Legislature(1997 - 1998)
03/03/1998 01:38 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 116 - WORKERS COMPENSATION SELF-INSURANCE GROUP
CHAIRMAN LEMAN announced HB 116 to be up for consideration.
MS. PATRICIA VINCENT, Kenai Peninsula Builders Association,
supported HB 116 which allows them to self-insure for workers
compensation with a self-pooling arrangement. This type of
legislation has been enacted in over 40 other states; 14 of them
utilizing the pooling concept.
MR. MICHAEL HINCHIN, Alaska Timber Insurance Exchange, testified
that, as a reciprocal, he and MR. PEAL had a letter from Senator
Kelly which raised a number of questions.
SENATOR KELLY wanted to know how much money they needed to start
their reciprocal and was it enough.
Number 511
MR. MARTIN PEAL, Chairman of the Board of Governors, Alaska Timber
Insurance Exchange, replied that they were formed in 1980 when the
requirement was $1,000,000 of capitalization. The statute has
moved that requirement up to $2,000,000. Their capitalization was
always monitored closely by the Division of Insurance and they were
pressured to keep it at a good level with respect to annual
premiums. At one time it was at least 30 percent, but it has been
changed to 50 percent, which has been very adequate for his group.
They never encroached the level required by the State. He said
their capitalization stands at $6.8 million currently.
SENATOR KELLY asked if they ever had to assess the members.
MR. PEAL replied that they issue non-assessable policies which
means when you write a policy, they use an experience rating
system. The premium is set and is not assessable for the year.
SENATOR KELLY asked if their ratings were established by a national
organization or did they do their own.
MR. PEAL said they use a combination. For classifications where
they write an extensive amount of business such as in logging, they
file rates with the State of Alaska that are either below the
National Rating organization or above. For the other classes, they
typically use organization rates.
SENATOR KELLY asked if they use rates and then go under or above
compared to an experience factor.
MR. PEAL replied that is correct. However, those deviations must
be approved by the Division of Insurance.
SENATOR KELLY asked if he thought this self-insurance pool the
Committee was looking at in this committee substitute would work
like the reciprocal has.
MR. PEAL replied that he had some significant concerns. He thought
the Director of Insurance should have some authority on this. He
thought the size of the group was very small and the principle of
insurance is to spread risk among a larger number of people. He
didn't know how the reinsurance would work, because you need
adequate stop insurance to stop your losses. The joint and several
liability provision of the bill ought to concern anyone who has a
substantial stake in the pool, in case there is an assessment
because of a failure.
MR. PEAL said they had other questions; one had to do with benefits
members gain from participating in a reciprocal. He thought an
important benefit lies in the fact that the Board and management
are owners in the timber industry and manage their own safety
operations.
TAPE 98-9, SIDE B
Their frequency of accidents today is less than half of what it was
10 years ago. The members, after meeting the substantial
capitalization requirements and setting conservative reserves, get
profits returned to them as investment income. They have very low
administrative and overhead costs, there being no brokers'
commissions. There is more direct contact with an injured worker
which brings about a quicker return to work.
MR. HINCHIN said the other benefit that's important is that they do
return all the net income back to the members. In 1997 they
returned 62 percent of the premiums. Over a period from 1992 -
1997 70 percent of the premiums were returned back to the members
of the Exchange. So, in effect, they paid 30 percent of the
established workers compensation rate.
SENATOR KELLY asked if that was because over a period of years they
established a strong reserve or equity base.
MR. PEAL answered that it was a combination of factors. They have
strong capitalization, strong reserves that have built up over time
and have been invested, and they tend to set conservative rates
knowing that a profit will be returned.
Number 540
SENATOR KELLY asked how their members pay for their premium.
MR. PEAL answered that they pay monthly.
SENATOR KELLY asked why monthly instead of quarterly.
MR. PEAL answered that quarterly payments are too risky for
collecting premiums. When you write a policy and the premiums
don't come in, you have to give notice which runs another 30 days
before you can send a notice of cancellation. In an industry where
premiums are pretty large, that can mount up pretty fast.
