Legislature(1993 - 1994)
04/18/1994 08:00 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 342 - RISK BASED CAPITAL FOR INSURERS Number 370 CHAIRMAN VEZEY opened CSSB 342 for discussion. DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT (CED), addressed CSSB 342. He began CSSB 342 is a companion bill to HB 514, which State Affairs has already heard. He said CSSB 342 provides a new system for calculating the solvency of insurance companies. The old law is a "one size fits all" template that is used on companies as large as Allstate and as small as the Alaska Timber Exchange. With the sophistication of financial products and the diversification of assets of all financial institutions over the last 10 years arises the need for a new system. MR. WALSH explained the new formula calculates the various risk, (e.g., asset, underwriting, etc...) that an individual insurance company undertakes. Insurance companies insure different types of people and things, therefore the reserving each company must do is different based upon their asset risk. Likewise their investment risk. Alaskan domestic companies are conservative and tend to invest in T bills, which are very safe with low risk. Other companies tend to invest in higher risk items. Under the old system, each type of company got equal credit on their financial statement for the value of those assets, regardless of where they were invested. Risk based capital would weight them. MR. WALSH stated risk based capital has been worked out on a national basis for the last 5-6 years. Contributors were insurance commissioners with input from consumer groups and also from the industry. CED is very pleased with CSSB 342. MR. WALSH expressed Alaskan companies would be able to expand their distribution of money, and hopefully provide better coverage at lower cost. At 100 percent of risk based capital CED must take the company over, at 150 percent they must have a rehabilitation plan, at 200 CED works out a voluntary way to bring the company back into good health. He said the average solid company in the U.S. has a risk based capital number around 485-500. The 10 Alaska domestic companies range from 934-24,000. Therewith, Alaska has very small conservatively run companies. This value has not been apparent under the old system, however, it would be under the new. He noted CSSB 342 would hopefully result in premium decrease which will make Alaskan companies much more competitive with outside companies who are competing for the same risk. MR. WALSH stated CSSB 342 passed the Senate, 19-1. CED noticed as it passed through there was one additional change they wanted to make. He referred to page 2 where it states whatever system is passed must be substantially similar to that passed by the National Association Insurance Commissioners. He recommended the committee delete this sentence because the sentence is redundant, and they have jealously guarded both the legislative and administrative prerogative to tailor the national models for what is best for the Alaskan marketplace. With its removal, the emphasis would be put on the establishment of risk based capital instructions by regulation in the state, and for the state. Number 445 CHAIRMAN VEZEY mentioned he was surprised because he had only received one letter of support from an insurance company on this issue. MR. WALSH said he felt likewise. He said he talked with the CEOs or the representatives of probably a half dozen of Alaska's domestic companies and they all said they were in support and would contact the committee. CHAIRMAN VEZEY explained he did not solicit their input. He said he thought SB 342 was an "absolutely outstanding idea" for encouraging competition to come into Alaska and improve the options available to customers. He noted it would be the most major change in insurance since statehood. MR. WALSH agreed, one of them. CHAIRMAN VEZEY further stated he thought they should use a slow approach. He reiterated his concern for little input even from those outside Alaska. MR. WALSH responded everyone on a nationwide basis is "delighted" with CSSB 342. CSSB 342 provides regulators with a much better tool to identify a company as they start to descend and to intervene. He noted the overwhelming majority of the 6,000 insurance companies in the U.S. are not in any trouble at all. The new formula would merely allow everyone to see how strong the companies are. Number 481 JOHN GEORGE, AMERICAN COUNCIL OF LIFE INSURANCE, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS, answered questions on CSSB 342. He explained he had not signed up to testify because he wanted to stay out of the way, thereby expediting CSSB 342 from committee faster. He stated they feel CSSB 342 is good solid regulation and urge its passage. CHAIRMAN VEZEY reiterated his concern about the lack of input because he felt CSSB 342 to be a major piece of legislation. MR. GEORGE agreed. They were trying to stay out of the way because the director was tending to it. He said if they had opposed CSSB 342, they would have made efforts to make amendments or kill it. CHAIRMAN VEZEY observed people think CSSB 342 is more positive than negative. He would like both sides of the story. MR. GEORGE commented the companies he represents are not Alaska domestic companies, they do business on a national basis and are basically domiciled in another state. He believed CSSB 342 would have the greatest impact on Alaska domestics. He has not heard any opposition. CHAIRMAN VEZEY noted CSSB 342 came up fairly late in the session, therefore he was not sure if