Legislature(2003 - 2004)

01/28/2004 04:10 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                              
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                        January 28, 2004                                                                                        
                           4:10 p.m.                                                                                            
                                                                                                                                
TAPE(S) 04-2                                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE LABOR AND COMMERCE                                                                                                       
                                                                                                                                
 Senator Con Bunde, Chair                                                                                                       
 Senator Ralph Seekins, Vice Chair                                                                                              
 Senator Gary Stevens                                                                                                           
 Senator Hollis French                                                                                                          
                                                                                                                                
HOUSE LABOR AND COMMERCE                                                                                                        
                                                                                                                                
 Representative Tom Anderson, Chair                                                                                             
 Representative Carl Gatto, Vice Chair                                                                                          
 Representative Nancy Dahlstrom                                                                                                 
 Representative Bob Lynn                                                                                                        
 Representative Norman Rokeberg                                                                                                 
 Representative Harry Crawford                                                                                                  
 Representative David Guttenberg                                                                                                
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE LABOR AND COMMERCE                                                                                                       
                                                                                                                                
 Senator Bettye Davis                                                                                                           
                                                                                                                                
HOUSE LABOR AND COMMERCE                                                                                                        
                                                                                                                                
 All members present                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
^OVERVIEW: WORKERS' COMPENSATION                                                                                              
   · Linda Hall, Director, Division of Insurance                                                                                
     Department of Labor and Workforce Development, PO Box 21149                                                                
     Juneau, AK 99802-1149                                                                                                      
   · Mr. Paul Lisankie, Director, Division of Workers'                                                                          
     Compensation,    Department    of   Labor    and    Workforce                                                              
     Development, PO Box 21149, Juneau AK 99802-1149                                                                            
   · Ms. Lori Wing, President, Alaska Independent Insurance                                                                     
     Agents and Brokers Association, PO Box 112908, Anchorage AK                                                                
     99511-2908                                                                                                                 
                                                                                                                                
SUMMARY OF INFORMATION                                                                                                        
                                                                                                                                
CO-CHAIR TOM  ANDERSON convened  the joint  meeting of  the Senate                                                            
Labor  and Commerce  Standing Committee  and the  House Labor  and                                                              
Commerce Standing Committee at 4:10 p.m.                                                                                        
                                                                                                                                
CO-CHAIR  CON BUNDE  took over the  gavel and  announced that  Ms.                                                              
Linda Hall would give an overview of Workers' Compensation.                                                                     
                                                                                                                                
MS. LINDA  HALL, Director,  Division of  Insurance, Department  of                                                              
Labor and  Workforce Development, said  she would present  a short                                                              
history of  workers' compensation,  how it affects  employers, the                                                              
current  status  of  the  workers'  compensation  market  and  the                                                              
crisis  facing the  Guaranty Fund.  She  introduced Mr.  Lisankie,                                                              
Director,  Division  of  Workers' Compensation,  who  would  brief                                                              
them on the history of the program.                                                                                             
                                                                                                                                
MR. PAUL  LISANKIE, Director,  Division of Workers'  Compensation,                                                              
said he  had been director  for about 24  days, but had  worked in                                                              
the field of  workers' compensation for 20 years  within the State                                                              
of  Alaska.   He  spent   the  last  10   years  as   an  attorney                                                              
representing  clients in  workers'  compensation  matters and  the                                                              
last  six   years  as  an   assistant  attorney  general   in  the                                                              
Department   of   Law,   Civil  Division,   Torts   and   Workers'                                                              
Compensation Section,  representing the  state of Alaska,  a large                                                              
self-insured workers' compensation employer. He said:                                                                           
                                                                                                                                
     The  part that's  working in  Workers' Compensation,  it                                                                   
     appears  quite   well,  is  the  historical   trade  off                                                                   
     between  the  rights  of employees  and  the  rights  of                                                                   
     employers that  resulted with the Workers'  Compensation                                                                   
     system in  lieu of having  a series of lawsuits  between                                                                   
     employees  who   get  injured  on  the  job   and  their                                                                   
     employers.... It  avoids a multiplicity of  lawsuits and                                                                   
     reflects  that trade off  between the historical  rights                                                                   
     of employees  to seek  damages through  the tort  system                                                                   
     just  like anybody  else  and also,  it  trades off  the                                                                   
     rights  of employers  to defend  themselves saying  they                                                                   
     weren't   negligent.   As    we   all   know,   Workers'                                                                   
     Compensation  is  a  no  fault  system  and  it  doesn't                                                                   
       matter why an injury happens other than trying to                                                                        
         avoid it happening a second time. From a legal                                                                         
     standpoint, it's no fault....                                                                                              
                                                                                                                                
MR. LISANKIE said  the act was put forward in 1988  and amended in                                                              
2000 and further that:                                                                                                          
                                                                                                                                
     The  intent was  expressed so  as to  insure the  quick,                                                                   
     efficient,  fair and predictable  delivery of  indemnity                                                                   
     and   medical  benefits   to   injured   workers  at   a                                                                   
     reasonable  cost to  the employers  who  are subject  to                                                                   
     the provisions of the act.                                                                                                 
                                                                                                                                
He  related  that  data collected  by  the  Workers'  Compensation                                                              
Division  on an  annual basis  indicates  some of  the major  cost                                                              
drivers  that are  contributing  to some  degree  to the  observed                                                              
problems.  The  last  year  that data  [contained  in  the  annual                                                              
report]  had  been  analyzed  was 2002.  The  number  of  reported                                                              
injuries  and occupational  diseases went  down from about  28,000                                                              
in 2001  to less  than 26,000  in 2002  (7.8 percent).  That's the                                                              
only thing  that went  down. Benefits  all went  up, some  of them                                                              
significantly.                                                                                                                  
                                                                                                                                
