Legislature(1999 - 2000)

03/21/2000 08:10 AM CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
        HOUSE COMMUNITY AND REGIONAL AFFAIRS                                                                                    
                 STANDING COMMITTEE                                                                                             
                   March 21, 2000                                                                                               
                     8:10 a.m.                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                                 
                                                                                                                                
Representative John Harris, Co-Chairman                                                                                         
Representative Carl Morgan, Co-Chairman                                                                                         
Representative Andrew Halcro                                                                                                    
Representative Lisa Murkowski                                                                                                   
Representative Fred Dyson                                                                                                       
Representative Reggie Joule                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                  
                                                                                                                                
Representative Albert Kookesh                                                                                                   
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
HOUSE BILL NO. 404                                                                                                              
"An Act relating to joint insurance arrangements; and providing for                                                             
an effective date."                                                                                                             
                                                                                                                                
     - MOVED CSHB 404(CRA) OUT OF COMMITTEE                                                                                     
                                                                                                                                
PREVIOUS ACTION                                                                                                                 
                                                                                                                                
BILL: HB 404                                                                                                                    
SHORT TITLE: JOINT INSURANCE ARRANGEMENTS                                                                                       
                                                                                                                                
Jrn-Date    Jrn-Page           Action                                                                                           
 2/16/00      2219     (H)  READ THE FIRST TIME - REFERRALS                                                                     
 2/16/00      2219     (H)  CRA, L&C                                                                                            
 3/21/00               (H)  CRA AT  8:00 AM CAPITOL 124                                                                         
                                                                                                                                
WITNESS REGISTER                                                                                                                
                                                                                                                                
REPRESENTATIVE DAVIS                                                                                                            
Alaska State Legislature                                                                                                        
Capitol Building, Room 513                                                                                                      
Juneau, Alaska  99801                                                                                                           
POSITION STATEMENT:  Testified as sponsor of HB 404.                                                                            
                                                                                                                                
KEVIN SMITH, Risk Manager                                                                                                       
Alaska Municipal League's Joint Insurance Association                                                                           
217 Second Street                                                                                                               
Juneau, Alaska 99801                                                                                                            
POSITION STATEMENT:  Testified in support of HB 404.                                                                            
                                                                                                                                
SUSAN SPINDLER                                                                                                                  
Brady & Co                                                                                                                      
PO Box 107502                                                                                                                   
Anchorage, Alaska 99510                                                                                                         
POSITION STATEMENT:  Testified on HB 404.                                                                                       
                                                                                                                                
BOB LOHR, Director                                                                                                              
Division of Insurance                                                                                                           
Department of Community & Economic Development                                                                                  
PO Box 110805                                                                                                                   
Juneau, Alaska 99811-0805                                                                                                       
POSITION STATEMENT:  Testified that the division opposes HB 404.                                                                
                                                                                                                                
MICHAEL COMBS                                                                                                                   
Combs Insurance Agency;                                                                                                         
Board of Directors                                                                                                              
Alaska Independent Insurance Agents and Brokers, Inc.                                                                           
PO Box 816                                                                                                                      
Palmer, Alaska 99645                                                                                                            
POSITION STATEMENT:  Testified in opposition to HB 404.                                                                         
                                                                                                                                
DEB DAVIDSON, Staff                                                                                                             
     to Representative Davis                                                                                                    
Alaska State Legislature                                                                                                        
Capitol Building, Room 513                                                                                                      
Juneau, Alaska  99801                                                                                                           
POSITION STATEMENT:  Commented on the amendment proposed by AIIAB.                                                              
                                                                                                                                
EILEEN TERWILLIGER, Executive Director                                                                                          
Alaska Municipal League Joint Insurance Association                                                                             
807 G Street                                                                                                                    
Anchorage, Alaska 99501                                                                                                         
POSITION STATEMENT:  Discussed the JIA and its relationship with                                                                
the brokers in the state.                                                                                                       
                                                                                                                                
BILL LAWRENCE, Staff                                                                                                            
     to Representative Morgan                                                                                                   
Alaska State Legislature                                                                                                        
Capitol Building, Room 409                                                                                                      
Juneau, Alaska  99801                                                                                                           
POSITION STATEMENT:  Offered information regarding the fiscal note                                                              
for HB 404.                                                                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                                
                                                                                                                                
TAPE 00-17, SIDE A                                                                                                              
Number 0001                                                                                                                     
                                                                                                                                
CO-CHAIRMAN called the House Community and Regional Affairs                                                                     
Standing Committee meeting to order at 8:10 a.m.  Members present                                                               
at the call to order were Representatives Harris, Morgan, Halcro,                                                               
Murkowski, Dyson and Joule.  Representative Kookesh was not in                                                                  
attendance.                                                                                                                     
                                                                                                                                
HB 404-JOINT INSURANCE ARRANGEMENTS                                                                                             
                                                                                                                                
CO-CHAIRMAN MORGAN announced that the first order of business would                                                             
be HOUSE BILL NO. 404, "An Act relating to joint insurance                                                                      
arrangements; and providing for an effective date."                                                                             
                                                                                                                                
