Legislature(2005 - 2006)BELTZ 211
03/30/2006 01:30 PM LABOR & COMMERCE
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 241-JOINT INSURANCE ARRANGEMENTS CHAIR CON BUNDE announced SB 241 to be up for consideration. RYAN MACKINSTER, staff to Senator Cowdery, sponsor of SB 241, explained that it creates in statute the ability to have self- insured workers' compensation groups. Currently individual companies can be self-insured in Alaska and this allows companies within the same industry to get together and form a group to be self-insured like the individual companies if they meet all the other requirements. Several other states allow this now. MR. MAKINSTER said that a minimum of five or more employers would be needed to form a group, but different types of companies could not form a group. He said the CS before the committee was much larger than the original bill and that Linda Hall, director of the Division on Insurance was concerned it left a lot of the ideas in regulation rather than putting them in statute so the boundaries would be clearer. 1:34:32 PM SENATOR RALPH SEEKINS moved to adopt CSSB 241, version G, as the working document. There were no objections and it was so ordered. MR. MAKINSTER explained that one of the first issues was to make sure there were adequate funds for expenses to maintain the program and to pay for claims. He said that Section 21.77.200 on page 12 requires the association to adopt a plan that is approved by the director that includes an advance payment of 15 percent with the balance to be paid in monthly or quarterly installments. The assessments must be based on actuarial projections that include appropriate reserves and the costs associated with the plan. Appropriate reserves, he said, is defined on page 12 in Section 21.77.210. They cover actual claims, claims that have occurred but are not reported, and reserves for uncollected debts based on experience. 1:36:55 PM Furthermore, Mr. MAKINSTER said, the group is required to deposit at least 65 percent of the money collected in an account to pay claims or expenses related to those claims. The remaining 35 percent would go to paying for operating costs. He said that workers' compensation costs are determined by AS 23.30, the workers' compensation statute. MR. MAKINSTER said that what happens when not enough money is collected was a concern and page 12 also addresses that in Section 21.77.230. It requires the group to collect an additional assessment to make up any shortfall. It gives the director the power to decide what additional assessments are needed if the group fails to initiate that on its own. He reminded the committee that the original intent of workers' compensation was to insure that workers would be paid for lost wages, injuries and expenses incurred if an accident happened in exchange for not suing the employer for those costs. He said another section provides that dividends can be paid back to the members, which is a provision used in other states. On page 11, Section 21.77.190 requires the approval of the director before those dividends are paid. The idea behind the dividend is that if the group works together to implement a safety plan that will lower risk over time for both the system and the workers, it would not have to pay out claims and there is some reward for that. 1:38:53 PM MR. MAKINSTER said if one member of the group goes bankrupt, they are bound together through a joint and several liability clauses to insure that claims are paid and bankruptcy does not remove the liability to pay claims. Beyond that, there is a surety bond payable to the state in the amount required by the director to ensure that claims are paid. CHAIR BUNDE asked if he had an estimate of what would be saved if this were to become law. MR. MAKINSTER replied that he didn't have a number. 1:40:29 PM LINDA HALL, Director, Division of Insurance, directed her comments to the CS. She said the bill requires the legislature to make a public policy decision and she wanted to make sure all the potential pieces were put before it before that decision was made. Also, she said she wasn't particularly comfortable coming before them with what they would perceive as an extremely negative position on the bill; she didn't do it lightly. MS. HALL said she still wasn't convinced that the bill provided protections even though she worked with the sponsor group to do that. She said she would talk about three areas - financial oversight, regulatory oversight, and fiscal impact - and then what she saw as a different solution. 1:42:03 PM MS. HALL said that one of the basic principles of insurance regulation is financial oversight to insure that claims get paid and while the CS had detailed requirements, she was still concerned that it had no liquidity requirements. It also had a narrow tangible net worth requirement. 1:42:41 PM CHAIR BUNDE asked what amount she was talking about for a liquidity requirement. MS. HALL replied that this bill was modeled after some Nevada statutes and with Oregon statutes that required specific working capital in sufficient amounts to establish the strength and liquidity of the business. She didn't favor setting a specific limit, but thought it could vary from group to group depending upon their financial statements. She said that currently, there is no requirement for individual members and suggested that higher risk occupations have greater need for more liquidity. 