SENATOR KELLY asked what their deposit premium was for someone
joining the organization.
MR. PEAL answered about 30 percent of estimated annual premiums.
SENATOR KELLY asked if that had always been the case.
MR. HINCHIN answered that he had been there for the last 10 years.
It is adjusted as membership grows or decreases.
SENATOR KELLY asked if they have to pay monthly premiums also.
MR. PEAL explained you pay monthly premiums based upon the payrolls
an employer pays. During the first two years a person is a member
of the Exchange, they are also surcharged 20 percent of their
premiums, so they are essentially paying 120 percent. That 20
percent goes into their own capital account with the Exchange.
After the two year period, a member has approximately 70 percent of
their annual premium on deposit with the Exchange.
SENATOR KELLY asked him what he thought of the provision in the
self-insurance pool that only requires a five percent premium
deposit to join the group.
MR. PEAL explained that that five percent has only to do with their
own guarantee fund.
SENATOR KELLY asked how one becomes a member of a pool under the
committee substitute.
MR. PEAL answered there is a provision in there for a deposit of 25
percent of the premium for the first year, but it goes on to say
that it would be consumed as the first year's premiums.
SENATOR KELLY asked if in his group, do they pay 30 percent up
front, but do they also pay the entire premium the first year plus
20 percent.
MR. PEAL said that is correct until the capital account is built up
to the level it is supposed to be.
SENATOR KELLY asked how the capital account worked for the member.
MR. PEAL explained that is the capitalization of the Exchange.
SENATOR KELLY asked if they established their capital by using the
30 percent on first year deposits.
MR. PEAL answered that the capital account is separate from that,
although the Division of Insurance looks at the combination of the
capital account and the deposit premium when looking at the
soundness and capitalization of the Exchange.
MS. MARIANNE BURKE, Director, Division of Insurance, addressed the
profitability of workers compensation in this State with copies of
the 1996 profitability report prepared by the National Association
of Insurance Commissioners, by state and five territories, for
workers compensation. Alaska worker compensation for 1996 return
on net worth was 12.7 percent. Country-wide including the five
territories was 12.4 percent. Of the 55 entities, 30 were at the
same profitability or higher than Alaska.
CHAIRMAN LEMAN asked if it was possible that one carrier could have
been a lot higher than the average, like 22 percent.
MS. BURKE answered that it's possible, but looking at the annual
statements that are filed with the Division, the five top writers
in the State did not have profitability of those high numbers.
Number 458
SENATOR KELLY asked if she was concerned about the capitalization
requirements of this plan as compared to the reciprocals which are
obviously in place and working well.
MS. BURKE answered that she is extremely concerned. The two
successful reciprocals in the State (since 1980 and 1983) have all
started out with cash and marketable securities. The Timber
Exchange started out with a $300,000 deposit of cash under a tri-
party agreement with the Director of the Exchange and the Bank.
The money was actually in the bank which could only be accessed
with the agreement of the three parties. In addition, they had
$825,000 in cash and marketable securities that was owned by the
Exchange. When you compare that to the bill before them, the
closest amount to the $300,000 held in the bank would be the
$450,000 security bond which is only accessible when the entity
becomes insolvent.
SENATOR KELLY asked where the cash comes from to operate in this
plan.
MS. BURKE answered that they have to have a minimum of their first
year's premium which is 25 percent of $500,000. That is their
premium that they pay up front. There is no equivalent to the
capitalization that was addressed by the reciprocal.
SENATOR MACKIE asked if the $125,000 up front was to pay for
administration and to pay for any claims that come up the first
year.
MS. BURKE responded that according, to this bill of the $125,000,
70 percent is available to pay claims. The remaining 30 percent is
to be used to pay for administrative costs including the cost of
the safety program, payroll audit, and other administrative charges
they may have. Their total amount of minimum premium for the year
is $500,000 to get started, of which they would have 70 percent.
But that must cover all claims plus reinsurance. For reinsurance,
the lower you get as an attachment point, the premium gets higher.
SENATOR KELLY asked if that is what is called reinsurance.
