03/12/2021 01:30 PM Senate LABOR & COMMERCE

          SB 88-STATE INSUR. CATASTROPHE RESERVE ACCT.                                                                      
                                                                                                                                
1:49:53 PM                                                                                                                    
CHAIR  COSTELLO announced  the consideration  of SENATE  BILL NO.                                                               
88, "An Act  relating to the state  insurance catastrophe reserve                                                               
account; and providing for an effective date."                                                                                  
                                                                                                                                
She  listed the  individuals  available to  answer questions  and                                                               
stated the intent is to hear the introduction and hold the bill.                                                                
                                                                                                                                
1:50:38 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
1:52:26 PM                                                                                                                    
CHAIR COSTELLO  reconvened the  meeting and  asked Mr.  Jordan to                                                               
present SB 88.                                                                                                                  
                                                                                                                                
1:52:43 PM                                                                                                                    
SCOTT JORDAN,  Director, Division of Risk  Management, Department                                                               
of Administration  (DOA), Juneau, Alaska, delivered  a PowerPoint                                                               
to  present SB  88.  He displayed  highlighted  portions of  Sec.                                                               
37.05.289,  the Catastrophe  Reserve Account  (CATFund) that  was                                                               
enacted  in  FY88.   The  key  points  are  that   the  fund  was                                                               
established to  cover unanticipated costs related  to the state's                                                               
self-insurance program;  the fund  has a $5  million cap;  and no                                                               
more than $5 million may be retained in the fund.                                                                               
                                                                                                                                
MR. JORDAN  turned to the  list of expenditures from  the CATFund                                                               
since its inception. Over the last  33 years, the state has spent                                                               
approximately $149 million  from the fund, or  about $4.5 million                                                               
per year. He noted that the  chart has several columns but he was                                                               
focusing on the column showing Total Expended on the far right.                                                                 
                                                                                                                                
He turned to  the chart and line graph of  the 10-year history of                                                               
property  premiums and/or  losses  from  FY10-FY20. The  Property                                                               
Premiums  column, highlighted  in  blue, reflects  a little  more                                                               
than $2  million paid  in FY  10 and  $5.1 million  in FY  20. He                                                               
referred  to the  line  graph  on the  right.  It  shows a  sharp                                                               
increase from FY  11 to FY 12 and another  market driven increase                                                               
in FY  18 and FY 19.  He explained that the  hardening reflects a                                                               
lack of capacity in the  global market to pay catastrophic claims                                                               
and this causes premiums to rise.                                                                                               
                                                                                                                                
MR.  JORDAN  directed attention  to  the  Property Losses  column                                                               
highlighted in orange. It reflects  about $13 million in property                                                               
losses that  the CATFund paid  over the same 10-year  period. The                                                               
line graph is relatively flat except  for the $4 million loss due                                                               
to  the fire  at the  Crystal Lake  Hatchery in  March 2014.  The                                                               
subsequent  spike in  FY  20 was  due to  $1.26  million paid  in                                                               
claims from  the November  30, 2018  earthquake in  Anchorage and                                                               
the $1 million  payment when a DOTPF maintenance  shop in McGrath                                                               
collapsed from snow load.                                                                                                       
                                                                                                                                
1:56:44 PM                                                                                                                    
MR. JORDAN turned to the charts  on slide 4 and explained that he                                                               
included them  to show all  the expenses  that go along  with the                                                               
premiums  the state  pays  for excess  insurance.  The top  chart                                                               
reflects $39  million in property premiums  from FY 10 to  FY 20.                                                               
The  lower chart  reflects a  little  over $80  million paid  for                                                               
aviation,  marine, property,  and bonds.  He noted  that property                                                               
premiums are about half of overall premium payments each year.                                                                  
                                                                                                                                
MR. JODAN  turned to slide  5 that  lists the larger  claims paid                                                               
out of the Catastrophic Reserve Account. These were:                                                                            
                                                                                                                                
     head2right AMJS LeConte Grounding May 2004   $1.187                                                                        
        million                                                                                                                 
     head2right F&G Crystal Lake Hatchery fire March 2014 $4.078                                                                
        million                                                                                                                 
     head2right Alaska Aerospace Kodiak Launch Facility                                                                         
        rocket explosion August 2014                                                                                            
         $1.513 million                                                                                                         
     head2right PFAS claims starting in November 2017  $5.877                                                                   
        million                                                                                                                 
     head2right Earthquake related claims November 2018                                                                         
         $1.263 million                                                                                                         
                                                                                                                                
1:58:12 PM                                                                                                                    
SENATOR  STEVENS asked  if he  agreed that  other insurance  paid                                                               
much more  than the state's  $1.5 million payment for  the rocket                                                               
explosion at the Kodiak launch facility.                                                                                        
                                                                                                                                
