Legislature(2003 - 2004)
02/03/2004 01:30 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
SB 276-ALASKA INSURANCE GUARANTY ASSOCIATION
CHAIR CON BUNDE announced SB 276 to be up for consideration.
MS. LINDA HALL, Director, Division of Insurance, recapped:
The Alaska Insurance Guaranty Association (AIGA) is
formed under Alaska statute - the purpose is to
minimize financial loss to policyholders and
claimants. Assessments are made through that guaranty
association to pay the claims of insolvent insurers.
In July 2003, Fremont Insurance was declared insolvent
by the Los Angeles Superior Court and even though they
had actively written business for approximately two
and a half years, they left $60 million in claims and
outstanding claims reserves. When they were an active
insurer in our state, they insured 27 percent of our
workers' compensation premium. The magnitude of this
insolvency far surpassed any prior insolvency and
dramatically exceeds the resources of the association.
There are actually three other insolvent insurance
companies in the Guaranty Fund right now. Those are
Reliance, Paula and Legion. So, the problem we have
was created with the massive insolvency of Fremont,
but we're still dealing with four insolvent workers'
compensation insurers.
I am asked regularly for the causes, what happened,
how did it get here, and they become very technical. I
would put forth that generally there are many factors
that cause insolvencies in insurance companies - poor
management is high on that list, lack of adequate
reserving for future claims, and there are allegations
that they have lower income due to price discounting.
In the case of Fremont, we saw a rapid growth that was
unable to be sustained. There have been no allegations
of fraudulent behavior, misappropriation of funds -
the types of things we read about in some of the large
national funds. I would throw that out.
When there are insufficient funds in the Guaranty
Association to pay claims, statute allows for the
prorating of payments to claimants. That has a great
impact on the beneficiaries of the payments from the
Guaranty Fund. That prorating today, I just checked
statistically yesterday, as of 2/4/04, there are still
open claims of 580 injured workers being handled by
the Guaranty Association. There were originally
approximately 700 Fremont claims; approximately 200 of
those have been settled and finalized, but we still
have almost 600 injured workers whose claims are being
handled.
When a claim is prorated, that injured worker will get
a prorated amount of their weekly wage payment; they
will get a prorated amount to pay for medical
benefits. So, the worker will suffer with the result
of that pro-ration. Ultimately, the workers
compensation obligation is an obligation of the
employer. If there are insufficient funds to pay the
claims of the injured workers, that statutory
obligation will revert to the employer. So, we have
currently - and I checked these statistics yesterday,
also - we have currently, claims of 380 employers
being handled by the Guaranty Association. So, we have
a potential impact of 380 employers who purchase a
workers' compensation policy in good faith, who now
will get that obligation back. I think that has the
potential for a pretty dramatic impact on some of our
small businesses that are certainly not prepared for
that kind of unanticipated financial cause.
CHAIR BUNDE asked if receiving only a prorated benefit could be
viewed as a breach of contract [because workers' compensation
law says an injured worker can't sue his employer] and allow the
injured worked actionable cause against his employer.
MS. HALL deferred the liability question to Mr. Lisankie and
continued to brief the committee:
We are in very uncharted territory. Not only has that
never occurred here, to the best of our research
ability, it has never occurred any place in the
country. So, procedurally, we're really aren't sure
what would happen. In likelihood, those injured
workers would apply first to the workers' compensation
board to enforce that statutory obligation. So, in
that process we would have some forms of litigation
whether it was through the Workers' Compensation Board
or through the courts for the employer to take back
that responsibility for payments.
CHAIR BUNDE said the committee would like expanded information
on what the liability would likely be if the Legislature chose
not to take any action [going to pro-ration].
MS. HALL informed the committee that for the month of January,
the division received a $2.1 million claims payment and that is
the size of the obligation for that month. The payments get
smaller as they are projected out in time, because of
settlements and workers going back to work. The magnitude of the
problems is estimated to reach its maximum [more than $20
million] in 2008. That is the obligation that would go back to
employers, however it is prorated.
2:50 p.m.
MS. HALL said the goal of SB 276 is, "To find a method of
securing a stream of funds without a bailout of the
industry...."
SB 276 attempts to utilize the traditional philosophy of
insurance, which is to spread the risk across a large number of
people and to spread the cost of the current crisis across a
large population. This is not a popular proposal, because no one
wants to pay more.
MS. HALL likened the Guaranty Fund to a safety net to protect
policyholders and claimants in the event of a insolvency. It has
covered insolvencies for 20 years and works well in other
states. She said the policy question the Legislature must decide
is, "Do we want to have that safety net in place for the
protection of our claimants and our policyholders?"
The Guaranty Fund has three accounts: workers' compensation,
automobile and "others" and SB 276 changes how assessments are
done.
The first piece of the funding proposal will be to
deal with the assessments as they stand today.
Currently, there is a statutory cap of 2 percent of
assessments made on the line of business - work comp,
auto or other and we're proposing that that line of
business cap be increased to 4 percent. That
generates, obviously, double the 2 percent cap. Right
now we generate $4.2 million; with our 2 percent
assessment it would obviously double. That is a
projection. We have $2.4 million - I just mentioned in
January the expenditures were $2.1 million. So, we're
only generating at best with that four months worth of
payments of claims.
