CSHB 116(FIN) - WORKERS COMPENSATION SELF-INSURANCE GROUP REPRESENTATIVE PETE KOTT came forward to present HB 116 and discuss changes made in the proposed committee substitute. HB 116 establishes a workers' compensation self-insurance pool for various groups of 10 or more players. The bill contains layers of protection to assure that employees hurt on the job are afforded the same compensation provided to them under any other arrangement. Several layers of protection would fall under the purview of the director's control. Before receiving a certificate of approval from the director the group must: be properly organized; consist of 10 members; ensure that payment of at least 25 percent of the annual premium can be made; show at least $1 million in net worth; provide a security of at least $450,000; ensure aggregate excess insurance in an amount determined by the director; and have joint and several liability and a performance bond. The director can revoke the certificate and examine the group's books at any time. A board of trustees must pay all workers' compensation benefits; 70 percent of the premiums collected must be used for payment of claims and the remaining 30 percent must be deposited into an administrative fund. Annual audits on approved forms must be submitted to the director. Representative Kott explained how an insured worker would use the workers' compensation self insurance group process. CHAIRMAN TAYLOR asked if the safeguards fail, whether the existing fund (the Alaska Guarantee Fund), paid into by all insurers in the state, would come into play. REPRESENTATIVE KOTT responded he would have to refer that question to an expert. He explained this self insurance pool would be established with about $187,000 (25 percent of $1 million minus 30 percent for administrative funds). REPRESENTATIVE KOTT noted the proposed changes in the committee substitute are the result of consultations with other parties on what works best in other states. The changes are as follows. On line 19, page 2, a reference to specific IRS provisions was deleted. The current language is generic so that it will not be affected by changes to the IRS code, which is in a state of flux. The annual premium amount was increased to $1 million on page 3, line 28, to satisfy concerns about having sufficient start-up funds. A provision on page 4, lines 5-6, adds a professional liability policy for trustees. REPRESENTATIVE KOTT indicated it is his goal to assure employees injured on the job receive the same compensation they would receive under any other arrangement. The word "member" was replaced by the word "group" on page 8, line 25, and on page 10, lines 12 and 13, to correct a technical oversight. On page 10, line 5, the 25 percent additional premium for the first year was deleted, as it is now required up front. On page 10, lines 14 and 15, a provision was added requiring the group to obtain reinsurance for the fund as approved by the director, and it gives the director the authority to set the amount of reinsurance required. On page 10, line 25, the 25 percent additional payment from the reserve was deleted, and the start-up amount was increased to $1 million. On page 13, lines 23 and 24, the phrase, "who have been engaged in the same or similar type business in the state for at least three years" was deleted. Employers must meet minimum requirements to join the group which should assure members are not high-risk. The legal drafter expressed concern that the three year requirement might create an equal protection issue. Number 279 SENATOR MILLER moved to adopt SCSHB 116(JUD) (the X version, dated 4/7/98 by Mike Ford), for the purpose of discussion. There being no objection, SCSHB 116(JUD) was adopted. CHAIRMAN TAYLOR took public testimony. Number 288 ALAN WILSON, a Juneau general contractor and member of the Alaska Homebuilders' Association, stated he has been working on this issue for some time and that this bill is very important to him as an employer. HB 116 has the potential to: significantly decrease workers' compensation premiums; provide for more direct control over administrative costs and a higher degree over claims reserves; provide for self audits of safety conditions without negative repercussions; give groups control to aggressively investigate fraud; use proactive claims management; lower attorneys' costs; allow for the quick return of claimants to work; improve communication regarding safety; and allow for more adaptability of funds to suit the industry. He pointed out the Alaska Timber Insurance Exchange (ATIE) operates as a pool that focuses on one aspect of the industry. ATIE has become very successful and is underwriting approximately five percent of the business in the state - businesses comprised of people involved in the timber industry. ATIE has reserves of approximately $8 million and it returns 63 percent of premiums to its members. He believed part of the reason for its success is its knowledge of the timber industry. Number 328 BILL TAYLOR, an Anchorage homebuilder, emphasized that HB 116 does not reinvent the wheel because it is based on model legislation that has proved successful in approximately 15 states. The bill provides every possible layer