MS. BURKE answered that is correct.
SENATOR MACKIE asked if the reinsurance would cover any claims that
would exceed the amount that was available to pay any claims.
MS. BURKE clarified that stop loss (reinsurance) will pay at what
is known as an attachment point. So if you have five accidents
that cost $10,000 each, you would be paying the full $50,000,
because the attachment wouldn't occur until $10,000 is met for each
one. Different industries are different in this regard. Some have
small claims with a lot of frequency with a low dollar value;
others have few claims, but very high dollar value.
MS. BURKE said that Senator Kelly had asked how the capitalization
in 1980 compared to today's dollars and she applied the Anchorage
consumer price index to that. The equivalent today would require
$2,340,000 in cash and marketable securities in the ownership of
the organization itself.
CHAIRMAN LEMAN said he thought the inflation was overstated a
little bit. He thought it would be safe to say $2,000,000.
MS. BURKE said the guarantee fund, if you did business in Alaska,
and there are over 500 who are licensed to write workers'
compensation here, are on the hook for 2 percent of their direct
premiums written each year. In the case of the Timber Exchange,
for 1996, their direct premium was $8.4 million. One company would
have to pay $168,000 into the guarantee fund, should the need
arise. All 500 companies that write workers' compensation in
Alaska are on the line each year. It is the ultimate safety net.
If a licensed insurance company or a reciprocal becomes insolvent,
the payments to the injured worker are seamless. The injured
worker does not know the company is insolvent, because the
guarantee association steps in and makes sure those payments are
continued. The money to make those payments is assessed against
them on an as needed basis.
The guarantee fund in the committee substitute calls for a five
percent, one-time only assessment. For the first year, if they
have their minimum premium, that would be $25,000. There is no way
to project how much premium they will have in the future. She
could only address the minimums that are provided for in this bill.
The guarantee association has worked throughout the country for as
long as anyone has been tracking this.
Number 383
SENATOR MACKIE asked if in the first year there would be $500,000
from which 70 percent would be available to pay claims.
MS. BURKE said that is correct.
SENATOR MACKIE asked if he is an injured worker and files a claim
that exceeds that amount of money, what steps would follow.
MS. BURKE explained that a worker files a claim, and as long as the
group has the cash (not net worth) to pay, the injured worker would
be paid timely and the injured worker wouldn't know what the status
of the company was. If there was a series of accidents or injuries
that are below the reinsurance figure and the money is exhausted,
the next step would be to go to the guarantee fund of $25,000. If
that is exhausted, the members can be assessed for additional
premiums. This bill does not provide that money to be on deposit,
but to be in assets.
SENATOR MACKIE asked who has the ability to assess them, themselves
or the Director.
MS. BURKE replied both. If they don't pay it promptly, it falls to
the Director to assess it. If those funds are exhausted and they
can get no other funds from the builders, there is joint and
several liability which could be considered analogous to the
guarantee fund, and the other insured members would have to step
forward and convert their assets to cash. If that is exhausted and
the company is insolvent, the State of Alaska would step in,
according to the legislation, call down the $450,000 security that
is available - only when they are insolvent. Then the State would
have to take over payment of the claims. If that were inadequate,
she didn't know where the money would come from.
SENATOR MACKIE asked if they would be litigating personal assets
and those kinds of things.
MS. BURKE responded that since this isn't an insurance company, it
doesn't have the protection of liquidation. It would go into
bankruptcy.
SENATOR KELLY asked to see the section on the $25,000 limit on the
guarantee fund. Someone indicated it was Section 160 on page 10.
SENATOR MACKIE commented that $25,000 is five percent of $500,000.
SENATOR KELLY remarked that was a one-time only assessment.
MS. BURKE indicated both comments were right.
SENATOR KELLY asked if she felt that was sufficient to protect
injured worker's medical bills and pay given the cash flow
scenario.
MS. BURKE responded that she didn't feel it was anywhere near
adequate.
SENATOR KELLY asked what she thought would be adequate.