He said  that indemnity  payments, time loss  for people  who were                                                              
unable to  work because  they were  injured, increased  from $62.5                                                              
million in  2001 to $65.3 million  in 2002 (4.5  percent). Injured                                                              
workers are  also entitled to  reemployment benefits and  in 2001,                                                              
the  expense for  the  entire  reemployment benefits  program  was                                                              
$13.1  million  and  in  2002,  it  was  $15.7  million  (up  19.9                                                              
percent).                                                                                                                       
                                                                                                                                
MR.  LISANKE  said the  division  tries  to  stay  on top  of  the                                                              
results of  the reemployment  benefits program  and the  best they                                                              
can figure  is that  in 2002 only  28 people completed  retraining                                                              
plans. He  hastened to add that  the entire $15.7 million  was not                                                              
aimed at  those 28  people. Other  people in  the program  are not                                                              
necessarily expected  to exit it  in that calendar year.  Based on                                                              
that data there  is reason for concern about the  results they are                                                              
getting.                                                                                                                        
                                                                                                                                
Payment of  medical benefits is  the other major cost  driver, and                                                              
those  increased by  11.5 percent  from  2001 to  2002. The  total                                                              
amount of medical  benefits paid in 2001 was $95.6  million and in                                                              
2002  it was up  to $106.6  million. This  is the  first year  the                                                              
medical  benefits exceeded  50 percent  of all  the benefits  that                                                              
were paid  under the  rubric of  Workers' compensation.  "So, it's                                                              
becoming the benefit that's absorbing the program."                                                                             
                                                                                                                                
There  are some  questions about  what  the Workers'  Compensation                                                              
Board  and the division  can do  in regard  to addressing  medical                                                              
benefits. A  provision in the act  says that every year  the board                                                              
can  review  medical charges  to  make  sure  they do  not  exceed                                                              
usual,  customary  and reasonable  fees.  A regulation  defines  a                                                              
                                                     th                                                                         
usual, reasonable  and customary fee to  be at the 90   percentile                                                              
level,  the  level at  which  9  out of  10  bills are  paid.  The                                                              
statute  suggests  that the  review  has  to  be done  within  the                                                              
framework  of  what  is  usual,  reasonable  and  customary.  Some                                                              
states set a  value-driven cap on service, such  as with Medicare,                                                              
but he  didn't think  language in  our statute  would allow  that.                                                              
The board might consider resetting the percentile.                                                                              
                                                                                                                                
MR. LISANKIE said  another question is whether  legislative intent                                                              
is  being lived  up to  with the  proliferation  of board  panels.                                                              
When the  law was  passed originally,  the entire board  consisted                                                              
of  three people.  If  there had  to  be a  hearing  to resolve  a                                                              
dispute, it  was the same  three folks.  They could make  the kind                                                              
of  decisions  people  could  plan   around.  This  is  important,                                                              
because workers'  compensation decisions  are not conceived  of as                                                              
being directly binding  or setting precedent. In  1965, two panels                                                              
were  created  instead   of  one  and  the  commissioner   of  the                                                              
Department of Labor  or his designee was the third  person on each                                                              
of  them. Now  there are  seven  panels. Mixing  and matching  the                                                              
seven management  members, seven labor members and  seven or eight                                                              
hearing  officers  can  conceivably   create  about  300  or  more                                                              
different combinations  and if there are disagreements  about what                                                              
the law  says, it  is difficult  for someone  like an  attorney to                                                              
try and  advise his client  about what  they should do  to conform                                                              
their behavior  to the act. He  also noted that panels  are manned                                                              
by volunteers who  get paid $50 per day and there  is only so much                                                              
you can expect them to do.                                                                                                      
                                                                                                                                
CO-CHAIR  BUNDE  said  he  received   information  about  workers'                                                              
compensation  reform in  Oregon and  asked Mr.  Lisankie if  he is                                                              
familiar with it.                                                                                                               
                                                                                                                                
MR. LISANKIE  replied that  he had seen  the information,  but had                                                              
not had time to review it in great depth.                                                                                       
                                                                                                                                
REPRESNETATIVE  NORMAN   ROKEBERG  said  the   Attorney  General's                                                              
office  was   working  on   restructuring  workers'   compensation                                                              
methodology and asked if he had worked on it with them.                                                                         
                                                                                                                                
MR.  LISANKIE replied  that  he  had input  into  it  when he  was                                                              
working in that office.                                                                                                         
                                                                                                                                
CO-CHAIR BUNDE thanked him for his testimony and introduced Lori                                                                
Wing, President, Alaska Independent Insurance Agents and Brokers                                                                
Association, to give the next presentation.                                                                                     
                                                                                                                                
MS. LORI WING, President, Alaska Independent Insurance Agents                                                                   
and Brokers Association, gave the committee an insurance                                                                        
broker's perspective saying:                                                                                                    
                                                                                                                                
     We're trying to  get them [a client] a work  comp policy                                                                   
     that is  competitive in  the market  place, but is  also                                                                   
     cost  effective   for  them.  We  also  work   with  the                                                                   
     insurers,   because   that's   who  is   supplying   the                                                                   
     insurance  policy.   On  occasion,  we  work   with  the                                                                   
     claimants, their employees.                                                                                                
                                                                                                                                
She said that workers' compensation is required by statute, but                                                                 
most employers are also in some sort of contract where they are                                                                 
required to provide it as a part of the contract. She explained:                                                                
                                                                                                                                
