HB 524 - INSURANCE POOLING BY EMPLOYER ASS'N. Number 1856 CHAIRMAN KOTT announced the next order of business would be HB 524, "An Act relating to insurance pooling." GEORGE DOZIER, Committee Aid, House Labor and Commerce Committee, explained HB 524 would permit employer associations to form joint insurance arrangements (JIA). The purpose of the JIAs is to permit a greater number of individuals to collectively assume risk and/or to purchase group coverage. Mr. Dozier explained the bill defines an "employer association" as consisting of at least five employers who are in the same or similar business. Each employer association would have to be in existence at least five years. Pursuant to the bill, any type of insurance could be purchased except for four types. Those are disability, health, life and title insurance. If a JIA is formed, it would not be subject to regulation under Title 21, but the JIA would have to file an annual report with Legislative Audit. Number 1930 MARIANNE BURKE, Director, Division of Insurance, Department of Commerce and Economic Development, was next to testify on HB 524. She indicated the division is against the bill and their concern is one of solvency. The division, by statute, is precluded from oversight of the JIAs. They have no way of assuring that they have adequate reserves and surplus to meet their claims as they come due, and that their claimants are treated in a fair, nondiscriminatory way and that if their claimants have problems, the division doesn't have a statutory authority to assist them in resolving these problems. MS. BURKE said the solvency issue is their primary concern. She said the one JIA currently in the state has not ran into any problems with solvency. She believes this is due to a combination of good management and good luck. They have not reached a situation where they have had to make assessments against their members to cover catastrophic occurrences. However, if they do reach that situation, they all have a taxing base; they can raise additional monies. An unidentified speaker questioned who "they" is. MS. BURKE answered municipalities, governmental entities. She said they can raise additional funds. She referred to the group that is considered in the bill and said if they ran into a catastrophic situation where they had claims that were in excess of whatever reserves they had set aside, assuming they had set aside reserves, they could easily face an assessment that would exceed their available assets. In that case there would be no money to pay the (indisc.) and there is no safety net because they are not protected by guarantee funds. There have some been some very notable successes with JIAs, again it was because of a combination of really good management and good fortune. On the other side of the coin, there have been some very notable disasters. Ms. Burke said in preparation for her testimony, the division did query other states to see what their experience has been. There was one that was a group of small businesses. They consisted of the "mom and pop" type business that joined into a JIA arrangement in Florida in January, 1991. By May, 1995, they had a $4 million deficit. There was legislation enacted in Florida to give their department the authority to oversee them and to insist on solvency. Currently, their deficit is at $20 million and growing. On the other extreme, there is a hospital association that also joined together to form a JIA. They have been taken over by the Department of Insurance in Florida because they are insolvent. The only way the department has of trying to assist them in raising money to pay the legitimate claims of these people who are relying on this association is to consider assessing every hospital in the state for a pro rata share. Ms. Burke said the feedback they've gotten is that's not very popular down there. MS. BURKE pointed out insurance companies can become insolvent and that happens, but at least we minimize that risk by insisting that they have adequate reserves, that they adhere to a set of statutes as far as nondiscrimination is concerned, as far as claims handling, and that they all play by the rules. If they still go under, there is the guarantee association, whereby all the remaining insurance companies have to put money in to make good on the claims of the insurance company that failed. A JIA doesn't have that type of protection. She said that is a concern to the Department, as its primary mission is to protect the insurance consumers in the state of Alaska. A JIA arrangement is totally outside of the Department's ability to assist them or have any oversight. Number 2166 REPRESENTATIVE ELTON referred to the experiences in Florida and said he is curious as to why there is a zero fiscal note. MS. BURKE said the effect on the state of Alaska would be zero. She said they would have no regulatory authority. REPRESENTATIVE ELTON referred to Alaska Troller's Association, Alaska Forest Products Association, Pacific Seafood Processors Association, Alaska Miners Association and asked if those groups would be eligible to form a JIA if the bill were to become law. MS. BURKE said if it is an employer group as defined in the bill, they would be eligible. Number 2209 REPRESENTATIVE ELTON said those associations have different businesses that have been members of the associations for a long time. He said he would think that if "employer association" were defined to mean "An unincorporated