Number 0105                                                                                                                     
                                                                                                                                
REPRESENTATIVE DAVIS, Alaska State Legislature, testified as the                                                                
sponsor of HB 404.  He noted his involvement in local government                                                                
and recalled the increasing costs of municipal insurance policies,                                                              
which began 15 years ago.  At that time, the pooling concept had                                                                
been going around the country.  This problem lead to the creation                                                               
of the Alaska Municipal League's Joint Insurance Association                                                                    
(AML/JIA), which has been working well over the years.  As the                                                                  
legislature has created additional difficulties for municipalities                                                              
through budget cuts, which has led municipalities to subcontract,                                                               
privatize, et cetera in order to reduce their budgets.  He pointed                                                              
out that in rural areas, in particular, municipalities have                                                                     
contracted with nonprofit organizations that seem to be taking on                                                               
more responsibilities of the municipality.  However, those                                                                      
nonprofits are not eligible to join the JIA pool.  Therefore, HB
404 allows those nonprofit organizations, Native associations and                                                               
Native village councils to benefit from any benefits that may be                                                                
achieved by joining the AML/JIA insurance pool.  Representative                                                                 
Davis noted that the idea for this legislation was brought to his                                                               
attention by AML/JIA and thus he deferred any questions to Mr.                                                                  
Smith, AML/JIA.                                                                                                                 
                                                                                                                                
CO-CHAIRMAN HARRIS noted that the Alaska Independent Insurance                                                                  
Agents and Brokers, Inc., (AIIAB) oppose HB 404.  He asked if that                                                              
group had spoken with Representative Davis in regard to their                                                                   
opposition.                                                                                                                     
                                                                                                                                
REPRESENTATIVE DAVIS replied no.  He said that he believes it is                                                                
obvious why the AIIAB oppose HB 404 as they probably ensure some of                                                             
these organizations to some degree now.  Should HB 404 pass, there                                                              
is the possibility that this group would lose some business.                                                                    
                                                                                                                                
CO-CHAIRMAN HARRIS asked if there have been instances in which                                                                  
people, who would now be covered under HB 404, did not have                                                                     
insurance because they could not afford it.                                                                                     
                                                                                                                                
REPRESENTATIVE DAVIS answered that he was not familiar with the                                                                 
details of the nonprofits.                                                                                                      
                                                                                                                                
REPRESENTATIVE JOULE asked Representative Davis if he had seen the                                                              
amendment [that is included in the committee packet].                                                                           
                                                                                                                                
REPRESENTATIVE DAVIS replied yes and commented that it is a good                                                                
amendment.  He explained that under HB 404 as written, should a                                                                 
nonprofit that becomes a member of the pool default or face a large                                                             
claim, the nonprofit does not have any taxing authority to recoup                                                               
their specific responsibilities.  Since the nonprofits do not have                                                              
taxing authority, they may not have the money to pay the claim.                                                                 
Therefore, this legislation [amendment] creates a co-signer along                                                               
with their claim so that a municipality or a taxing authority is                                                                
held jointly responsible.                                                                                                       
                                                                                                                                
Number 0593                                                                                                                     
                                                                                                                                
KEVIN SMITH, Risk Manager, Alaska Municipal League's Joint                                                                      
Insurance Association, noted his support of HB 404.  As                                                                         
Representative Davis noted earlier, 15 years ago market conditions                                                              
were different; that market was referred to as a hard market by the                                                             
industry as it was expensive for public entities nationwide to                                                                  
obtain insurance.  That time period spawned the pooling concept,                                                                
which is a group self-insurance program for entities that were too                                                              
small to maintain self-insurance by themselves.  At that time "we"                                                              
[AML/JIA] considered nonprofits, but the legislature was a bit                                                                  
skittish as the pooling concept was fairly new.  Therefore, the                                                                 
legislature decided to hold to a safety valve of an accessible                                                                  
program which means that any entity in a joint insurance                                                                        
arrangement would have to have a tax base, in the event of a                                                                    
failure of the overall program.                                                                                                 
                                                                                                                                
MR. SMITH acknowledged that in the last 15 years the market has                                                                 
changed and is not so hard.  Furthermore, Alaska's economy has                                                                  
changed in regard to how local government services are funded.                                                                  
There have also been changes in the pooling environment as 70                                                                   
percent of public entities nationwide are in some sort of pooling                                                               
arrangement for their primary protection.  To date none of these                                                                
programs have "gone bust."  In fact, half the programs nationwide                                                               
do not have a tax accessible sort of provision in their state                                                                   
statute.  As Representative Davis mentioned, nonprofits and Native                                                              
village councils and associations have experienced changes as well.                                                             
He explained that as more municipalities are privatizing,                                                                       
nonprofits are picking up [services] such as animal control,                                                                    
clinics, hospitals, senior centers and various other public                                                                     
services that are traditionally the purview of a local government                                                               
agency.  Mr. Smith said that AML and JIA felt that this looks like                                                              
a trend and there will be an increasing role of the nonprofits and                                                              
Native village councils in Alaska.  Therefore, in order to stay                                                                 
stable and maintain market share it would be to the cities', the                                                                
schools', the nonprofits' and the [Native] village councils'                                                                    
advantage to be able to all pool together.                                                                                      
                                                                                                                                