     Those  contracts  will  ask the  employer's  insurer  to                                                                   
     release  them  from  any  potential  right  of  recovery                                                                   
     against the owner  of a project. In other  words, if you                                                                   
     were walking  through a  building and  were a tenant  in                                                                   
     this  building,  our  lease  may say  that  our  insurer                                                                   
     waives  all rights against  the owner  of the  building.                                                                   
     If  you slip and  fall or  such, the  work comp  carrier                                                                   
     will pay the  claim, but they have no right  or recourse                                                                   
     to  go back  against the  building owner  for an  unsafe                                                                   
     building, just  as an example. That does have  an impact                                                                   
     on claims  when they  are paid,  but it  is the cost  of                                                                   
     business  for the employer  to do  business. He's  going                                                                   
     to sign the  contract; he needs to sign  the contract to                                                                   
     keep  people employed.  It's just one  of the  downsides                                                                   
     of the contracts.                                                                                                          
                                                                                                                                
     Who is providing  the workers' compensation  policies in                                                                   
     Alaska?  If you  look at  who  is registered  or who  is                                                                   
     authorized  to write insurance  in the State  of Alaska,                                                                   
     there are  approximately 400  insurers right now....  Of                                                                   
     those  400,   approximately  100  are  filed   to  write                                                                   
     workers'  compensation. Of  those 100, approximately  15                                                                   
     are    actively    or   currently    writing    workers'                                                                   
     compensation  in Alaska.  Of  those 15,  eight  actually                                                                   
     write  workers'  comp and  of  those eight,  about  four                                                                   
     write in Interior Alaska - in rural Alaska.                                                                                
                                                                                                                                
She  informed  them that  most  of  the  employers in  Alaska  are                                                              
subject to  four companies  and that some  companies file  up here                                                              
[in Alaska] for  one reason - because they have an  account with a                                                              
big employer  like J.C.  Penny or BP  Alaska. The eight  companies                                                              
who  are writing  in  the  Anchorage  Bowl, Fairbanks,  the  Kenai                                                              
Peninsula Borough  and Southeast Alaska have minimum  premiums set                                                              
in some  cases and might  also be subject  to not writing  certain                                                              
types of business.  From a broker's perspective,  the pickings get                                                              
slimmer and  slimmer as to  who will write  workers' comp  for the                                                              
employers in this state.                                                                                                        
                                                                                                                                
In  2002, one  company  wrote  the  predominant workers'  comp  in                                                              
Alaska. They  stepped up to the  plate on numerous  occasions when                                                              
others  wouldn't  and  for  that the  state  should  be  thankful.                                                              
Others  don't   write  workers'   compensation  because   in  some                                                              
instances  they  don't like  the  type  of  business or  in  other                                                              
cases, they don't like the location.                                                                                            
                                                                                                                                
MS. WING  explained when  Kemper Insurance  became insolvent,  its                                                              
business  transitioned to  Eagle Pacific  and Lumbermen's  Mutual.                                                              
She said for an insurer to be able to write coverage in Alaska:                                                                 
                                                                                                                                
     They want  to know that they  are going to  meet certain                                                                   
     premium  levels and  usually  those  premium levels  are                                                                   
     quite  substantial. It  has to  be worth  their time  to                                                                   
     come in  and set up an  office to educate the  public to                                                                   
     their  existence,  to  file  rates and  forms,  to  hire                                                                   
     underwriters,  to hire claims  adjusters to do  business                                                                   
     in  a  certain  area.  They   also  have  to  be  priced                                                                   
     competitively  to make a  profit and  they have to  also                                                                   
     be able  to cost  effectively provide  services such  as                                                                   
     claims administration  and loss control services  to the                                                                   
     consumers,  to  their  insureds. Most  insurers  do  not                                                                   
     feel that Alaska is big enough to do that.                                                                                 
                                                                                                                                
     Why so few  insurers are writing workers'  comp? We look                                                                   
     at  the combined  loss ratios  over the  last few  years                                                                   
     for  Alaska.  Generally speaking,  they  want  to see  a                                                                   
     combined loss  ratio of less  than 100 percent,  meaning                                                                   
     for  every  dollar  they  take in,  how  much  they  are                                                                   
     paying  out in claims.  In 2000,  for every dollar  that                                                                   
     was taken  in, the  insurers were  paying out $1.60.  In                                                                   
     2001,  the statistics  show  that  they are  paying  out                                                                   
     about $1.20; and  2002 and 2003, I believe  are going to                                                                   
     be higher than 120 percent.                                                                                                
                                                                                                                                
     How, why  and what happened?  Insurance is cyclical  and                                                                   
     we go  from a hard market  where insurance is  very hard                                                                   
     to  get  as  far as  decent  terms  and  conditions  and                                                                   
     pricing is  to a soft market.  We were in a  soft market                                                                   
     for  a  number   of  years.  We've  forgotten   in  some                                                                   
     respects what  we paid in 1980;  we forgot what  we paid                                                                   
     in 1990;  and around  2001, the hard  market hit  us and                                                                   
     it  hit us  hard. It  did not  just hit  Alaska; it  hit                                                                   
     worldwide,  in  all  honesty   -  2001  I'll  give  some                                                                   
     statistics  as   to  what  happened  -   the  difference                                                                   
     between the net  loss that the insurers took  in 2001 as                                                                   
     opposed to the  net income they had in 2000.  The events                                                                   
     of  September 11  had a  great impact  on the  insurance                                                                   
     market and  while we can look  and say that  happened in                                                                   
     New  York  and how  could  it  impact us,  the  insurers                                                                   
     doing  business  up here  from  Alaska National  to  the                                                                   
     [indisc.] and  like such -  they buy reinsurance  behind                                                                   
     them.  If you follow  that trail  back, you'll see  that                                                                   
     the  same reinsurers  were  the ones  doing business  in                                                                   
     New  York as  the ones  doing business  in Alaska.  When                                                                   
     they lost  money in New York,  they were kind  enough to                                                                   
     pass it on down to us here in Alaska.                                                                                      
                                                                                                                                
