Legislature(1997 - 1998)
02/26/1997 03:22 PM House L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 26, 1997
3:22 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative John Cowdery
Representative Bill Hudson
Representative Jerry Sanders
Representative Joe Ryan
Representative Tom Brice
Representative Gene Kubina
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
* HOUSE BILL NO. 116
"An Act relating to workers' compensation self-insurance."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 116
SHORT TITLE: WORKERS' COMPENSATION SELF-INSURANCE GROUP
JRN-DATE JRN-PG ACTION
02/05/97 243 (H) READ THE FIRST TIME - REFERRAL(S)
02/05/97 243 (H) LABOR & COMMERCE
02/07/97 277 (H) COSPONSOR(S): KOHRING
02/13/97 349 (H) COSPONSOR(S): OGAN
02/17/97 376 (H) COSPONSOR(S): GREEN
02/21/97 430 (H) COSPONSOR(S): ELTON
02/26/97 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
REPRESENTATIVE PETE KOTT
Alaska State Legislature
Capitol Building, Room 204
Juneau, Alaska 99801
Telephone: (907) 465-3777
POSITION STATEMENT: Sponsor of HB 116.
STEVEN WISDOM, President
Alaska State Homebuilders Association
P.O. Box 4184
Homer, Alaska 99603
Telephone: (907) 235-6045
POSITION STATEMENT: Testified in support of HB 116.
RICHARD BLOCK
Alaska National Insurance Company
360 West Benson
Anchorage, Alaska 99503
Telephone: (907) 563-5121
POSITION STATEMENT: Testified against HB 116.
BILL TAYLOR, Builder
Alaska State Homebuilders Association
2340 Loren Circle
Anchorage, Alaska 99516
Telephone: (907) 244-6233
POSITION STATEMENT: Testified in support of HB 116.
MARIANNE BURKE, Director
Division of Insurance
Department of Commerce
and Economic Development
P.O. Box 110805
Juneau, Alaska 99811-0805
Telephone: (907) 465-2515
POSITION STATEMENT: Testified on HB 116.
AL WILSON, Member
Alaska State Homebuilders Association
P.O. Box 22797
Juneau, Alaska 99802
Telephone: (907) 586-2240
POSITION STATEMENT: Testified in support of HB 116.
LINDA HALL, Commercial Insurance Broker
Alaska Independent Insurance Agents and Brokers
311 "C" Street
Anchorage, Alaska 99503
Telephone: (907) 561-1250
POSITION STATEMENT: Testified in opposition to HB 116.
PAUL GROSSI, Director
Division of Workers' Compensation
Department of Labor
P.O. Box 25512
Juneau, Alaska 99802-5512
Telephone: (907) 465-2797
POSITION STATEMENT: Testified on HB 116.
ROBIN WARD, Member
Alaska State Homebuilders Association
Box 91443
Anchorage, Alaska 99501
Telephone: (907) 562-3770
POSITION STATEMENT: Testified on HB 116.
ACTION NARRATIVE
TAPE 97-14, SIDE A
Number 001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee to order at 3:22 p.m. Members present at the
call to order were Representatives Rokeberg, Cowdery, Brice and
Ryan. Representatives Hudson and Kubina arrived at 3:30 p.m.
Representative Sanders arrived at 3:40 p.m.
HB 116 - WORKERS' COMPENSATION SELF-INSURANCE GROUP
Number 047
CHAIRMAN ROKEBERG announced the committee would hear HB 116,
"An Act relating to workers' compensation self-insurance,"
sponsored by Representative Kott.
Number 073
REPRESENTATIVE PETE KOTT came before the committee to present HB
116. He stated he has provided the committee with copies of
letters that have been consolidated into a booklet format which
indicates there is a lot of support for HB 116. He read the
following statement into the record:
"This bill seeks to address what I perceive is the high cost in
providing worker compensation insurance for Alaska's workers.
Worker compensation is critically important to Alaskans. It is
necessary for our state to make provisions for unfortunate workers
who are injured on the job. At the same time, keeping business
open for our workers is equally as important. If worker
compensation premiums become too costly, businesses will fold and
potential businesses won't commence, and certainly what that means
is there will be quite a few unemployed Alaskans.
"Both goals providing for injured workers and keeping businesses
open here in the state is a must and is addressed in this
particular measure. I believe that the bill furthers both of these
goals. It provides a mechanism for lowering workers' compensation
insurance premiums and it provides an abundance of security for
injured workers."
REPRESENTATIVE KOTT said a similar piece of legislation was before
the House Labor and Commerce last year. He said the issue and the
idea isn't a new one and it is working well in approximately 17
states. He continued to read his statement:
"What the bill does is it permits employers to form worker
compensation self-insurance groups. These are associations that
consist of five or more employers who are engaged in a similar
business and which belong to a bona fide trade or professional
association. What the employers do, in essence, is enter into
agreements to pool their liabilities for worker compensation
benefits.
"The bill provides strict protection to workers in a variety of
ways and I'll just mention a few. A worker compensation self-
insurance group cannot come into being without first being
certificated by the director of the Division of Insurance. The
director must be first convinced that very stringent requirements
are met. The net worth of all the members must be at least a
million dollars. In addition, security must be deposited with the
director and made negotiable to the Department of Labor. These
resources may be drawn upon to pay worker compensation claims in
the unlikely event of a default. I may add also that the director
will determine the amount and form of that particular security.
"In addition to the security, it is necessary that the groups
purchase excess insurance. This is not optional. It is in fact
required. Again, it is the director of Insurance who determines
the form and the amount that is required in this excess insurance
arrangement. In point of fact, the director in the bill even has
veto power in the selection of the specific insurance carrier.
"In addition, injured workers are protected by requiring all
participating employers to sign indemnity agreement making each one
jointly liable for the workers' compensation obligations of all
other members. Again, the director may prescribe the contents of
these agreements.
"House Bill 116 also protects workers by requiring fidelity bonds.
Once again, the director has the right to control the form and the
amount of these bonds. Similarly, the director is granted
discretion to also require the filing of these performance bonds.
"Once a group is certified, it cannot voluntarily cease operations
until the director grants approval. And, before that approval is
given, the director must be satisfied that the group has insured or
reinsured its incurred workers' compensation obligations with an
authorized insurer under an agreement filed with and approved by
the director of Insurance.
"To ensure that any potential problems are corrected at an early
stage, the bill requires that self-insurance groups must maintain
a detailed file. They're audited and there is financial statements
filed with the director. This must be done on an annual basis and
the director may prescribe the nature and frequency of these
reports. In fact, this measure takes one step further. The
director is entitled to examine the affairs, accounts, records,
transactions and assets of these groups whenever the director
wants, whether it's daily, weekly, monthly, quarterly or annually,
it's up basically to the director as to whether and when they want
to look over these reports or transactions. And the important
thing here is the expenses associated with that is borne by the
groups.
"A self-insurance group will be governed by a board of directors,
which will set policy and ultimately be responsible for the affairs
of the group. The board will employ an administrator for the day-
to-day operations. In addition, service companies may be employed
to provide specialized services, such as designing and implementing
worker safety programs."
