SB 357-INSURANCE  CHAIR CON BUNDE called the Senate Labor and Commerce Standing Committee meeting to order at 1:30 p.m. Present were Senators Gary Stevens, Ralph Seekins, Hollis French and Chair Con Bunde. Senator Bettye Davis arrived at 1:40. The first order of business to come before the committee was SB 357. CHAIR BUNDE explained that SB 357 is the insurance omnibus bill that ensures state consistency with federal law and the National Association of Insurance Commissioners (NAIC) and contains reforms to standards and guidelines. It updates procedures and transactions within the Division of Insurance. He generally summarized that it would: Provide an electronic communications opportunity between the Division of Insurance, the public, the industry and other regulators with the goal of promoting efficiencies. It has provisions and changes for reinsurance, contains recommendations on licensing revisions that have been suggested by an NAIC accreditation team. It changes the liability for civil damages when filing reports concerning fraudulent acts to a person involved in the prevention and detection of fraudulent insurance acts. It contains provisions that clarify that a Guaranty Fund deposit is required for title insurance companies and it provides changes to tax and late payments to make penalties more consistent with the Department of Revenue's statutes. It includes penalties for surplus line brokers who submit late payments on taxes. In general, these changes to Title 21 will promote consistency between Alaska and other states, promote more efficient operations and provide better public protection. MS. LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development (DCED), said SB 357 deals with changes to Title 21. The changes that we have proposed in this bill are, we feel, necessary to keep Alaska statutes consistent with some federal law. There were a number of changes to licensing several years ago to meet the requirements of the Gramm-Leach-Bliley Act and with model acts and standards of the National Association of Insurance Commissioners (NAIC).... Some of the changes are a result of the accreditation process. We are accredited by the NAIC. Some are the result of an industry task force and others are just reflective of what we think are good business practices.... I have categorized what I think are the most significant changes into six categories. [Indisc.] We thought that was appropriate. We did, however, on the other end in each of those sections include a $10,000 penalty for willful violation of these statutes. [Indisc.] MS. HALL explained that reinsurance is basically insurance for insurance companies and if a non-admitted [to Alaska] insurer takes over the insurance of a domestic insurer, the division needs to be involved in that. That situation typically occurs when the state has an insolvent insurer. Further, she explained that there were changes for domestic seeding of insurers requiring them to be licensed in the state where they are domiciled. SENATOR BETTYE DAVIS arrived at 1:40 p.m. MS. HALL stated that sections 12 and 13 deal with the licensing of a reinsurer and use language taken from the NAIC model regulation. She explained that a number of years ago, a pool of life insurers, Unicover, provided reinsurance for workers' compensation coverage, called a carve-out. It eventually unraveled and became insolvent. Out of this situation, probably the most important activity that really came to light for regulators is when they realized life insurance companies were reinsuring workers' compensation and weren't licensed to do that. Section 12 sought to provide some assurances that the state of domicile is aware that the reinsurer is writing the workers' compensation line of business and does not object. MS. HALL explained that the financial statements and analyses of life insurance companies are significantly different from the financial statements and analyses of property casualty insurers. NAIC is the regulatory joint body of regulators from each state. They recently recognized this difference in financial analyses by requiring an additional supplemental financial form that could be done with just a letter. We're looking to make sure the state of domicile of domestic companies in Alaska who currently reinsure portions of their workers' compensation book of business is aware of that. We're certainly not looking to make a statute change that puts our domestic companies at a disadvantage.... When the workers' compensation is a property casualty line, we want to make sure they are aware so they do the additional analysis that's required of a property casualty carrier. MS. HALL explained further that: The other two reinsurance sections, sections 47 and 48, require a filing approval by the director of the reinsurance agreements. We have had several inquiries about this item and it is my intent to work with industry in changing the language. We would make the requirement to file with the director. We would not necessarily think we would have to approve the company insurance agreement and ... to make the reinsurance agreements confidential. They are proprietary; they are the financial terms on which an insurance company purchases their insurance and we do think that's appropriate. In some past financial examinations, there have been difficulties [in] obtaining signed reinsurance agreements. We are willing to make the changes necessary to address the concerns of industry, but we also need to meet the needs of our financial examiners. So, we would like to make sure that we do have the authority to obtain signed copies of the reinsurance agreements. The reinsurance is part of the financial examination to determine the level of risk an insurance company can afford. So, I would anticipate bringing some changes in language for your consideration. CHAIR BUNDE asked when he could anticipate those changes. MS. HALL replied that she had the language today. She would bring it to him for review. She continued her explanation: The fourth section that has major changes is licensing. Over the years, we have tried to make Alaska licensing consistent with the rest of the country. There are some federal regulations that require us to make certain provisions so that we are reciprocal with other states. We have attempted to do that - [it] allows our resident licensees to be able to obtain licenses in other areas as well as allows non-residents to do business here. Changes briefly - we will add crop insurance, not that we have a lot of that, and surety licenses that currently are not licensed sections. They are just included in the property casualty licenses. We are proposing to eliminate trainee licenses so that we are consistent with national regulations. There are very few trainee licenses today and we feel it's better for someone to study to become licensed before they start dealing with the public. We have removed some language that could impose some barriers for what we call limited lines license, bail bonds and - I'm drawing a total blank. Then we have statutory language that said they must. Their sole purpose is to be appointed by an insurance company. It's a burden that we don't think is appropriate today. We have some sections that delete additional experience requirements that are inconsistent