MS. BURKE replied that she would tie it to a percentage of their
premium assessable every year, but she would like to add that
guarantee associations have been used one time in the State of
Alaska in the past 10 years. It is the capitalization up front
that protects the workers. The money on deposit can make the
worker whole on a timely basis and is built up over time. When the
Timber Exchange started, they had 40 percent of their premium that
they put in as capitalization in addition to the money they were
required by statute to put up. The profitability of insurance
companies is in large measure to their investments. Her quote of
profitability includes profits on investments, as well. Twelve
percent, or 12.7 percent, it will vary. There will be years when
they make more money and there will be years when they make no
money. They need capitalization to earn the return on investments
to help smooth it out.
Number 267
MS. ROBIN WARD, Executive Director, Alaska Homebuilders
Association, said the New Mexican self-insurance pool, which is
very successful, started when they had 800 statewide members of
their trade association. Alaska Homebuilders have 892 members.
MR. ALLAN WILSON, member, Alaska Homebuilders Association, said he
is a builder here in Juneau. He has spent some time with a firm
called Towers Perrin, the second largest reinsurer in the world.
A gentleman he has been working with currently works with six other
homebuilder pools in the country. With a handout he explained the
cost of the reinsurance is 10 - 15 percent of the premium base; in
this case $50,000 - $75,000. He thought that was a significant
number since other higher numbers had been quoted during the
hearing. The stop loss insurance has two parts to it. There's
specific excess insurance which is per claim and goes on for the
duration of the claim, even if it goes for five years to
$5,000,000. The second portion is the aggregate, excess insurance
and the specific insurance applies to that premium amount. This
insurance kicks in and pays everything from there and up to an
amount that is agreed to by the Director and the trustees of the
pool. The cost, whether it's $1,000,000 or $5,000,000 is neither
here nor there.
Several other factors affect the cost of the excess insurance - who
your third party administrator is, the people who do your actuarial
work, the administrators, the more experienced they are, the
cheaper the insurance becomes. The 10 - 15 percent rate can be
reduced even beyond that point.
MR. WILSON said there are seven reasons they have for choosing this
option as opposed to the options Mr. Block suggested at the last
hearing. The profits remain with the industry, the lack of site
safety programs is vital to these organizations and getting workers
back quicker with less legal involvement (by 70 percent). In all
three alternatives Mr. Block presented there are no incentives to
provide a safe workplace. In the proposal, everyone pays the same
rates. He thought the expensive premiums were barriers put up by
big companies to keep entities like the Alaska Homebuilders out of
the market. He thought it was important for their long term
profitability that they get some control over some of these issues.
Number 152
REPRESENTATIVE PETE KOTT, sponsor, passed a handout to the
Committee that explained the process for paying solvent and
insolvent claims. He noted that the reinsurance was a major aspect
of this bill and is somewhat different from the Timber Exchange's.
He reiterated how much control the Division of Insurance has over
this program. A group applying for self insurance must prove to
the Director that the organization consists of at least 10 members.
They must have payment by each member equal to 25 percent of their
annual premium and they must show the Director a net worth of
$1,000,000 and show a security amount in the total of $450,000,
must have aggregate insurance as required by the Director, and
provide the Director premiums of at least half a million dollars
the first year and $750,000 in subsequent years.
The Director is also involved with the joint and several liability
of members, the fidelity bonds, a performance bond, the certificate
of approval, examination of the books, review of the annual
financial statements and require additional reports and premiums.
Refunds from the pool are made only after approval of the Director.
The reserve plan is on approval of the Director. This is the
amount of leverage the Division has over this particular group. He
referred the Committee to page 10 for the financial requirements.
He said he is very comfortable with this proposal.
Number 41
CHAIRMAN LEMAN the security amount of $450,000 on page 2 seems to
be low without them being liquid assets. Another concern is the
joint and several provision, because he thought that would scare
off members to join and without adequate members, they wouldn't get
capitalized initially to get off and running.
REPRESENTATIVE KOTT explained that the $450,000 deposit can be made
in many different forms and is the amount required of 80 percent of
the other states.
