Legislature(2003 - 2004)

03/22/2004 09:05 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR SENATE BILL NO. 276(L&C)                                                                                            
     "An Act relating to  the Alaska Insurance Guaranty Association;                                                            
     relating  to the powers  of the Alaska  Industrial Development                                                             
     and Export Authority  concerning the association; and providing                                                            
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken stated  that this  legislation  would increase  the                                                            
Alaska Insurance  Guaranty  Association's ability  to pay  Workman's                                                            
Compensation claims. He  noted that the legislation had been held in                                                            
Committee  to address  funding issues,  and he reminded  that  CS SB
276(L&C)  version  of the  bill  specifies  that earnings  from  the                                                            
Alaska Permanent Fund would be a funding source.                                                                                
                                                                                                                                
Co-Chair  Green moved  to adopt  committee substitute,  Version  23-                                                            
GS2105\Q as the working document.                                                                                               
                                                                                                                                
Co-Chair Wilken  objected for further clarification.  He stated that                                                            
the  spreadsheet  titled  "Alaska  Insurance  Guaranty  Association                                                             
Worker's   Compensation  Account,   Cash  Flow   Projection   as  of                                                            
12/31/2003,"  provided by the Department  of Community and  Economic                                                            
Development,  further  explains  the bill's  funding  mechanism.  In                                                            
addition,  he  noted  that  the  Version  "Q" committee   substitute                                                            
eliminates  language specifying  that the  Earnings Reserve  Account                                                            
would be the funding source for the program.                                                                                    
                                                                                                                                
LINDA  HALL,   Director,  Division   of  Insurance,  Department   of                                                            
Community  and Economic  Development,  noted  that  the Version  "Q"                                                            
committee substitute  "is identical" to the L&C version  of the bill                                                            
"with  the exception  that it does  removes  self-insurers from  the                                                            
assessment process." This  change, she continued, would result in an                                                            
assessment  process that  would increase  the  assessments in  those                                                            
accounts   that  have   "an  insolvency"   such   as  the   Workers'                                                            
Compensation (WC)  account. She noted that the aforementioned  chart                                                            
reflects  cash flow  projections based  on the  current two  percent                                                            
assessment  and the projections were  the assessment levy  increased                                                            
to four percent.  She specified that  the WA account assessments  as                                                            
well as the other accounts  within the Guaranty Fund are depicted on                                                            
the spreadsheet.                                                                                                                
                                                                                                                                
Ms. Hall pointed  out that the Auto  Fund Assessment would  increase                                                            
.19 percent  in  calendar year  2004. She  exampled  that on a  $600                                                            
automobile premium, this  would translate to a $1.24 increase, which                                                            
she declared, "is not a  huge amount of money." She stated that this                                                            
low percentage  increase was possible  because there the  Fund had a                                                            
positive cash balance at the beginning of calendar year 2004.                                                                   
                                                                                                                                
Ms. Hall commented  that for the full  calendar year 2005,  the four                                                            
percent  assessment rate  on the WC  account would  equate to  a .47                                                            
percent increase.  She also  noted that for  the full calendar  year                                                            
2005, a $600 automobile  premium with the .19 percent increase would                                                            
equate  to  an additional  $3.06.  She  voiced  that  these  minimum                                                            
increases  would  assist  the  Association  in getting  out  of  its                                                            
deficit situation.                                                                                                              
                                                                                                                                
Ms. Hall  noted that  the WC rate  would reduce  to 3.37 percent  in                                                            
calendar year  2006, and to 2.48 percent in calendar  year 2007, and                                                            
the Other Funds  assessments would be eliminated beginning  in 2006.                                                            
                                                                                                                                
Senator  Bunde asked  whether  the assessment  rate  increase  would                                                            
apply to other insurance premiums such as homeowners insurance.                                                                 
                                                                                                                                
Ms. Hall affirmed that it would.                                                                                                
                                                                                                                                
Senator  Bunde   asked  whether  the   Division  of  Insurance   has                                                            
calculated  the cost to each Alaskan  were the excess earnings  from                                                            
the Permanent  Fund  reserve  account used  to fund  the program  as                                                            
specified in the L&C version of the bill.                                                                                       
                                                                                                                                
Co-Chair  Wilken noted  that  the cost  might be  approximately  two                                                            
dollars.                                                                                                                        
                                                                                                                                
Co-Chair Green  asked for clarification that while  the four percent                                                            
assessment  would apply to the WC  fund, the .19 percent  assessment                                                            
would be applicable to all other funds.                                                                                         
                                                                                                                                
Ms. Hall concurred.                                                                                                             
                                                                                                                                
Co-Chair Green  asked whether the  funding mechanism being  proposed                                                            
would have minimal impact on the public and other entities.                                                                     
                                                                                                                                
