Legislature(1997 - 1998)
02/26/1997 03:22 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE February 26, 1997 3:22 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery Representative Bill Hudson Representative Jerry Sanders Representative Joe Ryan Representative Tom Brice Representative Gene Kubina MEMBERS ABSENT All members present COMMITTEE CALENDAR * HOUSE BILL NO. 116 "An Act relating to workers' compensation self-insurance." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 116 SHORT TITLE: WORKERS' COMPENSATION SELF-INSURANCE GROUP JRN-DATE JRN-PG ACTION 02/05/97 243 (H) READ THE FIRST TIME - REFERRAL(S) 02/05/97 243 (H) LABOR & COMMERCE 02/07/97 277 (H) COSPONSOR(S): KOHRING 02/13/97 349 (H) COSPONSOR(S): OGAN 02/17/97 376 (H) COSPONSOR(S): GREEN 02/21/97 430 (H) COSPONSOR(S): ELTON 02/26/97 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER REPRESENTATIVE PETE KOTT Alaska State Legislature Capitol Building, Room 204 Juneau, Alaska 99801 Telephone: (907) 465-3777 POSITION STATEMENT: Sponsor of HB 116. STEVEN WISDOM, President Alaska State Homebuilders Association P.O. Box 4184 Homer, Alaska 99603 Telephone: (907) 235-6045 POSITION STATEMENT: Testified in support of HB 116. RICHARD BLOCK Alaska National Insurance Company 360 West Benson Anchorage, Alaska 99503 Telephone: (907) 563-5121 POSITION STATEMENT: Testified against HB 116. BILL TAYLOR, Builder Alaska State Homebuilders Association 2340 Loren Circle Anchorage, Alaska 99516 Telephone: (907) 244-6233 POSITION STATEMENT: Testified in support of HB 116. MARIANNE BURKE, Director Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, Alaska 99811-0805 Telephone: (907) 465-2515 POSITION STATEMENT: Testified on HB 116. AL WILSON, Member Alaska State Homebuilders Association P.O. Box 22797 Juneau, Alaska 99802 Telephone: (907) 586-2240 POSITION STATEMENT: Testified in support of HB 116. LINDA HALL, Commercial Insurance Broker Alaska Independent Insurance Agents and Brokers 311 "C" Street Anchorage, Alaska 99503 Telephone: (907) 561-1250 POSITION STATEMENT: Testified in opposition to HB 116. PAUL GROSSI, Director Division of Workers' Compensation Department of Labor P.O. Box 25512 Juneau, Alaska 99802-5512 Telephone: (907) 465-2797 POSITION STATEMENT: Testified on HB 116. ROBIN WARD, Member Alaska State Homebuilders Association Box 91443 Anchorage, Alaska 99501 Telephone: (907) 562-3770 POSITION STATEMENT: Testified on HB 116. ACTION NARRATIVE TAPE 97-14, SIDE A Number 001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee to order at 3:22 p.m. Members present at the call to order were Representatives Rokeberg, Cowdery, Brice and Ryan. Representatives Hudson and Kubina arrived at 3:30 p.m. Representative Sanders arrived at 3:40 p.m. HB 116 - WORKERS' COMPENSATION SELF-INSURANCE GROUP Number 047 CHAIRMAN ROKEBERG announced the committee would hear HB 116, "An Act relating to workers' compensation self-insurance," sponsored by Representative Kott. Number 073 REPRESENTATIVE PETE KOTT came before the committee to present HB 116. He stated he has provided the committee with copies of letters that have been consolidated into a booklet format which indicates there is a lot of support for HB 116. He read the following statement into the record: "This bill seeks to address what I perceive is the high cost in providing worker compensation insurance for Alaska's workers. Worker compensation is critically important to Alaskans. It is necessary for our state to make provisions for unfortunate workers who are injured on the job. At the same time, keeping business open for our workers is equally as important. If worker compensation premiums become too costly, businesses will fold and potential businesses won't commence, and certainly what that means is there will be quite a few unemployed Alaskans. "Both goals providing for injured workers and keeping businesses open here in the state is a must and is addressed in this particular measure. I believe that the bill furthers both of these goals. It provides a mechanism for lowering workers' compensation insurance premiums and it provides an abundance of security for injured workers." REPRESENTATIVE KOTT said a similar piece of legislation was before the House Labor and Commerce last year. He said the issue and the idea isn't a new one and it is working well in approximately 17 states. He continued to read his statement: "What the bill does is it permits employers to form worker compensation self-insurance groups. These are associations that consist of five or more employers who are engaged in a similar business and which belong to a bona fide trade or professional association. What the employers do, in essence, is enter into agreements to pool their liabilities for worker compensation benefits. "The bill provides strict protection to workers in a variety of ways and I'll just mention a few. A worker compensation self- insurance group cannot come into being without first being certificated by the director of the Division of Insurance. The director must be first convinced that very stringent requirements are met. The net worth of all the members must be at least a million dollars. In addition, security must be deposited with the director and made negotiable to the Department of Labor. These resources may be drawn upon to pay worker compensation claims in the unlikely event of a default. I may add also that the director will determine the amount and form of that particular security. "In addition to the security, it is necessary that the groups purchase excess insurance. This is not optional. It is in fact required. Again, it is the director of Insurance who determines the form and the amount that is required in this excess insurance arrangement. In point of fact, the director in the bill even has veto power in the selection of the specific insurance carrier. "In addition, injured workers are protected by requiring all participating employers to sign indemnity agreement making each one jointly liable for the workers' compensation obligations of all other members. Again, the director may prescribe the contents of these agreements. "House Bill 116 also protects workers by requiring fidelity bonds. Once again, the director has the right to control the form and the amount of these bonds. Similarly, the director is granted discretion to also require the filing of these performance bonds. "Once a group is certified, it cannot voluntarily cease operations until the director grants approval. And, before that approval is given, the director must be satisfied that the group has insured or reinsured its incurred workers' compensation obligations with an authorized insurer under an agreement filed with and approved by the director of Insurance. "To ensure that any potential problems are corrected at an early stage, the bill requires that self-insurance groups must maintain a detailed file. They're audited and there is financial statements filed with the director. This must be done on an annual basis and the director may prescribe the nature and frequency of these reports. In fact, this measure takes one step further. The director is entitled to examine the affairs, accounts, records, transactions and assets of these groups whenever the director wants, whether it's daily, weekly, monthly, quarterly or annually, it's up basically to the director as to whether and when they want to look over these reports or transactions. And the important thing here is the expenses associated with that is borne by the groups. "A self-insurance group will be governed by a board of directors, which will set policy and ultimately be responsible for the affairs of the group. The board will employ an administrator for the day- to-day operations. In addition, service companies may be employed to provide specialized services, such as designing and implementing worker safety programs." Number 591 REPRESENTATIVE KOTT referred to safety and said he would like to point out another benefit of the bill. He said he had previously mentioned how the bill assists workers by protecting employment opportunities and provides for work-related injuries. Another important benefit to the worker is this bill would promote worker safety. He said if you look at safety records and accidents in other states, you'll find they have declined because each individual member of this group is responsible for maintaining a safe work environment. He noted premiums will be based on the safe work environment. Representative Kott referred to the other colleagues in the pool and said he would have a vested interest in making sure that they have a safe environment. There is some self motivation to design and put in place a strong safety program within the group. REPRESENTATIVE KOTT said there are people who are supportive