Legislature(2003 - 2004)
03/03/2004 01:58 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 403 - ALASKA INSURANCE GUARANTY ASSOCIATION [Contains mention that SB 276, the companion bill to HB 403, would be heard by the House Judiciary Standing Committee at a later date.] Number 0265 CHAIR McGUIRE announced that the next order of business would be HOUSE BILL NO. 403, "An Act relating to the Alaska Insurance Guaranty Association; relating to joint insurance arrangements and assessments to the association; relating to the powers of the Alaska Industrial Development and Export Authority concerning the association; and providing for an effective date." [Before the committee was CSHB 403(L&C).] Number 0265 LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development (DCED), explained that HB 403 is intended to address a funding shortage in the Alaska Insurance Guaranty Association [Fund]. She said: The [Alaska Insurance Guaranty Association] was formed under statute, and its members are insurance companies who write business in Alaska. The purpose of the [Alaska Insurance Guaranty Association] is to minimize financial loss to both policyholders and claimants; they provide payment of claims - step in place of an insolvent insurer. Assessments are made to provide the funds to pay those claims. In July of 2003, Fremont Indemnity Company ["Fremont"] was declared insolvent by the Los Angeles superior court, and while they had not actively written business since early in 2001, they left behind estimated claim reserves, over a period of time, of $60 million. When they were an active insurer they wrote 27 percent of the Alaska workers' compensation market, so it was [a] very large percentage of our market. At the time they were declared insolvent, there were two other insolvent workers' compensation insurers in the [Alaska Insurance Guaranty Association]: Reliance Insurance Company, which was domiciled in Pennsylvania, the largest insolvency of [an] insurance carrier ever to occur in this country; and Paula Insurance [Company], also domiciled, as was Fremont, in California. The magnitude, however, of the Fremont insolvency far surpassed any prior insolvency, and exceeded the resources of the [Alaska Insurance Guaranty Association]. The assessments of the [Alaska Insurance Guaranty Association] currently are capped in statute at 2 percent. That 2 percent raises $4.2 million on an annual basis; November, December, January claim payments were ranging from $1.7 million to $2.1 million per month, so you can see the size of the gap. Number 0439 We have had insolvencies in Alaska for probably 20 years. We've always been able to cover them; this safety net provided for policyholders when we have insolvencies. In this particular case, we're dealing with workers' compensation. When there are insufficient funds in the [Alaska Insurance Guaranty Association], statute allows a prorating of claim payments. In August I received, as the director of the Division of Insurance, a letter from the [Alaska Insurance Guaranty Association] indicating it was their intent to begin prorating claims because they could see they were not going to have sufficient money. This seemed to all of us to be an absolutely unacceptable solution, as it would mean injured workers would start receiving partial weekly wage benefits, and partial payments would go to medical providers. We felt the impact on claimants would be disastrous. MS. HALL also said: To give you an idea of the magnitude, on February 2 of this year there were 598 open claims for injured workers; that's from four insolvent carriers. On the other side of that lack of payment to claimants, we have where that obligation would go next - the next place that obligation will go will be to employers. Workers' compensation is an obligation of the employer, typically satisfied by the purchase of a workers' compensation policy. When we have the scenario that developed, ... we now have that obligation going back to an employer - an employer who, in good faith, purchased an insurance policy, who felt they had taken care of their obligation, [and] who ... [now has] an unanticipated financial obligation back. We have 380 Alaskan employers who have injured workers whose claims are currently being funded through the [Alaska Insurance Guaranty Association]. Those claims for those 380 employers, or the 598 injured workers, can range from very minimal amounts up to ... one claim that's reserved at $5 million. We're talking [about a] substantial financial obligation potentially faced by Alaskan employers. It's our concern, it's my concern, that this unanticipated additional cost could truly stretch small businesses to the point where they could no longer stay in business - they could be forced to file bankruptcy or to, at minimum, ... have no assets to function their business. Number 0607 [Chair McGuire turned the gavel over to Vice Chair Anderson.] MS. HALL continued: The potential for a prorating of claims was averted in the