Legislature(2005 - 2006)BELTZ 211
03/30/2006 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB241 | |
| SB307 | |
| SB272 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 241 | TELECONFERENCED | |
| += | SB 307 | TELECONFERENCED | |
| += | SB 309 | TELECONFERENCED | |
| += | SB 272 | TELECONFERENCED | |
SB 241-JOINT INSURANCE ARRANGEMENTS
CHAIR CON BUNDE announced SB 241 to be up for consideration.
RYAN MACKINSTER, staff to Senator Cowdery, sponsor of SB 241,
explained that it creates in statute the ability to have self-
insured workers' compensation groups. Currently individual
companies can be self-insured in Alaska and this allows
companies within the same industry to get together and form a
group to be self-insured like the individual companies if they
meet all the other requirements. Several other states allow this
now.
MR. MAKINSTER said that a minimum of five or more employers
would be needed to form a group, but different types of
companies could not form a group. He said the CS before the
committee was much larger than the original bill and that Linda
Hall, director of the Division on Insurance was concerned it
left a lot of the ideas in regulation rather than putting them
in statute so the boundaries would be clearer.
1:34:32 PM
SENATOR RALPH SEEKINS moved to adopt CSSB 241, version G, as the
working document. There were no objections and it was so
ordered.
MR. MAKINSTER explained that one of the first issues was to make
sure there were adequate funds for expenses to maintain the
program and to pay for claims. He said that Section 21.77.200 on
page 12 requires the association to adopt a plan that is
approved by the director that includes an advance payment of 15
percent with the balance to be paid in monthly or quarterly
installments. The assessments must be based on actuarial
projections that include appropriate reserves and the costs
associated with the plan. Appropriate reserves, he said, is
defined on page 12 in Section 21.77.210. They cover actual
claims, claims that have occurred but are not reported, and
reserves for uncollected debts based on experience.
1:36:55 PM
Furthermore, Mr. MAKINSTER said, the group is required to
deposit at least 65 percent of the money collected in an account
to pay claims or expenses related to those claims. The remaining
35 percent would go to paying for operating costs. He said that
workers' compensation costs are determined by AS 23.30, the
workers' compensation statute.
MR. MAKINSTER said that what happens when not enough money is
collected was a concern and page 12 also addresses that in
Section 21.77.230. It requires the group to collect an
additional assessment to make up any shortfall. It gives the
director the power to decide what additional assessments are
needed if the group fails to initiate that on its own. He
reminded the committee that the original intent of workers'
compensation was to insure that workers would be paid for lost
wages, injuries and expenses incurred if an accident happened in
exchange for not suing the employer for those costs.
He said another section provides that dividends can be paid back
to the members, which is a provision used in other states. On
page 11, Section 21.77.190 requires the approval of the director
before those dividends are paid. The idea behind the dividend is
that if the group works together to implement a safety plan that
will lower risk over time for both the system and the workers,
it would not have to pay out claims and there is some reward for
that.
1:38:53 PM
MR. MAKINSTER said if one member of the group goes bankrupt,
they are bound together through a joint and several liability
clauses to insure that claims are paid and bankruptcy does not
remove the liability to pay claims. Beyond that, there is a
surety bond payable to the state in the amount required by the
director to ensure that claims are paid.
CHAIR BUNDE asked if he had an estimate of what would be saved
if this were to become law.
MR. MAKINSTER replied that he didn't have a number.
1:40:29 PM
LINDA HALL, Director, Division of Insurance, directed her
comments to the CS. She said the bill requires the legislature
to make a public policy decision and she wanted to make sure all
the potential pieces were put before it before that decision was
made. Also, she said she wasn't particularly comfortable coming
before them with what they would perceive as an extremely
negative position on the bill; she didn't do it lightly.
MS. HALL said she still wasn't convinced that the bill provided
protections even though she worked with the sponsor group to do
that. She said she would talk about three areas - financial
oversight, regulatory oversight, and fiscal impact - and then
what she saw as a different solution.
