Legislature(1997 - 1998)

02/17/1998 01:35 PM Senate L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
         SENATE LABOR AND COMMERCE COMMITTEE                                   
                  February 17, 1998                                            
                      1:35 P.M.                                                
                                                                               
MEMBERS PRESENT                                                                
                                                                               
Senator Loren Leman, Chairman                                                  
Senator Jerry Mackie, Vice Chairman                                            
Senator Tim Kelly                                                              
Senator Mike Miller                                                            
Senator Lyman Hoffman                                                          
                                                                               
MEMBERS ABSENT                                                                 
                                                                               
All members present                                                            
                                                                               
COMMITTEE CALENDAR                                                             
                                                                               
SENATE BILL NO. 198                                                            
"An Act relating to partnerships; amending Rules 25(c), 79, and 82,            
Alaska Rules of Civil Procedure; and providing for an effective                
date."                                                                         
                                                                               
     - SCHEDULED BUT NOT HEARD                                                 
                                                                               
HOUSE BILL NO. 116                                                             
"An Act relating to workers' compensation self-insurance."                     
                                                                               
     - HEARD AND HELD                                                          
                                                                               
PREVIOUS SENATE COMMITTEE ACTION                                               
                                                                               
SB 198 - See Labor and Commerce minutes dated 2/10/98.                         
                                                                               
HB 116 - No previous action to consider.                                       
                                                                               
WITNESS REGISTER                                                               
                                                                               
Ms. Annette Kreitzer, Staff                                                    
Senate Labor and Commerce Committee                                            
State Capitol Bldg.                                                            
Juneau, AK 99811-1182                                                          
POSITION STATEMENT: Commented on HB 116.                                       
                                                                               
Representative Pete Kott                                                       
State Capitol Bldg.                                                            
Juneau, AK 99811-1182                                                          
POSITION STATEMENT: Sponsor of HB 116.                                         
                                                                               
                                                                               
Ms. Sarah McNair-Grove, Insurance Analyst                                      
Division of Insurance                                                          
P.O. Box 110805                                                                
Juneau, AK 99811-0805                                                          
POSITION STATEMENT: Opposed HB 116.                                            
                                                                               
Ms. Robin Ward                                                                 
Alaska Homebuilders Association                                                
P.O. Box 91443                                                                 
Anchorage, AK 99503                                                            
POSITION STATEMENT: Supported HB 116.                                          
                                                                               
Mr. Steven Wisdom                                                              
Alaska Homebuilders Association                                                
P.O. Box 4184                                                                  
Homer, AK 99403                                                                
POSITION STATEMENT: Supported HB 116.                                          
                                                                               
Mr. Paul Grossi, Director                                                      
Workers Compensation                                                           
Department of Labor                                                            
P.O. Box 25512                                                                 
Juneau, AK 99802-5512                                                          
POSITION STATEMENT: Opposed HB 116.                                            
                                                                               
Mr. Richard Block                                                              
Alaska National Insurance Co.                                                  
360 W. Benson Blvd. #300                                                       
Anchorage, AK 99503                                                            
POSITION STATEMENT: Opposed HB 116.                                            
                                                                               
ACTION NARRATIVE                                                               
                                                                               
TAPE 98-6, SIDE A                                                              
                                                                               
Number 001                                                                     
                                                                               
                 SB 198 - UNIFORM PARTNERSHIP ACT                              
                                                                               
CHAIRMAN LEMAN called the Senate Labor and Commerce Committee                  
meeting to order at 1:35 p.m. and announced they would hold the                
hearing on SB 198 at later date.                                               
HB116                                                                          
                                                                               
        HB 116 - WORKERS COMPENSATION SELF-INSURANCE GROUP                     
                                                                               
CHAIRMAN LEMAN announced HB 116 to be up for consideration and that            
there was a proposed committee substitute as a result of four                  
concerns the committee had last year.                                          
                                                                               
SENATOR KELLY moved to adopt the committee substitute to CSHB 116              
and asked for unanimous consent.  There were no objections and it              
was so ordered.                                                                
                                                                               
