Legislature(1997 - 1998)
04/15/1998 01:39 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSHB 116(FIN) - WORKERS COMPENSATION SELF-INSURANCE GROUP
REPRESENTATIVE PETE KOTT came forward to present HB 116 and discuss
changes made in the proposed committee substitute. HB 116
establishes a workers' compensation self-insurance pool for various
groups of 10 or more players. The bill contains layers of
protection to assure that employees hurt on the job are afforded
the same compensation provided to them under any other arrangement.
Several layers of protection would fall under the purview of the
director's control. Before receiving a certificate of approval
from the director the group must: be properly organized; consist of
10 members; ensure that payment of at least 25 percent of the
annual premium can be made; show at least $1 million in net worth;
provide a security of at least $450,000; ensure aggregate excess
insurance in an amount determined by the director; and have joint
and several liability and a performance bond. The director can
revoke the certificate and examine the group's books at any time.
A board of trustees must pay all workers' compensation benefits; 70
percent of the premiums collected must be used for payment of
claims and the remaining 30 percent must be deposited into an
administrative fund. Annual audits on approved forms must be
submitted to the director. Representative Kott explained how an
insured worker would use the workers' compensation self insurance
group process.
CHAIRMAN TAYLOR asked if the safeguards fail, whether the existing
fund (the Alaska Guarantee Fund), paid into by all insurers in the
state, would come into play.
REPRESENTATIVE KOTT responded he would have to refer that question
to an expert. He explained this self insurance pool would be
established with about $187,000 (25 percent of $1 million minus 30
percent for administrative funds).
REPRESENTATIVE KOTT noted the proposed changes in the committee
substitute are the result of consultations with other parties on
what works best in other states. The changes are as follows. On
line 19, page 2, a reference to specific IRS provisions was
deleted. The current language is generic so that it will not be
affected by changes to the IRS code, which is in a state of flux.
The annual premium amount was increased to $1 million on page 3,
line 28, to satisfy concerns about having sufficient start-up
funds.
A provision on page 4, lines 5-6, adds a professional liability
policy for trustees. REPRESENTATIVE KOTT indicated it is his goal
to assure employees injured on the job receive the same
compensation they would receive under any other arrangement.
The word "member" was replaced by the word "group" on page 8, line
25, and on page 10, lines 12 and 13, to correct a technical
oversight. On page 10, line 5, the 25 percent additional premium
for the first year was deleted, as it is now required up front. On
page 10, lines 14 and 15, a provision was added requiring the group
to obtain reinsurance for the fund as approved by the director, and
it gives the director the authority to set the amount of
reinsurance required.
On page 10, line 25, the 25 percent additional payment from the
reserve was deleted, and the start-up amount was increased to $1
million. On page 13, lines 23 and 24, the phrase, "who have been
engaged in the same or similar type business in the state for at
least three years" was deleted. Employers must meet minimum
requirements to join the group which should assure members are not
high-risk. The legal drafter expressed concern that the three year
requirement might create an equal protection issue.
Number 279
SENATOR MILLER moved to adopt SCSHB 116(JUD) (the X version, dated
4/7/98 by Mike Ford), for the purpose of discussion. There being
no objection, SCSHB 116(JUD) was adopted.
CHAIRMAN TAYLOR took public testimony.
Number 288
ALAN WILSON, a Juneau general contractor and member of the Alaska
Homebuilders' Association, stated he has been working on this issue
for some time and that this bill is very important to him as an
employer. HB 116 has the potential to: significantly decrease
workers' compensation premiums; provide for more direct control
over administrative costs and a higher degree over claims reserves;
provide for self audits of safety conditions without negative
repercussions; give groups control to aggressively investigate
fraud; use proactive claims management; lower attorneys' costs;
allow for the quick return of claimants to work; improve
communication regarding safety; and allow for more adaptability of
funds to suit the industry. He pointed out the Alaska Timber
Insurance Exchange (ATIE) operates as a pool that focuses on one
aspect of the industry. ATIE has become very successful and is
underwriting approximately five percent of the business in the
state - businesses comprised of people involved in the timber
industry. ATIE has reserves of approximately $8 million and it
returns 63 percent of premiums to its members. He believed part of
the reason for its success is its knowledge of the timber industry.
