Legislature(1995 - 1996)
03/23/1995 01:35 PM Senate L&C
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SL&C 3/23/95
SB 104 JOINT INSURANCE ARRANGEMENTS
CHAIRMAN KELLY called the Senate Labor and Commerce Committee
meeting to order at 1:35 p.m. and announced SB 104 to be up for
consideration.
MARY JACKSON, Aide to Senator Torgerson, said this legislation,
passed in 1986, authorized municipalities, school districts, and
REA's to form joint insurance arrangements and extends that
authorization to entities that perform a quasi-governmental service
defined as being non-profit corporations, native associations, and
native village councils. The test of "quasi-government" is that
they must exercise at least two of the general municipal powers.
Number 43
DON KOCH, Chief, Market Surveillance Section, Division of
Insurance, said he did not support the extension proposed in SB
104. The reason is because the entities involved under this
legislation could form a joint arrangement; they don't necessarily
have to join an existing arrangement. He was concerned primarily
with the financial wherewithal of those entities to bear each
others liabilities. A joint insurance arrangement is not
necessarily the purchase of an insurance product; it's an agreement
to share the liabilities of others who are a part of that
agreement, he explained.
MR. KOCH said that mechanisms already exist allowing purchase of
insurance jointly and he has no problem with that. He explained
there is an existing federal statute that enables risk purchasing
groups and risk retention groups. The risk purchasing group allows
a group of entities to come together, pool their resources, and
jointly purchase insurance, but not jointly share each others
risks. He referenced AS 21.36.190 in this regard.
SENATOR KELLY asked why he hadn't received a position paper from
the Division of Insurance regarding this legislation. MR. KOCH
replied that it had been completed yesterday and needed to be
reviewed by "the chain of command." He said the division was also
dealing with a number of other controversial issues.
SENATOR TORGERSON asked if the department opposed the joint
insurance arrangement when it was established seven years ago. MR.
KOCH replied that initially they had some of the same concerns. At
that time, however, it was pointed out that under the powers of a
municipality, extending to the school districts, had taxing power
and the ability to draft ordinances and enforce them. The
financial concerns "tended to go away" since a tax base would be a
backup.
SENATOR TORGERSON pointed out that there is presently a successful
program operating in the state including municipalities and public
corporations, so the liability would be spread out even farther.
MR. KOCH replied that basically their view has been that whenever
unregulated entities share risk, as soon as there are two, you
basically have an insurance plan. There are already a number of
mechanisms in the insurance code that provide opportunities for
people to form insurers of various kinds. One kind that comes to
his mind is the reciprocal exchange which is a form of insurance
company that is totally owned by the people who are insured. The
management of a reciprocal exchange is performed by an attorney in
fact so there isn't the normal "superstructure" an insurance
company has. The expenses are, therefore, reduced. Two of these
are already in the state - Alaska Timber Insurance Exchange and
ARECA Insurance Exchange. There are a series of financial
requirements in place and performance issues. The lack of
regulatory oversite was deliberate in this type of arrangement,
because there were conflicts between state statue and municipal
regulations. He explained that municipalities are generally more
sophisticated when they go into the market place. They have
attorneys on staff and can make and receive the kinds of judgements
they need to make decisions. His concern is with non profit
corporations, in particular, they may not have that degree of
sophistication, so when they make an agreement to share someone
else's liabilities, they might not know what they are doing.
SENATOR KELLY noted there was a letter of support from Egegik
Improvement Corporation saying the reason they want this
legislation is so they can join the pools and pay lower premiums.
Yet, he mused, there are higher risks for taking large losses by
joining one of the pools. MR. KOCH said that was definitely a
concern.
SENATOR KELLY asked if they would regulate the new units. MR. KOCH
replied that they wouldn't. Furthermore, none of the provisions in
the Insurance Code apply to them, including things such as reserves
for losses, including such things as capital and surplus
requirements so there is some floor for finances or trade
practices.
Number 271
SENATOR KELLY asked who regulated them. MR. KOCH said he thought
they made an annual report to the legislature.
Number 283
MS. JACKSON informed the committee that the regulatory practices
that the JI's have to conform to are state statute. The Division
of Insurance does not have oversite.
SENATOR KELLY asked Mr. Koch if the regulations were in state
statute or state regulation. He replied that if there were
regulations at all, they were not in the Insurance Code and he
didn't know of them existing anywhere else.
SENATOR KELLY asked how he defined a trade practice. MR. KOCH
replied unfair claims settlement practices, discrimination,
boycott, coercion, intimidation, misrepresentation are all things
that are dealt with in the Insurance Code in Chapter 36, the Unfair
Trade Practices Act.
SENATOR KELLY asked if he was saying that none of those things
would be enforceable with the new organization. MR. KOCH replied
that was correct; they do not apply. Statute 76 is structured as
an exclusive statute, and nothing else in Title 21 applies to it.
KEVIN SMITH, Alaska Municipal League Joint Insurance Association,
said the reason they support this legislation is because they have
received a number of phone calls from non profits and village
councils that are taking over traditional municipal services who
are finding that liability insurance is becoming expensive for
them. Some of them are very small with very few assets and not
necessarily the sophistication Mr. Koch attributes to them.
SENATOR KELLY asked how many municipalities he had in his group
right now. MR. SMITH answered 95.
SENATOR KELLY asked if there were a $1 million liability loss,
would that be divided by 95. MR. SMITH replied there was another
mechanism in the form of financial requirements of a JIA that would
make the structure such that you shouldn't ever have to go to the
membership to seek additional funds. AS 21.76.020 says: "By
October 1 of each year, the administrator of a joint insurance
arrangement shall prepare and deliver to the LBA Committee a report
showing the true, correct financial condition of the arrangement."
The report must: have a certified analysis by a member of the
American Academy of Actuaries of the sufficiency of the loss
reserves, be certified by a public accountant and must include a
provision in the cooperative agreement requiring an annual
determination by a casualty actuary who is, again, a member of the
American Academy of Actuaries. The annual determination would show
that the procedures for establishing reserves for losses are
actuarialy sound.
Number 350
SENATOR KELLY asked if there were two reports on file now at LBNA.
MR. SMITH answered presumably. SENATOR KELLY asked staff to get
the reports.
MR. SMITH continued saying a JIA would have to do an annual
independent audit including a review of the actuarial assumptions
used for establishing the reserves, including a certification that
the actuarial assumptions continue to be sound and that the level
of reserves are adequate.
SENATOR KELLY asked, again, about a $1 million liability claim and
if all 95 members pay equally and do they all pay equally into the
reserves. MR. SMITH replied no, if they were to go back to the
membership and assess them, it would be based on payroll. In the
case of $1 million claim, the excess insurance would pick that up.
SENATOR TORGERSON asked how successful this JIA program has been
since its inception. MR. SMITH replied that the program started in
1988 with 37 members over the objections of the Division of
Insurance. There are now 95 members; they get approximately $5
million in premiums each year. The goal of the organization was to
stabilize the commercial market so that rates weren't fluctuating
up and down. He said he had seen a number of commercial carriers
cut their quotes in order to compete with a joint insurance
association. He said they have 60% of the market share in
municipalities alone.
SENATOR KELLY asked what their reserves were. MR. SMITH replied
that they have approximately $16 million.
SENATOR KELLY asked if they had any outstanding lawsuits going.
MR. SMITH said he didn't know that and it wouldn't be in the
report. He said it would probably be a line item where the
accountant said these are the outstanding liabilities at the time.
SENATOR KELLY said he would hold SB 104 until receiving copies of
the reports and the letter from the Division of Insurance.
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