     All  the events and  inadequate reserves  that were  set                                                                   
     had  an impact  on the  insurance market  from Enron  to                                                                   
     pharmaceuticals  to also decline  in investment  income.                                                                   
     So, you  add it  all up and  we like to  think of  it as                                                                   
     you  had  some  underpricing  of  premiums,  credits  to                                                                   
     insureds,  you had rising  medical and indemnity  costs,                                                                   
     you had  catastrophic events  and you  had a decline  in                                                                   
     investment  income and what  you end  up with is  almost                                                                   
     like "A Perfect Storm."                                                                                                    
                                                                                                                                
     I showed  some statistics as  far as property  rates. If                                                                   
     you  were  paying  50  cents  in 1987,  I  show  how  it                                                                   
     continued  to go down  until 1999/2000  when it  started                                                                   
     to  come  back  up.  Property  rates  in  2002  probably                                                                   
     doubled from  what they were  in 2001. Again, to  put it                                                                   
     into  perspective, my  next slide shows  that if  you're                                                                   
     paying $100,000  for a property premium in  1987 without                                                                   
     any regard  for inflation,  you're probably paying  that                                                                   
     again in 2002....                                                                                                          
                                                                                                                                
     I'm also showing  the same scenario for  casualty rates.                                                                   
     Workers'  compensation  we're  feeling more  than  other                                                                   
     insurance,  because  it is  in  most cases  the  largest                                                                   
     premium that  the employers  are paying.... The  premium                                                                   
     is   developed  off   of   actual  payroll;   each   job                                                                   
     classification  is assigned a  loss cost. Employers  are                                                                   
     subject to an  experience mod, which is a  reflection of                                                                   
     their individual  loss experience. It could be  a credit                                                                   
     or a debit.  It may be subject to other  grading factors                                                                   
     and the  programs may  be written  as a guaranteed  cost                                                                   
     or  as  a  loss  sensitive   program  -  loss  sensitive                                                                   
     meaning  that  it's  a  deductible  program  or  perhaps                                                                   
     retrospectively  rated,  meaning  that  we're  going  to                                                                   
     come to some  agreement with the insurance  company that                                                                   
     if our  losses come  to this  point, that they're  going                                                                   
     to give  money back  to us. If  they exceed this  point,                                                                   
     we're   going  to  pay   more.  It's   a  loss   sharing                                                                   
     mechanism.                                                                                                                 
                                                                                                                                
     What  makes  up  the  loss costs?  The  loss  costs  are                                                                   
     actually   the  actual  or   expected  losses   for  any                                                                   
     individual  classification in  Alaska. They're based  on                                                                   
     historical, but  they're trended forward to  future. The                                                                   
     insurers, then,  take the advisory loss costs  issued by                                                                   
     the  state and  they add  on  for their  own profit  and                                                                   
     expenses.  That's what  the insureds,  the employers  we                                                                   
     refer to, use as their rate for work comp.                                                                                 
                                                                                                                                
     Predicting  loss cost is  hard to do  and that's  been a                                                                   
     problem  with the  employers  and with  the insureds.  I                                                                   
     can't tell  them what their  loss costs are going  to be                                                                   
     in 2006  or 2007.  We have  done a very  good job  as an                                                                   
     industry  both  in  Alaska  and  nationally  of  talking                                                                   
     about   medical  insurance   and  the  availability   to                                                                   
     employers or  to the employee  of how much  you're going                                                                   
     to have  to bear  and how much  the employers are  going                                                                   
     to have to  pay.... This always impacts the  bottom line                                                                   
     for any organization.  We have not taken that  same data                                                                   
     and  said  that  same  health   cost  is  impacting  the                                                                   
     workers' compensation  and it  has.... We have  not done                                                                   
     a very good  job of saying the increased  cost of health                                                                   
     insurance  has  every  bit  of  an  impact  on  workers'                                                                   
     compensation.                                                                                                              
                                                                                                                                
MS.  WING  informed  them  that  workers'  compensation  pays  for                                                              
medical costs,  lost wages, impairment rating  and rehabilitation.                                                              
There  is also  a  small death  benefit  associated  with it.  She                                                              
explained that  Alaska bills on  the whole person  theory, meaning                                                              
that the whole  person is worth $177,000 and  an impairment rating                                                              
is based  on a  1 percent  to 100  percent rating  for an  injury.                                                              
American  Medical  Association  guidelines  are used  as  well  as                                                              
subjective considerations.                                                                                                      
                                                                                                                                
One employer paid  $292,000 for workers' compensation  in 1999 and                                                              
it is up to $524,000 this year - a dramatic impact.                                                                             
                                                                                                                                
The  Association feels  there has  to  be a  better solution  than                                                              
continuing  to  raise rates.  It  has an  impact  as  far as  some                                                              
insureds staying  in business, but  the system needs to  be looked                                                              
at and changed. She concluded saying:                                                                                           
                                                                                                                                
     I don't know  of an employer that does not  want to take                                                                   
     care  of   their  employees,   but  I  also   know  most                                                                   
     employers don't  want to go  out of business  because of                                                                   
     work comp premiums.                                                                                                        
                                                                                                                                
CO-CHAIR BUNDE  asked her  to look  at what Oregon  did to  see if                                                              
Alaska  could  profit  from that  experience.  She  indicated  she                                                              
would be  happy to do  that. He commented  that companies  build a                                                              
reserve fund to be  able to ride out the low  years and a ten-year                                                              
cycle probably wouldn't look so dramatic.                                                                                       
                                                                                                                                
