Legislature(1997 - 1998)
02/27/1997 01:32 PM Senate L&C
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* first hearing in first committee of referral
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SB 95 WORKERS COMPENSATION SELF-INSURANCE GROUP
CHAIRMAN LEMAN called the Senate Labor and Commerce Committee
meeting to order at 1:32 p.m., and said since there was lack of a
quorum they would be in work-session mode. He said they would hold
SB 65 until next Thursday and announced SB 95 to be up for
consideration.
SENATOR MILLER, sponsor of SB 95, said he introduced this bill
primarily because he believes in the concept of insurance pooling.
He said several years ago the State allowed the timber industry to
drop its costs over a period of time by pooling.
Number 74
MR. STEVE WISDOM, President, Alaska State Homebuilders Association,
said they have Statewide support on this issue. For most of the
small builders the workers' compensation rate is in the $17 - $19
per $100 range. He said there are over 40 states that have
legislation enabling this. About 14 other states are using almost
the same as what is in this bill.
When someone joins a pool, they have to commit to a number of
things: a safety program, on-site safety inspections by the
administrator of the group, a safer work place, reduced rates, and
follow-up when working with an injured worker.
MR. WISDOM said ASHA has addressed the Division of Insurance's
concerns with solvency, the guarantee, the premium tax, and the
surety issue. They feel they can work these things out with the
Division of Insurance because they are not asking not to be
regulated.
He said this type of pooling has reduced worker's compensation
insurance in other states on an average of 37%. A number of
studies have been done on self-insured groups and they show they
are effective in the worker's compensation area. With commercial
carriers 70% of the cases had attorneys involved; with the self-
insured groups, only 27% used attorneys.
Number 164
CHAIRMAN LEMAN announced an at-ease from 1:42 - 1:45 p.m. to allow
more seating.
MR. BILL TAYLOR, Alaska State Homebuilders Association, said he
wanted to concentrate on the area of insolvency. The bill has a
minimum net-worth requirement of $1 million which is used as a
safety net for any back-up claim or problem that the group may
encounter. He said Ms. Burke, Director, Division of Insurance,
pointed out that this was an imperfect form of capital requirement,
because typically if you have a crisis, it is better to have simple
liquidity rather than pledged assets (in the form of tools, truck,
land, etc.) In times of crisis you usually need that money
immediately, he said, and it is a legitimate concern which he
thought could be readily addressed.
Another concern was if there was a loss, the way the legislation is
written, the State of Alaska just becomes the loss payee. He said
that is true. The State has to become the loss payee when you have
money that needs to be used to pay a claimant. He thought the
simple solution to that is to simply make the loss payee give the
Division of Insurance the ability to assign that to some claims
administrator.
Another concern is the start-up risk. Ms. Burke pointed out some
weaknesses in the initial requirements to take 25% of the first
year's estimated premium. However, he thought they had insured
around this risk by having the ability to negotiate a reinsurance
rate that would allow an extra layer of protection. Also, he said
the additional capital requirements have to come in the form of
government guaranteed instruments like a federally insured
certificate of deposit or a government issued bond.
Number 256
He said the Director may veto who they choose for reinsurance and
he thought that was important protection because some of the off-
shore markets for reinsurance may not be as stable. He said there
is also a fidelity bond for the administrator and a performance
bond for the claims administrator which they thought was important
protection against the potential claimant. They do not feel this
legislation puts the claimant at risk. If it does, they are
willing to amend it to provide that protection.
MR. TAYLOR said the major carriers don't come into the market place
on-site for job safety training which he thought was an important
adaptation that will occur as a byproduct of this legislation. He
noted there is also peer pressure within the group because once you
are invited in, you are going to be on the line.
CHAIRMAN LEMAN said he wants to make sure that the $1 million is
money that is readily available to the pool before the bill leaves
committee. MR. TAYLOR agreed.
Number 312
MS. ROBIN WARD, ASHA, said they have four areas of concern: the
liquidity of the $1 million; the minimum of five employers (they
are willing to consider a minimum number of employees); their being
exempt from the premium tax, and the guarantee fund. She said the
guarantee fund was an oversight, because they had planned to put
that in to the legislation because it provides one more layer for
the worker against insolvency.
