Legislature(1997 - 1998)
05/08/1998 04:20 PM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
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MINUTES
SENATE FINANCE COMMITTEE
8 May 1998
4:20 P.M.
TAPES
SFC-98, Tape 163, Sides A and B
CALL TO ORDER
Senator Sharp, Co-chair, convened the meeting at
approximately 4:20 p.m.
PRESENT
In addition to Co-chair Sharp, Senators Pearce, Phillips,
Donley, Torgerson, Parnell, and Adams were present at the
meeting.
Also present: Marianne Burke, Director, Division of
Insurance, Department of Commerce and Economic Development;
Senator Tim Kelly; Representative Pete Kott, Sponsor.
SUMMARY INFORMATION
CSHB 116(FIN)
WORKERS COMPENSATION SELF-INSURANCE GROUP
CSHB 116(FIN) was HEARD and HELD in committee for
further consideration.
HOUSE BILL 116
"An Act relating to workers' compensation self-
insurance."
Co-chair Sharp informed the committee that five amendments
had been filed related to the bill.
Senator Adams MOVED Amendment 1.
Senator Torgerson OBJECTED.
Senator Adams explained that Amendment 1 related to the
responsibilities of the director's office.
MARIANNE BURKE, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT
OF COMMERCE AND ECONOMIC DEVELOPMENT, explained that
Amendment 1 would address the fact that the director had a
great deal of authority when it came to the organization of
the entities. She maintained that the bill detailed a list
of qualifications that a group had to satisfy; if the
conditions were satisfied, the director would have a
specified timeframe in which to review the answers or the
documents submitted. She stressed that there would be no
leeway whatsoever so far as asking for additional
information, support, or clarification. The director could
only deny issuance of a certificate because one of the
listed items had not been satisfied. The director would
have some discretion regarding whether or not the documents
and information submitted were adequate. It would take away
the automatic rubber-stamping of information that was
presented without verification or other support.
Ms. Burke stated that the division's opinion was that it
was critical that the information being presented be
verified and questioned if necessary when an organization
was being formed. She believed any insurance company
seeking to do business in the state of Alaska had to
subject themselves to questions, clarifications, and
additional information, as well as voluminous support for
their position; this was not provided for in the bill. She
thought the bill had a "trust me" approach.
Co-chair Sharp questioned page 2 of the amendment. He
wondered why the word "may" was substituted for "shall" in
several places. Ms. Burke replied that the purpose
throughout Title XXI was to make sure an insurance company
stayed solvent; there was a great deal of discretion and
responsibility placed on the director to explore every
possibility of raising funds to meet the claims in a timely
manner. She added there was no guarantee there would be
another way to do it, but the state had to do everything
possible to keep the organization afloat.
Senator Torgerson queried changing the language. He read
lines 30 and 31, which used to say "the director shall"
(make up the deficit) and the change to "the director may"
(make up the deficit), and opined that the state would want
to order the company make up the deficit. Ms. Burke
explained that with the word "may," the director could
immediately order the action, but it would not be
mandatory. The word "shall" would make the action
mandatory; the state would want to be able to assure any
restructuring if there was another way to make good on the
claims with the assets available. She felt it was very
disruptive to put an assessment against the net worth of
the members; in many cases the net worth was made up of
equipment and equipment would have to be sold to raise the
cash. She acknowledged that some builders could have the
cash readily available, but she had no way of knowing the
form of the net worth and no way of assuring that it could
be raised quickly enough to meet the needs of the injured
workers.
Senator Donley compared the bill, the suggested amendment,
and the uniform act; he thought the language in the bill
(page 4, line 22) was identical to the uniform act in that
it stated that the commissioner "shall." He thought one of
the reasons the insurance commissioners felt the word
"shall" was important was that it gave some clarity and
direction.
Senator Torgerson MAINTAINED his OBJECTION.
A roll call was taken on the motion.
In favor: Adams, Phillips, Sharp
Opposed: Parnell, Donley, Torgerson
Senator Pearce was absent from the vote.
The motion FAILED (3/3). Amendment 1 was not adopted.
Senator Adams MOVED Amendment 2.
Senator Torgerson OBJECTED.
