HOUSE BILL NO. 102 "An Act relating to the state insurance catastrophe reserve account; and providing for an effective date." 2:25:04 PM Co-Chair Bishop noted that the committee had heard the companion bill for HB 102 the previous session and had heard public testimony. 2:25:54 PM SCOTT JORDAN, DIRECTOR, DIVISION OF RISK MANAGEMENT, DEPARTMENT OF ADMINISTRATION, discussed the presentation "House Bill 102 - Alaska Department of Administration - Division of Risk Management" (copy on file). He showed slide 2, "Purpose": The assets of the Catastrophe Reserve Account (CATFund) may be used to obtain insurance, to establish reserves for the self-insurance program, and to satisfy claims or judgments arising under the program. ? The purpose is to allow the State to self-insure for property coverage. ? HB102 will save the state $3M in the first year and $26M over the next 5 years (est.) ? Due to global property insurance markets hardening we had a 30% increase in insurance costs from FY20 ($5.1M) to FY21 ($6.6M) and FY22 was ($7.1M). ? HB102 is a request to change the Catastrophe Reserve Account (CATFund) limit from $5,000,000 to $50,000,000 unencumbered. ? Currently the limit on catastrophe coverage that can be purchased is $50,000,000 for an annual premium. We can save that annual premium by self-insuring 2:28:20 PM Mr. Jordan showed slide 3, "What other states are doing?": • Just pay the higher premiums. Some states are forced to maintain excess coverage due to benefits paid by FEMA which requires "Obtain and Maintain" agreements when FEMA pays for a catastrophic loss. • Set up Captive Plans-similar to self-insured plan. • Increase Self-Insured Retentions (SIR), in some states $40M to $50M retention. • Some states are coming off multi-year premium price guarantees. Mr. Jordan spoke to slide 4, "Comparison of premiums paid, property losses paid, recovery (excess insurance) FY95- 2020": FY95-FY2020 property premiums paid $59,017,386 FY95-FY2020 property losses paid by DRM $26,145,207 FY95-FY2020 recovery from excess insurance $17,942,815 FY2014 Kodiak Launch Facility loss $15,931,131* FY2007 DOT-Girdwood Fire $ 835,136 FY2000 Court Plaza Bldg $ 1,176,54 *this type of claim is now excluded from coverage Mr. Jordan noted that there had been about a $1.9 million return on an $85 million investment in the losses. 2:32:18 PM Co-Chair Stedman asked if the premiums were calculated nation-wide, such as in the flood insurance program. He thought it would be difficult to get through the regulatory environment. Mr. Jordan explained that the state's insurance went both through the domestic market and the London market, which came up with the rates. There were models through which the markets could come up with catastrophic loss rates, and freely admitted the modelling was not correct. He cited that the state paid about 7.4 cents per $100. Senator Wielechowski thought Mr. Jordan indicated that the state was responsible for $50 million in damages and then would purchase insurance for any amount beyond. Mr. Jordan stated that the division's intention was to fully self-insure the program. With the $50 million increase proposed in the bill, it would allow the state to have the same funding it currently purchased for catastrophic losses (earthquake and flood insurance). Senator Wielechowski mentioned catastrophic earthquakes in Anchorage and Fairbanks, and wildfire that destroyed state facilities. He asked about the state's liability. Mr. Jordan stated there was no liability component when considering property losses. He explained that if there was a catastrophic loss, the state would go to the carrier for the full limit. If the state did a self-insurance program, it would have access to the fund at full value and would probably turn to the Federal Emergency Management Agency (FEMA) to help reimburse the losses. Senator Wielechowski hypothesized about a catastrophic incident in the state with enormous loss of hundreds of millions. He asked how much the state would be responsible for under the current insurance and if the state would rely on FEMA if it was self-insured. Mr. Jordan answered affirmatively. Currently the state's catastrophic loss coverage from purchased insurance had a limit of $50 million. The excess carriers would only pay $50 million. There was a different retention schedule for catastrophic versus non-catastrophic losses. He continued that catastrophic losses were only paid by percentage of value. He continued that the way the insurance was written, it would take the loss of many buildings to get $50 million from the insurance company, whereas with the provisions in the bill, the state would pay the first