1:42:03 PM
MS. HALL said that one of the basic principles of insurance
regulation is financial oversight to insure that claims get paid
and while the CS had detailed requirements, she was still
concerned that it had no liquidity requirements. It also had a
narrow tangible net worth requirement.
1:42:41 PM
CHAIR BUNDE asked what amount she was talking about for a
liquidity requirement.
MS. HALL replied that this bill was modeled after some Nevada
statutes and with Oregon statutes that required specific working
capital in sufficient amounts to establish the strength and
liquidity of the business. She didn't favor setting a specific
limit, but thought it could vary from group to group depending
upon their financial statements. She said that currently, there
is no requirement for individual members and suggested that
higher risk occupations have greater need for more liquidity.
1:44:01 PM
MS. HALL said another concern she had was that there is no
requirement for individual members to have audited financial
statements, but the association is required to have one. She
explained that there is a difference in general accounting
principals (GAP), which this bill is predicated on, and
insurance that is regulated based on statutory accounting;
assets are valued differently. She said the National Association
of Insurance Commissioners has an office called the SVO that
strictly does asset valuation. A great deal of attention is
given to the quality of assets in an insurance company, which is
important; and she said there are other assets besides liquidity
that make up net worth and the department needs to know that
there is a real method of evaluating those.
She said financial responsibility rests with the association and
it needs to have a tie-in with its members, but the joint and
several liability agreements in this bill do not include the
association. They do in the Nevada bill and she thought that was
very important.
MS. HALL said Section 21.77.230 deals with insufficient assets
and when an association is insolvent, it allows the director to
withdraw the certificate of approval, but doesn't say what
happens then. Current insurance statutes have provisions for the
Division of Insurance, namely the director, to become either a
supervisor or the association can go into receivership. This
bill does not give her authority to take over any assets.
1:46:30 PM
Under regulatory authority to penalize for violations, she
explained that the largest insurance company in the world was
penalized $1.6 billion to resolve allegations of deceptive
accounting practices. Prior to that, she had one subsidiary of
that company as an Alaska domestic and had done a financial exam
and found some accounting irregularities, which she didn't think
were intentionally deceptive, but nevertheless were not in
accordance with the state's standard accounting practices. The
company was fined $400,000. Recently, the division fined the
same company $65,000 for not getting its financial statements in
on time. She emphasized, "There needs to be a penalty!"
MS. HALL said that regulatory oversight is not part of this bill
even though a lot of financial requirements had been added and
it specifically says it's not insurance and nothing else applied
except Chapter 77, which was created for self-insured groups.
Chapter 36 of the Insurance Title provides the controlling
language for trade practices and frauds. It includes oversight
of marketing, misrepresentation, false advertising, unfair
discrimination, unfair claims practices, etc., and those could
not be applied to a self-insured group. She thought those were
consumer protections and asserted that claimants are consumers
and they need to be protected in some instances.
MS. HALL said that the division is currently conducting a market
conduct review of a claims adjusting company because of
complaints. The adjusting company is a licensee and she has the
authority to look at its files and determine what they are doing
and, as a result, has found a substantial number of statutory
violations. This kind of regulatory oversight is not present in
CSSB 241.
1:49:05 PM
MS. HALL went on to explain that all licensees have to pay a
license fee and a continuation fee. The division operates in an
arena where those who are regulated pay for it and not by
choice. The bill provides for a license fee only and she wanted
a continuation fee as well. However, the greater issue for the
legislature to deliberate is the premium tax since the entities
would no longer pay a premium and therefore no premium tax. This
tax is a major source of revenue to the general fund. In 2004
premium tax was the second largest source of revenue to the
general fund.
She said that probably one group self-insured association not
paying tax wouldn't have an impact, but the more of that you
get, the more the impact it has on the general fund.