They also don't expect the administration to regulate and oversee
them for free and she said they would negotiate a premium tax that
would cover the costs. She said they do not want to change the way
the worker is taken care of. They would be very careful about who
would be let into a pool. Problems with a safety record, for
instance, would require a probationary period and a team to come in
to help make sure the job site becomes safe rather than just
kicking them out which is not their intention. Once they are in,
they want them to stay in. The track record in most states is 90%
participation for those who keep renewing year after year.
MS. WARD said there has been a drastic reduction in the number of
accidents in self pooling because of the safety program and the
peer pressure that comes with it. The have also noticed along with
fewer claims, that the rehabilitation is faster and there is very
diligent investigation of fraud. This is not the case with a
commercial carrier. She said that most of them search long and
hard for employees they can trust and they want to make sure they
keep them safe at all costs.
CHAIRMAN LEMAN commented that the amount that is collected from the
premium tax is considerably more than the cost to the Division. He
asked if she would view paying the same tax as other people do as
being appropriate. MS. WARD said she didn't know, because she
didn't know what they are paying.
Number 378
MR. DICK BLOCK, Alaska National Insurance Co., said there has been
substantial recognition of the problems among the group advocating
the bill and that is gratifying. He said they are one of the
primary writers of workers' compensation in the State of Alaska.
He said he is a risk management consultant and has done work for a
number of industry sectors on this whole issue of providing some
means of grouping the industry to get economies of scale or to
bring about better safety and loss control. He agreed there are
advantages to be gained by grouping and they do work successfully.
He said that Senator Miller refers to an existing State program
called the Timber Insurance Exchange which he regards as a
successful example of what happens when you do grouping. Another
enterprise is the Alaska Rural Electrical Cooperative Association
(ARECA). He emphasized that there already exists in current law
three ways he has identified that the Homebuilders or any other
homogeneous industry can have the advantages of grouping, the
advantages of a safety program and more control over how losses are
dealt with, and some say over what expenses are incurred in the
marketing and administrative costs.
Under current law any trade association can create a purchasing
group. They can aggregate their membership into a single-group
policy, they can pool their experience, and it has the advantage
that they are not required to put up any capital. They would enter
into an agreement to put this together with an existing, licensed,
and regulated insurer, and set up the parameters for the program as
to how the premiums would be calculated. He emphasized that
programs organized under this law have worked well where they've
been used.
A second opportunity under current statute is to form a reciprocal
insurer which is what is being done under the Timber Exchange and
ARECA. Here they are required to put up a substantial amount of
capital, the amount necessary to underpin the security due the
injured workers. It is their own operation. They would have say
over their investments, marketing, and administration, etc.
The third way is simply for there to be a group marketing mechanism
to be installed to find a market that is willing to provide lower-
cost coverage because they are getting all or most of the members
of the group. This is also being currently done in this State, but
he is not that familiar with it. It's the National Electrical
Contractors Association.
MR. BLOCK said in all three of the examples he has cited there is
a licensed, regulated, capitalized, dedicated insurance enterprise
- whether it provides a program to the group or whether it is an
enterprise that is owned and operated by the group. It comes under
the regulatory regime of the Division of Insurance. By "dedicated"
he means that the capital is available only to pay the obligations
arising out of the insuring functions, not for operating expenses.
What is proposed by the Homebuilders is not an entity, at all. It
is simply the mutual exchange of contracts - one homebuilder to all
the other homebuilders - that they will pay a premium. Out of the
premium will come losses and expenses, and if the premium is
inadequate to cover the losses and expenses, the other homebuilders
have the right of action against the homebuilder to collect
whatever is available. He wanted to make it clear that the $1
million referred to in the bill is not $1 million of capital in an
insuring enterprise. No money to start the operation goes into the
insuring enterprise. Rather it is the accumulated sum of the net
worths of those who are contributing to the program. There is no
underlying capital in the insuring mechanism; all there is is a
right of action against the several participants against a resource
that is also available for their operating costs. This is the
fundamental difference and makes the program totally inappropriate
in a State of our size for our kind of operation.
MR. BLOCK said he has found in a few states he has looked at, like
California, that they require $5 million of capital. In addition
to that to get started you must contribute essentially an amount
equal to the last three years losses as known by the organization.
