Legislature(1997 - 1998)
02/27/1997 01:32 PM Senate L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE February 27, 1997 1:32 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Mike Miller MEMBERS ABSENT Senator Jerry Mackie, Vice Chairman Senator Tim Kelly Senator Lyman Hoffman COMMITTEE CALENDAR SENATE BILL NO. 65 "An Act relating to domestic animals, to food, and to the Alaska Food, Drug and Cosmetic Act; and providing for an effective date." - SCHEDULED, BUT NOT HEARD SENATE BILL NO. 95 "An Act relating to workers' compensation self-insurance." PREVIOUS SENATE COMMITTEE ACTION SB 65 - See Labor and Commerce minutes dated 2/13/97 and 2/20/97. SB 95 - No previous action to be considered. WITNESS REGISTER Alaska State Homebuilders Association (ASHA) Mr. Steve Wisdom, President P.O. Box 4184 Homer, AK 99603 Mr. Bill Taylor 2340 Loren Circle Anchorage, AK 99516 Ms. Robin Ward, Chairman P.O. Box 91443 Anchorage, AK 99509 POSITION STATEMENT: All supported SB 95. Mr. Dick Block, Alaska National Insurance Co. 360 W. Benson #300 Anchorage, AK 99503 POSITION STATEMENT: Opposed SB 95. Ms. Marianne Burke, Director Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, AK 99811-0805 POSITION STATEMENT: Opposed SB 95. Ms. Linda Hall, Alaska Independent Insurance Agents and Brokers 3111 C St. Anchorage, AK 99513 POSITION STATEMENT: Opposed SB 95. Mr. Paul Grossi, Director Division of Worker's Compensation Department of Labor P.O. Box 25512 Juneau, AK 99802-w-5512 POSITION STATEMENT: Opposed SB 95. ACTION NARRATIVE TAPE 97-8, SIDE A Number 001 SB 95 WORKERS COMPENSATION SELF-INSURANCE GROUP CHAIRMAN LEMAN called the Senate Labor and Commerce Committee meeting to order at 1:32 p.m., and said since there was lack of a quorum they would be in work-session mode. He said they would hold SB 65 until next Thursday and announced SB 95 to be up for consideration. SENATOR MILLER, sponsor of SB 95, said he introduced this bill primarily because he believes in the concept of insurance pooling. He said several years ago the State allowed the timber industry to drop its costs over a period of time by pooling. Number 74 MR. STEVE WISDOM, President, Alaska State Homebuilders Association, said they have Statewide support on this issue. For most of the small builders the workers' compensation rate is in the $17 - $19 per $100 range. He said there are over 40 states that have legislation enabling this. About 14 other states are using almost the same as what is in this bill. When someone joins a pool, they have to commit to a number of things: a safety program, on-site safety inspections by the administrator of the group, a safer work place, reduced rates, and follow-up when working with an injured worker. MR. WISDOM said ASHA has addressed the Division of Insurance's concerns with solvency, the guarantee, the premium tax, and the surety issue. They feel they can work these things out with the Division of Insurance because they are not asking not to be regulated. He said this type of pooling has reduced worker's compensation insurance in other states on an average of 37%. A number of studies have been done on self-insured groups and they show they are effective in the worker's compensation area. With commercial carriers 70% of the cases had attorneys involved; with the self- insured groups, only 27% used attorneys. Number 164 CHAIRMAN LEMAN announced an at-ease from 1:42 - 1:45 p.m. to allow more seating. MR. BILL TAYLOR, Alaska State Homebuilders Association, said he wanted to concentrate on the area of insolvency. The bill has a minimum net-worth requirement of $1 million which is used as a safety net for any back-up claim or problem that the group may encounter. He said Ms. Burke, Director, Division of Insurance, pointed out that this was an imperfect form of capital requirement, because typically if you have a crisis, it is better to have simple liquidity rather than pledged assets (in the form of tools, truck, land, etc.) In times of crisis you usually need that money immediately, he said, and it is a legitimate concern which he thought could be readily addressed. Another concern was if there was a loss, the way the legislation is written, the State of Alaska just becomes the loss payee. He said that is true. The State has to become the loss payee when you have money that needs to be used to pay a claimant. He thought the simple solution to that is to simply make the loss payee give the Division of Insurance the ability to assign that to some claims administrator. Another concern is the start-up risk. Ms. Burke pointed out some weaknesses in the initial requirements to take 25% of the first year's estimated premium. However, he thought they had insured around this risk by having the ability to negotiate a reinsurance rate that would allow an extra layer of protection. Also, he said the additional capital requirements have to come in the form of government guaranteed instruments like a federally insured certificate of deposit or a government issued bond. Number 256 He said the Director may veto who they choose for reinsurance and he thought that was important protection because some of the off- shore markets for reinsurance may not be as stable. He said there is also a fidelity bond for the administrator and a performance bond for the claims administrator which they thought was important protection against the potential claimant. They do not feel this legislation puts the claimant at risk. If it does, they are willing to amend it to provide that protection. MR. TAYLOR said the major carriers don't come into the market place on-site for job safety training which he thought was an important adaptation that