HB 164-INSURANCE; RISK MG'T; HOLDING COMPANIES  4:07:16 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 164, "An Act relating to insurance; relating to risk based capital for domestic insurers and fraternal benefit societies, including provisions related to insurers subject to risk based capital and action level event requirements; relating to review by the director of insurance of an insurer's risk based capital plan; relating to confidentiality and sharing of certain information submitted to the director of insurance for evaluating insurance holding companies, risk based capital, risk management, and own risk and solvency assessments; clarifying provisions related to risk based capital plans; relating to exemptions by the director of insurance for certain domestic and casualty insurers from risk based capital requirements; relating to insurance holding companies, including filing requirements, divestiture, content of statements, and hearings; relating to registration requirements; relating to transactions within an insurance holding company system or transactions involving a domestic insurer; relating to management and examination of domestic insurers that are part of an insurance holding company system; adding provisions relating to participation by the director of insurance in a supervisory college; relating to civil and criminal penalties for violations of provisions related to insurance holding companies; relating to provisions for risk management and own risk and solvency assessments; relating to operating requirements for controlling insurance producers; relating to producer-controlled insurers; adding and amending definitions related to insurers; and providing for an effective date." 4:07:50 PM The committee took an at-ease from 4:07 p.m. to 4:12 p.m. 4:12:21 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community, & Economic Development (DCCED), began her PowerPoint on HB 164, related to insurance. She stated that the mission of the Division of Insurance is to regulate the insurance industry to protect Alaskan consumers [slide 1]. 4:13:48 PM MS. WING-HEIER stated that individual state governments are the primary regulators of insurance. In Alaska, the state regulates seven domestic insurance companies, including Alaska Vision, Sunderland Insurance Services, Inc., Alaska Timber Insurance Exchange that are domiciled in Alaska. The division regulates close to 1,100 foreign insurance companies. CHAIR OLSON interjected that foreign insurance companies does not mean outside the country, but outside Alaska. MS. WING-HEIER agreed. She named a few major foreign insurance companies, including State Farm, Geico, Safeco, Premera, and Aetna qualify but they are not domiciled in the state. She indicated it was due to the way these companies are incorporated. The ones [HB 164 would address] under discussion today are those domiciled within the state. MS. WING-HEIER said that in 1945, Congress passed the McCarran- Ferguson Act (15 U.S.C. 1011 - 1015) which exempted: the business of insurance from most federal regulation, and to this date insurance has been regulated by states, and state-based regulation works [slide 3]. MS. WING-HEIER said that the act provided that, " ... [n]o Act of Congress shall be construed to invalidate, impair, or supersede any law by any State for the purpose of regulating the business of insurance ...." However, in 2010, Congress passed Dodd-Frank with a provision establishing the federal insurance office. Although it was currently set up as a non-regulatory agency, it is poised to step in and take over state-based regulation. She acknowledged that this wasn't something that is being addressed every day; however, the division is very much aware of its existence and the authorization it could hold over the states with federal regulation of insurance. Again, state- based regulation has been very successful for over 100 years. 4:15:55 PM MS. WING-HEIER directed attention to slide 4, stating that during the 2007-2009 financial crisis which hit hard the financial services industry of which insurance is a part, the insurance industry was held as a shining example of what worked. The Independent Insurance Agents & Brokers of America (IIABA) agreed stating in a 2011 letter to the FIO: "Even during the most tumultuous of times, state insurance regulators ensure that insurers are solvent, that claims are paid, and that consumers are protected. The IIABA remains dedicated to preserving state insurance regulation." She said that this statement was powerful enough that the federal Government Accountability Office put it in its 2013 report to Congress. 4:16:53 PM MS. WING-HEIER directed attention to slide 5, stating the National Association of Insurance Commissioners (NAIC) is the U.S. standard setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, of the protocols of the insurance companies, the producers, the brokers, and the adjustors. Through peer review, the division monitors companies, brokers, and ourselves, she said. MS. WING HEIER acknowledged while much of the business of insurance is local in nature due to differences of risk and other factors particular to a local area, the elected or appointed state government officials who oversee the regulation of insurance companies and producers in their respective jurisdiction - the members of the NAIC recognize that there often is a need for national standards and uniformity. 