Number 591
REPRESENTATIVE KOTT referred to safety and said he would like to
point out another benefit of the bill. He said he had previously
mentioned how the bill assists workers by protecting employment
opportunities and provides for work-related injuries. Another
important benefit to the worker is this bill would promote worker
safety. He said if you look at safety records and accidents in
other states, you'll find they have declined because each
individual member of this group is responsible for maintaining a
safe work environment. He noted premiums will be based on the safe
work environment. Representative Kott referred to the other
colleagues in the pool and said he would have a vested interest in
making sure that they have a safe environment. There is some self
motivation to design and put in place a strong safety program
within the group.
REPRESENTATIVE KOTT said there are people who are supportive of the
bill and there are people who have concerns. He said he has
addressed some of the concerns with the bill. Representative Kott
said he is primarily looking out for the worker. He said, "I, in
no way shape or form, want to undermine or undercut a worker's
claim as it relates to workers' compensation. I want the employees
of this state to continue to receive the same fair level of
compensation that they currently receive."
Number 797
REPRESENTATIVE BILL HUDSON said he has received phone calls from
people who have questioned the validity or the adequateness of the
$1 million asset coverage to be made available in the package. He
said some people have thought that as much as $3 million would be
necessary in order to guarantee that the workers covered under this
program would be fully covered.
REPRESENTATIVE KOTT explained the $1 million figure is just a
figure that he started with. There is no magic number. He said it
is just a basic number. Representative Kott said the other issue
tied to that is the number of employers that can form this group
which is five with an aggregate sum of $1 million in capital or
assets. He informed the committee that he knows a restaurant owner
where his assets associated with his facility are $1.5 million. As
a potential employer looking to get into the pool, he would not be
as aggressive to get into the pool knowing that there were only
four others. The more in the pool, the more apt they are to be
able to share the risks that are assumed. He said he thinks $1
million is a good starting point. You also have to recognize that
as we pay the worker compensation monies to the injured workers, it
starts with the premiums that are set up in the 70 percent, 30
percent pool for those claims to be paid from. After that pool
runs dry, then you would go to your excess insurance, which is
required in the bill to be set by the director. After that, if it
runs dry, you would go to the surety bond which is determined by
director. There is a number of steps you have to go through before
you actually get to the $1 million or $5 million.
Number 998
STEVEN WISDOM, President, Alaska State Homebuilders Association
(ASHBA), came before the committee to testify. He informed the
committee his association would like to see HB 116 become law.
Most of the homebuilders in the state are small employers and have
to pay workers' compensation insurance. An average rate is between
$17 to $19 per hundred for carpenters. There aren't a lot of
options for employees on a job site doing residential construction,
so this equates to a major potion of their payroll. Mr. Wisdom
said they are always looking at ways to cut operating costs to meet
their end goal of affordable housing for Alaskans. Mr. Wisdom
said, "The bill itself, being small employers and dealing with
large insurance corporations, they're playing actuarial numbers all
the time. It's a roll of the die, they know what the odds are out
there and they're collecting their profits off it accordingly. One
large insurer in the state covers approximately 30 percent of the
workmen's comp premiums in the state of Alaska. The most recent
study I read in 1994, wrote about $46 million in net premiums. Of
that, approximately 58 percent was a loss ratio and approximately
20 percent was the operating cost. Their total cost was
approximately 78.8 percent. That adds out to about 22 percent net
profit that they're making off of the workmens' comp."
MR. WISDOM explained that currently in the case of the small
builder, where there are typically less than ten employees, you pay
your premium and that is all you hear from the insurance company.
If you have a loss, you get a drop notice the next year to go find
a new carrier. He pointed out that there is nobody that follows up
on safety programs, etc. There is no involvement between the two
industries, it's pay your money, let them collect their profits and
if you have a loss you have to find someone else. Mr. Wisdom said
this is not an acceptable way of doing business. He said ASHBA is
very much in favor of HB 116 from the standpoint that it requires
a commitment from every participant to join one of these pools.
There are 40 other states that have similar legislation of which 14
are very close to the program that the ASHBA would like to see
implemented in Alaska. He said the bill is written so that other
trade associations could get into this business as well and that is
why it's important there is good regulation from the Division of
Insurance and the Department of Labor.
Number 1142
MR. WISDOM said to form these types of self-insurance pools, it
takes a strong commitment from each participant. The pools will be
careful as to what goes on with their members. They will look for
safety programs to be implemented. They will look for on-site
inspections. They will look for follow up if and when a worker is
injured. Other nationwide studies show that the average loss with
a self-insured group runs about $27,000. That same loss with a
commercial carrier runs closer to $43,000. Attorney involvement
with a commercial carrier involves 70 percent of the cases. With
self-insured groups, it's 49 percent. He noted these figures come
from studies that have been conducted across the nation. It shows
that working with the injured worker in getting them back on the
job lowers the costs. He stated that through these types of
programs, the worker benefits as well.
Number 1260
REPRESENTATIVE JOHN COWDERY referred to pools in other states and
questioned whether an effort has been made to verify the entry
fees, or the ability to meet the minimum requirements financially.
MR. WISDOM responded in the affirmative and noted he has some
recent financial statements from the groups. He also noted he gave
the committee members a booklet and said it represents the contacts
through the building industry.
CHAIRMAN ROKEBERG asked Mr. Wisdom what his experience has been
with his workers' comp rates over the last few years.
MR. WISDOM responded, "One year ago I was mid-year with a carrier
and all of a sudden my loss ratio hit 70 percent, and that's not
actual losses, but that's anticipated losses as well. They sent me
a cancellation letter because they were not going to make an excess
of 30 percent profit off me for that given year. Fortunately, I
was able to go outside and negotiate with another one and actually
ended up with a lower rate, but that's the way the major carriers
treat small business today. If they're not going to get the set
profit margin they want, they will even cancel you midstream.
Number 1425
RICHARD BLOCK, Alaska National Insurance Company (ANIC), was next
to come before the committee to address HB 116. He explained ANIC
is a large writer of workers' compensation and has been writing in
Alaska for 16 years. Mr. Block informed the committee he has been
involved in the insurance industry in one aspect or another for 29
years, 22 in Alaska. He said he has been working with a number of
clients who have explored the possibility of trying to solve some
of the same problems that Mr. Wisdom suggested needed to be
addressed. It is important that we understand what the problem is.
His understanding is that occassionally these kinds of entities
come into existence because workers' comp or some line of insurance
is not even available, a voluntary market will not write it. He
said that is not the case here as workers' compensation is
available to every employer, if not through the voluntary market
then through the assigned risk facilities that are available in the
state. He said he believes the problem they're facing is the issue
of price. Workers' compensation has, at times, been expensive. He
said he thinks they are attempting to find a way to reduce their
price by not addressing the issue of losses which is the primary
driver of price, but by being excused from having to pay some of
the costs that are normally attended and required to be paid by all
employers in this state through the workers' compensation
mechanism. They do that by assigning to this plan the name "self-
insurance" or "self-insurance group," when it is not self-
insurance. Mr. Block pointed out that what this program does is
what every insurance program does which is it shifts the burden of
loss from one person, for whom a loss might be catastrophic, to the
financial resources of other people, in this case the other
employers who are homebuilders and participants in this program.