The second piece of the assessment would be to allow
assessing the other two unaffected funds up to a
maximum of 2 percent. These two provisions expand the
current statutory assessment base just for the cost of
the whole crisis. Neither increasing the assessment to
pay for the loss of others nor assessing the accounts
involved is a popular solution. The Guaranty Fund,
again, functions as a safety net and the premise is
that the cost of the safety net is spread across the
insured population.
MS. HALL explained that the proposed approach, although it's
controversial, is not unique to this state [18 other states have
one guaranty fund within their property casualty account] and
that Alaska already has a .5 percent assessment for homeowners,
commercial property, boat and whatever because of the insolvency
of one insurance company [primarily] that wrote medical
malpractice.
The second piece of SB 276 is the assessment of other entities
that are not currently part of the assessment pool, which
includes self-insureds and joint insurance arrangements. The
division has considered either bringing them into the fund or
starting a separate guaranty fund for self-insureds. However,
that idea has been tried in other states, but hasn't worked
because there is no "hammer" to collect assessments.
MS. HALL informed the committee that her division has oversight
of traditional insurance companies, but not for any of the
entities she is proposing to assess. That means if she concluded
that a financial statement wasn't stable, she couldn't stop the
company from continuing to do business.
Therefore, I don't think it's fair to put them in this
Guaranty Association. I do recognize that these
entities did not create the crisis but, again, the
general philosophy of this whole proposal [is] to
spread the cost of risk to the broadest possible
population.
She has been asked if doing that is fair and her response has
been that it may not be fair, but she didn't know if it was fair
for the injured worker to suffer a loss of benefits or for a
small business employer to get the cost of the claim back. She
continued to explain:
The third component of this legislation is the ability
to allow [the] Alaska Industrial Development & Export
Authority (AIDEA) to provide guarantees for the
Guaranty Association to obtain loans. The Guaranty
Association by statute currently has the ability to
borrow, but they are not really a viable commercial
loan prospect. They don't have any assets. Their only
asset is the stream of assessments that by the current
cash flow projections is going to be used up until
2010. So, we've got six where that would not be
available to pay back loans. So on its own, they are
not a commercial viable prospect. Legislation does cap
the maximum outstanding principal balance at any one
time at $30 million.
We've worked with financial experts to find the most
efficient cost effective manner of finding funds and
this seemed to be the best route as we've looked at
that. We have explored various options with commercial
lenders, with other states - insurance companies have
been willing to step forward and talk about making
loans to the Guaranty Association. As we evaluated the
cost of all of those - and cost is of concern, because
that repayment cost will still be part of the
assessment process, this seemed to be the most viable
of all those options....
In closing...SB 276 contains painful, expensive
unpopular provisions. I do not believe, however, that
the provisions are as painful as doing nothing. I
think that the outcomes of doing nothing and allowing
prorating and allowing injured workers without
immediate access to their payments they have been
getting every two weeks, to have employers potentially
out of business because they cannot afford this
obligation is more painful - more painful to the
economy.
I would urge you to focus on the overall major issue
at hand. If we allow ourselves to get sidetracked by
each of the individual components of the bill, we have
groups that oppose this piece, but not this piece, I
don't think we're going to find a solution....
MS. HALL said in the six months since this problem was brought
to her attention, she has not found any other viable solutions
brought to her, but she is willing to talk about anything that
would work.
CHAIR BUNDE noted that she had spread the assessment over the
widest possible base of employers only and asked if spreading it
over the general public had been considered.
MS. HALL replied no and she wasn't sure of how that would be
accomplished. She tried to keep the assessment within the
industry.
3:05 p.m.
SENATOR SEEKINS asked why insurance for health and life have
separate guaranty associations.
MS. HALL replied that those are separate funds in every state.
SENATOR SEEKINS asked how much money the State of Alaska has in
the separate guaranty accounts.
MS. HALL replied that they don't keep cash in the accounts and
don't assess until there is a loss [post-loss assessment].
SENATOR SEEKINS asked if that meant they would start being
assessed now.
MS. HALL replied that the maximum 2 percent assessments started
in August 2003 as soon as this problem became known. The 2004
[for the whole year] assessment was made in January. This is the
only way prorating was averted.
SENATOR SEEKINS asked if the assessment included homeowners and
auto.
MS. HALL replied no, only a workers' compensation account can be
assessed.
TAPE 04-4, SIDE A
SENATOR SEEKINS asked what cash reserves AIDEA has and what the
rate of return is, if they are invested.
MS. HALL answered that AIDEA doesn't make loans.
CHAIR BUNDE asked the committee to hold their questions so that
people on-line could testify. He noted that this bill would be
heard again.
SENATOR FRENCH asked if there was a sunset provision, assuming
this bill is adopted and solves the crisis.
MS. HALL replied that she has considered a sunset provision, but
she wanted to make sure that the mechanism they use solves not
only the current crisis, but provides sufficient ability to
handle another crisis down the road.