1:44:01 PM MS. HALL said another concern she had was that there is no requirement for individual members to have audited financial statements, but the association is required to have one. She explained that there is a difference in general accounting principals (GAP), which this bill is predicated on, and insurance that is regulated based on statutory accounting; assets are valued differently. She said the National Association of Insurance Commissioners has an office called the SVO that strictly does asset valuation. A great deal of attention is given to the quality of assets in an insurance company, which is important; and she said there are other assets besides liquidity that make up net worth and the department needs to know that there is a real method of evaluating those. She said financial responsibility rests with the association and it needs to have a tie-in with its members, but the joint and several liability agreements in this bill do not include the association. They do in the Nevada bill and she thought that was very important. MS. HALL said Section 21.77.230 deals with insufficient assets and when an association is insolvent, it allows the director to withdraw the certificate of approval, but doesn't say what happens then. Current insurance statutes have provisions for the Division of Insurance, namely the director, to become either a supervisor or the association can go into receivership. This bill does not give her authority to take over any assets. 1:46:30 PM Under regulatory authority to penalize for violations, she explained that the largest insurance company in the world was penalized $1.6 billion to resolve allegations of deceptive accounting practices. Prior to that, she had one subsidiary of that company as an Alaska domestic and had done a financial exam and found some accounting irregularities, which she didn't think were intentionally deceptive, but nevertheless were not in accordance with the state's standard accounting practices. The company was fined $400,000. Recently, the division fined the same company $65,000 for not getting its financial statements in on time. She emphasized, "There needs to be a penalty!" MS. HALL said that regulatory oversight is not part of this bill even though a lot of financial requirements had been added and it specifically says it's not insurance and nothing else applied except Chapter 77, which was created for self-insured groups. Chapter 36 of the Insurance Title provides the controlling language for trade practices and frauds. It includes oversight of marketing, misrepresentation, false advertising, unfair discrimination, unfair claims practices, etc., and those could not be applied to a self-insured group. She thought those were consumer protections and asserted that claimants are consumers and they need to be protected in some instances. MS. HALL said that the division is currently conducting a market conduct review of a claims adjusting company because of complaints. The adjusting company is a licensee and she has the authority to look at its files and determine what they are doing and, as a result, has found a substantial number of statutory violations. This kind of regulatory oversight is not present in CSSB 241. 1:49:05 PM MS. HALL went on to explain that all licensees have to pay a license fee and a continuation fee. The division operates in an arena where those who are regulated pay for it and not by choice. The bill provides for a license fee only and she wanted a continuation fee as well. However, the greater issue for the legislature to deliberate is the premium tax since the entities would no longer pay a premium and therefore no premium tax. This tax is a major source of revenue to the general fund. In 2004 premium tax was the second largest source of revenue to the general fund. She said that probably one group self-insured association not paying tax wouldn't have an impact, but the more of that you get, the more the impact it has on the general fund. 1:50:40 PM MS. HALL strongly felt the indemnity agreement should include the association. Nevada statutes require annual assessments - the premium the association would pay to an insurance company - of at least $300,000 or an amount, which the director determines to be satisfactory based on annual review of actuarial solvency. Each member must have a tangible net worth of at least $250,000, not just an aggregate and an insurance premium of at least $10,000. It also provides that the director would approve an annual assessment much as rate filings are approved today. This means she would review the actuarial projections and reserving. She said that Nevada also has provisions to assess other self- insured associations for the claims obligations of an insolvent association. In addition to the joint and several liability of the group, if they became insolvent, all of the members would be assessed although she didn't know if Alaska had enough bodies to make that work. She said that Oregon also has good ideas like specific requirements for excess insurance and working capital - requirements that are likely to improve accident prevention and claims handling. It also requires irrevocable letters of credit for deposits. The last concern Ms. Hall mentioned was in current statutes. AS 21.75 allows for the formation of reciprocals, she explained, that are entities that are kind of like insurance companies, but they are limited to trade associations. Alaska has two that are operating very successfully today - the timber exchange and ARECA (Alaska Rural Electric Cooperative Association). They operate under the division's oversight much as an insurance company, but with lower requirements - $1.5 million to capitalize, which she thought wasn't a lot of money for paying workers' compensation claims that have the potential of being expensive and long-tailed. She knew of an insurance company that had a reserve of $7 million. MS. HALL said she has yet to hear any reason that a reciprocal would not be a viable entity for the trade associations to join together and set its own rates, do its own safety programs and admit its own members. She emphasized that she has not seen any reason that this already statutorily-created entity could not serve the same purposes and it comes under the division's regulatory and financial oversight. 