SB 107-INSURANCE; RISK MG'T; HOLDING COMPANIES  1:07:04 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of SB 107. "An Act relating to insurance; relating to risk based capital for domestic insurers and fraternal benefit societies, including provisions related to insurers subject to risk based capital and action level event requirements; relating to review by the director of insurance of an insurer's risk based capital plan; relating to confidentiality and sharing of certain information submitted to the director of insurance; relating to evaluating an insurance holding company and the acquisition of control of or merger with a domestic insurer; relating to risk based capital, risk management, and own risk and solvency assessments of insurers; clarifying provisions related to risk based capital plans; relating to exemptions by the director of insurance for certain domestic and casualty insurers from risk based capital requirements; relating to insurance holding companies, including filing requirements, divestiture, content of statements, notifications, and hearings; relating to registration requirements of insurers; relating to transactions within an insurance holding company system or transactions involving a domestic insurer; relating to management and examination of domestic insurers that are part of an insurance holding company system; adding provisions relating to participation by the director of insurance in a supervisory college; relating to civil and criminal penalties for violations by insurers and individuals; relating to provisions for risk management and own risk and solvency assessments by insurers; relating to operating requirements for controlling insurance producers; relating to producer-controlled insurers; adding and amending definitions related to insurers; and providing for an effective date." She noted that this was the first hearing. 1:07:40 PM WESTON EILER, Aide to the Senate Labor and Commerce Committee, introduced SB 107 on behalf of the Labor and Commerce Committee speaking briefly to the following sponsor statement: The primary focus of the finance section of the Division of Insurance is the financial regulation of domestic and foreign insurers for the benefit and protection of Alaska policyholders. Requirements for financial supervision of insurers licensed in Alaska are imposed by Alaska statutes and regulations. Much of the statutory framework governing this effort comes from model laws passed by the National Association of Insurance Commissioners (NAIC). The financial section is unique in the Division as it is the only section that is accredited by the NAIC. The accreditation program provides a process whereby solvency regulation of multi-state insurance companies can be enhanced and adequately monitored with an emphasis on: · Adequate solvency laws and regulations in each accredited state to protect consumers and guarantee funds; · Effective and efficient financial analysis and examination processes; · Appropriate organizational and personnel practices; and · Effective and efficient process regarding the review of organization, licensing and change or control of domestic insurance. Being accredited provides a means whereby other states will accept the examinations of Alaska's multi-state insurers; and that we can accept the examinations of non-domestic insurers licensed to sell in Alaska from other accredited states without having to perform our own examinations. Alaska has seven domestic insurers and approximately 1,100 foreign insurers. Finally, the importance of accreditation cannot be understated as respects our commitment to state-based regulation. Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd- Frank), provided for the creation of the Federal Insurance Office (FIO). The FIO's is charged with monitoring the insurance industry (with the exception of the health insurance industry) including identifying activities within a sector that could potentially contribute to a systemic crisis to the broader financial system, the extent to which under- served communities have access to affordable insurance products and the sector's regulation. The FIO is authorized to receive and collect data and information on the insurance industry and can enter into information sharing agreements with state regulators. They also have the authority to require an insurer to submit data to its office. In 2013, the FIO released a mandated study titled "How to Modernize and Improve the System of Insurance Regulation in the United States". The report acknowledges many of the strengths as well as the successes of state-based insurance regulation. Nonetheless, the framework has been set for federal regulation if state-based regulation were to fail. It is not thought that federal oversight of Alaska, or any other states, will be in the best interest of the states. However, the states are continually monitored for adoption of and compliance of statutes regarding financial solvency and other regulations promoting a sound insurance industry that protects consumers. An accredited state meets the criteria set by the NAIC and accepted by the FIO. MR. EILER deferred further introduction and explanation to Lori Wing-Heier. 