of protection. Model legislation in other states only requires $500,000 up front. Because members have an individual stake in each claim, they will be proactive in handling fraud and loss control, as well as safety issues. He stated insolvency of the fund would occur if three catastrophic claims were filed in one day, which is statistically improbable. The Division of Insurance will have regulatory authority where statutory authority stops. Number 360 MARIANNE BURKE, Director of the Division of Insurance, stated she is most concerned about this legislation and focused her testimony on points made by previous speakers during today's testimony. The increase from $500,000 to $1 million for the first year premium is a move in the right direction, however the net effect is zero because under the former version of the bill, the pool was required to put up a 25 percent deposit. The effect on cash in hand to pay claims has not changed. Reinsurance, or stop-loss insurance, is a valid way of spreading risk and is standard practice, however the pool must pay all claims up to that attachment point. A $250,000 claim would bankrupt the association right away. Ms. Burke stated all insurers doing business in Alaska must belong to the Alaska Insurance Guarantee Association (AIGA)to do business here. A statute change would be necessary to allow self insured plans to join this group. She would not advise allowing a self insured plan into that group because AIGA would be fully liable for any other insurance company that becomes insolvent. She clarified the AIGA consists of cash while reinsurance is an agreement to pay money if a contingency occurs. Regarding similar statutes in other states, Ms. Burke noted the first similar pool was established in North Carolina but it had 4,000 employers, not 10. The State of Florida had a proliferation of these types of pools and is now facing multi-million dollar uninsured claims. She described differences between the proposal before the committee and similar legislation that was enacted in New Mexico which has since increased its start- up requirement from $1 million to $3 million. MS. BURKE stated the surety bond required in HB 116 can only be used if the fund is insolvent. She pointed out the entitlement of compensation to an injured worker is established by statute, not by an insurer. The amount of medical cost is determined by the provider, not by the employer, worker, or insurer. The one way an employer can impact this entire cost package is through loss control. Any insurance company in Alaska that writes workers' compensation insurance must provide assistance in loss control when asked. MR. K. SCOTT McENTIRE, an Anchorage general contractor and an injured worker, stated he takes exception to the bill. He disagreed that the possibility of three catastrophic accidents occurring in one day was improbable. He expressed concern that this legislation would exempt the newly established groups from complying with most of the Division of Insurance's regulations. TAPE 98-33, SIDE B Number 001 MR. McENTIRE continued. He pointed out 50 percent of employers in Alaska are uninsured and the Division of Insurance cannot enforce existing regulations because it has only one investigator. He strongly recommended that no action be taken on HB 116. MR. McENTIRE read the following written testimony submitted by BARBARA WILLIAMS, who was unable to be present. I am Barbara Williams and my husband has been in the workers' compensation system. First off, let me start by saying how dare you for purposefully leaving out key components to pressure the [indisc.] injured workers, that is, injured workers are aware of how poorly this system is working. I noticed that Pete Kott is a sponsor for this bill. This doesn't surprise me because I have waited four years for empty promises of help from him. This is a prime example of how government has gone awry. The [indisc.] defendants and the corporations stand to gain from this, not the injured worker. You guys aren't even following your own rules. Where does that leave us, the injured workers, but with less rights than we started? Shame on all of you. Number 511 GERALD MILBRETT made the following comments. When he received a catastrophic injury, the current system did not work for him. He does not believe $1,000,000 in coverage is enough as his physician expenses alone were $400,000. He is in a wheelchair and constantly worries about his finances. This bill is designed to save the employers money. The insurance company that covered him manipulated him into what it wanted him to do, which has barely kept him and his family afloat. He stated he does not believe this bill will work. MICHAEL HINCHEN, general manager and comptroller of the Alaska Timber Insurance Exchange (ATIE), stated ATIE supports the concept of allowing employers to get together to insure their workers' compensation obligations as a group. It has been ATIE's experience that its members of substantial size and net worth have supported an "industry together" concept which has made affordable workers' compensation available to both large and small employers involved in the timber industry. ATIE was formed in 1980 as a reciprocal insurer under Title 