1:54:30 PM MS. HALL closed saying she was very sensitive to the high cost of workers' compensation today and she didn't want to take people out of the system without first looking at improving it. She said that Director Lisankie provided her with a report from California that said after its reforms between July 1, 2003 and January 1, 2006, premiums had gone down by 46 percent. She emphasized that there are other ways to help employers reduce costs than by taking them out of the system and reducing the mass in which to spread the risk. She urged the committee to work within the current system to deal with escalating costs, 67 percent of which are medical. However that is funded, she said, those costs won't change and she didn't feel she had seen evidence indicating that premium would be reduced. 1:57:10 PM PAUL LISANKIE, Director, Division of Workers' Compensation, Department of Labor and Workforce Development (DOLWD), offered background on the scope of the current self-insurance program. Only individual employers can be self-insured and he has the authority for granting or denying applications lodged with the Workers' Compensation Board. The program is up to 31 approved employers. He said approximately 26 percent of all employed Alaskans are working for an employer that self-insures its workers' compensation liability. That means there is no guaranty fund the way there is for insurance companies. If a self-insured becomes insolvent, the only recourse for injured workers who are getting benefits is bankruptcy court. He suggested that the committee consider that in addition to the large self-insureds under his supervision, which he thought were barely adequately capitalized, that this legislation would be opening the doors to an unlimited and unknown number of small employers to self- insure through the trade associations. MR. LISANKIE repeated that the current program is barely adequate - partly because it is operating under regulations that are 23 years old, but he is the process of revising those regulations right now. Currently there is a minimum requirement of $5 million in tangible assets to even qualify for consideration as a self-insurer; with inflation, that would be about $10 million in today's dollars and that is probably where the regulations are going. Current regulations for security provide for a minimum of $300,000 or 125 percent of actual liabilities; so, that $300,000 would double to around $600,000. 2:01:38 PM MR. LISANKIE closed by saying when one looks at the opinions of people who talk about the best practices of workers' compensation, essentially they suggest having three guarantee funds. The first is a fund for the insurance companies, which Alaska has had for many years, the second is a fund for making up benefits of employees who are injured while they are working for employers who are illegally uninsured (Alaska has this since last year), and a last fund to guarantee self-insurers because of the importance of the benefits. Alaska doesn't have this in its current program and that absence is reflected in the current bill, which would be specific to group self-insurers. 2:02:45 PM He underscored Director Hall's comment that if you look at the Nevada statute as a template, it does have a guaranty fund both for the individual self-insured employers and the group self- insurers - the groups that would be covered under this bill. 2:03:11 PM CHAIR BUNDE asked if the state could be looked at as the guarantor if there would be some catastrophe under this bill. MR. LISANKIE replied that he didn't know. CHAIR BUNDE said he also wanted to know what a guaranty fund would look like as far as amounts and costs to the individuals that would be part of the group. 2:04:09 PM SENATOR SEEKINS asked Mr. Lisankie to explain the guaranty fund for self-insured companies. MR. LISANKIE replied that the fund would be in place for a failure of a self-insured. Now there is no recourse outside of the federal bankruptcy system. He said the assessment would presumably be made every year and go into a backup fund that would be accessed to pay benefits that could not be covered by one of the members of the group going insolvent. CHAIR BUNDE said the state has something like that for insurance companies. MR. LISANKIE affirmed that and added that fund had to be adjusted in 2004 because of the large loss from a few insolvent insurers. He said: Frankly, that's part of the reason why I'm as concerned about this as I am right now - because we have this current system in place without a guaranty fund and having sat through that testimony and lived through that period, it's one of the things that keeps me awake at night when I'm regulating along with the panel of the Workers' Compensation Board - these 31 entities that are self-insured as we speak. 2:06:03 PM TOM SMITH, President, Alaska State Homebuilding Association, supported SB 241, because it would provide one more option to any trade group, but specifically to homebuilders, to help with the escalating costs of workers' compensation insurance. He said he realized that rates wouldn't be that different, but they would have more control over safety by being part of a smaller group and members could possibly retain some of the premiums. ROBERT VOGEL, ProGroup Management, said his is an administration company and he had worked with the sponsors of this bill to help them to understand self-insured groups. He said that ProGroup has managed four different self-insured groups for over 10 years; one of the groups consists of homebuilders. 