1:09:16 PM At ease 1:11:06 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community and Economic Development (DCCED), stated she would go through a PowerPoint presentation to frame the issue addressed in SB 107. She said the issue of the bill relates to the mission of the Division of Insurance, which is to regulate the insurance industry to protect Alaskan consumers. The intent of the bill is to ensure that the insurance companies doing business in Alaska are solvent and whole and Alaskan consumers are protected. 1:12:33 PM MS. WING-HEIER spoke to the following points regarding state- based regulation: Unlike any other major industry, the individual state governments are the primary regulators of the business of insurance and are responsible for the safety and soundness of the U.S. insurance system. · In 1945, Congress passed the McCarran-Ferguson Act (15 U.S.C. 1011 - 1015) which exempted: the business of insurance from most federal regulation. The Act provided that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance." · In the Act, Congress made clear its intent stating that "the continued regulation and taxation by the several States of the business of insurance is in the public interest, and silence on the part of Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States." · Through the years, Congress has enacted legislation specifically related to insurance including flood insurance, crop insurance, terrorism protection insurance, producer licensing uniformity and reciprocity, uniform standards for surplus lines eligibility and the creation of the Federal Insurance Office (FIO) which is, for the most part, a non-regulatory agency. · One of the reasons why the state-based system of insurance regulation continues is that it has worked. · For example, during the 2007 - 2009 financial crisis which hit hard the financial services industry of which insurance is a part, the United States Government Accountability Office, in a 2013 report to Congress, noted "[t]he effects of the financial crisis on insurers and policyholders were generally limited, with a few exceptions." · The Independent Insurance Agents & Brokers of America (IIABA) agreed stating in a 2011 letter to the FIO: "Even during the most tumultuous of times, state insurance regulators ensure that insurers are solvent, that claims are paid, and that consumers are protected. IIABA remains dedicated to preserving state insurance regulation." MS. WING-HEIER said the McCarran-Ferguson Act put the transaction of insurance under the states, taking it away from federal regulation. State-based regulation holds today because it works. An important fundamental of state-based regulation is accreditation, which is looking for reciprocity in the solvency standards amongst insurance companies that are domiciled in Alaska and doing business outside Alaska or insurance companies domiciled outside and doing business in Alaska. They are all judged by the same standard. What this model legislation seeks to ensure is that there is reciprocity among the statutes in the other 55 jurisdictions - the states, territories, and the District of Columbia. 1:15:49 PM SENATOR ELLIS joined the committee. SENATOR STEVENS asked if the division ensures that claims are paid. MS. WING-HEIER answered yes; insurance companies report in their financials what they expect to pay and what they have paid. She discussed the following points related to the National Association of Insurance Commissioners: · The National Association of Insurance Commissioners (NAIC) is the U.S. standard- setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. · Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight. NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the U.S. · While much of the business of insurance is local in nature due to differences of risk and other factors particular to a local area, the elected or appointed state government officials who oversee the regulation of insurance companies and producers in their respective jurisdiction (the members of the NAIC), recognize there often is a need for national standards and/or uniformity. · The NAIC promotes national standards, uniformity, reciprocity, and consistency at the national level through the development of model laws and regulations. MS. WING-HEIER said the only time a state is required to adopt a model is for an accreditation. 1:17:43 PM CHAIR COSTELLO asked when the state last went through the accreditation process. MS. WING-HEIER replied it was in 2012 and the next accreditation will be in 2017. A report is due in June, 2015 as to accreditation status on the adoption of model laws. She discussed the following points on the NAIC Model Law Program: · Much of the work of the NAIC is conducted through its committees, task forces, working groups, or subgroups and it is here where discussion most likely begins in the consideration of a new model law. However, these entities may not devote resources to the actual development or drafting of a model law unless it is determined that the subject of the model law necessitates a minimum national standard and/or requires uniformity amongst all states. · It also must be determined that the NAIC members are committed to devoting significant regulator and association resources to educate, communicate and support a model that has been adopted by the membership. · Only model laws mandated by federal law are exempt from these determinations. · The model law development and drafting