Senator Adams explained that the amendment related to a
requirement that the combined net worth of a group's
membership be at least $1 million, as evidenced by
financial statements audited by an independent certified
public accountant (CPA).
Ms. Burke opined that the issue was one of the most
troublesome of the bill, and was a basic representation by
a group of people that their combined net worth was $1
million. She asserted that the wording was exactly the same
as wording in the model act. She added that certain states
had found it necessary to increase the amount; in Alaska,
the audited net worth and what might be thought to be the
net worth could be completely different numbers. She
understood and appreciated the desire of the homebuilders
to not have to present audited financial statements for
every single member; she noted Amendment 2 did not propose
that.
Ms. Burke reported that many of the homebuilders were ready
to have audited financial statements for bonding and
financing purposes. The essence of the requirement would be
met if a given number of people entered into an association
with audited financial statements and their combined net
worth was $1 million or more, since they would all be
jointly liable; if one individual had a net worth of $1
million, the requirement in the bill would be met.
Ms. Burke pointed out that audited financial statements for
individuals or companies would reflect more closely the
realizable value of the assets; net worth could be in the
form of equipment, tools, raw land, or cash. She stated
that the state wanted to know that one of the fundamental
elements of the bill (the combined net worth of $1 million)
was verified by audited financial statements.
Co-chair Sharp asked whether the bill required the
financial statements to be certified by a professional. Ms.
Burke responded in the negative. She stated that once the
entity was up and in operation, the assets owned by the
association would be audited, but not individual members.
Senator Torgerson queried details about the uniform act.
Ms. Burke clarified that the combined net worth of $1
million was in the uniform act; the division was proposing
an amendment to the language in the uniform model act.
Senator Torgerson asked whether the requirement that would
be added was in the act. Ms. Burke responded in the
affirmative.
SENATOR TIM KELLY asserted that the uniform model act had
been around since 1993, no state had adopted it as it was,
and only four states had adopted something similar. He did
not think the act had a lot of value to the state of
Alaska. He did not think it was unreasonable to assume that
at least of few of the members in the self-insurance group
could be audited to be worth a combined total of $1
million. Not all the members would have to be audited, and
it could be one member, if that member could show at least
$1 million worth of real assets. The only way the figure
could be obtained was through an audit. He asserted that
any group that wanted to be an insurance company in the
state had to be willing to be audited.
Senator Parnell stated that he was troubled by comments
that it was acceptable to have a few members of the
association be worth $1 million, but on the other hand,
there could be requirements to have everyone involved
submit the numbers before evaluation. He wanted a
safeguard. He asked whether there was a combined net worth
requirement on reciprocals. Ms. Burke responded that the
reciprocals had $1.5 million worth of cash or acceptable
marketable securities they started out; they were not
relying on the net worth of their members.
Co-chair Sharp pointed out that there was contributed
capital to the reciprocal.
Senator Kelly added that the net worth of the members was
because of the joint and several liability clause. He
argued that someone would have to pay if there were several
injuries, because the capital would not be available. The
group would have to go to the membership. The amendment
would only require that there be $1 million worth of
audited assets to protect the workers. The $1 million was
included in the model act that almost nobody had adopted.
Co-chair Sharp asked details about other states. Ms. Burke
replied that there were four states that had similar
legislation. Based on the information received, the
combined net worth requirement of each one of the states
was $1 million, except for New Mexico, which required $3
million.
A roll call was taken on the motion to adopt Amendment 2.
In favor: Torgerson, Adams, Phillips, Sharp
Opposed: Parnell, Donley
Senator Pearce was absent from the vote.
The motion PASSED (4/2). Amendment 2 was adopted.
Senator Adams MOVED to ADOPT Amendment 3.
Senator Torgerson OBJECTED.
Ms. Burke explained the amendment. There had been a lot of
testimony about the specific and aggregate excess insurance
and about where it could be gotten. One of the homebuilders
companies represented testified that they could get better
arrangements at a less reputable company, which was a major
concern to the division. The division wanted any aggregate
and specific insurance to be issued by a company that held
a certificate of authority in the state of Alaska. She
noted that there were 1,200 total insurance companies in
Alaska, so availability would in no way be restricted. The
amendment would assure that who the insurance was bought
from was fully capitalized and regulated.