21. ATIE has had to follow Alaska insurance statutes, including those involving capitalization and insolvency. The income generated by its operations have been returned to its policyholders, in the form of dividends. As a result of the dividends, the net cost of workers' compensation to ATIE's policyholders has been significantly less. More importantly, as a result of the efforts of policyholders, the number of time-loss accidents decreased by over 200 during the 10 year period ending in 1998. MR. HINCHEN stated ATIE is concerned about some of the language in HB 116. The bill lacks a requirement for adequate capitalization to form a self-insured group. In ATIE's experience, a single claim can result in cash payments in excess of $200,000 in a single year. ATIE has had to cover several catastrophic injuries in one year. The self-insured group must pay claims out of pocket first, and then request reimbursement from the reinsurer. The reimbursement process has taken over one year. ATIE's second concern is joint and several liability and assessable policies. What has helped to make ATIE a success is that large employers, with substantial net worths, have been willing to participate in the ATIE, thus helping develop the premium volume needed to obtain economies of scale and spreading of risk. They have been willing to do this because their liability has not been joint and several, and their policies have not been assessable. A third concern with joint and several liability and assessable policies is the collection of funds when and if it is necessary for a group to levy assessments against its members. The provisions of HB 116 might require the group to have a minimum net worth, but will the members be able to come up with the cash needed to pay their assessment? The most important concern ATIE has is whether injured workers will receive their benefits in a timely manner. The Board of Governors of ATIE is very concerned about who will ultimately pay the bill if a group formed under the provisions of HB 116 fails and adequate funds are not available from its members. HB 116 should contain specific provisions to protect insurance carriers who have met sound capitalization requirements from assessment in the event of the failure of a self-insured group formed under HB 116. Number 445 CHAIRMAN TAYLOR noted his understanding from Ms. Burke was that the Division of Insurance would not be able to access funds from the AIGA to make payments to injured workers if a self insured group became insolvent becaused the self insured group is not considered to be an insurance company. He asked Mr. Hinchen if that was correct. MR. HINCHEN explained that is correct, but he noted ATIE's concern is that if a group does fail, someone will look for the "deep pocket" and insurance companies will likely be called upon to bail out the failed group. Number 430 CHAIRMAN TAYLOR commented he was not sure that could happen because once the joint and several assets are gone, and the guarantors' and reinsurers' obligations are fulfilled, there would be no other asset base to turn to. MR. HINCHEN noted ATIE wanted confirmation of that. CHAIRMAN TAYLOR noted he requested a legal opinion on that question, and the opinion verified Ms. Burke's opinion. CHAIRMAN TAYLOR indicated he had an amendment prepared that would make the state the final backup. Number 417 PAUL GROSSI, Director of the Workers' Compensation Division, stated the Department of Labor supports HB 116 in concept, but it has two basic problems with the bill. Its first concern is a lack of adequate funding in the form of cash to pay claims; the second is who will pay outstanding claims in the event of insolvency. He agreed increasing the initial premium to $1 million is a step in the right direction, however eliminating the reserve of 25 percent of the premium is a step in the wrong direction. For the first month, the group will have $175,000 available to pay claims, and although catastrophic injuries are not the commonplace injuries, they do occur. Although stop-loss insurance covers the excess over that amount, the minimum retention is usually around $500,000 to $1 million, which this group will not have as start up funds. In the event of insolvency, if only one group is participating, it will only be able to cover $25,000. The $1 million in net worth is likely to be in the form of equipment and property which will have to be liquidated before it can be used to pay claims. MR. GROSSI also mentioned that the previous committee asked the Department of Labor to get independent sources to evaluate this legislation. NCCI and Bruno Czyrka, Administrator of the Bureau of Workers' Disability Compensation in Michigan, both reported the proposed legislation contains problems with insolvency and funding. CHAIRMAN TAYLOR expressed concern that within the building industry, general contractors hire subcontractors who are self- employed and do not have workers' compensation insurance. He questioned how the non-union, small businessperson is being helped if the state makes no adjustments to the existing program. MR. GROSSI replied the subcontractor who is a sole proprietor may not be covered under workers' compensation, however, if the general