SB 276-ALASKA INSURANCE GUARANTY ASSOCIATION    CHAIR CON BUNDE announced SB 276 to be up for consideration. MS. LINDA HALL, Director, Division of Insurance, recapped: The Alaska Insurance Guaranty Association (AIGA) is formed under Alaska statute - the purpose is to minimize financial loss to policyholders and claimants. Assessments are made through that guaranty association to pay the claims of insolvent insurers. In July 2003, Fremont Insurance was declared insolvent by the Los Angeles Superior Court and even though they had actively written business for approximately two and a half years, they left $60 million in claims and outstanding claims reserves. When they were an active insurer in our state, they insured 27 percent of our workers' compensation premium. The magnitude of this insolvency far surpassed any prior insolvency and dramatically exceeds the resources of the association. There are actually three other insolvent insurance companies in the Guaranty Fund right now. Those are Reliance, Paula and Legion. So, the problem we have was created with the massive insolvency of Fremont, but we're still dealing with four insolvent workers' compensation insurers. I am asked regularly for the causes, what happened, how did it get here, and they become very technical. I would put forth that generally there are many factors that cause insolvencies in insurance companies - poor management is high on that list, lack of adequate reserving for future claims, and there are allegations that they have lower income due to price discounting. In the case of Fremont, we saw a rapid growth that was unable to be sustained. There have been no allegations of fraudulent behavior, misappropriation of funds - the types of things we read about in some of the large national funds. I would throw that out. When there are insufficient funds in the Guaranty Association to pay claims, statute allows for the prorating of payments to claimants. That has a great impact on the beneficiaries of the payments from the Guaranty Fund. That prorating today, I just checked statistically yesterday, as of 2/4/04, there are still open claims of 580 injured workers being handled by the Guaranty Association. There were originally approximately 700 Fremont claims; approximately 200 of those have been settled and finalized, but we still have almost 600 injured workers whose claims are being handled. When a claim is prorated, that injured worker will get a prorated amount of their weekly wage payment; they will get a prorated amount to pay for medical benefits. So, the worker will suffer with the result of that pro-ration. Ultimately, the workers compensation obligation is an obligation of the employer. If there are insufficient funds to pay the claims of the injured workers, that statutory obligation will revert to the employer. So, we have currently - and I checked these statistics yesterday, also - we have currently, claims of 380 employers being handled by the Guaranty Association. So, we have a potential impact of 380 employers who purchase a workers' compensation policy in good faith, who now will get that obligation back. I think that has the potential for a pretty dramatic impact on some of our small businesses that are certainly not prepared for that kind of unanticipated financial cause. CHAIR BUNDE asked if receiving only a prorated benefit could be viewed as a breach of contract [because workers' compensation law says an injured worker can't sue his employer] and allow the injured worked actionable cause against his employer. MS. HALL deferred the liability question to Mr. Lisankie and continued to brief the committee: We are in very uncharted territory. Not only has that never occurred here, to the best of our research ability, it has never occurred any place in the country. So, procedurally, we're really aren't sure what would happen. In likelihood, those injured workers would apply first to the workers' compensation board to enforce that statutory obligation. So, in that process we would have some forms of litigation whether it was through the Workers' Compensation Board or through the courts for the employer to take back that responsibility for payments. CHAIR BUNDE said the committee would like expanded information on what the liability would likely be if the Legislature chose not to take any action [going to pro-ration]. MS. HALL informed the committee that for the month of January, the division received a $2.1 million claims payment and that is the size of the obligation for that month. The payments get smaller as they are projected out in time, because of settlements and workers going back to work. The magnitude of the problems is estimated to reach its maximum [more than $20 million] in 2008. That is the obligation that would go back to employers, however it is prorated. 2:50 p.m. MS. HALL said the goal of SB 276 is, "To find a method of securing a stream of funds without a bailout of the industry...." SB 276 attempts to utilize the traditional philosophy of insurance, which is to spread the risk across a large number of people and to spread the cost of the current crisis across a large population. This is not a popular proposal, because no one wants to pay more. MS. HALL likened the Guaranty Fund to a safety net to protect policyholders and claimants in the event of a insolvency. It has covered insolvencies for 20 years and works well in other states. She said the policy question the Legislature must decide is, "Do we want to have that safety net in place for the protection of our claimants and our policyholders?" The Guaranty Fund has three accounts: workers' compensation, automobile and "others" and SB 276 changes how assessments are done. The first piece of the funding proposal will be to deal with the assessments as they stand today. Currently, there is a statutory cap of 2 percent of assessments made on the line of business - work comp, auto or other and we're proposing that that line of business cap be increased to 4 percent. That generates, obviously, double the 2 percent cap. Right now we generate $4.2 million; with our 2 