HOUSE BILL NO. 164 "An Act relating to insurance; relating to health care insurance, exemption of certain insurers, reporting, notice, and record-keeping requirements for insurers, biographical affidavits, qualifications of alien insurers assuming ceded insurance, risk-based capital for insurers, insurance holding companies, licensing, federal requirements for nonadmitted insurers, surplus lines insurance, insurance fraud, life insurance policies and annuity contracts, rate filings by health care insurers, long-term care insurance, automobile service corporations, guaranty fund deposits of a title insurer, joint title plants, delinquency proceedings, fraternal benefit societies, multiple employer welfare arrangements, hospital and medical service corporations, and health maintenance organizations; and providing for an effective date." 3:15:37 PM KONRAD JACKSON, STAFF, REPRESENTATIVE KURT OLSON, explained that the Department of Commerce, Community, and Economic Development (DCCED) was the requestor of the bill. He added that the purpose of the bill was to clean up language and terminology related to insurance. In addition, the legislation would deal with issues that would bring the state into compliance with federal regulations. LINDA HALL, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT, explained that HB 164 was long; some of the items were required, and some represented streamlining activities that would update consumer protections. She explained the subject grouping in the bill and her intent to provide an overview by section. Ms. Hall began with Section 1, which covered a small change in statute (also reflected in Section 22) that would allow insurance companies selling group insurance to be exempt from the state's licensing statutes if they had less than $50,000 in premiums. For example, one company (the Texas Health Insurance Policy) was headquartered in Texas and covered five employees in Alaska; the division did not think it necessary for the company to go through the entire licensing process to get a certificate of authority to be able to continue to write health insurance for only five employees. Ms. Hall informed the committee that the terminology section was intended to bring various Alaska statutes into conformity with each other. The term "managed care entity" would be taken out and replaced with "health care insurer" throughout the following 21 sections. She detailed that the term "managed care" was only found in AS 21.07; changing the terminology would reduce confusion and create consistency. 3:19:38 PM Ms. Hall directed attention to pages 15 through 22, containing a variety of technical changes related to solvency oversight. She described the primary mission of the Division of Insurance as solvency oversight of the insurance companies doing business in the state. The division's general philosophy was that if there was not money to pay a claim when a consumer had one, the rest of it did not matter. Other things (such as measuring capital and risk) followed solvency. Ms. Hall referred to sections in which the National Association of Insurance Commissioners model laws had changed. The current issue was "risk-based capital"; instead of a formula for determining the amount of capital and surplus, there was a different type of evaluation that dealt with the risk taken by companies. She referred to past investments in sub-prime mortgages; these would be considered "high-risk," and would not be allowed. Ms. Hall pointed that there were very different types of risk. For example, there were insurance companies dealing with earthquake insurance, and others dealing with brick dwellings in the middle of the country and not on a fault. Much of the language in HB 164 dealt with risk-based capital and changes in the way that was evaluated. In addition, the bill would increase the level at which regulators took action from 250 percent to 300 percent. Ms. Hall noted that some of the sections required the reporting of electronic mailing addresses. She reminded the committee about a past discussion about how the division communicated with those it regulated; it was allowed to collect electronic mailing address so that it could be more efficient in its communications. Record maintenance requirements would also be made more stringent. Ms. Hall pointed out that the division tried to meet national standards set by the National Association of Insurance Commissioners so that financial examinations were capable of being used by other states. 3:23:13 PM Ms. Hall turned to the section labeled "Licensing," which would streamline the way the state licensed agents. There would no longer be an individual or firm license; the license would belong to the individual and if the individual changed employment, the license would go with them. The need to report to the division would be eliminated if the individual turned in the license and got a new one. The process would save work and eliminate penalties for not doing things in a timely fashion. Both the way the division licensed and the very complex fee structure would be changed. Ms. Hall continued that the statute would require an employment contract so the individual agent working in a firm could operate under the appointments by the insurance companies that the firm was allowed to do business with. In addition, the fiduciary accounts and records could be used. Ms. Hall highlighted Section 38, which would remove the requirement that non-residents be fingerprinted. She noted that there was