Ms. Burke continued that the legislation as written simply
required that there be evidence of the availability of the
excess insurance. However, the availability would have
already been proven; there was earlier testimony that the
excess insurance was available, but whether it could be
gotten and afforded was a different matter. Amendment 3
would provide for two things. First, it would provide that
the insurance would actually be gotten and not just
available. Second, it would require that the insurance
would be written by a "real insurance company," not an
unregulated "offshore" company without clarity about how
the claims would be paid. She asserted that the division
felt very strongly that offshore companies were a threat to
the people they insured.
Senator Parnell asked whether any of the 1,200 insurance
companies in the state currently held a valid certificate
authority and whether those that did held specific and
aggregate excess insurance. Ms. Burke responded that there
were many hundreds of companies; in addition, there were
surplus line companies that were permitted and held
authority to operate in Alaska.
Senator Parnell asked what it took to get a valid
certificate of authority. Ms. Burke replied that a company
had to submit financial statements to the Division of
Insurance and demonstrate that it had sufficient surplus
and capital to write the proposed lines of insurance. The
company also had to submit biographical information on the
key management people to show that they were trustworthy
and had no convictions for stealing from insurance
companies. In addition, there was a risk-based capital
formula that had to be satisfied, and a fee of $2,500 was
required.
AT EASE
RECONVENED
Senator Adams MOVED an amendment to Amendment: delete "an
amount" and "acceptable" on line 1.
REPRESENTATIVE PETE KOTT, SPONSOR, spoke to the amendment.
He thought the standard should not be different than any
other existing carrier of reciprocal or self-insured
employer of the state. He was troubled by the language
"maintained at all times." He thought the language could
eliminate potential to write at the end of the section
which would allow a group to provide securities in lieu of
re-insurance. He opined that there could be a time with a
lot of cash available and a company could want to get
security in another way.
Senator Torgerson asked whether the standard in the
legislation represented a different standard for other
companies in the state. Ms. Burke responded that other
companies did not have to rely on the excess insurance for
their totals on the second layer; they capitalized and had
[unintelligible]. Even self-insured individuals (employers)
had to have a personal net of $500,000. A reciprocal had to
have $1.5 million [unintelligible].
In response to a question, Ms. Burke responded that there
was a totally different entity.
Representative Kott added that it was because they did not
have cash; they had to get the insurance.
Senator Donley thought existing carriers, reciprocals, and
the self-insured were not required to meet the particular
requirement; the requirement would be unique.
Co-chair Sharp queried the difference in capitalization
requirements for reciprocals. He asked whether there was
still a difference regarding the type of assets pledged.
Ms. Burke responded that the entity had no assets of its
own as reserves. A reciprocal had $1.5 million.
Senator Adams referred to the amendment to the amendment.
Co-chair Sharp pointed to the second line and the first
"and" and asked whether he wanted that dropped out. Senator
Adams answered in the affirmative. Co-chair Sharp did not
see where the word "amount" was.
Senator Kelly explained that the first line should read:
"(3) obtain specific and aggregate excess insurance in a
form"; add "and in an amount" (underlined), to read:
"obtain specific and aggregate excess insurance in a form
and an amount acceptable to the director." He stressed that
that was what would take the place of the lack of capital
or reserves in the particular [unintelligible].
Co-chair Sharp summarized that the first line would read,
"obtain specific and aggregate excess insurance in a form
and amount and acceptable…"
Co-chair Sharp thought the proposed amendment was a
technical amendment.
Ms. Burke reviewed the difference between the amendment and
what was in the bill. The bill read "evidence of the
availability" while the amendment was saying to "obtain
it." She maintained that the bill did not require that that
be obtained from an insurance company holding a valid
certificate of authority to do business in Alaska.
Co-chair Sharp noted that line 21 said "evidence of
availability" has been obtained or would be obtained.
Co-chair Sharp called the amendment "technically corrected
Amendment 3."
A roll call was taken on the motion to adopt Amendment 3 as
amended.
In favor: Adams, Phillips, Sharp
Opposed: Donley, Torgerson, Parnell
Senator Pearce was absent from the vote.