2:09:12 PM MR. VOGEL clarified that this law is intended to allow a group of individual employers to finance their projected losses in the same manner a single self-insured entity has done under those same provisions. Employers within the same industry would form an unincorporated, non-profit association that would be owned by its members collectively for the purpose of self-insuring its workers' compensation liability, thereby obtaining the same status as a singly self-insured employer. This self-insured group is a separate distinct legal entity and is not part of the common trade association. The tie-in to the common trade association is it helps strengthen the commonality of the risk. You don't want a restaurant joining a builders association because of the different risks involved. He stated that SIGs (self insured groups) are viable alternatives for employers to improve their risk management procedures, worker safety and care; they have been authorized in 39 states, mostly recently in Texas. They have been in existence for over 40 years using the basic tenants outlined in this bill, which stresses solvency, owner accountability and responsibility. He said one of the requirements to qualify to become a SIG is to have a minimum of $5 million in tangible net worth. He noted that Director Lisankie said that the minimum tangible net worth for individual self-insureds in Alaska is $10 million, so this would be $10 million also. Whatever the self-insured law is, that is what these groups would follow. MR. VOGEL explained that tangible net worth is the net worth of a company less its intangible assets. The employers sign a joint and several liability agreements binding them to pay all of the claims of this group. That is measured through GAP, the most common method of measuring net worth across the country. But the law backs away from intangible assets because the idea is to have assets that can be sold. He explained that the group would most likely have a $350,000 to $750,000 deductible. After that, even if there were a $7 million claim, an excess insurance company would pay the rest. That is why they have to make sure they use "A" rated companies providing that the group would pay for. He said the group would be subject to paying claims under AS 23.30. He said this law does not require each member to have audited financials, but from a liquidity standpoint, the group should have GAP audited financials. Annual CPA audits are required as well as adequacy audits by an independent actuary who has joint and several liability agreements that support the liquidity. Each member has annual payroll audits to assure correct reporting of collections and the director of the Division of Insurance can audit those records as necessary to insure compliance and solvency. 2:17:09 PM He opined that a group self-insured becomes a better alternative to a single self-insured because if one company goes bankrupt, others are there to cover the claims. If a member leaves the group, he still remains bound to it by its joint and several agreements. MR. VOGEL said that Nevada passed its law in 1990 and 2,400 businesses have formed 13 groups there. He said that the number of groups is generally a function of the number of businesses the state has. He thought possibly only a dozen groups would form in Alaska. 2:23:17 PM He concluded saying this is not insurance, it is self-insurance and people should not be afraid of it. It may cost a little more in the first year to start a group, but over a 10-year period, savings can be generated. Improved care of the employees is the first and foremost goal of programs like this and he reported that his homebuilders group has saved about 20 percent on its premiums since 1999 compared to the standard carrier market. Return-to-work times and medical costs were generally cut in half. The auto dealers retail and transportation group experienced much the same results after 10 years. The groups have built up reserves and have continued to thrive and grow. CHAIR BUNDE thanked Mr. Vogel for his comments and said that committee time was limited and asked testifiers to summarize their testimony. 2:25:40 PM LARRY PARTUSCH, Anchorage Homebuilders' Association, supported SB 241 saying it provides another option for funding workers' compensation. He said that having companies in the same industry in one group encourages them to police their own industry. His experience was that he couldn't get benefits from the use of safety practices when he was in a big group. KENTON BRINE, Property Casualty Insurers Association of America, said his is a trade association representing about 1,000 member insurance companies across the country including some of the leading workers' compensation insurance writers. He understood this legislation is an option that is being sought by homebuilders, in particular, and his concern stems from what he heard from the directors of the Division of Insurance and the Division of Workers' Compensation that there are not adequate regulatory oversights and from the perspective of an injured worker, if an entity becomes insolvent, it will look a lot like a bankrupt insurance company and the question is how do you get your bills paid. He said: It isn't that we are in opposition to the formation of this option; it is rather that we are concerned that the way it is being formulated it is going to lead to a great deal of risk to injured workers, to the employers that joined these groups and to the broader insurance marketplace. He supported continuing the department's efforts of addressing the cost drivers to workers' compensation rather than creating other options using the same cost structure. He also pointed out that the system that these groups would be departing would suffer as well. Legislators and administrators might eventually have to pick up the pieces of a decimated insurance system that is the result of weak regulatory oversight as a result of this legislation. 2:30:12 PM MICHAEL BELL, Alaska Trucking Association, supported SB 241. He testified that workers' compensation is one of the largest concerns for trucking companies in Alaska that are faced with increasing rates that can only be attributed to market increases. Customer service has been replaced by "Pay it or find it elsewhere" attitude. He mentioned that small companies have to cut corners, operate without coverage, sell off portions of their assets, or close their doors. A change is needed now he said, as some of his members' rates exceed $36 per $100 of payroll. CHAIR BUNDE said the committee shared his concerns about the costs of workers' compensation and wanted to do what it could to help. He then set SB 241 aside.