They are recognizing that these are very high risk operations and
there needs to be money at hand in order to provide the same level
of safety to the injured workers as they would have from an
insuring entity.
Number 479
He noted that Ms. Ward said ASHA is willing to participate in a
guarantee association and willing to pay a premium tax to be
negotiated, but the premium tax is not a negotiable item. It's
2.7%; every employer pays that rate. Premium tax is a source of
revenue for the State and not a means of funding the Division of
Insurance. It seems a gratuitous gesture on the part of the
Homebuilders to say they are willing to participate in the
guarantee association, meaning they would pay their fair
assessment, but the counter to that is in the event of insolvency
of this enterprise, it would be the requirement of the guarantee
association to pick up the losses; and this is cited as an
additional means of protection for the injured worker. It also
means it's an additional burden and an additional threat to all the
other employers and insurers in the State if their organization
isn't properly capitalized and managed.
MR. BLOCK pointed out that they are dealing with the most volatile
line of insurance - workers' compensation. The problem is that
these claims are not fully determined for a period of up to five or
15 years. It may take several years before an accurate estimate
can be made. In the company he was with for six years, they found
they didn't reach a level of stability in what the amount of the
claims were in aggregate for a period of about five years.
The need for the capital underpinning is to protect against the
extreme volatility throwing them into an insolvency position.
He said that also unfortunately the bill is open to any industry
that wants to get into this, which is fair, but the problem is that
they have seen in other contexts a statute like this being utilized
by a clever marketeer as a means of saving a lot of money only to
find in a few years that it is a disaster for all that are in the
group. He said this happened several years ago with multiple
employer trusts and multiple employer welfare arrangements as
allowed under federal law with respect to medical and life
insurance benefits for employees. The proposed legislation is not
all that different than what was originally contemplated in the
legislation authorizing those.
CHAIRMAN LEMAN thanked him for his informative testimony and the
letter he had written the committee.
MS. MARIANNE BURKE, Division of Insurance, said the Homebuilders
Association had attempted to address the concerns she and Mr.
Grossi had pointed out last year, but they had not gone far enough.
MS. BURKE stressed that there is no insurer in the State of Alaska
who is not capitalized which means the money is in the group, not
with some individuals or policy holders or contract holders. The
net worth is in the group. Within the insurance community there are
"admitted assets" which is defined in statute as those assets that
are more liquid. For example, a building is hard to convert to
cash in a reasonable length of time. Her division looks to surplus
the capitalization as admitted assets less any liabilities.
She said it has been pointed out that at inception there would be
no monies or assets in this group. The first influx of money is
from premiums. Of that, 25%, there will be $43,750 available for
claims.
She said the guarantee fund is made up of insurers who are at risk
for their fellow insurers. This proposed group is arguably some
other kind of entity. Whether or not they would be eligible to
participate in the guarantee fund as the statutes are currently
written is highly debatable. The guarantee fund is there when you
become insolvent, she pointed out. It is not available to help you
through financing during the period of time you are getting
started. It is not available if you get into a financial crisis.
It is available when you have gone into liquidation.
MS. BURKE said that bonds were also mentioned as being available
and the director having the authority to set the amounts of those
bonds. The proposed legislation specifically says that money
cannot be used until the group is insolvent. At that time the
money is paid to the State. However, the State is not currently in
the business of paying workers' compensation for any other group.
That is an administrative function and there are attendant costs to
it which they currently do not collect fees for.
Reinsurance, she explained, is purchased to kick in when a claim
reaches a certain point. It is also referred to as stop-loss. It
kicks in for all claims for less than a certain amount. It does
not kick in when you are out of money; that is not the purpose. It
does not kick in when you have exhausted all of your funds on a
series of claims that are, for instance, $5,000. (There could be
100 $5,000 claims.)
TAPE 97-8, SIDE B
MS. BURKE said the reinsurance is also priced, in part, by when it
kicks in. All claims over $5,000, for instance, would be more
expensive because it's greater risk. If you increase the stop-loss
to $100,000, you'll pay less premium for it, but you are at risk
for more dollars.