The motion FAILED (3/3). Amendment 3 was not adopted.
Senator Adams MOVED Amendment 4.
Co-chair Sharp OBJECTED.
Senator Adams explained that the amendment would add
present language in Section 21.47.050. The language existed
and the amendment would add the underlined language "and
its members."
Ms. Burke detailed that the entity was not an insurer and
did not have any assets of its own; capitalization was not
there. She added that one of the critical elements of
protecting the workers was the combined net worth of its
members. She noted that many industries had cyclical net
worth; there were times when the net worth was considerably
reduced or nonexistent. The division wanted to know that
there was the ability to verify that there was still net
worth out there.
Representative Kott spoke in opposition to the proposed
amendment. He argued that an amendment had already been
accepted that audited the financial statements of the
group. He felt the proposed amendment was redundant in
examining the numbers, records, accounts, and transactions,
especially if the members would bear the expense of the
audit, which could run from $1,500 up to $4,000. He thought
the language suggesting that the director could take the
action as often as he or she wanted, in addition to the
expense, made the measure overly burdensome and
inappropriate to pass on to the group members.
Ms. Burke noted that the audit amendment passed by the
committee related to getting the certificate of authority
to go into business; Amendment 4 spoke to on-going
operations. She asserted that the two requirements were
totally different. She added that the requirement was
identical to requirements reciprocals and insurance
companies had. She noted that the entity itself was relying
on the members, as opposed to their own assets.
Co-chair Sharp pointed out that Amendment 2 required a
certified audit by a CPA only at the time of application to
verify the underlying assets.
Senator Torgerson asked whether an individual could be a
member and not pledge their assets to the pool. He wondered
whether the intent was to consider the assets of members
only. Ms. Burke responded that the bill would require all
members to sign a joint and several liability agreement.
Senator Donley compared the language in the bill to the
uniform act. He stated that the act was almost precisely
the same as the existing language in the bill. There was no
requirement in the uniform act that its members' affairs,
transactions, accounts, records, and assets be subjected to
any frequency of examination the director might want. He
agreed with the sponsor that the proposal was "drastic and
extreme" and too broad.
Co-chair Sharp MAINTAINED his OBJECTION.
A roll call was taken on the motion to adopt Amendment 4.
In favor: Torgerson, Adams, Sharp
Opposed: Phillips, Donley, Parnell
Senator Pearce was absent from the vote.
The motion FAILED (3/3). Amendment 4 was not adopted.
Senator Adams MOVED Amendment 5. He explained that the
amendment related to a health insurance group that would be
required to have and maintain surplus in the form and
manner acceptable to the director equal to the greater of
(with a list).
Co-chair Sharp OJBECTED.
Ms. Burke detailed that during the hearings for HB 116, a
chair of a committee had asked that the bill be sent out to
experts in the field. One of the experts identified was the
president of self-insured entities, who recommended that
there be at least a one-to-one ratio; for every dollar of
premium, there should be one dollar of reserve. In the case
of the bill, that would mean $1 million in reserves. The
expert was asked three specific questions and his responses
were provided to the homebuilders and the division. He was
asked whether there was adequate protection for injured
employees, whether there was adequate capital to fund the
group, and whether there was adequate protection in the
event that a group became insolvent; his answer to all
three questions was "no."
Ms. Burke continued that Amendment 5 did not ask for $1
million upfront, but for one-half of what would be required
of a reciprocal, or $750,000. Then, over a period of five
years, the surplus could be built up to the point that
there would be the recommended one-to-one ratio. She argued
that if that seemed excessive, she wanted to point out that
[unintelligible; name of a company?] had less than $800,000
in worker's compensation premiums, but had a surplus of
$13.8 million. She stressed that the requirement was geared
to help a company build up to the amount recommended by the
recognized expert. She noted that the expert was not the
division's choice, but had been identified by the
legislature as appropriate to address the issue.
Ms. Burke emphasized that the division's concern was having
the money available to provide for the care of injured
workers. The reserve would be like a savings account in the
bank; it might not be needed, but it could be invested and
the investment earnings used to offset the amount charged
in premiums. She pointed out that the reciprocals had
investment earnings that reduced the amount of money they
had to collect in premiums. The point was to keep the
earnings for themselves. A two-fold purpose would then be
served, to provide a savings account at the beginning, and
to provide a mechanism for earning investment income to
offset the future cost of premiums.