will occur as a byproduct of this legislation. He noted there is also peer pressure within the group because once you are invited in, you are going to be on the line. CHAIRMAN LEMAN said he wants to make sure that the $1 million is money that is readily available to the pool before the bill leaves committee. MR. TAYLOR agreed. Number 312 MS. ROBIN WARD, ASHA, said they have four areas of concern: the liquidity of the $1 million; the minimum of five employers (they are willing to consider a minimum number of employees); their being exempt from the premium tax, and the guarantee fund. She said the guarantee fund was an oversight, because they had planned to put that in to the legislation because it provides one more layer for the worker against insolvency. They also don't expect the administration to regulate and oversee them for free and she said they would negotiate a premium tax that would cover the costs. She said they do not want to change the way the worker is taken care of. They would be very careful about who would be let into a pool. Problems with a safety record, for instance, would require a probationary period and a team to come in to help make sure the job site becomes safe rather than just kicking them out which is not their intention. Once they are in, they want them to stay in. The track record in most states is 90% participation for those who keep renewing year after year. MS. WARD said there has been a drastic reduction in the number of accidents in self pooling because of the safety program and the peer pressure that comes with it. The have also noticed along with fewer claims, that the rehabilitation is faster and there is very diligent investigation of fraud. This is not the case with a commercial carrier. She said that most of them search long and hard for employees they can trust and they want to make sure they keep them safe at all costs. CHAIRMAN LEMAN commented that the amount that is collected from the premium tax is considerably more than the cost to the Division. He asked if she would view paying the same tax as other people do as being appropriate. MS. WARD said she didn't know, because she didn't know what they are paying. Number 378 MR. DICK BLOCK, Alaska National Insurance Co., said there has been substantial recognition of the problems among the group advocating the bill and that is gratifying. He said they are one of the primary writers of workers' compensation in the State of Alaska. He said he is a risk management consultant and has done work for a number of industry sectors on this whole issue of providing some means of grouping the industry to get economies of scale or to bring about better safety and loss control. He agreed there are advantages to be gained by grouping and they do work successfully. He said that Senator Miller refers to an existing State program called the Timber Insurance Exchange which he regards as a successful example of what happens when you do grouping. Another enterprise is the Alaska Rural Electrical Cooperative Association (ARECA). He emphasized that there already exists in current law three ways he has identified that the Homebuilders or any other homogeneous industry can have the advantages of grouping, the advantages of a safety program and more control over how losses are dealt with, and some say over what expenses are incurred in the marketing and administrative costs. Under current law any trade association can create a purchasing group. They can aggregate their membership into a single-group policy, they can pool their experience, and it has the advantage that they are not required to put up any capital. They would enter into an agreement to put this together with an existing, licensed, and regulated insurer, and set up the parameters for the program as to how the premiums would be calculated. He emphasized that programs organized under this law have worked well where they've been used. A second opportunity under current statute is to form a reciprocal insurer which is what is being done under the Timber Exchange and ARECA. Here they are required to put up a substantial amount of capital, the amount necessary to underpin the security due the injured workers. It is their own operation. They would have say over their investments, marketing, and administration, etc. The third way is simply for there to be a group marketing mechanism to be installed to find a market that is willing to provide lower- cost coverage because they are getting all or most of the members of the group. This is also being currently done in this State, but he is not that familiar with it. It's the National Electrical Contractors Association. MR. BLOCK said in all three of the examples he has cited there is a licensed, regulated, capitalized, dedicated insurance enterprise - whether it provides a program to the group or whether it is an enterprise that is owned and operated by the group. It comes under the regulatory regime of the Division of Insurance. By "dedicated" he means that the capital is available only to pay the obligations arising out of the insuring functions, not for operating expenses. What is proposed by the Homebuilders is not an entity, at all. It is simply the mutual exchange of contracts - one homebuilder to all the other homebuilders - that they will pay a premium. Out of the premium will come losses and expenses, and if the premium is inadequate to cover the losses and expenses, the other homebuilders have the right of action against the homebuilder to collect whatever is available. He wanted to make it clear that the $1 million referred to in the bill is not $1 million of capital in an insuring enterprise. No money to start