percent assessment it would obviously double. That is a projection. We have $2.4 million - I just mentioned in January the expenditures were $2.1 million. So, we're only generating at best with that four months worth of payments of claims. The second piece of the assessment would be to allow assessing the other two unaffected funds up to a maximum of 2 percent. These two provisions expand the current statutory assessment base just for the cost of the whole crisis. Neither increasing the assessment to pay for the loss of others nor assessing the accounts involved is a popular solution. The Guaranty Fund, again, functions as a safety net and the premise is that the cost of the safety net is spread across the insured population. MS. HALL explained that the proposed approach, although it's controversial, is not unique to this state [18 other states have one guaranty fund within their property casualty account] and that Alaska already has a .5 percent assessment for homeowners, commercial property, boat and whatever because of the insolvency of one insurance company [primarily] that wrote medical malpractice. The second piece of SB 276 is the assessment of other entities that are not currently part of the assessment pool, which includes self-insureds and joint insurance arrangements. The division has considered either bringing them into the fund or starting a separate guaranty fund for self-insureds. However, that idea has been tried in other states, but hasn't worked because there is no "hammer" to collect assessments. MS. HALL informed the committee that her division has oversight of traditional insurance companies, but not for any of the entities she is proposing to assess. That means if she concluded that a financial statement wasn't stable, she couldn't stop the company from continuing to do business. Therefore, I don't think it's fair to put them in this Guaranty Association. I do recognize that these entities did not create the crisis but, again, the general philosophy of this whole proposal [is] to spread the cost of risk to the broadest possible population. She has been asked if doing that is fair and her response has been that it may not be fair, but she didn't know if it was fair for the injured worker to suffer a loss of benefits or for a small business employer to get the cost of the claim back. She continued to explain: The third component of this legislation is the ability to allow [the] Alaska Industrial Development & Export Authority (AIDEA) to provide guarantees for the Guaranty Association to obtain loans. The Guaranty Association by statute currently has the ability to borrow, but they are not really a viable commercial loan prospect. They don't have any assets. Their only asset is the stream of assessments that by the current cash flow projections is going to be used up until 2010. So, we've got six where that would not be available to pay back loans. So on its own, they are not a commercial viable prospect. Legislation does cap the maximum outstanding principal balance at any one time at $30 million. We've worked with financial experts to find the most efficient cost effective manner of finding funds and this seemed to be the best route as we've looked at that. We have explored various options with commercial lenders, with other states - insurance companies have been willing to step forward and talk about making loans to the Guaranty Association. As we evaluated the cost of all of those - and cost is of concern, because that repayment cost will still be part of the assessment process, this seemed to be the most viable of all those options.... In closing...SB 276 contains painful, expensive unpopular provisions. I do not believe, however, that the provisions are as painful as doing nothing. I think that the outcomes of doing nothing and allowing prorating and allowing injured workers without immediate access to their payments they have been getting every two weeks, to have employers potentially out of business because they cannot afford this obligation is more painful - more painful to the economy. I would urge you to focus on the overall major issue at hand. If we allow ourselves to get sidetracked by each of the individual components of the bill, we have groups that oppose this piece, but not this piece, I don't think we're going to find a solution.... MS. HALL said in the six months since this problem was brought to her attention, she has not found any other viable solutions brought to her, but she is willing to talk about anything that would work. CHAIR BUNDE noted that she had spread the assessment over the widest possible base of employers only and asked if spreading it over the general public had been considered. MS. HALL replied no and she wasn't sure of how that would be accomplished. She tried to keep the assessment within the industry. 3:05 p.m. SENATOR SEEKINS asked why insurance for health and life have separate guaranty associations. MS. HALL replied that those are separate funds in every state. SENATOR SEEKINS asked how much money the State of Alaska has in the separate guaranty accounts. MS. HALL replied that they don't keep cash in the accounts and don't assess until there is a loss [post-loss assessment]. SENATOR SEEKINS asked if that meant they would start being assessed now. MS. HALL replied that the maximum 2 percent assessments started in August 2003 as soon as this problem became known. The 2004 [for the whole year] assessment was made in January. This is the only way prorating was averted. SENATOR SEEKINS asked if the assessment included homeowners and auto. MS. HALL replied no, only a workers' compensation account can be assessed. TAPE 04-4, SIDE A  SENATOR SEEKINS asked what cash reserves AIDEA has and what the rate of return is, if they are invested. MS. HALL answered that AIDEA doesn't make loans. CHAIR BUNDE asked the committee to hold their questions so that people on-line could testify. He noted that this bill would be heard again. SENATOR FRENCH asked if there was a sunset provision, assuming this bill is adopted and solves the crisis. MS. HALL replied that she