Legislature(2003 - 2004)
03/26/2004 08:06 AM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 311-INSURANCE & WORKERS' COMPENSATION SYSTEM
MS. LINDA HALL, Director of the Division of Insurance, told
members that she and Mr. Lisankie would describe the bill
sections and indicated that the team that worked on SB 311 has
been involved in discussions with other interested parties in an
attempt to reach consensus on sections of the bill that are
causing dissention. They hope to present a committee substitute
next week that will reflect some agreement on those issues. She
then offered to provide some background information on what
prompted the bill.
CHAIR SEEKINS announced that, at the request of the sponsor, he
would not take public testimony today, but the bill would be
rescheduled next week. He hoped to have a bill before the
committee next week that would be ready to move out of
committee. He then asked Ms. Hall to proceed.
MS. HALL indicated that all members have heard her discuss the
cash deficit in the Guaranty Association. She said she would
also discuss the unhealthy workers' compensation environment in
Alaska. The Division of Insurance is dealing with four
problematic areas. The first is the lack of profitability in the
workers' compensation market from 1997 to 2002, when losses
ranged from 99.9 percent to 154 percent. The high of 154 percent
means that insurance companies spent $1.54 for workers'
compensation claims for every dollar of premium collected. The
average over that same 5-year period was 124 percent, which is 5
percent higher than the national average. Alaska's workers'
compensation claims are more expensive and costly than the
national average, which isn't attractive either. The cost of
medical benefits has increased substantially, which tend to
increase the cost of workers' compensation claims and result in
higher premiums.
MS. HALL told members the Division of Insurance approved a rate
increase effective January 1, 2004, which averaged 21.2 percent.
As the cost of claims increased, the actuarial analysis showed
that historical claims and projections of future claim costs
indicated the need for a substantial rate increase. Within the
21.2 percent average, about 30 classifications decreased, mostly
related to marine industries. However, 17 classifications had
rate increases in excess of 50 percent.
MS. HALL said the last factor in the increase is the assigned
risk pool. Because of the mandatory nature of workers'
compensation, the Division has a mechanism to ensure that
everyone can afford to purchase workers' compensation insurance.
That market has also suffered substantial losses; the dollars
spent on claims have not met the revenue in premiums. Alaska has
had the highest rate of any state of workers' compensation
assessments for its assigned risk pool from 1997 through 2001.
In 2002, Alaska dropped to number six. The average burden has
ranged from 4 percent to 10 percent and is an additional cost to
insurance companies on top of their operating costs, again
making Alaska an unattractive marketplace. She emphasized that
Alaska's workers' compensation environment has become very
expensive for employers and unattractive to insurers. She said
from her perspective, the state cannot continue to just increase
workers' compensation premiums. The state needs to look for ways
to stem increasing costs and bring about some efficiency in the
system. The state needs a stable, sustainable workers'
compensation environment that will encourage companies to do
business here and provide affordable insurance so that employers
can continue to develop jobs.
MS. HALL informed members that a healthy environment depends on
adequate rates, a self-funded assigned risk pool and a viable
workers' compensation system. She pointed out, "SB 311 is fairly
unique as it represents cross-departmental solutions to various
issues." She emphasized that the bill addresses a number of
issues, many of which affect insurance and the marketplace. The
focus and stimulus of the bill were to affect changes in the
marketplace. She then addressed the insurance pieces of the
bill:
Section 3 adds a requirement to increase the deposits
of insurance companies that write workers'
compensation. These special deposits would be for the
benefit of workers in case of an insolvency.
Section 5 addresses the Board of Governors of the
Guaranty Association. Today we have nine member
boards, seven of those are insurance companies. They
have done an excellent job so the change in the board
representation is not a reflection on what they've
done. But what I'd like to do is see a board that has
representatives of all the stakeholders. We have - in
the proposal I have two members of labor, two members
of employers, an agent and four insurance companies.
The number would stay the same but they would have a
different representation.
Section 6 of the bill is called a net worth exclusion.
It's a way to bring some cap to cost in the Guaranty
Association. Currently, except [for] workers'
compensation, all claims and Guaranty Association
[costs] are capped at $500,000. Workers' compensation
claims are unlimited. Thirty-two other states have
what we call the net worth exclusion for workers'
compensation and I'm proposing that we adopt that in
our statutes. The purpose - the goal would be to not
pay claims of employers whose net worth exceeds $25
million. The other states that have such caps, and
there are 32 of them, range from $10 million to $50
million - 25 seemed like a number that would work well
for Alaskans.
