Legislature(2001 - 2002)
04/15/2002 03:25 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
April 15, 2002
3:25 p.m.
MEMBERS PRESENT
Representative Lisa Murkowski, Chair
Representative Andrew Halcro, Vice Chair
Representative Kevin Meyer
Representative Pete Kott
Representative Norman Rokeberg
Representative Harry Crawford
Representative Joe Hayes
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 429
"An Act relating to certain licenses for the sale of tobacco
products; relating to tobacco taxes and sales and cigarette tax
stamps; relating to provisions making certain cigarettes
contraband and subject to seizure and forfeiture; relating to
certain crimes, penalties, and interest concerning tobacco taxes
and sales; relating to notification regarding a cigarette
manufacturer's noncompliance with the tobacco product Master
Settlement Agreement or related statutory provisions and to
confiscation of the affected cigarettes; and providing for an
effective date."
- MOVED CSHB 429(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 246
"An Act relating to confidentiality of records and to cease and
desist orders of the division of insurance, to insurance company
investments, to unauthorized insurers, to surplus lines
insurance, to health insurance, to life insurance, to annuity
insurance, to consumer credit insurance, to title insurance, and
to hospital and medical service corporations; and providing for
an effective date."
- MOVED CSHB 246(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 66
"An Act relating to pesticide use; and providing for an
effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 429
SHORT TITLE:TOBACCO TAXATION; LICENSING
SPONSOR(S): RLS BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/15/02 2282 (H) READ THE FIRST TIME -
REFERRALS
02/15/02 2282 (H) L&C, JUD, FIN
02/15/02 2282 (H) FN1: (REV)
02/15/02 2282 (H) GOVERNOR'S TRANSMITTAL LETTER
04/03/02 (H) L&C AT 3:15 PM CAPITOL 17
04/03/02 (H) Heard & Held
04/03/02 (H) MINUTE(L&C)
04/08/02 (H) L&C AT 3:15 PM CAPITOL 17
04/08/02 (H) Scheduled But Not Heard
04/10/02 (H) L&C AT 3:15 PM CAPITOL 17
04/10/02 (H) Heard & Held
MINUTE(L&C)
04/15/02 (H) L&C AT 3:15 PM CAPITOL 17
BILL: HB 246
SHORT TITLE:OMNIBUS INSURANCE BILL
SPONSOR(S): LABOR & COMMERCE BY REQUEST
Jrn-Date Jrn-Page Action
04/17/01 1015 (H) READ THE FIRST TIME -
REFERRALS
04/17/01 1015 (H) L&C, JUD
04/15/02 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
NEIL SLOTNICK, Deputy Commissioner
Office of the Commissioner
Department of Revenue
PO Box 110405
Juneau, Alaska 99811-0405
POSITION STATEMENT: During the hearing on HB 429, he discussed
a formula to eliminate any additional competitive advantage
being provided by the discount.
MIKE ELERDING
Northern Sales Company of Alaska
PO Box 8112
Ketchikan, Alaska
POSITION STATEMENT: During hearing on HB 429, testified that he
was not opposed to stamping itself, however, he expressed the
need to pass an unfair trade practices law before requiring
stamping.
BOBBY SCOTT, Vice President
Jan's Distributing, Inc.
1807 W. 47th Avenue
Anchorage, Alaska 99517-3164
POSITION STATEMENT: During hearing on HB 429, testified that
the governor's fiscal notes don't address any of the actual
problems with regard to curbing the black market sale of
cigarettes.
BOB GALOSICH, Vice President
Wholesale Operations
Alaska Commercial Company;
Operator, Frontier Expediters
(No address provided)
POSITION STATEMENT: Testified in opposition to HB 429.
JOHANNA BALES, Revenue Auditor
Tax Division
Department of Revenue
550 W. 7th Ave., Suite 500
Anchorage, AK 99501
POSITION STATEMENT: Answered questions with regard to HB 429.
BOB LOHR, Director
Division of Insurance
Department of Community & Economic Development
3601 C Street, Suite 1324
Anchorage, Alaska 99503-5948
POSITION STATEMENT: Presented HB 246.
KATIE CAMPBELL, Actuary L/H
Division of Insurance
Department of Community & Economic Development
PO Box 110805
Juneau, Alaska 99811-0805
POSITION STATEMENT: Answered questions during hearing on HB
246.
ACTION NARRATIVE
TAPE 02-57, SIDE A
Number 0001
CHAIR LISA MURKOWSKI called the House Labor and Commerce
Standing Committee meeting to order at 3:25 p.m.
Representatives Murkowski, Halcro, Meyer, Crawford, and Hayes
were present at the call to order. Representatives Kott and
Rokeberg arrived as the meeting was in progress.
HB 429-TOBACCO TAXATION; LICENSING
CHAIR MURKOWSKI announced that the first order of business would
be HOUSE BILL NO. 429, "An Act relating to certain licenses for
the sale of tobacco products; relating to tobacco taxes and
sales and cigarette tax stamps; relating to provisions making
certain cigarettes contraband and subject to seizure and
forfeiture; relating to certain crimes, penalties, and interest
concerning tobacco taxes and sales; relating to notification
regarding a cigarette manufacturer's noncompliance with the
tobacco product Master Settlement Agreement or related statutory
provisions and to confiscation of the affected cigarettes; and
providing for an effective date."
CHAIR MURKOWSKI reminded the committee that some time ago the
committee heard the Department of Revenue's introduction of HB
429 and some limited public testimony. Since that time, the
committee has received a couple of amendments. She informed the
committee that she has been working with the department as well
as Mike Elerding, who had expressed concerned with regard to how
the stamping procedure would take place in Alaska. There was
concern that local Alaskan distributors would be at a
competitive disadvantage with those large out-of-state
businesses who already perform tax stamping. She said that
there was the hope that something could be worked out that would
allow the department to eliminate/limit the amount of cigarette
contraband while allowing small Alaskan businesses to compete.
Number 0238
NEIL SLOTNICK, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, informed the committee that the
department did consider Mr. Elerding's proposal that the
stamping be required to take place in Alaska. However, Mr.
Slotnick suggested that the aforementioned requirement not be
pursued because he believes there would be serious
constitutional problems. Requiring the stamping to take place
in Alaska would exclude an interstate business from
participating in Alaska trade. The U.S. Supreme Court is chary
of allowing states to use their tax code to create a competitive
advantage for in-state businesses versus out-of-state interstate
businesses. Furthermore, Mr. Slotnick said he believes it would
create difficulties for certain retailers who have done all they
can to work with Alaska and comply with our tax. Moreover, such
a requirement wouldn't address the competitive advantage the
large wholesalers would have. Mr. Slotnick noted his agreement
with Mr. Elerding that there is an economy of scale in stamping
these cigarettes.
MR. SLOTNICK reminded the committee that in the original
legislation he had proposed a split discount rate in which the
distributor who stamps the cigarettes would keep a small portion
of the tax in order to compensate that distributor for their
costs. That split discount rate was in recognition of the
aforementioned economies of scale. In discussions with Mr.
Elerding, Mr. Elerding proposed a three-tiered discount rate.
Mr. Slotnick said that the goal was to make stamping neutral so
that the cost per cigarette so that everyone's cost per
cigarette was approximately the same regardless of the size of
the wholesaler. The discount worked out to be about eight-
tenths of a cent per cigarette per stamping for most of the
wholesalers. The proposal was that for $1 million or less in
stamps, a 3 percent discount would be given. For all purchases
of stamps between $1 million to $2 million there would be a 2
percent discount. Above $2 million but not more than $5 million
there is only a .5 percent discount. Stamp purchases above $5
million don't receive a discount. This is the best formula that
could be developed to eliminate any additional competitive
advantage being provided by the discount.
Number 0563
CHAIR MURKOWSKI requested that Mr. Slotnick provide her with
some idea as to [which wholesalers] fall where [in regard to the
amount of stamps purchased]. She asked if there would be any
wholesaler that would purchase over $5 million and which
wholesalers would fall into the category that receives the 3
percent discount.