Number 328
BILL TAYLOR, an Anchorage homebuilder, emphasized that HB 116 does
not reinvent the wheel because it is based on model legislation
that has proved successful in approximately 15 states. The bill
provides every possible layer of protection. Model legislation in
other states only requires $500,000 up front. Because members have
an individual stake in each claim, they will be proactive in
handling fraud and loss control, as well as safety issues. He
stated insolvency of the fund would occur if three catastrophic
claims were filed in one day, which is statistically improbable.
The Division of Insurance will have regulatory authority where
statutory authority stops.
Number 360
MARIANNE BURKE, Director of the Division of Insurance, stated she
is most concerned about this legislation and focused her testimony
on points made by previous speakers during today's testimony. The
increase from $500,000 to $1 million for the first year premium is
a move in the right direction, however the net effect is zero
because under the former version of the bill, the pool was required
to put up a 25 percent deposit. The effect on cash in hand to pay
claims has not changed. Reinsurance, or stop-loss insurance, is a
valid way of spreading risk and is standard practice, however the
pool must pay all claims up to that attachment point. A $250,000
claim would bankrupt the association right away. Ms. Burke stated
all insurers doing business in Alaska must belong to the Alaska
Insurance Guarantee Association (AIGA)to do business here. A
statute change would be necessary to allow self insured plans to
join this group. She would not advise allowing a self insured plan
into that group because AIGA would be fully liable for any other
insurance company that becomes insolvent. She clarified the AIGA
consists of cash while reinsurance is an agreement to pay money if
a contingency occurs. Regarding similar statutes in other states,
Ms. Burke noted the first similar pool was established in North
Carolina but it had 4,000 employers, not 10. The State of Florida
had a proliferation of these types of pools and is now facing
multi-million dollar uninsured claims. She described differences
between the proposal before the committee and similar legislation
that was enacted in New Mexico which has since increased its start-
up requirement from $1 million to $3 million.
MS. BURKE stated the surety bond required in HB 116
can only be used if the fund is insolvent. She pointed out the
entitlement of compensation to an injured worker is established by
statute, not by an insurer. The amount of medical cost is
determined by the provider, not by the employer, worker, or
insurer. The one way an employer can impact this entire cost
package is through loss control. Any insurance company in Alaska
that writes workers' compensation insurance must provide assistance
in loss control when asked.
MR. K. SCOTT McENTIRE, an Anchorage general contractor and an
injured worker, stated he takes exception to the bill. He
disagreed that the possibility of three catastrophic accidents
occurring in one day was improbable. He expressed concern that
this legislation would exempt the newly established groups from
complying with most of the Division of Insurance's regulations.
TAPE 98-33, SIDE B
Number 001
MR. McENTIRE continued. He pointed out 50 percent of employers in
Alaska are uninsured and the Division of Insurance cannot enforce
existing regulations because it has only one investigator. He
strongly recommended that no action be taken on HB 116.
MR. McENTIRE read the following written testimony submitted by
BARBARA WILLIAMS, who was unable to be present.
I am Barbara Williams and my husband has been in the
workers' compensation system. First off, let me start by
saying how dare you for purposefully leaving out key
components to pressure the [indisc.] injured workers,
that is, injured workers are aware of how poorly this
system is working. I noticed that Pete Kott is a sponsor
for this bill. This doesn't surprise me because I have
waited four years for empty promises of help from him.
This is a prime example of how government has gone awry.
The [indisc.] defendants and the corporations stand to
gain from this, not the injured worker. You guys aren't
even following your own rules. Where does that leave us,
the injured workers, but with less rights than we
started? Shame on all of you.
Number 511
GERALD MILBRETT made the following comments. When he received a
catastrophic injury, the current system did not work for him. He
does not believe $1,000,000 in coverage is enough as his physician
expenses alone were $400,000. He is in a wheelchair and constantly
worries about his finances. This bill is designed to save the
employers money. The insurance company that covered him
manipulated him into what it wanted him to do, which has barely
kept him and his family afloat. He stated he does not believe this
bill will work.
MICHAEL HINCHEN, general manager and comptroller of the Alaska
Timber Insurance Exchange (ATIE), stated ATIE supports the concept
of allowing employers to get together to insure their workers'
compensation obligations as a group. It has been ATIE's experience
that its members of substantial size and net worth have supported
an "industry together" concept which has made affordable workers'
compensation available to both large and small employers involved
in the timber industry. ATIE was formed in 1980 as a reciprocal
insurer under Title 21. ATIE has had to follow Alaska insurance
statutes, including those involving capitalization and insolvency.