MS. ANNETTE KREITZER, Staff, Senate Labor and Commerce Committee,              
explained the changes in the adopted committee substitute.  She                
said the addition from this committee is on pages 12 and 13,                   
Section 21.47.200 which the Homebuilders Association submitted.                
                                                                               
Number 123                                                                     
                                                                               
REPRESENTATIVE KOTT, sponsor of HB 116, testified that 14 other                
states have passed similar legislation successfully.  It contains              
numerous substantive and procedural requirements designed to ensure            
that workers compensation self insurance groups remain fiscally                
sound and are able to fulfill Alaska's workers compensation                    
requirements.  The Director of Insurance has an enormous amount of             
leverage over the operation of these self insurance groups.                    
                                                                               
There are some concerns that there isn't enough cash up front to               
pay workers compensation claims and he is extremely comfortable                
with the way the bill deals with this.  First of all, the aggregate            
net worth of the employers (who must be 10 or more in number) must             
be $1 million.  There is also a cash security bond, or another                 
instrument acceptable to the division, in the amount of $450,000.              
There is another layer of provisions in the aggregate excess                   
insurance that can and would be acquired under the guidance of the             
Division of Insurance who will set the parameters for that.                    
                                                                               
The first year's premium is a minimum of half a million dollars.               
Thereafter each premium of the group is $750,000.  The first year's            
premium has been divided into two categories, 70 percent for the               
reserve pool and 30 percent for the administrative pool.  Fifty                
percent of the premium is paid up-front.  Of that $175,000 will be             
put into the premium side and the other 30 percent would be put                
into the administrative costs.  He said there are always monthly               
premiums being paid by the members of the group.                               
                                                                               
The excess insurance (reinsurance) or stop loss policy is set at               
$5,000.  He said one would need 40 claims the first month to go                
through the $5,000 and it wouldn't matter if the claims are $50,000            
or  $1,000,000.  Subsequent years, the group would have to again               
get the excess insurance and the premium would be adjusted                     
accordingly.                                                                   
                                                                               
There is also a self insurance guarantee fund of five percent which            
amounts to $25,000.  If for some reason there were a large number              
of claims, the process would be that the surplus would be used from            
the fiscal year rather than the current year.  Then you would turn             
to the administrative funds, then the first year's premium, then go            
to the guarantee fund.  You would then assess the membership.                  
There are several opportunities to ensure that the worker is held              
harmless and that any form of compensation that is owed to them is             
paid.  REPRESENTATIVE KOTT said he thought this would go a long way            
toward lowering costs for employers which would provide additional             
opportunity to either infuse themselves with some capital                      
investments or hiring new employees.                                           
                                                                               
MS. SARAH MCNAIR-GROVE, Insurance Analyst, said that many of the               
things that were addressed as changes have gone a long way to                  
address the Division's concerns, but its main concern that hasn't              
been addressed is the liquidity of the assets.  There is a $1                  
million net worth requirement, but there is no requirement that any            
of this be actually available in cash to pay out to a loss, if                 
there is one.  There is a bond, but the way the draft is written,              
the bond will only be available after the group becomes insolvent.             
So it will be there after there are problems, but not before.  She             
concluded that a lot of concerns have been met and she appreciates             
that, but the bill hasn't gone far enough in addressing all the                
concerns they have.                                                            
                                                                               
SENATOR KELLY asked how they get the initial capitalization to                 
begin operating the organization.                                              
                                                                               
MS. GROVE said she wasn't sure of the answer to that, but the                  
security bond is not used for the operations of the group.  It is              
used only to pay losses, if there has been an insolvency.                      
                                                                               
SENATOR KELLY asked if that was for $450,000.                                  
                                                                               
MS. GROVE replied yes.                                                         
                                                                               
SENATOR KELLY asked where the initial operating cash comes from.               
                                                                               
REPRESENTATIVE KOTT explained that the initial capitalization is on            
page 10 which says that the group must meet at least 25 percent of             
the estimated annual premium which is $500,000 minimum for the                 
group.  The other part is on page 2, #10 - proof of payment to the             
group by each member of not less than 25 percent.                              
                                                                               