Number 0858                                                                                                                     
                                                                                                                                
MR. SMITH turned to Co-Chairman Harris' question regarding whether                                                              
these entities are having difficulty finding insurance.  He                                                                     
informed the committee that in 1994 "we" [JIA] began getting phone                                                              
calls regularly from nonprofits and Native village councils looking                                                             
for insurance.  He noted that this occurred at the same time five                                                               
municipalities dissolved and another 11 were considering dissolving                                                             
because they were not able to make it with the amount of flat state                                                             
shared revenue they were receiving.  Since then there have been                                                                 
some creative relationships between the nonprofits and the tribal                                                               
entities and local governments such as the Quinhagak agreement.                                                                 
Additionally, in the absence of a borough or a municipality there                                                               
are nonprofits that are performing de facto municipal services.                                                                 
For example, in 1994 the Egegik Improvement Corporation was                                                                     
essentially the de facto municipal government for the area.                                                                     
Although he did not believe there are a great number of nonprofits                                                              
that cannot obtain insurance today, "we" [JIA] still receive about                                                              
half a dozen calls per month from such entities seeking coverage.                                                               
Without HB 404 or some coverage of some kind, a number of the                                                                   
nonprofits and the Native village councils will go bare.  Mr. Smith                                                             
commented that every citizen in the state needs some protection in                                                              
the event that something goes wrong.  By providing a cost effective                                                             
tool for these organizations that are providing these public                                                                    
services, it [HB 404] provides an alternative to going bare.                                                                    
                                                                                                                                
MR. SMITH moved on to the tax base issue.  He reiterated that the                                                               
accessible provision is a safety valve that was put in 15 years ago                                                             
when it was unknown how pooling was going to work.  Although                                                                    
municipalities in Alaska have taxing authority, many of the state's                                                             
municipalities do not have a tax base.  For example, the City of                                                                
Platinum, which is a member of [JIA], has 43 residents and a city                                                               
payroll of $37,500 and its property values total $23,500.  He said                                                              
that many nonprofits would have deeper pockets than the City of                                                                 
Platinum.  Mr. Smith stated that the pool is financially stable and                                                             
structured in a way that it cannot go broke with the regulations in                                                             
place.  The regulations involve annual actuarial reviews to ensure                                                              
adequate loss reserves and independent audits to ensure the books                                                               
are straight, both of which have allowed the [JIA] to return                                                                    
millions of dollars to the members owning the organization.  He                                                                 
noted that JIA's board of directors are the stakeholders, which are                                                             
largely comprised of member entities.  Mr. Smith believes that JIA                                                              
has adequate oversight and there is some tax base.                                                                              
                                                                                                                                
MR. SMITH noted his support of the amendment, which would require                                                               
some taxable entity in the pool in order to provide stability.                                                                  
                                                                                                                                
Number 1226                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON asked if this pool is self-insurance.                                                                      
                                                                                                                                
MR. SMITH explained that the pool is a self-insured entity, but the                                                             
pool purchases insurance over and above self-insured retention                                                                  
(SIR).  In the case of the AML's pool, JIA, it has a $25 million                                                                
SIR with another $10 million of excess insurance.  In further                                                                   
response to Representative Dyson, Mr. Smith explained that the pool                                                             
obtains enough money to operate through the collection of premiums                                                              
adequate to cover the cost of losses and the cost of                                                                            
administration, including training, loss control services, risk                                                                 
management services, et cetera.  Any money left after the year                                                                  
closes is returned to the membership.  He reiterated that the pool                                                              
is not a for-profit business.                                                                                                   
                                                                                                                                
REPRESENTATIVE DYSON surmised, then, that these new entities, many                                                              
of which are small, that may qualify will have to be able to pay                                                                
their share in order to participate in the pool.                                                                                
                                                                                                                                
MR. SMITH replied yes.  In further response to Representative                                                                   
Dyson, Mr. Smith indicated agreement that the opposition from the                                                               
AIIAB may be due to their view that [the JIA pool] would be                                                                     
competition for coverage that they are selling to some of these                                                                 
entities [that would enter the pool].                                                                                           
                                                                                                                                
Number 1377                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON remarked that he was disappointed that the                                                                 
Minto case did not make it to court and that the sovereign immunity                                                             
issue was not settled in court.  "Indeed, you'all, if you had a                                                                 
huge claim from a Native corporation you'all would not refuse to                                                                
pay based on sovereign immunity because you have a different mind                                                               
set.  Right?"                                                                                                                   
                                                                                                                                