association that had been in existence for at least five years and that consists of at least five employers who are engaged in the same or similar types of trade, business or profession." He said he is a little bit bothered because he is not sure that any of the groups should be involved in a JIA and yet it seems they would qualify under the definition in the bill. MS. BURKE said she is most concerned of any group forming a JIA that does not have any statutory requirements to have proper reserves. She noted that in Title 21 there are provisions for reciprocal arrangements and joint purchasing, but they're all tied to having adequate solvencies that is available to move the claims. Not all groups have to have what we think of as traditional insurance. In fact even in the worker's compensation statutes, if you have adequate collateral, security and assets it is her understanding that you could self-insure worker's comp, for example. But it is regulated. Number 2313 REPRESENTATIVE BRIAN PORTER said it is his understanding that insurance rates have a fee that goes to the state. MS. BURKE said there is a premium tax. All the property casualty insurance companies pay 2.7 percent of the premium in the form of a premium tax. Title insurance, for example, is 1 percent. They do vary, but all insurers that do business in the state of Alaska pay totally into the general fund. REPRESENTATIVE PORTER said this is general state revenue. He said if a number of these people pooled up and formed a JIA, wouldn't that fee revenue decrease. MS. BURKE said if the department had some way of knowing who they are going to be and what their insurance needs are that would no longer be covered. It could be done if she knew who was planning to be a part of the JIA and what their current premium base is. Number 2351 REPRESENTATIVE ROKEBERG questioned what worker's compensation insurers pay. MS. BURKE said they pay 2.7 percent. REPRESENTATIVE ROKEBERG asked who the one JIA is. MS. BURKE said the Municipal League. Number 2383 PAUL GROSSI, Director, Division of Workers' Compensation, Department of Labor, was next to address HB 524. He told the committee Ms. Burke has said many of the things he wanted to say. Basically the department is concerned about the Workers' Compensation aspect and the association's ability to pay their obligations under the Workers' Compensation Act. Currently, employers either purchase a workers' compensation insurance policy or they self insure. They purchase a workers' compensation policy and Ms. Burke's division regulates those people or they come to his division and certify to self-insure. The Division of Workers' Compensation regulates them directly. Mr. Grossi said a JIA is neither one of those things. There would be no regulatory authority over them for the workers' compensation coverage. He said they would still be required to pay according to the act but the department doesn't have any way of knowing whether they will have an ability to do that and if something happens, there is no safety net to cover these. Mr. Grossi said there is no requirement that there be funds to start out and there is no security deposit required. There is no requirement even to have joint and several liability. If something happens to an individual employer, what happens in that event? Mr. Grossi said there are a number of things the department is worried about, but primarily injured workers not being compensated. Number 2455 REPRESENTATIVE ROKEBERG asked what the regulatory or statutory requirements are to become certified self-insured. MR. GROSSI said it requires the company to show a certain amount of assets and they may be required to have a security deposit of $250,000 or $300,000. He noted he isn't sure of the exact number. There are a number of requirements to show they have the capacity to pay the claims. TAPE 96-21, SIDE B Number 001 MR. GROSSI said, "...the one - the big thing, in fact, is this would be a problem under this current legislation, they have to basically show us their financial statements so that we know that they're solvent and they have to do that yearly. Under this, we would have no way of looking at the individual employers to look at their financial statement to see what their abilities are to pay these things and what kind of assets they have." MR. GROSSI said there is a requirement for a yearly audit, which he believes the JIAs have, but that wouldn't tell him what the individual employers ability is to pay and what assets they have. Number 051 ROBIN WARD, Alaska State Home Builders' Association, was next to testify via teleconference from Anchorage. Ms. Ward read a position statement into the record: "The Alaska State Home Builders' Association is supporting a change in the insurance laws of Alaska. Alaska has the second highest workers' comp rate in the United States for home builders. The result of a study performed by the National Association of Home Builders' Economic Mortgage Finance and Housing Division revealed that the workers' comp cost to a new home in Alaska, usually calculated in dollars per $100 in wages, was a whopping $6,312. That's based on sub-suppliers and the general contractors work comp fees through the entire house building. With the national average cost being approximately $4,321, Alaska has the distinction of having rates 40 percent higher in the nation, second only to Hawaii. "The State Home Builders' Association is proposing a change in the insurance law that would allow employer associations to form a self insured fund. This allows a preselected, and I do want to reiterate a preselected group of employers to pool their money to pay workers' compensation claims. In almost all cases, the fund would be managed (indisc.