SENATOR KELLY asked if there is a minimum figure.                              
                                                                               
REPRESENTATIVE KOTT replied that the minimum figure is the                     
aggregate amount of $500,000.                                                  
                                                                               
SENATOR KELLY said if there were 10 members, everyone would put up             
$50,000 in cash to get started and asked if that was correct.                  
                                                                               
MS. ROBIN WARD, Alaska Homebuilders Association, answered that the             
actual initial premium is half of $500,000.  The minimum number of             
employer members is 10, but the combination still has to be                    
$500,000 for the first year.  Fifty percent of that is paid up                 
front.  Twenty-five percent is prepaid premiums; the other 25                  
percent is prepaid premiums in the form of a deposit that stays                
with the account in the reserve account until the employer leaves              
the pool.  She estimates that the first day they start there will              
be $175,000 as a minimum in cash to begin.                                     
                                                                               
SENATOR KELLY asked how many members she has committed to joining              
the organization when they get going.                                          
                                                                               
MS. WARD answered that they have a list of many more than 10, but              
without the legislation they can't begin their business plan.                  
                                                                               
SENATOR KELLY asked if the 10 had signed a commitment to do it.  He            
asked how dependable were the commitments for the $175,000 which               
isn't a lot of money.                                                          
                                                                               
MS. WARD replied that the commitments are very solid, because they             
can't even get a certificate until that many members are signed up             
and can prove they have $500,000 in the first annual premiums.  She            
repeated that she has a list of interested people, but they can't              
draft a business plan without legislation, because they don't know             
what form it will be in.                                                       
                                                                               
Number 314                                                                     
                                                                               
SENATOR MACKIE said one of his concerns was for the actual workers             
out there who get injured and whether or not there will be                     
sufficient finances available to take care of those claims.  He                
asked if there was any reason the Division might believe under this            
provision there might not be enough money to initially pay claims.             
                                                                               
MS. GROVE answered that one of their main concerns is the initial              
start-up and that the initial amount of the money is only $175,000             
and 30 percent of it goes to administrative costs and 70 percent               
goes to paying losses.  If there is a large loss right away, you               
could go through that 70 percent very quickly.                                 
                                                                               
SENATOR MACKIE asked if they didn't also pay premiums on a monthly             
basis.                                                                         
                                                                               
MS. GROVE answered said that is part of the new proposal, yes.  She            
deferred further comments to the Department of Labor because they              
are the ones who deal with claims payments.                                    
                                                                               
SENATOR MACKIE asked if she could recommend something in particular            
that would make the Division feel better about the whole thing.                
                                                                               
MS. GROVE replied that they are not at all opposed to the idea of              
self-insured groups, but they have proposed to them that of the $1             
million net worth, that they set aside 25 percent of it as liquid              
assets so it's not just net worth in their tool, vehicles, and                 
trucks.  However, they have responded, "no."                                   
                                                                               
SENATOR KELLY commented that the Homebuilders Association is                   
proposing instead of $250,000 liquid cash, if they can get all                 
these folks to join, to have $175,000 in liquid cash to start.                 
                                                                               
MS. WARD replied that is correct.                                              
                                                                               
SENATOR KELLY commented that if these people get together to form              
an insurance company, they need about $3 million in cash, or they              
can get together and form a reciprocal insurance company for which             
they need about $1,750,000 in cash, but what THEY want to do is get            
together and form a self-insured group and only have $175,000 in               
cash.  He asked if that was pretty close to where they are.                    
                                                                               
MS. WARD answered yes, but that's on the first day.                            
                                                                               
SENATOR HOFFMAN asked if 70 percent of the $250,000 has to be                  
liquid cash and 30 percent of that is for administrative costs or              
if that $250,000 has to be all liquid.                                         
                                                                               