MR. SLOTNICK answered that he could only say, due to
confidentiality, that there would be wholesalers that would fall
in both categories.
CHAIR MURKOWSKI asked if it would be the Wal-Mart and Costco
type stores that would have volumes over $5 million. She said
that she was trying to understand whether there would be a local
Alaskan distributor that would fall in the over $5 million
category.
MR. SLOTNICK indicated that the big box wholesalers do represent
the largest category and those big box wholesalers have told the
department that they probably will be stamping in the state,
although there has been no firm commitment.
MR. SLOTNICK, in response to Representative Meyer, answered that
this legislation only addresses cigarettes because the stamp was
too difficult to place on the other tobacco products. There is
no state that requires a stamp on other forms of tobacco because
there is no automation available to stamp those products. The
legislature has made a policy decision that individual
importation of other tobacco products without the stamp
liability is acceptable.
Number 0798
MIKE ELERDING, Northern Sales Company of Alaska, noted that the
committee packet should include his written testimony. House
Bill 429 seeks to create a tax stamp for cigarettes in Alaska.
Currently, only four states, including Alaska, don't have some
form of tax stamping. Alaska is also among the minority of
states that doesn't have an unfair trade practices law. Mr.
Elerding informed the committee that his concern with HB 429 is
related to the unfair trade practices used by a number of
nationally recognized chain stores in Alaska. These stores are
selling cigarettes at or below cost. Basically, these stores
are using cigarettes as a loss "leader" to attract shoppers.
Furthermore, predatory pricing practices make it extremely
difficult for Alaska-based distributors to make a profit on the
products sold. For every $1 profit [distributors] make on
cigarettes, the State of Alaska makes a profit of $14.29. The
wholesale list price to the large grocers in Juneau is $14.29.
Mr. Elerding directed the committee to a chart in the committee
packet entitled, "Juneau, Alaska - April 2002 Wholesale List
Price $39.12." He explained that of the $39.12 wholesale list
price for a [carton of cigarettes], $26.81 represents the
[wholesaler's] cost to the manufacturer, which amounts to 68
percent. The state receives $10 [per carton], which amounts to
26 percent. The City & Borough of Juneau's excise tax is $1.61
[per carton], which is 4 percent. He noted that the City &
Borough of Juneau and the Municipality of Anchorage are the only
two areas that charge an excise tax for cigarettes. The
wholesale distributor profit for Northern Sales Company of
Alaska is $.70 [per carton], which is 2 percent. Mr. Elerding
said that although he isn't making a lot of money on cigarettes,
there is at least one nationally recognized store in Juneau that
is selling cigarettes in Juneau below their cost. With stamping
there will be additional costs. Therefore, it's going to be
difficult for Northern Sales Company of Alaska to continue in
the cigarette business if the state doesn't develop an unfair
trade practices law. Mr. Elerding wasn't opposed to stamping
in and of itself, but the unfair trade practices law is
necessary before implementing a law requiring state wholesale
distributors to stamp cigarettes before selling them in the
state.
Number 1032
REPRESENTATIVE MEYER asked whether it's a fairly common practice
to have loss leaders to get people in the store in the hopes
that loss is made up on other items.
MR. ELERDING agreed with the premise suggested by Representative
Meyer. However, when it becomes a predatory practice it tends
to drive competitors out of business and seems illegal.
Furthermore, Mr. Elerding didn't believe it is in anyone's best
interest to continue to sell cigarettes below cost to the
detriment of local wholesalers. Mr. Elerding informed the
committee that there is only one manufacturer that makes
stamping equipment, and this manufacturer isn't currently doing
business in Alaska. This stamping equipment manufacturer can't
quote him a price for the stamping equipment and presently, this
manufacturer has no plans to establish maintenance for this
equipment. Mr. Elerding pointed out that [Northern Sales
Company of Alaska] sells about 350,000 cartons of cigarettes a
year, and therefore if there is a problem with the stamping
equipment, there would need to be an immediate fix to the
equipment. Mr. Elerding expressed the need for HB 429 to be
coupled with assurances that [a company] in Alaska would be able
to purchase the equipment to actually perform the stamping in
the state and receive maintenance for that equipment.
Number 1140
REPRESENTATIVE ROKEBERG expressed concern with Mr. Elerding's
comment that Alaska doesn't have an unfair trade practices
statute. Representative Rokeberg said there is an unfair trade
practices statute and surmised that perhaps [Mr. Elerding meant]
that Alaska's statute doesn't speak to predatory pricing.
Representative Rokeberg related his assumption that Costco and
Wal-Mart, due to their purchasing power, are able to obtain
cigarettes at a lower cost-to-goods-sold pricing. Therefore,
those businesses would still make a profit although they could
sell the cigarettes below what [Northern Sales Company of
Alaska] could in Juneau or Anchorage. Representative Rokeberg
asked if other states would consider such situations a predatory
practice.
MR. ELERDING explained that everyone, whether it's [Northern
Sales Company of Alaska] or Costco, purchasing [from the major
tobacco manufacturer] for the same exact invoice price.
Therefore, when one sels cigarettes at cost or below cost,
that's the same as the raw cost from the manufacturers invoice.
REPRESENTATIVE ROKEBERG remarked that he found it interesting
that there is a set wholesale price on a national basis.
MR. ELERDING interjected that it's also interesting that every
time Phillip Morris raises its prices so do RJ Reynolds and
Brown Williamson. The prices are exactly the same for the major
brands.
REPRESENTATIVE ROKEBERG asked if the freight on board (FOB) is
at a major distribution point.
MR. ELERDING answered that the FOB is the (indisc.) warehouse
out of Seattle. There is only one bonded warehouse in Alaska
and it's located in Anchorage.
CHAIR MURKOWSKI returned to the proposal for a four-tiered
approach.
MR. ELERDING said that he liked the approach, which he worked on
with Mr. Slotnick. In further response to Chair Murkowski, Mr.
Elerding agreed that the [four-tiered approach] would help level
the playing field somewhat for in-state distributors.
Number 1364
BOBBY SCOTT, Vice President, Jan's Distributing, Inc., testified
via teleconference. He noted his agreement with Mr. Elerding.
Mr. Scott turned to the governor's fiscal notes, which do not
address or target any of the actual problems with regard to
curbing the black market sale of cigarettes. He expressed
interest in obtaining statistics on that matter. Furthermore,
the $14.29 profit the state receives is "very real" as is the
additional costs the distributors would incur. Moreover, he
inquired as to who would be in change of enforcement of
stamping, which will probably be another cost to the taxpayers.
CHAIR MURKOWSKI recalled from the initial testimony that the
state doesn't have very accurate numbers with regard to seized
contraband material. She asked if the tiered approach helps Mr.
Scott's business in terms of competing with [out-of-state]
companies.
MR. SCOTT answered, "Other than having to add on extra employees
to run them, it might." He agreed that it's better than the
alternative of no discount.
Number 1484
REPRESENTATIVE ROKEBERG pointed out that Mr. Scott had indicated
in his written testimony, included in the committee packet, that
a stamping machine costs about $25,000. That cost didn't
include freight fees and the required maintenance agreement.
Representative Rokeberg inquired as to how many people would be
required to operate the stamping machine.
MR. SCOTT explained that a representative of RJ Reynolds
provided him with examples of [the number of employees] other
states have used. The RJ Reynolds representative specified that
at a minimum three people are required to operate the stamping
machine.
REPRESENTATIVE ROKEBERG inquired as to how often the stamping
machine would have to be run in order to deal with Mr. Scott's
volume of business.
MR. SCOTT replied that he couldn't answer that question.
REPRESENTATIVE ROKEBERG related, "I think it relates to this
issue about the amendment we have and you spoke to that. What's
that going to generate and see if you can either basically try
to recoup your costs by the discount amount because ... this
sounds like a private fiscal note, this bill, versus what we can
do to soften the blow to these people."