--coughing) association called the third party administrator. These firms bill the premiums, pay the claims, audit the plan, underwrite clients, service risk managers, select a reinsurance company and assist the agents in marketing the insurance. The advantage is in forming groups such (indisc.-- coughing) are potential for significant work comp premium savings, more direct control over the insurance costs, a higher degree of control over claims (indisc.--coughing), self audits can be done without negative repercussions and most of the (indisc.) self insured fund can be more readily adapted to suit the needs of the association. We're hoping by some changes that we can have more control over managing our claims. We feel that we could do a better job of getting our people back to work in a short amount of time with less claims." MS. WARD indicated she has visited with the Department of Labor and it was her understanding they would oversee this. She said her organization is looking at doing substantial reserves along with reinsurance for major claims. Number 155 REPRESENTATIVE PORTER said, "Robin, your statement in conclusion there that you thought that the Department of Labor would oversee it was kind of the basis for the question that I was going to ask regarding putting a pencil, I guess, to what you would expect if there was kind of a hybrid of what this bill is which would be the ability to pool, but the ability also of the department to set reasonable criteria for available assets, and it sounds like the kinds of things that you're talking about. MS. WARD said absolutely. She indicated they have no problem. Ms. Ward said her organization assumed they would either be under the preview of the Department of Labor or under the Division of Insurance. Most builders are fiscally conservative and there is no problem following the same rules that the work comp companies do today. Ms. Ward said referred to the committee substitute and said she doesn't believe that the word "unincorporated" should be included. Most of their nonprofit associations and trade associations are incorporated nonprofits. Number 289 RON PRICE, Interior Builders' Association, State Alaska Home Builders' Association, testified via teleconference from Fairbanks in support of HB 524. He said they want to control their own destiny. Mr. Price pointed out that North Carolina has been a model state. In their years of existence, they've had $27 million worth of savings. He said he believes there is $95 million in reserves. Mr. Price said, "Granted, they are a much larger membership than we are, and that was a concern of ours, but they help us to identify with the state of New Mexico that just recently enacted self insurance for themselves." MR. PRICE referred to the question about having a catastrophe early on without any reserves is taken care of by the reinsurance out there. North Carolina, in its first year of having this program, got a major claim. A person fell off of a scaffold and was in a coma for five years. Their responsibility was $125,000 which was taken care of by reinsurance. That was a premium paid on insurance. Mr. Price said his organizations are very concerned about the (indisc.) numbers and the membership that is available. There are 13 or 14 other states that have had it in existence. He said his organizations are industry based and includes not only builders, but suppliers, architects, appraisers, etc. Mr. Price said half the risk among those different professions is to allow them to realize some savings. By being a member of his association does not automatically qualify a person for their workmans' comp program. He said they will be selective on that. MR. PRICE explained they will also, in controlling their own destiny, initiate safety programs. The other states have found claim reductions are down by 50 percent by pursuing the safety programs actively. Mr. Price said again, the program would be handled by a third party administrator and can meet any standards that the state wants to put out there. He stated strong support for the bill. Number 412 MS. BURKE came back before the committee. She said a number of things have been brought up and she would like to address the workers' comp premiums. She explained those are by industry and are industry specific, based on costs incurred. In other words, if you are in a state that has higher wages, higher costs of rehabilitation, higher costs of training and the whole series of costs incurred, your premiums will be higher. They're based on severity and frequency. So if you are in an industry that has high frequency, lots of small claims, it will force up the premiums. If you you're in an industry that has a few very severe claims, it will force up premiums. Ms. Burke pointed out reinsurance might help in a situation where there were a few large dollar claims, but if you are in an industry that has a lot of smaller claims, claims below this umbrella, you're absorbing all those costs. MS. BURKE referred to the issue of safety programs and said that is a good issue. It is a very direct way that any industry can reduce their cost of workers' comp. She noted it has happened in the