the operation goes into the insuring enterprise. Rather it is the accumulated sum of the net worths of those who are contributing to the program. There is no underlying capital in the insuring mechanism; all there is is a right of action against the several participants against a resource that is also available for their operating costs. This is the fundamental difference and makes the program totally inappropriate in a State of our size for our kind of operation. MR. BLOCK said he has found in a few states he has looked at, like California, that they require $5 million of capital. In addition to that to get started you must contribute essentially an amount equal to the last three years losses as known by the organization. They are recognizing that these are very high risk operations and there needs to be money at hand in order to provide the same level of safety to the injured workers as they would have from an insuring entity. Number 479 He noted that Ms. Ward said ASHA is willing to participate in a guarantee association and willing to pay a premium tax to be negotiated, but the premium tax is not a negotiable item. It's 2.7%; every employer pays that rate. Premium tax is a source of revenue for the State and not a means of funding the Division of Insurance. It seems a gratuitous gesture on the part of the Homebuilders to say they are willing to participate in the guarantee association, meaning they would pay their fair assessment, but the counter to that is in the event of insolvency of this enterprise, it would be the requirement of the guarantee association to pick up the losses; and this is cited as an additional means of protection for the injured worker. It also means it's an additional burden and an additional threat to all the other employers and insurers in the State if their organization isn't properly capitalized and managed. MR. BLOCK pointed out that they are dealing with the most volatile line of insurance - workers' compensation. The problem is that these claims are not fully determined for a period of up to five or 15 years. It may take several years before an accurate estimate can be made. In the company he was with for six years, they found they didn't reach a level of stability in what the amount of the claims were in aggregate for a period of about five years. The need for the capital underpinning is to protect against the extreme volatility throwing them into an insolvency position. He said that also unfortunately the bill is open to any industry that wants to get into this, which is fair, but the problem is that they have seen in other contexts a statute like this being utilized by a clever marketeer as a means of saving a lot of money only to find in a few years that it is a disaster for all that are in the group. He said this happened several years ago with multiple employer trusts and multiple employer welfare arrangements as allowed under federal law with respect to medical and life insurance benefits for employees. The proposed legislation is not all that different than what was originally contemplated in the legislation authorizing those. CHAIRMAN LEMAN thanked him for his informative testimony and the letter he had written the committee. MS. MARIANNE BURKE, Division of Insurance, said the Homebuilders Association had attempted to address the concerns she and Mr. Grossi had pointed out last year, but they had not gone far enough. MS. BURKE stressed that there is no insurer in the State of Alaska who is not capitalized which means the money is in the group, not with some individuals or policy holders or contract holders. The net worth is in the group. Within the insurance community there are "admitted assets" which is defined in statute as those assets that are more liquid. For example, a building is hard to convert to cash in a reasonable length of time. Her division looks to surplus the capitalization as admitted assets less any liabilities. She said it has been pointed out that at inception there would be no monies or assets in this group. The first influx of money is from premiums. Of that, 25%, there will be $43,750 available for claims. She said the guarantee fund is made up of insurers who are at risk for their fellow insurers. This proposed group is arguably some other kind of entity. Whether or not they would be eligible to participate in the guarantee fund as the statutes are currently written is highly debatable. The guarantee fund is there when you become insolvent, she pointed out. It is not available to help you through financing during the period of time you are getting started. It is not available if you get into a financial crisis. It is available when you have gone into liquidation. MS. BURKE said that bonds were also mentioned as being available and the director having the authority to set the amounts of those bonds. The proposed legislation specifically says that money cannot be used until the group is insolvent. At that time the money is paid to the State. However, the State is not currently in the business of paying workers' compensation for any other group. That is an administrative function and there are attendant costs to it which they currently do not collect fees for. Reinsurance, she explained, is purchased to kick in when a claim reaches a certain point. It is also referred to as stop-loss. It kicks in for all claims for less than a certain amount. It does not kick in when you are out of money; that is not the purpose. It does not kick in when you have exhausted all of your funds on a series of claims that are, for instance, $5,000. (There could be 100 $5,000 claims.) TAPE 97-8, SIDE B MS. BURKE said the reinsurance is also