Ms. Hall responded that  this legislation would affect "the broadest                                                            
base"  of the insured  marketplace  and would,  she continued,  have                                                            
"minimal  impact on the  paying public while  raising a substantial                                                             
amount of  money," even with  the elimination  of the assessment  on                                                            
the  self-insured   entities.  She   noted  that  the  .19   percent                                                            
assessment on  such things as automobile, homeowner,  and commercial                                                            
property is  small because they present  a much larger premium  base                                                            
that  the WC  base.  This larger  base,  she noted,  generates  more                                                            
money, "by  far," than the  four percent  assessment increase  on WC                                                            
premiums.                                                                                                                       
                                                                                                                                
Senator  Bunde  surmised,  therefore,  that  the  people  who  would                                                            
directly benefit from this  legislation would be in the minority and                                                            
the people  who would have no direct  benefit from it would  pay the                                                            
majority of the assessments.                                                                                                    
                                                                                                                                
Ms.  Hall  stated  that the  people  who  would  benefit  from  this                                                            
legislation are those "who  pay the smaller amounts of premium." She                                                            
noted that  currently, the amount  assessed from the WC base,  which                                                            
is less  than half  the size  of the  other premium  bases, is  $4.3                                                            
million.                                                                                                                        
                                                                                                                                
Co-Chair  Green asked  whether  this  legislation would  enable  the                                                            
Division  to be better  situated  "to respond,  react, and  predict"                                                            
future claims  in order to  prevent a reoccurrence  of this  sort of                                                            
financial situation.                                                                                                            
                                                                                                                                
Ms. Hall  voiced optimism  that this legislation  would address  the                                                            
situation.  She  also  noted  that  separate  legislation  is  being                                                            
brought  forward that proposes  to require  deposits from  insurance                                                            
companies "to  provide an additional pocket of money"  with which to                                                            
address  insolvency issues.  She noted  that the  magnitude of  this                                                            
insolvency   "has   depleted   the   resources   of   the   Guaranty                                                            
Association."                                                                                                                   
                                                                                                                                
Co-Chair Wilken removed his objection.                                                                                          
                                                                                                                                
There being  no further objection,  Version  "Q" was ADOPTED  as the                                                            
working document.                                                                                                               
                                                                                                                                
Co-Chair Wilken  referenced an Associated Builders  and Contractors,                                                            
Inc. letter,  dated  March 1, 2004  and addressed  to Senator  Bunde                                                            
[copy on  file] that  spoke to  their concern  regarding a  previous                                                            
change in  the WC rate that  had occurred  midyear, in July,  to the                                                            
dismay  of those  in  the construction  industry.  This  timing,  he                                                            
continued had  negatively impacted  the industry because  previously                                                            
bid  projects  had not  factored  in  the new  rate.  Therefore,  he                                                            
requested  confirmation  that the  rate increases  proposed in  this                                                            
legislation would not occur midyear.                                                                                            
                                                                                                                                
Ms. Hall  clarified  that the increases  in  question pertained  "to                                                            
increases in benefits  which had an immediate affect  on rates." She                                                            
agreed that, "it  was very unfortunate that that occurred  midterm."                                                            
Continuing,  she  clarified  that  Guaranty   Fund  assessments  are                                                            
annually  assessed at  the renewal  of a policy  and therefore,  she                                                            
stressed, would  not be done midterm.  She qualified that  while the                                                            
Department historically  implements rate increases on January first,                                                            
they  would not  apply to  an individual  policy  until that  policy                                                            
renews. She  stressed that  this would be  the procedure with  these                                                            
assessments.                                                                                                                    
                                                                                                                                
Co-Chair Wilken  surmised therefore, that there would  be no midyear                                                            
surprises.                                                                                                                      
                                                                                                                                
Co-Chair  Green  moved  to  report  the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal notes.                                                                       
                                                                                                                                
Senator  Bunde objected.  He  expressed  that to  assess  businesses                                                            
further  at this  time would  be unfortunate,  and  he specifically                                                             
stated that it  would be unfortunate to assess people  who buy other                                                            
types of insurance  policies. He preferred that this  legislation be                                                            
financed  via other avenues  such as by the  excess earnings  of the                                                            
Permanent  Fund, as  that would  not, he opined,  negatively  impact                                                            
Alaskans.                                                                                                                       
                                                                                                                                
Senator  Olson  echoed  Senator  Bunde's  concern.  He  stated  that                                                            
numerous  businesses  have  contacted  him to  voice  opposition  to                                                            
increases  in their  WC assessment  "due  to the  downturn in  their                                                            
funding sources  ranging from the  State to the business  climate in                                                            
rural Alaska now."  He shared the desire that other  funding sources                                                            
be identified.                                                                                                                  
                                                                                                                                
Co-Chair Green  voiced concern about  the fact that other  premiums,                                                            
such  as automobile  and  homeowner  premiums  would  be  increased.                                                            
Therefore,  she asked  Ms. Hall  to explain  how  the Guaranty  Fund                                                            
functions overall,  and how this legislation,  as a solution  to the                                                            
situation, "is not off  the mark in solving this temporary problem."                                                            
                                                                                                                                