Number 1569
BOB GALOSICH, Vice President, Wholesale Operations, Alaska
Commercial Company; Operator, Frontier Expediters, testified via
teleconference. He informed the committee that Frontier
Expediters is a DBA (ph) and the wholesale arm of the Alaska
Commercial Company. The wholesale arm of the business employs
about 17 people. Mr. Galosich said that he couldn't provide the
committee with good numbers for cigarette sells in 2001 because
the company didn't sell cigarettes for nine months of 2001 due
to the municipal tax issue. However, Mr. Galosich estimated
that in 2002 sales and distributions to its 24 [Alaska
Commercial Company] stores will be approximately $20 million, of
which about half is from tobacco products. An inventory of
about $400,000 is maintained, including the $10 state tax in
Anchorage. Mr. Galosich said that he was adamantly opposed to
HB 429 as written because it adversely impacts small tobacco
wholesalers.
MR. GALOSICH said that [small tobacco wholesalers] operate on
thin margins for competitive reasons. Alaska is one of
approximately 17 states that do not have a minimum sell law.
This legislation would cause a substantial increase in operating
costs for the wholesaler and that would continue to place [the
small tobacco wholesalers] at a competitive disadvantage.
Although the discount structure would help, one must keep in
mind that in Alaska no one has stamping machines and no one has
ever done stamping. Therefore, there is the combination of an
investment, a learning curve, additional people costs, and air
rate that's going to contribute to costs in the beginning. Mr.
Galosich related his belief that no one has had enough time to
study exactly what the impact would be other than to say that it
would be a negative impact on business. Furthermore, the state
has been unable to quantify the amount of lost revenue due to
contraband cigarette sales. Mr. Galosich remarked that getting
contraband cigarettes in Alaska is difficult. "Do the existing
volumes justify the burden on the small businessmen in Alaska, I
don't think at this point that they do," he concluded.
Number 1746
CHAIR MURKOWSKI returned to Mr. Scott's questions. With regard
to the contraband, Chair Murkowski related that there doesn't
seem to be anything firm in terms of what the Department of
Revenue might expect to recover from any contraband.
MR. SCOTT specified that he wanted to know why the department
has such a sense of urgency with the implementation of this tax
stamp. Mr. Scott reminded the committee that he also inquired
as to who would enforce this.
MR. SLOTNICK deferred to Johanna Bales. However, he said that
the department cannot quantify the amount of contraband
cigarettes coming into the state, although there is knowledge
that it does happen due to Ms. Bales' work. Mr. Slotnick
related the hope that the contraband is small, but Hawaii, which
is also remote, became a quick target for importers of untaxed
cigarettes. Hawaii's stamp law significantly reduced the
contraband. Mr. Slotnick specified that the goal [with HB 429]
is to perform reasonable enforcement action; the department
doesn't want the state to be an attractive target for the
importers of untaxed cigarettes. With regard to enforcement,
Mr. Slotnick informed the committee that [the department] would
need at least two additional positions to help enforce this law.
Moreover, the department will cross-train with law enforcement
and investigative officials who are in the field, which will
include Village Public Safety Officers (VPSOs), troopers, city
police, investigators, department investigators, and the
Department of Health & Social Services. Additionally, Mr.
Slotnick expected that the public would report sightings of
unstamped cigarettes.
REPRESENTATIVE MEYER related his understanding then that this
stamp would ensure that the state tobacco tax is being paid. He
asked if there is a way in which the cities of Juneau and
Anchorage could also ensure that they receive their tax as well,
or will those cities need their own stamp.
MR. SLOTNICK answered that he believes the cities would need
their own stamp.
Number 1908
JOHANNA BALES, Revenue Auditor, Tax Division, Department of
Revenue, testified via teleconference. Ms. Bales said that the
only city she knew of that had its own [cigarette] stamp is New
York City. All the other states feel that the cities would have
to have a stamp designating that the tax is paid. One of the
problems with cities having their own stamp is that [the
department] has confidentiality statutes that don't allow it to
share information with the municipalities.
REPRESENTATIVE ROKEBERG inquired as to the percent increase in
revenue Hawaii experienced after implementing the [tobacco] tax.
MR. SLOTNICK answered that when the stamp was imposed, Hawaii
experienced a 25 percent increase in revenue collection.
MS. BALES, in response to Mr. Slotnick, specified that the
cigarette tax in Hawaii increased from about $.60 to $1.00 a
pack. Although She pointed out that it's difficult to decipher
the amount of total revenue Hawaii saw, Hawaii's collection
increased from $4 million a month before the stamp to $6.5
million a month in revenue [after implementation of the stamp].
REPRESENTATIVE ROKEBERG asked if the discounts in the amendment
would be sufficient to cover the costs of applying the stamps.
MS. BALES pointed out that [the department] has seen a 22
percent reduction in reported taxable cigarettes once Alaska's
tax rates increased. [The department] believes that is the
result of a combination of people who have stopped smoking or
cut back and bootlegging. Without a stamp, it's impossible for
the department to determine what makes up the 22 percent.
However, for every 1 percent increase, after implementing the
stamp, [the state] will receive $400,000 more in revenue each
year. A 10 percent increase would amount to an additional $4
million in revenue.
MR. SLOTNICK added that although this [discount proposal] won't
cover all the distributor's costs, it narrows it to less than
$.01 per cigarette. Mr. Slotnick related the belief that the
distributors will experience an increase in revenue if there is,
in fact, an increase in taxable sales. Mr. Slotnick
acknowledged that the discount rate could be changed so that it
covers all the distributor's costs, but it would result in a
much higher fiscal note. Furthermore, Mr. Slotnick reiterated
his belief that the distributors will experience an increase in
sales with the passage of HB 429 and thus the [discount
amendment] is generous.
Number 2072
REPRESENTATIVE ROKEBERG surmised then that Mr. Slotnick believes
[under HB 429] sales would increase, and therefore the increased
cost would be offset with the discount and the increased sales.
MR. SLOTNICK responded, "I'm not sure I'm willing to go quite
that far. I don't know whether they will, in fact, offset all
of their costs, but at least there's no competitive advantage."
REPRESENTATIVE ROKEBERG envisioned Wal-Mart or Costco doing this
with a stamp machine outside of the state, and perhaps doing so
cheaper.
MR. SLOTNICK said that the department expects there to be some
out-of-state stamping. He reiterated that [some of the larger
distributors] have indicated a high probability that they will
stamp in the state. Some of the smaller wholesalers who operate
out of Seattle and ship to remote communities will probably
stamp out of state.
CHAIR MURKOWSKI informed the committee that Mark Johnson,
Department of Health & Social Services, is present to answer any
additional questions regarding the tobacco enforcement aspect of
this. There were no questions of Mr. Johnson.
Number 2173
MR. ELERDING related that since the arrival of the national box
stores in Anchorage, the volume of cartons that move through the
bonded warehouse has steadily declined. Therefore, in Mr.
Elerding's opinion, the majority of the stamping by the larger
stores will be performed outside of Alaska.
CHAIR MURKOWSKI, determining there to be no one else to testify,
closed public testimony.
Number 2215
REPRESENTATIVE MEYER commented that he is having difficulty
getting excited about HB 429. Even with the amendments,
[stamping] could still hurt the small business wholesalers in
Alaska. He related that he wasn't convinced that Alaska has a
[tobacco] bootlegging problem.
CHAIR MURKOWSKI said that was her concern when the committee
first heard the bill. However, the proposal being discussed as
the four-tiered system addresses the competitive disadvantage
and levels the playing field a bit. She recognized
Representative Meyer's concern to be in regard to whether it's
necessary to have a stamping operation in this state. She said
the state doesn't want to be a target for contraband and she
questioned whether that would be the case if Alaska is one of
the last states to monitor [cigarette contraband].