MS. GROVE explained that in order to form this group there has to              
be a net worth and the proposal says $1 million of net worth,                  
however they want to calculate it.  The Division is recommending               
that in part of that calculation there be some liquidity.  The                 
other part is the premiums, the $175,000 figure that's been                    
mentioned here, is what's divided into the 70 and 30 percent.                  
                                                                               
SENATOR HOFFMAN asked if they were recommending that $250,000 of               
the $1,000,000 be liquid.                                                      
                                                                               
MS. GROVE answered yes.                                                        
                                                                               
SENATOR HOFFMAN asked what they are proposing.                                 
                                                                               
MS. GROVE answered that they are proposing $1,000,000 with no                  
liquidity requirements.                                                        
                                                                               
SENATOR HOFFMAN asked if they wanted more liquidity to protect the             
employees, if there's injury.                                                  
                                                                               
MS. GROVE answered that is correct.                                            
                                                                               
SENATOR KELLY asked if the Division of Insurance supports the                  
committee substitute.                                                          
                                                                               
MS. GROVE answered that the current proposal hasn't gone far                   
enough, no.                                                                    
                                                                               
Number 403                                                                     
                                                                               
SENATOR MACKIE asked if she could look at the group's finances a               
year from now and start with that, would she be comfortable with               
it.                                                                            
                                                                               
MS. GROVE answered although she didn't know what the point in time             
would be, she would be more comfortable if she was convinced there             
was enough money from the beginning to pay losses that might occur.            
                                                                               
SENATOR MACKIE said one of his concerns as far as liquidity goes is            
that there be a guarantee that claims could be paid and he thought             
they would have to look at some averages, because the last thing               
they want is for an injured worker to have to sue 50 or 20                     
different participants to try and get a claim paid.  He also wanted            
to see some specifics from the Division.                                       
                                                                               
CHAIRMAN LEMAN asked if there was a definition in law about what               
constitutes a liquid asset.                                                    
                                                                               
MS. GROVE said she would find out for them.                                    
                                                                               
SENATOR HOFFMAN asked if she didn't support the legislation                    
primarily because it didn't go far enough in protection for claims             
from employees.                                                                
                                                                               
MS. GROVE answered that is correct.                                            
                                                                               
SENATOR KELLY asked if the Director of Insurance had physically met            
with this group in the interim to discuss her problems on this                 
issue.                                                                         
                                                                               
MS. GROVE answered that they have tried to meet with them and there            
have been various telephone calls back and forth, but there was no             
meeting during the interim. The Director of the Division of Workers            
Compensation, Marianne Burke, wrote a memo to the Homebuilders                 
Association in April and she got a response to it about two days               
ago that addressed some of Ms. Burke's concerns, but not others.               
                                                                               
Number 430                                                                     
                                                                               
MR. STEVEN WISDOM, Alaska Homebuilders Association, said back in               
the spring they did have a meeting with Ms. Burke and one of her               
representatives in Anchorage; there has been communication back and            
forth, but no physical meeting since.                                          
                                                                               
MR. WISDOM said that of the 14 states with self insurance some of              
them did have substantial losses early on, but every one of them               
has remained viable and very effective in the marketplace.  This               
type of program helps each of the employers look after each other              
to make sure they keep a safe workplace which enhances it for the              
employee.                                                                      
                                                                               
He said that the Department of Labor ran a review of the current               
membership showing losses last year (although these members                    
wouldn't necessarily be a member of this insurance group), but they            
were surprised at how low the losses were in the residential                   
building industry.  When they started working on this bill several             
years ago, they were paying an average of $19 per $100 of wages in             
workmens' compensation costs.  Today that has dropped to $11 and it            
could drop more.  He thought this was because this type of industry            
is coming to Alaska.  In all cases across the board in the 14 other            
states, the loss ratios have continued to go down for the                      
participants because of the way the programs are set up.                       
                                                                               
SENATOR KELLY said he was aware that workers' compensation rates               
have been going down in the State of Alaska, but it's not just for             
homebuilders; it's for everybody.  He likes to think the                       
legislature could take some credit for that in the workers'                    
compensation reform they passed several years ago.  He thought it              
wasn't necessarily the threat of this legislation going through the            
system.                                                                        
                                                                               