Ms. Burke stated that the division believed the provision
was critical.
Representative Kott agreed that the provision had been one
of the crucial components of the bill for the past two
years. There had been arguments regarding whether there
would be enough cash to pay benefits to workers injured on
the job. He argued that whether one report or another
conflicting report were considered, he was convinced that
there was enough capital up front to pay for injured
workers. He referred to testimony by Alaskan labor
organizations in favor of the legislation; the labor
organizations were clearly looking out for the best
interests of the workers. He emphasized that the
legislation would not establish an insurance company or a
reciprocal; the model act did not have the laborious
requirement. In addition, the four states that had
implemented the model act varied to some agree and the
other states had legislation that varied. He stated that
Alaska would not be on the lower end of the spectrum and
would not be on the upper end. However, Alaska would
exceeded the average for the acts.
Representative Kott pointed out that the top 20 riders in
Alaska had been considered and the leading carrier met the
one-to-one ratio requirement; the other 19 he found did
not, contrary to testimony given. He did not believe they
were obligated under statute or regulation to maintain the
requirement.
Representative Kott informed the committee that Amendment 5
would hamper the particular program from succeeding. He did
not think there was any way that the threshold in the
amendment could be met without significantly affecting the
group's ability to succeed.
Senator Kelly opined that the weakness of the bill was the
lack of requirement for up-front capital and argued that
the amendment would establish that capital. The groups
hoped to use the premium for two reasons; first, as a
business expense to pay cash outlays, and second, as an
investment to get a payoff at the end. They hoped to have
fewer-than-average injuries in order to build up the
surplus, and then redistribute the money back to the
employees. The point was to spend less money on worker
compensation.
Senator Kelly emphasized that HB 116 was not about
protecting the worker. Under the best scenario, the worker
would be treated the same under a self-insured, reciprocal,
or insurance company if there was adequate capitalization.
The rest of the people had money in the bank if there were
injuries. However, there was no capital up front, which was
the object of the amendment.
Senator Kelly pointed out that some labor unions had
testified in support of the legislation because they did
not have "a dog in the fight" for the most part; most of
the people covered by the homebuilders were not labor-union
members and were not paying dues. The fact that labor
unions were not concerned did not mean other people should
not be concerned about the Alaskan workers. He questioned
whether organizations without $750,000 to put up front
should be insuring Alaskan workers. He did not think the
numbers would work. He believed the amendment would provide
the backup to make sure injured workers would get their
lost wages and medical bills covered.
The OBJECTION was MAINTAINED.
A roll call was taken on the motion to adopt Amendment 5.
In favor: Adams, Phillips, Sharp
Opposed: Donley, Torgerson, Parnell
Senator Pearce was absent from the vote.
The motion FAILED (3/3). Amendment 5 was not adopted.
Co-chair Sharp asked whether anyone paid an injured
employee if the company failed or whether the worker would
have to wait until the failed company balanced its books.
Ms. Burke responded that there was no back-up; other than
the proposed legislation, there was nothing.
Senator Adams pointed out that there had been four
amendment votes that failed with three-to-three tie votes
because of a missing member. He wondered whether the
measure could be held overnight until the other member
could be present.
[SFC-98, Tape 163, Side B]
There was a discussion about the version before the
committee.
Senator Donley MOVED to REPORT SCS CSHB 116(FIN) out of
committee with individual recommendations and attached
fiscal notes.
Senator Adams OBJECTED.
A roll call was taken on the motion.
In favor: Donley, Torgerson, Parnell
Opposed: Adams, Phillips, Sharp
Senator Pearce was absent from the vote.
The motion FAILED (3/3). The bill was not reported from
committee.
Co-chair Sharp noted that the bill would be on the table
the following morning.
CSHB 116(FIN) was HEARD and HELD in committee for further
consideration.
Co-chair Sharp RECESSED the meeting to the call of the
chair at 5:15 p.m.
ADJOURNMENT
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