Legislature(1997 - 1998)

02/26/1997 03:22 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
          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.                                                                          
                                                                               

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