Legislature(2003 - 2004)
03/09/2004 01:30 PM Senate L&C
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SB 357-INSURANCE
CHAIR CON BUNDE called the Senate Labor and Commerce Standing
Committee meeting to order at 1:30 p.m. Present were Senators
Gary Stevens, Ralph Seekins, Hollis French and Chair Con Bunde.
Senator Bettye Davis arrived at 1:40. The first order of
business to come before the committee was SB 357.
CHAIR BUNDE explained that SB 357 is the insurance omnibus bill
that ensures state consistency with federal law and the National
Association of Insurance Commissioners (NAIC) and contains
reforms to standards and guidelines. It updates procedures and
transactions within the Division of Insurance. He generally
summarized that it would:
Provide an electronic communications opportunity
between the Division of Insurance, the public, the
industry and other regulators with the goal of
promoting efficiencies. It has provisions and changes
for reinsurance, contains recommendations on licensing
revisions that have been suggested by an NAIC
accreditation team. It changes the liability for civil
damages when filing reports concerning fraudulent acts
to a person involved in the prevention and detection
of fraudulent insurance acts. It contains provisions
that clarify that a Guaranty Fund deposit is required
for title insurance companies and it provides changes
to tax and late payments to make penalties more
consistent with the Department of Revenue's statutes.
It includes penalties for surplus line brokers who
submit late payments on taxes. In general, these
changes to Title 21 will promote consistency between
Alaska and other states, promote more efficient
operations and provide better public protection.
MS. LINDA HALL, Director, Division of Insurance, Department of
Community & Economic Development (DCED), said SB 357 deals with
changes to Title 21.
The changes that we have proposed in this bill are, we
feel, necessary to keep Alaska statutes consistent
with some federal law. There were a number of changes
to licensing several years ago to meet the
requirements of the Gramm-Leach-Bliley Act and with
model acts and standards of the National Association
of Insurance Commissioners (NAIC).... Some of the
changes are a result of the accreditation process. We
are accredited by the NAIC. Some are the result of an
industry task force and others are just reflective of
what we think are good business practices....
I have categorized what I think are the most
significant changes into six categories. [Indisc.] We
thought that was appropriate. We did, however, on the
other end in each of those sections include a $10,000
penalty for willful violation of these statutes.
[Indisc.]
MS. HALL explained that reinsurance is basically insurance for
insurance companies and if a non-admitted [to Alaska] insurer
takes over the insurance of a domestic insurer, the division
needs to be involved in that. That situation typically occurs
when the state has an insolvent insurer. Further, she explained
that there were changes for domestic seeding of insurers
requiring them to be licensed in the state where they are
domiciled.
SENATOR BETTYE DAVIS arrived at 1:40 p.m.
MS. HALL stated that sections 12 and 13 deal with the licensing
of a reinsurer and use language taken from the NAIC model
regulation. She explained that a number of years ago, a pool of
life insurers, Unicover, provided reinsurance for workers'
compensation coverage, called a carve-out. It eventually
unraveled and became insolvent. Out of this situation, probably
the most important activity that really came to light for
regulators is when they realized life insurance companies were
reinsuring workers' compensation and weren't licensed to do
that.
Section 12 sought to provide some assurances that the
state of domicile is aware that the reinsurer is
writing the workers' compensation line of business and
does not object.
MS. HALL explained that the financial statements and analyses of
life insurance companies are significantly different from the
financial statements and analyses of property casualty insurers.
NAIC is the regulatory joint body of regulators from each state.
They recently recognized this difference in financial analyses
by requiring an additional supplemental financial form that
could be done with just a letter. We're looking to make sure the
state of domicile of domestic companies in Alaska who currently
reinsure portions of their workers' compensation book of
business is aware of that.
We're certainly not looking to make a statute change
that puts our domestic companies at a disadvantage....
When the workers' compensation is a property casualty
line, we want to make sure they are aware so they do
the additional analysis that's required of a property
casualty carrier.