Because of that, it becomes very important that we know and
understand how the financial resources of those other people are
going to be available to pay the losses that are going to come
about because it is important that we protect the underlying
beneficiaries of this which are the injured workers.
MR. BLOCK said when you deal with workers' comp as opposed to a
property insurance problem, we are talking about the most volatile
kind of insurance there is. These losses are very hard to predict
on occasion. They may take anywhere from 2 to 20 years to be
resolved. There is the possibility of latent injury which can be
reported several years after the event. It sometimes can make it
very difficult to determine what the cost of loss is ultimately
going to be. Mr. Bock said ANIC's principle concern about this is
the financial integrity of the program.
Number 1705
MR. BLOCK said it has been indicated that there is $1 million of
underlying net worths supporting this organization. He said the
committee needs to realize that is not entirely true. In any
insuring organization currently in Alaska, whether it be a stock,
mutual or a reciprocal company, there is the requirement that funds
be put in that enterprise that comprised the capital against which
it writes. In this case, no such requirement is made. It is
required that the participants have in the aggregate $1 million of
net worth, but there is no provision in the bill for determining
the validity of that $1 million of net worth. There aren't any
audited financial statements required, nor is there the requirement
that the net worth be segregated to pay workers' compensation
claims or to pay the net loss under the program. In other words,
it is the same net worth that is supporting, in this case, the
homebuilders's operations. Mr. Block said it has been said in the
bill and in some of the testimony that before we get to the net
worth of the homebuilders, there is excess or even aggregate stop
loss insurance or reinsurance. It is true that is part of the
program. He stated he thinks there are some misunderstandings
about that. One misunderstanding is the notion that when the
premium portion of the resources of this enterprise are gone you go
to the excess insurance. That is not exactly true. For example,
excess insurance may be written to cover all losses to the extent
the loss exceed $25,000. If the losses are less than $25,000 and
if there is more losses than anticipated and they're all under
$25,000, the excess never kicks in and it would have to paid out of
the 70 percent pool.
MR. BLOCK said another notion is that this excess or aggregate stop
loss insurance will always be available. That's not always true
because these people are writing to the extent that the risk is
acceptable and they could terminate and leave the entity without
the protection they need in order to have a continuing program.
MR. BLOCK noted he was president of Alaska National for six years.
Sometimes you place reinsurance with carriers that have very valid
names and are sound financially at the time you place the
reinsurance, and many years later they aren't able to respond to
their obligations under the reinsurance contracts. He said they
were fortunate that they had the surplus in the company to support
the gap that was left when the reinsurer failed. It is important
that this pooling arrangement have the necessary underpinning in
case that reinsurance or that excess coverage, which they're
defending, should disappear.
Number 1797
MR. BLOCK said there is a court of last resort. In the event of a
failure of the organization there are surety bonds, cut through
reinsurance provisions or security deposits. He said he isn't sure
the legislation is structured well because it says these are
payable to the state. His understanding is that if they're payable
to the state and then it becomes necessary for the state to pick up
the deficiency, it might require a legislative appropriation in
order to get that money back out to where it goes.
MR. BLOCK said another thing that should be reviewed not only by
the state, but by the ASHBA, is whether this is really going to
reduce their costs. He said, "I believe Chairman Rokeberg asked
the question about what has been the trend in premiums over the
last few years and indeed it's been my quick review that the
premiums, overall, for workers' comp in the state of Alaska are
trending downward, but even within the homebuilders classifications
- the carpentry classes - they are trending down. And so the
question is going to be when you put one of these together and
where you have to charge enough premium of the participants so that
70 percent equals the loss that you're going to have, both for
actual and for future losses and enough to cover the cost of
purchasing the reinsurance and enough to cover the expenses they
choose to pay for operating this program, are you not going to get
yourself back to essentially the cost they're paying now? I can't
say for sure one way or another, but that would be my -- experience
tells me that's likely what is going to happen."
MR. BLOCK said another concern is the notion that this program
really becomes available to any group that wishes to engage in such
a program. What has happened is that when these things have been
tolerated, and without adequate capital and regulation, they have
caused some major damage to people who weren't aware of what they
were getting into. Mr. Block said several years ago a similar
argument was made to Congress concerning medical and life insurance
benefits - employee benefits for workers. If they're paying too
much money to standard stock insurance companies, could they not
form a vehicle for pooling in what they called then "a self-
insurance pool." Congress authorized that medical and life
benefits be provided by what were called "multiple employer welfare
arrangements" or "multiple employer trusts." While they started
out working all right, what they would become is excuses for
marketeers to begin presenting products to employers on the basis
that they were going to save a lot of money, but without adequate
information that the employers had residual liability in the event
that these things were inadequately funded. Mr. Block explained
very serious problems occurred which are discussed in his written
testimony to the committee.
MR. BLOCK said there is nothing in HB 116 that safeguards against
a similar situation taking place in Alaska with respect to workers'
compensation. The legislation says that in the event that the
premium for any year exceeds the losses and expenses for a year,
the premium will be returned to the homebuilders, but it says this
will be done not less than 12 months after the end of the fiscal
year. Mr. Block said the problem with that is we don't know what
the losses are for maybe up to five years.
Number 2013
MR. BLOCK said he would point out some of the areas where he thinks
the bill is providing some unfair advantages to someone who forms
one of these. One is it tends to exempt the enterprise from having
to pay premium tax. Premium tax is a method used to fund state
government. All employers pay it indirectly because it's a cost
loaded into everybody's premium. He said because this is arguably
not an insurance company and it's not going pay an insurance
premium tax, what would be the fairness of that? Some of the
administrative expenses to the Division of Insurance are lower than
what any other insurance carrier would have to pay. They are not
required to be a participant in either the assigned risk program
because that is a cost employers pay by virtue of an assessment
against the insurance companies loaded into the rate. It wouldn't
be some here and the same with the guarantee association. He said
it is ASHBA's concern that these are costs imposed by government
and not by the insurance companies. If it is good public policy
for these costs to be levied directly against insurance companies
and indirectly against employers, why should these employers be
exempt?