priced, in part, by when it kicks in. All claims over $5,000, for instance, would be more expensive because it's greater risk. If you increase the stop-loss to $100,000, you'll pay less premium for it, but you are at risk for more dollars. The surety bonds are very good protection, but the protection is for the performance of those people, not to pay claims. If all the criteria as outlined in the proposed legislation is met as spelled out, including only $250,000 of premium for the first year or which only 25% has to be paid up front, that translates to the $43,750 she mentioned earlier. If there is reinsurance, if the bonds are in place, the director has no discretion - the director must issue a certificate of approval. The wording should be "the director shall." MS. BURKE cautioned that comparing insurance laws of one state with other states is misleading. Her understanding is that the first group to form a self insurance group was in North Carolina and it was formed in the middle of a major workers' compensation crisis. There was no market and something had to be done. There were 7,000 builders involved and from day one they had to have a guarantee fund. But in North Carolina, unlike the State of Alaska, the premium tax could be used for anything and they were permitted to take a part of the pool of the premium tax and create their own guarantee fund. In the State of Alaska the premium tax is 100% general receipts. Not one penny goes to the Division of Insurance for oversight or regulation. Number 543 The proposed regulation calls for a $500 one-time fee. The insurers doing business in the State of Alaska pay $2,500 per year for the regulation of their companies and their practices. She pointed out that the statutorily required responsibilities and duties of the Division for those insurers are substantially less than what is contemplated in this legislation. They do not provide administrative functions to any insurer; they are their regulators. It is important to remember that the premium tax is an unrestricted source of funds for the State of Alaska. MS. BURKE said that Ms. Ward addressed the number of employees which is important, and of the four issues stressed in their first meeting last year - solvency, guarantee protection, safeguards against unfair trade practices and settlement procedures - in existing statute the insurers must act in accordance with the rules. This legislation exempts this group from Title 21 which deals with unfair trade practices or settlement procedures. The division's last concern is a complaint resolution process. Currently if you, as an insurance policy holder, have a problem with a company, a complaint can be filed with the division. Since they regulate the company, they can cut through red tape and assist in getting a resolution. This is a vital part of their duties and has been ruled by the Alaska Supreme Court that to be their number one job. Another critical point, MS. BURKE pointed out, is the market. There is a very healthy workers' compensation insurance market right now. They are at an all-time high on competition and all of us benefit from that because it brings costs down. Over the past 10 years we have been on a downward trend on workers' compensation premiums. Each year on January 1, the workers' compensation premiums are set based on statistical data for prior years. All classifications have the same manual rate as any other employer in the State of Alaska. This is the starting point. You can pool your resources and get a lot of buying power and an insurer will give you a volume adjustment. If you have a safe record, you get an experience modifier; or if you've really had a bad record, it will push you up. This is where the safety and loss control comes in and is so critically important. That is available to everybody. It is the employer and employee who ultimately determine whether or not it is a safe working place. The safety programs, the recognition by employers and employees of the impact it has on the cost of doing business has paid off in the downward trend. This year the overall decrease in workers' compensation premiums for the State of Alaska was 10.3%. That is the effect on all classifications. She said two of four classifications used by the Homebuilders went down, one of them over 28%. Two of them went up, the highest being seven percent. This is a very good indication of the consciousness of loss control and prevention. She said the Division had recommended that this group look at the reciprocal statute, chapter 75 in Title 21, because it is there and it works. CHAIRMAN LEMAN asked her to clarify her calculation on how she got to $43,750 to be available for claims in the first year. MS. BURKE explained that the statute says that only 70% of the money paid up front can be used for claims. Number 451 MS. LINDA HALL , Alaska Independent Insurance Agents and Brokers, opposed SB 95 and said she has two broad areas of concern. One is the effect on the insurance market place in general and numerous provisions of the actual bill. She feels that the workers' compensation insurance market in Alaska is very strong today. There is an increasing number of carriers in Alaska. Within the last month there is a newly approved business has emerged here that is targeting employers whose premiums are in the $1,000 - $20,000 range. This was not the case several years ago. That is a premium range that's very difficult. She has seen a drastic decrease in the overall workers' compensation rate since the reforms were enacted in 1988. Rates have decreased in general 40.1% in that time period. As of January 1, 1997, there was a 10.3% rate decrease