CS FOR SENATE BILL NO. 276(L&C) "An Act relating to the Alaska Insurance Guaranty Association; relating to the powers of the Alaska Industrial Development and Export Authority concerning the association; and providing for an effective date." This was the second hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this legislation would increase the Alaska Insurance Guaranty Association's ability to pay Workman's Compensation claims. He noted that the legislation had been held in Committee to address funding issues, and he reminded that CS SB 276(L&C) version of the bill specifies that earnings from the Alaska Permanent Fund would be a funding source. Co-Chair Green moved to adopt committee substitute, Version 23- GS2105\Q as the working document. Co-Chair Wilken objected for further clarification. He stated that the spreadsheet titled "Alaska Insurance Guaranty Association Worker's Compensation Account, Cash Flow Projection as of 12/31/2003," provided by the Department of Community and Economic Development, further explains the bill's funding mechanism. In addition, he noted that the Version "Q" committee substitute eliminates language specifying that the Earnings Reserve Account would be the funding source for the program. LINDA HALL, Director, Division of Insurance, Department of Community and Economic Development, noted that the Version "Q" committee substitute "is identical" to the L&C version of the bill "with the exception that it does removes self-insurers from the assessment process." This change, she continued, would result in an assessment process that would increase the assessments in those accounts that have "an insolvency" such as the Workers' Compensation (WC) account. She noted that the aforementioned chart reflects cash flow projections based on the current two percent assessment and the projections were the assessment levy increased to four percent. She specified that the WA account assessments as well as the other accounts within the Guaranty Fund are depicted on the spreadsheet. Ms. Hall pointed out that the Auto Fund Assessment would increase .19 percent in calendar year 2004. She exampled that on a $600 automobile premium, this would translate to a $1.24 increase, which she declared, "is not a huge amount of money." She stated that this low percentage increase was possible because there the Fund had a positive cash balance at the beginning of calendar year 2004. Ms. Hall commented that for the full calendar year 2005, the four percent assessment rate on the WC account would equate to a .47 percent increase. She also noted that for the full calendar year 2005, a $600 automobile premium with the .19 percent increase would equate to an additional $3.06. She voiced that these minimum increases would assist the Association in getting out of its deficit situation. Ms. Hall noted that the WC rate would reduce to 3.37 percent in calendar year 2006, and to 2.48 percent in calendar year 2007, and the Other Funds assessments would be eliminated beginning in 2006. Senator Bunde asked whether the assessment rate increase would apply to other insurance premiums such as homeowners insurance. Ms. Hall affirmed that it would. Senator Bunde asked whether the Division of Insurance has calculated the cost to each Alaskan were the excess earnings from the Permanent Fund reserve account used to fund the program as specified in the L&C version of the bill. Co-Chair Wilken noted that the cost might be approximately two dollars. Co-Chair Green asked for clarification that while the four percent assessment would apply to the WC fund, the .19 percent assessment would be applicable to all other funds. Ms. Hall concurred. Co-Chair Green asked whether the funding mechanism being proposed would have minimal impact on the public and other entities. Ms. Hall responded that this legislation would affect "the broadest base" of the insured marketplace and would, she continued, have "minimal impact on the paying public while raising a substantial amount of money," even with the elimination of the assessment on the self-insured entities. She noted that the .19 percent assessment on such things as automobile, homeowner, and commercial property is small because they present a much larger premium base that the WC base. This larger base, she noted, generates more money, "by far," than the four percent assessment increase on WC premiums. Senator Bunde surmised, therefore, that the people who would directly benefit from this legislation would be in the minority and the people who would have no direct benefit from it would pay the majority of the assessments. Ms. Hall stated that the people who would benefit from this legislation are those "who pay the smaller amounts of premium." She noted that currently, the amount assessed from the WC base, which is less than half the size of the other premium bases, is $4.3 million. Co-Chair Green asked whether this legislation would enable the Division to be better situated "to respond, react, and predict" future claims in order to prevent a reoccurrence of this sort of financial situation. Ms. Hall voiced optimism that this legislation would address the situation. She also noted that separate legislation is being brought forward that proposes to require deposits from insurance companies "to provide an additional pocket of money" with which to address insolvency issues. She noted that the magnitude of this insolvency "has depleted the resources of the Guaranty Association." Co-Chair Wilken removed his objection. There being no further objection, Version "Q" was ADOPTED as the working document. Co-Chair Wilken referenced an Associated Builders and Contractors, Inc. letter, dated March 1, 2004 and addressed to Senator Bunde [copy on file] that spoke to their concern regarding a previous change in the WC rate that had occurred midyear, in July, to the dismay of those in the construction industry. This timing, he continued had negatively impacted the industry because previously bid