MR. BLOCK asked if the homebuilders or any other group would like
to reduce their costs without some relief. He said Mr. Wisdom said
what they would like is a vehicle for imposing safety and having
common interest so they could have a motivation for a higher level
of safety for their members. That is a worthy objective as they
would like to reduce litigation by having more to say about how
their claims are administered. Mr. Block said there may be other
things they hope to achieve in cost savings and marketing or
administration by virtue of having their own program. He stated he
looks at those as worthy objectives and if there is a way that can
be accomplished, there might be some value to their trade
organization exploring them. Mr. Block stated he would like to
point out that there is already in law ways in which they can do
that. They don't need this bill to do it. For example, under
current statute there is a provision that a trade association can
form a purchasing group. He noted in his written testimony, he
refers to the specific statute which allows that. They would not
be required to put up capital, but they would have the full
protection of a regulated insurance company providing the
protection. They may wish to form a reciprocal and that is in
effect what they're doing. They are forming a reciprocal which is
an organization for the mutual exchange of indemnities. There is
already authority to form such a reciprocal. He explained the
difference between the reciprocal on the books and what they're
hoping to do is an amount of capital is required in order to assure
the protection of the injured worker. There are also requirements
for complying with the normal Division of Insurance oversight, as
well as the obligation to pay the taxes and assessments that all
other carriers would have to pay. Mr. Block informed the committee
there is already one such organization, the Alaska Timber Insurance
Exchange, which was formed and has been doing that for the loggers.
MR. BLOCK said under current statute, if there were an enterprising
producer or an enterprising trade association, they could pull
together their industry into a common purchasing regime and deal
with a carrier that could negotiate their expenses. They could
come up with a program that would be very cost effective for them
if they wished to do that. He noted the National Electrical
Contractors Association is already doing that. He said while he
realizes the homebuilders are looking to reduce their costs, they
are doing it by trying to avoid costs that all other employers are
obligated, by the legislature, to pay. He said he believes they
are also doing it by denying themselves and denying the injured
worker the financial protection that is provided by adequate
surplus dedicated to such a program. He urged the committee to not
adopt such a program.
Number 2227
REPRESENTATIVE COWDERY asked Mr. Block how large a claim usually
is.
MR. BLOCK said a homebuilder could have a carpenter who cuts his
finger and he would have a very small claim. There could also be
a large claim from someone from a different industry. Mr. Block
said, "I don't think it's industry dependent or size of employer
dependent, but my understanding -- I'd have to go back to some of
the figures I've seen maybe about a year ago, but the average cost
is running maybe $12,000 or $15,000 for a time loss claim. That is
taking all time loss claims."
REPRESENTATIVE COWDERY questioned what the time frame is from when
the claim is made.
MR. BLOCK explained most claims are the result of an immediate and
traumatic event. He said they find out about a claim within hours,
days or weeks. There are some claims that are made for soft
injuries like back injuries that may not be made for a long period
of time. It is not so much the reporting that causes the long term
escalation in values. What happens is during the course of both
physical and vocational rehabilitation, you learn things about
physical condition or the medical modalities needed to bring back
health again. He explained what you thought might be resolved by
a simple operation or a simple application of medicine turns out to
be far more complicated. You may not learn that for maybe up to a
year. Mr. Bock said "And then all of sudden you have to increase
your reserves because the medical cost attendant to this, plus the
attendant loss time and other things, benefits under the comp come
at you late. And that's what causes the delay and that causes the
need to increase reserves well after a year after you policy year
is closed."
Number 2338
REPRESENTATIVE COWDERY asked Mr. Block who determines his company's
financial responsibility or back up money.
MR. BLOCK said it is regulated by state law in Title 21 which
specifies how much capital they have to put in, how the capital may
be invested, how they must be examined, how frequently they are
examined, what their rates are, what their business practices are,
and what their policy forms are. He noted it is all regulated at
the state level by the Division of Insurance.
REPRESENTATIVE COWDERY asked if the bill would be under the same
regulation.
MR. BLOCK responded, "The problem with the way this bill is
drafted, Representative Cowdery, is the answer is yes and no,
because yes, it says that we will be regulated to some extent by
the director of the Division of Insurance, but it's strange because
it starts out by saying, `But we're not an insurance enterprise.'
So the only regulatory authority that I see that the director has
is what's specifically granted which is to approve it's initial
application and to do some financial review. But the problem with
- in every aspect of regulation for our company and for any other
company, a reciprocal or a mutual, there are standards set up -
what the capital must be, what our financial standards must be, how
much more capital we have to put in based on our writings. For
this, there is no standards. It just says, `The director shall
determine.'"
Number 2414
REPRESENTATIVE HUDSON asked Mr. Block to cite the statutory
reference to the reciprocal.
MR. BLOCK responded he believes it is 21.75.
Number 2435
REPRESENTATIVE JOE RYAN said, "My brief perusal of 5.1, I noticed
different occasions that trust had to be established -- the monies
put into a trust, a irrevocable trust, on some occasions to make
sure that the financial resources were there for (indisc.) and so
forth. My question on this million dollar net worth - well you are
always able to sell things unless it's cash liquid. (Indisc.)
always able to liquidate those assets and get the million dollars
or perhaps what it is. Is there any concern in that respect that
if there is catastrophic losses, perhaps if those assets can't be
liquidated to meet the requirement?"
MR. BLOCK informed the committee he specifically referred to that
in his written testimony. One of the problems with the bill is it
requires $1 million net worth, aggregated from all of the
participating employers, in this case the homebuilders, but it does
not specify what the assets have to be. They can be equipment,
tractors, tools, land, whatever they happen to have. Mr. Block
explained that is one of the issues they raised which is the equity
of the assets they are looking to and the adequate valuing of those
assets. It is not required that the financial statements be
audited to test the true validity of the value of the assets.
TAPE 97-14, SIDE B
Number 001
REPRESENTATIVE RYAN said, "...and I know this kind of insurance
does have a long tail. I'd like you to examine that a little bit
more for me and tell me what would be available to the person who
had the claim if the reinsurance company perhaps was no longer in
business or it ceased doing business - it was difficult to get
(indisc.) money? What kind of recourse would a person have?"
MR. BLOCK responded, "Okay, an employee is injured and three to
five years after the injury, with a very serious demand for medical
care and ongoing payments and rehabilitation, so forth, still lying
against this enterprise, and now they're looking to their excess
carrier to pay this high amount of money and the excess carrier is
gone. Where do they go? Well it's not entirely clear, but from
the way the bill is drafted, it would appear as though there are
some resources in this security deposit or in the bond that's filed
with the director. But that's again unclear to me how that works
because it says they're payable to the state or to the Department
of Labor and I'm not sure how that then gets from the Department of
Labor to an injured worker without an appropriation. That aside,
if that's inadequate or if that presents a problem, then the next
step is for the entity to make an assessment against all the
homebuilders for whatever the value of the net deficiency is with
respect to that policy year." He said if this comes into existence
in 1998, there is a 1998 loss and in 2003 they find out there is
large amount of deficit, in 2003 they would then go back to those
people who were in this program in 1998 and ask them to pay the
deficiency.
Number 080
REPRESENTATIVE GENE KUBINA asked if the reinsurers would be
regulated by the department so that they meet all of those
qualifications.
MR. BLOCK said they should be. He pointed out that for his company
or any insurance company, they do not get credit for reinsurance
unless the reinsurer is itself either regulated by the Division of
Insurance or accepted by the Division of Insurance based on the
financial information the division has about those companies. Mr.