of the bill and there are people who have concerns. He said he has addressed some of the concerns with the bill. Representative Kott said he is primarily looking out for the worker. He said, "I, in no way shape or form, want to undermine or undercut a worker's claim as it relates to workers' compensation. I want the employees of this state to continue to receive the same fair level of compensation that they currently receive." Number 797 REPRESENTATIVE BILL HUDSON said he has received phone calls from people who have questioned the validity or the adequateness of the $1 million asset coverage to be made available in the package. He said some people have thought that as much as $3 million would be necessary in order to guarantee that the workers covered under this program would be fully covered. REPRESENTATIVE KOTT explained the $1 million figure is just a figure that he started with. There is no magic number. He said it is just a basic number. Representative Kott said the other issue tied to that is the number of employers that can form this group which is five with an aggregate sum of $1 million in capital or assets. He informed the committee that he knows a restaurant owner where his assets associated with his facility are $1.5 million. As a potential employer looking to get into the pool, he would not be as aggressive to get into the pool knowing that there were only four others. The more in the pool, the more apt they are to be able to share the risks that are assumed. He said he thinks $1 million is a good starting point. You also have to recognize that as we pay the worker compensation monies to the injured workers, it starts with the premiums that are set up in the 70 percent, 30 percent pool for those claims to be paid from. After that pool runs dry, then you would go to your excess insurance, which is required in the bill to be set by the director. After that, if it runs dry, you would go to the surety bond which is determined by director. There is a number of steps you have to go through before you actually get to the $1 million or $5 million. Number 998 STEVEN WISDOM, President, Alaska State Homebuilders Association (ASHBA), came before the committee to testify. He informed the committee his association would like to see HB 116 become law. Most of the homebuilders in the state are small employers and have to pay workers' compensation insurance. An average rate is between $17 to $19 per hundred for carpenters. There aren't a lot of options for employees on a job site doing residential construction, so this equates to a major potion of their payroll. Mr. Wisdom said they are always looking at ways to cut operating costs to meet their end goal of affordable housing for Alaskans. Mr. Wisdom said, "The bill itself, being small employers and dealing with large insurance corporations, they're playing actuarial numbers all the time. It's a roll of the die, they know what the odds are out there and they're collecting their profits off it accordingly. One large insurer in the state covers approximately 30 percent of the workmen's comp premiums in the state of Alaska. The most recent study I read in 1994, wrote about $46 million in net premiums. Of that, approximately 58 percent was a loss ratio and approximately 20 percent was the operating cost. Their total cost was approximately 78.8 percent. That adds out to about 22 percent net profit that they're making off of the workmens' comp." MR. WISDOM explained that currently in the case of the small builder, where there are typically less than ten employees, you pay your premium and that is all you hear from the insurance company. If you have a loss, you get a drop notice the next year to go find a new carrier. He pointed out that there is nobody that follows up on safety programs, etc. There is no involvement between the two industries, it's pay your money, let them collect their profits and if you have a loss you have to find someone else. Mr. Wisdom said this is not an acceptable way of doing business. He said ASHBA is very much in favor of HB 116 from the standpoint that it requires a commitment from every participant to join one of these pools. There are 40 other states that have similar legislation of which 14 are very close to the program that the ASHBA would like to see implemented in Alaska. He said the bill is written so that other trade associations could get into this business as well and that is why it's important there is good regulation from the Division of Insurance and the Department of Labor. Number 1142 MR. WISDOM said to form these types of self-insurance pools, it takes a strong commitment from each participant. The pools will be careful as to what goes on with their members. They will look for safety programs to be implemented. They will look for on-site inspections. They will look for follow up if and when a worker is injured. Other nationwide studies show that the average loss with a self-insured group runs about $27,000. That same loss with a commercial carrier runs closer to $43,000. Attorney involvement with a commercial carrier involves 70 percent of the cases. With self-insured groups, it's 49 percent. He noted these figures come from studies that have been conducted across the nation. It shows that working with the injured worker in getting them back on the job lowers the costs. He stated that through these types of programs, the worker benefits as well. Number 1260 REPRESENTATIVE JOHN COWDERY referred to pools in other states and questioned whether an effort has been made to verify the entry fees, or the ability to meet the minimum requirements financially. MR. WISDOM responded in the affirmative and noted he has some recent financial statements from the groups. He also noted he gave the committee members a booklet and said it represents the contacts through the building industry. CHAIRMAN ROKEBERG asked Mr. Wisdom what his experience has been with his workers' comp rates over the last few years. MR. WISDOM responded, "One year ago I was mid-year with a carrier and all of a sudden my loss ratio hit 70 percent, and that's not actual losses, but that's anticipated losses as well. They sent me a cancellation letter because they were not going to make an excess of 30 percent profit off me for that given year. Fortunately, I was able to go outside and negotiate with another one and actually ended up with a lower rate, but that's the way the major carriers treat small business today. If they're not going to get the set profit margin they want, they will even cancel you midstream. Number 1425 RICHARD BLOCK, Alaska National Insurance Company (ANIC), was next to come before the committee to address HB 116. He explained ANIC is a large writer of workers' compensation and has been writing in Alaska for 16 years. Mr. Block informed the committee he has been involved in the insurance industry in one aspect or another for 29 years, 22 in Alaska. He said he has been working with a number of clients who have explored the possibility of trying to solve some of the same problems that Mr. Wisdom suggested needed to be addressed. It is important that we understand what the problem is. His understanding is that occassionally these kinds of entities come into existence because workers' comp or some line of insurance is not even available, a voluntary market will not write it. He said that is not the case here as workers' compensation is available to every employer, if not through the voluntary market then through the assigned risk facilities that are available in the state. He said he believes the problem they're facing is the issue of price. Workers' compensation has, at times, been expensive. He said he thinks they are attempting to find a way to reduce their price by not addressing the issue of losses which is the primary driver of price, but by being excused from having to pay some of the costs that are normally attended and required to be paid by all employers in this state through the workers' compensation mechanism. They do that by assigning to this plan the name "self- insurance" or "self-insurance group," when it is not self- insurance. Mr. Block pointed out that what this program does is what every insurance program does which is it shifts the burden of loss from one person, for whom a loss might be catastrophic, to the financial resources of other people, in this case the other employers who are homebuilders and participants in this program. Because of that, it becomes very important that we know and understand how the financial resources of those other people are going to be available to pay the losses that are going to come about because it is important that we protect the underlying beneficiaries of this which are the injured workers. MR. BLOCK said when you deal with