REPRESENTATIVE MEYER recalled an earlier point with regard to
the difficulties of having a stamping machine in Alaska. The
only state that would be similarly situated would be Hawaii,
which has a larger population base that could fix a broken
stamping machine.
TAPE 02-57, SIDE B
REPRESENTATIVE MEYER expressed concern that there could be some
other inherent risks that could hurt the small businesses other
than the volume.
Number 2331
REPRESENTATIVE HAYES moved that the committee adopt Amendment 1,
which reads as follows:
Page 7, lines 23-27:
Delete: "For the first $1,000,000 in denominated
value of stamps purchased by a licensee under this
section in the same calendar year is equal to one
percent of the denominated values of the additional
stamps."
Page 7, line 31, following "AS 43.50.500-43.50.700.":
Insert: "The discount under this subsection is
equal to the sum of the amounts calculated using the
following percentages of denominated value of stamps
purchased by a licensee under this section in a
calendar year:
(1) $1,000,000 or less, three percent;
(2) the amount that is more than $1,000,000,
but not more than $2,000,000, two percent;
(3) the amount this is more than $2,000,000,
but not more than $5,000,000, 0.5 percent;
(4) the amount that is over $5,000,000, zero
percent."
There being no objection, Amendment 1 was adopted.
REPRESENTATIVE HAYES related his belief that it's probably safe
to assume that Alaska has some bootleg contraband because Alaska
is one of only four states that doesn't know. Amendment 1
places a safeguard in the bill, which Representative Hayes said
made him more comfortable. With regard to the concerns that
this stamping machine couldn't be fixed in Alaska,
Representative Hayes said he believes there are plenty of good
mechanics in the state who could probably fix it.
Number 2238
REPRESENTATIVE HALCRO moved to report HB 429 as amended out of
committee with individual recommendations and the accompanying
fiscal note. There being no objection, CSHB 429(L&C) was
reported from the House Labor and Commerce Standing Committee.
HB 246-OMNIBUS INSURANCE BILL
CHAIR MURKOWSKI announced that the next order of business would
be HOUSE BILL NO. 246, "An Act relating to confidentiality of
records and to cease and desist orders of the division of
insurance, to insurance company investments, to unauthorized
insurers, to surplus lines insurance, to health insurance, to
life insurance, to annuity insurance, to consumer credit
insurance, to title insurance, and to hospital and medical
service corporations; and providing for an effective date."
[The committee's discussion was directed at Version 22-LS0743\J,
Ford, 2/20/02.]
Number 2193
BOB LOHR, Director, Division of Insurance, Department of
Community & Economic Development (DCED), specified that in
[Version 22-LS0743\J, Ford, 2/20/02] there are two substantive
issues and some miscellaneous provisions. The bill contains a
number of confidentiality provisions, which would basically
require the Division of Insurance to protect the confidentiality
of insurance examination work papers in order to increase the
willingness of insurers to share confidential information with
the division during the examination process. Currently, the
division has the authority to compel the production of
documents, but at times the insurer will argue that production
to the division risks access to those documents by third party
litigators. The current protection in statute is somewhat
limited; the director has the authority to make documents
confidential when it is in the public interest and can do so for
as long as necessary to protect the confidentiality. The
statute basically provides for a situational standard that's
designed to be somewhat temporary. This [legislation] would
make [confidentiality] automatic with respect to certain
categories of documents. Mr. Lohr emphasized that this change
is important so that Alaska will remain accredited by the
National Association of Insurance Commissioners (NAIC), meaning
that Alaska meets the minimum national standards for financial
regulation of insurance companies. Furthermore, [this
legislation] would make it possible for the division to share
confidential information with federal and state regulators and
to receive documents that other states and the NAIC have
gathered about insurance companies. Mr. Lohr informed the
committee that the Washington State insurance commissioner will
not share investigative files with Alaska's Division of
Insurance under the current confidentiality standards. He
explained that Washington State wants a confidentiality
agreement on a case-by-case basis. Furthermore, Washington
State wants an agreement that is at least as protective as their
law. Washington State wants to avoid someone going to another
jurisdiction, such as Alaska, and seek production of documents
under that jurisdiction's public records act when those
documents weren't available directly from the insurance
regulators in Washington State.
Number 2068
CHAIR MURKOWSKI recalled the credit scoring legislation
introduced by Representative Crawford and the question regarding
whether aspects or insurers' records would be considered
confidential. She asked if the aforementioned would be an
example of the confidentiality provisions being discussed now.
MR. LOHR replied no and pointed out that the provisions
implicated by Representative Crawford's bill deal with rate
making. Within the rate-making statute there is a provision
specifying that once the division has concluded action on a
requested rate, all of the supporting documents related to that
rate request become public. Therefore, in order for an insurer
to get a credit scoring model approved, the insurer would have
to be willing for that model to become public. That provision
wouldn't be impacted by HB 246.
Number 2011
MR. LOHR returned to [Version J] and the Multiple Employer
Welfare Arrangements (MEWA), which consists of a group of
employers that form a pool to provide health insurance to their
employees. The division would like to encourage the formation
of financially sound MEWAs. Furthermore, Alaska wants to
attract additional responsible insurers and sound alternative
health insurance arrangements to the state. He noted that
competition in this area is desirable. However, the current law
requires MEWAs to obtain a certificate of authority as a health
insurer and thus requires the MEWA to maintain approximately $2
million of capital and surplus and file financial statements
that would be regulatory overkill, in Mr. Lohr's opinion. Mr.
Lohr pointed out that [Version J] establishes capital surplus,
reserve standards, financial reporting, et cetera that are more
appropriate to the structure and type of business in which a
MEWA engages.
MR. LOHR turned to the miscellaneous provisions of [Version J].
He noted that he has chosen only three examples of those
provisions. One of the provisions would establish fees for late
payment of premium taxes in order to encourage the timely
payment of premium taxes, which are general fund revenues.
Another provision would establish an annual fee to operate as a
joint insurance arrangement (JIA) in order to offset the
division's cost of enforcing the provisions of AS 21.76. Mr.
Lohr explained that JIAs aren't regulated as insurance entities
under state law. However, in order to preserve the competitive
playing field, each of the JIAs have frequently requested that
the division be the "competitive gatekeeper." The division
incurs an expense for doing the aforementioned and if those
expenses aren't covered by fees paid by the JIAs, then the
expenses would be recovered through the fees to the division
from the licensees. However, the division doesn't feel that
it's appropriate to cross subsidize JIA activities out of
licensing fees. Another provision would establish minimum
attachment points consistent with NAIC's model law for stop-loss
insurance policies that are purchased by employers to self-
insure their health insurance plans. These minimums will help
eliminate health insurance policies sold as stop-loss insurance
in order to avoid compliance with health insurance laws,
including guaranty issue, federal portability requirements, and
benefit mandates. Mr. Lohr related his belief that this
legislation isn't controversial because the text of this
legislation has been "shopped" to all interested parties of
which the division is aware. The division hasn't received
substantial opposition and thus wouldn't predict controversy
with regard to the provisions of the legislation.
REPRESENTATIVE CRAWFORD requested explanation of attachment
points and retention limits.
Number 1827
KATIE CAMPBELL, Actuary L/H, Division of Insurance, Department
of Community & Economic Development, explained that an
attachment point is the point at which the insurance would
actually kick in. Therefore, an employer who wanted to self-
insure their health insurance benefits while protecting
themselves from large claims or excessive numbers of claims
[would use] the attachment point. Ms. Campbell pointed out that
a small employer who wants to self-insure can't purchase a stop-
loss policy with a retention of less than $10,000 per claim.
Therefore, the employer would have to take the risk for any
amount below $10,000, on an individual claim. Ms. Campbell
explained that if the [attachment point] is low enough that all
the risk is on the insurance company [that is] health insurance
instead of stop-loss insurance. Stop-loss insurance policies
aren't subject to health insurance laws and thus the employer
wouldn't have credible coverage. A stop-loss policy isn't
health insurance, she specified.