Block said he would hope this would apply. He said he would hope
that if this became law, the current director would be astute
enough to require that, but the statute and bill do not say it's
required. He said he supposes they could go get excess or
aggregate stop loss coverage from any market that would be prepared
to write it.
REPRESENTATIVE RYAN said if this bill becomes law, where would the
state ultimately come in to take responsibility?
MR. BLOCK indicated that is the concern he has. He said he isn't
clear from the language in the bill as to how they come in. He
explained the state is the beneficiary of whatever security the
director would require, the surety bond, the security deposit, the
cut through reinsurance, etc. The bill says it shall be
negotiable, made payable to the state, but it's not clear what
would happen when a deficiency in a private organization exists how
they would transfer the money or the resources into that private
organization. Mr. Block said he would imagine that what should
happen is that the monies from the security deposits, deposit funds
or bonds should be payable to the enterprise so that the enterprise
has the funds to make those payments.
Number 301
BILL TAYLOR, Builder, Alaska State Homebuilders Association, came
before the committee to testify in support of HB 116. He noted he
builds about 25 houses a year in the Anchorage area. A concern
that keeps coming up is the concern over insolvency and protection
of the worker. With the way the bill is drafted, he feels it gives
the worker a substantial amount of protection. Mr. Taylor said
insolvency could happen in a melt down situation, but he feels the
statistical probability of that occurring is minimal. He said he
thinks we have a very low risk of that occurrence, and even if it
did occur there is still a layer of protection. The capital
requirement of $1 million is certainly a starting point. Mr.
Taylor noted he believes the current capital requirement is $5
million, however, they would certainly support lowering that to $1
million. He said he thinks there is an element regarding what the
capital requirement is. That is the base, the platform for which
they protect their claimants. The $1 million is the expanded layer
of protection on top of the reinsurance or the stop loss insurance.
Mr. Taylor asked the committee members to focus on the fact that
the capital requirement is there. Mr. Taylor said the builders
understand risk and they deal with risk every day. They realize
what joint and several liability is. He said Mr. Block made a
valid point about the assets that are at risk. Those assets could
come in multiple forms. He pointed out the builders that are
interested in the bill know that when they sign on, their assets
are on the line.
Number 470
MR. TAYLOR referred to the insolvency of the organization and said
it is really a hypothetical possibility. He said they do have the
fiduciary responsibility to make sure they do have the capital in
tact and that it's adequately systemized with the assets. They
also have the stop loss insurance that will kick in. In theory,
the stop loss insurance companies could go out of business, but
there is nothing to say that maybe some of the off shore markets
would be riskier than some of the continental markets. He noted
the continental markets can be controlled by the director of
Insurance. The Division of Insurance has the responsibility to
review and approve who the reinsurance companies are.
MR. TAYLOR said, "What we want to communicate to you is that we
become, as builders, stakeholders in an enterprise that will help
us lower costs and manage claims and protect our claimants. The
last thing that we want to see is to put somebody that's framing a
house and falls off the roof and breaks a limb, to not have money
available to him. So the legislation, as we've crafted it, and it
certainly will need to fine tuning if concerns arise as we go, we
don't want that person to be at risk and I think we've adequately
provided for that guarantee through the capital requirements and
the insurance - reinsurance. So I think that this extra layer will
go beyond that point because we have the fidelity bond that's
required of the administrator and a performance bond. So not only
are we insured, but our claims administrators are insured. As an
example, if liquidity is a problem initially, there is nothing to
prevent us in the legislation, if liquidity is a concern, for us to
get a bond. If you take a group of 100 builders and put them
together and pledge a million dollars with an asset, an insurance
company can provide a liquidity bond for the million dollar net
worth. So we can solve that problem if it arises."
MR. TAYLOR said if there are some minor holes in the legislation,
the intent is not to leave those holes. The intent is to make sure
those details are worked out with the commissioner, as they
ultimately have control as to how it is regulated. Mr. Taylor said
they are not trying to avoid regulation, they want to participate
in regulation to the benefit of the builders and the potential work
comp claimants. Mr. Taylor explained the builders see this bill as
them forming a pool where pure pressure is one of the most vital
elements of managing claims. He said the workers will be working
in a safer environment as the companies are stakeholders and are
personally at risk if something goes wrong on a co-builder's sites.
Number 779
REPRESENTATIVE KUBINA referred to pure pressure and said if there
are 12 companies in a pool and one company doesn't like the safety
record of another, could they be expelled from the group.
MR. TAYLOR said there will be provision in documentation to allow
them to move that person out of the pool. They would then go back
into private insurance.
REPRESENTATIVE KUBINA asked how that is different from a previous
testifier saying they received a drop notice from an insurance
company. He said that was used as one argument earlier, and they
are able to do the same thing.
MR. TAYLOR explained what the human reaction is to pure pressure is
to simply rectify the problem that exists. He said they wouldn't
be interested in expelling someone who was initially invited in.
Number 839
REPRESENTATIVE COWDERY questioned whether the $1 million is per
company or per pool.
MR. TAYLOR explained it is $1 million per pool.
Number 967
REPRESENTATIVE JERRY SANDERS asked Mr. Taylor if he feels that pure
pressure is that much stronger than the financial pressure they
receive by their premiums going up. He asked if he feels the
insurance company is more willing to give up that premium and drop
the insured than the pool would be.
MR. TAYLOR said, "As a pool, for instance if we used homebuilders
as an example, as a pool if you invite a co-builder into your pool
and illustrate to him what the goals of this pool are, he's going
to respond in a positive way in creating a better work environment
in helping the pool manage the claims. There seem to be -- and I
think it's fairly common whether you're exposed to workman's comp
or not, that there are gross abuses in workman's compensation. And
there are a lot of claims that are paid that maybe shouldn't be or
there are claims that are legitimate claims that are double and
triple pay. So we're trying to, as small businessmen, we can
realize the significance and importance of controlling costs and I
think this give us an opportunity to do that and still protect the
worker."
Number 1069
MARIANNE BURKE, Director, Division of Insurance, Department of
Commerce and Economic Development, came before the committee to
testify on HB 116. She said she would like to thank Mr. Block, who
touched on a number of the issues she was going to touch on. She
said she would like to acknowledge the fact that last year when the
original proposed legislation was introduced and there were a
number of issues raised, she and the director of the Division of
Workers' Compensation met with members of the Alaska State
Homebuilders Association and stressed the concerns that they had.
She said they specifically pointed to the fact that solvency was a
major concern. They have gone back and significantly changed the
proposed legislation. She said she would have to echo the concerns
on solvency. There are no provisions in HB 116 to allow the
director to look at the financial statements of the members. The
legislation does say that there will be an examination of the
group, in other words, the money that is in the group premiums, but
nothing allows the director to make sure that the underlying $1
million is in fact there.
MS. BURKE said it has been testified to that liquidity is a major
concern. Net worth can be composed of land and aliquot assets.
There is nothing in the legislation that permits the director to
determine what kind of assets are available. For an insurance
company licensed to do business in the state there are very strict
guidelines on the type of assets that can be considered. There are
very strict regulations governing what types of securities can be
considered and that they must be valued in a certain way.