The income generated by its operations have been returned to its
policyholders, in the form of dividends. As a result of the
dividends, the net cost of workers' compensation to ATIE's
policyholders has been significantly less. More importantly, as a
result of the efforts of policyholders, the number of time-loss
accidents decreased by over 200 during the 10 year period ending in
1998.
MR. HINCHEN stated ATIE is concerned about some of the language in
HB 116. The bill lacks a requirement for adequate capitalization
to form a self-insured group. In ATIE's experience, a single claim
can result in cash payments in excess of $200,000 in a single year.
ATIE has had to cover several catastrophic injuries in one year.
The self-insured group must pay claims out of pocket first, and
then request reimbursement from the reinsurer. The reimbursement
process has taken over one year. ATIE's second concern is joint
and several liability and assessable policies. What has helped to
make ATIE a success is that large employers, with substantial net
worths, have been willing to participate in the ATIE, thus helping
develop the premium volume needed to obtain economies of scale and
spreading of risk. They have been willing to do this because their
liability has not been joint and several, and their policies have
not been assessable. A third concern with joint and several
liability and assessable policies is the collection of funds when
and if it is necessary for a group to levy assessments against its
members. The provisions of HB 116 might require the group to have
a minimum net worth, but will the members be able to come up with
the cash needed to pay their assessment? The most important
concern ATIE has is whether injured workers will receive their
benefits in a timely manner. The Board of Governors of ATIE is
very concerned about who will ultimately pay the bill if a group
formed under the provisions of HB 116 fails and adequate funds are
not available from its members. HB 116 should contain specific
provisions to protect insurance carriers who have met sound
capitalization requirements from assessment in the event of the
failure of a self-insured group formed under HB 116.
Number 445
CHAIRMAN TAYLOR noted his understanding from Ms. Burke was that the
Division of Insurance would not be able to access funds from the
AIGA to make payments to injured workers if a self insured group
became insolvent becaused the self insured group is not considered
to be an insurance company. He asked Mr. Hinchen if that was
correct.
MR. HINCHEN explained that is correct, but he noted ATIE's concern
is that if a group does fail, someone will look for the "deep
pocket" and insurance companies will likely be called upon to bail
out the failed group.
Number 430
CHAIRMAN TAYLOR commented he was not sure that could happen because
once the joint and several assets are gone, and the guarantors' and
reinsurers' obligations are fulfilled, there would be no other
asset base to turn to.
MR. HINCHEN noted ATIE wanted confirmation of that.
CHAIRMAN TAYLOR noted he requested a legal opinion on that
question, and the opinion verified Ms. Burke's opinion.
CHAIRMAN TAYLOR indicated he had an amendment prepared that would
make the state the final backup.
Number 417
PAUL GROSSI, Director of the Workers' Compensation Division, stated
the Department of Labor supports HB 116 in concept, but it has two
basic problems with the bill. Its first concern is a lack of
adequate funding in the form of cash to pay claims; the second is
who will pay outstanding claims in the event of insolvency. He
agreed increasing the initial premium to $1 million is a step in
the right direction, however eliminating the reserve of 25 percent
of the premium is a step in the wrong direction. For the first
month, the group will have $175,000 available to pay claims, and
although catastrophic injuries are not the commonplace injuries,
they do occur. Although stop-loss insurance covers the excess over
that amount, the minimum retention is usually around $500,000 to $1
million, which this group will not have as start up funds. In the
event of insolvency, if only one group is participating, it will
only be able to cover $25,000. The $1 million in net worth is
likely to be in the form of equipment and property which will have
to be liquidated before it can be used to pay claims.
MR. GROSSI also mentioned that the previous committee asked the
Department of Labor to get independent sources to evaluate this
legislation. NCCI and Bruno Czyrka, Administrator of the Bureau of
Workers' Disability Compensation in Michigan, both reported the
proposed legislation contains problems with insolvency and funding.
CHAIRMAN TAYLOR expressed concern that within the building
industry, general contractors hire subcontractors who are self-
employed and do not have workers' compensation insurance. He
questioned how the non-union, small businessperson is being helped
if the state makes no adjustments to the existing program.
MR. GROSSI replied the subcontractor who is a sole proprietor may
not be covered under workers' compensation, however, if the general
contractor uses that method of employment to prevent paying
workers' compensation, the general contractor may be liable for
those benefits.