Section 105 is the other section that is important to
me in terms of our workers' compensation market. It
repeals the 25 percent statutory cap on the surcharges
for the assigned risk pool and exclusion for
surcharges on policies under $3,000. I feel that the
assigned risk pool must be self-funding. There are
nearly 8,800 policies, 17 percent of our market is in
the assigned risk pool. 6,000 of those policies have
premiums under $3,000. The average premium for those
policies is $864. Small employers have claims equally
big as large employers. The size of the employer does
not normally correlate with the size of the claim. We
have an average premium of $864. A single claim will
offset, probably in that size, several hundred of
those policies. So I'm looking in this provision to
make that pool self-funding to allow it to fluctuate
as the losses in the pool fluctuate in the same way we
allow rates for the traditional market to fluctuate
based on the cost of claims. The assigned risk pool is
probably one of the major factors that is a deterrent
to new companies coming into our marketplace. When
they look at that and know off the top they are going
to pay anywhere from 4 to 6 percent of their income to
offset work comp losses in the assigned risk pool,
they frequently decide they don't want to do business
here. It's a very fragile marketplace and I'd like to
find ways to bring it to a healthier place where we
encourage companies to do business in Alaska.
CHAIR SEEKINS announced that Senators Therriault and Ogan had
joined the committee some time ago.
SENATOR THERRIAULT asked Ms. Hall to review the workings of the
assigned risk pool.
MS. HALL explained the assigned risk pool is considered to be
the market of last resort. It is a place to obtain coverage
when an employer cannot get workers' compensation from a
traditional carrier. Many small employers, particularly those
with premiums under $10,000, find it difficult to obtain
coverage in the traditional marketplace. With a premium that
size, a single loss costs enough that it is a losing proposition
to underwrite that type of business. Some of the policies in the
assigned risk pool are higher hazard, but not many. Usually
employers with bad loss ratios are in the assigned risk pool,
but about 93 percent of them are there because they are small.
The pool losses have been exceeding the premiums collected since
at least 1997 so the pool has been losing money at a very
substantial rate. That 4 to 10 percent loss of money is a direct
assessment back to the insurance companies that write business
in our state. They must participate in those losses, known as
reinsurance. That amount is not charged back to a policyholder,
it is a direct obligation of the insurance company.
SENATOR THERRIAULT affirmed that amount makes up the difference
and then asked Ms. Hall to review Section 6.
MS. HALL said Section 6 pertains to the net worth exclusion so
that if an employer's net worth is over $25 million, the system
would not pay the claims of the insolvent insurer for that
employer.
CHAIR SEEKINS commented that since the state requires employers
to purchase workers' compensation, the assigned risk pool is a
very valuable asset to small companies that may not be able to
use a major carrier.
SENATOR THERRIAULT asked Ms. Hall if she was speaking to the
claims being paid out of the Guaranty Fund, in regard to Section
6.
MS. HALL said that is correct.
SENATOR THERRIAULT asked if the employers would pay into the
Guaranty Fund, but if there was insolvency and a company had
substantial assets, that company would still have to pick up its
individual company claims.
MS. HALL replied:
Yes. The only way they would pay into the Guaranty
Fund is in a situation where there is an assessment,
which is certainly the case today. We have assessments
that are passed back on to that policyholder. But as I
said, in many states, it's felt to be the best public
policy. Those employers in theory have more financial
resources to take back and be able to fund the claims
- the workers' compensation obligations for their
employees.
CHAIR SEEKINS asked if there is a mechanism in the bill that
would allow a company who is subject to this risk to avoid the
surcharge that would fund the Guaranty Fund.
MS. HALL said not as proposed.
CHAIR SEEKINS surmised that companies would have to pay into it
as a part of their premiums, but would not be able to reap the
benefits.
MS. HALL said that is correct.
CHAIR SEEKINS suggested the committee might address that.
MR. PAUL LISANKIE, Director of the Division of Workers'
Compensation, Department of Labor and Workforce Development
(DOLWD), told members he would provide a brief overview of the
major portions of the bill as they would affect the Division of
Workers' Compensation and the Workers' Compensation Board and
then answer questions.
CHAIR SEEKINS interjected to announce that he intends to hear an
introduction of the bill but not take public testimony today. He
said the Division and other folks are working on a committee
substitute to address the concerns that both sides have had on
the issue. He believes this is a high impact bill and it is not
his intention to ignore the entreaties of both sides of the
matter. He intends to move some version of the bill out of
committee by the end of the next week.
