SB 117-INSURANCE FOR SCHOOL DISTRICTS CHAIRMAN MILLER brought up SB 117 and a proposed committee substitute (CS) for consideration, and invited Ms. Mossgrove to testify. MS. SUE MOSSGROVE, staff to Senator Taylor and to the Administrative Regulation Review Committee, explained the bill is the result of a problem identified in regulation. The CS clarifies that if a school district is not in a flood plain or a flood prone area, it does not have to purchase flood insurance. In addition, language has been added to exempt schools from carrying earthquake insurance unless they are in an active seismic zone. The requirement to have earthquake insurance is left to the discretion of the DOE commissioner. Clear seismic zones ranging from 0-4 have been mapped out in Alaska. The CS also clarifies that this amendment to Title 14 applies only to REAAs, not to schools that are eligible for self-insurance. The CS adds definitions from CFR 44 of flood plain and flood prone areas; the same definitions in the regulation as well. SENATOR ELTON asked about earthquake zones and whether a zero classification is inactive and 1 is active. MS. MOSSGROVE replied a map exists with the zones laid out, zero being the lowest potential for earthquake activity. The "ring of fire" is zone 4, the highest. The zones 0-4 guidelines are set by the building code. SENATOR ELTON asked if an REAA school in a 1-4 zone will be required to carry earthquake insurance while REAA schools in zone 0 will not. MS. MOSSGROVE replied that is correct but the final decision is left to the commissioner's discretion. Schools in zones zero and one do not need to carry insurance because no earthquakes have ever been recorded in those zones. SENATOR ELTON expressed hesitancy about whether to give different commissioners the latitude to re-define seismic zones. Zone zero is easy, but zone one and two are not as clear. He said he is uncomfortable that the bill does not contain more specifics to guide the commissioner's decisions. SENATOR WILKEN agreed with Senator Elton's concern and noted that Anchorage has 4 or 5 seismic zones within it and that a school could straddle seismic zones. He suggested the committee re-think who defines seismic zones, and whether the designation applies to a school area or a district. He indicated the University of Alaska has plenty of maps available. Number 145 MS. MOSSGROVE said she got her information from the University's website, DNR and the U.S. Geological Survey. The map she used lays out the seismic zones quite clearly. She was unaware that Anchorage has different seismic zones within it because it is shown only as Zone 4 on her map. SENATOR WILKEN said the Geophysical Institute is currently working on defining the seismic zones in Anchorage for major structures so they don't all pay at the Zone 4 level. SENATOR ELTON asked Ms. Mossgrove to describe the net effect on the REAAs. MS. MOSSGROVE said Senator Taylor's intention is to clarify in statute who has to have insurance, and to allow DOE to apply some common sense, especially in times of revenue shortages. It is her understanding that the state currently requires earthquake and flood insurance for all REAAs. The insurance industry has combined the two coverages and created a blanket policy to provide a cheaper rate. Number 101 SENATOR ELTON asked if that means the pooled insurance will be higher for non-REAAs if some REAAs no longer have to purchase the earthquake coverage. MS. MOSSGROVE deferred to DOE to answer that question. MR. MICHAEL MORGAN, Facilities Manager for DOE, explained that current regulation requires flood insurance for all structures in a flood plain or flood prone area. It also requires earthquake insurance only for REAAs that are housed in state-owned buildings. The change will lift the requirement that all REAAs in state-owned buildings carry blanket earthquake and flood insurance. MR. MORGAN said the practical effect should net zero, because almost all REAAs are covered through the Alaska School Insurance Company's (ASIC) program as part of its broad coverage policy offering earthquake and flood coverage. When DOE did the regulation two years ago, it talked to ASIC and AML. ASIC said because of the marketplace, no cost savings would result if one or two districts wanted out of earthquake and flood coverage. It should not really increase the cost of the premium to districts. Number 056 SENATOR ELTON asked whether, because of the insurance market the pool is now working in, no net savings to any district wanting to cancel earthquake coverage may occur. He questioned what will happen if ASIC begins using another insurance market, and whether, if this bill passes, the Juneau school district's insurance could increase because another district dropped out of the pool. MR. MORGAN replied that if any district pulls out of the pool the insurance rates of the remaining members would be affected. He could not say how that would balance out over the long term. Mr. Morgan said DOE is uncomfortable being put in the position of determining seismic zones, and he agrees with the comments made by both Senators Elton and Wilken. SENATOR ELTON asked if the risk that other districts' insurance rates will increase if this bill is enacted is insignificant. MR. MORGAN said he believes "this will have really no effect on other districts." SENATOR WILKEN asked if any REAAs are not in state-owned facilities. MR. MORGAN said some REAAs have asked for title to the land and buildings under AS 14.08.151 which requires DOE to convey the title if requested. Some REAAs have already taken title to land and buildings. SENATOR WILKEN asked if the REAAs assume the maintenance and operating costs when they take title. MR. MORGAN said REAAs do that whether or not they have title. SENATOR ELTON noted the issue raises an especially interesting question because if a school building originally served 13 