MS. WING  responded that  going far enough  back in  history would                                                              
probably  make  that  true.  In  the  last  few  years,  asbestos,                                                              
tobacco and  some pharmaceuticals  claims were under-reserved  and                                                              
she didn't know how that would play out.                                                                                        
                                                                                                                                
REPRESENTATIVE CARL  GATTO asked when  someone files a  claim, are                                                              
some medical records not available because of confidentiality.                                                                  
                                                                                                                                
MS.  WING   replied  that  brokers   don't  review   records,  but                                                              
adjusters and employers  have to comply with the  Health Insurance                                                              
Portability and Accountability Act (HIPAA).                                                                                     
                                                                                                                                
REPRESENTATIVE NORMAN  ROKEBERG asked if Kemper had  been declared                                                              
insolvent.                                                                                                                      
                                                                                                                                
MS. WING  replied that she didn't  know if they had  been declared                                                              
insolvent, but  they had  ceased doing business  and sold  off all                                                              
their business to different insurance companies.                                                                                
                                                                                                                                
     But to  the best  of my knowledge  I don't believe  they                                                                   
     are in liquidation....  Almost insolvent - I  think they                                                                   
     came  real  close.  I  don't think  I've  ever  seen  an                                                                   
     insurance  company  give  up what  they  consider  their                                                                   
     rights to renewal  and transfer the business  to another                                                                   
     insurer   as  quick.  Kemper,   which  was  a   national                                                                   
     company, well respected - 100 years old and I thought                                                                      
      as stable as a rock - three months in and they were                                                                       
     gone.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked if  they sold  their  obligations,                                                              
too.                                                                                                                            
                                                                                                                                
MS. WING replied no.                                                                                                            
                                                                                                                                
REPRESENTATIVE   ROKEBERG    said   the   National    Council   on                                                              
Compensation  Insurance  (NCCI)   set  rates  and  the  department                                                              
promulgates  regulations to  adopt those  rates. He  asked if  she                                                              
had an  opinion about whether the  rates were set  and promulgated                                                              
too low  for the last  eight years and  helped contribute  to some                                                              
of the problems and insolvency.                                                                                                 
                                                                                                                                
MS. WING replied  that she doesn't have access  to the information                                                              
that the NCCI has but, in her opinion, they were too low.                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  if  NCCI recommends  a  range  of                                                              
rates and then it's up to the department to estimate.                                                                           
                                                                                                                                
MS.  WING  replied  that  Ms. Hall,  the  director,  could  better                                                              
answer that.                                                                                                                    
                                                                                                                                
CO-CHAIR BUNDE noted  that he talked to a businessman  who said he                                                              
thought the rates  were set too low and decided on  his own to pay                                                              
higher rates. He asked Ms. Hall to comment further.                                                                             
                                                                                                                                
MS. HALL  reemphasized in the last  six years, Alaska went  from a                                                              
loss ratio low  of 99.9 percent to  a high of 154 percent,  for an                                                              
average of  123 percent. The national  average for that  same six-                                                              
year period is 118  percent. "So, we are experiencing  in Alaska a                                                              
higher loss ratio than is being experienced nationally."                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG asked her to explain loss ratio.                                                                        
                                                                                                                                
MS.  HALL  explained that  it  is  the  amount of  money  expended                                                              
compared to  the amount of  money taken  in. This means  for every                                                              
dollar taken  in with  a 154  percent loss  ratio, $1.54  is being                                                              
spent.  Workers'   compensation  has   not  been  profitable   for                                                              
insurance companies for at least the last six years.                                                                            
                                                                                                                                
She said  that she recently  approved rate increases  for workers'                                                              
compensation to  be effective on  January 1. Rates  were increased                                                              
by  21.2 percent  on  the average  -  the largest  increase  since                                                              
1988, but it  actually puts rates  at the same level they  were in                                                              
1992.                                                                                                                           
                                                                                                                                
CO-CHAIR  BUNDE asked if  that means  that the  rates will  now be                                                              
what they  were in  1992. She  indicated that  was correct  - they                                                              
went down and now they are going back up.                                                                                       
                                                                                                                                
Since 1988,  rates decreased in  nine years, remained flat  in two                                                              
years, and  had modest  increases for five  years (3  percent last                                                              
year and 10 percent the year before that).                                                                                      
                                                                                                                                
MS.  HALL pointed  out  that  there has  been  a decrease  in  the                                                              
number  of claims,  which is  good; but  that tended  to mask  the                                                              
increasing  cost of  claims, which  is  now catching  up with  the                                                              
leveling out of the number of claims.                                                                                           
                                                                                                                                
MS. HALL explained  that the assigned risk pool  is another aspect                                                              
of workers'  compensation. If an  employer cannot  obtain workers'                                                              
compensation through  the voluntary  market, there is  an assigned                                                              
risk pool  that will write  the coverage. Today,  approximately 17                                                              
percent of the  state's workers' compensation business  is written                                                              
in that  pool, most are small  employers. Ninety-three  percent of                                                              
the  policies are  under $10,000.  The policy  count includes  the                                                              
clerical  classification,  retail   stores,  restaurants,  single-                                                              
family  dwellings  for carpentry  and  physicians'  offices -  not                                                              
necessarily high-risk employers.                                                                                                
                                                                                                                                