Number 1260
MS. BURKE said she would like to emphasize the reinsurance. As
written, HB 116 has layers. It goes first to the group, not the
individual members, and if there isn't sufficient money there to
pay the underlying claims, the next step is to go to reinsurance.
As has been pointed out, reinsurance only pays after a certain
point. The group will have to have paid those first dollars in
order to trigger reinsurance.
MS. BURKE said there has also been testimony as to the fact that
the premiums will come into this plan. She said she would like to
point out that the legislation requires a minimum premium base for
the first year of $250,000. Only 25 percent of that has to paid up
front or $62,500. Ms. Burke said following the legislation, 70
percent of that premium amount is available to pay claims. That
means that $44,000 at the inception of the group would be available
to pay claims. There is no provision in the legislation that says
when the other 75 percent of the $250,000 has to be paid. Ms.
Burke referred to wording in the bill, "The director shall issue a
certificate of approval if these criteria are met." She said if
there is $43,450 to pay claims, the director "shall" issue the
certificate assuming the other conditions are met as to surety
bonds, bonding of the administrator, etc. She asked the committee
to keep in mind those bondings are to the performance of those
individuals and not bonding to pay claims.
Number 1379
MS. BURKE said there has been discussion about the monies payable
to the state in the form of securities, bonds or whatever, that the
director determines the amount. She explained the legislation
clearly says they will not be used to pay claims until such time as
the group is unable to pay the claims they're legally required to
pay. In other words, those monies would not be available until the
group is insolvent. They wouldn't be available to draw on
throughout the process.
MS. BURKE said the issue of insolvency is also very troublesome.
Insurance companies in the state cannot go into bankruptcy and
there is a very good public policy as to why they can't. They have
obligations to policyholders. The law provides that the director
can take a troubled company into receivership and work with that
company to rehabilitate it before insolvency ever occurs. The last
thing any director would like to see is a company insolvent, which
means they failed to help them get back on their feet. She pointed
out there is no such provision in HB 116. Ms. Burke said, "It is
arguable whether or not this group might be able to go into
bankruptcy because if it is in fact not insurance, it could go into
bankruptcy. The issue of whether it is or is not insurance would
be a finding of fact." She said the court has been clear over the
years as to what constitutes the business of insurance and it boils
down to if there is a transfer of risk, you're in the business of
insurance. Ms. Burke said as described in HB 116, there is a
transfer of risk.
Number 1623
MS. BURKE referred to the guarantee fund and said it is another
issue that is troublesome to her. She said the guarantee fund is
good public policy. An insured plan must participate in this
guarantee fund. It simply means that if a company doesn't have the
resources to make good on their claims, the other companies step in
on their behalf and make on those claims. She said this is a very
good safeguard and it is present in every state of the union.
Number 1683
MS. BURKE referred to how rates are developed and said out of all
insurance, probably workers' comp is the easiest to understand.
Every insured employer in the state of Alaska must report their
data, their payroll, the classification, to a statistical agency.
In Alaska, that is the National Council of Compensation Insurance
(NCCI). This statistical group aggregates all of this data so all
the participants from one class are put in one bucket and all of
the other workers are allocated to what they're doing. From that,
a manual rate is determined every year effective January 1. The
factors that go into that are medical claims, payments to
individuals while they're injured in a permanent or temporary
disability, retraining, legal costs, etc. The information is then
used to arrive at a per dollar manual rate.
MS. BURKE said, "For every $100 worth of payroll, $5.50 was paid
out by this classification of people. The proposed legislation
specifically states that these rates will be used in this group.
So we're starting from the same point. How can you, as an
employer, have any impact on what you're paying? Experience. How
many accidents did you have? How many dollars did you, as an
employer incur for an injured employee. You start out with a
manual rate and for just discussion purposes, lets say it's $100.
If you haven't had a lot of accidents over the past years, you get
an experience rate that drops you lower than $100. If you have had
a lot of accidents, you can be $100 plus. This is where the
employer's safety program loss control pays off. This is available
to every employer in the state of Alaska, whether they're a
participant in this pool, insured by any company. The experience
modifier is there and you are rewarded or punished by what happens.
The proposed legislation says this is the method that will be used.
It is already available through the current system that they have.
This concerns me because I don't see where the proposed savings
will necessarily come out."
MS. BURKE said Mr. Taylor referred to peer pressure and said she
would agree that it is very effective. That same pure pressure can
also work to keep classification rates down. Ms. Burke said,
"Right now, if fellow competitors out there are unsafe, they're
driving the manual rate up for you and you're paying part of their
lack of safe environment."
MS. BURKE said there was a reference made to reciprocal statutes,
21.75. She said, "I'd like to add to that we had proposed this to
this group as legislation that already exists. We have two
excellent examples. Timber, as Mr. Block referred to, has been
around since 1980, worked very well. The Alaska Rural
Electrification Group is also another example and has been around
since 1983 - worked quite well. These reciprocals pay premium tax,
they're subject to all of the oversight, all of the prohibitions
against unfair practices, all of the provisions that require they
participate in the guarantee fund. The reciprocal statutes also
provide a means where you reach a point where you are no longer
jointly and severely liable. As the group gets more money and
reserves, they don't have to look to their members to make good.
They've got the money there. These have worked quite well. The
key there and the difference I would say that between the proposed
legislation and statutes in 21.75 is the solvency issue - the money
that they had when they started. Not the individual members, but
the group had the money, $1 million, the group - the money was
already in there plus an additional $500,000."
MS. BURKE said the state of Alaska has a healthy workers comp
market. She referred to the question that was raised as to what
would happen if the number insurers get less in the state, insurers
won't want to stay here and write insurance for small groups. It's
not profitable to them. Our competitive market would be at risk.
Number 2290
MS. BURKE said, "To give you an example of what has happened in our
market this past year, the statistical data showed that we could
lower the workers' comp premiums - that manual rate that I was
talking about, and I signed the order lowering overall the workers'
compensation premiums in the state of Alaska 10.3 percent. Now
there were some that increased, there were some that decreased as
much as 38 percent in one year. This is the continuation of a
trend that started after major legislation in 1988, when the whole
system was overhauled, we have been on a downward trend. This
reflects the management of claims, the loss control. The most
effective thing in the world is don't let the accident happen.
Work safe. If there is an accident, manage the recovery, work with
the injured party to get them productive and even if it's on a
modified return to work program, but work with them. This has paid
off for the businesses in the state of Alaska, it's paid off
handsomely. I think the cumulative decreases about 40 percent
since 1988."
Number 2446
REPRESENTATIVE COWDERY asked what the size is of companies are that
self-insure.
MS. BURKE responded, "The larger companies, lots of employees with
a net worth that is substantial enough that they can personally
keep these risks, the BPs, the Arcos, the Carr-Godsteins, these are
all examples - the municipality of Anchorage. They all have to...
TAPE 97-15, SIDE A
Number 001
REPRESENTATIVE COWDERY asked who would manage the pool.