procedure entails a rigorous process providing notice and opportunity for consumer groups and industry to comment. · Both the parent committee with oversight for the subject area of a model law and the entire membership of the NAIC must adopt any proposed model law by a two-thirds majority vote. · The process of creating a national standard, however, does not stop there. The decision to implement each standard remains with the individual states. · Adoption of certain model laws are required if a state insurance regulatory agency is to be accredited under the NAIC financial regulation standards & accreditation program. MS. WING-HEIER relayed that Alaska sits on the Property and Casualty Committee and the Market Regulation and Consumer Affairs Committee. It also sits on 14 task forces, 3 liaison committees and numerous working groups. She also vice-chairs the American Indian and Alaska Native Liaison Committee. It's in these committees that discussions come forward about what is best for regulation. Once the laws come forward they have been well vetted by all jurisdictions. They are brought out for both industry and public comment. 1:19:03 PM CHAIR COSTELLO asked how much time the division dedicates to the efforts related to the NAIC. MS. WING-HEIER replied the division tries to attend three meetings a year. Additionally there are a lot of conference committee calls and on occasion she'll send staff to the Kansas City office if a new subject is coming out. CHAIR COSTELLO asked how many other states have gone through the process that Alaska is currently undertaking. MS. WING-HEIER answered that all states have gone through the process. 1:20:18 PM MS. WING-HEIER explained that the mission of the NAIC financial regulation standards and accreditation program is to establish and maintain state regulator standards to promote sound insurance company financial solvency regulation. This is a critical function for consumer protection because an insurance company that isn't financially solvent, cannot meet its contractual policy obligations to pay claims in the event of a loss. She said the regulation and accreditations standards are important because Alaska has about 1,100 insurance companies that do business in the state. She continued to review the following points: · The accreditation program provides a process whereby solvency regulations of multi-state insurance companies can be enhanced and adequately monitored. · This is important, particularly for a small state such as Alaska, because if another state meets the accreditation standards of the NAIC, then Alaska can have the confidence that insurance companies operating here but domiciled in another state are being adequately regulated for financial solvency by the domiciliary state. · Similarly, if Alaska is not accredited, other states can no longer rely on examinations performed by the division on insurers domiciled here. Those insurers would become subject to examinations by all states in which they do business which would be a significant financial burden. · Alaskan consumers could be negatively impacted as companies may decide not to operate in Alaska due to the duplicative examination costs incurred by operating in a non-accredited state. 1:21:22 PM MS. WING-HEIER explained that accreditation process is for a five-year period and the division's next full accreditation review will be in 2017. A key component of the financial solvency regulation accreditation review is a determination by the NAIC accreditation review team that the state has the necessary solvency laws and regulations to protect consumers and guarantee funds. She stated that the first part of the bill is about risk-based capital (RBC), which is a method of measuring the minimum amount of capital that is appropriate to support an insurer's overall business operations. This surplus capital provides a cushion to an insurer against insolvency. It is also referred to as the insurance company's elastic measure. RBC limits the amount of risk a company can take so a company with a higher amount of risk has to hold a higher amount of capital. Risk-based capital has two main components: 1) it is a formula with an established hypothetical minimum capital level that is compared to an insurance company's actual capital level; and 2) the model law grants automatic authority to the state insurance regulator to take specific actions based on the level of impairment. The model addresses insurer reporting requirements, the hearing process, and confidentiality concerns. It includes provisions for exemptions, foreign insurers and immunity. The division is updating the risk-based capital and the new standards are effective January 1, 2016. These changes appear in the first eight pages of the bill and amend chapter 14 in AS 21. 