MR. SMITH said that is true.  He understood Representative Dyson to                                                             
be referring to the McCorick(ph) helicopter accident in which there                                                             
was some dispute as to whether there was workers' compensation                                                                  
coverage for the pilot and the chairman of the corporation.                                                                     
Ultimately, the commercial insurance company chose to "hang its                                                                 
hat" on the sovereign immunity issue.  He noted that this settled                                                               
last week.  Mr. Smith said that as a part of doing business with                                                                
[AML/JIA], sovereign immunity must be waived.  If an entity has                                                                 
sovereign immunity there is no reason to purchase insurance.                                                                    
                                                                                                                                
MR. SMITH answered yes, in regard to whether [JIA's] backup                                                                     
insurance company would honor its obligation to pay.  He specified                                                              
that in this instance, [JIA] manages the program and has a "treaty"                                                             
with the insurance company.  He said that [JIA's] philosophy has                                                                
always been to look for coverage wherever possible.                                                                             
                                                                                                                                
Number 1538                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON related his understanding then that any Native                                                             
tribal council coming to JIA for coverage would be "foreswearing                                                                
playing the sovereign immunity card."  He asked if Mr. Smith knew                                                               
of any groups in Alaska who are pursuing sovereign immunity as                                                                  
their protection.                                                                                                               
                                                                                                                                
MR. SMITH responded that he was not aware of any entities actively                                                              
pursuing sovereign immunity.  He reiterated that in order to enter                                                              
this program, he believes that [JIA] would require, at least in the                                                             
internal documents, that the entity waive sovereign immunity.  The                                                              
program wants to collect premiums in order to cover losses if they                                                              
were to occur.                                                                                                                  
                                                                                                                                
REPRESENTATIVE DYSON requested that if such a trend [of pursuing                                                                
sovereign immunity] began, he would like to know.                                                                               
                                                                                                                                
REPRESENTATIVE MURKOWSKI commented that she may disagree with the                                                               
simple answer of these entities signing a waiver.  She believes                                                                 
that is the issue that will be grappled with.  She noted that JIA                                                               
has some 141 participants in the program currently and inquired as                                                              
to what Mr. Smith anticipated of the pool if HB 404 were to pass.                                                               
She posed a situation in which the pool doubles and there are                                                                   
entities that really do not have a tax base and after making the                                                                
initial premium go "belly up."  How much could the program take on;                                                             
how big can the program go?                                                                                                     
                                                                                                                                
MR. SMITH commented that he believes the initial expansion would be                                                             
fairly slow.  He noted that they would be interested in employing                                                               
some strict underwriting criteria to ensure that there are fairly                                                               
sophisticated communities that are good risks.  He anticipated                                                                  
bringing on small, largely volunteer operations.  For example, the                                                              
Homer Friends of the Animals perform the animal control for the                                                                 
City of Homer.  Most of the workers are volunteers and need some                                                                
workers compensation, but their total payroll is very small.                                                                    
"While we may bring in large numbers ultimately, in terms of the                                                                
actual dollar volume and the risk involved, we're expecting that to                                                             
be relatively low."  Given the structure that we have, a $25                                                                    
million exposure per loss with the $10 million excess being covered                                                             
by someone else, he predicted that the program could expand to                                                                  
twice the current size, in terms of the premium volume, and remain                                                              
solid.                                                                                                                          
                                                                                                                                
Number 1775                                                                                                                     
                                                                                                                                
REPRESENTATIVE HALCRO inquired as to how Mr. Smith would describe                                                               
the financial footing of the JIA presently.                                                                                     
                                                                                                                                
MR. SMITH answered that the financial footing of the JIA currently                                                              
exceeds all the national standards for pooling arrangements.  He                                                                
informed the committee that JIA has roughly $16 million in                                                                      
corporate assets, which includes the building JIA owns and uses in                                                              
Anchorage as well as money set aside for loss reserves and a                                                                    
surplus.  Therefore, he characterized JIA's current financial                                                                   
situation as one of the best in the country.                                                                                    
                                                                                                                                
REPRESENTATIVE HALCRO directed Mr. Smith's attention to a letter                                                                
that he sent to the House Labor & Commerce Committee about HB 378.                                                              
Representative Halcro quoted the following from the letter, "Unless                                                             
there is an increase in services, the JIA sees no reason to cost                                                                
shift from the private industry to the public sector at a time when                                                             
local government entities are struggling for their survival.  ...                                                               
In summary, the JIA would encourage you to exclude public entities                                                              
from the provisions of this bill.  The cost shifting from the                                                                   
private industry to the public sector could not come at a worse                                                                 
time."  That statement seems to be at odds with Mr. Smith's                                                                     
previous statement that JIA is on solid financial ground.                                                                       
Therefore, Representative Halcro inquired as to the JIA's financial                                                             
situation.                                                                                                                      
                                                                                                                                
MR. SMITH remarked that he believes that this is comparing apples                                                               
to oranges.  He stated that AML/JIA is sound; however, municipal                                                                
government in general is struggling.  Since JIA is not a for-profit                                                             
business, this $16 million in corporate assets belongs to the 141                                                               
members of the AML/JIA.  He pointed out that the change in law                                                                  
considered in HB 378 would impose additional costs on                                                                           
municipalities at a time when public sector finance is a real                                                                   
challenge.                                                                                                                      
                                                                                                                                