workers' comp as opposed to a property insurance problem, we are talking about the most volatile kind of insurance there is. These losses are very hard to predict on occasion. They may take anywhere from 2 to 20 years to be resolved. There is the possibility of latent injury which can be reported several years after the event. It sometimes can make it very difficult to determine what the cost of loss is ultimately going to be. Mr. Bock said ANIC's principle concern about this is the financial integrity of the program. Number 1705 MR. BLOCK said it has been indicated that there is $1 million of underlying net worths supporting this organization. He said the committee needs to realize that is not entirely true. In any insuring organization currently in Alaska, whether it be a stock, mutual or a reciprocal company, there is the requirement that funds be put in that enterprise that comprised the capital against which it writes. In this case, no such requirement is made. It is required that the participants have in the aggregate $1 million of net worth, but there is no provision in the bill for determining the validity of that $1 million of net worth. There aren't any audited financial statements required, nor is there the requirement that the net worth be segregated to pay workers' compensation claims or to pay the net loss under the program. In other words, it is the same net worth that is supporting, in this case, the homebuilders's operations. Mr. Block said it has been said in the bill and in some of the testimony that before we get to the net worth of the homebuilders, there is excess or even aggregate stop loss insurance or reinsurance. It is true that is part of the program. He stated he thinks there are some misunderstandings about that. One misunderstanding is the notion that when the premium portion of the resources of this enterprise are gone you go to the excess insurance. That is not exactly true. For example, excess insurance may be written to cover all losses to the extent the loss exceed $25,000. If the losses are less than $25,000 and if there is more losses than anticipated and they're all under $25,000, the excess never kicks in and it would have to paid out of the 70 percent pool. MR. BLOCK said another notion is that this excess or aggregate stop loss insurance will always be available. That's not always true because these people are writing to the extent that the risk is acceptable and they could terminate and leave the entity without the protection they need in order to have a continuing program. MR. BLOCK noted he was president of Alaska National for six years. Sometimes you place reinsurance with carriers that have very valid names and are sound financially at the time you place the reinsurance, and many years later they aren't able to respond to their obligations under the reinsurance contracts. He said they were fortunate that they had the surplus in the company to support the gap that was left when the reinsurer failed. It is important that this pooling arrangement have the necessary underpinning in case that reinsurance or that excess coverage, which they're defending, should disappear. Number 1797 MR. BLOCK said there is a court of last resort. In the event of a failure of the organization there are surety bonds, cut through reinsurance provisions or security deposits. He said he isn't sure the legislation is structured well because it says these are payable to the state. His understanding is that if they're payable to the state and then it becomes necessary for the state to pick up the deficiency, it might require a legislative appropriation in order to get that money back out to where it goes. MR. BLOCK said another thing that should be reviewed not only by the state, but by the ASHBA, is whether this is really going to reduce their costs. He said, "I believe Chairman Rokeberg asked the question about what has been the trend in premiums over the last few years and indeed it's been my quick review that the premiums, overall, for workers' comp in the state of Alaska are trending downward, but even within the homebuilders classifications - the carpentry classes - they are trending down. And so the question is going to be when you put one of these together and where you have to charge enough premium of the participants so that 70 percent equals the loss that you're going to have, both for actual and for future losses and enough to cover the cost of purchasing the reinsurance and enough to cover the expenses they choose to pay for operating this program, are you not going to get yourself back to essentially the cost they're paying now? I can't say for sure one way or another, but that would be my -- experience tells me that's likely what is going to happen." MR. BLOCK said another concern is the notion that this program really becomes available to any group that wishes to engage in such a program. What has happened is that when these things have been tolerated, and without adequate capital and regulation, they have caused some major damage to people who weren't aware of what they were getting into. Mr. Block said several years ago a similar argument was made to Congress concerning medical and life insurance benefits - employee benefits for workers. If they're paying too much money to standard stock insurance companies, could they not form a vehicle for pooling in what they called then "a self- insurance pool." Congress authorized that medical and life benefits be provided by what were called "multiple employer welfare arrangements" or "multiple employer trusts." While they started out working all right, what they would become is excuses for marketeers to begin presenting products to employers on the basis that they were going to save a lot of money, but without adequate information that the employers had residual liability in the event that these things were inadequately funded. Mr. Block explained very serious problems occurred which are discussed in his written testimony to the committee. MR. BLOCK said there is nothing in HB 116 that safeguards against a similar situation taking place in Alaska with respect to workers' compensation. The legislation says that in the event that the premium for any year exceeds the losses and expenses for a year, the premium will be returned to the homebuilders, but it says this will be done not less than 12 months after the end of the fiscal year. Mr. Block said the problem with that is we don't know what the losses are for maybe up to five years. Number 2013 MR. BLOCK said he would point out some of the areas where he thinks the bill is providing some unfair advantages to someone who forms one of these. One is it tends to exempt the enterprise from having to pay premium tax. Premium tax is a method used to fund state government. All employers pay it indirectly because it's a cost loaded into everybody's premium. He said because this is arguably not an insurance company and it's not going pay an insurance premium tax, what would be the fairness of that? Some of the administrative expenses to the Division of Insurance are lower than what any other insurance carrier would have to pay. They are not required to be a participant in either the assigned risk program because that is a cost employers pay by virtue of an assessment against the insurance companies loaded into the rate. It wouldn't be some here and the same with the guarantee association. He said it is ASHBA's concern that these are costs imposed by government and not by the insurance companies. If it is good public policy for these costs to be levied directly against insurance companies and indirectly against employers, why should these employers be exempt? MR. BLOCK asked if the homebuilders or any other group would like to reduce their costs without some relief. He said Mr. Wisdom said what they would like is a vehicle for imposing safety and having common interest so they could have a motivation for a higher level of safety for their members. That is a worthy objective as they would like to reduce litigation by having more to say about how their claims are administered. Mr. Block said there may be other things they hope to achieve in cost savings and marketing or administration by virtue of having their own program. He stated he looks at those as worthy objectives and if there is a way that can be accomplished, there might be some value to their trade organization exploring them. Mr. Block stated he would like to point out that there is already in law ways in which they can do that. They don't need this bill to do it. For example, under current statute there is a provision that a trade association can form a purchasing group. He noted in his written testimony, he refers to the specific statute which allows that. They would not be