Number 527                                                                     
                                                                               
MS. WARD reiterated the layers of protection they are giving the               
worker.  They want to make sure they are providing every layer of              
protection they can for them.  That is why it is so important for              
them to have the excess aggregate insurance.  Even if there is a               
catastrophic claim in the first day, they would only pay the                   
deductible because reinsurance would pick up the rest.  Liquidity              
of assets is the very bottom, seventh layer of protection.  She                
said that the department wants small business owners to put up                 
$100,000 or $150,000 of assets and take one quarter of that, which             
is probably their checking account, their cash flow, and pledging              
it to this fund which can't be touched.  She feels that is                     
unrealistic and that there isn't that much risk that they would                
ever have to assess the group members or take any of their assets.             
There is an assessment that can be taken from the members if they              
have to, but the likelihood of that happening is probably one in a             
million.  They haven't found any evidence of that happening in                 
researching the other 14 states.                                               
                                                                               
CHAIRMAN LEMAN asked if she had found any requirement for liquidity            
in the seventh layer in her research of the other states.                      
                                                                               
MS. WARD replied none.                                                         
                                                                               
SENATOR KELLY said he was wondering if her group is basically                  
paying the same premiums that they are paying now, and they are                
going to have to put a significant cash deposit up-front to get                
started,  where the payoff is.  If the workers' compensation system            
up here isn't broken, and it doesn't appear to be, because there               
are about 50 companies writing premiums up here and rates are going            
down, why are they rushing in to fix it?  He thought her answer                
might be that they want to get together and get the profits that               
the insurance companies are now getting and redistribute them to               
their group.  So in the long run that would mean less, but if that             
was the case, what were they estimating the insurance companies are            
getting for a profit margin?  He wanted to know how the group was              
going to save a lot money for their members.                                   
                                                                               
MS. WARD said she had done some research and Alaska now is in the              
top five of the most profitable states to write workers'                       
compensation insurance in.  Most of the insurance companies are                
making an average of 22 - 37 percent profit on their premiums.  She            
said it is a long term investment for her group.  They have to                 
build their reserves before they can return any premium refunds to             
their members.  She thought there were more benefits in that they              
would be doing their own claims management, could investigate fraud            
more thoroughly and get the worker back faster.  She said the large            
insurance companies are just paying claims and not managing them as            
well as her group could.                                                       
                                                                               
Number 509                                                                     
                                                                               
MR. PAUL GROSSI, Director, Workers Compensation, said he supported             
the concept of the bill for these groups to be inclined to pay                 
attention to their claims and to build safety programs, but they               
are concerned about where the money is.  He said money from their              
group has to be there to pay for the excess insurance since they               
are self-insured.  He questioned that there would be enough.                   
                                                                               
He reiterated that the biggest problem is capitalization.  The only            
money the group has to operate with is the 25 percent deposit and              
the 25 percent of the advanced premium which amounts to 50 percent             
of the total premium or $250,000.  Only 70 percent, or $175,000, of            
that is available for claims.  It appears that premiums can be                 
assessed monthly, but it also says quarterly.  So the initial                  
capitalization could be $175,000 for the first three months of the             
existence of this group.  A lot of things can happen during that               
time.  He said that the Homebuilders as a group is probably a good             
group, but the problem with the bill is that it doesn't say this is            
just for the Homebuilders.  It's for anyone with $1 million in                 
assets and who can meet the other requirements.  This is the                   
problem he has.                                                                
                                                                               
His suspicion is that this group will end up with more than $1                 
million in assets and more than the $500,000 premium.  But he is               
thinking about the least common denominator here.  The $1 million              
in assets is a requirement, but that doesn't exist inside the                  
group; it belongs to all the individuals.  The group is a different            
entity than all the individuals outside of that.  The $1 million in            
assets is there, but it is only available if the group goes                    
insolvent, so that's not anything they operate or pay claims with.             
The $450,000 security deposit comes in only if the group is unable             
to pay claims and is only for the purpose of paying claims.  There             
is also $25,000 in the guarantee fund, but that's only available if            
the group goes insolvent.  So they have only the $175,000 to pay               
claims for what could be as long as the first three months.                    
                                                                               