MR. LOHR surmised that a self-insured party isn't subject to the
insurance code in the way that an insurer would be. Therefore,
if a self-insured party can eliminate all risk to itself by
virtue of a high deductible and a low attachment point, the
self-insured is [risk free] and still isn't treated as an
insurer.
REPRESENTATIVE ROKEBERG directed attention to page 12, line 25,
which specifies the regulated type institutions. "We're not
talking about a self-insured here," he asked.
MS. CAMPBELL explained that insurance companies actually write
the stop-loss policy, and therefore it's insurance, but not
health insurance. The [stop-loss insurance] is similar to
employer liability in which the employer purchases a stop-loss
policy to cover any losses incurred in their health plan over
the [specified] dollar amount.
REPRESENTATIVE ROKEBERG inquired as to how a MEWA would issue a
stop-loss insurance policy.
MS. CAMPBELL clarified that [a MEWA] would have to purchase a
stop-loss insurance policy. She related that the goal was to
cover anyone who could have a license to write an insurance
policy. Therefore, any stop-loss policy issued by anyone who
has a license to write insurance is subject to the same
standard, including the MEWAs. She agreed with Representative
Rokeberg that the self-insured can't be covered under the
Employee Retirement and Income Security Act of 1974 (ERISA).
Number 1609
CHAIR MURKOWSKI turned attention to the sectional analysis [done
by the Division of Insurance] and the definition of the health
care insurance plan [found in Section 36 of Version J on page
14]. The sectional analysis says, "The unintended consequence
is that individual short-term medical coverage must comply with
health benefit mandates." The sectional analysis goes on to
say, "This section amends the definition of health care
insurance plan in order to exclude short-term individual health
coverage from the benefit mandates." She asked if the
aforementioned means that under [Version J individual short-term
medical coverage] wouldn't be required to carry coverage for
prostrate screening and breast cancer screening.
MS. CAMPBELL replied yes and explained that this federal
definition wasn't translated into our laws accurately. The
intent was that it shouldn't apply to individual short-term
medical coverage, such as a three-month period when an
individual is between coverage. There are some insurers who
actually want to market such short-term coverage.
Number 1526
CHAIR MURKOWSKI surmised then that [Version J] is consistent
with the Health Insurance Portability and Accountability Act
(HIPAA).
MR. LOHR agreed, adding that HIPAA compliance is an important
element in keeping the federal government "off our back."
CHAIR MURKOWSKI related her understanding then that [Version J]
only takes on two policy issues: the confidentiality components
and the MEWA regulations.
MR. LOHR replied yes and added that there are other potentially
controversial provisions such as the possibility that JIAs might
believe paying any fee at all is inappropriate and thus oppose
it. Currently, there is an exemption under the surplus lines
taxation law for aircraft regularly engaged in interstate
commerce. This legislation proposes to change the language to
refer to "primarily engaged".
CHAIR MURKOWSKI inquired as to whether "primarily engaged" has
been defined.
MR. LOHR answered that it isn't defined in this legislation and
it may be an appropriate subject for regulation. The division
wanted to clarify the statute before taking on the regulatory
effort.
Number 1428
REPRESENTATIVE ROKEBERG directed attention to Section 35 on page
14 and inquired as to why that language was included.
MS. CAMPBELL explained that the insurance companies interpreted
the original provision to mean that they didn't have to provide
at least $1,500 [of coverage]. Therefore, this language merely
clarifies the original intent that a health care insurer can't
provide less than $1,500 per year. This was discovered when the
division reviewed the contracts.
REPRESENTATIVE ROKEBERG recalled the debate on this matter
revolving around why if someone didn't use all their benefit
that they would have to lose their benefit or why would the
insurer have to pay more if the $1,500 wasn't used.
CHAIR MURKOWSKI related her understanding that the insurance
companies interpreted the language to mean that they weren't
required to provide anything unless it was up to $1,500.
MS. CAMPBELL indicated that the original language "up to $1,500"
created the problem. The language in [Version J] specifies that
an [insurer] has to provide up to $1,500 of benefit.
REPRESENTATIVE ROKEBERG asked if the language in [Version J]
says that.
MS. CAMPBELL said, "So they have to provide at least $1,500 for
a covered person."
REPRESENTATIVE ROKEBERG inquired as to a situation in which the
person doesn't want to spend $1,500.
CHAIR MURKOWSKI said that the language doesn't seem to allow for
[coverage] of less [than $1,500].
Number 1256
REPRESENTATIVE ROKEBERG turned to Section 41 and interpreted
that section as adding MEWAs to the Alaska Comprehensive Health
Insurance Association (ACHIA).
MR. LOHR agreed with Representative Rokeberg's interpretation.
He added that the division is trying to broaden the base of
inclusion.
CHAIR MURKOWSKI returned to the current language relating to
diabetes education and pointed out that it says, "coverage for
the cost of diabetes training or education is limited to $1,500
for a covered person in a year."
MS. CAMPBELL explained that the insurance companies were
interpreting the existing language as allowing them to provide
benefits up to $3,000. In other words, the existing language
seemed to cap the benefit.
CHAIR MURKOWSKI recalled that the intent was not to put in place
an unlimited requirement that an insurer had to provide diabetes
education and training at an unrestricted amount. Therefore,
the $1,500 was a compromise. If the insurer wanted to provide
more coverage, the existing language was construed as
restraining.
Number 1146
MR. LOHR offered the following language: "The health care
insurer shall provide benefits not to exceed $1,500 and may
provide benefits in excess of this amount."
MS. CAMPBELL agreed that the aforementioned language might get
to the problem. Ms. Campbell pointed out that other benefit
mandates such as with alcohol and drug abuse and those
established limits haven't been interpreted to mean that if
someone didn't use it, the benefit still had to be paid.
REPRESENTATIVE ROKEBERG remarked that the language [in Section
35] isn't clear to the average person.
MS. CAMPBELL suggested that the language [in Section 35] could
refer to "coverage" rather than "benefits".
CHAIR MURKOWSKI agreed that the change to "coverage" seems
appropriate.
MS. CAMPBELL interjected that the term "limited" in the existing
statute seemed to cause the problem.
Number 1022
REPRESENTATIVE ROKEBERG moved that the committee adopt
conceptual Amendment 1, as follows:
Page 14, line 10,
Delete "benefits"
Insert "coverage"
There being no objection, conceptual Amendment 1 was adopted.
CHAIR MURKOWSKI noted that the committee packet includes several
amendments [to Version J] and asked whether Mr. Lohr cared to
speak to them.
MR. LOHR pointed out that the legislation seems to have an error
in which "small" and "large" are reversed and thus there is the
need to amend that. The change from "large" to "small" confirms
the lower retention limits for a smaller entity. It doesn't
make sense to have stricter standards for the large entity than
for the small entity. For actuarial purposes, the smaller
entity needs additional sidebars. The same amendment inserts a
section that references AS 21.07, the codified Patients' Bill of
Rights, and AS 21.18.080-21.18.086, the health reserving
standards. The addition of these references were included to
ensure that the provisions in the case of hospital medical
service corporations, of which Blue Cross is an example, [were
included]. He informed the committee that the Blue Cross
statute includes a provision that other provisions of the code
don't apply to them unless explicitly listed. Although Blue
Cross has treated the aforementioned provisions as if they
apply, a strict reading of the code wouldn't apply them as a
matter of law.
Number 0810
REPRESENTATIVE HAYES moved that the committee adopt Amendment 2,
which reads as follows:
Page 13, line 1
replace "large" with "small"
Page 13, line 8
replace "small" with "large"
Page 29, line 27
Insert new bill section to read:
*Sec. ____. AS 21.87.340 is amended by adding a
new paragraphs to read:
(22) AS 21.07;
(23) AS 21.18.080-21.18.086
There being no objection, Amendment 2 was adopted.