state of Alaska. Those industries that have put in safety programs benefit from them, because again, what is applied to your premium is an experience factor. If you don't have a lot of claims, you have a reduction in you premiums. MS. BURKE referred to discussion on whether or not it would be regulated and explained that JIAs, by statute, are outside the Division of Insurance's ability to regulate. If the bill did pass, there would be an additional need for legislation to provide for whatever regulation or oversight would be proposed. Number 525 CHAIRMAN KOTT questioned whether the department has any authority over Title 21. MS. BURKE said none whatsoever with JIAs. She pointed out it specifically says not regulated by the department. Number 637 REPRESENTATIVE JERRY SANDERS questioned whether there are any changes the legislature could make that would give the department authority over the JIAs. MS. BURKE said yes but then they would be subject to all the solvency requirements that they are asking to not be subject to. She pointed out the legislature could enact legislation that would spell out different criteria for their solvency requirements. Ms. Burke said her only authority is that she receives a copy of their report. She can't do anything with it, but she receives it. CHAIRMAN KOTT asked if she would receive the report directly or if it is through Legislative Budget and Audit. MS. BURKE pointed out the statute says they will provide her a copy. She said the legislature is responsible for the oversight of the JIAs. Number 588 REPRESENTATIVE ELTON said he has always assumed the size of the pool helps reduce the rates because the more you spread the risk, the better off you are. He said in one case, the committee heard from a statewide organization of homebuilders and in the second case, the committee heard from a person who was a member of the statewide organization but is also a member of the Interior Builders' Association. The way HB 524 is drafted, both of those organizations would probably qualify for establishing a JIA. He said it would seem to him that the Interior Builders' Association would be a higher risk JIA because they have a smaller number of members in the state group. He asked if that was a valid assumption. MS. BURKE said he is getting to the heart of insurance. The whole principle behind insurance is spreading the risk over a large basis, but in a JIA, without solvency requirements you could have five very profitable solvent companies that have lots of assets that would have the ability to meet their obligations to pay claims. You could have a very large group that by the simple nature of the (indisc.) that they have profitable, marginal, not so marginal members that they would not be able to meet their obligations because the assessment would be spread out among all the members. Without the joint and several liability, you would not necessarily have sufficient money from the more profitable ones. REPRESENTATIVE ELTON referred to how and employer association is defined in the bill and said it would seem that the requirement is that the employer association have at least five employers but there is no assumption that all five employers have to participate in the JIA. They could have two employers that participate. Number 711 REPRESENTATIVE PORTER said if it had joint and several liability, then if the JIA that had five businesses in it had a claim against it, the joint association would be liable or any individual member could be sued to the extent of their assets also. MS. BURKE said that is correct. REPRESENTATIVE PORTER questioned why anybody would want to sign into an association like that. MS. BURKE said there is a very sincere belief that they're not going to have large claims and that they can manage their claims and their claims would be less than what they'd pay in premiums. She said that may be true for several years. We've all paid fire insurance on our house, but she doubts if there are many people in the room that have had to collect. REPRESENTATIVE PORTER said if he has an insurance policy with State Farm and his neighbor has a State Farm policy, he doesn't want to have to pay more because somebody sues him. MS. BURKE explained under an insurance contract, you're pooling the total losses and sharing them among all of the people on a more less pro rata basis. It is not joint and several liability. She pointed out JIAs normally assess all their members equal, however if there is joint and several liability that is incorporated into their contract or the instrument that brings them together, then it could go to those people who have the dollars to make good on the claims. Ms. Burke said she is talking about a situation where you might have several builders that are financially well off and can meet these claims, but others are not. Number 848 REPRESENTATIVE ELTON referred to the definition on line 12 and said by that definition what you're doing is excluding those groups that are incorporated because in the bill an employer association means an unincorporated association. So an incorporated association would be excluded under that definition. He noted it is a small technical thing the committee might want to address. Number 891 CHAIRMAN KOTT stated it is not his intent to move HB 524. It is his intent work with the department to see if there is any way to move toward a happy medium and agree on some of the concepts. He said the bill would be held.