Ms. Hall stated  that "the concept of the Guaranty  Fund in Alaska",                                                            
as in  every other  state, "is to  provide a  safety net to  protect                                                            
policy holders and claimants  in the case of a solvent insurer." She                                                            
stressed  therefore, that  the theory  is to institute  a series  of                                                            
assessments,  which would  provide funds in  case of an insolvency.                                                             
She noted that  similar to Alaska's current two percent  assessment,                                                            
the majority  of states  have limitations  on their assessment,  She                                                            
shared that,  whereas Alaska's Fund  is comprised of three  accounts                                                            
with varying rates  of assessment percentages, 18  other states have                                                            
a single account  within their guaranty association.  She noted that                                                            
Alaska,  being  a  small  State  with   a small   premium  base,  is                                                            
challenged  in its  endeavor to  develop a Guaranty  Association  to                                                            
address emergencies  "with the small amount of premiums  that it has                                                            
to deal with."                                                                                                                  
                                                                                                                                
Ms. Hall  specified that  the WC account,  the Auto Account  and the                                                            
Other  Account   comprise  the  three   accounts  of  the   Guaranty                                                            
Association.  She stated  that the  Other Account  encompasses  such                                                            
things   as  homeowners,   commercial   property,   and   commercial                                                            
liability. She  stated that currently, there is a  one half of a one                                                            
percent assessment  on such  things as homeowners  and boat  owners,                                                            
due,  "primarily"  to  the  insolvency   of a  medical  malpractice                                                             
insurer. She declared that  assessing entities to provide sufficient                                                            
funds for the  situation relating  to this legislation is  basically                                                            
the  same  as  assessing  a  homeowner  for  a medical  malpractice                                                             
insurer.                                                                                                                        
                                                                                                                                
Ms.  Hall,  in addressing  Senator  Olson's  comments,  also  voiced                                                            
concern regarding  the increases in  business WC premiums.  However,                                                            
she noted  that  the proposed  increase  is small  in comparison  to                                                            
previous   adjustments.   In   addition,   she   stated   that   the                                                            
aforementioned  companion bill would propose measures  to reduce the                                                            
WC premiums  as she  agreed that  small businesses  are being  over-                                                            
burdened with an average assessment of 22 percent.                                                                              
                                                                                                                                
Co-Chair Wilken voiced agreement.                                                                                               
                                                                                                                                
Senator Olson  questioned whether  the State is addressing  measures                                                            
to  get  self-insured  employers   to contribute   to  the  Guaranty                                                            
Association as, he declared,  currently the WC "burden" is placed on                                                            
small businesses.                                                                                                               
                                                                                                                                
Ms. Hall  clarified that  the Guaranty Fund  does not protect  self-                                                            
insured  employers,  and, therefore,  she  continued,  were they  to                                                            
become insolvent,  their  employees would  receive no benefits  from                                                            
the Fund.  She noted that  the 24 self- insurers  in the State  must                                                            
provide  financial guarantees  and meet  other eligibility  criteria                                                            
established by the Division  of Workers' Compensation in order to be                                                            
self-insured. She noted  that the original proposal did include them                                                            
in  the  assessment  base; however,  she  continued,  "there  was  a                                                            
substantial  amount   of  sentiment  that  because   they  were  not                                                            
protected by that that they should not be forced to contribute."                                                                
                                                                                                                                
Senator Olson  understood  that the Guaranty  Fund does not  protect                                                            
the self-insured  employers. However, he asked whether  inclusion of                                                            
them in an assessment might still be a consideration.                                                                           
                                                                                                                                
Ms. Hall responded no.                                                                                                          
                                                                                                                                
Co-Chair  Green interjected  that the Division  of Insurance  is not                                                            
responsible  for nor does not oversee  joint insurance arrangements                                                             
or self-insurers.                                                                                                               
                                                                                                                                
Ms. Hall  communicated that  while the Division  of Insurance  could                                                            
conduct financial  examinations and  suspend an "admitted  insurance                                                            
company's"  certificate to operate,  it has no oversight  ability in                                                            
regards to joint  insurance arrangements or self-insurers  even were                                                            
the Division  to receive  financial information  that they  were "in                                                            
distress."                                                                                                                      
                                                                                                                                
A  roll call  was  taken  on the  motion  to  report the  bill  from                                                            
Committee.                                                                                                                      
                                                                                                                                
IN FAVOR: Senator  Dyson, Senator  Hoffman, Senator B. Stevens,  Co-                                                            
Chair Green, and Co-Chair Wilken                                                                                                
                                                                                                                                
OPPOSED: Senator Bunde and Senator Olson                                                                                        
                                                                                                                                
The motion PASSED (5-2)                                                                                                         
                                                                                                                                
The motion to report the bill from Committee PASSED.                                                                            
                                                                                                                                
CS SB  276 (FIN)  was REPORTED  from  Committee with  a zero  fiscal                                                            
note, dated  March 23, 2004 from the  Department of Administration,                                                             
and two zero fiscal notes,  dated March 24, 2004 from the Department                                                            
of Community and Economic Development.                                                                                          
                                                                                                                                

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