required to put up capital, but they would have the full protection of a regulated insurance company providing the protection. They may wish to form a reciprocal and that is in effect what they're doing. They are forming a reciprocal which is an organization for the mutual exchange of indemnities. There is already authority to form such a reciprocal. He explained the difference between the reciprocal on the books and what they're hoping to do is an amount of capital is required in order to assure the protection of the injured worker. There are also requirements for complying with the normal Division of Insurance oversight, as well as the obligation to pay the taxes and assessments that all other carriers would have to pay. Mr. Block informed the committee there is already one such organization, the Alaska Timber Insurance Exchange, which was formed and has been doing that for the loggers. MR. BLOCK said under current statute, if there were an enterprising producer or an enterprising trade association, they could pull together their industry into a common purchasing regime and deal with a carrier that could negotiate their expenses. They could come up with a program that would be very cost effective for them if they wished to do that. He noted the National Electrical Contractors Association is already doing that. He said while he realizes the homebuilders are looking to reduce their costs, they are doing it by trying to avoid costs that all other employers are obligated, by the legislature, to pay. He said he believes they are also doing it by denying themselves and denying the injured worker the financial protection that is provided by adequate surplus dedicated to such a program. He urged the committee to not adopt such a program. Number 2227 REPRESENTATIVE COWDERY asked Mr. Block how large a claim usually is. MR. BLOCK said a homebuilder could have a carpenter who cuts his finger and he would have a very small claim. There could also be a large claim from someone from a different industry. Mr. Block said, "I don't think it's industry dependent or size of employer dependent, but my understanding -- I'd have to go back to some of the figures I've seen maybe about a year ago, but the average cost is running maybe $12,000 or $15,000 for a time loss claim. That is taking all time loss claims." REPRESENTATIVE COWDERY questioned what the time frame is from when the claim is made. MR. BLOCK explained most claims are the result of an immediate and traumatic event. He said they find out about a claim within hours, days or weeks. There are some claims that are made for soft injuries like back injuries that may not be made for a long period of time. It is not so much the reporting that causes the long term escalation in values. What happens is during the course of both physical and vocational rehabilitation, you learn things about physical condition or the medical modalities needed to bring back health again. He explained what you thought might be resolved by a simple operation or a simple application of medicine turns out to be far more complicated. You may not learn that for maybe up to a year. Mr. Bock said "And then all of sudden you have to increase your reserves because the medical cost attendant to this, plus the attendant loss time and other things, benefits under the comp come at you late. And that's what causes the delay and that causes the need to increase reserves well after a year after you policy year is closed." Number 2338 REPRESENTATIVE COWDERY asked Mr. Block who determines his company's financial responsibility or back up money. MR. BLOCK said it is regulated by state law in Title 21 which specifies how much capital they have to put in, how the capital may be invested, how they must be examined, how frequently they are examined, what their rates are, what their business practices are, and what their policy forms are. He noted it is all regulated at the state level by the Division of Insurance. REPRESENTATIVE COWDERY asked if the bill would be under the same regulation. MR. BLOCK responded, "The problem with the way this bill is drafted, Representative Cowdery, is the answer is yes and no, because yes, it says that we will be regulated to some extent by the director of the Division of Insurance, but it's strange because it starts out by saying, `But we're not an insurance enterprise.' So the only regulatory authority that I see that the director has is what's specifically granted which is to approve it's initial application and to do some financial review. But the problem with - in every aspect of regulation for our company and for any other company, a reciprocal or a mutual, there are standards set up - what the capital must be, what our financial standards must be, how much more capital we have to put in based on our writings. For this, there is no standards. It just says, `The director shall determine.'" Number 2414 REPRESENTATIVE HUDSON asked Mr. Block to cite the statutory reference to the reciprocal. MR. BLOCK responded he believes it is 21.75. Number 2435 REPRESENTATIVE JOE RYAN said, "My brief perusal of 5.1, I noticed different occasions that trust had to be established -- the monies put into a trust, a irrevocable trust, on some occasions to make sure that the financial resources were there for (indisc.) and so forth. My question on this million dollar net worth - well you are always able to sell things unless it's cash liquid. (Indisc.) always able to liquidate those assets and get the million dollars or perhaps what it is. Is there any concern in that respect that if there is catastrophic losses, perhaps if those assets can't be liquidated to meet the requirement?" MR. BLOCK informed the committee he specifically referred to that in his written testimony. One of the problems with the bill is it requires $1 million net worth, aggregated from all of the participating employers, in this case the homebuilders, but it does not specify what the assets have to be. They can be equipment, tractors, tools, land, whatever they happen to have. Mr. Block explained that is one of the issues they raised which is the equity of the assets they are looking to and the adequate valuing of those assets. It is not required that the financial statements be audited to test the true validity of the value of the assets. TAPE 97-14, SIDE B Number 001 REPRESENTATIVE RYAN said, "...and I know this kind of insurance does have a long tail. I'd like you to examine that a little bit more for me and tell me what would be available to the person who had the claim if the reinsurance company perhaps was no longer in business or it ceased doing business - it was difficult to get (indisc.) money? What kind of recourse would a person have?" MR. BLOCK responded, "Okay, an employee is injured and three to five years after the injury, with a very serious demand for medical care and ongoing payments and rehabilitation, so forth, still lying against this enterprise, and now they're looking to their excess carrier to pay this high amount of money and the excess carrier is gone. Where do they go? Well it's not entirely clear, but from the way the bill is drafted, it would appear as though there are some resources in this security deposit or in the bond that's filed with the director. But that's again unclear to me how that works because it says they're payable to the state or to the Department of Labor and I'm not sure how that then gets from the Department of Labor to an injured worker without an appropriation. That aside, if that's inadequate or if that presents a problem, then the next step is for the entity to make an assessment against all the homebuilders for whatever the value of the net deficiency is with respect to that policy year." He said if this comes into existence in 1998, there is a 1998 loss and in 2003 they find out there is large amount of deficit, in 2003 they would then go back to those people who were in this program in 1998 and ask them to pay the deficiency. Number 080 REPRESENTATIVE GENE KUBINA asked if the reinsurers would be regulated by the department so that they meet all of those qualifications. MR. BLOCK said they should be. He pointed out that for his company or any insurance company, they do not get credit for reinsurance unless the reinsurer is itself either regulated by the Division of Insurance or accepted by the Division of Insurance based on the financial information the division has about those companies. Mr. Block said he would hope this would apply. He said he would hope that if this became law, the current director would be astute enough to require that, but the statute and bill do not say it's required. He said he supposes they could go get excess or aggregate stop loss coverage from any market that would be prepared to write