He explained that the Department of Labor already certifies large              
employers to self insure and they require excess insurance.  The               
closest he could find to a group like the Homebuilders was a group             
that is an oil service company which had 243 employees in 1996.                
                                                                               
TAPE 98-6, SIDE B                                                              
                                                                               
They self-insure for $1 million and purchased excess insurance for             
everything over that.  Their premium for that policy was $168,885.             
This group is going to have to self-insure for much less than that,            
at least in the first year.  He estimated only $175,000 because                
that's all the cash they have to pay claims.  They would then have             
to devise the specific and aggregate excess insurance to address               
the rest and didn't see how they could do that operating on a                  
shoestring.  Claims can get really expensive, maybe $1 million for             
one catastrophic claim.                                                        
                                                                               
A small concern he has is the guarantee fund of $25,000.  If this              
group does go insolvent, that $25,000 is pretty meaningless.  It's             
something, but their liabilities could be way above $450,000.  To              
say this is a guarantee fund like our guarantee association is not             
accurate.                                                                      
                                                                               
SENATOR KELLY asked if this bill didn't make them part of the                  
guarantee association.                                                         
                                                                               
MR. GROSSI replied no, that this is entirely different.  They are              
their own entity.                                                              
                                                                               
SENATOR KELLY said a year ago the legislature set up a guarantee               
association that all insurance companies are a part of; so if an               
insurance company goes belly up, all the other insurance companies             
get assessed and have to make up for the insolvency.                           
                                                                               
MR. GROSSI said that is correct.                                               
                                                                               
SENATOR KELLY asked if this was just their own little $25,000 deal.            
                                                                               
MR. GROSSI answered yes, but there could be more, if there was more            
than one group involved.                                                       
                                                                               
SENATOR KELLY asked if no other insurance company in Alaska has to             
step in and get assessed to help for this group's insolvency.                  
                                                                               
MR. GROSSI replied that is correct.                                            
                                                                               
SENATOR KELLY asked if it was just this $25,000.                               
                                                                               
MR. GROSSI said that is correct.                                               
                                                                               
SENATOR KELLY said he didn't realize this was a stand-alone thing.             
                                                                               
SENATOR MACKIE said he thought he heard there were surety bonds to             
deal with insolvency.                                                          
                                                                               
MR. GROSSI responded that there is a $450,000 deposit, which added             
to the $25,000 would be $475,000, but there could be millions of               
dollars in liability, too.  There is the assessment of the members,            
too, but the whole thing is that you want to avoid all of that.                
You want something that is fundamentally sound so you never have to            
deal with the guarantee fund or the surety bond.                               
                                                                               
SENATOR HOFFMAN said that there are all these layers that someone              
who is hurt has to go through and the final chapter of it all is               
having to take these people to court and having to liquidate their             
assets in order to get reimbursed.                                             
                                                                               
MR. GROSSI said that is correct.                                               
                                                                               
CHAIRMAN LEMAN asked if he had done any actuarial studies to look              
at a block of people in this industry and look at the history of               
claims to see if the amount of monies being suggested in this bill             
compensate for the claims.                                                     
                                                                               
Number 540                                                                     
                                                                               
MR. GROSSI said that is part of the problem.  One of the rules of              
thumb they have noticed over the years is that approximately 10                
percent of the work force gets injured in any given year.  What's              
unpredictable is where catastrophic injuries are going to occur and            
when.  They do happen, but there's no way to predict them.  The                
larger the group, the more able they are to deal with that                     
situation.                                                                     
                                                                               
SENATOR KELLY asked if this group were to form and have a                      
particularly tragic accident, and for one reason or another the                
group does become insolvent, does the person who got hurt have a               
course of action to the individual members of this group.                      
                                                                               
MR. GROSSI said yes, there is a joint and several liability                    
section.                                                                       
                                                                               