TAPE 98-10, SIDE A
He thought each individual member would make their own decision
about joining. The drawing feature about this group is that they
have the ability to do self-checking on members and he thought
members who had more to lose would eventually benefit.
CHAIRMAN LEMAN said he wanted this group to succeed and was
pointing out his concerns.
MS. WARD said she has found that in all other states the joint and
several provision has been an advantage, because they can watch
over each other's safety program and things like that.
SENATOR KELLY asked where the Alaska State Homebuilder's
Association's form came from and what's it supposed to show.
REPRESENTATIVE KOTT said this is a listing to find out what the
losses were from this particular group to insure there would be the
ability to pay those claims. This is one page selected at random
and it's not entirely accurate.
SENATOR KELLY pointed out that it is pretty incomplete, because
they are awfully small numbers. However, it does show the
volatility of claims every year. In 1992 for only 10 companies
it's $66,000, in 1993 it's $22,000, in 1994 it's $70,000, in 1995
it's $53,000, in 1996 it's back to $25,000, and he guessed that
1997 was an up year.
REPRESENTATIVE KOTT said it does look volatile, but when you
average them out, it still falls well below the capitalization
required by the bill.
SENATOR KELLY responded that there are only 10 companies showing
here. It doesn't show how much in premiums they pay. He said that
someone was telling him that last year he had $135,000 claim. He,
himself, had a heart attack last year and if that had happened
during working hours, he could have pressed in court for worker's
compensation claiming stress, and some of those are being
recognized. That was a $70,000 medical bill not counting lost
time. It can happen to anyone in this group; it's not uncommon.
Medical payments are expensive as heck. If a worker gets unlucky
and falls under one of these groups that's undercapitalized, there
can be a big problem.
REPRESENTATIVE KOTT agreed and explained that the chart was
provided for illustration purposes only. The bill does call for 10
employers and they would have to come up with half a million
dollars in premiums. He said the reinsurance would kick in, if he
had a heart attack.
SENATOR KELLY responded that there are a million heart attacks in
the United States each year and courts have allowed those types of
claims during working hours to be workers' compensation claims.
He told Ms. Ward he found that to form a self-insurance group in
New Mexico, they need a net worth of $3 million and the employers
must have been in business for five years and asked if she would
object to having those provisions in the Alaska law.
MS. WARD answered yes. In New Mexico their original legislation
was $1 million and this proposal also calls for being in business
for five years.
SENATOR KELLY asked where the five year business requirement was
and hoped that it was in Alaska. He asked if it means the employer
or the association has to have been in business for five years.
New Mexico says the employers. He doesn't care about the
association; he's worried about the employers who are supposed to
be paying the premiums to protect the workers.
Number 110
SENATOR KELLY moved a conceptual amendment saying that you have to
have been an employer in the State of Alaska for five years before
you're eligible to join one of these insurance pools.
MS. WARD said this is the first time anyone mentioned the employer
and it was their intention that the association needed to be in
business for five years, because they are afraid that other
employers would go out and start another trade association and
immediately self pool. They trust the trustees of their group to
decide who will be allowed into it.
SENATOR KELLY said he got the information about the New Mexico
statute from the National Council on Compensation Insurance as he
requested in the last meeting. They have some concerns about the
bill and this is one of them. If someone has been in business up
here for five years, that's probably a pretty stable person. He
would not be as concerned with other provisions in the bill, if
that were the case. He did not trust the Board of Trustees, whose
sole line is volume, to be any kind of a judge.
REPRESENTATIVE KOTT opposed the amendment because if he had a good
track record for even one year, he thought he should be allowed to
enter this group. The Board will take into consideration a number
of factors. He did not think it business friendly to exclude
someone from another state who has a good record.
SENATOR KELLY responded that until they can prove they can stay in
business for five years, they can go out like everybody else and
buy their workers' compensation insurance from an insurance company
or a reciprocal, or they could self-insure. They don't have to
join this particular association. If he wants to make the
association work with weak capitalization requirements, he should
look at the provisions in the New Mexico law that make it work and
one of those is the five year provision. Maybe that's the basic
reason it's working there. We can't just take the good aspects
without taking some of the reasons behind why it worked. This is
clearly criteria on how they select their membership. He thought
they should at least establish a three year standard.
