HOUSE BILL 116 "An Act relating to workers' compensation self- insurance." Co-chair Sharp informed the committee that five amendments had been filed related to the bill. Senator Adams MOVED Amendment 1. Senator Torgerson OBJECTED. Senator Adams explained that Amendment 1 related to the responsibilities of the director's office. MARIANNE BURKE, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT, explained that Amendment 1 would address the fact that the director had a great deal of authority when it came to the organization of the entities. She maintained that the bill detailed a list of qualifications that a group had to satisfy; if the conditions were satisfied, the director would have a specified timeframe in which to review the answers or the documents submitted. She stressed that there would be no leeway whatsoever so far as asking for additional information, support, or clarification. The director could only deny issuance of a certificate because one of the listed items had not been satisfied. The director would have some discretion regarding whether or not the documents and information submitted were adequate. It would take away the automatic rubber-stamping of information that was presented without verification or other support. Ms. Burke stated that the division's opinion was that it was critical that the information being presented be verified and questioned if necessary when an organization was being formed. She believed any insurance company seeking to do business in the state of Alaska had to subject themselves to questions, clarifications, and additional information, as well as voluminous support for their position; this was not provided for in the bill. She thought the bill had a "trust me" approach. Co-chair Sharp questioned page 2 of the amendment. He wondered why the word "may" was substituted for "shall" in several places. Ms. Burke replied that the purpose throughout Title XXI was to make sure an insurance company stayed solvent; there was a great deal of discretion and responsibility placed on the director to explore every possibility of raising funds to meet the claims in a timely manner. She added there was no guarantee there would be another way to do it, but the state had to do everything possible to keep the organization afloat. Senator Torgerson queried changing the language. He read lines 30 and 31, which used to say "the director shall" (make up the deficit) and the change to "the director may" (make up the deficit), and opined that the state would want to order the company make up the deficit. Ms. Burke explained that with the word "may," the director could immediately order the action, but it would not be mandatory. The word "shall" would make the action mandatory; the state would want to be able to assure any restructuring if there was another way to make good on the claims with the assets available. She felt it was very disruptive to put an assessment against the net worth of the members; in many cases the net worth was made up of equipment and equipment would have to be sold to raise the cash. She acknowledged that some builders could have the cash readily available, but she had no way of knowing the form of the net worth and no way of assuring that it could be raised quickly enough to meet the needs of the injured workers. Senator Donley compared the bill, the suggested amendment, and the uniform act; he thought the language in the bill (page 4, line 22) was identical to the uniform act in that it stated that the commissioner "shall." He thought one of the reasons the insurance commissioners felt the word "shall" was important was that it gave some clarity and direction. Senator Torgerson MAINTAINED his OBJECTION. A roll call was taken on the motion. In favor: Adams, Phillips, Sharp Opposed: Parnell, Donley, Torgerson Senator Pearce was absent from the vote. The motion FAILED (3/3). Amendment 1 was not adopted. Senator Adams MOVED Amendment 2. Senator Torgerson OBJECTED. Senator Adams explained that the amendment related to a requirement that the combined net worth of a group's membership be at least $1 million, as evidenced by financial statements audited by an independent certified public accountant (CPA). Ms. Burke opined that the issue was one of the most troublesome of the bill, and was a basic representation by a group of people that their combined net worth was $1 million. She asserted that the wording was exactly the same as wording in the model act. She added that certain states had found it necessary to increase the amount; in Alaska, the audited net worth and what might be thought to be the net worth could be completely different numbers. She understood and appreciated the desire of the homebuilders to not have to present audited financial statements for every single member; she noted Amendment 2 did not propose that. Ms. Burke reported that many of the homebuilders were ready to have audited financial statements for bonding and financing purposes. The essence of the requirement would be met if a given number of people entered into an association with audited financial statements and their combined net worth was $1 million or more, since they would all be jointly liable; if one individual had a net worth of $1 million, the requirement in the bill would be met. Ms. Burke pointed out that audited financial statements for individuals or companies would reflect more closely the realizable value of the assets; net worth could be in the form of equipment, tools, raw land, or cash. She stated that the state wanted to know that one of the fundamental elements of the bill (the combined net worth of $1 million) was verified by audited financial statements. Co-chair Sharp asked whether the bill required the financial statements to be certified by a professional. Ms. Burke responded in the negative. She stated that once the entity was up and in operation, the assets owned by the association would be audited, but not individual members. Senator Torgerson queried details about the uniform act. Ms. Burke clarified that the combined net worth of $1 million