4:17:41 PM MS. WING-HEIER said the NAIC, working with regulators, promotes national standards, uniformity, reciprocity, and consistency at the national level through the development of model laws and regulations. MS. WING-HEIER said much of the work of the NAIC is conducted through its committees, task forces, working groups, or subgroups. Alaska sits on two subcommittees: Property and Casualty Insurance, and Market Regulation and Consumer Affairs C&D) committee, and 14 task forces, 3 liaison committees, including the American Indian and Alaska Native Liaison Committee, which she chairs; and numerous working groups. The committee level is where the discussion most likely begins in the consideration of a new model law. MS. WING-HEIER said the NAIC members dedicate significant to educating consumers and the industry to support a model that has been adopted by the membership. Model laws are developed by drafting procedures that entail a rigorous process providing notice and opportunity for consumer groups and industry to comment. She said they take years to develop to the point at which they are presented to groups such as this committee. MS. WING-HEIER said that both the parent committee, such as the Property and Casualty Committee, Finance Committee, or the Health Committee, with oversight for the subject area of a model law and the entire membership of the NAIC must adopt any proposed model law by a two-thirds majority vote. The state in most cases is not required to adopt the model law except in the circumstances such as the one today, which is the adoption of the NAIC financial regulation standards & accreditation program [slide 6]. 4:20:07 PM MS. WING-HEIER said the mission of the NAIC's financial regulation standards & accreditation program is to establish and maintain state regulator standards to promote sound insurance company financial solvency regulation [slide 7]. Although it seems simple, but the state has seven domestic and 1,100 foreign insurance companies it monitors. The Department of Commerce, Community & Economic Development is a rather small department and with that many insurers, the state needs to be able to rely on its counterparts in other states to ensure that the insurance companies who are coming to Alaska to sell insurance to Alaskans meet a certain standard of financial solvency. In turn, other insurance commissioners or directors must be able to trust that insurance companies who are domiciled in Alaska doing business in the Lower 48 are also to financially solvent. Lastly, but equally important is consumer protection because an insurance company must be financially solvent to meet its contractual policy obligations to pay claims in the event of a loss to pay claims. 4:21:39 PM MS. WING-HEIER directed attention to slide 8, and said that the accreditation program provides a process whereby solvency regulations of multi-state insurance companies can be enhanced and adequately monitored. As mentioned earlier, it is important for a small state that the insurance companies domiciled here or those operating here but domiciled in another state are being adequately regulated for financial solvency by the domiciliary state. 4:22:16 PM MS. WING-HEIER said that Alaskan consumers could be negatively impacted as companies may decide not to operate in Alaska due to the duplicative examination costs incurred by operating in a non-accredited state. Thus, if Alaska loses its accreditation and companies had to bear the expense of having every state conducting an examination of their financial records and could not accept theirs, they could elect to not to be domiciled in Alaska, which would reduce the number of insurers, a reduction in employment and in premium taxes paid to the state. 4:23:04 PM CHAIR OLSON asked how much income the division generates each year. MS. WING-HEIER answered that the division generates approximately $55 million plus $7 million in fees collected from producers in the insurance companies. In further response to a question, she said last year the division's budget was $7.5 million and that the division is receipt-supported by the fees collected from insurance companies. 4:23:48 PM MS. WING-HEIER stated the accreditation was for a five year period. One of the key components of the financial solvency regulation accreditation review will be a determination by the NAIC accreditation review team that the state has the necessary solvency laws and regulations to protect consumers and guarantee funds [slide 9]. She reported that the division was due for an interim audit in June 2015. She feared the division will not pass, which was why HB 164 is important. 4:24:43 PM MS. WING-HEIER felt responsible for three provisions in HB 164 that should have been addressed two or three years ago, but she was not certain why the division did not request the changes. She referred to pages 2-8 to AS 21.14, related to risk based capital in the bill. Basically, this language would change the method of measuring the minimum amount of capital appropriate for an insurer to support its overall business operations in consideration of its size and risk profile. Capital provides a cushion to an insurer against insolvency and RBC will limit the amount of risk a company can take. Thus these provisions all pertain to solvency. She said this should have been effective January 1, 2015. She acknowledged other provisions should have been effective on January 2014 and January 2016. 