SL&C 3/23/95 SB 104 JOINT INSURANCE ARRANGEMENTS  CHAIRMAN KELLY called the Senate Labor and Commerce Committee meeting to order at 1:35 p.m. and announced SB 104 to be up for consideration. MARY JACKSON, Aide to Senator Torgerson, said this legislation, passed in 1986, authorized municipalities, school districts, and REA's to form joint insurance arrangements and extends that authorization to entities that perform a quasi-governmental service defined as being non-profit corporations, native associations, and native village councils. The test of "quasi-government" is that they must exercise at least two of the general municipal powers. Number 43 DON KOCH, Chief, Market Surveillance Section, Division of Insurance, said he did not support the extension proposed in SB 104. The reason is because the entities involved under this legislation could form a joint arrangement; they don't necessarily have to join an existing arrangement. He was concerned primarily with the financial wherewithal of those entities to bear each others liabilities. A joint insurance arrangement is not necessarily the purchase of an insurance product; it's an agreement to share the liabilities of others who are a part of that agreement, he explained. MR. KOCH said that mechanisms already exist allowing purchase of insurance jointly and he has no problem with that. He explained there is an existing federal statute that enables risk purchasing groups and risk retention groups. The risk purchasing group allows a group of entities to come together, pool their resources, and jointly purchase insurance, but not jointly share each others risks. He referenced AS 21.36.190 in this regard. SENATOR KELLY asked why he hadn't received a position paper from the Division of Insurance regarding this legislation. MR. KOCH replied that it had been completed yesterday and needed to be reviewed by "the chain of command." He said the division was also dealing with a number of other controversial issues. SENATOR TORGERSON asked if the department opposed the joint insurance arrangement when it was established seven years ago. MR. KOCH replied that initially they had some of the same concerns. At that time, however, it was pointed out that under the powers of a municipality, extending to the school districts, had taxing power and the ability to draft ordinances and enforce them. The financial concerns "tended to go away" since a tax base would be a backup. SENATOR TORGERSON pointed out that there is presently a successful program operating in the state including municipalities and public corporations, so the liability would be spread out even farther. MR. KOCH replied that basically their view has been that whenever unregulated entities share risk, as soon as there are two, you basically have an insurance plan. There are already a number of mechanisms in the insurance code that provide opportunities for people to form insurers of various kinds. One kind that comes to his mind is the reciprocal exchange which is a form of insurance company that is totally owned by the people who are insured. The management of a reciprocal exchange is performed by an attorney in fact so there isn't the normal "superstructure" an insurance company has. The expenses are, therefore, reduced. Two of these are already in the state - Alaska Timber Insurance Exchange and ARECA Insurance Exchange. There are a series of financial requirements in place and performance issues. The lack of regulatory oversite was deliberate in this type of arrangement, because there were conflicts between state statue and municipal regulations. He explained that municipalities are generally more sophisticated when they go into the market place. They have attorneys on staff and can make and receive the kinds of judgements they need to make decisions. His concern is with non profit corporations, in particular, they may not have that degree of sophistication, so when they make an agreement to share someone else's liabilities, they might not know what they are doing. SENATOR KELLY noted there was a letter of support from Egegik Improvement Corporation saying the reason they want this legislation is so they can join the pools and pay lower premiums. Yet, he mused, there are higher risks for taking large losses by joining one of the pools. MR. KOCH said that was definitely a concern. SENATOR KELLY asked if they would regulate the new units. MR. KOCH replied that they wouldn't. Furthermore, none of the provisions in the Insurance Code apply to them, including things such as reserves for losses, including such things as capital and surplus requirements so there is some floor for finances or trade practices. Number 271 SENATOR KELLY asked who regulated them. MR. KOCH said he thought they made an annual report to the legislature. Number 283 MS. JACKSON informed the committee that the regulatory practices that the JI's have to conform to are state statute. The Division of Insurance does not have oversite. SENATOR KELLY asked Mr. Koch if the regulations were in state statute or state regulation. He replied that if there were regulations at all, they were not in the Insurance Code and he didn't know of them existing anywhere else. SENATOR KELLY asked how he defined a trade practice. MR. KOCH replied unfair claims settlement practices, discrimination, boycott, coercion, intimidation, misrepresentation are all things that are dealt with in the Insurance Code in Chapter 36, the Unfair Trade Practices Act. SENATOR KELLY asked if he was saying that none of those things would be enforceable with the new organization. MR. KOCH replied that was correct; they do not apply. Statute 76 is structured as an exclusive statute, and nothing else in Title 21 applies to it. KEVIN SMITH, Alaska Municipal League Joint Insurance Association, said the reason they support this legislation is because they have received a number of phone calls from non profits and village councils that are taking over traditional municipal services who are finding that liability insurance is becoming expensive for them. Some of them are very small with very few assets and not necessarily the sophistication Mr. Koch attributes to them. SENATOR KELLY asked how many municipalities he had in his group right now. MR. SMITH answered 95. SENATOR KELLY asked if there were a $1 million liability loss, would that be divided by 95. MR. SMITH replied there was another mechanism in the form of financial requirements of a JIA that would make the structure such that you shouldn't ever have to go to the membership to seek additional funds. AS 21.76.020 says: "By October 1 of each year, the administrator of a joint insurance arrangement shall prepare and deliver to the LBA Committee a report showing the true, correct financial condition of the arrangement." The report must: have a certified analysis by a member of the American Academy of Actuaries of the sufficiency of the loss reserves, be certified by a public accountant and must include a provision in the cooperative agreement requiring an annual determination by a casualty actuary who is, again, a member of the American Academy of Actuaries. The annual determination would show that the procedures for establishing reserves for losses are actuarialy sound. Number 350 SENATOR KELLY asked if there were two reports on file now at LBNA. MR. SMITH answered presumably. SENATOR KELLY asked staff to get the reports. MR. SMITH continued saying a JIA would have to do an annual independent audit including a review of the actuarial assumptions used for establishing the reserves, including a certification that the actuarial assumptions continue to be sound and that the level of reserves are adequate. SENATOR KELLY asked, again, about a $1 million liability claim and if all 95 members pay equally and do they all pay equally into the reserves. MR. SMITH replied no, if they were to go back to the membership and assess them, it would be based on payroll. In the case of $1 million claim, the excess insurance would pick that up. SENATOR TORGERSON asked how successful this JIA program has been since its inception. MR. SMITH replied that the program started in 1988 with 37 members over the objections of the Division of Insurance. There are now 95 members; they get approximately $5 million in premiums each year. The goal of the organization was to stabilize the commercial market so that rates weren't fluctuating up and down. He said he had seen a number of commercial carriers cut their quotes in order to compete with a joint insurance association. He said they have 60% of the market share in municipalities alone. SENATOR KELLY asked what their reserves were. MR. SMITH replied that they have approximately $16 million. SENATOR KELLY asked if they had any outstanding lawsuits going. MR. SMITH said he didn't know that and it wouldn't be in the report. He said it would probably be a line item where the accountant said these are the outstanding liabilities at the time. SENATOR KELLY said he would hold SB 104 until receiving copies of the reports and the letter from the Division of Insurance.