The surety bonds are very good protection, but the protection is
for the performance of those people, not to pay claims. If all the
criteria as outlined in the proposed legislation is met as spelled
out, including only $250,000 of premium for the first year or which
only 25% has to be paid up front, that translates to the $43,750
she mentioned earlier. If there is reinsurance, if the bonds are
in place, the director has no discretion - the director must issue
a certificate of approval. The wording should be "the director
shall."
MS. BURKE cautioned that comparing insurance laws of one state with
other states is misleading. Her understanding is that the first
group to form a self insurance group was in North Carolina and it
was formed in the middle of a major workers' compensation crisis.
There was no market and something had to be done. There were 7,000
builders involved and from day one they had to have a guarantee
fund. But in North Carolina, unlike the State of Alaska, the
premium tax could be used for anything and they were permitted to
take a part of the pool of the premium tax and create their own
guarantee fund. In the State of Alaska the premium tax is 100%
general receipts. Not one penny goes to the Division of Insurance
for oversight or regulation.
Number 543
The proposed regulation calls for a $500 one-time fee. The
insurers doing business in the State of Alaska pay $2,500 per year
for the regulation of their companies and their practices. She
pointed out that the statutorily required responsibilities and
duties of the Division for those insurers are substantially less
than what is contemplated in this legislation. They do not provide
administrative functions to any insurer; they are their regulators.
It is important to remember that the premium tax is an unrestricted
source of funds for the State of Alaska.
MS. BURKE said that Ms. Ward addressed the number of employees
which is important, and of the four issues stressed in their first
meeting last year - solvency, guarantee protection, safeguards
against unfair trade practices and settlement procedures - in
existing statute the insurers must act in accordance with the
rules. This legislation exempts this group from Title 21 which
deals with unfair trade practices or settlement procedures.
The division's last concern is a complaint resolution process.
Currently if you, as an insurance policy holder, have a problem
with a company, a complaint can be filed with the division. Since
they regulate the company, they can cut through red tape and assist
in getting a resolution. This is a vital part of their duties and
has been ruled by the Alaska Supreme Court that to be their number
one job.
Another critical point, MS. BURKE pointed out, is the market.
There is a very healthy workers' compensation insurance market
right now. They are at an all-time high on competition and all of
us benefit from that because it brings costs down. Over the past
10 years we have been on a downward trend on workers' compensation
premiums. Each year on January 1, the workers' compensation
premiums are set based on statistical data for prior years. All
classifications have the same manual rate as any other employer in
the State of Alaska. This is the starting point. You can pool
your resources and get a lot of buying power and an insurer will
give you a volume adjustment. If you have a safe record, you get
an experience modifier; or if you've really had a bad record, it
will push you up. This is where the safety and loss control comes
in and is so critically important. That is available to everybody.
It is the employer and employee who ultimately determine whether or
not it is a safe working place.
The safety programs, the recognition by employers and employees of
the impact it has on the cost of doing business has paid off in the
downward trend. This year the overall decrease in workers'
compensation premiums for the State of Alaska was 10.3%. That is
the effect on all classifications. She said two of four
classifications used by the Homebuilders went down, one of them
over 28%. Two of them went up, the highest being seven percent.
This is a very good indication of the consciousness of loss control
and prevention.
She said the Division had recommended that this group look at the
reciprocal statute, chapter 75 in Title 21, because it is there and
it works.
CHAIRMAN LEMAN asked her to clarify her calculation on how she got
to $43,750 to be available for claims in the first year. MS. BURKE
explained that the statute says that only 70% of the money paid up
front can be used for claims.
Number 451
MS. LINDA HALL , Alaska Independent Insurance Agents and Brokers,
opposed SB 95 and said she has two broad areas of concern. One is
the effect on the insurance market place in general and numerous
provisions of the actual bill.
She feels that the workers' compensation insurance market in Alaska
is very strong today. There is an increasing number of carriers in
Alaska. Within the last month there is a newly approved business
has emerged here that is targeting employers whose premiums are in
the $1,000 - $20,000 range. This was not the case several years
ago. That is a premium range that's very difficult. She has seen
a drastic decrease in the overall workers' compensation rate since
the reforms were enacted in 1988. Rates have decreased in general
40.1% in that time period. As of January 1, 1997, there was a
10.3% rate decrease again for one/two family dwellings. That rate
will be $11.71 this year, a 28% decrease. Currently, employers who
institute safety procedures and who have good loss records can
obtain additional safety credit of 10 - 40%. Most of these credits
are a result of the marketplace and their own practices. These
benefit all Alaskan employers.