CHAIRMAN TAYLOR thought many general contractors cannot hire the
subcontractors as employees because it is unaffordable.
MR. GROSSI said that may be so, but the new program will still need
to be adequately funded.
Number 307
EDWARD SMITH, regional marketing manager for Safety National
Casualty Corporation (SNCC) of St. Louis, Missouri, informed
committee members he was invited to speak on behalf of group self
insurance because it is a specialty coverage that his company
underwrites. His company was founded in 1942 for the specific
purpose of writing excess workers' compensation insurance for
reinsurance. SNCC currently provides such insurance for over 100
self insured groups nationwide. SNCC believes the self insurance
group concept does offer the smaller to mid-size employer the
opportunity to enjoy the benefits of self insuring their workers'
compensation, when individually they would not be large enough to
take on that responsibility. SNCC believes two aspects of HB 116
are very favorable. HB 116 provides the regulator with the
opportunity to enforce some strict regulations. The group is
required to submit actuarial reports, annual financial statements,
and other types of data that will give the director the ability to
quickly ascertain whether the group is getting into trouble.
Although the State of Florida does have problems right now, its
regulations were written over 50 years ago and they are quite loose
in nature. Many of the groups in Florida are heterogeneous which
allows different types of employers to join together. One firm
takes care of all administrative duties and firm members hold seats
on the Board of Governors. The result is that 50 to 60 percent of
the contribution paid by each member is available to pay claims,
rather than 70 percent. NSCC provides excess coverage for some
public entities, and it provides statutory excess coverage above a
$300,000 self insured retention. The stop loss, or reinsurance,
provides that if the claims experience from a given year is very
high, that experience will be capped at a certain dollar amount
stated in the policy. He explained how SNCC would calculate the
payment of claims when a group has reached its payout limit. A
self insured group would be liable to pay usually $300,000 to
$350,000 from any one catastrophic occurrence, and 85 to 90 percent
of their total contributions for the year in the aggregate.
Reimbursement typically takes 8 to 10 years to pay for catastrophic
occurrences.
CHAIRMAN TAYLOR asked Mr. Smith why reimbursement takes 8 to 10
years.
MR. SMITH clarified that a large catastrophic loss, or a group of
large losses, often takes 8 to 10 years to mature or to add up to
a total cost of $300,000.
Number 177
REPRESENTATIVE KOTT concluded the testimony on HB 116 by explaining
that he worked laboriously with the director of the Division of
Workers' Compensation and a senator on Ms. Williams' husband's case
but unfortunately that case required a massive overhaul of the
workers' compensation statutes. He noted some injured workers'
situations may not have been as dramatic had they been members of
a workers' compensation insurance group. In past committee
meetings, the second 25 percent was not acknowledged, but now that
the money has been put up front, the Administration has
acknowledged it. He indicated one of the benefits of a pooling
arrangement is that it requires self policing. The result in other
states has been that costs have decreased, as well as accident
rates. The director of the Division of Insurance will have the
"hammer" in most cases, and if funding gaps exist, the certificate
will not be issued. He added the National Association of Insurance
Commissioners (NAIC), of which Alaska is a member, provided model
legislation in 1993 that requires a minimum of five or more
employers in each group. He described how HB 116 follows much of
that model legislation. He emphasized that business and labor
have joined hands to support this legislation.
CHAIRMAN TAYLOR read the following amendment he had prepared.
"If the director is unable to fully collect an assessment
imposed on a group that is liquidated, the director may direct
the Legislature to make up the deficiency by appropriation
from the general fund."
SENATOR ELLIS asked if the director has any authority to seek other
funds to fulfill claims without this amendment giving specific
statutory authority.
CHAIRMAN TAYLOR said he did not believe so.
SENATOR PARNELL asked if the director would have authority under
current law to make this kind of request so that everyone is
treated equally.
MS. BURKE informed committee members that question has never arisen
because the guaranteed fund is backed by $3.5 trillion worth of
assets within the insurance industry.
TAPE 98-34
SIDE A
CHAIRMAN TAYLOR noted if the Legislature can contemplate taking
care of the economic disaster in Bristol Bay, it might contemplate
taking care of economic disasters in other types of businesses.
SENATOR MILLER moved SCSHB 116(JUD) out of committee with
individual recommendations. There being no objection, the motion
carried.
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