REPRESENTATIVE KOTT said he didn't want to be business unfriendly.
SENATOR KELLY said he was not concerned with the Homebuilders and
the protection they would have; he is concerned about the employees
of the Homebuilders that the legislators are trying to protect
under the workers compensation law of the State of Alaska.
SENATOR MILLER moved to amend the amendment by changing five years
to three years. There were no objections and it was so ordered.
MR. PAUL GROSSI, Director, Division of Workers Compensation,
informed the Committee for an employer to be self insured in
Alaska, he has to have been in business here for five years.
SENATOR KELLY added, but you also have to have the $5 million net
worth.
MR. GROSSI said that is right.
Number 278
CHAIRMAN LEMAN asked if there was further discussion on the amended
amendment. SENATORS KELLY, MACKIE, MILLER, and HOFFMAN voted yes;
CHAIRMAN LEMAN voted no, and the amendment passed.
SENATOR KELLY said on page 4, line 6, he thought it was normal to
have an errors and omissions policy for Corporate Boards of
Directors, too, and made a motion to add "Trustees" after
"Administrator." He didn't think it would be that expensive to add
and it could help someone down the road somewhere. There were no
objections and it was so ordered.
SENATOR KELLY said on page 10, line 2 that he had real concerns
about the quarterly installments as did the Timber Exchange. Since
most of the homebuilders are going to be working seasonally and
since there would be only two quarters of the year in which they
would pay, a person could just pay the first quarter and then bail
out and head south and not pay the second quarter. If they have to
pay on a monthly basis, the Trustees would have a greater ability
to get that money before someone else, like a supplier or bank,
liens it. He moved to delete "or quarterly installments" and
insert "monthly." He said it also increased the capitalization.
There were no objections and it was so ordered.
Number 337
SENATOR KELLY asked how the penalties on page 11 equated with the
penalties in reciprocal laws.
MS. BURKE answered that she had prepared a side by side in which
that is addressed.
SENATOR MACKIE said they referred to AS 21.47.180.
MS. BURKE said that the penalties required for a reciprocal are the
same as for any other insurance entity - $2,500 per violation
compared to $500 in the proposal. It can go up to $25,000 as
compared to $5,000 in the aggregate.
SENATOR KELLY asked if there could be a penalty after a notice of
opportunity for hearing and another set of penalties upon a finding
in the bill.
MS. BURKE explained that the process is that they assess penalties
and, based on the results of a hearing, assess additional
penalties.
SENATOR KELLY asked if there were additional penalties in the
reciprocal.
MS. BURKE answered that there were the same requirements of $2,500
and $25,000.
SENATOR KELLY said what's lower in the committee substitute is the
initial after notice and opportunity penalty and the difference is
$2,000 and $20,000.
MS. BURKE answered yes; and added that the reciprocal is also
subject to $100 per day late filing fees for any of their required
reports.
SENATOR KELLY asked if the self insurance would not pay.
MS. BURKE said that is correct.
SENATOR KELLY said he thought those amounts were a little low. If
you want these things done properly, you have to make time to do
things like filing taxes, etc. He wasn't sure a civil penalty not
to exceed $500 would be enough incentive to force people to do
these things on time and stay out of trouble. He thought the
number should be somewhere between what's proposed in the CS and
the reciprocal.
SENATOR MACKIE said he would like to research that issue in the
next committee, because he doesn't know that much about it.
It was noted that the proposal goes to Judiciary and Finance
Committees, also.
SENATOR KELLY said that he doesn't object to the self insurance
pool concept, but he objects to what he considers to be the lack of
capitalization protection for injured workers.
Number 337
SENATOR MILLER moved to pass SCSHB 116(am) from Committee with
individual recommendations. SENATOR KELLY objected because he
didn't feel quite ready. There were no further objections and the
motion carried by a vote of four to one. SENATORS LEMAN, MILLER,
HOFFMAN, and MACKIE voted yes; SENATOR KELLY voted no.
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