SENATOR KELLY asked if all members of this group have to pay                   
equally or does it go to the deepest pocket.                                   
                                                                               
MR. GROSSI answered that it is joint and several, so it would be               
equal for a period of time, but obviously it would keep going into             
the pockets of those that have the most money in it.                           
                                                                               
SENATOR KELLY said they spent years trying to get away from that               
concept in tort reform.                                                        
                                                                               
MR. GROSSI commented that compensation rates have been going down,             
but they have been going down since 1988 by about 40 percent                   
overall.                                                                       
                                                                               
SENATOR KELLY asked what he attributed that to.                                
                                                                               
MR. GROSSI answered to a number of things - legislation in 1988 and            
1995 contributed quite a bit, but also safety has been stressed                
more and more claims are being worked and he liked to think his                
Division is working more efficiently, too.                                     
                                                                               
SENATOR KELLY asked if he agreed with the 22 - 37 percent profit               
margin.                                                                        
                                                                               
MR. GROSSI said he didn't have that information.                               
                                                                               
SENATOR KELLY asked for that information from the Division of                  
Insurance, because the legislature did a major effort back in 1989             
- 90 with the State health insurance costs and benefits.  At the               
time, the insurance companies had a four percent margin and he                 
thought they may have gone too far with workers' compensation                  
claims.                                                                        
                                                                               
MR. GROSSI concluded that if there is a group that is functioning              
correctly and there is a requirement of putting some cash in, they             
won't lose on it.  If his statements are too conservative, they                
will get that money back.                                                      
                                                                               
Number 460                                                                     
                                                                               
MR. RICHARD BLOCK, Alaska National Insurance Co.(ANIC), said he has            
offered a significant amount of testimony in opposition to this                
bill in the past.  While there are a number of areas he is                     
concerned with, the fundamental concern ANIC has is the one being              
discussed today.  That is the fact that there is no real financial             
underpinning to the obligations this enterprise would have to                  
injured workers. His objections persist into the committee                     
substitute.  The proposed financial protections are still                      
inadequate.  The reason "is that workers' compensation is probably             
the most volatile line of insurance there is."  Within the 10                  
percent of claims there could be a number of catastrophic claims               
which could be enormous.  Even if there are no catastrophic claims,            
one of the real problems is that workers' compensation is an                   
ongoing obligation to the injured worker.  It could go on for one              
to five years or even for the rest of a person's life.  An                     
insurance mechanism that is being set up to provide for the worker             
for the rest of their life has to be able to have the financial                
strength to meet this obligation.  This proposal falls short of                
that.                                                                          
                                                                               
Of the small amount of premiums that would be first available, one             
of the things that hasn't been explained accurately is that the                
cost of the excess insurance the Homebuilder's Association is                  
proposing to cover catastrophic claims comes out of the loss fund.             
An aggregate stop loss at $400,000 for a $500,000 annual premium is            
going to be terribly expensive.  If they are proposing a $5,000 per            
loss retention and a $400,000 annual aggregate stop loss, they are             
talking about 60 - 80 percent of the premium being used to pay for             
the excess.  Of the $175,000 a good portion is going to be used up             
rather quickly in excess and aggregate stop loss insurance                     
premiums.                                                                      
                                                                               
MR. BLOCK told how when he was involved in the formation of an                 
insurance company and followed the laws then, which required about             
$3 million of capital in the company, they went out and got                    
reinsurance and got it from companies that were "household names"              
in the insurance community and bought them through very able                   
brokers.  It turned out that within five or six years, those                   
companies went insolvent, and he ended up having to pay the claims             
the reinsurer was supposed to pay.  The amounts were within the                
surplus they had been building up over time and it didn't adversely            
affect their company.  Where there is no financial underpinning                
there is no place to turn other than the premium which isn't very              
much in this legislation.                                                      
                                                                               
MR. BLOCK said that excess insurance also doesn't cover everything             
like penalties that the Workers' Compensation Board assesses for               
improper claim handling, etc.  There are also punitive damages that            
may come around through the employer liability section that may or             
may not be covered by the excess coverage.                                     
                                                                               
