MINUTES SENATE FINANCE COMMITTEE 1 May, 1998 9:10 a.m. TAPES SFC 98 # 148, Side A (000-590) Side B (590-000) CALL TO ORDER Senator Bert Sharp, Co-Chair, convened the meeting at approximately 9:10 a.m. PRESENT In addition to Co-Chair Sharp, Senators Pearce, Donley, Adams, Parnell and Phillips were present when the meeting was convened. Also Attending: Senator LYDA GREEN; Senator TIM KELLY; Representative NORM ROKEBERG; Representative PETE KOTT; CURT PARKAN, Deputy Commissioner, Department of Transportation and Public Facilities; ALAN WILSON, Homebuilders Association; BRUCE HOCKMAN, Towers Perrin Insurance Company; DICK BLOCK, Block and Associates; MIKE GREANY, Director, Division of Legislative Finance and aides to committee members and other members of the Legislature. via Teleconference: From Anchorage: JOHN STEINER, Assistant Attorney General, Transportation Section, Civil Division, Department of Law; PAUL BOWERS. SUMMARY INFORMATION Co-Chair Sharp announced the committee would take up HB 210 first, then HB 197 and then start HB 116 about 10:00 a.m. Other bills on the agenda would be heard if time permitted. He noted SB 350 was not ready yet, as the interested parties were still working on a draft CS for the committee to consider. HOUSE BILL NO. 210 "An Act relating to the extension of contracts for the sale and delivery of in- bond merchandise at international airports." This was not the first hearing the committee had on this bill. Co-Chair Sharp invited the sponsor, Representative NORM ROKEBERG to join the committee and speak to the legislation. Representative Rokeberg made the following comments: "Good Morning Mr. Chairman and thank you for taking this up expeditiously. Mr. Chairman, after our meeting yesterday, I had occasion to talk to Commissioner Perkins because of the testimony the committee received yesterday and was [undecipherable] representative of the Department of Transportation and Public Facilities would be here today to basically recant their testimony from yesterday about this legislation. I peer over my shoulder...Mr. Parkan is here." "And then Mr. Chairman other than that, rather than debating the merits of the house bill that was passed two years ago, the committee wanted to take up the amendment at their discretion. But if we could have some testimony from the department I'd appreciate it." Co-Chair Sharp asked if the amendment Representative Rokeberg was referring to was Amendment #2. That was confirmed. Co-Chair Sharp called upon CURT PARKAN, the Deputy Commissioner from the Department of Transportation and Public Facilities to come to the table. Mr. Parkan introduced himself and spoke as follows: "With regard to [HB] 210 I don't have really much of a comment to make other than the department does not oppose this legislation. I believe the comments that were made yesterday by the director of statewide aviation represented a concerns that we do have with regard to a policy that would allow a person to have exclusive use of public resources forever. I think though that what is represented in this bill is substantially similar to regulations that we have drafted as a result of HB 543 a couple years ago." Senator Donley requested that when the sponsor of a bill had an amendment to offer, his or her name be noted on the amendment. He felt that it would be helpful if the co- chairs wanted a committee member to offer a motion on an amendment, if it were so noted. When the amendments were blank it was confusing for him. He noted that sometimes amendments were submitted by the administration and he would like those to also be noted accordingly. Co-Chair Sharp told Senator Donley the amendment before the committee was from the bill's sponsor. Representative Rokeberg affirmed. [There was some discussion between committee members that was undecipherable.] Co-Chair Sharp remembered the committee had discussed the amendment at the last meeting but that it had not been put on the table. Senator Parnell requested a brief explanation on what the amendment would try to accomplish. Representative Rokeberg gave this explanation: "Mr. Chairman, Senator Parnell, if you recall the testimony last year on this bill where we were endeavoring to extend the length of the duty free contractual lease - space lease at the international airport, in order that they can make substantial lease-hold improvements and they were asking for an extension of their lease terms to be amortize those improvements." "The Section two that's the committee substitute before you, speaks to the title fundamentally and just says that there's a agreed to extension provision in the lease that it can be exercised only. But I thought that in as much as this particular situation still is pertinent at the airport, that another method could be used without running into the constitutional stumbling blocks that we discussed last year on the bill." "That is to say if they - this amendment gives the commissioner discretion to enter into a modification of the contract revision if in fact there is a substantial improvement and then the increase in rent could be adjusted if they attributable to those improvements. In other words, they could give the investor a break on their improvements if in fact they generated the increased revenue. As an incentive to make the improvements because what happens under this contract is that the higher the revenues and gross sales of the duty-free shops the greater revenues the state gets." "So therefore, it's to the state's benefit and it's in the statute now, that the state generate increased revenues. The higher the revenues the higher the rent." "So this would be incentive to make improvements in display cases and other major investments to add additional and better quality merchandise to the store. Thereby increasing revenues to the contractee and the state. And this would allow the commissioner if he say fit, to generate a formula for modification of rent to incentivize those particular investments. It's a common commercial type device." Senator Parnell