Number 0772
REPRESENTATIVE KOTT moved to adopt CSHB 246, Version 22-
LS0743\J, Ford, 2/20/02, as the working document. There being
no objection, Version J was before the committee.
The committee then proceeded to restate the motions for
conceptual Amendment 1 and Amendment 2, which were adopted again
without objection.
Number 0708
REPRESENTATIVE ROKEBERG moved that the committee adopt Amendment
3 [22-LS8004\A.5, Ford, 4/4/02], which can be found at the end
of this section of minutes.
REPRESENTATIVE KOTT objected for discussion purposes.
MR. LOHR explained that Amendment 3 addresses the property
casualty guaranty fund, which is set up as a backstopping
mechanism to protect the consumer. When a consumer purchases an
insurance policy, the consumer wants to know that the premium
dollars paid to the company will be used to provide the claims
coverage promised. If the company goes under, this mechanism
ensures that all other companies participate in a guaranty fund
designed to pay claims against insolvent companies. Mr. Lohr
said this works very well because it provides a level of
insurance to the insurance system. "Every company that is
participating in a line of insurance is required, as a condition
of that access to that market, to agree to pay its pro rata
share on claims based on its market share in that line of
insurance," he explained. It's very important that this
amendment be in place, he said.
MR. LOHR specified that Amendment 3 would change the mechanism
of calculating the assessment. Currently, the assessment is
done at the end of the year in which the insolvency occurs. For
example, if a company became insolvent August 15, 2001, at the
end of 2001 the assessment would be based on the market share of
each company in the workers' compensation or property casualty
market in Alaska for that year only. This legislation would
provide that one year later there would be an adjustment of that
assessment based on the market share that occurred during the
subsequent year [of insolvency]. He explained that it intends
to address the current situation in which a new entrant into the
market during the year [of another company's insolvency] would
bear no assessment for the failure of the other company.
However, the new entrant may inherit a lot of business due to
the failure of the other company and thus there wouldn't be a
level playing field in that market at that time. Based on a
recalculation of that assessment one year later, the new entrant
would pay its fair share based on its market share at the time
of the insolvency of the other company. In response to
Representative Rokeberg, the new entrant would have its
assessment calculated one year subsequent to the prior
assessment. Mr. Lohr commented that this [amendment] would
establish a level playing field that wouldn't allow the new
entrant to enter the market for free. Furthermore, this would
result in a proportionately lower assessment to each of the
other players in the market and thus the total market doesn't
change but rather is reallocated. Mr. Lohr noted that this
proposal has been submitted to the board of directors of the
guaranty fund, which he understood had no opposition to this
concept.
REPRESENTATIVE KOTT asked if [Amendment 3] would be the new
Section 50.
MR. LOHR answered in the affirmative.
Number 0288
REPRESENTATIVE ROKEBERG asked if the board of the guaranty
association has representatives from each of the firms
participating in the association.
MR. LOHR related his belief that the members of the board of the
guaranty association represent the largest insurers in the
market. Furthermore, he said he believes that the voting is
weighted proportional to the member's market share. He noted
that he has heard no opposition from this board and the language
was submitted to this board. He mentioned that he received e-
mail confirmation from the board's staff that the board was
comfortable with the language.
REPRESENTATIVE KOTT withdrew his objection.
Therefore, Amendment 3 was adopted.
Number 0130
REPRESENTATIVE MEYER moved that the committee adopt Amendment 4,
which reads as follows:
Page 5, line 19:
Insert new bill section to read:
*Sec.___. AS 21.09.200(a) is amended to read:
(a) Each authorized insurer shall annually,
before March 2, file with the director or his designee
a full and true statement of its financial condition,
transactions, and affairs as of the preceding December
31. The reporting format for a given year is the most
recently approved National Association of Insurance
Commissioners' annual financial statement blank form
and instructions, supplemented for additional
information as required by the director. The director
may require the statement to be filed on electronic
media. The statement shall be verified by the oath of
the insurer's president or vice-president, and
secretary, or, if a reciprocal insurer, by oath of the
attorney-in-fact or its like officers if a corporation
unless verification is waived by the director of
insurance. The filing locations will be published by
the director at least annually.
Page 5, line 24:
Insert new bill sections to read:
*Sec.___. AS 21.09.200(e) is amended to read:
(e) An insurer shall pay to the division
$100 for each day the insurer fails to file the annual
statement in the form and location required and within
the time established in (a) of this section. The
authority of the insurer to enter into new obligations
or issue new or renewal policies of insurance in this
state may be suspended by the director if the annual
statement has not been filed by March 1.
*Sec.___. AS 21.09.205(b) is amended to read:
(b) A quarterly financial statement, if
required, is due 45 [60] days after the end of the
quarter to which it applies.
Page 8, line 15:
Insert new bill section to read:
*Sec.___. AS 21.27.330(b) is amended to read:
(b) If a licensee that is a firm transacts
business at more than one place of business [IN THIS
STATE], the licensee shall pay a license fee for each
place of business.
CHAIR MURKOWSKI objected for the purpose of discussion.
MR. LOHR explained that that the amendment would allow the
director of the Division of Insurance to delegate responsibility
to receive these annual statements. Furthermore, it would allow
the division to indicate the location of the filing annually.
This would typically be done in the annual statement of
instructions that the division already publishes for insurance
companies. The amendment also deals with the location of the
filing and amends the deadline for filing from 60 days to 45
days after the end of the quarter. Therefore, an insurance
company has a month-and-a-half to submit the requirement, which
he said he believes to be consistent with NAIC's standards for
quarterly reports.
TAPE 02-58, SIDE A
MR. LOHR continued by pointing out that Amendment 4 inserts a
new section that deletes the language "in this state". He
explained that [the language was deleted] because it has been
argued by an outside nonresident applicant for a license that
this language means that those not located in Alaska don't have
to pay this license fee. However, the division feels that a
nonresident applicant should pay their fair share, he said.
REPRESENTATIVE MEYER asked if these are conceptual amendments.
CHAIR MURKOWSKI said that the drafter can work out the sections.
Number 0069
REPRESENTATIVE ROKEBERG turned to the last portion of Amendment
4, which inserts a new bill section on page 8, line 15. He
questioned the drafting.
MR. LOHR, in response to Representative Rokeberg, explained that
the argument is that if a [nonresident] applicant doesn't intend
to open an office in Alaska, those applicants shouldn't pay any
fee at all for multiple places of business.
REPRESENTATIVE ROKEBERG pointed out that the current language is
more ambiguous because it says "the licensee shall pay a license
fee for each place of business" regardless of the state. He
recommended leaving the language "in this state" in the bill and
including language that specifies that if the licensee doesn't
have a premise in the state, the licensee is still required to
purchase a license.
CHAIR MURKOWSKI asked if the language read "If a licensee that
is a firm transacts business at more than one place of business,
the licensee shall pay a license fee for each place of business
in this state." would address Representative Rokeberg's concern.
REPRESENTATIVE ROKEBERG said that the language could state, "A
business that has no premises in the state still must pay a
licensing fee."
MR. LOHR said he considered Representative Rokeberg's suggestion
as a friendly amendment.
REPRESENTATIVE ROKEBERG moved that the committee adopt an
amendment to Amendment 4 that would result in the new section to
be inserted on page 8, line 15, to read as follows: "If a
licensee that is a firm transacts business at more than one
place of business, the licensee shall pay a license fee for each
place of business in this state. If a licensee does not have a
place of business in this state, he is still required to pay a
license fee."
REPRESENTATIVE MEYER noted his acceptance of that amendment to
Amendment 4.
MR. LOHR said that the person that should be consulted is the
director of the Division of [Occupational] Licensing and the
licensing supervisor who suggested the amendment. He offered to
consult with the [licensing supervisor] and hold that portion of
the amendment until the next committee of referral.
Number 0394
REPRESENTATIVE ROKEBERG pointed out that the amendment could be
conceptual.
