Legislature(2001 - 2002)
04/17/2001 01:30 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 191-JOINT AVIATION INSURANCE ARRANGEMENTS
CHAIRMAN PHILLIPS announced SB 191 to be up for consideration.
SENATOR TAYLOR, sponsor of SB 191, explained that it would provide
an opportunity and an option for those people who run air carrier
businesses in the State of Alaska, everything from mom and pop air
taxi operators all the way up, to create and form their own
insurance pool for purposes of insuring the various risks, both to
hull and liability, and even workers' compensation that they are
involved in today. This is the result of a weakening market [stock
market] in the U.S., but the insurance industry has dramatically
increased premiums to air carriers all across the state, some of
whom are barely making it today.
SENATOR TAYLOR said this pattern has repeated itself on a five-year
cycle for at least the last 30-years. When we were faced with the
very same type of problem with municipalities and also with school
districts, about 14 years ago the legislature created AMLJIA, which
has been a very successful pool. It also created the education pool
that insures a majority of all the school districts in the state.
That has resulted in significant decreases in premiums to both the
municipalities and the school districts over that period of time,
saving hundreds of millions of dollars.
He heard constituents talk about 200 percent increases in premiums.
A meeting with Congressman Young revealed that he had heard the
same concerns and was willing on a federal level to provide us
assistance in funding the initial reserves. Senator Taylor
explained that this is the way MICA was created, the insurance
company created by the State of Alaska when our medical profession,
both doctors and hospitals, were faced with astronomical premium
increases. He said:
MICA was so successful that they only used $3 million of
the original $10 million that the legislature had
appropriated for their reserves. At the end of a 12 year
period, they had been so successful, they had accumulated
reserves so far beyond anything that could be justified
that the internal revenue service was going to begin
taxing all the participants on the reserves in that pool.
The doctors and hospitals came to the legislature and
asked them to "kill that company" and they went back into
the private sector with a company called NORCAL.
To give you an idea of how large the excess reserves were
at the time, NORCAL accepted all the claims against the
medical profession in Alaska and gave to every single one
of the doctors and hospitals who continued on with them a
three-year credit against future premiums. Several of our
hospitals and a majority of the doctors involved paid no
malpractice premium for three-years. They had that much
credit accumulated.
SENATOR TAYLOR said that the Alaska Loggers Insurance Pool, on
average, would run about 37 percent below the lowest numbers on
market for premium. "It is still alive and doing well today, even
though the timber industry has pretty well gone under, and provided
them with some tremendous savings on insurance premiums."
He said the first pool he came in contact with was the halibut
pool, which had been created in Washington State. During those
years, our boats were seeing 15 - 30 percent increases in hull
coverage. A guy with a wooden boat could no longer buy insurance.
"The very same fellow had a wooden boat setting alongside of him in
Petersberg that belonged to the halibut pool and during that three
years of really dramatic increases, the guys in the halibut pool
got a check back from their insurance pool because there weren't
any claims and they got paid the excess back."
Number 700
SENATOR TAYLOR said all the SB 191 does is provide air carriers
with the option, an additional tool, to create their own insurance
pool so to give themselves some protection from the dramatic sweeps
and changes that are occurring and have occurred historically in
this market. There is nothing mandatory in the bill that would
require them to do anything.
SENATOR TAYLOR said that the law was changed years and years ago by
heavy lobbying from the insurance industry to make certain that no
one else could go into the insurance business except them.
You couldn't be self insured as a small group of people."
He said the reason Boeing and other big companies, even the State
of Alaska are self-insured is because, "We don't want to give up
that 25 - 30% minimum, for small businesses, of our overall income
just to have somebody out there whose going to take care of our
claims for us. When you get large enough, you take care of your own
claims."
SENATOR TORGERSON asked what the difference was between this and
the Homebuilders Association fiasco the legislature got into.
SENATOR TAYLOR explained that they were trying to set themselves up
with limited reserves.
SENATOR TORGERSON said, "There aren't any reserves here."
SENATOR TAYLOR said, "They didn't on the other either."
SENATOR TORGERSON asked, "Aren't we concerned about not having any
reserves?"
SENATOR TAYLOR replied, "We weren't with our municipalities and
schools. We set up mandatory reserves on those, each one of them.
The reserves in this instance - I think they would have a hard time
meeting, Senator Torgerson, without having extraordinarily high
premiums up front. That's a choice they are going to have to make.
Not us."
SENATOR TORGERSON added, "Under this section of the statute, these
are not audited records, either, of the state. These are totally
stand alone, right?"
SENATOR TAYLOR replied, "Right, these are independent companies."
SENATOR TORGERSON asked, "The JIA could also insure these folks if
they wish the way it is written? Is that correct?"
SENATOR TAYLOR answered, "I'm not sure if they could or not."
SENATOR TORGERSON responded, "It says may enter into cooperative
agreements with each other."
SENATOR TAYLOR replied, "I don't doubt that they could, but I don't
think there's any desire to."
SENATOR TORGERSON retorted, "That's what this bill says."
SENATOR TAYLOR said he didn't have a problem with it. "If people
are getting down to the place where they can't afford the insurance
and they are going to go bare, I'd rather have them at least have
some option available to them."