end of 2003 through a series of, first, loans from the California liquidator. The [Alaska Insurance Guaranty Association] received $5 million from the California liquidator, [$4.5 million] from the estate of Fremont, $500,000 from the Paula [Insurance Company] estate, [and at] the end of December, we received $2.6 million from the Pennsylvania department of insurance from the estate of Reliance [Insurance Company]. So sufficient funds came in, along with the assessments that were done, to allow the [Alaska Insurance Guaranty Association Fund] to pay claims through the end of the year and they have continued to pay claims. Anticipated date, currently, that the [Alaska Insurance Guaranty Association Fund] will run out of money is probably the end of May - we will run out of money this year - there will be no money to pay claims at that rate. ... The funding proposal here is proposed to find a steam of funds without requesting what I would call a bailout of the industry by state funds. With the fiscal issues being faced by Alaska, it seemed [inappropriate] to ask for money from the state, so we chose instead to present a proposal [such] that all employees and employers across the state who are involved in the insurance world of workers' compensation would be assessed ..., as they are today, for the cost of this insolvency. Using the basic principles of insurance, we've ... tried to spread the risk so the cost of the funding would go across the workers' compensation environment. There is little question in my mind that the proposed solutions are not popular; at first consideration I don't know anybody who's going to stand up and say, "Oh, let me pay" - it doesn't usually work that way. The [Alaska Insurance Guaranty Association Fund] is a safety net. Not only did this legislature create that, but every other state has a similar guaranty fund. It's been a public policy adoption that we need a mechanism to provide this safety net. Number 0719 MS. HALL added: In the [Alaska Insurance Guaranty Association Fund] there are three types of accounts, and I do want to describe this so that some of ... the provisions of the bill will make a little more sense. There are three what I would refer to as buckets: there is a workers' compensation bucket; there is an auto bucket; and there is an "other" [bucket, which] ... includes everything except workers' compensation and auto. There are also a few coverage lines that are not covered by the [Alaska Insurance Guaranty Association Fund] such as surety coverage and fidelity coverage. But generally it will include homeowner's coverage, commercial property, commercial liability, boats, anything that's not auto and [workers' compensation]. Today, when we have an insolvency, we assess only the line of business, the account, that has the insolvency; in a particular case, we are only assessing today the workers' compensation account for the insolvent workers' compensation carriers. The bill proposes to change that to allow, instead of the current 2 percent cap, ... that assessment to be increased to 4 percent for the account in which there is an insolvency. The second step in the process would be to allow an assessment of the other two remaining buckets - the auto bucket and the "other" bucket. Doing that is not unprecedented, either around the country or in Alaska; 18 states have structured their guaranty association so that there is a single account, so any insolvency is spread across all lines of business. In our particular situation, today in Alaska, there is [a] guaranty fund assessment in that "other" account of one half of 1 percent [.5 percent] which is now being applied, or can be applied, to (indisc. - coughing) your homeowner's policy, commercial property policies, whatever falls in that "other" account, and it's done primarily due to the insolvency of a medical malpractice carrier. So right now, today, your homeowner's policy is likely being assessed at [.5 percent] to pay for a medical malpractice insolvency. That principle, to me, I find we should be able to [carry] that out and assess across those lines; I think we already do it with two exceptions, [so] I'm not sure why we need to make exceptions for the auto and the [workers' compensation] accounts either. So I don't think this is an unprecedented action. Number 0914 [Vice Chair Anderson returned the gavel to Chair McGuire.] MS. HALL went on to say: The third step of the current bill would be to allow [the Alaska Industrial Development and Export Authority (AIDEA)] to provide guarantees for the [Alaska Insurance Guaranty Association] to obtain loans to meet their cash requirements should assessments not be enough. We're looking at plugging a current hole, but I'm also looking for a mechanism [such] that we never get here again; I would like to make sure that we're never faced with this prorating of claims. The [Alaska Insurance Guaranty Association] currently has the statutory authority to borrow money, but they are not a viable commercial