with federal regulations that would put some of our licensees at a disadvantage with other states and we are also requiring that surplus lines brokers be licensed as producers before they can become a surplus lines broker. These changes, again, are basically consistent with the National Producer Model Licensing Act and to bring Alaska into compliance with that. This section is surplus lines. In the summer of 2003, we had an industry task force that met three times with the Division of Insurance staff to look at our statutes and our regulations. That's the practice of surplus lines business. Surplus lines business - we have two kinds of insurance placements. One is called admitted insurance companies. We regulate them; we have to approve their rates. We approve their forms; they jump through all the hoops to be considered admitted insurers. We have another group of insurance companies who for various reasons choose to do business on a non-admitted basis in not only our state, but in many states. These are called surplus lines companies. It doesn't mean that they are of less value or of less financial stability; it just means they have chosen to operate differently. Because the business of insurance is so protected for our consumers, there are special statutes and regulations that tell how that business must be conducted. There are particular disclosures that are given; the business just operates somewhat differently than the traditional insurance market that most people are aware of. The producer group that met this summer with division staff evaluated how Alaska works and this included not only Alaskan surplus lines brokers, we also had people come to these meetings from Seattle where a lot of Alaska business is written. So, we had a fairly broad, I felt, representation of industry to look at how we do business, how efficiently we work. The changes that I would highlight for you in this particular section - one would allow that for the placement of health insurance in the surplus lines arena, if we had a health insurance crisis. The criteria, and there are some fairly strict stipulations in that section, but the basic criteria [is] we have to find it in the public interest. This was done at the suggestion of the Washington Surplus Lines Brokers. A number of years ago, there was a lot of publicity when Washington literally had [indisc.] surplus lines markets lines for coverage. If you can't find coverage in the traditional market, you go to the surplus lines market. They suggested we make this statutory provision that should we ever get into a crisis situation, it would allow us some flexibility. CHAIR BUNDE asked her how she would define a health insurance crisis. MS. HALL answered: We don't define it in statute, but we talk about in the public's interest. If we had no insurance companies that were willing to write health insurance here... It can't be done for competitive reasons, it can't be done for pricing reasons; it truly would be when we found a real need in our market. Typically, surplus lines placements are done after there's a diligent search. In the traditional market, coverage is not available or at least not on the same terms. That's the only way that coverage can be placed in a surplus lines market. CHAIR BUNDE inserted, "There is very likely a premium for those premiums." MS. HALL affirmed: Yes, there is. They typically are more expensive.... Basically - the health insurance example - if there were no or maybe one health insurer left in the state, and I would hate to think we'd get there, but we don't know what will happen going forward. If there were no insurance companies or maybe one that refused to take your business, we still have the ACHIA [Alaska Comprehensive Health Insurance Association] high-risk pool. But, it would allow the Division of Insurance to make provisions for a company that did not today have a certificate of authority to do business in our state, but that was a stable company, that we had their financial statements that we reviewed their rates. We could allow them to do business in that circumstance. SENATOR FRENCH asked if it was the lack of a certificate of authority that classified them as a surplus line. MS. HALL replied that is correct. She continued her explanation: Section 32 requires some changes in the documents that are provided. Today, in our statutory language, we have requirements to produce documents from the surplus lines of a broker to the insured that are practically impossible to meet. It asks for everything that would be in the policy from every exclusion to every condition; and it's very difficult to do that in any effective way. We do feel that the insured is entitled to a document that outlines all the material parts of an insurance policy it needs and we do specify in the proposed statute the pieces that would have to be there. When we name the subject of insurance, the insurance company, the premium and material exclusions coverage limitations, we think the insured certainly have a right to have that information prior to purchase of the insurance policy. There is also a provision currently in statute that a policy is not binding and does not have to be paid for until the insured gets the notices that are required under the surplus lines statute and notices of what those coverages are. The other section I would like to point out is section 33, which places responsibility on a producing broker as well as the surplus lines broker for notice to the consumer of a surplus lines placement. There is statutory language that requires the insured to be notified of the fact and we've all become familiar with… solvencies and the Guaranty Fund. It has a much different meaning today. There is a requirement on any surplus lines policy that there is a stamp and type 10 print. So it's a particular size that's on every policy and notice is to be given to every insured that surplus lines polices are not subject to the Guaranty Fund. So, that is another difference, Senator French, with the surplus lines coverages. They do not have the protection of the Guaranty Association. So, this notice requirement requires the producer, as well as the surplus lines broker, to give that notice to the consumer. CHAIR BUNDE asked her to differentiate between surplus lines and reinsurance. "In essence, wouldn't my company basically go to surplus lines to reinsure?" MS. HALL replied: No, reinsurance companies actually can be admitted insurance companies in their state of domicile with a certificate of authority. Some of them are from countries other than the United States. Those are called aliens - in case we wanted to know that. We are the domestic company if they are in your state. A company that is domiciled in another state is called a foreign insurer and if they are in another country, they are an alien insurer. Many of the reinsurance companies are domiciled in European countries. So, the reinsurance is the insurance companies' insurance. They write your $1,000 policy. They retain - I'm using really general figures - they retain $100 of that risk and they reinsure the other $900. That reinsurance counts as part of the financial [indisc.]. CHAIR BUNDE said that the committee looked forward to working on a CS that would incorporate the changes she wants in about two weeks.