     The  assigned risk  pool  has been  losing  money at  an                                                                   
     even   faster  rate  than   the  voluntary   traditional                                                                   
     insurance  market.  Currently,  when  the  claims  costs                                                                   
     exceed  the  premium  collected  in  the  assigned  risk                                                                   
     pool,  that difference  is  an assessment  to  insurance                                                                   
     companies.  Insurance  companies  pay  that  from  their                                                                   
     profits  or lack thereof....  Right  now Alaska has  the                                                                   
     highest assigned  risk pool  assessment of any  state in                                                                   
     the  country and  that is at  6 percent.  So, right  off                                                                   
     the top,  our insurance companies  are paying  6 percent                                                                   
     of their  direct written premium  back into the  pool to                                                                   
     subsidize those  losses. This is creating  an additional                                                                   
     burden on insurance  companies and making Alaska  a less                                                                   
     than attractive market place.                                                                                              
                                                                                                                                
MS.  HALL  said  that new  legislation  would  address  that.  The                                                              
biggest  thing she  wanted  to talk  about  is the  crisis in  the                                                              
Alaska Insurance Guaranty Association.                                                                                          
                                                                                                                                
     The  Guaranty   Association   is  formed  under   Alaska                                                                   
     statutes and  it is a group of insurance  companies. Any                                                                   
     insurance  company that writes  business in Alaska  must                                                                   
     belong to the  Guaranty Association. The purpose  of the                                                                   
     association is  to minimize financial loss  to claimants                                                                   
     and  policyholders  because  of  the  insolvency  of  an                                                                   
     insurer.  The Guaranty  Association pays  the claims  in                                                                   
     the place  of an insolvent  insurer. When an  insurer is                                                                   
     declared  insolvent,  their   claims  are  sent  to  the                                                                   
     Guaranty  Association.   There  have  been   claims  for                                                                   
     insolvent  insurers  in Alaska  for twenty  plus  years.                                                                   
     It's not an  unusual thing to occur. We have  had in the                                                                   
     last   three  years,   46   property  casualty   company                                                                   
     insolvencies.  This is not  a unique problem  in Alaska;                                                                   
     it  is  a  national  problem. We're  seeing  a  rash  of                                                                   
     insolvencies with devastating effects.                                                                                     
                                                                                                                                
     In  July 2003,  Fremont Indemnity  Company was  declared                                                                   
     insolvent  by  the  California courts  and  we  received                                                                   
     notice  of  that  the  day   after  it  happened.  While                                                                   
     Fremont had  not actively  written business since  early                                                                   
     2001,  when  they  actively  wrote  business,  they  had                                                                   
     approximately  27 percent  of  the Alaska  market.  When                                                                   
     they were  declared insolvent, their outstanding  claims                                                                   
     and  claim  reserves liabilities  totaled  $60  million.                                                                   
     This insolvency  is of a  magnitude never dreamed  of in                                                                   
     the  history of  the Guaranty  Association.  So, it  has                                                                   
     over-taxed  the ability of  the Guaranty Association  to                                                                   
     handle  those claims.  There are  three other  insolvent                                                                   
     workers' compensation  insurance companies  whose claims                                                                   
     are  being handled  in the  Guaranty Association.  Those                                                                   
     would be Reliance, Paula Insurance and Legion.                                                                             
                                                                                                                                
     These claims  are sent to the Guaranty  Association. The                                                                   
     Association  in turn  makes  an assessment  on  insurers                                                                   
     and that  is currently  capped in  statute at 2  percent                                                                   
     of  their net  direct written  premium. That  assessment                                                                   
     is able to be passed on to policy holders.                                                                                 
                                                                                                                                
CO-CHAIR BUNDE interrupted to ask if the Guaranty Association is                                                                
funded by a 6 percent surcharge.                                                                                                
                                                                                                                                
MS. HALL  replied no,  that assessment  is for  the assigned  risk                                                              
pool and right now  that has a deficit of 6  percent. The Guaranty                                                              
Fund assessment  is 2 percent;  the assigned risk  pool assessment                                                              
is paid  strictly by insurance  companies. The assessment  for the                                                              
Guaranty Association  is passed  on to  policyholders and  it will                                                              
be  shown on  the  face  of an  insurance  policy.  Based on  2002                                                              
premiums, that 2  percent cap raises $4.2 million -  and there are                                                              
$60 million in  Fremont claims, which, however, is  payable over a                                                              
number of years.                                                                                                                
                                                                                                                                
TAPE 04-2, SIDE B                                                                                                             
                                                                                                                                
MS. HALL said  that payments to the Guaranty  Association are $1.7                                                              
million  to $1.8 million  per month.  She recapped  that they  are                                                              
raising $4.2  million annually  and paying  out at  a rate  of 1.7                                                              
percent per month. "So, we do have a serious cash flow problem."                                                                
                                                                                                                                
In August,  she received  a letter  from the Guaranty  Association                                                              
indicating  they were going  to begin  prorating claims  payments.                                                              
This is  an absolutely  unacceptable alternative,  although  it is                                                              
allowed by statute.                                                                                                             
                                                                                                                                
     What it  meant is that  at some time,  and I'm  going to                                                                   
     use  50 percent  as an  example,  injured workers  would                                                                   
     receive  only  a portion  of  their  indemnity  payment,                                                                   
     which  is  really their  loss  of  wages when  they  are                                                                   
     unable  to work. They  would receive  only a portion  of                                                                   
     their  medical benefits.  I, frankly,  have a hard  time                                                                   
     imagining  they're going  to get  medical treatment  for                                                                   
     very long  if their  doctors are  being paid 50  percent                                                                   
     of  the bill.  So, we have  a devastating  affect to  an                                                                   
     injured worker,  because they're receiving  only partial                                                                   
     benefit.                                                                                                                   
                                                                                                                                