it. REPRESENTATIVE RYAN said if this bill becomes law, where would the state ultimately come in to take responsibility? MR. BLOCK indicated that is the concern he has. He said he isn't clear from the language in the bill as to how they come in. He explained the state is the beneficiary of whatever security the director would require, the surety bond, the security deposit, the cut through reinsurance, etc. The bill says it shall be negotiable, made payable to the state, but it's not clear what would happen when a deficiency in a private organization exists how they would transfer the money or the resources into that private organization. Mr. Block said he would imagine that what should happen is that the monies from the security deposits, deposit funds or bonds should be payable to the enterprise so that the enterprise has the funds to make those payments. Number 301 BILL TAYLOR, Builder, Alaska State Homebuilders Association, came before the committee to testify in support of HB 116. He noted he builds about 25 houses a year in the Anchorage area. A concern that keeps coming up is the concern over insolvency and protection of the worker. With the way the bill is drafted, he feels it gives the worker a substantial amount of protection. Mr. Taylor said insolvency could happen in a melt down situation, but he feels the statistical probability of that occurring is minimal. He said he thinks we have a very low risk of that occurrence, and even if it did occur there is still a layer of protection. The capital requirement of $1 million is certainly a starting point. Mr. Taylor noted he believes the current capital requirement is $5 million, however, they would certainly support lowering that to $1 million. He said he thinks there is an element regarding what the capital requirement is. That is the base, the platform for which they protect their claimants. The $1 million is the expanded layer of protection on top of the reinsurance or the stop loss insurance. Mr. Taylor asked the committee members to focus on the fact that the capital requirement is there. Mr. Taylor said the builders understand risk and they deal with risk every day. They realize what joint and several liability is. He said Mr. Block made a valid point about the assets that are at risk. Those assets could come in multiple forms. He pointed out the builders that are interested in the bill know that when they sign on, their assets are on the line. Number 470 MR. TAYLOR referred to the insolvency of the organization and said it is really a hypothetical possibility. He said they do have the fiduciary responsibility to make sure they do have the capital in tact and that it's adequately systemized with the assets. They also have the stop loss insurance that will kick in. In theory, the stop loss insurance companies could go out of business, but there is nothing to say that maybe some of the off shore markets would be riskier than some of the continental markets. He noted the continental markets can be controlled by the director of Insurance. The Division of Insurance has the responsibility to review and approve who the reinsurance companies are. MR. TAYLOR said, "What we want to communicate to you is that we become, as builders, stakeholders in an enterprise that will help us lower costs and manage claims and protect our claimants. The last thing that we want to see is to put somebody that's framing a house and falls off the roof and breaks a limb, to not have money available to him. So the legislation, as we've crafted it, and it certainly will need to fine tuning if concerns arise as we go, we don't want that person to be at risk and I think we've adequately provided for that guarantee through the capital requirements and the insurance - reinsurance. So I think that this extra layer will go beyond that point because we have the fidelity bond that's required of the administrator and a performance bond. So not only are we insured, but our claims administrators are insured. As an example, if liquidity is a problem initially, there is nothing to prevent us in the legislation, if liquidity is a concern, for us to get a bond. If you take a group of 100 builders and put them together and pledge a million dollars with an asset, an insurance company can provide a liquidity bond for the million dollar net worth. So we can solve that problem if it arises." MR. TAYLOR said if there are some minor holes in the legislation, the intent is not to leave those holes. The intent is to make sure those details are worked out with the commissioner, as they ultimately have control as to how it is regulated. Mr. Taylor said they are not trying to avoid regulation, they want to participate in regulation to the benefit of the builders and the potential work comp claimants. Mr. Taylor explained the builders see this bill as them forming a pool where pure pressure is one of the most vital elements of managing claims. He said the workers will be working in a safer environment as the companies are stakeholders and are personally at risk if something goes wrong on a co-builder's sites. Number 779 REPRESENTATIVE KUBINA referred to pure pressure and said if there are 12 companies in a pool and one company doesn't like the safety record of another, could they be expelled from the group. MR. TAYLOR said there will be provision in documentation to allow them to move that person out of the pool. They would then go back into private insurance. REPRESENTATIVE KUBINA asked how that is different from a previous testifier saying they received a drop notice from an insurance company. He said that was used as one argument earlier, and they are able to do the same thing. MR. TAYLOR explained what the human reaction is to pure pressure is to simply rectify the problem that exists. He said they wouldn't be interested in expelling someone who was initially invited in. Number 839 REPRESENTATIVE COWDERY questioned whether the $1 million is per company or per pool. MR. TAYLOR explained it is $1 million per pool. Number 967 REPRESENTATIVE JERRY SANDERS asked Mr. Taylor if he feels that pure pressure is that much stronger than the financial pressure they receive by their premiums going up. He asked if he feels the insurance company is more willing to give up that premium and drop the insured than the pool would be. MR. TAYLOR said, "As a pool, for instance if we used homebuilders as an example, as a pool if you invite a co-builder into your pool and illustrate to him what the goals of this pool are, he's going to respond in a positive way in creating a better work environment in helping the pool manage the claims. There seem to be -- and I think it's fairly common whether you're exposed to workman's comp or not, that there are gross abuses in workman's compensation. And there are a lot of claims that are paid that maybe shouldn't be or there are claims that are legitimate claims that are double and triple pay. So we're trying to, as small businessmen, we can realize the significance and importance of controlling costs and I think this give us an opportunity to do that and still protect the worker." Number 1069 MARIANNE BURKE, Director, Division of Insurance, Department of Commerce and Economic Development, came before the committee to testify on HB 116. She said she would like to thank Mr. Block, who touched on a number of the issues she was going to touch on. She said she would like to acknowledge the fact that last year when the original proposed legislation was introduced and there were a number of issues raised, she and the director of the Division of Workers' Compensation met with members of the Alaska State Homebuilders Association and stressed the concerns that they had. She said they specifically pointed to the fact that solvency was a major concern. They have gone back and significantly changed the proposed legislation. She said she would have to echo the concerns on solvency. There are no provisions in HB 116 to allow the director to look at the financial statements of the members. The legislation does say that there will be an examination of the group, in other words, the money that is in the group premiums, but nothing allows the director to make sure that the underlying $1 million is in fact there. MS. BURKE said it has been testified to that liquidity is a major concern. Net worth can be composed of land and aliquot assets. There is nothing in the legislation that permits the director to determine what kind of assets are available. For an insurance company licensed to do business in the state there are very strict guidelines on the type of assets that can be considered. There are very strict regulations governing what types of securities can be considered and that they must be valued in a certain way. Number 1260 MS. BURKE said she