SENATOR FRENCH commented:
Maybe it's my background as a prosecutor, but when I
see a $60 million hole in the ground that really
developed before your watch began, my approach might
be to throw somebody in the hole, if I'm being asked
to fill it.
He wanted to see some reassessment of the decisions that were
made that got the state into this mess.
MS. HALL added that one of the division's major focuses is an
analysis of the situation. She said that Alaska veered higher
than the national average for a couple of years in the
discounting area, but was lower in a number of years. The
state's loss ratios have tracked in many ways, although for the
last three years it has significantly outpaced national loss
averages. Put together with rates and discounting, there has
been an overall effect.
MS. HALL said she meets quarterly with regulators around the
country and discusses things like solvency regulations. Alaska
defers to the state of domicile of an insurer for the oversight
of every insurance company that does business in Alaska annually
but today, the division is much more aware of the combined
impact of discounting, reserving practices and the rate making
process.
CHAIR BUNDE said he joined Senator French in asking her for an
expanded suggestion for a solution.
MR. KEVIN SMITH, Executive Director, Alaska Municipal League -
Joint Insurance Association (AML-JIA), said the JIA is a self
insurance program for 140 Alaskan cities, boroughs and school
districts that would ordinarily be considered too small to self
insure on their own, but as a group are able to take a self
insured retention in workers' compensation of $300,000 and
purchase excess insurance above that.
AML-JIA pays an actuary to calculate the estimated losses in the
self-insured retention layer. The estimate is a best guess
figure and, if the guess is too low, the JIA already has a
mechanism to assess its own membership to come up with the cash.
The AML-JIA is not entitled to and does not expect or need
access to the Alaska Guaranty Fund.
MR. SMITH said he estimated that $1 million of the proposed
assessment would come from the self-insured employers - $317,000
from the State of Alaska and about $500,000 from local
governments and school districts. About $90,000 would come from
the AML-JIA and be due in this fiscal year with no prior notice.
He said the AML-JIA does not have the funds that an insurance
organization, which shows profits to stockholders, does.
AML-JIA's goal is to run on a narrow margin. It would have to
ask for additional monies from local governments that are
already struggling with retirement issues, the increasing cost
of health insurance, diminishing revenue sharing and municipal
assistance and increased costs in workers' compensation.
MR. SMITH said he did not think asking for a user fee from
people who can't use the fund is good public policy.
Is it fair? No, it's not fair. It's not even right.
Essentially, this money would have to come from the
classrooms; this money would come from police
departments; this money would come from snow removal
budgets and I would ask that we eliminate the self-
insureds and the joint insurance arrangements from the
bill.
SENATOR SEEKINS said that most entities in the AML have the
ability to raise taxes locally.
MR. SMITH replied that is theoretically correct and that is why
joint insurance arrangements are restricted to public entities
only [and not entities like tribes, for example].
SENATOR SEEKINS reasoned that if those employers had to share in
this unexpected burden along with the private sector, they would
have a mechanism to recover those losses.
MR. SMITH replied that would depend on the size of the
community. Some communities, like Koyuk, would have to figure
out how to survive.
SENATOR SEEKINS asked if those same entities were asking the
non-public employees of the State of Alaska to jointly help them
address the PERS and TRS shortages.
MR. SMITH replied that was beyond his scope to comment on.
SENATOR GARY STEVENS asked where a school district that was at
its cap already could get funds.
MR. SMITH responded that he is not a school finance expert, but
in that case, it would seem that securing those funds would have
to be taken from the classroom.
CHAIR BUNDE thanked him for his testimony.
MR. JEFF BUSH, Deputy Director, Alaska Public Entity Insurance
(APEI), said he represents 27 Rural Education Attendance Areas
(REAAs) and school districts and 12 municipalities. Based on
National Council on Compensation Insurance (NCCI) estimates,
local government workers' comp premiums could go up 22 - 32
percent. The proposal in SB 276 talks essentially about a tax on
top of that premium increase.
MR. BUSH emphasized the fact that school districts don't have
the power to tax, making it difficult to come up with extra
money. "So, it would, in fact, come out of the classroom and
many of our school districts around the state are struggling
right now...."
He added that many municipalities don't have powers of taxation,
because they are in the unorganized borough.
MR. BUSH said APEI would be charged approximately $32,000 this
year if SB 276 passes. He joined Mr. Smith in saying that
assessing APEI is not fair because it does not participate in
the [Guaranty Fund] program and their local funding would go to
subsidizing the program. He asked the committee to delete
sections of the bill that apply to joint insurance arrangements
and self-insureds.
MR. MIKE KLAWITTER, Director, Risk Management, Anchorage School
District, said SB 276 would cost the school district $127,000 in
unexpected and unfunded assessments or about 2.5 teaching
positions. He pointed out that the district could not use the
[Guaranty] fund in any way.
CHAIR BUNDE thanked Mr. Klawitter for his testimony and said he
would hold the bill for further work. There being no further
business to come before the committee, he adjourned the meeting
at 3:27 p.m.
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