MS. HALL explained further that:
The other two reinsurance sections, sections 47 and
48, require a filing approval by the director of the
reinsurance agreements. We have had several inquiries
about this item and it is my intent to work with
industry in changing the language. We would make the
requirement to file with the director. We would not
necessarily think we would have to approve the company
insurance agreement and ... to make the reinsurance
agreements confidential. They are proprietary; they
are the financial terms on which an insurance company
purchases their insurance and we do think that's
appropriate.
In some past financial examinations, there have been
difficulties [in] obtaining signed reinsurance
agreements. We are willing to make the changes
necessary to address the concerns of industry, but we
also need to meet the needs of our financial
examiners. So, we would like to make sure that we do
have the authority to obtain signed copies of the
reinsurance agreements. The reinsurance is part of the
financial examination to determine the level of risk
an insurance company can afford. So, I would
anticipate bringing some changes in language for your
consideration.
CHAIR BUNDE asked when he could anticipate those changes.
MS. HALL replied that she had the language today. She would
bring it to him for review. She continued her explanation:
The fourth section that has major changes is
licensing. Over the years, we have tried to make
Alaska licensing consistent with the rest of the
country. There are some federal regulations that
require us to make certain provisions so that we are
reciprocal with other states. We have attempted to do
that - [it] allows our resident licensees to be able
to obtain licenses in other areas as well as allows
non-residents to do business here.
Changes briefly - we will add crop insurance, not that
we have a lot of that, and surety licenses that
currently are not licensed sections. They are just
included in the property casualty licenses. We are
proposing to eliminate trainee licenses so that we are
consistent with national regulations. There are very
few trainee licenses today and we feel it's better for
someone to study to become licensed before they start
dealing with the public.
We have removed some language that could impose some
barriers for what we call limited lines license, bail
bonds and - I'm drawing a total blank. Then we have
statutory language that said they must. Their sole
purpose is to be appointed by an insurance company.
It's a burden that we don't think is appropriate
today.
We have some sections that delete additional
experience requirements that are inconsistent with
federal regulations that would put some of our
licensees at a disadvantage with other states and we
are also requiring that surplus lines brokers be
licensed as producers before they can become a surplus
lines broker. These changes, again, are basically
consistent with the National Producer Model Licensing
Act and to bring Alaska into compliance with that.
This section is surplus lines. In the summer of 2003,
we had an industry task force that met three times
with the Division of Insurance staff to look at our
statutes and our regulations. That's the practice of
surplus lines business. Surplus lines business - we
have two kinds of insurance placements. One is called
admitted insurance companies. We regulate them; we
have to approve their rates. We approve their forms;
they jump through all the hoops to be considered
admitted insurers. We have another group of insurance
companies who for various reasons choose to do
business on a non-admitted basis in not only our
state, but in many states. These are called surplus
lines companies. It doesn't mean that they are of less
value or of less financial stability; it just means
they have chosen to operate differently.
Because the business of insurance is so protected for
our consumers, there are special statutes and
regulations that tell how that business must be
conducted. There are particular disclosures that are
given; the business just operates somewhat differently
than the traditional insurance market that most people
are aware of.
The producer group that met this summer with division
staff evaluated how Alaska works and this included not
only Alaskan surplus lines brokers, we also had people
come to these meetings from Seattle where a lot of
Alaska business is written. So, we had a fairly broad,
I felt, representation of industry to look at how we
do business, how efficiently we work.
The changes that I would highlight for you in this
particular section - one would allow that for the
placement of health insurance in the surplus lines
arena, if we had a health insurance crisis. The
criteria, and there are some fairly strict
stipulations in that section, but the basic criteria
[is] we have to find it in the public interest. This
was done at the suggestion of the Washington Surplus
Lines Brokers. A number of years ago, there was a lot
of publicity when Washington literally had [indisc.]
surplus lines markets lines for coverage. If you can't
find coverage in the traditional market, you go to the
surplus lines market. They suggested we make this
statutory provision that should we ever get into a
crisis situation, it would allow us some flexibility.