He informed them that there are 36 states that have adopted                    
legislation that would permit group self-insurance.  His written               
testimony has some of their requirements and there are a lot of                
states that adopt financial requirements that are equal to or less             
than what is in the bill before the Committee.  There are also                 
states that require substantially more.  A number of the groups                
have worked extremely well and have begun to return funds back to              
the employer participants.  It also has to be said that there are              
groups that failed and have resulted in at least assessments back              
to the individual employers that participated in those groups.  He             
said he can tell the committee that the difference between the                 
successful states and the unsuccessful ones is the fact that the               
successful ones were very adamant in requiring adequate financial              
underpinning, adequate net worth in the participants, that there be            
cash put into the organization, and in some cases audited financial            
statements, and numerous other protections, many of which are not              
in the proposed bill.                                                          
                                                                               
He thought there is a misunderstanding about how rates are made in             
this state.  Rates are determined by a rating organization, the                
National Council on Workers' Compensation Insurance, and it files              
an actuarial calculated proposal to the Division of Insurance who              
reviews it.  That information is based entirely on past loss and               
past payroll experience.  Underneath that there is a range of                  
competition among carriers that affects the actual price a                     
homebuilder pays, but that's a matter of competition.                          
                                                                               
Among the states that have adopted these groups, they have found               
that the reason they got started was because there was a crisis in             
those states.  If you have total lack of insurance or insurance                
that's available only to a select few or only at exorbitantly high             
prices, and the legislature adopts the authority to establish one              
of these groups, you are going to have almost a captive market.                
They have found, however, when the market turned around and the                
more standard markets became available, there was a rapid                      
depopulation and disbanding of these groups.                                   
                                                                               
In this state there is aggressive competition and lowered rates                
already.  It's going to be substantially more difficult for such a             
group as this to get started, if they have high requirements (as he            
suggests) to protect the financial underpinning.  He said there                
would be distractions that would draw the financially strong people            
away from the group.  This means that because there will likely be             
a smaller population doing this and likely those that are least                
able financially to support it, there's going to have to be                    
something there to provide the financial underpinning that isn't               
being provided by the fact that just about everyone in that                    
industry are getting involved with it.                                         
                                                                               
If the legislature doesn't provide this authority, there are                   
alternatives to the standard insurance market already on the books             
like a reciprocal insurance exchange, a group retrospective rating             
plan, and group franchising.                                                   
                                                                               
SENATOR KELLY asked him to explain the alternatives to the                     
committee in the form of a letter because he wasn't sure this group            
knew there were options out there.  He asked Mr. Block if                      
assessments of individual members to made up for the losses he                 
talked about earlier caused any bankruptcies.                                  
                                                                               
MR. BLOCK said he knew that assessments had occurred to the                    
individual participants, but he couldn't tell him at the moment if             
they had been forced into bankruptcy.                                          
                                                                               
SENATOR KELLY asked if there was a national organization this                  
proposal could be sent to for an objective analysis.                           
                                                                               
MR. BLOCK said there are such organizations.                                   
                                                                               
SENATOR KELLY had two questions for the Division of Insurance to               
answer; the first is if the purported 22 - 37 percent profit margin            
is a fact. Then he wanted an opinon from the Division of Insurance             
on whether  E and O insurance should be extended to the board of               
trustees as it is to the administrator for the organization.                   
                                                                               
CHAIRMAN LEMAN said he wanted to know if the joint and several                 
liability point was an issue.                                                  
                                                                               
SENATOR MACKIE said he wanted to understand this issue better and              
wanted an example of the process an injured worker would have to go            
through to receive a claim versus how it's done currently.                     
                                                                               
SENATOR KELLY said he wanted an independent organization to review             
the bill and compare it to experience in other states.                         
                                                                               
CHAIRMAN LEMAN said he would hold the bill for the information and             
adjourned the meeting at 3:05 p.m.                                             

Document Name Date/Time Subjects