they should rush into it. He considered waiting for the next legislative session to move it through then. REPRESENTATIVE ULMER questioned if CSSB 342 had another referral. MR. WALSH answered CSSB 342 would be referred to Judiciary next; however, they have indicated they will waive it. He noted REPRESENTATIVE GENE THERRIAULT had heard HB 514 in Labor & Commerce and was supportive. REPRESENTATIVE ULMER noted if CSSB 342 passed with 19 `yes' votes in the Senate it was a fairly good indication there is not a problem it. She stated the packet does not show opposition and there is potential for significant benefit for Alaskans, therefore, she was ready to pass CSSB 342 out of committee. CHAIRMAN VEZEY replied significant risk comes with significant benefits. Number 528 REPRESENTATIVE OLBERG moved to delete on page 2, lines 18, 19 and 20 of CSSB 342(L&C), as recommended by MR. WALSH. CHAIRMAN VEZEY stated a another committee substitute had been prepared reflecting the proposed amendment. REPRESENTATIVE OLBERG, therefore, moved to adopt the House CS for CSSB 342(STA), version J, for purposes of discussion. CHAIRMAN VEZEY, hearing no objection, adopted the HCS for CSSB 342(STA). He recalled MR. WALSH to the table for questions. He questioned MR. WALSH'S reference to the state taking over at 100 percent, whereby he had thought the bill mentioned 70 percent. Number 565 KATIE CAMPBELL, LIFE & HEALTH ACTUARY, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT, answered CHAIRMAN VEZEY. She clarified 70 percent was the mandatory control event. MR. WALSH corrected himself and said the formula is based upon 100 percent calculation of risk based capital and 70 percent is the mandatory takeover. CHAIRMAN VEZEY clarified the mandatory control level is 70 percent. MS. CAMPBELL stated the first level where the director is required to take action is at the regulatory action level. This means the company action the company has to take. CHAIRMAN VEZEY clarified the regulatory action event was at 150 percent. MS. CAMPBELL said correct. She noted 200 percent is where the company has to file a financial plan of action. MR. WALSH explained one of the problems with the current formula is that it is subject to varying interpretations. He gave the example of Executive Life, whereby there was serious debate as to whether or not the company was "underwater" when it was taken over. Some argue it was "underwater" a year earlier. MR. WALSH expressed risk based capital sets up a fair and more certain formula. There is no question that at 200 percent of risk based capital the company must come into the regulator with a plan. This plan is then shared with all the regulators from the states in which that company writes. If the company continues descent to 150 percent, some regulatory action is required. CED would put in a plan. When the company reaches the mandatory 70 percent level, CED shuts the company down. There would be no debate as there has been with Executive Life. He noted the failure of the old system with Executive Life provided the impetus to resolve a better system. Number 609 CHAIRMAN VEZEY observed the formula, which was not before him, was a rather complex algorithm of accounting evaluation. MR. WALSH affirmed CHAIRMAN VEZEY. He had attended numerous meetings with experts and has confidence in the formula. He said he does not have the educational background or capability to explain in any form other than the most general policy terms. CHAIRMAN VEZEY asked MR. GEORGE to join the table again. He inquired who MR. GEORGE was representing. MR. GEORGE answered the American Council of Life Insurance (ACLI), a trade association of life insurance companies, and the National Association of Independent Insurers (NAII), a property/casualty insurance company trade association. He noted Allstate, USAA, Progressive and Nationwide. CHAIRMAN VEZEY clarified he did not represent major carriers such as Great Northwest, Aetna, Blue Cross and Willis Corroon, within the state. MR. GEORGE replied Aetna is a member of the ACLI. Major property/ casualty insurance companies such as the Firemen's Fund, Aetna Property & Casualty and Continental Casualty, are not members of the NAII. He noted a large portion of the property insurance in the state is written by the NAII. Members of the ACLI write virtually all of the life and health insurance in Alaska. CHAIRMAN VEZEY explained there is an imposed deadline of April 20 for moving Senate Bills, therefore, he would hold HCSCSSB 342 in committee because he did not feel comfortable with it yet. He would like assurance from the industry. Number 643 REPRESENTATIVE ULMER asked CHAIRMAN VEZEY to identify which companies he would like to hear from. MR. GEORGE stated he did not represent any of the domestic companies such as Alaska National, and others formed in the state of Alaska. CHAIRMAN VEZEY asked if MR. GEORGE was referring to the underwriters as opposed to the brokers. MR. GEORGE clarified he did not represent the brokers. CHAIRMAN VEZEY asked for names of the some of the underwriters he did not represent. MR. GEORGE answered Firemen's Fund, Industrial Indemnity and Aetna Property & Casualty. He noted there are major companies on the national basis he did represent, however, he had not heard opposition from them. Those companies would be members of the American Insurance Association, which does have a lobbyist. He assumed if they were in opposition they would have been present. CHAIRMAN VEZEY stated he believed the committee should move with due deliberation because of the complex subject matter.