clarified that it would allow the commissioner to make the provisions during the contract term or only on the extension of the contract. Representative Rokeberg responded that the intention would be to allow the provision midstream in the contract. Senator Torgerson asked if the leasehold improvements would then become part of the facility. He noted that the representative mentioned cabinets and merchandise, but felt that was a marketing decision and true leasehold improvements would apply better to adding walls and other structural changes. Representative Rokeberg responded that the reversionary interest in the leasehold improvements should be spoken to in the lease rather than statutes. He didn't think it would be appropriate to provide for that in statute, but should be spelled out in the lease document. Senator Torgerson understood that, but wanted to make sure the intent was not to apply to merchandise for sale. He pointed out that Representative Rokeberg's testimony indicated the leasehold improvements applied to glass cabinets or merchandise. He wanted to make sure it wasn't the bill's intent to be that broad. The representative clarified that he meant to say "display of merchandise" not the merchandise itself. Senator Torgerson wanted to hear the commissioner's opinion on the amendment. Mr. Parkan appreciated Representative Rokeberg's intention to allow the department flexibility. He deferred to the Department of Law for an opinion on the legality of the requirement. He noted the DOL had the greatest concern last year when the bill was first introduced. He offered JOHN STEINER, Assistant Attorney General in the Transportation Section, was on-line from Anchorage and could testify. Co-Chair Sharp called upon Mr. Steiner to speak at the request of Senator Torgerson. Mr. Steiner spoke as follows: "The - there is some concern with the - see there are two aspects of concern here. One is the concept of a mid-stream adjustment and the other is sort of the lack of definition within the actual proposed language." "First of all, let me say that the concept in general of granting this kind of a reduction in rent is actually in the solicitation for the current bid. However, it was limited to only a situation for the very first year in [undecipherable] you get a larger initial improvement. And it was only in the event that the improvements were $1 million or more. Under the language here, it is not at all clear what a substantial investment might be, what constitutes improvement whether they be a glass display cases, which would remain the property of the concessionaire or whether it would be the movement of walls." "Now, I would hasten to add that in a solicitation, the department already has the ability to do this very thing, to set up the contract in such a way that it would put in a midstream incentive for additional improvements if the department saw that the result would be a net increase of revenues. However, having a contract in place - if there were a contract in place that already specified a limited opportunity for this and no other opportunity for this kind of thing to allow it midstream without having noticed that in the original solicitation for the contract would be of competitive concerns and might well actually draw a claim that there was a material change [undecipherable] contractor, which had not been an opportunity provided to the other bidders. So there is a legal concern in that regard." "There - as far as the specific language, there are concerns especially when it's not tied to an existing solicitation, with regard not only to what is substantial, what is an improvement, but also when it could take place. Under the language here, the word subsequent to award would appear to cover even the very initial improvements, which it would be assumed that any contractor would have to make under any circumstances. It's unclear whether it's a modify, which could mean take them up, take them down or whether it's required to the contractor concur with those modifications." "The phraseology of - on the increase of the contractor's income, it's also unclear whether it - or the increase in [undecipherable] whether we're talking just the increase percentage rate, which I believe is what Representative Rokeberg had in mind, or actually the increase of payment itself. In other words, whether this would eliminate any possibility of the department - or allow elimination of the possibility of the department increasing revenues to the department or simply increasing the percentage rate apply." "And the last thing is that it deals with - talks about the contractor's income. It's unclear whether that would be gross income or net income. The contracts generally always deal in terms of gross revenues rather than income." "Those are concerns about how this statute is specifically set up. However, it is also true that the department could design a solicitation under the boundaries of this amendment. Or frankly without the amendment they could do it, which would allow this very thing under the terms specifically established in the solicitation for the contract." "If the committee sees fit to entertain - of adopting this, the DOL would recommend that it be specified that this would be true to only to the extent that the possibility were under terms established in a solicitation for a contract and according to standards supplied in that solicitation. That would enable the bidders to comment on those terms and put it all in a public process so everyone would know what kinds of modifications might be available under what circumstances." Senator Pearce had a general question. She wanted to know the leasehold improvement policies of other venues, such as SEA-TAC, Portland, or any airports owned by counties. Mr. Parkan responded saying they had done a cursory review of other airports and found that every one was a little bit different. What was unique about the State Of Alaska was the constitutional requirements for access, notice requirements and equal protection. Therefore leases