was in the uniform act; the division was proposing an amendment to the language in the uniform model act. Senator Torgerson asked whether the requirement that would be added was in the act. Ms. Burke responded in the affirmative. SENATOR TIM KELLY asserted that the uniform model act had been around since 1993, no state had adopted it as it was, and only four states had adopted something similar. He did not think the act had a lot of value to the state of Alaska. He did not think it was unreasonable to assume that at least of few of the members in the self-insurance group could be audited to be worth a combined total of $1 million. Not all the members would have to be audited, and it could be one member, if that member could show at least $1 million worth of real assets. The only way the figure could be obtained was through an audit. He asserted that any group that wanted to be an insurance company in the state had to be willing to be audited. Senator Parnell stated that he was troubled by comments that it was acceptable to have a few members of the association be worth $1 million, but on the other hand, there could be requirements to have everyone involved submit the numbers before evaluation. He wanted a safeguard. He asked whether there was a combined net worth requirement on reciprocals. Ms. Burke responded that the reciprocals had $1.5 million worth of cash or acceptable marketable securities they started out; they were not relying on the net worth of their members. Co-chair Sharp pointed out that there was contributed capital to the reciprocal. Senator Kelly added that the net worth of the members was because of the joint and several liability clause. He argued that someone would have to pay if there were several injuries, because the capital would not be available. The group would have to go to the membership. The amendment would only require that there be $1 million worth of audited assets to protect the workers. The $1 million was included in the model act that almost nobody had adopted. Co-chair Sharp asked details about other states. Ms. Burke replied that there were four states that had similar legislation. Based on the information received, the combined net worth requirement of each one of the states was $1 million, except for New Mexico, which required $3 million. A roll call was taken on the motion to adopt Amendment 2. In favor: Torgerson, Adams, Phillips, Sharp Opposed: Parnell, Donley Senator Pearce was absent from the vote. The motion PASSED (4/2). Amendment 2 was adopted. Senator Adams MOVED to ADOPT Amendment 3. Senator Torgerson OBJECTED. Ms. Burke explained the amendment. There had been a lot of testimony about the specific and aggregate excess insurance and about where it could be gotten. One of the homebuilders companies represented testified that they could get better arrangements at a less reputable company, which was a major concern to the division. The division wanted any aggregate and specific insurance to be issued by a company that held a certificate of authority in the state of Alaska. She noted that there were 1,200 total insurance companies in Alaska, so availability would in no way be restricted. The amendment would assure that who the insurance was bought from was fully capitalized and regulated. Ms. Burke continued that the legislation as written simply required that there be evidence of the availability of the excess insurance. However, the availability would have already been proven; there was earlier testimony that the excess insurance was available, but whether it could be gotten and afforded was a different matter. Amendment 3 would provide for two things. First, it would provide that the insurance would actually be gotten and not just available. Second, it would require that the insurance would be written by a "real insurance company," not an unregulated "offshore" company without clarity about how the claims would be paid. She asserted that the division felt very strongly that offshore companies were a threat to the people they insured. Senator Parnell asked whether any of the 1,200 insurance companies in the state currently held a valid certificate authority and whether those that did held specific and aggregate excess insurance. Ms. Burke responded that there were many hundreds of companies; in addition, there were surplus line companies that were permitted and held authority to operate in Alaska. Senator Parnell asked what it took to get a valid certificate of authority. Ms. Burke replied that a company had to submit financial statements to the Division of Insurance and demonstrate that it had sufficient surplus and capital to write the proposed lines of insurance. The company also had to submit biographical information on the key management people to show that they were trustworthy and had no convictions for stealing from insurance companies. In addition, there was a risk-based capital formula that had to be satisfied, and a fee of $2,500 was required. AT EASE RECONVENED Senator Adams MOVED an amendment to Amendment: delete "an amount" and "acceptable" on line 1. REPRESENTATIVE PETE KOTT, SPONSOR, spoke to the amendment. He thought the standard should not be different than any other existing carrier of reciprocal or self-insured employer of the state. He was troubled by the language "maintained at all times." He thought the language could eliminate potential to write at the end of the section which would allow a group to provide securities in lieu of re-insurance. He opined that there could be a time with a lot of cash available and a company could want to get security in another way. Senator Torgerson asked whether the standard in the legislation represented a different standard for other companies in the state. Ms. Burke responded that other companies did not have to rely on the excess insurance for their totals on the second layer; they capitalized and had [unintelligible]. Even self-insured individuals (employers) had to have a personal net of $500,000. A reciprocal had to have $1.5 million [unintelligible]. In response to a question, Ms. Burke