loan prospect - they don't have any assets, ... they don't accumulate a bank of money. This is called a "post loss assessment." Only when they have a need for funds do they make an assessment on an annual basis; in November of last year, they determined they needed their assessment for 2004 and they made that assessment. If they, in fact, would run out of money, we would like them to be able to borrow. They have no assets; the only asset they have is this stream of assessments that currently is being used, up until about 2010. Commercial banks aren't really likely to look at you and say, "Oh, it's okay, you don't have to pay me back for another six years." The maximum principal outstanding balance at any one time would be capped at $30 million. Generally I've worked with financial experts; ... the current chairman of AIDEA, Mike Barry, worked with me diligently. We looked at various bond possibilities, various types of loans, looking for the most efficient effective way to borrow money, and this seemed to be the best way. This is the best proposal we came up with; this is a backstop. Hopefully, through the process of assessments, we would never get here, but, again, it provides a final safety net. Number 0986 MS. HALL concluded: I would close by saying [that HB 403] provides some what I would consider to be painful, somewhat expensive, very unpopular provisions. I do, however, believe that the provisions are not nearly as painful as the consequences of no action. I would urge you to think about ..., at a minimum, temporary interruption of benefits for 598 injured Alaskan workers [and] financial obligation going back to 380 employers. ... This is safety net, it's been a public policy for a number of years in most all states, and ... I would urge [your] support for the bill. CHAIR McGUIRE mentioned that the Senate companion bill [SB 276] would be heard by the committee at a later date, and suggested that members limit debate on HB 403 and save the bulk of their questions for the hearing on the Senate bill. REPRESENTATIVE GARA asked how much money is needed this year to make the [Alaska Insurance Guaranty Association] whole. MS. HALL said it would take approximately $5.8 million, since there is a balance left over from last year and the $4.2 million assessment has already been made for 2004. REPRESENTATIVE GARA asked why, under current law, the assessments can't be made large enough to raise the money that's needed. MS. HALL replied: The current statute has a 2 percent cap. That 2 percent cap, in the workers' compensation line, only raises $4.2 million. And that has already been assessed for 2004. There was approximately [a] $6 million balance brought forward from last year through the loans and the early distribution from Pennsylvania, and we have done the $4.2 million assessment already. REPRESENTATIVE GARA asked who can currently be assessed up to that 2 percent cap. Number 1141 MS. HALL said that currently, only the workers' compensation line can be assessed that 2 percent. She went on to say, "Some carriers - Reliance [Insurance Company], for example - wrote all three lines; they wrote workers' compensation, they wrote auto, they wrote liability, and so all three lines are being assessed based on the premium volumes in their particular lines of business." In response to a further question, she reiterated that if nothing is done, the projection is that the [Alaska Insurance Guaranty Association] would run out of money at the end of May, and this means that there would be no claims paid for the rest of the year - June through December. The next assessment that would be available would be in January of 2005. She said that according to her understanding of interpretations of statute, that January '05 assessment would go towards paying what wasn't paid in '04; in other words, there would be no money with which to pay claims in '05. REPRESENTATIVE GARA asked whom would the [Alaska Insurance Guaranty Association] be able to assess if this legislation passes and what would the percentage of that assessment be. MS. HALL said that the workers' compensation assessment would go up to 4 percent for this year, and that although the [Alaska Insurance Guaranty Association] has asked for the ability to assess auto and "other" lines up to 2 percent, the latter actual calculated assessment today is .19 percent for '04 and then there would be an additional 2 percent. She went on to say, "In 2005, just to give you an example of where that goes, we would again assess 4 percent in the workers' compensation line, and [.47 percent] in the other two lines, so we're talking about [.5 percent] on auto [and .5 percent] on the policies that are in the 'other' bucket." She reiterated that the policies in the "other" bucket include "homeowner's, commercial property, commercial liability, boats" - everything except auto and workers' compensation. REPRESENTATIVE GARA asked what would the percentage have to be raised to if they only wanted to assess workers