded that the numbers had been run back to
FY 10. He noted that the only claim that the state had
collected excess insurance on between FY 10 and FY 20 was
for the Alaska Aerospace Kodiak Launch Facility rocket
explosion.
Senator von Imhof thought it would be helpful for the
committee to see a report on how much the state had paid in
premiums, how much the state had been paid in claims, and
how much the state had paid each year from FY 10 to the
present.
Mr. Jordan stated that slide 6 showed property losses shown
on the table indicated funds that the state had paid. He
said that in FY 18 the state recouped the funds for the
Alaska Aerospace rocket explosion. He admitted that the
state benefitted from insurance in that instance but
believed that increasing the fund to $50 million would
cover the losses, without requiring premium payments. He
agreed to provide the requested information to the
committee.
10:20:52 AM
Mr. Jordan showed slide 7, "10 year history of property
payments compared to all lines of business." He explained
that the top portion of the slide showed property premiums
paid by the state since FY 10. He noted that half of the
premiums paid out every year for excess insurance was for
property. He cited that worker's compensation was one of
the largest areas for payout every year. He said that the
majority of the premiums were paid out in aviation and
property.
10:22:15 AM
Mr. Jordan reviewed slide 8, "Larger claims paid out of the
CRA(CATFund)":
• AMHS LeConte Grounding May 2004 $1,187,330
• F&G Crystal Lake Hatchery fire March 2014
$4,078,137
• Alaska Aerospace Kodiak Launch Facility rocket
explosion August 2014 $1,513,667
• PFAS claims starting in November 2017 $5,877,555
• Earthquake related claims November 2018
$1,263,631
*In the last 10 years, this is the only claim the
State has collected excess insurance on.
10:23:33 AM
Senator Wielechowski asked why the state was paying PFAS
claims. He thought the claims should be paid by the private
companies that were responsible for the water table
pollution.
Mr. Jordan explained that the state had initially looked at
the PFAS issue as a potential liability claim and had
started looking into providing clean drinking water to
residents by bringing in bottled water. He shared that the
eventual solution had been to connect residents to the city
water system. He lamented that the division had never been
advised of the potential PFAS pollution in other
communities. He said that the state's policy was to not
collect a premium for this type of incident; the policies
did not cover hazardous release. He relayed that there were
5 areas currently covered for temporary water and working
toward a final solution. He believed DOT would be taking
the lead on cleanup areas. The state was pursuing
litigation against 3M and Dupont for the initial chemical
pollution.
Co-Chair Bishop understood that the state would be joining
a class action suit with numerous other states regarding
the issue.
Mr. Jordan was not involved in the litigation. He believed
there were other states pursuing litigation.
10:26:03 AM
Mr. Jordan looked at slide 9, "Lapse Appropriations
Summary":
The State Insurance Catastrophic Reserve Fund, Fund #
3209, (Cat Fund) is part of the General Fund and Other
Non-segregated Investments (GeFONSI). The GeFONSI are
funds that have been pooled together for investment
purposes. The Cat Fund is part of the NonMOU group,
which allows for the interest earned to be deposited
back into the General Fund.
? The budget includes lapse appropriations to shore up
certain state accounts up to statutory limits
? The Risk Management lapse appropriation is last to
ensure sufficient lapse for the other accounts
? The total FY2021 projected UGF lapse is $110.7
million
10:27:37 AM
Co-Chair Stedman understood that the proposal was to take
the unused surplus at the end of the fiscal year and move
it to create the $50 million account.
Mr. Jordan answered in the affirmative.
Co-Chair Stedman stressed the importance of transparency
when discussion the financial state of the state. He
wondered whether an appropriation from the legislature into
the fund would be a cleaner. He thought that if agencies
had surplus money, their budget could be trimmed, and the
surplus could be deposited into the constitutional budget
reserve (CBR). He thought that the inter-agency receipts
that were charged to create the funds could be used as a
self-funding mechanism, which could be easily tracked.
10:29:50 AM
Senator von Imhof referenced lapsed funds and asked, in the
event that the reverse sweep did not occur, a sweep of
excess funds in various accounts would be used to fund the
$50 million.
Mr. Jordan deferred to OMB.
Co-Chair Stedman asked whether the fund would be sweepable.
Ms. Harbour stated that the lapsed balances that would be
moved to the CAT fund would be put into the fund before the
timing of the reverse sweep from the general fund into the
CBR. She affirmed that the CAT fund was not sweepable
because it is not subject to further appropriation.
10:31:48 AM
Senator von Imhof wondered how the fund would be funded to
$50 million.
Ms. Harbour responded that a considerable amount was
expected to lapse in FY 21 because of the federal Covid-19
dollars; specifically, the federal match for Medicaid.
Senator von Imhof thought Ms. Harbour had indicated that
OMB would be eyeing federal Covid-19 dollars for the
building of the insurance fund.
Ms. Harbour clarified that the state had not spent as much
general fund on Medicaid as was anticipated when developing
the FY 21 budget because of additional federal
participation in the program. She added that there may be
other areas of general fund lapse.
10:33:20 AM
Co-Chair Stedman referenced his earlier point that Covid-19
funds coming from different sources would offer opportunity
to offset general funds. He cautioned that the committee
should be careful when offsetting general funds that it was
clearly understood what was being offset. He expressed
concern that that it could become difficult to track the
funds overtime. He urged the committee to error on the side
of transparency.
10:35:43 AM
Senator Olson thought it looked as though the lapsed funds
should go through the reappropriation process rather than
being shuffled around by a non-appropriating body.
Ms. Harbour stated that the operating budget bill included
language specifically stating that if there was excess
general fund at the end of the fiscal year that would
lapse, it could be used to replenish the CAT fund up to the
amount set in statute.
Senator Olson asked about the difference between the intent
of the bill and going through the normal reappropriation
guidelines. He asked wondered whether this was an attempt
of trying to avoid the reappropriation process.
Ms. Harbour referenced that it was the legislature's choice
whether or not to fund the program. She said that lapse
fund balances had been used in the past to keep the fund
balance up.
10:37:54 AM
Co-Chair Stedman understood that the language section of
the operating budget had limits and gave the legislature
power of appropriation. He asked that the fiscal note be
reconsidered, and thought it would be cleaner and easier to
follow the money.
10:39:26 AM
Co-Chair Bishop OPENED public testimony.
10:39:36 AM
CHARLES MCKEE, SELF, ANCHORAGE (via teleconference),
mentioned the bill. He mentioned the Court system. He
referenced corporations. He shared that he had been charged
with a crime. He discussed the Department of
Administration.
Co-Chair Bishop set the bill aside.
SB 88 was HEARD and HELD in committee for further
consideration.
10:42:33 AM
AT EASE
10:43:50 AM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 88 Sectional Analysis version A 2-23-21.pdf |
SFIN 4/21/2021 9:00:00 AM |
SB 88 |
| SB 88 Sponsor Statement 2-17-21.pdf |
SFIN 4/21/2021 9:00:00 AM |
SB 88 |
| SB 10 Amendments 4.21.2021.pdf |
SFIN 4/21/2021 9:00:00 AM |
SB 10 |
| SB 10 Amendment 4 Wilson.pdf |
SFIN 4/21/2021 9:00:00 AM |
SB 10 |
| SB 88 4.21.21 Senate Finance presentation.pdf |
SFIN 4/21/2021 9:00:00 AM |
SB 88 |