would like to emphasize the reinsurance. As written, HB 116 has layers. It goes first to the group, not the individual members, and if there isn't sufficient money there to pay the underlying claims, the next step is to go to reinsurance. As has been pointed out, reinsurance only pays after a certain point. The group will have to have paid those first dollars in order to trigger reinsurance. MS. BURKE said there has also been testimony as to the fact that the premiums will come into this plan. She said she would like to point out that the legislation requires a minimum premium base for the first year of $250,000. Only 25 percent of that has to paid up front or $62,500. Ms. Burke said following the legislation, 70 percent of that premium amount is available to pay claims. That means that $44,000 at the inception of the group would be available to pay claims. There is no provision in the legislation that says when the other 75 percent of the $250,000 has to be paid. Ms. Burke referred to wording in the bill, "The director shall issue a certificate of approval if these criteria are met." She said if there is $43,450 to pay claims, the director "shall" issue the certificate assuming the other conditions are met as to surety bonds, bonding of the administrator, etc. She asked the committee to keep in mind those bondings are to the performance of those individuals and not bonding to pay claims. Number 1379 MS. BURKE said there has been discussion about the monies payable to the state in the form of securities, bonds or whatever, that the director determines the amount. She explained the legislation clearly says they will not be used to pay claims until such time as the group is unable to pay the claims they're legally required to pay. In other words, those monies would not be available until the group is insolvent. They wouldn't be available to draw on throughout the process. MS. BURKE said the issue of insolvency is also very troublesome. Insurance companies in the state cannot go into bankruptcy and there is a very good public policy as to why they can't. They have obligations to policyholders. The law provides that the director can take a troubled company into receivership and work with that company to rehabilitate it before insolvency ever occurs. The last thing any director would like to see is a company insolvent, which means they failed to help them get back on their feet. She pointed out there is no such provision in HB 116. Ms. Burke said, "It is arguable whether or not this group might be able to go into bankruptcy because if it is in fact not insurance, it could go into bankruptcy. The issue of whether it is or is not insurance would be a finding of fact." She said the court has been clear over the years as to what constitutes the business of insurance and it boils down to if there is a transfer of risk, you're in the business of insurance. Ms. Burke said as described in HB 116, there is a transfer of risk. Number 1623 MS. BURKE referred to the guarantee fund and said it is another issue that is troublesome to her. She said the guarantee fund is good public policy. An insured plan must participate in this guarantee fund. It simply means that if a company doesn't have the resources to make good on their claims, the other companies step in on their behalf and make on those claims. She said this is a very good safeguard and it is present in every state of the union. Number 1683 MS. BURKE referred to how rates are developed and said out of all insurance, probably workers' comp is the easiest to understand. Every insured employer in the state of Alaska must report their data, their payroll, the classification, to a statistical agency. In Alaska, that is the National Council of Compensation Insurance (NCCI). This statistical group aggregates all of this data so all the participants from one class are put in one bucket and all of the other workers are allocated to what they're doing. From that, a manual rate is determined every year effective January 1. The factors that go into that are medical claims, payments to individuals while they're injured in a permanent or temporary disability, retraining, legal costs, etc. The information is then used to arrive at a per dollar manual rate. MS. BURKE said, "For every $100 worth of payroll, $5.50 was paid out by this classification of people. The proposed legislation specifically states that these rates will be used in this group. So we're starting from the same point. How can you, as an employer, have any impact on what you're paying? Experience. How many accidents did you have? How many dollars did you, as an employer incur for an injured employee. You start out with a manual rate and for just discussion purposes, lets say it's $100. If you haven't had a lot of accidents over the past years, you get an experience rate that drops you lower than $100. If you have had a lot of accidents, you can be $100 plus. This is where the employer's safety program loss control pays off. This is available to every employer in the state of Alaska, whether they're a participant in this pool, insured by any company. The experience modifier is there and you are rewarded or punished by what happens. The proposed legislation says this is the method that will be used. It is already available through the current system that they have. This concerns me because I don't see where the proposed savings will necessarily come out." MS. BURKE said Mr. Taylor referred to peer pressure and said she would agree that it is very effective. That same pure pressure can also work to keep classification rates down. Ms. Burke said, "Right now, if fellow competitors out there are unsafe, they're driving the manual rate up for you and you're paying part of their lack of safe environment." MS. BURKE said there was a reference made to reciprocal statutes, 21.75. She said, "I'd like to add to that we had proposed this to this group as legislation that already exists. We have two excellent examples. Timber, as Mr. Block referred to, has been around since 1980, worked very well. The Alaska Rural Electrification Group is also another example and has been around since 1983 - worked quite well. These reciprocals pay premium tax, they're subject to all of the oversight, all of the prohibitions against unfair practices, all of the provisions that require they participate in the guarantee fund. The reciprocal statutes also provide a means where you reach a point where you are no longer jointly and severely liable. As the group gets more money and reserves, they don't have to look to their members to make good. They've got the money there. These have worked quite well. The key there and the difference I would say that between the proposed legislation and statutes in 21.75 is the solvency issue - the money that they had when they started. Not the individual members, but the group had the money, $1 million, the group - the money was already in there plus an additional $500,000." MS. BURKE said the state of Alaska has a healthy workers comp market. She referred to the question that was raised as to what would happen if the number insurers get less in the state, insurers won't want to stay here and write insurance for small groups. It's not profitable to them. Our competitive market would be at risk. Number 2290 MS. BURKE said, "To give you an example of what has happened in our market this past year, the statistical data showed that we could lower the workers' comp premiums - that manual rate that I was talking about, and I signed the order lowering overall the workers' compensation premiums in the state of Alaska 10.3 percent. Now there were some that increased, there were some that decreased as much as 38 percent in one year. This is the continuation of a trend that started after major legislation in 1988, when the whole system was overhauled, we have been on a downward trend. This reflects the management of claims, the loss control. The most effective thing in the world is don't let the accident happen. Work safe. If there is an accident, manage the recovery, work with the injured party to get them productive and even if it's on a modified return to work program, but work with them. This has paid off for the businesses in the state of Alaska, it's paid off handsomely. I think the cumulative decreases about 40 percent since 1988." Number 2446 REPRESENTATIVE COWDERY asked what the size is of companies are that self-insure. MS. BURKE responded, "The larger companies, lots of employees with a net worth that is substantial enough that they can personally keep these risks, the BPs, the Arcos, the Carr-Godsteins, these are all examples - the municipality of Anchorage. They all have to... TAPE 97-15, SIDE A Number 001 REPRESENTATIVE COWDERY asked who would manage the