contractor uses that method of employment to prevent paying workers' compensation, the general contractor may be liable for those benefits. CHAIRMAN TAYLOR thought many general contractors cannot hire the subcontractors as employees because it is unaffordable. MR. GROSSI said that may be so, but the new program will still need to be adequately funded. Number 307 EDWARD SMITH, regional marketing manager for Safety National Casualty Corporation (SNCC) of St. Louis, Missouri, informed committee members he was invited to speak on behalf of group self insurance because it is a specialty coverage that his company underwrites. His company was founded in 1942 for the specific purpose of writing excess workers' compensation insurance for reinsurance. SNCC currently provides such insurance for over 100 self insured groups nationwide. SNCC believes the self insurance group concept does offer the smaller to mid-size employer the opportunity to enjoy the benefits of self insuring their workers' compensation, when individually they would not be large enough to take on that responsibility. SNCC believes two aspects of HB 116 are very favorable. HB 116 provides the regulator with the opportunity to enforce some strict regulations. The group is required to submit actuarial reports, annual financial statements, and other types of data that will give the director the ability to quickly ascertain whether the group is getting into trouble. Although the State of Florida does have problems right now, its regulations were written over 50 years ago and they are quite loose in nature. Many of the groups in Florida are heterogeneous which allows different types of employers to join together. One firm takes care of all administrative duties and firm members hold seats on the Board of Governors. The result is that 50 to 60 percent of the contribution paid by each member is available to pay claims, rather than 70 percent. NSCC provides excess coverage for some public entities, and it provides statutory excess coverage above a $300,000 self insured retention. The stop loss, or reinsurance, provides that if the claims experience from a given year is very high, that experience will be capped at a certain dollar amount stated in the policy. He explained how SNCC would calculate the payment of claims when a group has reached its payout limit. A self insured group would be liable to pay usually $300,000 to $350,000 from any one catastrophic occurrence, and 85 to 90 percent of their total contributions for the year in the aggregate. Reimbursement typically takes 8 to 10 years to pay for catastrophic occurrences. CHAIRMAN TAYLOR asked Mr. Smith why reimbursement takes 8 to 10 years. MR. SMITH clarified that a large catastrophic loss, or a group of large losses, often takes 8 to 10 years to mature or to add up to a total cost of $300,000. Number 177 REPRESENTATIVE KOTT concluded the testimony on HB 116 by explaining that he worked laboriously with the director of the Division of Workers' Compensation and a senator on Ms. Williams' husband's case but unfortunately that case required a massive overhaul of the workers' compensation statutes. He noted some injured workers' situations may not have been as dramatic had they been members of a workers' compensation insurance group. In past committee meetings, the second 25 percent was not acknowledged, but now that the money has been put up front, the Administration has acknowledged it. He indicated one of the benefits of a pooling arrangement is that it requires self policing. The result in other states has been that costs have decreased, as well as accident rates. The director of the Division of Insurance will have the "hammer" in most cases, and if funding gaps exist, the certificate will not be issued. He added the National Association of Insurance Commissioners (NAIC), of which Alaska is a member, provided model legislation in 1993 that requires a minimum of five or more employers in each group. He described how HB 116 follows much of that model legislation. He emphasized that business and labor have joined hands to support this legislation. CHAIRMAN TAYLOR read the following amendment he had prepared. "If the director is unable to fully collect an assessment imposed on a group that is liquidated, the director may direct the Legislature to make up the deficiency by appropriation from the general fund." SENATOR ELLIS asked if the director has any authority to seek other funds to fulfill claims without this amendment giving specific statutory authority. CHAIRMAN TAYLOR said he did not believe so. SENATOR PARNELL asked if the director would have authority under current law to make this kind of request so that everyone is treated equally. MS. BURKE informed committee members that question has never arisen because the guaranteed fund is backed by $3.5 trillion worth of assets within the insurance industry. TAPE 98-34 SIDE A CHAIRMAN TAYLOR noted if the Legislature can contemplate taking care of the economic disaster in Bristol Bay, it might contemplate taking care of economic disasters in other types of businesses. SENATOR MILLER moved SCSHB 116(JUD) out of committee with individual recommendations. There being no objection, the motion carried.