students and now serves eight, the school building is no longer classified as a school under the formula. MR. MORGAN agreed that a student population must consist of more than 10 students in order for a school to exist. Regarding the question of what happens to the ownership issue when titles are transferred, MR. MORGAN stated titles are transferred with their underlying restrictions on deeds. Deeds acquired by the state from the BIA usually contain a restriction requiring the land to be used for school purposes. The REAA could probably rent or lease the school building and keep the land. CARL ROSE, Executive Director of the Association of Alaska School Boards (AASB) and President of the Alaska Public Entity Insurance Company (APEIC), formerly the Alaska School Insurance Company (ASIC) until two years ago. ASIC was domiciled in Vermont because it was created as a pool before the Alaska insurance pooling laws were enacted; two years ago ASIC decided to domicile in Alaska. MR. ROSE discussed the background of this issue. In 1985, most of the REAAs were unable to obtain insurance. The AASB created, under its charter, a pool of property values within the REAAs and small school districts, to take to market. At that time, AASB was looking at premium prices in the area of $1.25 per $100 of coverage. By the year 1991, AASB was able to drive that price down to 21 cents per $100. As an insurance company, APEIC has suffered over $36 million in losses as a result of total loss fire damage and a few floods. After paying $36 million in damages, APEIC's premium rates only increased to 41 cents per $100, and they continue to decrease. At present, insurance companies are making money on investments and the focus is not on underwriting but on getting the premiums to invest. When the investment climate begins to tail off, insurance companies will be forced to focus on underwriting and the industry is cyclical. Regarding how APEIC came up with the idea of providing earthquake and flood insurance, REAAs were required, under their use permits, to provide that coverage it they did not take possession of the buildings. That scheme acted as the footprint for the APEIC so that the REAAs could get coverage. As a result, APEIC was able to get the coverage at a fairly low rate because it spread the cost to those outside of an earthquake zone, similar to the Universal Service Fund in relation to telephone rates. SB 117 will not have a net impact on the REAAs that exist right now. The insurance industry looks at Alaska as an active seismic area, although some areas of Alaska are not active. APEIC differentiates between the two. With respect to REAAs, MR. ROSE did not think SB 117 would have an effect. He said he understood at one point in time, a group of people who did not need earthquake coverage wanted to be exempted from the requirement. Because of the state of the market, the insurance industry has adopted a quality-added atmosphere: the industry is trying to offer broad coverage for the lowest possible premium to attract consumers. The net result is that if the Legislature segments the market and no longer requires certain schools to have coverage, the premium rates on those who do need the coverage would be driven up. MR. ROSE repeated that regarding REAAs, he does not believe SB 117 will change anything in existence right now but he questioned whether newly acquired buildings would be required to have the insurance. Two insurance pools are available in the state: AML and APEIC. Both are trying to provide broad areas of coverage. He believes SB 117 does clarify what people will be required to do and the industry is positioned to provide the coverage. SENATOR ELTON asked if Yakutat no longer purchases flood insurance because it is not in a flood plain, whether its insurance rates will remain the same so that no other pool member's rates will be affected. MR. ROSE replied that is an accurate assessment. Yakutat is not an REAA so it is not required to provide this coverage right now. APEIC's broad policies include earthquake and flood coverage. He noted Yakutat did not want that coverage, but it was part of the broad package. He repeated that the quality-added approach taken by the insurance industry is to provide as much coverage as possible for the premium dollar. He noted the savings would be minuscule if a specific coverage was broken out because purchasing large quantities of insurance as a pool provides more buying power. MR. MORGAN said his reading of the committee substitute is that the current requirement in regulation that cities, boroughs and municipalities in a flood plain or flood prone area carry coverage would not change. CHAIRMAN MILLER asked if Mr. Morgan's reading of the original bill was that Yakutat would not have to purchase coverage. MR. MORGAN said that is correct; if a school is not located in a flood plain or flood prone area, it will not be required to be covered for such. SENATOR WILKEN moved to adopt CSSB 117(HES), Version H. There being no objection, CSSB 117(HES) was adopted in lieu of the original bill. SENATOR ELTON stated he believes a definition of "seismic zone" should be included in the bill. SENATOR WILKEN agreed. MS. MOSSGROVE noted the drafter specifically included the word "active" when referring to a seismic zone because Alaska as a whole is considered to be a seismic zone. CHAIRMAN MILLER thought the committee would be more comfortable clarifying the different zones and their ratings to determine which zones should and should not be covered. SENATOR WILKEN suggested asking the drafter to define "active seismic area" within the bill so that a reference exists. CHAIRMAN MILLER suggested Senator Wilken, Senator Taylor, Mr. Morgan and Mr. Rose get together and come up with a solution. CHAIRMAN MILLER stated there being no other business to come before the committee, the Senate HESS Committee was adjourned.