REPRESENTATIVE HALCRO disagreed that the discussion is comparing                                                                
apples to oranges.  According to the JIA's position paper on HB
404, "Since the AML/JIA is never exposed to more than $250,000 on                                                               
any loss it would take more large losses in a single year than we                                                               
have experienced in the past 12 years total to exhaust the                                                                      
financial resources of the organization."  Representative Halcro                                                                
asked if the JIA should be required to compete by the same rules as                                                             
other commercial carriers if JIA is going to expand its pool to                                                                 
good risk.                                                                                                                      
                                                                                                                                
MR. SMITH said he believes that is the key policy question.  If the                                                             
desire is to provide public services at a time when Alaskans demand                                                             
public services be delivered as cost effectively and efficiently as                                                             
possible, then he believes the tools should be provided to do so.                                                               
He did not believe it is difficult to see the difference between an                                                             
insurance company, which is in business trying to make money, and                                                               
a municipal government, which is the business of providing public                                                               
services in which profit is not the motive.  Mr. Smith maintained                                                               
that the two are an apples to oranges comparison.                                                                               
                                                                                                                                
REPRESENTATIVE HALCRO commented that the same discussion is being                                                               
heard in the House Labor & Commerce Committee in regard to CFAB.                                                                
He informed the committee that Commercial Fishing and Agriculture                                                               
Bank (CFAB) was established 20 years ago for a very specific reason                                                             
and now it wants to reduce its risk, broaden its asset base and                                                                 
move into tourism.  However, the commercial bankers point out that                                                              
CFAB was originally established to help commercial fishermen and                                                                
agriculture to which the commercial bankers agreed.  He asked if                                                                
Mr. Smith could understand the opposition.                                                                                      
                                                                                                                                
MR. SMITH replied yes.                                                                                                          
                                                                                                                                
Number 2127                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON related his understanding that the existing                                                                
pool members would subsidize the new smaller members.                                                                           
                                                                                                                                
MR. SMITH replied no.  He explained that JIA is looking at how to                                                               
set rates that are adequate to cover the risk for each member on an                                                             
individual basis as well as for the pool as a whole.  Therefore, he                                                             
felt that there would be collection of a premium that is more than                                                              
adequate to cover most of the losses.  In the event that JIA                                                                    
experiences more losses than it has in total over the past 12                                                                   
years, those entities [municipalities] with the tax base would have                                                             
to "foot the bill."  He noted that a bill can be submitted to some                                                              
of the nonprofits and some of the other entities as well.  He                                                                   
pointed out that because the JIA board is created by the                                                                        
membership, it is the membership and it is at the board's direction                                                             
that this avenue is pursued.  Therefore, the municipalities within                                                              
this program seem to be supportive of this approach, which should                                                               
be evidenced by letters of support in the packet.                                                                               
                                                                                                                                
REPRESENTATIVE DYSON asked if the existing large municipal members'                                                             
rates would increase as a result of including many new members.                                                                 
                                                                                                                                
MR. SMITH replied no and commented that he expected the opposite to                                                             
occur.  He explained, "The larger number of entities that you can                                                               
make, the law of large numbers makes the amount of losses more                                                                  
predictable.  Again, because there is an actuarial review to review                                                             
the overall health of the pool and each individual member, Mr.                                                                  
Smith expected that the overall health of the pool would increase                                                               
and thus drive rates down.                                                                                                      
                                                                                                                                
REPRESENTATIVE DYSON asked if all of the AML participants have had                                                              
a chance to express their views on HB 404.  Can it be assumed that                                                              
by-and-large the AML membership is in agreement?                                                                                
                                                                                                                                
MR. SMITH answered yes and noted that the AML has supported this in                                                             
its policy statement for several years and thus is, in large part,                                                              
supported by municipalities.                                                                                                    
                                                                                                                                
Number 2317                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON moved that the committee adopt Amendment 1,                                                                
which reads as follows:                                                                                                         
                                                                                                                                
     Page 2, line 3:                                                                                                            
          Delete ";"                                                                                                            
          Insert "and at least one entity described                                                                             
          under (1) - (4) of this subsection                                                                                    
          participates in the cooperative agreement:"                                                                           
                                                                                                                                
There being no objection, it was so ordered and Amendment 1 was                                                                 
adopted.                                                                                                                        
                                                                                                                                
Number 2355                                                                                                                     
                                                                                                                                
SUSAN SPINDLER, Brady & Company, testified via teleconference from                                                              
Anchorage.  Ms. Spindler turned to the sponsor statement which                                                                  
states that these entities that would like to enter into this                                                                   
arrangement are having problems purchasing cost effective                                                                       
insurance.  She disagreed with that statement.  She noted that she                                                              
has been a member of the insurance industry for almost 20 years and                                                             
that Brady & Company insures a number of these entities for which                                                               
she did not find it difficult to obtain insurance.  There are a                                                                 
number of nonprofit insurance programs available which provide all                                                              
insurance lines at very competitive rates.  With regard to the                                                                  
earlier statement that the independent insurance agents are                                                                     
concerned because this [expansion] would cut into their                                                                         
competition, Ms. Spindler said, "Somebody made a statement to me                                                                
that they felt that perhaps, the JIA may be also expanding for the                                                              
same reason of competition to expand their base for insurance.  So,                                                             
it could also be competition on their [JIA's] standpoint ... so, I                                                              
think that works both ways."                                                                                                    
                                                                                                                                