again for one/two family dwellings. That rate will be $11.71 this year, a 28% decrease. Currently, employers who institute safety procedures and who have good loss records can obtain additional safety credit of 10 - 40%. Most of these credits are a result of the marketplace and their own practices. These benefit all Alaskan employers. MS. HALL said the overall workers' compensation premium in Alaska is not large when compared to the national premium level. Allowing special interest groups to withdraw their premiums from the market will decrease the overall premium volume which becomes less attractive to insurance companies. There has to be a sufficient market to justify commitment of resources in the State. They are very concerned about the potential affect on the withdrawal of premiums for special industry groups. She said a number of their concerns with SB 95 have been addressed by other speakers before her. She is concerned that this bill creates a new chapter 47 and it very specifically provides that the self insurance group will not be subject to provisions of the insurance laws in this title except as provided in this chapter. This means that these groups would not be subject to premium taxes which would create a financial advantage for them and a distinct disadvantage for the rest of the industry. They are also very concerned that when they exempt a group from insurance regulation, they are taking from their members protections against misrepresentation like marketeers and would not provide the protection of the Unfair Claims Settlement Practices Act which guarantees that claims be settled in a particular manner within a particular time frame. One of the reasons for the formation of self insurance groups is that an employer cannot afford workers' compensation premiums, although they are going down, at this point. However, her concern is that if the employer cannot afford the current premium, how could he take on the responsibility the joint and several liability obligation would put upon him. The bill provides for manual rates to be used for a minimum of five years. Manual rates are the ones currently charged in the insurance industry prior to other types of discounts. This bill has a detailed list of other types of expenses from examination by the director to excess insurance, to reinsurance, CPA audits, surety bonds, etc. and she finds it difficult to imagine any significant premium savings if they are covering expenses outlined in this bill. In conclusion, she requested the committee consider the potential impact of an insolvent group. There are questions as to where the liability would end up and where the funds would be found to pay the legal liability to injured workers, and who would oversee the process of compensating injured workers. If a group is given special status by statute, would the legislature be responsible for the financial impacts of the failure of that group? She said they had seen the impact of an insolvent self-insured single employer, Wein Air. When they filed bankruptcy, the injured workers became merely creditors in bankruptcy with a preferred status. Although those workers were ultimately all compensated, it was a very slow process. Number 330 CHAIRMAN LEMAN said yesterday he learned there were about 12,000 U.S. insurance companies, but about 5 of them were writing workers' compensation insurance in Alaska. MS. HALL said she was sure it was more than five. CHAIRMAN LEMAN said he thought that the insurance industry was healthy here and didn't think a pool of homebuilders would necessarily imbalance the potential insureds so much that the insurance companies would want to pull out of Alaska. MS. HALL agreed and added that an insurance company needs a certain amount of premiums so that they can commit their resources. CHAIRMAN LEMAN asked if a claims adjustment has to be done locally, do they all have a local presence or do they do that by contracting with other service providers who can do that for them. MS. HALL answered that they could do either. MR. PAUL GROSSI, Director, Division of Workers' Compensation, said their sole interest is to make sure that claims are paid and that injured workers receive the benefits they are entitled to. They do have some concerns even though this is a much better bill than last year's. The bill still does not address solvency and an ability to pay claims that can come up. There would have to be amendments to AS23.30 so that these entities can be recognized and regulated. He supported Ms. Burke's testimony and said he wouldn't repeat the same concerns. MR. GROSSI explained that when a group gets their initial approval, they could become insolvent from their first claim, because there is no capitalization. Using the Wein Air example, he said they required $5 million worth of assets before they could be self- insured. Using this type of scheme should have some requirement for liquid assets so there would be some initial ability to pay claims. The makeup of one group of just five members seemed low to him. At five members there would have to be some sort of minimum number of employees. Under current statute there are a couple of civil remedies and some criminal remedies for those employers who fail to keep workers' compensation in effect. He said they would want to use as a criteria for policing the makeup of the groups, that if someone had been convicted of a crime that they would not be allowed to participate because that would show they are not reliable in this type of situation. CHAIRMAN LEMAN thanked him for his testimony and said they would hold SB 95 for further work. CHAIRMAN LEMAN adjourned the meeting at 2:58 p.m.