CHAIR BUNDE asked her how she would define a health insurance
crisis.
MS. HALL answered:
We don't define it in statute, but we talk about in
the public's interest. If we had no insurance
companies that were willing to write health insurance
here... It can't be done for competitive reasons, it
can't be done for pricing reasons; it truly would be
when we found a real need in our market. Typically,
surplus lines placements are done after there's a
diligent search. In the traditional market, coverage
is not available or at least not on the same terms.
That's the only way that coverage can be placed in a
surplus lines market.
CHAIR BUNDE inserted, "There is very likely a premium for those
premiums."
MS. HALL affirmed:
Yes, there is. They typically are more expensive....
Basically - the health insurance example - if there
were no or maybe one health insurer left in the state,
and I would hate to think we'd get there, but we don't
know what will happen going forward. If there were no
insurance companies or maybe one that refused to take
your business, we still have the ACHIA [Alaska
Comprehensive Health Insurance Association] high-risk
pool. But, it would allow the Division of Insurance to
make provisions for a company that did not today have
a certificate of authority to do business in our
state, but that was a stable company, that we had
their financial statements that we reviewed their
rates. We could allow them to do business in that
circumstance.
SENATOR FRENCH asked if it was the lack of a certificate of
authority that classified them as a surplus line.
MS. HALL replied that is correct. She continued her explanation:
Section 32 requires some changes in the documents that
are provided. Today, in our statutory language, we
have requirements to produce documents from the
surplus lines of a broker to the insured that are
practically impossible to meet. It asks for everything
that would be in the policy from every exclusion to
every condition; and it's very difficult to do that in
any effective way. We do feel that the insured is
entitled to a document that outlines all the material
parts of an insurance policy it needs and we do
specify in the proposed statute the pieces that would
have to be there. When we name the subject of
insurance, the insurance company, the premium and
material exclusions coverage limitations, we think the
insured certainly have a right to have that
information prior to purchase of the insurance policy.
There is also a provision currently in statute that a
policy is not binding and does not have to be paid for
until the insured gets the notices that are required
under the surplus lines statute and notices of what
those coverages are.
The other section I would like to point out is section
33, which places responsibility on a producing broker
as well as the surplus lines broker for notice to the
consumer of a surplus lines placement. There is
statutory language that requires the insured to be
notified of the fact and we've all become familiar
with… solvencies and the Guaranty Fund. It has a much
different meaning today. There is a requirement on any
surplus lines policy that there is a stamp and type 10
print. So it's a particular size that's on every
policy and notice is to be given to every insured that
surplus lines polices are not subject to the Guaranty
Fund. So, that is another difference, Senator French,
with the surplus lines coverages. They do not have the
protection of the Guaranty Association. So, this
notice requirement requires the producer, as well as
the surplus lines broker, to give that notice to the
consumer.
CHAIR BUNDE asked her to differentiate between surplus lines and
reinsurance. "In essence, wouldn't my company basically go to
surplus lines to reinsure?"
MS. HALL replied:
No, reinsurance companies actually can be admitted
insurance companies in their state of domicile with a
certificate of authority. Some of them are from
countries other than the United States. Those are
called aliens - in case we wanted to know that. We are
the domestic company if they are in your state. A
company that is domiciled in another state is called a
foreign insurer and if they are in another country,
they are an alien insurer. Many of the reinsurance
companies are domiciled in European countries. So, the
reinsurance is the insurance companies' insurance.
They write your $1,000 policy. They retain - I'm using
really general figures - they retain $100 of that risk
and they reinsure the other $900. That reinsurance
counts as part of the financial [indisc.].
CHAIR BUNDE said that the committee looked forward to working on
a CS that would incorporate the changes she wants in about two
weeks.
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