4:25:38 PM REPRESENTATIVE LEDOUX related her understanding that in order to be accredited the legislature must pass HB 164. MS. WING-HEIER answered yes. 4:25:52 PM REPRESENTATIVE LEDOUX surmised that if the state is not accredited all sorts of problems happen. MS. WING-HEIER answered yes. CHAIR OLSON acknowledged that was the reason HB 164 is being fast-tracked. 4:26:04 PM MS. WING-HEIER said the risk-based capital provides the cushion to protect solvency. The risk-based capital compares risk based on a ration of the risk to capital. This means the division knows the company has enough capital for underwriting, other investments to ensure claims can be paid when Alaskan consumers submit the claims. 4:26:36 PM MS. WING-HEIER directed attention to slide 11, to insurance holding companies, on pages 8-16 of the bill, which must be effective in 2016 in order for the state to pass accreditation. Referring back to the financial crisis in the Lower 48, many people probably heard of AIG [American International Group], which was a holding company. She said what brought down AIG was not its insurance operations, but aircraft leasing and other investments that AIG had made. The foregoing provisions would allow the state to review other operations insurance companies have and not allow them to invest insurance dollars in other operations. She added that this language does require other reporting mechanisms, but that she essentially described what the holding company provisions of this bill would accomplish. 4:27:42 PM CHAIR OLSON asked whether the financial crisis was also due to substandard mortgages. MS. WING-HEIER answered yes. 4:27:51 PM MS. WING-HEIER directed attention to slide 12, to Risk Management and Own Risk Solvency Assessment (ORSA). She described this as enterprise risk management that would require insurance companies to report to the state on confidential investments, as well as their risk management framework, to allow the state to see the how the companies are judging themselves. Although these provisions are not yet in the NAIC [National Association of Insurance Commissioners] model law, they have been proposed and the division anticipates these provisions will be adopted this fall. 4:28:41 PM MS. WING-HEIER stated that the controlling insurance producer provisions should have been effective on January 1, 2014. Basically, these provisions would provide additional guidelines for businesses between the controlled insurers and controlling producers necessary for fiduciary and oversight reasons, for example, when an insurance producer owns the insurance company [slide 13]. 4:29:07 PM MS. WING-HEIER suggested that this bill needs to pass this year since the provisions must be in place by January 2016. CHAIR OLSON commented that the director has only been on the job for a little over one year, approximately 15 months. 4:30:01 PM REPRESENTATIVE LEDOUX directed attention to Section 1 of the bill and asked whether maritime policies were indemnity policies and if they will be included in the bill. MS. WING-HEIER answered yes; for domestic companies, but generally speaking maritime insurance falls under surplus lines placement, typically offered through Lloyds of London. 4:30:56 PM CHAIR OLSON commented that he did not believe any domestic insurer writes maritime coverages for at least 15 years. REPRESENTATIVE LEDOUX asked whether Alaska National Insurance offers it. CHAIR OLSON offered his belief the last one was Pacific Marine Underwriting Managers Ltd. 4:31:16 PM MS. WING-HEIER said some incidental policies may be written, but it was not their main line of business for any of the foregoing companies. CHAIR OLSON acknowledged that Alaska National Insurance writes some incidental coverage, and Longshoremen and Harbor Workers coverage, but he did not believe they offered offshore unless it would be workers' compensation for people working on the oil platforms. MS. WING-HEIER suggested that Sunderland Insurance Services, Inc. may write some. CHAIR OLSON said he stands corrected. 4:31:45 PM REPRESENTATIVE HUGHES asked how much business insurance companies domiciled in Alaska provide outside Alaska. MS. WING-HEIER answered that Sunderland Insurance Services does some, but Alaska National Insurance probably does the most and operates in Idaho, California, Louisiana, and are likely looking to expand. She suggested that the others are content to be in Alaska. 4:32:44 PM REPRESENTATIVE HUGHES noted that obvious this is needed sooner rather than later. She asked whether anything in the bill that was not related for accreditation. MS. WING-HEIER answered no; that the bill was limited strictly to accreditation and financial solvency for domestic insurance companies in Alaska. 4:34:36 PM CHAIR OLSON, after first determining no one wished to testify, closed public testimony on HB 164. 4:35:00 PM REPRESENTATIVE HUGHES moved to report HB 164 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HB 164 was reported from the House Labor and Commerce Standing Committee.