CHAIR MURKOWSKI said that she wasn't sure she understood because
she thought that one would pay a license fee based on the
locations, although it has been determined that there might not
be locations within Alaska.
MR. LOHR recommended deleting from Amendment 4, the following
language:
Page 8, line 15:
Insert new bill section to read:
*Sec.___. AS 21.27.330(b) is amended to read:
(b) If a licensee that is a firm transacts
business at more than one place of business [IN THIS
STATE], the licensee shall pay a license fee for each
place of business.
MR. LOHR said that the division can deal with the enforcement
issue through current statute, if necessary.
Number 0543
REPRESENTATIVE ROKEBERG withdrew his amendment to Amendment 4
and then moved to delete from Amendment 4, the following
language:
Page 8, line 15:
Insert new bill section to read:
*Sec.___. AS 21.27.330(b) is amended to read:
(b) If a licensee that is a firm transacts
business at more than one place of business [IN THIS
STATE], the licensee shall pay a license fee for each
place of business.
There being no objection, the amendment to Amendment 4 was
adopted.
CHAIR MURKOWSKI withdrew her objection to Amendment 4, and there
being no other objection, Amendment 4 [as amended] was adopted.
Number 0597
REPRESENTATIVE ROKEBERG remarked that the July 1, 2002,
effective date seemed unusual. For example, the omnibus
insurance bill had different effective dates for different
sections.
MR. LOHR said that he didn't believe the changes would require
substantive retooling by the insurers. Therefore, a uniform
effective date [seems appropriate].
REPRESENTATIVE ROKEBERG turned to the MEWA regulations and asked
if Mr. Lohr believes [this legislation] has lessened the burden
of entering in this market versus the current situation.
MR. LOHR answered, "Most definitely."
REPRESENTATIVE ROKEBERG requested an example of the amount of
money that [an insurer] has to put forth for their solvency
provisions upon operation.
MS. CAMPBELL directed the committee to the bottom of page 21,
which specifies that $200,000 must be deposited with the
director to cover insolvency. The language also requires a
written plan of operation and the insurer also has to submit
financial statements to assure stop-loss coverage.
MR. LOHR pointed out that the current insolvency requirement for
insurance companies is $2 million.
REPRESENTATIVE ROKEBERG asked if there is a provision that would
allow the money to be released once the plan reached a certain
size with a certain balance sheet.
MR. LOHR informed the committee that the capital surplus
requirement for an insurance company is a perpetual requirement.
These requirements are typically maintained on an interstate
basis. A multi-state insurance company isn't required to have a
separate dedicated capital surplus reserve for Alaska. The
insurance company is allowed to invest the aforementioned
[capital surplus revenue]. The capital surplus requirement is
maintained for the life of the company.
REPRESENTATIVE ROKEBERG asked whether the money would be
deposited with the directors of insurance in the various states.
MS. CAMPBELL explained that the $200,000 requirement is an
initial requirement occurring when the [company] qualifies to
become a MEWA. The requirement is certified and recommended by
a qualified actuary. Ms. Campbell pointed out that this
$200,000 is what the [insurer] is actually holding, no
additional money is being given to the director; there is merely
an initial deposit during startup.
Number 0863
REPRESENTATIVE ROKEBERG presumed that [the insurer] could dip
into the [$200,000] fund at a certain point or the director
would allow them the use of that money.
MR. LOHR noted that question has come up after the September
11th tragedy. The company must maintain the minimum capital
surplus requirement in order to be in good standing. A company
seeking a lower level of reserve would have to speak with the
regulator. Mr. Lohr informed the committee that Ms. Glover
should be available to discuss reserving requirements.
REPRESENTATIVE ROKEBERG turned to page 23, paragraph (5) [of
Version J] and inquired as to what that's about.
MS. CAMPBELL answered that ERISA requires that MEWAs hold
fidelity bonds. In further response to Representative Rokeberg,
Ms. Campbell said that the fidelity bonds have to do with the
solvency aspects. Unlike a health insurance company, these
MEWAs aren't covered under the guaranty fund and thus there are
some additional requirements.
Number 1007
MR. LOHR noted that there have been some MEWA wannabes which
have claimed that they are exempt from federal law because they
are state regulated and vice versa. In these situations, these
[companies] can be turning premium into personal income and
never pay a claim. It takes vigilant review and coordination
among state regulators to deal with these. Mr. Lohr said that
he wasn't sure that [the division] has been able to document any
at this time, although there have been some that are located in
other states and have written some business in Alaska. This law
would assist in [enforcement].
MR. LOHR, in response to Representative Rokeberg, said that the
division has had communications with the MEWA forming in
Fairbanks. At this time, that MEWA has been informed that it
must comply with the full-blown requirements of being an
insurance company. The division has also advised this MEWA of
HB 246.
REPRESENTATIVE ROKEBERG surmised then that without the passage
of this legislation, the MEWA forming in Fairbanks would be put
out of business.
MR. LOHR agreed that without this legislation, the requirements
would be burdensome.
Number 1164
REPRESENTATIVE MEYER moved to report CSHB 246, Version 22-
LS0743\J, Ford, 2/20/02, as amended out of committee with
individual recommendations and the accompanying zero fiscal
note. There being no objection, CSHB 246(L&C) was reported from
the House Labor and Commerce Standing Committee.
The following is Amendment 3:
Page ____, line ____:
Insert new bill sections to read:
"* Sec. ___. AS 21.80.060 is amended to read:
Sec. 21.80.060. Powers and duties of the
association. (a) The association
(1) is obligated to pay covered claims
existing before the order of liquidation and arising
within 30 days after the order of liquidation, or
before the policy expiration date if less than 30 days
after the order of liquidation, or before the insured
replaces the policy or causes its cancellation if the
insured does so within 30 days after the order of
liquidation, but this obligation includes only that
amount of each covered claim that is less than
$500,000, except that a covered claim for return of
unearned premium may not exceed $10,000 for each
policy, and except that the association shall pay the
full amount of any covered claim arising out of a
workers' compensation policy; the association is not
obligated
(A) to a policyholder or claimant in an
amount in excess of the obligation of the insolvent
insurer under the policy from which the claim arises;
or
(B) to pay a claim filed with the
association after the final date set by the court for
the filing of claims against the liquidator or
receiver of an insolvent insurer;
(2) is considered the insurer to the extent
of its obligation on the covered claims and to that
extent has all rights, duties, and obligations of the
insolvent insurer as if the insurer had not become
insolvent;
(3) shall allocate claims paid and expenses
incurred among the three accounts separately, and
assess member insurers separately for each account
amounts necessary to pay the obligation of the
association under (1) of this subsection subsequent to
an insolvency, the expenses of handling covered claims
subsequent to an insolvency, and other expenses
authorized by this chapter; under this paragraph,
(A) the assessments of each member insurer
must initially be based on a uniform percentage, as
determined by the association, of [IN THE PROPORTION
THAT] the net direct written premiums of each [THE]
member insurer for the last year for which annual
statements have been filed [CALENDAR YEAR PRECEDING
THE ASSESSMENT] on the kinds of insurance in the
account; this initial assessment shall be adjusted by
applying the same uniform percentage as initially used
to each member insurer's net direct written premiums
for the calendar year following the year in which the
initial assessment was issued; any difference between
the initial assessment amount and the adjusted
assessment amount allocated to a member insurer shall
be levied against or credited back to the member
insurer, as appropriate, by the association; the
association shall calculate and issue all appropriate
levies and credits as soon as practical after all
member insurers have filed their annual statements for
the calendar year following the year in which the
initial assessment was issued [BEARS TO THE NET DIRECT
WRITTEN PREMIUMS OF ALL MEMBER INSURERS FOR THE
CALENDAR YEAR PRECEDING THE ASSESSMENT ON THE KINDS OF
INSURANCE IN THE ACCOUNT; EACH MEMBER INSURER SHALL BE
NOTIFIED OF THE ASSESSMENT NOT LATER THAN 30 DAYS
BEFORE IT IS DUE];
(B) on an annual basis, the association
shall determine if funding is required for any of the
three accounts; based on this determination, the
association shall, during November of each year, issue