MS. BURKE responded that as stated in the bill, they would have a
board of trustees. The make up of the trustees is spelled out and
they would contract with a third party administrator. She noted
there are a number of duties that the Division of Insurance would
assume that are not part of their normal regulatory duties, they're
more administrative rather than regulatory.
Number 085
REPRESENTATIVE SANDERS said it looks like there are about 300
businesses and it takes 5 businesses to form a pool. He referred
to the fiscal note and asked if there wouldn't be a lot of
difference in the division's costs if one pool was formed with 300
members rather than forming 60 pools with five members each.
MS. BURKE said the premium tax would be the same - the lost revenue
to the state.
REPRESENTATIVE SANDERS asked if that is what the division's fiscal
note reflects.
MS. BURKE explained the premium tax would be the same - the lost
revenue to the state.
REPRESENTATIVE SANDERS again asked if that is what the fiscal note
reflects.
MS. BURKE said they also made an assumption that other groups would
follow. She said it is an estimate based on the premium of those
groups.
REPRESENTATIVE SANDERS said there is nothing in the division's
fiscal note that reflects oversight over these groups.
MS. BURKE said there are three numbers. One is loss of premium tax
revenue. There is also a fiscal note indicating (indisc.)
administrative duties that the division would have to assume. She
said a issue that hasn't been addressed is the fact that insurers
pay fees to the division to perform the duties that they do in a
regulatory basis. The amount that is proposed in the bill to be
paid to the division is $500. Insurers currently pay $2,500.
Number 253
REPRESENTATIVE RYAN asked where the state of Alaska's liability
comes in if it doesn't work. He asked if there has been any court
experience with this if it were deemed the state was negligent by
not taking the proper precautions.
MS. BURKE said, "That issue is open, I don't know what would
happen. It is not an insurer. It does not have the safeguards to
keep the state from being liable. I think it would be a finding of
fact whether the state would have to assume the liability. It does
say that these monies are payable to the state and the state will
pay it out in claims. What if there is not enough money? That's
not addressed. I don't know if the state would be liable or not.
I would assume there is always that real possibility of they've got
an injured person out there and they don't have any money and no
ones paying their medical bills and feeding their family. They're
going to go on state programs to pay those medical bills."
Number 394
AL WILSON, Member, Alaska State Homebuilders Association, came
before the committee to testify on HB 116. He noted he builds
homes in Juneau. Mr. Wilson said he employees four to five people
seasonally. He informed the committee under the current system of
workers' comp he pays the same rate, which is $17 per hundred on
payroll. He pays that for a journeyman carpenter and a high school
kid that is on summer break. This serves as a disincentive for
hiring inexperienced or young people into the trade. If they
convert to a self-insuring system, his workers' comp rates would be
reduced through rebates and the potential savings would allow him
to hire additional employees as well as the high school person that
needs training to become employable in the industry. Additionally,
the self-insured system emphasizes safety on the job because a
reduction in work related accidents results in rebates to the
members of the groups. Mr. Wilson explained that currently, he
could be the most safety conscious builder on the block and it has
absolutely no bearing to his workers' comp rate. Everyone pays the
same. Under the self-insured system, the more safety conscious
they are, the more they save. Mr. Wilson said the size of the
Alaska State Homebuilders Association has been called into question
by some people. The argument is that 850 members aren't enough to
make self-insurance financially feasible. He said in review of
other states that have allowed self-insuring clearly shows that
this is not the case. Mr. Wilson discussed the New Mexico and
North Carolina self-insurance programs. He told the committee that
the most important measure of the bill is the focus it brings to
accident prevention and the injured worker. Saving money on
workers' comp rates and maintaining the highest quality of safety
on job sites is a win-win situation. He urged the passage of HB
116.
Number 667
LINDA HALL, Commercial Insurance Broker, Alaska Independent
Insurance Agents and Brokers, was next to come before the committee
to testify in opposition to HB 116. She noted her organization is
a trade association of independent agents across the state who work
with employers and their clients and represents multiple insurance
companies. Ms. Hall said her organization opposes the bill in two
areas. One is a general concern with the effect on the insurance
marketplace. The other concern is with some of the actual
provisions. The workers' compensation market currently in Alaska
is the strongest most of us have ever seen it. There are
increasing numbers of new companies writing business here and it
has been a profitable market. Within the last month, a new company
came into Alaska specifically targeting those premiums the
committee is talking about today, the $1,000 to $20,000 premium
range. There has been a point where that was a difficult type of
risk to place, but there are markets interested in Alaska and
interested in Alaska businesses. Work comp rates have increasingly
gone down since the work comp reforms in 1988. Overall, there has
been a 40.1 percent decrease in workers' compensation rates.
Director Burke referred to a 10.3 percent rate decrease. The
carpentry rate for two family dwellings has gone from $16.30 to
$11.71 in 1997, which is a 28 percent decrease. She said they feel
that other employers who have adequate safety protections and a
good loss record can obtain additional credits. There are credits
currently in the marketplace anywhere from 10 percent to 40
percent. Ms. Hall said, "It is a market that has benefitted all
Alaskan employers and they are very concerned if we start taking
specific industry groups, pulling them out of that overall market,
the effect on the remaining Alaska work comp marketplace will be
very detrimental."
MS. HALL explained that the workers' compensation premium in Alaska
overall is a very small portion of the premium nationally. If we
have insurance companies looking for places to invest their assets
and resources, they are going to want a sufficient amount of
premium to make that worth their while. If we allow specific
industry groups to pull the premium out, soon we don't have a
premium base that attracts new companies and we won't have the type
of marketplace we are currently seeing. She said they are
concerned about the affect on employers who don't qualify for self-
insurance groups.
Number 853
MS. HALL said HB 116 sets up a new chapter for self-insurance
groups. This chapter specifically states in its scope that the
groups would not be subject to the provision of the insurance laws
except as specified in the chapter. This means they are not paying
premium tax, they're not contributing to guarantee funds and it
sets them up with an unfair financial advantage. It sets them up
with an unfair advantage against insurers who have to pay those
costs and other employers who aren't eligible for those groups. It
also takes away protections that are currently in insurance
statutes. Ms. Hall said there has been testimony about asking
members to leave a group if they didn't follow safety procedures.
There would be no anti-discrimination statutes. The Unfair Claims
Settlement Practices Act of the insurance chapters would not apply
to these groups.
MS. HALL said the rates mandated in the bill are manual rates.
Those are mandated to be charged for five years. She said, "If
we're talking charging manual rates, we're talking the same rates
insurers are charging right now. We are talking about additional
administrative expenses for reinsurance, excess insurance, audits,
administration, third party administrators. There is a whole list
of expenses outlined in this bill. I'm not sure that I understand
how we save money when we're mandating charging manual rates for
five years, we're talking all kinds of insurance requirements to
the point I'm not sure where we really have any room left to save
rates." Ms. Hall said there are already in statute provisions for
reciprocal insurers, provisions for purchasing groups that would
allow various associations to put together a mechanisms to solve
some of the other types of problems that they may see in their
industry. She thanked the committee for listening to her.