     The other piece  of that is the effect on  the employer.                                                                   
     The workers'  compensation  obligation is an  obligation                                                                   
     of  the  employer  under  statute.  That  obligation  is                                                                   
     typically satisfied  through the purchase of  a workers'                                                                   
     compensation  insurance  policy.   When  that  insurance                                                                   
     company fails,  I just talked  about how that  insolvent                                                                   
     company's  claims go  to the Guaranty  Fund. When  those                                                                   
     claims go to  the Guaranty Fund and there's  no money to                                                                   
     pay   them,    that   obligation   for    the   workers'                                                                   
     compensation  benefits  will go  back  to the  employer.                                                                   
     So,  what we have  now is  an employer  who has in  good                                                                   
     faith  purchased  an  insurance   policy  thinking  that                                                                   
     would  satisfy  their workers'  compensation  obligation                                                                   
     and now they get back that obligation.                                                                                     
                                                                                                                                
     To give  you an  idea of the  magnitude of the  problem,                                                                   
     currently of  the four companies whose claims  are being                                                                   
     handled in  the Guaranty  Fund, there are  approximately                                                                   
     700  injured   workers.  So,   we're  talking   about  a                                                                   
     significant  number  of  injured workers  who  stand  to                                                                   
     potentially    have    claims    prorated.    We    have                                                                   
     approximately  400  employers   whose  claims  of  their                                                                   
     injured workers  are in this same Guaranty  Association.                                                                   
     Claims range  in size  from - there's  one claim  in the                                                                   
     Guaranty  Fund of  approximately $5  million. We're  not                                                                   
     talking  inexpensive claims.  We have  two in excess  of                                                                   
     $2  million,  probably 100  in  excess of  $100,000.  My                                                                   
     concern and  one of the reasons  we're here today  is to                                                                   
     let you  know the situation.  I think most of  these are                                                                   
     small  businesses. Most small  businesses are  operating                                                                   
     on very minimal  profit margins. If that  employer, that                                                                   
     small   business,   would   get   back   this   workers'                                                                   
     compensation benefit  obligation, it's likely  to create                                                                   
     financial  ruin,  frankly. I  don't  think any  of  them                                                                   
     probably have  the real financial capability  of picking                                                                   
     up that benefit obligation.                                                                                                
                                                                                                                                
REPRESENTATIVE  GATTO  asked  if   a  person  works  for  a  large                                                              
employer  and   also  has  medical   insurance,  has   a  workers'                                                              
compensation claim,  and the employer goes into  chapter 11, could                                                              
regular health  insurance cover the  claim (even though  they have                                                              
no way  to recoup it through  workers' compensation).  "Would they                                                              
come  back to  the injured  party and  say, 'We're  going to  deny                                                              
your claim?"                                                                                                                    
                                                                                                                                
MS.  HALL replied,  "Most  group  health insurance  policies  very                                                              
specifically exclude  workers' compensation. So that  would not be                                                              
a source of benefit payments."                                                                                                  
                                                                                                                                
She continued to explain:                                                                                                       
                                                                                                                                
     The  actual prorating  of claims did  not occur  through                                                                   
     some very  diligent efforts of the Guaranty  Association                                                                   
     Board. The  Division of Insurance  has worked  with them                                                                   
     -  there's really  been  an  effort nationally  to  work                                                                   
     with   Alaska.   No   state  has   ever   had   workers'                                                                   
     compensation   claims  prorated   and  we've  had   huge                                                                   
     support  from other states  trying to  work with  us and                                                                   
     help  us find sources  of money.  California, Office  of                                                                   
     the  Liquidator,   has  made   loans  to  our   Guaranty                                                                   
     Association  based  on  potential   asset  distributions                                                                   
     later  of  $5  million  -  $4.5  million  based  on  the                                                                   
     Fremont estate and $.5 million on the Paula estate.                                                                        
                                                                                                                                
     In   January,  another   assessment  -   there  was   an                                                                   
     assessment done  in August of the 2 percent  - there was                                                                   
     a  second  assessment   in  January.  The  end   of  the                                                                   
     December, we  also received $2.6 million from  the State                                                                   
     of  Pennsylvania,   an  early   distribution  from   the                                                                   
     Reliance  estate. So,  there have  been enough  incoming                                                                   
     funds  to not have  to prorate  claims, but the  sources                                                                   
     of  those monies  are quickly  drying  up. The  Guaranty                                                                   
     Fund will  actually run out  of money probably  in April                                                                   
     - is  the projection  right now -  based on the  current                                                                   
     rate  of claims  payments.  The  maximum gap  right  now                                                                   
     projected  would be  reached  in 2008  - the  cumulative                                                                   
     deficit - and  that's about $25 million. Again,  we have                                                                   
     claims - some  of them are settled - some  employees get                                                                   
     better  and they  go back to  work, but  some work  comp                                                                   
     claims have very long tails.                                                                                               
                                                                                                                                
     I guess  in closing....  I would  emphasize that  Alaska                                                                   
     needs  a healthy workers'  compensation marketplace.  We                                                                   
     need  a  stable  environment  that's  sustainable,  that                                                                   
     would  encourage current  companies  to  continue to  do                                                                   
     business here and attract new markets.                                                                                     
                                                                                                                                
     A healthy  work comp  environment depends  on a  variety                                                                   
     of  factors -  adequate  rates, a  self-funded  assigned                                                                   
     risk plan,  a cooperative  regulatory environment  and a                                                                   
     sound workers' compensation system.                                                                                        
                                                                                                                                
MS. HALL said SB  276 and HB 403 addressed the  funding crisis and                                                              
that another bill deals with reform.                                                                                            
                                                                                                                                
CO-CHAIR  BUNDE said  he looked  forward  to working  with her  on                                                              
these issues.                                                                                                                   
                                                                                                                                