CO-CHAIRMAN HARRIS requested that Mr. Lohr, Division of Insurance,                                                              
comment on the amendment and the opposition letter from the AIIAB.                                                              
                                                                                                                                
Number 2513                                                                                                                     
                                                                                                                                
BOB LOHR, Director, Division of Insurance, Department of Community                                                              
& Economic Development, stated that he believes the amendment goes                                                              
to the right direction in terms of trying to attempt a connection                                                               
of financial responsibility to a tax base, which addresses the                                                                  
concern of the legislature when it originally adopted the JIA                                                                   
legislation years ago.  With regard to HB 404 as a whole, the                                                                   
division opposes HB 404 and believes it to be unnecessary at this                                                               
time.                                                                                                                           
                                                                                                                                
MR. LOHR informed the committee that most of his career was spent                                                               
with nonprofit corporations.  He did recall the aforementioned                                                                  
liquidity crisis and the crunch that can place on a budget.  He                                                                 
explained that essentially there would be fixed funds for grant or                                                              
contract with one component of expense that is expanding, which can                                                             
cause some serious internal repercussions.  However, Mr. Lohr said                                                              
that his information says that there is nothing approaching such a                                                              
situation.  The availability of coverage now is quite widespread                                                                
from the admitted market, which is insurance provided through                                                                   
licensed brokers and agents from companies that are licensed to do                                                              
business in Alaska.  When someone is admitted to the Alaska                                                                     
insurance market, they are actively regulated by the division.                                                                  
                                                                                                                                
MR. LOHR turned to the JIA.  He referred to AS 21.76.020 which                                                                  
provides that "A joint insurance arrangement may not be considered                                                              
insurance for the purpose of any other law of the state and is not                                                              
subject to regulations adopted by the director."  Therefore, the                                                                
JIA arrangements are not subject to the same regulatory scrutiny                                                                
that any other insurance company, agent or broker in the state                                                                  
would be subjected to.  He acknowledged that there are some                                                                     
exceptions such as high risks that the admitted market cannot write                                                             
or is unwilling to write because of the risk or the uniqueness.  In                                                             
such cases, surplus lines are an option.  He explained that surplus                                                             
lines is coverage that is provided by entities that are not                                                                     
admitted to the Alaska market.  If, after three efforts, an agent                                                               
or broker finds that coverage is simply not available, he/she could                                                             
turn to the surplus lines market in which case the customer of the                                                              
insurance would understand completely that [the surplus lines                                                                   
market] is not subject to the division's jurisdiction.  Therefore,                                                              
there would be increased risks with such coverage.                                                                              
                                                                                                                                
MR. LOHR expressed concern with the level playing field as it is                                                                
the public policy to require insurance companies, agents and                                                                    
brokers to be subject to regulation of the state.  Therefore, the                                                               
division would be concerned with alternatives to that which allow                                                               
others into the field without the same degree of regulation because                                                             
that may provide a competitive advantage.  Mr. Lohr said,                                                                       
"Competing equally for a customer may simply not be appropriate to                                                              
give one the advantage of less regulation, possible lower solvency                                                              
requirements and lower costs, in terms of the cost of compliance                                                                
with regulation....  That could be a competitive factor."                                                                       
                                                                                                                                
CO-CHAIRMAN HARRIS inquired as to the thought behind the                                                                        
legislature not requiring the JIA to have oversight from the                                                                    
division as the private insurance companies do.  He asked if it was                                                             
because the JIA is dealing with public entities only.                                                                           
                                                                                                                                
MR. LOHR specified that his understanding from that era is very                                                                 
anecdotal.  However, the oral tradition within the division is that                                                             
the then director of the division did not want to have authority                                                                
over this entity [JIA] due to a perceived political clout that the                                                              
entity might have as well as whether there would be evenhanded                                                                  
regulation would be applied.  At the time, it was determined best                                                               
to not have the responsibility to regulate without the appropriate                                                              
authority.  Therefore, the division requested that it not be given                                                              
authority over the JIA.  He noted that he was not sure whether                                                                  
there were other factors in that discussion.                                                                                    
                                                                                                                                