1:23:20 PM MS. WING-HEIER said the second part of the bill updates the insurance holding company chapter in AS 21 to reflect the status or organizational structure of holding companies, and looking at what a holding company may have besides an insurance company. If there is more than one insurance company within that holding company, it would be possible to see the finances of each company to see that each can stand on its own and is not subsidized by another company. She displayed and briefly reviewed the following points: · Prior to the 2010 model revisions, the model law focused on protecting the solvency of insurers within an insurance holding company system, by monitoring transactions between insurers and their affiliates, dividends declared by insurers and acquisitions of insurers. · The model pertains to subsidiaries of insurers, acquisition of control or merger with domestic insurers, acquisitions involving insurers not otherwise covered, registration of insurers, and standards and management of an insurer within a holding company system. · The model revisions are aimed at assessing the "enterprise risk" within the entire insurance holding company system (including the risk caused by non-insurer affiliates) and determining the impact of such risk upon the solvency of insurers within the insurance group. · To accomplish this goal, the revisions enhance a chief insurance regulator's ability to supervise the insurance group by mandating reporting of information regarding the solvency and risk of an insurer's non-insurer affiliates and allowing examination of such entities. · This portion of the bill incorporates changes made to Model Law 440, Model Insurance Holding Company System Regulatory Act. CHAIR COSTELLO asked if the information about companies within a holding company is sent to the division in hard copy or available online. MS. WING-HEIER replied there are some aspects that have to be reported to the division. With the amendments, insurers will now have to report to the division through a risk management framework called an own risk solvency. The division also does physical financial examinations of its insurers each year. 1:24:44 PM MS. WING-HEIER discussed risk management and owner risk solvency assessment outlined in the new chapter AS 21.23. She explained that it puts the onus on the insurance companies to report to the division on confidential matters involving their enterprise risk management. She reviewed the following points: · This new model requires insurers to maintain a risk management framework and complete an ORSA Summary Report to be filed with the chief insurance regulator of the domiciliary state, unless exempt. · The confidential filing summarizes the insurer's or group's risk management framework, assessment of risk exposures, group risk capital and prospective solvency assessment. · These reports represent a proactive approach by providing chief insurance regulators with an additional tool to evaluate the prospective solvency of an insurer. · This portion of the bill adopts Model Law 505, Risk Management And Own Risk And Solvency Assessment Model Act. CHAIR COSTELLO asked if she and the division staff sign confidentiality agreements. MS. WING-HEIER answered that confidentiality is built into the insurance statutes in AS 21.06.060. The bill references the current standards. CHAIR COSTELLO asked how that applies to individual state employees. MS. WING-HEIER replied it would apply to all employees within the division and all division contractors. She reviewed the updates in chapter 27 relating to the operating requirements for controlling insurance producers. She explained that it sets out the parameters for the owner of an insurance company who is also selling the insurance of the insurance company. The amendments dictate when to draw the line between the owner and agent of an insurance company. She displayed the following points: · There are situations in which a producer soliciting, negotiating or procuring the making of an insurance contract on behalf of an insured also controls directly or indirectly the insurance company. · In such situations, additional guidelines for business between controlled insurers and controlling producers are necessary for fiduciary and oversight reasons. · This model requires specific contract provisions to be contained in controlling producer/controlled insurer contracts. · This portion of the bill incorporates amendments to Model Law 325, Business Transacted With Producer Controlled Property/Casualty Insurer Act. SENATOR STEVENS asked if she can deny insurance companies from doing business in Alaska. MS. WING-HEIER answered yes. SENATOR STEVENS referenced her duty to protect the consumer and asked if she looks at more than just solvency in determining whether or not an insurance company can do business in Alaska. MS. WING-HEIER explained that for a company to receive a certificate of authority to conduct business within the state, it has to meet certain financial solvency requirements. After it is allowed to do business, it is monitored by best practices to ensure that consumers are treated fairly. CHAIR COSTELLO asked for the rationale for including the NAIC model Risk Management and Own Risk and Solvency Assessment Act in a new chapter. She asked if it was uncommon to add a new chapter and questioned whether it was needed. MS. WING-HEIER explained that the NAIC model law provides an opportunity for the division as financial examiners to be proactive looking forward 3-5 years at what an insurance company may be planning regarding acquisitions, corporate governance and potential growth. Under the current procedure the financial examination is looking back, which only allows an opportunity to be reactive. She acknowledged that while it's rare to add a new chapter, it's not unheard of. CHAIR COSTELLO asked if a particular situation precipitated the change. MS. WING-HEIER answered no and added that the new chapter was created because it didn't particularly fit within any of the existing chapters. 