projects had not factored in the new rate. Therefore, he requested confirmation that the rate increases proposed in this legislation would not occur midyear. Ms. Hall clarified that the increases in question pertained "to increases in benefits which had an immediate affect on rates." She agreed that, "it was very unfortunate that that occurred midterm." Continuing, she clarified that Guaranty Fund assessments are annually assessed at the renewal of a policy and therefore, she stressed, would not be done midterm. She qualified that while the Department historically implements rate increases on January first, they would not apply to an individual policy until that policy renews. She stressed that this would be the procedure with these assessments. Co-Chair Wilken surmised therefore, that there would be no midyear surprises. Co-Chair Green moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. Senator Bunde objected. He expressed that to assess businesses further at this time would be unfortunate, and he specifically stated that it would be unfortunate to assess people who buy other types of insurance policies. He preferred that this legislation be financed via other avenues such as by the excess earnings of the Permanent Fund, as that would not, he opined, negatively impact Alaskans. Senator Olson echoed Senator Bunde's concern. He stated that numerous businesses have contacted him to voice opposition to increases in their WC assessment "due to the downturn in their funding sources ranging from the State to the business climate in rural Alaska now." He shared the desire that other funding sources be identified. Co-Chair Green voiced concern about the fact that other premiums, such as automobile and homeowner premiums would be increased. Therefore, she asked Ms. Hall to explain how the Guaranty Fund functions overall, and how this legislation, as a solution to the situation, "is not off the mark in solving this temporary problem." Ms. Hall stated that "the concept of the Guaranty Fund in Alaska", as in every other state, "is to provide a safety net to protect policy holders and claimants in the case of a solvent insurer." She stressed therefore, that the theory is to institute a series of assessments, which would provide funds in case of an insolvency. She noted that similar to Alaska's current two percent assessment, the majority of states have limitations on their assessment, She shared that, whereas Alaska's Fund is comprised of three accounts with varying rates of assessment percentages, 18 other states have a single account within their guaranty association. She noted that Alaska, being a small State with a small premium base, is challenged in its endeavor to develop a Guaranty Association to address emergencies "with the small amount of premiums that it has to deal with." Ms. Hall specified that the WC account, the Auto Account and the Other Account comprise the three accounts of the Guaranty Association. She stated that the Other Account encompasses such things as homeowners, commercial property, and commercial liability. She stated that currently, there is a one half of a one percent assessment on such things as homeowners and boat owners, due, "primarily" to the insolvency of a medical malpractice insurer. She declared that assessing entities to provide sufficient funds for the situation relating to this legislation is basically the same as assessing a homeowner for a medical malpractice insurer. Ms. Hall, in addressing Senator Olson's comments, also voiced concern regarding the increases in business WC premiums. However, she noted that the proposed increase is small in comparison to previous adjustments. In addition, she stated that the aforementioned companion bill would propose measures to reduce the WC premiums as she agreed that small businesses are being over- burdened with an average assessment of 22 percent. Co-Chair Wilken voiced agreement. Senator Olson questioned whether the State is addressing measures to get self-insured employers to contribute to the Guaranty Association as, he declared, currently the WC "burden" is placed on small businesses. Ms. Hall clarified that the Guaranty Fund does not protect self- insured employers, and, therefore, she continued, were they to become insolvent, their employees would receive no benefits from the Fund. She noted that the 24 self- insurers in the State must provide financial guarantees and meet other eligibility criteria established by the Division of Workers' Compensation in order to be self-insured. She noted that the original proposal did include them in the assessment base; however, she continued, "there was a substantial amount of sentiment that because they were not protected by that that they should not be forced to contribute." Senator Olson understood that the Guaranty Fund does not protect the self-insured employers. However, he asked whether inclusion of them in an assessment might still be a consideration. Ms. Hall responded no. Co-Chair Green interjected that the Division of Insurance is not responsible for nor does not oversee joint insurance arrangements or self-insurers. Ms. Hall communicated that while the Division of Insurance could conduct financial examinations and suspend an "admitted insurance company's" certificate to operate, it has no oversight ability in regards to joint insurance arrangements or self-insurers even were the Division to receive financial information that they were "in distress." A roll call was taken on the motion to report the bill from Committee. IN FAVOR: Senator Dyson, Senator Hoffman, Senator B. Stevens, Co- Chair Green, and Co-Chair Wilken OPPOSED: Senator Bunde and Senator Olson The motion PASSED (5-2) The motion to report the bill from Committee PASSED. CS SB 276 (FIN) was REPORTED from Committee with a zero fiscal note, dated March 23, 2004 from the Department of Administration, and two zero fiscal notes, dated March 24, 2004 from the Department of Community and Economic Development.