SB 88-STATE INSUR. CATASTROPHE RESERVE ACCT.  1:49:53 PM CHAIR COSTELLO announced the consideration of SENATE BILL NO. 88, "An Act relating to the state insurance catastrophe reserve account; and providing for an effective date." She listed the individuals available to answer questions and stated the intent is to hear the introduction and hold the bill. 1:50:38 PM At ease 1:52:26 PM CHAIR COSTELLO reconvened the meeting and asked Mr. Jordan to present SB 88. 1:52:43 PM SCOTT JORDAN, Director, Division of Risk Management, Department of Administration (DOA), Juneau, Alaska, delivered a PowerPoint to present SB 88. He displayed highlighted portions of Sec. 37.05.289, the Catastrophe Reserve Account (CATFund) that was enacted in FY88. The key points are that the fund was established to cover unanticipated costs related to the state's self-insurance program; the fund has a $5 million cap; and no more than $5 million may be retained in the fund. MR. JORDAN turned to the list of expenditures from the CATFund since its inception. Over the last 33 years, the state has spent approximately $149 million from the fund, or about $4.5 million per year. He noted that the chart has several columns but he was focusing on the column showing Total Expended on the far right. He turned to the chart and line graph of the 10-year history of property premiums and/or losses from FY10-FY20. The Property Premiums column, highlighted in blue, reflects a little more than $2 million paid in FY 10 and $5.1 million in FY 20. He referred to the line graph on the right. It shows a sharp increase from FY 11 to FY 12 and another market driven increase in FY 18 and FY 19. He explained that the hardening reflects a lack of capacity in the global market to pay catastrophic claims and this causes premiums to rise. MR. JORDAN directed attention to the Property Losses column highlighted in orange. It reflects about $13 million in property losses that the CATFund paid over the same 10-year period. The line graph is relatively flat except for the $4 million loss due to the fire at the Crystal Lake Hatchery in March 2014. The subsequent spike in FY 20 was due to $1.26 million paid in claims from the November 30, 2018 earthquake in Anchorage and the $1 million payment when a DOTPF maintenance shop in McGrath collapsed from snow load. 1:56:44 PM MR. JORDAN turned to the charts on slide 4 and explained that he included them to show all the expenses that go along with the premiums the state pays for excess insurance. The top chart reflects $39 million in property premiums from FY 10 to FY 20. The lower chart reflects a little over $80 million paid for aviation, marine, property, and bonds. He noted that property premiums are about half of overall premium payments each year. MR. JODAN turned to slide 5 that lists the larger claims paid out of the Catastrophic Reserve Account. These were: head2right AMJS LeConte Grounding May 2004 $1.187 million head2right F&G Crystal Lake Hatchery fire March 2014 $4.078 million head2right Alaska Aerospace Kodiak Launch Facility rocket explosion August 2014 $1.513 million head2right PFAS claims starting in November 2017 $5.877 million head2right Earthquake related claims November 2018 $1.263 million 1:58:12 PM SENATOR STEVENS asked if he agreed that other insurance paid much more than the state's $1.5 million payment for the rocket explosion at the Kodiak launch facility. MR. JORDAN agreed. He said the claim was about $34 million; the state's insurer paid about $17 million and the launch customer paid the other $17 million. SENATOR STEVENS expressed appreciation for the explanation. 1:59:00 PM MR. JORDAN turned to the Lapse Appropriations Summary on slide 6 that shows the funding for the Catastrophic Reserve Account. He explained that any money that Risk Management has left at the end of a fiscal year is swept into the CATFund. If that doesn't fill the fund to the $5 million cap, they look to the UGF lapse appropriation funds. He restated that the purpose of SB 88 is to allow the state to be self-insured for property coverage. The state already has a good record of self-insuring for workers' compensation and general liability and wants to add property coverage because premiums increased 30 percent for FY 21 and the expectation is that they will increase another 15 percent to 20 percent for FY 22. The $5.1 premium in FY 20 will be about $7.6 million in FY 22. Increasing the $5 million unencumbered cap on the CATFund to $50 million unencumbered cap will allow the state to equal the $50 million limit it can buy for catastrophic coverage from the market. He described it as a safety net that will save the additional $2.5 million the state currently pays for insurance and allow better control over claims. CHAIR COSTELLO said a sectional is not necessary. 2:02:24 PM SENATOR REVAK asked how the division decided on the $50 million cap. MR. JORDAN said the market currently limits catastrophic coverage to $50 million. The idea is for the state to step away from the property market completely and self-insure. CHAIR COSTELLO asked the reason that he mentioned coverage for earthquakes and floods but not fires. MR. JORDAN replied this would incorporate fire loss for state buildings but the state historically has not had large fire losses. The fund has been able to handle all the losses so far except for earthquake and flood. The concern is a catastrophic loss. 2:05:01 PM SENATOR STEVENS asked if the fund covers state-owned buildings like the Capitol. MR. JORDAN answered yes; the fund covers all state-owned property assets. CHAIR COSTELLO asked what other states have for insurance caps. MR. JORDAN replied it varies by state and runs the gamut but because of the tremendous market increase, the trend is for states to have self-insured programs. CHAIR COSTELLO asked if the Division of Risk Management in Department of Administration (DOA) interacts with the Division of Insurance in the Department of Commerce, Community and Economic Development (DCCED). MR. JORDAN answered that he speaks with Director Wing-Heier occasionally, but because the Catastrophic Reserve Account (CATFund) is a self-insured program, there isn't a lot of interaction. 2:07:27 PM CHAIR COSTELLO referred to the language on page 1, lines 7-8 that talks about "an amount that the commissioner of administration determines to be necessary". She asked if that would be a formal communication so the legislature is aware of the amount or if it would show up on a ledger. MR. JORDAN replied the amount that the commissioner determines is necessary comes from what the Division of Risk Management says is needed to bring the CATFund up to the $5 million cap. 2:08:28 PM CHAIR COSTELLO found no further questions and advised that she would hold SB 88 for further consideration.