1:31:49 PM SENATOR ELLIS asked her position on rate review authority by the Division of Insurance. MS. WING-HEIER replied the division has rate review authority over most insurance products that come into the state and they take this seriously. They have a consulting actuary and an actuary on staff. The reviews are done very carefully and according to a standard to ensure that the consumer isn't paying too much or too little. "[The rate] has to come through so many days in advance, we respond, they cannot be inadequate, they cannot be excessive and they cannot be unfairly discriminatory." Some people think these terms are ambiguous because it depends on perspective, but when she looks at a rate she follows the statute and is looking at whether it makes the company solvent without being excessive. SENATOR ELLIS discussed the sentiment among some legislators in years past that previous directors of insurance did just cursory reviews of the filings and requests from insurance companies, particularly with regard to health insurance. He related that several years ago he was confounded when then insurance director Linda Hall turned down federal funds to allow states to figure out why consumers were being charged certain rates for health insurance. He said she may have been acting at the direction of the governor, but it was almost willful ignorance to turn down the ability to dig into the facts and come up with an answer for consumers. He encouraged Ms. Wing-Heier take advantage of any opportunity to learn the facts about why health insurance costs in Alaska are so high. MS. WING-HEIER said the point is well taken. 1:37:36 PM SENATOR MEYER asked if the insurance market in Alaska is competitive. MS. WING-HEIER replied it is competitive in some lines of business such as auto and homeowner, but not others. The market in health care is limited and it is not competitive. SENATOR MEYER asked if she gives approval when one company transfers its customers to another because of bankruptcy, or if it happens automatically. MS. WING-HEIER replied the matter goes through the division but they don't approve it. The claims go through either the guarantee association for life and health or the guarantee association for property and casualty. The insurance companies and the consumers end up paying the claims of the insolvent insurers. These provisions are in the insurance statutes. 1:39:38 PM SENATOR GIESSEL asked her thoughts as to whether it would lower health insurance costs if Alaskans were able to buy their health insurance across state lines or if insurance rates are set based on cost. MS. WING-HEIER said she has been involved in several meetings with the Department of Health and Social Services (DHSS), Department of Labor and Workforce Development (DOLWD), and the Department of Administration to look at the issue in a more global way because it is an issue that the state faces as a whole. It is not a silo. The cost of health care in Alaska is very high and someone is paying for it through one program or another. 1:41:57 PM SENATOR ELLIS requested the committee keep track of this issue and have an ongoing dialog with the director because this has been a topic of concern for many years. He asked Ms. Wing-Heier if it is her view that health insurers do not want to write business in Alaska because it is a very small market and the cost of health care is so high it is out of line with the rest of the country. MS. WING-HEIER agreed that Alaska is a small market and the costs of health care are very high. SENATOR ELLIS reiterated his request that the committee work with the director to examine the reasons for the exorbitant and escalating health care costs in Alaska that are driving both the private market and public budgets. CHAIR COSTELLO said she took note of the request and would follow up. SENATOR GIESSEL asked Ms. Wing-Heier if she was also partnering with the health care commission, which has done studies on the topic of health care in Alaska. MS. WING-HEIER answered yes through the Department of Health and Social Services. 1:44:18 PM CHAIR COSTELLO asked if transparency can be legislated so that consumers will know the cost of health care services when they are shopping. MS. WING-HEIER replied the Affordable Care Act has provisions where the costs have to be public now. By statute rates in Alaska have to be public the day they are effective. 1:46:47 PM CHAIR COSTELLO related her experience calling different doctors in Fairbanks and Anchorage to find out what it would cost to treat a broken arm. The estimates ranged widely. She voiced frustration on behalf of Alaskans who have no idea what the final cost will be for a procedure and they keep getting bills from people they didn't know had a role in the process. MS. WING-HEIER said she'd take that under advisement. CHAIR COSTELLO asked if she would provide a color coded sectional showing the new chapter, the sections needed for accreditation, the model legislation, and a combination of the three. MS. WING-HEIER agreed. 1:47:50 PM CHAIR COSTELLO found no public testimony and closed it. 1:48:07 PM CHAIR COSTELLO announced that she would hold SB 107 in committee for further consideration.