MS. HALL said the overall workers' compensation premium in Alaska
is not large when compared to the national premium level. Allowing
special interest groups to withdraw their premiums from the market
will decrease the overall premium volume which becomes less
attractive to insurance companies. There has to be a sufficient
market to justify commitment of resources in the State. They are
very concerned about the potential affect on the withdrawal of
premiums for special industry groups.
She said a number of their concerns with SB 95 have been addressed
by other speakers before her. She is concerned that this bill
creates a new chapter 47 and it very specifically provides that the
self insurance group will not be subject to provisions of the
insurance laws in this title except as provided in this chapter.
This means that these groups would not be subject to premium taxes
which would create a financial advantage for them and a distinct
disadvantage for the rest of the industry. They are also very
concerned that when they exempt a group from insurance regulation,
they are taking from their members protections against
misrepresentation like marketeers and would not provide the
protection of the Unfair Claims Settlement Practices Act which
guarantees that claims be settled in a particular manner within a
particular time frame.
One of the reasons for the formation of self insurance groups is
that an employer cannot afford workers' compensation premiums,
although they are going down, at this point. However, her concern
is that if the employer cannot afford the current premium, how
could he take on the responsibility the joint and several liability
obligation would put upon him.
The bill provides for manual rates to be used for a minimum of five
years. Manual rates are the ones currently charged in the
insurance industry prior to other types of discounts. This bill
has a detailed list of other types of expenses from examination by
the director to excess insurance, to reinsurance, CPA audits,
surety bonds, etc. and she finds it difficult to imagine any
significant premium savings if they are covering expenses outlined
in this bill.
In conclusion, she requested the committee consider the potential
impact of an insolvent group. There are questions as to where the
liability would end up and where the funds would be found to pay
the legal liability to injured workers, and who would oversee the
process of compensating injured workers. If a group is given
special status by statute, would the legislature be responsible for
the financial impacts of the failure of that group? She said they
had seen the impact of an insolvent self-insured single employer,
Wein Air. When they filed bankruptcy, the injured workers became
merely creditors in bankruptcy with a preferred status. Although
those workers were ultimately all compensated, it was a very slow
process.
Number 330
CHAIRMAN LEMAN said yesterday he learned there were about 12,000
U.S. insurance companies, but about 5 of them were writing workers'
compensation insurance in Alaska. MS. HALL said she was sure it
was more than five.
CHAIRMAN LEMAN said he thought that the insurance industry was
healthy here and didn't think a pool of homebuilders would
necessarily imbalance the potential insureds so much that the
insurance companies would want to pull out of Alaska. MS. HALL
agreed and added that an insurance company needs a certain amount
of premiums so that they can commit their resources.
CHAIRMAN LEMAN asked if a claims adjustment has to be done locally,
do they all have a local presence or do they do that by contracting
with other service providers who can do that for them. MS. HALL
answered that they could do either.
MR. PAUL GROSSI, Director, Division of Workers' Compensation, said
their sole interest is to make sure that claims are paid and that
injured workers receive the benefits they are entitled to. They do
have some concerns even though this is a much better bill than last
year's. The bill still does not address solvency and an ability to
pay claims that can come up. There would have to be amendments to
AS23.30 so that these entities can be recognized and regulated. He
supported Ms. Burke's testimony and said he wouldn't repeat the
same concerns.
MR. GROSSI explained that when a group gets their initial approval,
they could become insolvent from their first claim, because there
is no capitalization. Using the Wein Air example, he said they
required $5 million worth of assets before they could be self-
insured. Using this type of scheme should have some requirement
for liquid assets so there would be some initial ability to pay
claims. The makeup of one group of just five members seemed low to
him. At five members there would have to be some sort of minimum
number of employees.
Under current statute there are a couple of civil remedies and some
criminal remedies for those employers who fail to keep workers'
compensation in effect. He said they would want to use as a
criteria for policing the makeup of the groups, that if someone had
been convicted of a crime that they would not be allowed to
participate because that would show they are not reliable in this
type of situation.
CHAIRMAN LEMAN thanked him for his testimony and said they would
hold SB 95 for further work.
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