pool. MS. BURKE responded that as stated in the bill, they would have a board of trustees. The make up of the trustees is spelled out and they would contract with a third party administrator. She noted there are a number of duties that the Division of Insurance would assume that are not part of their normal regulatory duties, they're more administrative rather than regulatory. Number 085 REPRESENTATIVE SANDERS said it looks like there are about 300 businesses and it takes 5 businesses to form a pool. He referred to the fiscal note and asked if there wouldn't be a lot of difference in the division's costs if one pool was formed with 300 members rather than forming 60 pools with five members each. MS. BURKE said the premium tax would be the same - the lost revenue to the state. REPRESENTATIVE SANDERS asked if that is what the division's fiscal note reflects. MS. BURKE explained the premium tax would be the same - the lost revenue to the state. REPRESENTATIVE SANDERS again asked if that is what the fiscal note reflects. MS. BURKE said they also made an assumption that other groups would follow. She said it is an estimate based on the premium of those groups. REPRESENTATIVE SANDERS said there is nothing in the division's fiscal note that reflects oversight over these groups. MS. BURKE said there are three numbers. One is loss of premium tax revenue. There is also a fiscal note indicating (indisc.) administrative duties that the division would have to assume. She said a issue that hasn't been addressed is the fact that insurers pay fees to the division to perform the duties that they do in a regulatory basis. The amount that is proposed in the bill to be paid to the division is $500. Insurers currently pay $2,500. Number 253 REPRESENTATIVE RYAN asked where the state of Alaska's liability comes in if it doesn't work. He asked if there has been any court experience with this if it were deemed the state was negligent by not taking the proper precautions. MS. BURKE said, "That issue is open, I don't know what would happen. It is not an insurer. It does not have the safeguards to keep the state from being liable. I think it would be a finding of fact whether the state would have to assume the liability. It does say that these monies are payable to the state and the state will pay it out in claims. What if there is not enough money? That's not addressed. I don't know if the state would be liable or not. I would assume there is always that real possibility of they've got an injured person out there and they don't have any money and no ones paying their medical bills and feeding their family. They're going to go on state programs to pay those medical bills." Number 394 AL WILSON, Member, Alaska State Homebuilders Association, came before the committee to testify on HB 116. He noted he builds homes in Juneau. Mr. Wilson said he employees four to five people seasonally. He informed the committee under the current system of workers' comp he pays the same rate, which is $17 per hundred on payroll. He pays that for a journeyman carpenter and a high school kid that is on summer break. This serves as a disincentive for hiring inexperienced or young people into the trade. If they convert to a self-insuring system, his workers' comp rates would be reduced through rebates and the potential savings would allow him to hire additional employees as well as the high school person that needs training to become employable in the industry. Additionally, the self-insured system emphasizes safety on the job because a reduction in work related accidents results in rebates to the members of the groups. Mr. Wilson explained that currently, he could be the most safety conscious builder on the block and it has absolutely no bearing to his workers' comp rate. Everyone pays the same. Under the self-insured system, the more safety conscious they are, the more they save. Mr. Wilson said the size of the Alaska State Homebuilders Association has been called into question by some people. The argument is that 850 members aren't enough to make self-insurance financially feasible. He said in review of other states that have allowed self-insuring clearly shows that this is not the case. Mr. Wilson discussed the New Mexico and North Carolina self-insurance programs. He told the committee that the most important measure of the bill is the focus it brings to accident prevention and the injured worker. Saving money on workers' comp rates and maintaining the highest quality of safety on job sites is a win-win situation. He urged the passage of HB 116. Number 667 LINDA HALL, Commercial Insurance Broker, Alaska Independent Insurance Agents and Brokers, was next to come before the committee to testify in opposition to HB 116. She noted her organization is a trade association of independent agents across the state who work with employers and their clients and represents multiple insurance companies. Ms. Hall said her organization opposes the bill in two areas. One is a general concern with the effect on the insurance marketplace. The other concern is with some of the actual provisions. The workers' compensation market currently in Alaska is the strongest most of us have ever seen it. There are increasing numbers of new companies writing business here and it has been a profitable market. Within the last month, a new company came into Alaska specifically targeting those premiums the committee is talking about today, the $1,000 to $20,000 premium range. There has been a point where that was a difficult type of risk to place, but there are markets interested in Alaska and interested in Alaska businesses. Work comp rates have increasingly gone down since the work comp reforms in 1988. Overall, there has been a 40.1 percent decrease in workers' compensation rates. Director Burke referred to a 10.3 percent rate decrease. The carpentry rate for two family dwellings has gone from $16.30 to $11.71 in 1997, which is a 28 percent decrease. She said they feel that other employers who have adequate safety protections and a good loss record can obtain additional credits. There are credits currently in the marketplace anywhere from 10 percent to 40 percent. Ms. Hall said, "It is a market that has benefitted all Alaskan employers and they are very concerned if we start taking specific industry groups, pulling them out of that overall market, the effect on the remaining Alaska work comp marketplace will be very detrimental." MS. HALL explained that the workers' compensation premium in Alaska overall is a very small portion of the premium nationally. If we have insurance companies looking for places to invest their assets and resources, they are going to want a sufficient amount of premium to make that worth their while. If we allow specific industry groups to pull the premium out, soon we don't have a premium base that attracts new companies and we won't have the type of marketplace we are currently seeing. She said they are concerned about the affect on employers who don't qualify for self- insurance groups. Number 853 MS. HALL said HB 116 sets up a new chapter for self-insurance groups. This chapter specifically states in its scope that the groups would not be subject to the provision of the insurance laws except as specified in the chapter. This means they are not paying premium tax, they're not contributing to guarantee funds and it sets them up with an unfair financial advantage. It sets them up with an unfair advantage against insurers who have to pay those costs and other employers who aren't eligible for those groups. It also takes away protections that are currently in insurance statutes. Ms. Hall said there has been testimony about asking members to leave a group if they didn't follow safety procedures. There would be no anti-discrimination statutes. The Unfair Claims Settlement Practices Act of the insurance chapters would not apply to these groups. MS. HALL said the rates mandated in the bill are manual rates. Those are mandated to be charged for five years. She said, "If we're talking charging manual rates, we're talking the same rates insurers are charging right now. We are talking about additional administrative expenses for reinsurance, excess insurance, audits, administration, third party administrators. There is a whole list of expenses outlined in this bill. I'm not sure that I understand how we save money when we're mandating charging manual rates for five years, we're talking all kinds of insurance requirements to the point I'm not sure where we really have any room left to save rates." Ms. Hall said there are already in statute provisions for reciprocal insurers, provisions for purchasing groups that would allow various associations to put together a mechanisms to solve some of the other types of