a national standard to no longer fingerprint agents to be in compliance with a federal law (the Gramm- Leach-Bliley Act). The statute would still require the firm to be responsible for the individuals working under it, but the individual agents would have more flexibility. The streamlining of agent licensing would allow people to conduct business in a more efficient manner. Representative Wilson asked for clarification related to resident and non-resident fingerprinting. Ms. Hall responded that a non-resident individual would be fingerprinted in their home state. The issue was reciprocity; there was a national standard of not fingerprinting. Representative Wilson asked whether there was a reason Alaska required fingerprinting. Ms. Hall replied that she did not know the reason for fingerprinting, as it pre-dated her (she had been doing insurance business in Alaska for over 20 years). She added that the general idea across the country was that background checks included questions about convictions of felonies; one of the standard criteria to become an insurance agent was trustworthiness. 3:27:12 PM Representative Wilson expressed concerns about the section. She did not want people to be fingerprinted in order to prove trustworthiness. She wanted to know where the section came from. She did not think it was a national standard, since only 24 states required fingerprinting. Representative Guttenberg pointed out that the bill could easily have said that agents were not required to be fingerprinted if they were fingerprinted in another state where their jurisdiction was, since less than half the states required fingerprinting. He thought there were three different things going on in the section: meeting the national standard of the insurance commissioners, some federal law issues, and the division's recommendations for changes in statute. He wondered whether three bills conforming to three different things would have helped. Representative Guttenberg asked that the three categories be delineated, if the bill was not held over. Ms. Hall replied that the fingerprinting was part of a national standard; all states did background checks, although they might not go so far as doing them by fingerprinting. She maintained that the state would not be in compliance with some of the national standards if the fingerprinting provision was changed. Ms. Hall noted that there were different levels in the bill. There were changes in federal law that had to be complied with. There were changes in accreditation standards. There were also things she would like to see, such as the streamlining of agent licensing. In addition, there was the section on long-term-care statutes, which were 20 years old and did not reflect the marketplace. There were consumer items that were not required by federal law or accreditation standards; however, her goal as the director of the division was protections for Alaska consumers. Ms. Hall acknowledged that all the various pieces had been gathered together in one bill. She noted that there had been significant discussion about whether to separate the issues into multiple bills. She said that the decision to have one bill had been made in conjunction with Representative Olson. 3:31:35 PM Ms. Hall stated that she could probably make HB 164 into four bills on different topics. Representative Wilson clarified that she supported background checks, but questioned the need for fingerprinting. She queried the extent of federal requirements. Ms. Hall replied that federal law did not call for fingerprinting, but the national standards had been adopted as the goal for how all states should do the background check. House Bill 164 would not add fingerprinting; Alaska had been fingerprinting for at least 24 years. She did not know why the requirement had started, but it was very old. Representative Wilson did not think "we've always done it" was a good enough reason. She thought the requirement for fingerprinting needed to be taken out of the bill unless there was a good justification for it. Representative Doogan queried the state's reason for fingerprinting. He wanted to check his assumption that people's identities were checked because they handled money and Alaska wanted to know whether they had been in trouble in some other state. Ms. Hall responded that the reason for fingerprinting was indeed related to handling money, but that was not the only reason for it. She referred to the example of a licensee who had issued false insurance certificates to people without collecting money (although that had happened as well); there were various types of crimes of fiduciary lack of responsibility. She noted that there was a federal law requiring any felon working in any aspect of the insurance business (even in the mailroom) to apply to the division. 