SENATOR TORGERSON said he agreed, but they don't have enough
reserves and there are no sideboards to this. "It's just go out and
do it."
SENATOR LEMAN asked what the state's requirement were on reserves.
SENATOR TAYLOR said they are under the state's insurance code,
which is regulated by an insurance commissioner.
SENATOR LEMAN asked if there was a requirement in the code that
would reach into this association?
SENATOR TAYLOR indicated yes.
MS. SARAH MCNAIR-GROVE, Division of Insurance, said Senator Leman
asked what the reserve requirements were and the answer is that the
JIA statute was a carved out from the regulation from the Division
of Insurance. "We do not regulate them, so any other requirements
that are in Chapter 21 would not apply to a JIA."
SENATOR TORGERSON asked if it would apply to this pool.
MS. MCNAIR-GROVE said that it wouldn't because it is being set up
in the JIA Chapter. "Any other statutes in Title 21 do not apply."
SENATOR LEMAN asked if they wanted to impose any requirements, they
would have to be imposed through separate legislation.
MS. MCNAIR-GROVE said that was correct.
SENATOR DAVIS asked what kind of reserves the municipalities and
schools needed to have on hand.
MS. MCNAIR-GROVE answered that she didn't know the answer.
CHAIRMAN PHILLIPS asked if the department had a position on this
bill.
MS. MCNAIR-GROVE replied that they just got the bill and haven't
had time to take a position.
CHAIRMAN PHILLIPS asked her if she could get one by Thursday.
MS. MCNAIR-GROVE answered that she would talk it over with the
director.
SENATOR TORGERSON said that he agreed with Senator Taylor, "We've
got to do something to allow some pooling, but I also agree that
there should be some sideboards. The debate we had over at
Homebuilders - they made some real valid points about trouble with
reserves, but I also agree that we ought to allow our folks to go
out and do pools. We should work on this and fix it."
CHAIRMAN PHILLIPS said he agreed.
MS. MCNAIR-GROVE added that there is a chapter in Title 21 dealing
with reciprocals and it is set up for this purpose, so people can
get together and pool their insurance risks. "That option is
already available to these types of people."
SENATOR TORGERSON asked what reserves are required for that.
MS. MCNAIR-GROVE replied that there are reserve requirements, but
she didn't know the numbers. She added that it is regulated by the
Division of Insurance as any other insurance company is.
SENATOR TORGERSON asked how they determine the reserve difference
between the Homebuilders and the airlines.
Number 1025
MS. MCNAIR-GROVE replied that the main difference is the type of
risk. Air lines is very high catastrophe and would need more
reserves initially, because if there was a large loss right at the
beginning, you would want to protect the solvency of your company.
SENATOR TORGERSON said the debate was that those reserves are too
high and that there's no way to pay down those reserves.
CHAIRMAN PHILLIPS asked Senator Taylor to work with the department
on a second draft.
SENATOR TAYLOR responded that they had looked at that question for
years and it seemed to depend on how big the crunch was at the time
about how concerned we were. He said:
I share the concerns that have been expressed that there
should be some sideboards, but inevitably, as soon as we
start setting sideboards, we end up trying to submit our
wisdom on this subject over and above that of those
people who may wish to create one. We certainly don't
want to set up an insurance pool that's going to fail or
that would have that inherent problem of not having
adequate reserves.
My only thought is that when we set up the other two, we
had municipal authority for taxation, which provided an
additional backup, so to speak. We had that same thing
available through schools. And yet other states have done
the same thing we did with the doctors. We knew it was
going to be expensive to create the reserves for the
doctors and hospitals upfront, so the legislature just
said, "Here's $10 million. If you need it, you can take
up to that $10 million."
They started of with $3 million and never had to write
the letter again. They then paid us back, by the way. Not
only that $3 million, but interest compounded on that $3
million for the whole time they had it.
There comes some point at which I don't believe a pool
will ever be created unless it's done by folks who have
sufficient credibility and business acumen. That the
people buying into the pool have credibility within that
system. They won't sign up if they think it's too thinly
done or too weak or that's going to jeopardize them,
individually, because as participants and owners within
the pool, unless Congress comes through with some level
of initial reserves, a block of $10 - $20 million that
just sits there for that purpose, I don't see the major
carriers coming in and kicking in $1 - $2 million a piece
just towards reserves unless they know how that system is
going to be operated and what the overall risks are and
how much risk they are putting their money to. I feel
somewhat constrained to try and develop here in the
legislature the type of specific sideboards that might
give us some comfort level as far as allowing it to be
created at the same time might either be way too high or
way too small for what it's really going to cost.
We have given authority to one group that never has
exercised that authority and that was Senator Eliason
following up on legislation for municipalities and school
districts. He actually passed a law that allowed fishing
organization to do the same thing. None of them have ever
put that together, but that option is available to them,
too. I thought I'd put in the basic blank check and see
whether anyone goes forward with it.
CHAIRMAN PHILLIPS asked everyone to get together and work on the
bill by next Thursday.
MR. JOHN WALSH, Independent Insurance Agents and Brokers, said he
wanted a couple of days to get comments back from them on this
issue.
CHAIRMAN PHILLIPS said that was fair and adjourned the meeting at
2:00 p.m.
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