responded that there was a totally different entity. Representative Kott added that it was because they did not have cash; they had to get the insurance. Senator Donley thought existing carriers, reciprocals, and the self-insured were not required to meet the particular requirement; the requirement would be unique. Co-chair Sharp queried the difference in capitalization requirements for reciprocals. He asked whether there was still a difference regarding the type of assets pledged. Ms. Burke responded that the entity had no assets of its own as reserves. A reciprocal had $1.5 million. Senator Adams referred to the amendment to the amendment. Co-chair Sharp pointed to the second line and the first "and" and asked whether he wanted that dropped out. Senator Adams answered in the affirmative. Co-chair Sharp did not see where the word "amount" was. Senator Kelly explained that the first line should read: "(3) obtain specific and aggregate excess insurance in a form"; add "and in an amount" (underlined), to read: "obtain specific and aggregate excess insurance in a form and an amount acceptable to the director." He stressed that that was what would take the place of the lack of capital or reserves in the particular [unintelligible]. Co-chair Sharp summarized that the first line would read, "obtain specific and aggregate excess insurance in a form and amount and acceptable…" Co-chair Sharp thought the proposed amendment was a technical amendment. Ms. Burke reviewed the difference between the amendment and what was in the bill. The bill read "evidence of the availability" while the amendment was saying to "obtain it." She maintained that the bill did not require that that be obtained from an insurance company holding a valid certificate of authority to do business in Alaska. Co-chair Sharp noted that line 21 said "evidence of availability" has been obtained or would be obtained. Co-chair Sharp called the amendment "technically corrected Amendment 3." A roll call was taken on the motion to adopt Amendment 3 as amended. In favor: Adams, Phillips, Sharp Opposed: Donley, Torgerson, Parnell Senator Pearce was absent from the vote. The motion FAILED (3/3). Amendment 3 was not adopted. Senator Adams MOVED Amendment 4. Co-chair Sharp OBJECTED. Senator Adams explained that the amendment would add present language in Section 21.47.050. The language existed and the amendment would add the underlined language "and its members." Ms. Burke detailed that the entity was not an insurer and did not have any assets of its own; capitalization was not there. She added that one of the critical elements of protecting the workers was the combined net worth of its members. She noted that many industries had cyclical net worth; there were times when the net worth was considerably reduced or nonexistent. The division wanted to know that there was the ability to verify that there was still net worth out there. Representative Kott spoke in opposition to the proposed amendment. He argued that an amendment had already been accepted that audited the financial statements of the group. He felt the proposed amendment was redundant in examining the numbers, records, accounts, and transactions, especially if the members would bear the expense of the audit, which could run from $1,500 up to $4,000. He thought the language suggesting that the director could take the action as often as he or she wanted, in addition to the expense, made the measure overly burdensome and inappropriate to pass on to the group members. Ms. Burke noted that the audit amendment passed by the committee related to getting the certificate of authority to go into business; Amendment 4 spoke to on-going operations. She asserted that the two requirements were totally different. She added that the requirement was identical to requirements reciprocals and insurance companies had. She noted that the entity itself was relying on the members, as opposed to their own assets. Co-chair Sharp pointed out that Amendment 2 required a certified audit by a CPA only at the time of application to verify the underlying assets. Senator Torgerson asked whether an individual could be a member and not pledge their assets to the pool. He wondered whether the intent was to consider the assets of members only. Ms. Burke responded that the bill would require all members to sign a joint and several liability agreement. Senator Donley compared the language in the bill to the uniform act. He stated that the act was almost precisely the same as the existing language in the bill. There was no requirement in the uniform act that its members' affairs, transactions, accounts, records, and assets be subjected to any frequency of examination the director might want. He agreed with the sponsor that the proposal was "drastic and extreme" and too broad. Co-chair Sharp MAINTAINED his OBJECTION. A roll call was taken on the motion to adopt Amendment 4. In favor: Torgerson, Adams, Sharp Opposed: Phillips, Donley, Parnell Senator Pearce was absent from the vote. The motion FAILED (3/3). Amendment 4 was not adopted. Senator Adams MOVED Amendment 5. He explained that the amendment related to a health insurance group that would be required to have and maintain surplus in the form and manner acceptable to the director equal to the greater of (with a list). Co-chair Sharp OJBECTED. Ms. Burke detailed that during the hearings for HB 116, a chair of a committee had asked that the bill be sent out to experts in the field. One of the experts identified was the president of self-insured entities, who recommended that there be at least a one-to-one ratio; for every dollar of premium, there should be one dollar of reserve. In the case of the bill, that would mean $1 million in reserves. The expert was asked three specific questions and his responses were provided to the homebuilders and the division. He was asked whether there was adequate protection for injured employees, whether there was adequate capital to fund the group, and whether there was adequate protection in the event that a group became