MR. JORDAN agreed.  He said the claim was about  $34 million; the                                                               
state's insurer  paid about $17  million and the  launch customer                                                               
paid the other $17 million.                                                                                                     
                                                                                                                                
SENATOR STEVENS expressed appreciation for the explanation.                                                                     
                                                                                                                                
1:59:00 PM                                                                                                                    
MR. JORDAN turned to the  Lapse Appropriations Summary on slide 6                                                               
that shows the  funding for the Catastrophic  Reserve Account. He                                                               
explained that  any money  that Risk Management  has left  at the                                                               
end of a  fiscal year is swept into the  CATFund. If that doesn't                                                               
fill the fund to  the $5 million cap, they look  to the UGF lapse                                                               
appropriation funds.                                                                                                            
                                                                                                                                
He restated that  the purpose of SB  88 is to allow  the state to                                                               
be self-insured  for property coverage.  The state already  has a                                                               
good  record  of  self-insuring  for  workers'  compensation  and                                                               
general  liability and  wants to  add  property coverage  because                                                               
premiums increased  30 percent for  FY 21 and the  expectation is                                                               
that they will  increase another 15 percent to 20  percent for FY                                                               
22. The $5.1  premium in FY 20  will be about $7.6  million in FY                                                               
22. Increasing the $5 million  unencumbered cap on the CATFund to                                                               
$50 million  unencumbered cap will  allow the state to  equal the                                                               
$50 million limit  it can buy for catastrophic  coverage from the                                                               
market.  He described  it  as a  safety net  that  will save  the                                                               
additional $2.5  million the state  currently pays  for insurance                                                               
and allow better control over claims.                                                                                           
                                                                                                                                
CHAIR COSTELLO said a sectional is not necessary.                                                                               
                                                                                                                                
2:02:24 PM                                                                                                                    
SENATOR REVAK asked  how the division decided on  the $50 million                                                               
cap.                                                                                                                            
                                                                                                                                
MR.  JORDAN   said  the  market  currently   limits  catastrophic                                                               
coverage to $50  million. The idea is for the  state to step away                                                               
from the property market completely and self-insure.                                                                            
                                                                                                                                
CHAIR COSTELLO  asked the reason  that he mentioned  coverage for                                                               
earthquakes and floods but not fires.                                                                                           
                                                                                                                                
MR. JORDAN  replied this  would incorporate  fire loss  for state                                                               
buildings  but the  state  historically has  not  had large  fire                                                               
losses. The  fund has been able  to handle all the  losses so far                                                               
except for  earthquake and flood.  The concern is  a catastrophic                                                               
loss.                                                                                                                           
                                                                                                                                
2:05:01 PM                                                                                                                    
SENATOR STEVENS  asked if the  fund covers  state-owned buildings                                                               
like the Capitol.                                                                                                               
                                                                                                                                
MR.  JORDAN  answered  yes;  the   fund  covers  all  state-owned                                                               
property assets.                                                                                                                
                                                                                                                                
CHAIR COSTELLO asked what other states have for insurance caps.                                                                 
                                                                                                                                
MR. JORDAN  replied it  varies by  state and  runs the  gamut but                                                               
because  of the  tremendous  market increase,  the  trend is  for                                                               
states to have self-insured programs.                                                                                           
                                                                                                                                
CHAIR  COSTELLO  asked if  the  Division  of Risk  Management  in                                                               
Department of  Administration (DOA)  interacts with  the Division                                                               
of  Insurance  in  the  Department  of  Commerce,  Community  and                                                               
Economic Development (DCCED).                                                                                                   
                                                                                                                                
MR.  JORDAN  answered that  he  speaks  with Director  Wing-Heier                                                               
occasionally,  but  because   the  Catastrophic  Reserve  Account                                                               
(CATFund)  is  a  self-insured  program, there  isn't  a  lot  of                                                               
interaction.                                                                                                                    
                                                                                                                                
2:07:27 PM                                                                                                                    
CHAIR  COSTELLO referred  to the  language on  page 1,  lines 7-8                                                               
that   talks  about   "an  amount   that   the  commissioner   of                                                               
administration  determines to  be necessary".  She asked  if that                                                               
would be  a formal communication  so the legislature is  aware of                                                               
the amount or if it would show up on a ledger.                                                                                  
                                                                                                                                
MR. JORDAN  replied the amount  that the  commissioner determines                                                               
is  necessary comes  from what  the Division  of Risk  Management                                                               
says is needed to bring the CATFund up to the $5 million cap.                                                                   
                                                                                                                                
2:08:28 PM                                                                                                                    
CHAIR COSTELLO  found no further  questions and advised  that she                                                               
would hold SB 88 for further consideration.