has considered a sunset provision, but she wanted to make sure that the mechanism they use solves not only the current crisis, but provides sufficient ability to handle another crisis down the road. SENATOR FRENCH commented: Maybe it's my background as a prosecutor, but when I see a $60 million hole in the ground that really developed before your watch began, my approach might be to throw somebody in the hole, if I'm being asked to fill it. He wanted to see some reassessment of the decisions that were made that got the state into this mess. MS. HALL added that one of the division's major focuses is an analysis of the situation. She said that Alaska veered higher than the national average for a couple of years in the discounting area, but was lower in a number of years. The state's loss ratios have tracked in many ways, although for the last three years it has significantly outpaced national loss averages. Put together with rates and discounting, there has been an overall effect. MS. HALL said she meets quarterly with regulators around the country and discusses things like solvency regulations. Alaska defers to the state of domicile of an insurer for the oversight of every insurance company that does business in Alaska annually but today, the division is much more aware of the combined impact of discounting, reserving practices and the rate making process. CHAIR BUNDE said he joined Senator French in asking her for an expanded suggestion for a solution. MR. KEVIN SMITH, Executive Director, Alaska Municipal League - Joint Insurance Association (AML-JIA), said the JIA is a self insurance program for 140 Alaskan cities, boroughs and school districts that would ordinarily be considered too small to self insure on their own, but as a group are able to take a self insured retention in workers' compensation of $300,000 and purchase excess insurance above that. AML-JIA pays an actuary to calculate the estimated losses in the self-insured retention layer. The estimate is a best guess figure and, if the guess is too low, the JIA already has a mechanism to assess its own membership to come up with the cash. The AML-JIA is not entitled to and does not expect or need access to the Alaska Guaranty Fund. MR. SMITH said he estimated that $1 million of the proposed assessment would come from the self-insured employers - $317,000 from the State of Alaska and about $500,000 from local governments and school districts. About $90,000 would come from the AML-JIA and be due in this fiscal year with no prior notice. He said the AML-JIA does not have the funds that an insurance organization, which shows profits to stockholders, does. AML-JIA's goal is to run on a narrow margin. It would have to ask for additional monies from local governments that are already struggling with retirement issues, the increasing cost of health insurance, diminishing revenue sharing and municipal assistance and increased costs in workers' compensation. MR. SMITH said he did not think asking for a user fee from people who can't use the fund is good public policy. Is it fair? No, it's not fair. It's not even right. Essentially, this money would have to come from the classrooms; this money would come from police departments; this money would come from snow removal budgets and I would ask that we eliminate the self- insureds and the joint insurance arrangements from the bill. SENATOR SEEKINS said that most entities in the AML have the ability to raise taxes locally. MR. SMITH replied that is theoretically correct and that is why joint insurance arrangements are restricted to public entities only [and not entities like tribes, for example]. SENATOR SEEKINS reasoned that if those employers had to share in this unexpected burden along with the private sector, they would have a mechanism to recover those losses. MR. SMITH replied that would depend on the size of the community. Some communities, like Koyuk, would have to figure out how to survive. SENATOR SEEKINS asked if those same entities were asking the non-public employees of the State of Alaska to jointly help them address the PERS and TRS shortages. MR. SMITH replied that was beyond his scope to comment on. SENATOR GARY STEVENS asked where a school district that was at its cap already could get funds. MR. SMITH responded that he is not a school finance expert, but in that case, it would seem that securing those funds would have to be taken from the classroom. CHAIR BUNDE thanked him for his testimony. MR. JEFF BUSH, Deputy Director, Alaska Public Entity Insurance (APEI), said he represents 27 Rural Education Attendance Areas (REAAs) and school districts and 12 municipalities. Based on National Council on Compensation Insurance (NCCI) estimates, local government workers' comp premiums could go up 22 - 32 percent. The proposal in SB 276 talks essentially about a tax on top of that premium increase. MR. BUSH emphasized the fact that school districts don't have the power to tax, making it difficult to come up with extra money. "So, it would, in fact, come out of the classroom and many of our school districts around the state are struggling right now...." He added that many municipalities don't have powers of taxation, because they are in the unorganized borough. MR. BUSH said APEI would be charged approximately $32,000 this year if SB 276 passes. He joined Mr. Smith in saying that assessing APEI is not fair because it does not participate in the [Guaranty Fund] program and their local funding would go to subsidizing the program. He asked the committee to delete sections of the bill that apply to joint insurance arrangements and self-insureds. MR. MIKE KLAWITTER, Director, Risk Management, Anchorage School District, said SB 276 would cost the school district $127,000 in unexpected and unfunded assessments or about 2.5 teaching positions. He pointed out that the district could not use the [Guaranty] fund in any way. CHAIR BUNDE thanked Mr. Klawitter for his testimony and said he would hold the bill for further work. There being no further business to come before the committee, he adjourned the meeting at 3:27 p.m.