1:50:40 PM
MS. HALL strongly felt the indemnity agreement should include
the association. Nevada statutes require annual assessments -
the premium the association would pay to an insurance company -
of at least $300,000 or an amount, which the director determines
to be satisfactory based on annual review of actuarial solvency.
Each member must have a tangible net worth of at least $250,000,
not just an aggregate and an insurance premium of at least
$10,000. It also provides that the director would approve an
annual assessment much as rate filings are approved today. This
means she would review the actuarial projections and reserving.
She said that Nevada also has provisions to assess other self-
insured associations for the claims obligations of an insolvent
association. In addition to the joint and several liability of
the group, if they became insolvent, all of the members would be
assessed although she didn't know if Alaska had enough bodies to
make that work.
She said that Oregon also has good ideas like specific
requirements for excess insurance and working capital -
requirements that are likely to improve accident prevention and
claims handling. It also requires irrevocable letters of credit
for deposits.
The last concern Ms. Hall mentioned was in current statutes. AS
21.75 allows for the formation of reciprocals, she explained,
that are entities that are kind of like insurance companies, but
they are limited to trade associations. Alaska has two that are
operating very successfully today - the timber exchange and
ARECA (Alaska Rural Electric Cooperative Association). They
operate under the division's oversight much as an insurance
company, but with lower requirements - $1.5 million to
capitalize, which she thought wasn't a lot of money for paying
workers' compensation claims that have the potential of being
expensive and long-tailed. She knew of an insurance company that
had a reserve of $7 million.
MS. HALL said she has yet to hear any reason that a reciprocal
would not be a viable entity for the trade associations to join
together and set its own rates, do its own safety programs and
admit its own members. She emphasized that she has not seen any
reason that this already statutorily-created entity could not
serve the same purposes and it comes under the division's
regulatory and financial oversight.
1:54:30 PM
MS. HALL closed saying she was very sensitive to the high cost
of workers' compensation today and she didn't want to take
people out of the system without first looking at improving it.
She said that Director Lisankie provided her with a report from
California that said after its reforms between July 1, 2003 and
January 1, 2006, premiums had gone down by 46 percent. She
emphasized that there are other ways to help employers reduce
costs than by taking them out of the system and reducing the
mass in which to spread the risk. She urged the committee to
work within the current system to deal with escalating costs, 67
percent of which are medical. However that is funded, she said,
those costs won't change and she didn't feel she had seen
evidence indicating that premium would be reduced.
1:57:10 PM
PAUL LISANKIE, Director, Division of Workers' Compensation,
Department of Labor and Workforce Development (DOLWD), offered
background on the scope of the current self-insurance program.
Only individual employers can be self-insured and he has the
authority for granting or denying applications lodged with the
Workers' Compensation Board. The program is up to 31 approved
employers. He said approximately 26 percent of all employed
Alaskans are working for an employer that self-insures its
workers' compensation liability. That means there is no guaranty
fund the way there is for insurance companies. If a self-insured
becomes insolvent, the only recourse for injured workers who are
getting benefits is bankruptcy court. He suggested that the
committee consider that in addition to the large self-insureds
under his supervision, which he thought were barely adequately
capitalized, that this legislation would be opening the doors to
an unlimited and unknown number of small employers to self-
insure through the trade associations.
MR. LISANKIE repeated that the current program is barely
adequate - partly because it is operating under regulations that
are 23 years old, but he is the process of revising those
regulations right now. Currently there is a minimum requirement
of $5 million in tangible assets to even qualify for
consideration as a self-insurer; with inflation, that would be
about $10 million in today's dollars and that is probably where
the regulations are going. Current regulations for security
provide for a minimum of $300,000 or 125 percent of actual
liabilities; so, that $300,000 would double to around $600,000.