3:35:19 PM Ms. Hall stated that fingerprinting seemed to help people remember that they had a felony in their background, although that was not common in Alaska. She added that there was a national database with the information about felons. The state checked license actions in the same way. Vice-chair Fairclough pointed to page 25 and asked for information about the new section allowing employment contracts. Ms. Hall answered that the state would require an employment contract. When the state changed the way it licensed (no longer had individuals in a firm license), it would require that a firm had a contract with the employees who would work under the firm license and under the appointment with the insurance company. Many of the agencies that did business in Alaska were called "independent agencies" with appointments with multiple insurance companies. She referred to Alaska National, the largest insurance company headquartered in Alaska. She described a possible situation involving an insurance agency with an appointment with insurance company A (such as Alaska National). The individuals working in the firm would use the appointment to transact business; they were enabled to write business under the appointment held by the firm. She added that the insurance companies did not normally appoint individuals in such cases. For example, Marsh (a large brokerage in Anchorage) probably had appointments with 45 companies and 50 to 70 employees; those employees could transact business with the 45 companies because of the single appointment. The division wanted there to be a connection so that the individual agent could work under the appointment, the records could be considered theirs, and the accounting of monies could be shared. 3:38:45 PM Vice-chair Fairclough summarized that the appointment was the contract between an insurance agency and someone being insured. Ms. Hall corrected her; the appointment was between the insurance company and the agency that would sell their product. The employment contract was between the agency selling the product and the individual agent working for the firm. Vice-chair Fairclough had questions related to payroll and accounting, but she said she was totally confused. Ms. Hall explained that the appointment was between those offering a product and the agency selling the product. The consumer would buy the product from the agency selling the product; the consumer did not buy the product directly from the insurance company offering the product. Vice-chair Fairclough questioned how the employment contracts were handled related to payroll. She wondered whether an employment contract could shelter an agency from a wrongdoing by the employee, whether they were handled as employees or contracts. Ms. Hall replied they were handled as an employee; the contract was not intended to make them an independent contractor. Vice-chair Fairclough asked whether the contract would provide protection from liability because of an independent employment contract with the person selling the product to the consumer. Ms. Hall replied in the negative. She pointed to page 25 (d), which stated that a firm would be responsible for the actions and the individual transacting insurance under the firm's employment; the intent was that the firm would continue to be responsible for the actions of the agent working under the contract. She emphasized that the contract was not a shelter from liability or responsibility. Ms. Hall continued her review of the legislation with what she felt was the most important section of the bill. She relayed that in June 2010, a federal law was passed called the Non-admitted and Reinsurance Reform Act. The law dealt with the premium tax of non-admitted or surplus-lines insurance. She detailed that there were two ways that insurance companies wrote business. The first, traditional way (pertaining to 90 percent of Alaskan insurance) was selling as an admitted insurer with a certificate of authority to operate in the state; premium tax was paid. 3:42:50 PM Ms. Hall continued that the state collected about $50 million in premium tax and about $47 million of that tax was from the admitted insurance market. The second way was called non-admitted or surplus-lines insurance; this pertained to insurers who decided they did not do enough business in Alaska to go through the rigors of becoming licensed and having forms and rates approved. The second group of insurers did business through a brokerage arrangement; the brokerage paid the premium tax for $3.5 million worth of business. The federal law referred to the second type of business, surplus lines. The second type of business was regulated differently, was not covered by the guarantee fund disclaimers, and was sold differently. Ms. Hall detailed that the federal law passed in June of 2010 pre-empted the states to the extent of changing the way the state could collect the premium tax. Instead of being collected only for the portion of the (multi-state) risk in Alaska, each state needed to pass legislation to collect 100 percent of the premium tax for a company whose home state was Alaska. Ms. Hall gave the example of a cruise-ship business that was headquartered in California but had risk in the form of lodges and docks in Alaska. A portion of the company's insurance risk was in Alaska. Alaska would collect premium tax on the pieces of property or liability risk that were in Alaska. Under the new federal law, California would collect 100 percent of the premium tax. Therefore, the federal law encouraged the states to either join a compact or to find some other procedure of collecting the taxes and re-allocating them back to the states. The taxing rate was not changed and a company would pay the same amount of tax if its home state was Alaska, but would pay all of the taxes to Alaska. Ms. Hall emphasized that the federal law intended each state to adopt uniform forms and procedures for reporting the collection and allocation of the premium tax. 3:46:20 PM Ms. Hall informed the committee that the section of the bill from pages 27 to 37 would change how the state would collect tax and would authorize the director to join a clearinghouse. She referred to