Number 2795                                                                                                                     
                                                                                                                                
MICHAEL COMBS, Combs Insurance Agency, testified via teleconference                                                             
from the Mat-Su Valley.  He noted that he also sits on the Board of                                                             
Directors for the Alaska Independent Insurance Agents and Brokers,                                                              
Inc.  He noted that the AIIAB position paper notes their opposition                                                             
to HB 404 as presented.  Currently, there is not fair competition                                                               
between the JIA and the private sector industry.  Mr. Combs said                                                                
that the AIIAB hoped that if HB 404 passes, the amendment offered                                                               
by the AIIAB would be adopted.  That amendment would bring the JIA                                                              
under the insurance regulations by amending AS 21.76.020 to read,                                                               
"A joint insurance arrangement is considered insurance for the                                                                  
purpose of the state and is subject to the regulations adopted by                                                               
the director."  If the JIA is financially sound and regulated                                                                   
within its ranks, then the JIA should have no difficulties in                                                                   
meeting the requirements of the Division of Insurance.  With regard                                                             
to the liquidity crisis of the 1980s, Mr. Combs said that crisis                                                                
never really occurred in Alaska.  However, AML still convinced the                                                              
legislature that without AS 21.76 all municipalities would be                                                                   
without insurance.  "The JIA wanted to be free of regulatory                                                                    
oversight as the members would obviously be very sophisticated and                                                              
would be able to provide sufficient oversight to their own                                                                      
programs."  Mr. Combs pointed out that AS 21.76 provides for a                                                                  
total exemption of all other insurance laws, including financial                                                                
solvency, unfair trade practices, unfair claims practices and                                                                   
policy format.  Therefore, the premium generated from JIA is also                                                               
exempt from the premium tax, which is paid by the rest of the                                                                   
insurance industry.  He said that this exemption has cost the state                                                             
in excess of $1.25 million in uncollected premium tax since the JIA                                                             
inception.  The premium tax is one of the leading income producers                                                              
to the state general fund.                                                                                                      
                                                                                                                                
MR. COMBS turned to the proposed expansion of the JIA which would                                                               
include all the Native villages and associations as well as all                                                                 
nonprofit corporations in Alaska.  In order to be eligible to be a                                                              
member of the JIA, one must satisfy only two requirements of AS                                                                 
29.35.010 which are the ability  "(11) to borrow money and issue                                                                
evidences of indebtedness" and "(14) to sue and be sued".  Every                                                                
corporation, nonprofit or for-profit, has those abilities.  These                                                               
nonprofits would include local churches, Boy Scout troops, Moose                                                                
Lodges and Little League programs.  In the 1980s the JIA was                                                                    
established to address the "trumped up" insurance crisis for                                                                    
municipalities.  Mr. Combs asked, "Tell me, where is the insurance                                                              
crisis for your local church?  How much additional insurance                                                                    
business do you want exempt from all insurance laws?  Who is going                                                              
to protect the Little League programs if the JIA fails?  Who wants                                                              
to assess these small innocent programs out of existence?"                                                                      
Currently, the JIA enjoys a great advantage over all admitted                                                                   
insurance companies as no regulation or premium tax provides the                                                                
JIA with a 6 percent pricing advantage over private counterparts.                                                               
Therefore, Mr. Combs requested that if approval of HB 404 is being                                                              
considered, the JIA exemptions should be provided to the rest of                                                                
the insurance industry or the aforementioned revisions to AS                                                                    
21.76.020 should be adopted.                                                                                                    
                                                                                                                                
TAPE 00-17, SIDE B                                                                                                              
                                                                                                                                
MR. COMBS, in response to Representative Dyson, said that the AIIAB                                                             
does have a representative [lobbyist].                                                                                          
                                                                                                                                
REPRESENTATIVE DYSON commented that the points raised by Mr. Combs                                                              
would probably be most appropriate in the House Labor & Commerce                                                                
Committee, which is the next committee of referral for HB 404.  He                                                              
encouraged Mr. Combs to have the association and its representative                                                             
to be very active with HB 404 as it moves through the process.                                                                  
                                                                                                                                
Number 2943                                                                                                                     
                                                                                                                                
CO-CHAIRMAN HARRIS asked if the amendment proposed by the AIIAB                                                                 
would be one that the sponsor could support.                                                                                    
                                                                                                                                
DEB DAVIDSON, Staff to Representative Davis, Alaska State                                                                       
Legislature, said that she did not believe the sponsor could                                                                    
support that amendment.  She noted that Representative Davis has                                                                
not seen this amendment as he only saw the opposition letter this                                                               
morning.  She believes that Representative Davis would feel, as                                                                 
would the AML/JIA, that serving the public purpose under its                                                                    
current self-policing would be adequate.  She said that she                                                                     
hesitated to speak too firmly on Representative Davis' opinion.                                                                 
                                                                                                                                
CO-CHAIRMAN HARRIS noted that he sits on the House Labor & Commerce                                                             
Committee, where this issue [the AIIAB amendment] could be a deal                                                               
killer.  He inquired as to why the JIA could not support the                                                                    
amendment proposed by the AIIAB.                                                                                                
                                                                                                                                
MR. SMITH agreed that this [the AIIAB amendment] could be a deal                                                                
killer.  He said that making the risk financing mechanism as                                                                    
efficient and cost effective as possible for public entities and                                                                
service providers is an appropriate response for trying to deliver                                                              
the services to Alaskans in a cost effective manner.  He did not                                                                
believe regulation by the Division of Insurance would make the JIA                                                              
any more financially solvent or serve the greater public good.                                                                  
Therefore, Mr. Smith announced strong opposition to the amendment                                                               
proposed by the AIIAB.                                                                                                          
                                                                                                                                