2:01:38 PM
MR. LISANKIE closed by saying when one looks at the opinions of
people who talk about the best practices of workers'
compensation, essentially they suggest having three guarantee
funds. The first is a fund for the insurance companies, which
Alaska has had for many years, the second is a fund for making
up benefits of employees who are injured while they are working
for employers who are illegally uninsured (Alaska has this since
last year), and a last fund to guarantee self-insurers because
of the importance of the benefits. Alaska doesn't have this in
its current program and that absence is reflected in the current
bill, which would be specific to group self-insurers.
2:02:45 PM
He underscored Director Hall's comment that if you look at the
Nevada statute as a template, it does have a guaranty fund both
for the individual self-insured employers and the group self-
insurers - the groups that would be covered under this bill.
2:03:11 PM
CHAIR BUNDE asked if the state could be looked at as the
guarantor if there would be some catastrophe under this bill.
MR. LISANKIE replied that he didn't know.
CHAIR BUNDE said he also wanted to know what a guaranty fund
would look like as far as amounts and costs to the individuals
that would be part of the group.
2:04:09 PM
SENATOR SEEKINS asked Mr. Lisankie to explain the guaranty fund
for self-insured companies.
MR. LISANKIE replied that the fund would be in place for a
failure of a self-insured. Now there is no recourse outside of
the federal bankruptcy system. He said the assessment would
presumably be made every year and go into a backup fund that
would be accessed to pay benefits that could not be covered by
one of the members of the group going insolvent.
CHAIR BUNDE said the state has something like that for insurance
companies.
MR. LISANKIE affirmed that and added that fund had to be
adjusted in 2004 because of the large loss from a few insolvent
insurers. He said:
Frankly, that's part of the reason why I'm as
concerned about this as I am right now - because we
have this current system in place without a guaranty
fund and having sat through that testimony and lived
through that period, it's one of the things that keeps
me awake at night when I'm regulating along with the
panel of the Workers' Compensation Board - these 31
entities that are self-insured as we speak.
2:06:03 PM
TOM SMITH, President, Alaska State Homebuilding Association,
supported SB 241, because it would provide one more option to
any trade group, but specifically to homebuilders, to help with
the escalating costs of workers' compensation insurance. He said
he realized that rates wouldn't be that different, but they
would have more control over safety by being part of a smaller
group and members could possibly retain some of the premiums.
ROBERT VOGEL, ProGroup Management, said his is an administration
company and he had worked with the sponsors of this bill to help
them to understand self-insured groups. He said that ProGroup
has managed four different self-insured groups for over 10
years; one of the groups consists of homebuilders.
2:09:12 PM
MR. VOGEL clarified that this law is intended to allow a group
of individual employers to finance their projected losses in the
same manner a single self-insured entity has done under those
same provisions. Employers within the same industry would form
an unincorporated, non-profit association that would be owned by
its members collectively for the purpose of self-insuring its
workers' compensation liability, thereby obtaining the same
status as a singly self-insured employer. This self-insured
group is a separate distinct legal entity and is not part of the
common trade association. The tie-in to the common trade
association is it helps strengthen the commonality of the risk.
You don't want a restaurant joining a builders association
because of the different risks involved. He stated that SIGs
(self insured groups) are viable alternatives for employers to
improve their risk management procedures, worker safety and
care; they have been authorized in 39 states, mostly recently in
Texas. They have been in existence for over 40 years using the
basic tenants outlined in this bill, which stresses solvency,
owner accountability and responsibility.
He said one of the requirements to qualify to become a SIG is to
have a minimum of $5 million in tangible net worth. He noted
that Director Lisankie said that the minimum tangible net worth
for individual self-insureds in Alaska is $10 million, so this
would be $10 million also. Whatever the self-insured law is,
that is what these groups would follow.