significant national debate on the best way to implement the federal law. Regulators formed an implementation taskforce and studied various ways to implement the law, including asking legislatures for authority to join a compact, keeping whatever the state was entitled to keep, or asking for authority to join a clearinghouse. Ms. Hall pointed out that there were perimeters in the bill that would protect the revenue stream, which was fairly small for Alaska; of the roughly $50 million of premium tax collected in the state, the number was probably $0.5 million. Ms. Hall noted that the section on surplus lines needed to be changed to achieve compliance with the federal law; it also needed an adoption of the definition of "home state" so that Alaska could collect 100 percent of the tax of any company that happened to be a multi-state company domiciled in Alaska. The bill would then allow the allocation of taxes and authorize the division to join a clearinghouse operation (a streamlined way of collecting and disbursing the taxes). Ms. Hall added that the division already had taxing authority and collected premium tax; it was not done through the Department of Revenue. Therefore, the taxation issue was not new authority. She noted that the perimeters of the clearinghouse were very small. 3:49:10 PM AT EASE 3:51:58 PM RECONVENED Vice-chair Fairclough OPENED public testimony. STEVE STEPHAN, DIRECTOR OF GOVERNMENT RELATIONS, NATIONAL ASSOCIATION PROFESSIONAL SURPLUS LINES OFFICE (via teleconference), testified both in support of and in opposition to HB 164. He explained that the National Association Professional Surplus Lines Office (NAPSLO) supported the proposed provision to tax 100 percent of the in-state risk. The association opposed the part of the bill that would delegate authority to the commissioner to enter into an interstate compact or agreement. He felt that the agreement that had been drafted was too burdensome a method of collecting taxes and would require numerous data elements and the construction of a bureaucracy to collect the taxes. He emphasized that there would be 30 data elements for each policy, which would need to be entered before inputting data to allocate taxes. Mr. Stephan continued that NAPSLO was not opposed to the states trying to share taxes with each other, but he felt the burden would fall on the broker. He stated that the association would support a method of sharing taxes that did not burden the broker. Mr. Stephan reported that part of the concern was that the computation of casualty risks would be required for the first time, which added a whole new burden on the broker. Currently, brokers did not typically divide things like director officer's insurance, umbrella, and excess; those types of risks were usually considered home-state risks. The agreement known as the non-admitted, multi-state agreement would require the broker to input all the data for the first time for the purpose of trying to pay taxes. Mr. Stephan added that there was a concern about legislative transparency; NAPSLO believed the agreement would change the tax laws of the state. An Alaska corporation with sales in Florida would be taxed at the higher Florida rate (in excess of 10 percent); a tax increase would have to be levied on some policy holders. The details of the agreement would also have to do with the amount of Alaska tax revenue that would be sent to other states. The association believed those things should be in a statute so that brokers, policy holders, and the brokerage insurance community could see and understand what the arrangement was. 3:56:19 PM Mr. Stephan continued that the admitted side (where 89 percent of the business was written) generally did not attempt to allocate things like health care; the allocation effort was focused on the small segment of the insurance community. Mr. Stephan pointed out that in general, the vast majority of policies in a normal state were single-state policies; most of the policies would be taxed by Alaska currently and would be taxed by Alaska following the introduction of the legislation. In a normal state, the amount might be 90 to 95 percent; Alaska would be different because it did not border other states. Multi-state risks would be difficult because contractors and others could not easily move from state to state. He guessed that the amount of multi-state risk written in Alaska would be very small. Mr. Stephan concluded with concerns about the long-term viability of an agreement between the states to share tax revenue, because a state would normally object to putting more money into a system than it got back out, and would drop back out. The concern was that the difficult and burdensome system for the broker would be built and then fall apart shortly afterwards because any state that put more money in than it got back out would drop back out of the system. Vice-chair Fairclough asked Mr. Stephan for a written copy of his comments. Mr. Stephan agreed to supply written testimony the following day. Ms. Hall commented that the goal of the national group of insurance regulators was not to create an additional burden on the brokers. She referred to the National Interstate Fuel Tax Agreement (NIFTA), which the Non-admitted Insurance Multi-State Agreement (NIMA) was modeled after; it was a simplified way of allocating collected tax. She stated that there would be no change in the tax rate. Ms. Hall added that she strongly disagreed with Mr. Stephan's statement that Alaskans would be taxed