Number 1023
REPRESENTATIVE COWDERY asked Mr. Hall to discuss the off-shore
markets.
MS. HALL said the off-shore markets are typically set up to avoid
regulation. It is a different type of regulation and it may be
foreign insurers, it may be what are called "captives."
Frequently, the off-shore markets are captives, a large
conglomerate may form its own insurance company called the
"captive," to write its own insurance and spread out into other
types of insurance. Bermuda is very attractive to captive insurers
and they don't need the types of requirements that U.S. regulators
have.
REPRESENTATIVE COWDERY asked if they have been a problem in Alaska.
MS. HALL said she isn't aware of any problems. They do crop up
occassionally, but she believes there have been very diligent
efforts to see that they don't enter our marketplace.
Number 1122
PAUL GROSSI, Director, Division of Workers' Compensation,
Department of Labor, came before the committee to testify on HB
116. He said he would agree that there are some concerns with the
bill that relate to solvency. The Department of Labor is concerned
that injured workers are not going to be paid. There are still
some deficiencies which Ms. Burke has pointed out. Mr. Grossi said
he doesn't see how the financial viability of a group can be judged
without being able to judge the financial viability of individual
members. Mr. Grossi said, "That seems to me that that would be the
first thing that you would address. And I would say that we
require, we being the Division of Insurance if I'm a laborer I'm --
for self insurers to file their audited financial statements when
they're coming into make an application originally -- three past
years. And then annually, we require them to file an updated
audited financial statement. We know what their financial
conditions are yearly. Under Title 23 we approve certificates of
self-insurance for individual employers."
CHAIRMAN ROKEBERG asked, "For what type of insurance?"
MR. GROSSI responded it is for an individual employer so they can
pay workers' compensation benefits. He noted they do require the
individuals to be highly capitalized. He said, "For example,
getting the minimum asset a $1 million for this group, we do
require $5 million in assets for an individual employer. And we
can't see why these groups should be held to a lesser standard.
Maybe they could be, but it would seem to me that you would at
least want to require -- if the $1 million is going to required as
assets, they should be liquid because, of course, you've -- I don't
want to get into repeating a lot of the same testimony, but the
premium that's established under the statute - the proposed statute
is so small that if you had one serious injury -- say the first
injury, say Marianne approves the certificate and the first injury
you have is a very serious injury and there is $75,000 worth the
medical benefits and indemnity benefits that are due. If you don't
have a proper amount of excess insurance or if the excess insurance
isn't low enough, you've exhausted your $43 or $62,000 worth of
cash and if the five members in the group are really just five guys
in pickup trucks and tools and some heavy equipment and a tractor
trailer, then you're insolvent. You're insolvent immediately and
that is our concern. Is there enough money here to pay workers'
compensation claims. There are some safeguards in that in the
security deposits, but again you have to be insolvent to get to
those. So we're wondering if the groups, themselves, are not
allowing themselves enough funding to take - so they can guarantee
solvency."
MR. GROSSI said there should be some requirement for a guarantee
association in case the entities do go belly up. Mr. Grossi said,
"How are individuals going to be paid for compensation payments
especially if there is over the short run until we -- some of these
things can be made - some of these assets can be made liquid and
money can be had from the securities - other deposits."
MR. GROSSI said he doesn't know what the proper number of members
in the group should be, but suggested there should be a minimum
number of employees in the group. He said his division requires at
least 100 employees for an individual employer. This is a way to
assure that an entity is viable.
Number 1543
ROBIN WARD, Member, Alaska State Homebuilders Association, came
before the committee to testify. She said they want to make sure
their workers are taken care of. The association has worked with
the Division of Insurance and the Division of Workers'
Compensation. She said her association is willing to sit down and
work out some of the concerns as this would be a long term
investment and they would be at risk for a long long time. She
said they want to make sure that what they are doing is right. Ms.
Ward asked the committee to keep in mind that this is successfully
working in 14 states. She said they used the model legislation
from those 14 states. There is a pattern of success by using the
models where they have reduced the actual number of claims and have
returned some of that premium back to the members, and have lowered
their operating costs to reach the goal of affordable housing.
MS. WARD said, "Reinsurance is we would pay the first section.
What that section is is how we negotiate how we negotiate with our
reinsurance. If it's $10,000 -- so I guess what I'm saying is even
if we start out with $45,000, you'd have to have four catastrophic
injuries right away to deplete that because if it's $10,000, they
kick in after that $10,000. We planned on putting it out to the
agents. We will be another market for them to broker - agents
broker insurance - all they do - they get a commission for writing
insurance just like they would with any of the other commercial
entities. So they would use us as one of their markets. And so
they could write us or they could write someone else. Rather than
kicking people out of our group, we would rather put them on
probation, bring in a team of peers and help them work out their
problems. We don't want to kick anybody out. Once we've invited
them in we want to keep them in there. And the records in other
states show that 90 percent stay in and reinsure and are able to
stay in because they're educated on job site safety and we also
have the ability that we do not today to have some hands on
management of our claims. We want to make sure that fraud is
investigated. Someone who doesn't deserve work comp provisions
shouldn't get them. We want to make sure that the workers get back
faster if there is any possibility of doing it. So those are some
of our goals, but again I want to reiterate that we're more than
willing to sit down and work out some of our concerns. This is,
and legislation is meant to be, the framework, the guidelines. We
fully expect to sit down and write regulations that cover some of
these details."
Number 1615
CHAIRMAN ROKEBERG asked Ms. Ward why her association wouldn't
consider the availability of the reciprocal agreements or a
reciprocal organization that is available under existing state law.
MS. WARD said, "Because it does have the higher -- we firmly
believe, and if we need to look at making that $1 million of assets
liquid, we will certainly look at that. We do not believe and I
again -- no one has shown us statistics that you need $5 million.
That may be the requirement, but I'm not sure anybody has ever used
that and I would like to see something where they have. We feel $1
million, based on other states, is enough to have. That doesn't
mean that -- remember that's only the minimum. That doesn't mean
that's what we're going to do. As we build up surplus reserves, we
may cash that in - make it money that the group actually owns and
take those assets that are pledged give them back to our members.
We all don't want to live for the next 20 years with our assets
pledged to this group. So most of the other states have put in
more reserves and invest it and keep it in there and then give out
benefits on the investment of that, but there are provisions that
are much more restrictive in the reciprocals and the exchanges."
MS. WARD asked the committee to remember that the way the
legislation is drafted, almost everything is under the director's
approval.
Number 1809
CHAIRMAN ROKEBERG asked Ms. Burke to provide the committee with the
history on the rate reductions over a ten year period. He
suggested she also give some examples of organizations such as the
Alaska Homebuilders Association. Chairman Rokeberg said HB 116
would be held over.
ADJOURNMENT
Number 1826
There being no further business to come before the House Labor and
Commerce Committee, CHAIRMAN ROKEBERG adjourned the meeting at 5:28
p.m.
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