REPRESENTATIVE DYSON commented that if the private carriers are                                                                 
easily able to ensure all the municipalities and boroughs, perhaps                                                              
the enabling legislation for the entire program should be reviewed.                                                             
He announced that he would not vote to hold HB 404 in committee,                                                                
but would recommend amending HB 404 as a way to encourage the next                                                              
committee of referral to have this discussion.                                                                                  
                                                                                                                                
REPRESENTATIVE JOULE inquired as to who performs the audits and                                                                 
reviews of the JIA.                                                                                                             
                                                                                                                                
MR. SMITH explained that the actuarial review is performed by                                                                   
someone who is certified by the American Academy of Actuaries.                                                                  
Then an independent auditor reviews the books and an annual report                                                              
is compiled and filed with the Division of Insurance as well as the                                                             
Legislative Budget and Audit Committee.  Mr. Smith specified that                                                               
JIA utilizes Armtech(ph), a third party administrator (TPA) in                                                                  
California, to perform much of the JIA's actuarial work.  He                                                                    
further specified that much of the auditing is performed by Pete                                                                
Marwick(ph) with KPMG.                                                                                                          
                                                                                                                                
Number 2671                                                                                                                     
                                                                                                                                
EILEEN TERWILLIGER, Executive Director, Alaska Municipal League                                                                 
Joint Insurance Association, testified via teleconference from                                                                  
Anchorage.  She thanked Mr. Smith for his earlier comments                                                                      
regarding AML/JIA as a solid organization and how its mission to                                                                
help local governments and school districts find coverage and                                                                   
services is a successful program.  These nonprofits and Native                                                                  
village governments want more than just the coverage; they want                                                                 
services from the JIA as well.  This program provides one of the                                                                
leading coverages available in the state to municipal governments.                                                              
Furthermore, this program is an exemplary provider of services that                                                             
range from contract review to education to training to onsite loss                                                              
control assistance and risk management assistance.  These services                                                              
are provided at a level which is not provided by any commercial                                                                 
provider that she is aware of.  Furthermore, these services are                                                                 
provided at no additional cost.                                                                                                 
                                                                                                                                
MS. TERWILLIGER informed the committee that approximately 25                                                                    
percent of the 141 participants work with brokers in the state for                                                              
which the JIA has good working relationships.  Those relationships                                                              
with the brokers are valued and the JIA supports their partnership                                                              
with its business.  The JIA is not in competition with the brokers                                                              
themselves.  She said that the brokers view the JIA as a product,                                                               
an alternative source to coverage.  Brokers support JIA because                                                                 
they know that their clients can receive quality coverage through                                                               
a financially sound organization as well as being eligible for                                                                  
dividends.  She explained that a dividend is money returned from                                                                
premiums, in the event that losses are less than what is necessary                                                              
to charge for premiums.  To date, the JIA has been able to return                                                               
$2.1 million of member's ownership benefits back to the members.                                                                
She noted that in addition to the studies mentioned by Mr. Smith,                                                               
the JIA undergoes four studies in order to determine the                                                                        
organization's financial solvency and reserves for loss                                                                         
sufficiency.  Furthermore, the JIA has an independent third party                                                               
audit all of the JIA's claims files.  There is also a rate study                                                                
that is performed every two years in which an actuary reviews the                                                               
JIA rates and makes adjustments.  She noted that since the                                                                      
beginning the rates have only decreased, which can be attributed to                                                             
the strength of the program.  Ms. Terwilliger assured the brokers                                                               
that this [HB 404] should not be of concern to them as the JIA                                                                  
still abides by its strong partnership with its brokers.                                                                        
                                                                                                                                
CO-CHAIRMAN MORGAN asked if there was anyone else present to                                                                    
testify.  There being no one, public testimony was closed.                                                                      
                                                                                                                                
Number 2444                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON moved to report HB 404 as amended out of                                                                   
committee with individual recommendations and no fiscal note at                                                                 
present.                                                                                                                        
                                                                                                                                
CO-CHAIRMAN MORGAN announced his understanding that the fiscal note                                                             
for HB 404 would be zero.                                                                                                       
                                                                                                                                
BILL LAWRENCE, Staff to Representative Morgan, Alaska State                                                                     
Legislature, interjected that with the industry amendment, the                                                                  
fiscal note would probably remain zero.  However, he noted that                                                                 
[the impact of the amendment on the fiscal note] had not yet been                                                               
analyzed.                                                                                                                       
                                                                                                                                
CO-CHAIRMAN MORGAN asked if there were any objections to reporting                                                              
HB 404 as amended from committee.  There being no objection, it was                                                             
so ordered and CSHB 404(CRA) was reported from committee.                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                     
                                                                                                                                
There being no further business before the committee, the House                                                                 
Community & Regional Affairs Standing Committee meeting was                                                                     
adjourned at 9:13 a.m.                                                                                                          

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