Legislature(1993 - 1994)
04/07/1994 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 514 - RISK BASED CAPITAL FOR INSURERS CHAIRMAN VEZEY opened HB 514 sponsored by the House Labor & Commerce Committee, for discussion. (REPRESENTATIVE ULMER left the meeting at 8:15 a.m.) Number 277 DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT, addressed HB 514. He noted the presence of Katie Campbell, Life and Health Actuary, who had the primary responsibility of composing HB 514. He stated HB 514 had a zero fiscal note and the support of regulators, the industry (particularly domestic), and national consumer groups. MR. WALSH stated historically, insurance company solvency has been regulated based upon a template. This template is a general outline, whereby it can apply to State Farm, or the Alaska Timber Exchange. He noted this template has proven inadequate as a predictor of insurance company solvency or as an early warning system for a company nearing trouble. MR. WALSH stated risk based capital has been developed over the last 4-5 years by national insurance regulators, as well as consumer groups in the industry. Risk based capital is a formula based upon the different levels of risk an individual company may have. For example, an auto company that writes drag racing policies would have a higher level of exposure than a company writing only personal passenger auto policies. Risk based capital would set up a formula for various kinds of risks that results in a number. The average number a good solid company would have is around 580 percent of risk based capital. Alaska domestic companies are between 900-24,000 percent of risk based capital. Therefore, Alaska domestic companies are small, but very well capitalized and strong. He stated the strength of a company does not come through in the traditional way of analyzing solvency. Therefore, when they seek credit, the solvency laws do not allow them to present themselves in as strong of light as the company actually exists. He pointed out risk based capital will help Alaskan companies to expand and grow. They will be allowed to have an investment policy which will return a higher yield, thereby resulting in lower rates and growth in the domestic industry. MR. WALSH stated the second feature of risk based capital is how it works as a warning system if the number decreases. Number decreases will be easy to detect. HB 514 requires when a company reaches 200 percent of risk based capital, twice the minimum amount it needs to stay solvent, they have to administer a rehabilitation plan. At 150 percent the Division of Insurance has to administer a plan. At 100 percent the Division of Insurance closes the company. He believed these provisions will help insure problems that have happened outside will not effect Alaskan consumers again. He noted the triggers where action is required. MR. WALSH estimated the standards were presently before 30 states and they would most likely pass. Risk based capital will become the national standard as of the end of 1995. He emphasized they suggested HB 514 this year because Alaska's domestic companies are so strong that it is to their advantage to start operating under risk based capital this year. HB 514 has the unanimous support of the Alaska industry. The Division of Insurance strongly supports HB 514. Number 370 CHAIRMAN VEZEY considered HB 514 to be a major change. He asked how long current standards had been in place. Number 373 MR. WALSH answered since statehood, and in other states before that. Number 374 CHAIRMAN VEZEY commented there is good reason for the change, but HB 514 is a radical departure from current practice. Number 378 MR. WALSH agreed. Number 382 CHAIRMAN VEZEY asked if risk based capital had not yet been adopted by any of the 30 states considering it. Who composed the proposal? Number 384 MR. WALSH answered he did not know if the other states had adopted the proposal yet. The proposal in HB 514 came from the National Association of Insurance Commissioners, made up of the 50 states, plus the five territories and other jurisdictions in the United States. The National Conference of State Legislators and their subgroup, the National Committee of Insurance Legislators, also contributed. Number 394 CHAIRMAN VEZEY asked how many years they had worked on risk based capital. Number 395 MR. WALSH responded 4-5 years. Number 396 CHAIRMAN VEZEY stated the proposal must have came together fairly recently, noticing the filing date. Number 397 MR. WALSH stated the final life and health formula was adopted in December. They waited to introduce the proposal to ensure Alaska's domestic industry and other major companies had an opportunity to comment. They suggested one amendment that House Labor & Commerce (L&C) adopted, which added a public hearing requirement, so as the formula changes the division is assured of a procedure to Alaskanize it. HB 514 was only recently introduced; however, a lot of work was done on it by the national association, the Alaska domestic industry, and the Division of Insurance. Number 412 CHAIRMAN VEZEY noticed the L&C committee substitute. He asked the role of a public hearing in the review of an organization's financial status. Number 418 MR. WALSH answered the public hearing would be for any changes in the formula that were proposed for addition. HB 514 states the national formula will be used as the main solvency tool in Alaska. He pointed out over the next few years there will be some minor adjustments to the formula. A formal public hearing, required by regulation, would be required before any of the adjustments could be adopted by the Division of Insurance. He stated the public hearing requirement is a very good change and they have sent it to the national association as a suggestion for the national model. Their job is to protect consumers and ensure their actions are not counter-productive to the development of Alaska's market. (REPRESENTATIVE ULMER returned at 8:25 a.m.) Number 434 CHAIRMAN VEZEY clarified HB 514 would allow Alaskan companies to issue more policies, recognizing they have a stronger capital base than current regulations permit. How would this help the consumers? MR. WALSH responded the biggest problem currently in Alaska is availability, not affordability. Over the last few years, he stated, Alaska has had four carriers with 85 percent of the auto market - Geico, Nationwide, Allstate, and State Farm. This market concentration does not lead to lower prices and product innovation. They have been working to bring new companies into the Alaskan market place. Safeco entered into Alaska as of April 1, 1994, already causing prices to drop as a result of the competition. There are three carriers with 80 percent of the market in health insurance - Great West, Aetna, and Blue Cross. More access and more companies are necessary for prices to remain low for consumers and choices are available. MR. WALSH believed HB 514 would help in two ways: 1) non- Alaskan companies that are writing here will be able to operate what is going to become the national standard, risk based capital; 2) the small Alaska domestic industry will have a better competitive advantage because their strength will be more apparent. MR. WALSH noted there is only one admitted carrier for taxi cabs, and virtually no admitted carriers for aviation. Number 481 CHAIRMAN VEZEY characterized HB 514 as relaxing the financial standards of the underwriting companies. How would it help consumers? MR. WALSH responded HB 514 would not relax any standards. Those companies who write higher risk insurance and tend to have an overly aggressive investment policy with their capital and surplus will be penalized by HB 514. He noted HB 514 would provide a more accurate picture of the status of a company. The National Insurance Consumers Organization have examined risk based capital and they are very supportive of HB 514. Number 509 CHAIRMAN VEZEY inquired why the insurance industry was not present to express their opinion. Number 524 MR. WALSH said, to the division's knowledge, the industry is very supportive of HB 514. He stated the Division had met with or talked on the phone with the management of all the Alaskan companies and all the legislative lobbyists or representatives of the other writers in Alaska. Number 535 CHAIRMAN VEZEY stated he recognized HB 514 would have a magnitude of impact of great import, therefore it would be held in committee for further review. He appreciated the research done to make the proposal. CHAIRMAN VEZEY called a recess at 8:34 a.m. The meeting resumed at 8:44 a.m. Members present were REPRESENTATIVES KOTT, OLBERG and ULMER. (REPRESENTATIVE G. DAVIS joined the meeting at 8:43 a.m.)
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