MR. LISANKIE noted that SB 311 has four major areas that will
impact the current workers' compensation program. The first
change would impact the current cost of living provisions. Under
the existing program, a person who is injured and gets a
workers' compensation rate established and moves to a higher
cost area than Alaska would get a higher compensation rate than
an Alaskan injured worker who resides in Alaska. Under SB 311,
the rate would be capped at the Alaska rate so that no one would
get a higher rate than an Alaskan injured worker.
The second important area of change is with uninsured employers.
The Division currently fines employers that do not follow the
law by properly insuring against their liability for workers'
compensation benefits. The Division has a limited armament to
use against employers. The Division can shut the business down
but, more often, after detected the employer will get insurance
so cannot be shut down. SB 311 will give the Division an
accelerated procedure for imposing civil fines against employers
who are working without the required insurance. The fine can be
up to $100 per day, per employee. The intent is to make the fine
so repugnant that businesses will be sure to get coverage.
MR. LISANKIE said the third change SB 311 will make is to
formally establish a Division of Workers' Compensation within
DOLWD. The director will be required to have at least three
years of experience in the field of workers' compensation. The
formal establishment of a division will provide for a firm
separation between the division and the group that resolves
disputes. The division and division director will be responsible
for investigations, administering the workers' compensation
system, and attempting to informally resolve potential disputes
about benefits. However, in the event that all attempts to
resolve a dispute fail and the case has to be adjudicated, the
case would go to a separate entity. The hearing before a
separate entity should assure the parties involved that the
previous attempts and players will not foreshadow the
adjudication. That same procedure is now used informally.
MR. LISANKIE said one significant change in the bill addresses a
problem the division sees too often. Some people are unable to
get an attorney if a dispute is appealed. SB 311 will give the
division and division director the opportunity, in questions of
unsettled law, to represent the position of the person without
an attorney. That will enable the pro se claimant to be more
focused and prepared for the hearing.
SENATOR THERRIAULT asked if someone within the division would
help the pro se claimant to focus on the appropriate legal
points.
MR. LISANKIE said that is correct.
SENATOR THERRIAULT questioned whether the staff person would
appear at the appeal hearing beside the claimant as legal
counsel.
MR. LISANKIE said the staff person would not be legal counsel
but would be involved in the proceeding. He then continued with
the impacts of SB 311 on the Division of Workers' Compensation
and said the fourth change pertains to how the initial disputes
are heard and resolved and who will hear the appeals. SB 311
proposes to have hearing officers hear the initial cases and
that appeals be heard by a new commission, named the Workers'
Compensation Appeals Commission, which would stand in lieu of
the Superior Court appeals process. The change will create a
more efficient, consistent and predictable system for decision-
making. Decisions with precedent value will be made sooner so
that the period of uncertainty about a given point on the law
will be shorter. He explained:
It sometimes happens now, for a variety of reasons,
that the workers' compensation board can be of two
minds on an issue and until it gets all the way to the
Supreme Court, right now, you never know which one of
those positions is going to be finally considered to
be the correct one. As you go through the present
system into the Superior Court appeal, you can get a
decision from a Superior Court judge [indisc.] the
question between you and your opponent in that
particular dispute but it doesn't have broad
precedential value across the board for anybody else.
What this bill would do by having the workers'
compensation appeals commission established is that
first line of appeal would go to the Workers'
Compensation Appeal Commission. Those commissioners
would render a decision. That decision would be
published and would have precedential value unless and
until it was overturned by the Alaska Supreme Court,
which would continue and be the final arbiter of what
is and is not the law in the State of Alaska. So what
it would do is give you a shortened period of
uncertainty so that other parties that had read that
decision could say all right, now we can base our
decisions to pay or not pay - I am entitled, I am not
entitled to certain benefits and they could move
forward from that day on unless and until the Supreme
Court gave other instructions.
SENATOR THERRIAULT noted that although Mr. Lisankie is claiming
that change will create efficiency and consistency early in the
process, one of the major criticisms leveled at that approach is
the expense. He asked Mr. Lisankie to comment about its cost
effectiveness.