SENATOR HOLLIS  FRENCH asked if  it was correct that  the workers'                                                              
compensation  fund   had  no  profit  for  six   years.  Ms.  Hall                                                              
indicated that was correct.                                                                                                     
                                                                                                                                
SENATOR  FRENCH followed  up asking  if she said  there were  nine                                                              
years of rate  decreases in the same business.  She indicated that                                                              
was correct.                                                                                                                    
                                                                                                                                
SENATOR FRENCH asked  why rates kept going down  when the industry                                                              
wasn't making money.                                                                                                            
                                                                                                                                
MS. HALL replied:                                                                                                               
                                                                                                                                
     The  rate decreases  occurred in the  early to  mid-90s.                                                                   
     They undoubtedly  do have some overlap. Rates  are based                                                                   
     on   actuarial  analysis   and  actuarial   assumptions.                                                                   
     Without  getting into technicalities,  they're based  on                                                                   
     Alaskan experience,  loss experience, actual  loss cost;                                                                   
     they're based  on countrywide experience.  Alaska really                                                                   
     doesn't have  a large enough  marketplace to  have sound                                                                   
     actuarial data  by itself.  So, it's a combination.  The                                                                   
     third   aspect   of   that   would   be   trending   and                                                                   
     projections.  Some of  those projections  have not  been                                                                   
     adequate.  In hindsight  some  of those  rates  probably                                                                   
     were not adequate,  but it is hindsight. We  are working                                                                   
     diligently  to look  at that ratemaking  process and  to                                                                   
     find  ways to  make  that going  forward  we don't  have                                                                   
     inadequate rates.  Our responsibility as  the regulatory                                                                   
     body is  to make  sure that rates,  this is in  statute,                                                                   
     are   neither   excessive,  inadequate,   nor   unfairly                                                                   
     discriminatory.  I would focus  today on the  inadequate                                                                   
     or excess and how you draw that line.                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  Ms.  Hall  if   there  were  any                                                              
procedural steps  she was taking or  was she just doing  the right                                                              
thing so far.                                                                                                                   
                                                                                                                                
MS. HALL  replied that  proration  of benefits  is in statute  for                                                              
the  Guaranty Association.  If  the  fund didn't  have  sufficient                                                              
money  to pay projected  claims  for the upcoming  year, it  would                                                              
need to prorate  claims or spend what they have  and stop totally.                                                              
The  Guaranty  Association steps  in  the  place of  an  insolvent                                                              
insurer.  A  local  claims  adjusting   office  is  a  third-party                                                              
administrator and  they review claims  and make claim  settlements                                                              
and claim payments on behalf of the Guaranty Association.                                                                       
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked if people  had looked at  the asset                                                              
base  of the  Guaranty  Association  to keep  from  going to  pro-                                                              
ration.                                                                                                                         
                                                                                                                                
MS. HALL  replied that  there had  been efforts  industry  wide to                                                              
help  resolve   the  situation.  For  instance,   after  Hurricane                                                              
Andrew,  Florida's  Guaranty Fund  did  a  bond issue  until  they                                                              
could pay  back the  claims, because of  a similar situation  with                                                              
their  property  claims.  California  has  about  a  $1.5  billion                                                              
deficit in  their guaranty  fund and they  issued bonds,  as well.                                                              
Alaska's  Guaranty Association  could  do that,  but because  they                                                              
have no assets, it would be considered a junk issue.                                                                            
                                                                                                                                
REPRESENTATIVE  NANCY  DAHLSTROM  asked  Mr.  Lisankie  to  define                                                              
occupational disease.                                                                                                           
                                                                                                                                
MR. LISANKIE replied that the act says:                                                                                         
                                                                                                                                
     It's a disease  that you are more likely  to get because                                                                   
     of  some  condition  of  your   employment.  It  can  be                                                                   
     anything from  an inhalation kind of injury  to just you                                                                   
     have  to work outside  in inclement  conditions and  you                                                                   
     get   frostbite,   but  it   has   to  be   related   to                                                                   
     circumstances of  your employment. Basically,  it has to                                                                   
     be more  likely to occur to  you in the job  format than                                                                   
     if you were just at home...                                                                                                
                                                                                                                                
SENATOR SEEKINS noted  that because of the experience  ratings for                                                              
his business, he  was able to have lowered workers'  comp premiums                                                              
this  year and  he is  thankful for  his employees  and staff  who                                                              
helped him attain that.                                                                                                         
                                                                                                                                
CO-CHAIRS   BUNDE  and   ANDERSON  thanked   everyone  for   their                                                              
testimony and  said they  looked forward to  working with  them to                                                              
resolve these  issues.   There being no  further business  to come                                                              
before the committee, the meeting was adjourned at 5:10 p.m.                                                                    
                                                                                                                              
ANNOUNCEMENTS                                                                                                                 
                                                                                                                                
No announcements                                                                                                                
                                                                                                                                
COMMITTEE ACTION                                                                                                              
                                                                                                                              
No action taken                                                                                                                 
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
5:10 p.m.                                                                                                                       
                                                                                                                                
NOTE:   The meeting  was recorded and  handwritten log  notes were                                                              
taken.   A copy of the  tape(s) and log  notes may be  obtained by                                                              
contacting  the Senate Records  Office at  State Capitol,  Room 3,                                                              
Juneau,  Alaska  99801  (mailing  address),  (907)  465-2870,  and                                                              
after adjournment  of the  second session of  the 23  Alaska State                                                              
Legislature  this information  may be obtained  by contacting  the                                                              
Legislative Reference Library at (907) 465-3808.                                                                                

Document Name Date/Time Subjects