at the Florida tax rate. She said that everyone would be taxed at the individual state tax rate that they currently had. An Alaskan company headquartered in Alaska with a $5 million building in Tampa (Florida) would currently be taxed at Florida rates on the building and taxed at Alaska rates on the rest of the account; that would not change with HB 164. She emphasized that the legislation clearly spelled out that the tax rates of each state would be applied to the portion of the risk in that state. She disagreed that Alaska did not allocate casualty; she had checked with commercial brokers, who told her that they allocated their casualty account when doing multi-state accounts. Vice-chair Fairclough requested that the written testimony submitted by Mr. Stephan include specific page and section numbers in the legislation so that Ms. Hall could respond. 4:00:21 PM Representative Gara asked how many other states were dealing with the provision in the manner Mrs. Hall had recommended it be dealt with. Ms. Hall responded that at last count, there were 17 states that had introduced the type of legislation represented in HB 164; another 14 were contemplating the same clearinghouse arrangement. There were about 10 states that had introduced a compact-type of legislation, 5 states that had both, and 11 states were still thinking about the issue. She emphasized that a far greater number of states were considering the simplified structure represented in HB 164. Representative Gara did not think many legislators understood the bill. 4:02:14 PM DALE FOSSELMAN, SENIOR VICE PRESIDENT, CORPORATE DEVELOPMENT, DENALI ALASKAN FEDERAL CREDIT UNION, WASILLA (via teleconference), testified in opposition to Section 79 of the legislation. He detailed that the credit union had 55,000 members and over 500 sponsor employers, the vast majority of whom employed less than 50 workers. He spoke to Section 79 of HB 164, which would address individual health care insurance policies in the group market. The credit union felt that the language in the section would severely limit both employer and employee choice of health care insurance, and would leave employees without insurance options for extended periods of times. Mr. Fosselman provided the example of a hypothetical employer forced to drop group health insurance coverage due to declining profitability, the increasing cost of insurance, or a combination of both factors. According to the proposed language in HB 164, no insurer could issue a policy to those employees for six months after the group- plan coverage ended. He believed the restriction was "quite onerous" and was poor public policy on several levels. Mr. Fosselman believed employers and employees should have more options to obtain health insurance in the described circumstances, instead of facing restricted access to health insurance. He thought the language of Section 79 was so broad as to seemingly prohibit even the discussion of individual health insurance policies with employers. Mr. Fosselman proposed enacting legislation that would expressly permit the use of federal tax-favored programs such as health reimbursement accounts (HRAs) when employers eliminated group health insurance benefits. From an employer perspective, he felt HRAs were easy to administer and allowed flexibility in determining contribution levels. From an employee perspective, he thought HRAs allowed the ultimate flexibility in how the dollars were spent, because they could be used for either a specific list of medical expenses (known as 213(d) expenses) or for those that had health insurance, they could be used for co-insurance, co- pays, or deductibles, in conjunction with that insurance. For those without insurance, HRAs could be used to fund health insurance premiums. Unlike flexible spending accounts, there would be no "use-it-or-lose-it" provision. Mr. Fosselman opined that individual policies were better than group policies. For one, individual policies were portable, and not tied to employment, which benefitted seasonal, part-time, and temporary workers. Individual policies typically had more stable pricing, because the risk-rating group was much larger than a smaller employer- based group. Individuals could currently chose from more than 40 plan designs available, in order to optimize coverage and cost at the individual level. The option remained for individuals to apply to the Alaska Comprehensive Health Association if pre-existing conditions prevented an insurer from issuing coverage; in addition, the employer would be able to increase the contribution for the individual employee. Mr. Fosselman concluded that Section 79 created more problems than it solved for working Alaskans and stated that establishing additional alternatives for employees and employers would constitute better public policy. Specifically, he believed that a statute that would absolutely confirm that employers of any size could establish HRAs that could fund individual health insurance expenses without triggering small group health insurance regulation would ably and better serve both employees and employers. 4:06:01 PM Vice-chair Fairclough asked for a written copy of the testimony given. She CLOSED public testimony. Ms. Hall acknowledged the complexity of the bill. She pointed out that there were several sections that she had not had an opportunity to speak to and welcomed individual questions if additional information was needed. HB 164 was HEARD and HELD in Committee for further consideration.