compensation lines. MS. HALL said she had not yet calculated what that percentage would have to be, but noted that the workers' compensation line is the smallest with regard to premium volume. The workers' compensation line raises roughly $4 million, whereas the other two lines raise roughly $15 million. This means that if the other two lines were assessed an additional .5 percent, it would amount to an additional "2 percent minimally, so somewhere [in the range of] 6 to 7 percent." Number 1304 REPRESENTATIVE SAMUELS asked if the percentages will drop as the money isn't needed any more. MS. HALL said yes, but noted that if the legislation is passed, the ability to assess up to the aforementioned percentages will still be there should a similar situation arise again. She went on to say: Frankly, today, we only have three companies who have a market share that could even potentially put us in this crises situation. ... I have no indication that we have any possibility of that, but I would never say never anymore. ... To carry out my ... rough calculations that I presented a minute ago, the assessments for the "other" and the auto accounts would totally go away in 2006, and the [workers' compensation] assessment would then drop to 3.37 [percent] in that year and subsequently it would continue to drop. So they would not stay at these levels for an extended period of time. ... I would say there have been insolvencies; ... we had a fifth insolvency in the workers' compensation arena on February 12. ... Protective National [Insurance Company of Omaha] has not had a certificate of authority to operate here since 1991, so we're talking 13 years ago since this company wrote business, and as of their 2002 yearend financial statement they had $1.6 million in outstanding Alaska claims. And that gives you an idea of the long "tail" on those claims. So ... I think we need to have a structure that anticipates insolvencies. We also, in ... [another] bill, have tried to do some other things to bring about some changes. REPRESENTATIVE SAMUELS asked whether money recovered from insolvent companies would automatically flow into the [Alaska Insurance Guaranty Association] Fund. MS. HALL said yes, but noted that it generally takes a couple of years before money recovered from insolvent companies is distributed. In response to a question, she said that "self insureds" are not covered by the [Alaska Insurance Guaranty Association] Fund, nor are they assessed by the [Alaska Insurance Guaranty Association]. Number 1500 REPRESENTATIVE SAMUELS moved to report CSHB 403(L&C) out of committee with individual recommendations and the accompanying fiscal notes. CHAIR McGUIRE, after noting that there were still questions for Ms. Hall, asked that the motion be voided. REPRESENTATIVE GRUENBERG asked how AIDEA came to be selected. MS. HALL explained that AIDEA was selected because it was willing and would be acceptable to commercial lenders. In response to a further question, she said that the cumulative maximum deficit is now estimated at $20 million. Number 1559 REPRESENTATIVE SAMUELS again moved to report CSHB 403(L&C) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 403(L&C) was reported from the House Judiciary Standing Committee. REPRESENTATIVE GARA noted that he did not want to slow the bill down and doesn't have a problem with moving it from committee. However, he does have a concern, he said, about passing the additional costs onto consumers of unrelated lines of insurance. He added: My preference would be to fund that extra amount, which would probably be ... in the [$1 million to $2 million] range. We're $5 million short right now, but they're raising the assessment on workers' [compensation] ratepayers from 2 percent to 5 percent, so that $5 million may ... [still be $2 million] short. I'd be much more in favor of just paying that through the general fund [GF]. ... It does sort of stick me wrong as charging just a certain class of consumers to pay for an unrelated class of problems. ... I mean, if it's something that society should pay for, society pay for it, and that's the general fund. ... CHAIR McGUIRE said that is a fair argument, and offered her understanding that at least as of today, the Senate version of the bill does contain a provision whereby funds would come from the general fund. REPRESENTATIVE GARA suggested that if other members share his view, an option would be to hold HB 403 in committee and wait for the Senate version to come before the committee. CHAIR McGUIRE suggested instead that they report HB 403 from committee and debate the Senate version when it comes before them, adding that the Speaker has indicated that the Senate version will be the vehicle that moves through the process. Therefore, when SB 276 comes before the committee, members can review whether it still contains the general-fund language and debate the issue at that time. [HB 403(L&C) was reported from committee.]
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