MR. VOGEL explained that tangible net worth is the net worth of
a company less its intangible assets. The employers sign a joint
and several liability agreements binding them to pay all of the
claims of this group. That is measured through GAP, the most
common method of measuring net worth across the country. But the
law backs away from intangible assets because the idea is to
have assets that can be sold. He explained that the group would
most likely have a $350,000 to $750,000 deductible. After that,
even if there were a $7 million claim, an excess insurance
company would pay the rest. That is why they have to make sure
they use "A" rated companies providing that the group would pay
for. He said the group would be subject to paying claims under
AS 23.30.
He said this law does not require each member to have audited
financials, but from a liquidity standpoint, the group should
have GAP audited financials. Annual CPA audits are required as
well as adequacy audits by an independent actuary who has joint
and several liability agreements that support the liquidity.
Each member has annual payroll audits to assure correct
reporting of collections and the director of the Division of
Insurance can audit those records as necessary to insure
compliance and solvency.
2:17:09 PM
He opined that a group self-insured becomes a better alternative
to a single self-insured because if one company goes bankrupt,
others are there to cover the claims. If a member leaves the
group, he still remains bound to it by its joint and several
agreements.
MR. VOGEL said that Nevada passed its law in 1990 and 2,400
businesses have formed 13 groups there. He said that the number
of groups is generally a function of the number of businesses
the state has. He thought possibly only a dozen groups would
form in Alaska.
2:23:17 PM
He concluded saying this is not insurance, it is self-insurance
and people should not be afraid of it. It may cost a little more
in the first year to start a group, but over a 10-year period,
savings can be generated. Improved care of the employees is the
first and foremost goal of programs like this and he reported
that his homebuilders group has saved about 20 percent on its
premiums since 1999 compared to the standard carrier market.
Return-to-work times and medical costs were generally cut in
half. The auto dealers retail and transportation group
experienced much the same results after 10 years. The groups
have built up reserves and have continued to thrive and grow.
CHAIR BUNDE thanked Mr. Vogel for his comments and said that
committee time was limited and asked testifiers to summarize
their testimony.
2:25:40 PM
LARRY PARTUSCH, Anchorage Homebuilders' Association, supported
SB 241 saying it provides another option for funding workers'
compensation. He said that having companies in the same industry
in one group encourages them to police their own industry. His
experience was that he couldn't get benefits from the use of
safety practices when he was in a big group.
KENTON BRINE, Property Casualty Insurers Association of America,
said his is a trade association representing about 1,000 member
insurance companies across the country including some of the
leading workers' compensation insurance writers. He understood
this legislation is an option that is being sought by
homebuilders, in particular, and his concern stems from what he
heard from the directors of the Division of Insurance and the
Division of Workers' Compensation that there are not adequate
regulatory oversights and from the perspective of an injured
worker, if an entity becomes insolvent, it will look a lot like
a bankrupt insurance company and the question is how do you get
your bills paid. He said:
It isn't that we are in opposition to the formation of
this option; it is rather that we are concerned that
the way it is being formulated it is going to lead to
a great deal of risk to injured workers, to the
employers that joined these groups and to the broader
insurance marketplace.
He supported continuing the department's efforts of addressing
the cost drivers to workers' compensation rather than creating
other options using the same cost structure. He also pointed out
that the system that these groups would be departing would
suffer as well. Legislators and administrators might eventually
have to pick up the pieces of a decimated insurance system that
is the result of weak regulatory oversight as a result of this
legislation.
2:30:12 PM
MICHAEL BELL, Alaska Trucking Association, supported SB 241. He
testified that workers' compensation is one of the largest
concerns for trucking companies in Alaska that are faced with
increasing rates that can only be attributed to market
increases. Customer service has been replaced by "Pay it or find
it elsewhere" attitude. He mentioned that small companies have
to cut corners, operate without coverage, sell off portions of
their assets, or close their doors. A change is needed now he
said, as some of his members' rates exceed $36 per $100 of
payroll.
CHAIR BUNDE said the committee shared his concerns about the
costs of workers' compensation and wanted to do what it could to
help. He then set SB 241 aside.
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