MR. LISANKIE agreed it is difficult to quantify how much money a
system that makes findings decisions more quickly will save. The
intention is that if the insurance company or the employer and
employee and their representatives have greater certainty in
what their obligations are, they will be able to pay without
having to litigate, which will create cost savings. He added:
There would also be, presumably, cost savings in the
many claims that in the current environment where
you're not certain what the obligations to pay are and
what the entitlements are - most cases in our system
never go to litigation, thank goodness. It would
overwhelm us. Most of them are settled between the
parties and what goes into the valuation of how much
money changes hands is what the entitlements might be
construed to be, what the liabilities might be
construed to be. So, if there's less in the way of
uncertainty about what the benefits are, and then more
benefits can be paid without litigation, fewer
benefits will have to go into litigation and
ultimately be settled. With money changing hands -
obviously if that settlement is litigated, somebody
would have gotten more and somebody would have gotten
less but you're not precisely sure who would get how
much more or how much less and that would be some
savings there. The commission itself is not a cost
savings.
SENATOR THERRIAULT asked the projected cost of the commission.
CHAIR SEEKINS estimated the total cost to be $750,[000] between
the division and the courts. He noted the court system's fiscal
note estimates the cost to be $200,000.
MR. LISANKIE specified the DOLWD's projected cost is $556,000,
which includes some start-up costs that will not carry over.
SENATOR THERRIAULT asked for an explanation of the source of the
funding for the commission.
MR. LISANKIE said the workers' safety account is comprised of a
portion of the premiums paid by the insurers that insure their
liability and an assessment against the self-insured employers
based on the amount of the total paid out benefits.
8:40 a.m.
SENATOR FRENCH thought it is important to remember that the
proposed structure of the appeals commission will be comprised
of six attorneys who will hold hearings and who will be overseen
by three appellate judges. He suggested that is a fairly top-
heavy appeals system. He guessed there are about 30 Superior
Court judges statewide and five Supreme Court justices to hear
their appeals, which amounts to a 6:1 ratio. He maintained the
2:1 ratio in SB 311 is inefficient.
SENATOR FRENCH said his second area of concern is removing the
hearing officer positions from classified service. In the model
act, the hearing officers remain in classified service. He felt
this issue is important because the hearing officers will have
to make rulings against their very employers, therefore they
will need to have some measure of cover to be able to make truly
independent decisions.
SENATOR FRENCH asked, in regard to the precedential weight being
given to the appeals commission, how the opinions will be
published to be sure everyone appearing before the commission
has access to those opinions.
MR. LISANKIE said he could not provide the specifics about
publication of the precedential opinions.
SENATOR FRENCH asked if the specifics will be worked out as the
project progresses.
MR. LISANKIE said that is correct.
SENATOR FRENCH said he is also concerned about the commission's
standard of review. SB 311 proposes a de novo review, meaning
the commission's review will start afresh, so that it will give
no deference to the facts given by the hearing officer. He noted
that also strikes him as being inefficient.
CHAIR SEEKINS asked Mr. Lisankie if the current court review is
a de novo review.
MR. LISANKIE said it is his understanding that the current
review at the superior court level is constrained, meaning it
only measures whether the fact finder had substantial evidence
to support his or her fact finding. Therefore, the court review
is not a de novo review.
CHAIR SEEKINS announced that he would set SB 311 aside and
strongly encouraged the stakeholders to work out a bill that
everyone involved finds acceptable.
SENATOR ELLIS requested that Chair Seekins provide public notice
of a subsequent hearing on SB 311 at least one full working day
before to provide adequate time for everyone to review the new
version.
CHAIR SEEKINS said it has never been his policy to rush
legislation through the committee and not allow members adequate
time to consider the legislation.
SENATOR ELLIS also asked Chair Seekins to publicly announce the
meeting one day in advance so that participants at
teleconference sites will be aware of an opportunity to testify.
CHAIR SEEKINS said his intent is to reschedule the bill, not to
bring it up unannounced under bills previously heard. He then
stated:
Although, our notice - well I'll put it this way, our
notice on intent to reschedule it may be required
depending on how soon I get it to go outside of the
normal notice process and still hold it under, but
make sure that it's published to that effect. How
would that be? Because if these guys - nobody should
think if they - let me tell you - nobody is going to
procedurally drag their feet to carry this thing
forward, okay?
SENATOR ELLIS responded:
My concern is public notice. We have the CS. Since the
CS is being talked about Mr. Chairman, by
stakeholders, you know, behind closed doors or out in
the hallway or wherever - outside the public process
here until it becomes a committee CS presented by you,
my interest is in adequate public notice so people can
testify and [indisc.] the CS.
CHAIR SEEKINS said he has the same interest and intends to give
plenty of notice so that people will have the opportunity to
weigh in and review the proposed legislation before it gets to
the committee.
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