insolvent; his answer to all three questions was "no." Ms. Burke continued that Amendment 5 did not ask for $1 million upfront, but for one-half of what would be required of a reciprocal, or $750,000. Then, over a period of five years, the surplus could be built up to the point that there would be the recommended one-to-one ratio. She argued that if that seemed excessive, she wanted to point out that [unintelligible; name of a company?] had less than $800,000 in worker's compensation premiums, but had a surplus of $13.8 million. She stressed that the requirement was geared to help a company build up to the amount recommended by the recognized expert. She noted that the expert was not the division's choice, but had been identified by the legislature as appropriate to address the issue. Ms. Burke emphasized that the division's concern was having the money available to provide for the care of injured workers. The reserve would be like a savings account in the bank; it might not be needed, but it could be invested and the investment earnings used to offset the amount charged in premiums. She pointed out that the reciprocals had investment earnings that reduced the amount of money they had to collect in premiums. The point was to keep the earnings for themselves. A two-fold purpose would then be served, to provide a savings account at the beginning, and to provide a mechanism for earning investment income to offset the future cost of premiums. Ms. Burke stated that the division believed the provision was critical. Representative Kott agreed that the provision had been one of the crucial components of the bill for the past two years. There had been arguments regarding whether there would be enough cash to pay benefits to workers injured on the job. He argued that whether one report or another conflicting report were considered, he was convinced that there was enough capital up front to pay for injured workers. He referred to testimony by Alaskan labor organizations in favor of the legislation; the labor organizations were clearly looking out for the best interests of the workers. He emphasized that the legislation would not establish an insurance company or a reciprocal; the model act did not have the laborious requirement. In addition, the four states that had implemented the model act varied to some agree and the other states had legislation that varied. He stated that Alaska would not be on the lower end of the spectrum and would not be on the upper end. However, Alaska would exceeded the average for the acts. Representative Kott pointed out that the top 20 riders in Alaska had been considered and the leading carrier met the one-to-one ratio requirement; the other 19 he found did not, contrary to testimony given. He did not believe they were obligated under statute or regulation to maintain the requirement. Representative Kott informed the committee that Amendment 5 would hamper the particular program from succeeding. He did not think there was any way that the threshold in the amendment could be met without significantly affecting the group's ability to succeed. Senator Kelly opined that the weakness of the bill was the lack of requirement for up-front capital and argued that the amendment would establish that capital. The groups hoped to use the premium for two reasons; first, as a business expense to pay cash outlays, and second, as an investment to get a payoff at the end. They hoped to have fewer-than-average injuries in order to build up the surplus, and then redistribute the money back to the employees. The point was to spend less money on worker compensation. Senator Kelly emphasized that HB 116 was not about protecting the worker. Under the best scenario, the worker would be treated the same under a self-insured, reciprocal, or insurance company if there was adequate capitalization. The rest of the people had money in the bank if there were injuries. However, there was no capital up front, which was the object of the amendment. Senator Kelly pointed out that some labor unions had testified in support of the legislation because they did not have "a dog in the fight" for the most part; most of the people covered by the homebuilders were not labor-union members and were not paying dues. The fact that labor unions were not concerned did not mean other people should not be concerned about the Alaskan workers. He questioned whether organizations without $750,000 to put up front should be insuring Alaskan workers. He did not think the numbers would work. He believed the amendment would provide the backup to make sure injured workers would get their lost wages and medical bills covered. The OBJECTION was MAINTAINED. A roll call was taken on the motion to adopt Amendment 5. In favor: Adams, Phillips, Sharp Opposed: Donley, Torgerson, Parnell Senator Pearce was absent from the vote. The motion FAILED (3/3). Amendment 5 was not adopted. Co-chair Sharp asked whether anyone paid an injured employee if the company failed or whether the worker would have to wait until the failed company balanced its books. Ms. Burke responded that there was no back-up; other than the proposed legislation, there was nothing. Senator Adams pointed out that there had been four amendment votes that failed with three-to-three tie votes because of a missing member. He wondered whether the measure could be held overnight until the other member could be present. [SFC-98, Tape 163, Side B] There was a discussion about the version before the committee. Senator Donley MOVED to REPORT SCS CSHB 116(FIN) out of committee with individual recommendations and attached fiscal notes. Senator Adams OBJECTED. A roll call was taken on the motion. In favor: Donley, Torgerson, Parnell Opposed: Adams, Phillips, Sharp Senator Pearce was absent from the vote. The motion FAILED (3/3). The bill was not reported from committee. Co-chair Sharp noted that the bill would be on the table the following morning. CSHB 116(FIN) was HEARD and HELD in committee for further consideration. Co-chair Sharp RECESSED the meeting to the call of the chair at 5:15 p.m.