problems that they may see in their industry. She thanked the committee for listening to her. Number 1023 REPRESENTATIVE COWDERY asked Mr. Hall to discuss the off-shore markets. MS. HALL said the off-shore markets are typically set up to avoid regulation. It is a different type of regulation and it may be foreign insurers, it may be what are called "captives." Frequently, the off-shore markets are captives, a large conglomerate may form its own insurance company called the "captive," to write its own insurance and spread out into other types of insurance. Bermuda is very attractive to captive insurers and they don't need the types of requirements that U.S. regulators have. REPRESENTATIVE COWDERY asked if they have been a problem in Alaska. MS. HALL said she isn't aware of any problems. They do crop up occassionally, but she believes there have been very diligent efforts to see that they don't enter our marketplace. Number 1122 PAUL GROSSI, Director, Division of Workers' Compensation, Department of Labor, came before the committee to testify on HB 116. He said he would agree that there are some concerns with the bill that relate to solvency. The Department of Labor is concerned that injured workers are not going to be paid. There are still some deficiencies which Ms. Burke has pointed out. Mr. Grossi said he doesn't see how the financial viability of a group can be judged without being able to judge the financial viability of individual members. Mr. Grossi said, "That seems to me that that would be the first thing that you would address. And I would say that we require, we being the Division of Insurance if I'm a laborer I'm -- for self insurers to file their audited financial statements when they're coming into make an application originally -- three past years. And then annually, we require them to file an updated audited financial statement. We know what their financial conditions are yearly. Under Title 23 we approve certificates of self-insurance for individual employers." CHAIRMAN ROKEBERG asked, "For what type of insurance?" MR. GROSSI responded it is for an individual employer so they can pay workers' compensation benefits. He noted they do require the individuals to be highly capitalized. He said, "For example, getting the minimum asset a $1 million for this group, we do require $5 million in assets for an individual employer. And we can't see why these groups should be held to a lesser standard. Maybe they could be, but it would seem to me that you would at least want to require -- if the $1 million is going to required as assets, they should be liquid because, of course, you've -- I don't want to get into repeating a lot of the same testimony, but the premium that's established under the statute - the proposed statute is so small that if you had one serious injury -- say the first injury, say Marianne approves the certificate and the first injury you have is a very serious injury and there is $75,000 worth the medical benefits and indemnity benefits that are due. If you don't have a proper amount of excess insurance or if the excess insurance isn't low enough, you've exhausted your $43 or $62,000 worth of cash and if the five members in the group are really just five guys in pickup trucks and tools and some heavy equipment and a tractor trailer, then you're insolvent. You're insolvent immediately and that is our concern. Is there enough money here to pay workers' compensation claims. There are some safeguards in that in the security deposits, but again you have to be insolvent to get to those. So we're wondering if the groups, themselves, are not allowing themselves enough funding to take - so they can guarantee solvency." MR. GROSSI said there should be some requirement for a guarantee association in case the entities do go belly up. Mr. Grossi said, "How are individuals going to be paid for compensation payments especially if there is over the short run until we -- some of these things can be made - some of these assets can be made liquid and money can be had from the securities - other deposits." MR. GROSSI said he doesn't know what the proper number of members in the group should be, but suggested there should be a minimum number of employees in the group. He said his division requires at least 100 employees for an individual employer. This is a way to assure that an entity is viable. Number 1543 ROBIN WARD, Member, Alaska State Homebuilders Association, came before the committee to testify. She said they want to make sure their workers are taken care of. The association has worked with the Division of Insurance and the Division of Workers' Compensation. She said her association is willing to sit down and work out some of the concerns as this would be a long term investment and they would be at risk for a long long time. She said they want to make sure that what they are doing is right. Ms. Ward asked the committee to keep in mind that this is successfully working in 14 states. She said they used the model legislation from those 14 states. There is a pattern of success by using the models where they have reduced the actual number of claims and have returned some of that premium back to the members, and have lowered their operating costs to reach the goal of affordable housing. MS. WARD said, "Reinsurance is we would pay the first section. What that section is is how we negotiate how we negotiate with our reinsurance. If it's $10,000 -- so I guess what I'm saying is even if we start out with $45,000, you'd have to have four catastrophic injuries right away to deplete that because if it's $10,000, they kick in after that $10,000. We planned on putting it out to the agents. We will be another market for them to broker - agents broker insurance - all they do - they get a commission for writing insurance just like they would with any of the other commercial entities. So they would use us as one of their markets. And so they could write us or they could write someone else. Rather than kicking people out of our group, we would rather put them on probation, bring in a team of peers and help them work out their problems. We don't want to kick anybody out. Once we've invited them in we want to keep them in there. And the records in other states show that 90 percent stay in and reinsure and are able to stay in because they're educated on job site safety and we also have the ability that we do not today to have some hands on management of our claims. We want to make sure that fraud is investigated. Someone who doesn't deserve work comp provisions shouldn't get them. We want to make sure that the workers get back faster if there is any possibility of doing it. So those are some of our goals, but again I want to reiterate that we're more than willing to sit down and work out some of our concerns. This is, and legislation is meant to be, the framework, the guidelines. We fully expect to sit down and write regulations that cover some of these details." Number 1615 CHAIRMAN ROKEBERG asked Ms. Ward why her association wouldn't consider the availability of the reciprocal agreements or a reciprocal organization that is available under existing state law. MS. WARD said, "Because it does have the higher -- we firmly believe, and if we need to look at making that $1 million of assets liquid, we will certainly look at that. We do not believe and I again -- no one has shown us statistics that you need $5 million. That may be the requirement, but I'm not sure anybody has ever used that and I would like to see something where they have. We feel $1 million, based on other states, is enough to have. That doesn't mean that -- remember that's only the minimum. That doesn't mean that's what we're going to do. As we build up surplus reserves, we may cash that in - make it money that the group actually owns and take those assets that are pledged give them back to our members. We all don't want to live for the next 20 years with our assets pledged to this group. So most of the other states have put in more reserves and invest it and keep it in there and then give out benefits on the investment of that, but there are provisions that are much more restrictive in the reciprocals and the exchanges." MS. WARD asked the committee to remember that the way the legislation is drafted, almost everything is under the director's approval. Number 1809 CHAIRMAN ROKEBERG asked Ms. Burke to provide the committee with the history on the rate reductions over a ten year period. He suggested she also give some examples of organizations such as the Alaska Homebuilders Association. Chairman Rokeberg said HB 116 would be held over. ADJOURNMENT Number 1826 There being no further business to come before the House Labor and Commerce Committee, CHAIRMAN ROKEBERG adjourned the meeting at 5:28 p.m.