initial assessments as may be necessary to cover the
projected reasonable costs of claims and expenses to
administer the association for the following year; the
association shall use the services of an independent
actuary to assist the association to evaluate and make
the projection; an initial assessment may be made at
any other time if the association determines funding
is necessary, except that a member insurer may not be
assessed initial assessments [IN ANY YEAR] on any
account in an amount greater than two percent of the
member insurer's net direct written premiums for the
applicable calendar year [PRECEDING THE ASSESSMENT ON
THE KINDS OF INSURANCE IN THE ACCOUNT];
(C) the association may pay claims in any
order that it determines reasonable, including the
payment of claims as they are received from claimants
or in groups or categories of claims; however, if the
maximum assessment, together with the other assets of
the association in any account, does not provide in
any one year in any account an amount sufficient to
make all necessary payments from that account, the
funds available shall be prorated, and the unpaid
portion shall be paid as soon thereafter as funds
become available;
(D) the association may defer, in whole or
in part, an assessment of any member insurer if the
assessment would endanger the ability of the member
insurer to fulfill the insurer's contractual
obligations or cause the member insurer's financial
statement to reflect amounts of capital or surplus
less than the minimum amounts required for a
certificate of authority by any jurisdiction in which
the member insurer is authorized to transact
insurance; however, during the period of deferment,
the member insurer may not pay dividends to
shareholders or policyholders; a deferred assessment
may only be paid when the payment does not reduce
capital or surplus below minimums required by law; a
member insurer who pays a larger assessment as a
result of a deferment given to another member insurer
shall receive a refund when the deferment ends or, at
the election of the member insurer, receive a credit
against future assessments;
(E) each member insurer may set off against
an assessment authorized payments made on covered
claims and expenses incurred in the payment of these
claims by the member insurer if they are chargeable to
the account for which the assessment is made;
(4) shall investigate claims brought
against the association, adjust, compromise, settle,
and pay covered claims to the extent of the
association's obligation, and deny all other claims,
and may review settlements, releases, and judgments to
which the insolvent insurer or its insureds were
parties to determine the extent to which settlements,
releases, and judgments may be properly contested;
(5) may, subject to AS 21.89.100, appoint,
substitute, or direct legal counsel retained under an
insurance policy for the defense of a covered claim;
(6) shall handle claims through its
employees or through one or more insurers or other
persons designated as servicing facilities; a
servicing facility shall operate and maintain its
principal office in this state unless the use of a
servicing facility located outside of the state would
result in operating cost savings of at least 10
percent and would not result in material delay in
claim payments; designation of a servicing facility is
subject to the approval of the director, but
designation may be declined by a member insurer;
(7) shall reimburse each servicing facility
for obligations of the association paid by the
facility and for expenses incurred by the facility
while handling claims on behalf of the association and
shall pay the other expenses of the association
authorized by this chapter.
(b) The association may
(1) employ or retain those persons
necessary to handle claims and perform other duties of
the association;
(2) borrow funds necessary to effect the
purposes of this chapter in accord with the plan of
operation;
(3) sue or be sued;
(4) negotiate and become a party to those
contracts that are necessary to carry out the purposes
of this chapter;
(5) perform all other acts necessary or
proper to carry out the purposes of this chapter;
(6) retain amounts excess of claims,
expenses, credits, and other liabilities in any
account to be applied to reduce future assessments in
that account, except that, if, in any year, the
association determines that significant funds in
excess of projected claims, expenses, credits, and
other liabilities exist in an account, the association
shall return amounts to policyholders, through
procedures established by the association, whereby the
association reimburses member insurers for providing
uniform credits against rates and premiums charged for
all policies applicable to the account issued during
the next calendar year [REFUND TO THE MEMBER INSURERS
IN PROPORTION TO THE CONTRIBUTION OF EACH MEMBER
INSURER TO THAT ACCOUNT THAT AMOUNT BY WHICH THE
ASSETS OF THE ACCOUNT EXCEED THE LIABILITIES IF, AT
THE END OF ANY CALENDAR YEAR, THE BOARD OF GOVERNORS
FINDS THAT THE ASSETS OF THE ASSOCIATION IN ANY
ACCOUNT EXCEED THE LIABILITIES OF THAT ACCOUNT AS
ESTIMATED BY THE BOARD OF GOVERNORS FOR THE COMING
YEAR].
* Sec. ___. AS 21.80.070(c) is amended to read:
(c) The plan of operation must
(1) establish the procedures whereby all
the powers and duties of the association under
AS 21.80.060 will be performed;
(2) establish procedures for handling
assets of the association, including procedures for
handling assets received from the estate of an
insolvent insurer;
(3) establish the amount and method of
reimbursing members of the board of governors under
AS 21.80.050;
(4) establish procedures by which claims
may be filed with the association and establish
acceptable forms of proof of covered claims; notice of
claims to the receiver or liquidator of the insolvent
insurer is considered notice to the association or its
agent, and a list of these claims shall be
periodically submitted to the association or similar
organization in another state by the receiver or
liquidator;
(5) establish regular places and times for
meetings of the board of governors;
(6) establish procedures for records to be
kept of all financial transactions of the association,
its agents, and the board of governors;
(7) provide that any member insurer
aggrieved by a final action or decision of the
association may appeal to the director within 30 days
after the action or decision;
(8) establish the procedures whereby
selections of the board of governors will be submitted
to the director;
(9) provide for a member insurer serving on
the board of governors to appoint an individual to
represent the member insurer on the board, including
appointment of an alternate or substitute
representative for the appointed person;
(10) contain additional provisions
necessary or proper for the execution of the powers
and duties of the association;
(11) establish procedures whereby the
association shall, concurrent with making any initial
assessments for the following year under
AS 21.80.060(a)(3)(B), determine uniform surcharge
percentages that may be applied by member insurers to
all policies related to an account;
(12) establish procedures whereby the
association shall determine surcharge percentages
related to an account so that adjusted assessments
match, as closely as possible, the amounts that would
be collected by member insurers, in the aggregate, if
the surcharge percentages were applied to all new and
renewal policies issued by member insurers during the
applicable 12-month period; any estimated or actual
difference between the aggregate assessment and
maximum allowable surcharge amounts related to an
account shall be taken into account by the association
in determining future surcharge percentages.
* Sec. ___. AS 21.80.140 is amended to read:
Sec. 21.80.140. Recognition of assessments in
surcharge rates. The rates and premiums charged for
insurance policies to which this chapter applies may
include surcharge rates [AMOUNTS] sufficient to offset
the adjusted assessments [ASSESSMENT] made under this
chapter and paid to the association by [THE] member
insurers [INSURER LESS AMOUNTS RETURNED TO THE MEMBER
INSURER BY THE ASSOCIATION], and these surcharge rates
may not be considered excessive because they contain
an amount reasonably calculated to offset the full
amounted of adjusted assessments paid by [THE] member
insurers. The association shall notify the director
of each surcharge percentage determined by the
association, and this surcharge percentage shall be
the maximum surcharge rate that may be applied by
member insurers related to the assessment, except that
a member insurer may make application to the director
to apply a higher surcharge rate [INSURER]. The
amount charged on a policy shall be shown separate
from the premium for coverage on the policy. [A
RATING ORGANIZATION MAY MAKE A PROVISION IN ITS RATE
FILING TO RECOVER AN ASSESSMENT UNDER THIS CHAPTER FOR
THE ORGANIZATION'S MEMBER AND SUBSCRIBER INSURERS.]
The surcharge rate [ASSESSMENT CHARGE] is not
considered a premium and is not subject to the premium
tax imposed under AS 21.09.210."
The committee took an at-ease from 5:23 p.m. to 5:24 p.m.
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
5:20 p.m.
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