dollar out the door. 2:36:44 PM Senator von Imhof understood that the deductible was the first 5 percent of the building, but if the state did not purchase insurance, it would be liable for the entire $50 million. Mr. Jordan stated that with excess insurance on catastrophic losses, the state was required to pay 5 percent of a buildings value for a catastrophic loss. Under the self-insurance scenario, risk management would pay the first dollar out the door to agencies that had losses out of the catastrophic loss fund. If there was a $5 million loss on a $100 million building, it would be paid out of the fund. Senator von Imhof asked about if the whole $100 million building was lost to fire. Mr. Jordan stated that the fund would pay up to $50 million, and the state would likely turn to FEMA for support on the additional amount. He reminded that it would be similar to the current scenario since $50 million was the most that insurance would pay. Senator von Imhof referenced the earthquake in November of 2018, and she imagined the losses exceed $50 million across Southcentral Alaska. Mr. Jordan stated that the losses to the state did not exceed $50 million but the losses to all of the state did exceed $50 million. Senator von Imhof asked if the state had been able to collect from FEMA in the scenario. Mr. Jordan affirmed that there were a few agencies that had gone to FEMA. He explained that FEMA had a requirement that the Risk Management Division could not request the funds; rather, the occupying agency of the building had to do the request. He mentioned that the Department of Corrections and the Department of Transportation and Public Facilities had to go directly to FEMA. Co-Chair Bishop asked if there had to be a federal disaster declaration in order to apply to FEMA. Mr. Jordan knew that Department of Military and Veterans Affairs stepped in for disasters, but he did not know if there had to be a disaster declaration. Co-Chair Bishop asked if Mr. Jordan could respond to the question in writing. Mr. Jordan agreed. Senator Wielechowski asked if the bill would apply to the University or the Court System. Mr. Jordan affirmed that the bill would apply to the Court System, but the University had its own program. Senator von Imhof asked if the State Insurance Catastrophe Reserve Account could be swept. Mr. Jordan did not know the answer. He offered to get the answer from the Office of Management and Budget. Senator von Imhof wanted to know if the fund could be swept and the reasoning behind the fund status. 2:40:25 PM PALOMA HARBOUR, FISCAL MANAGEMENT PRACTICES ANALYST, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, replied that the fund was not subject to the sweep because it spent without further appropriation. Once there was money in the fund, the actual expenditures from the fund did not require further appropriation. Mr. Jordan advanced to slide 5, which showed a bar graph entitled "10-year History of Property Premiums/Losses," which illustrated the property premiums the state had paid to losses and included FY 12 to FY 22. He pointed out that in most years premiums far exceeded what had been paid in losses, with the exception of FY 15 when the Crystal Lake Hatchery burned down and there was a $4.4 million loss. He pointed out that in FY 21 there was nearly zero premium because the previous year the state had been unable to get insurance because the market had not been able to meet the states capacity of $7.8 billion worth of property. In FY 22, the state had about a $7.1 million premium. There were losses in the current year that had not been recorded at the time the report was run. Mr. Jordan referenced slide 6, "10-year history of property premiums/losses," which showed a table and a graph entitled '10-year History of Property Premiums/Losses.' He pointed out the blue line showed the state had about $34 million in losses over the ten-year period. The orange line showed the property losses. Mr. Jordan showed slide 7, "Lapse Appropriations Summary": The State Insurance Catastrophic Reserve Fund, Fund # 3209, (Cat Fund) is part of the General Fund and Other Non-segregated Investments (GeFONSI). The GeFONSI are funds that have been pooled together for investment purposes. The Cat Fund is part of the Non-MOU group, which allows for the interest earned to be deposited back into the General Fund. Mr. Jordan noted that he had a fiscal note he could address. 2:44:03 PM AT EASE 2:44:31 PM RECONVENED Co-Chair Bishop set an amendment deadline of Friday, April 22nd at 5 oclock. HB 102 was HEARD and HELD in committee for further consideration. Co-Chair Bishop discussed the agenda for the following day.