were extended at other airports differently. They did not require the public notice that Alaska did. Senator Pearce wanted to learn the industry standard. She felt that most of the major improvements made on leasehold properties were financed. She spoke of her experience working in banks making loan packages for airport hangers that were on state-owned, leased property. The lease arrangement was taken into account, she said. It seemed to her that the prudent leaseholder would make financial improvement arrangements into the lease contract. She felt the standards that would be set by this legislation went on with no way for the airport, if there was a higher and better use for that land, to make a change. Because of that, she wanted to know what other airports did differently. Mr. Parkan said he had been referring to Section 2, which addressed duty-free leases. Section 1, which dealt with land leases, he felt the trend in other airports was to have shorter, fixed terms for the leases, for the very reason Senator Pearce voiced. Senator Pearce countered, asking who owned the huge facilities at SEA-TAC, such as the Alaska Airlines hangers. If the airport expanded and needed that space, would the airlines be paid for their facilities, she asked how it would work. Mr. Parkan replied that the way the leases worked in many cases was at the end of the lease term, the improvements reverted to the airport. The airport would then own those improvements. Then if the airport decided to expand and needed the space occupied by the hangers, they could do so with the shorter leases, he explained. That was different that the arrangements in Alaska, according to Mr. Parkan. Senator Pearce asked if none of Alaska's leases were set up as described for SEA-TAC. Mr. Parkan said there were a couple leases that were that way. He gave an example of the Federal Express lease. There was further discussion between Senator Pearce and Mr. Parkan about which leases in Alaska were set up in which manner. Senator Torgerson said he would propose an amendment to the amendment when the committee was ready. Representative Rokeberg wished to reply to Senator Pearce's question about airport leases in other states. While what Mr. Parkan said was true, Representative Rokeberg stated that Alaska's airport situation couldn't be compared to airports in other states. Major airports in the Lower 48 did have short-term leases because they had a captured market. There was more demand for lands surrounding those airports then actual land. Therefore, they generally ran five-year rollovers and rent was increased above fair market value. Anchorage and Fairbanks had a completely different situation he stressed. Here the state wanted to try to encourage development by inviting air cargo companies and others to invest in Alaskan airports. He felt the one reason Federal Express agreed to it's lease arrangement was because they were glad to have a longer term lease when they were already accustom to those types of improvement reversions. That didn't mean another investor would do that, he warned. Senator Torgerson agreed with what the sponsor said. He felt the only thing lacking from the legislation was the approval of the department before they had any reduction to the lease arrangement. When he asked the sponsor about this, Representative Rokeberg responded that it would be an automatic process that improvements wouldn't happen before departmental approval. The senator felt that it needed to be specified since it wasn't clear as he read the amendment and listened to DOL. Therefore he was offering an amendment to amendment #2, which would change line 11. After the word "improvements" language would be inserted to read, "improvements, approved by the department..." He read the entire sentence into the record. Co-Chair Sharp instructed that there first needed to be a motion to adopt Amendment #2. Senator Torgerson moved to adopt Amendment #2. Representative Rokeberg interjected that he had no objection to the amendment to the amendment. Senator Torgerson moved to Amend Amendment #2 as detail above. Without objection, Amendment #2 was amended. There was no objection or discussion on Amended Amendment #2 and Co-Chair Sharp ordered it adopted. Senator Adams noted he had two amendments for consideration. Co-Chair Sharp wanted to ensure the CS had been adopted. Senator Adams pointed out that if the CS had not been adopted, Senator Torgerson would need to withdraw action taken on Amendment #2 and re-offer after the CS was formally before the committee. Senator Torgerson withdrew his amendment to Amendment #2 and withdrew Amendment #2. Co-Chair Sharp noted no objection to the withdrawal of Amendment #2 and ordered it withdrawn. Senator Torgerson moved to adopt as a working draft, the "K" version CS for HB 210. It was adopted without objection. Senator Torgerson moved to adopt Amendment #2 and moved to amend Amendment #2 as previously detailed. Without objection, Co-Chair Sharp ordered adoption of the amendment to Amendment #2 and the adoption of Amended Amendment #2. Senator Adams moved for adoption of Amendment #3. Co-Chair Sharp objected and Senator Adams spoke to his amendment. He reminded the committee they had discussed it the other day. It would provide that a lease not exceed 55 years and pointed out language on page 1, line 13, which said "the commissioner shall approve application for new leases..." He explained that if that language was not inserted, it would allow leases to go on forever. Another area the committee had problems as listening to DOL testimony, was the constitutionality of this section if not changed. He referred to the presentation of Mr. Steiner talking about Article 2 Section 6 and Article 8 Sections 2 and 10. Senator Adams spoke of his desire to allow leaseholders to collect capitalization and investment on their particular lease holdings. Co-Chair Sharp spoke to his objection, which was that he felt the amendment would change existing law that was just passed two years ago to attempt to solve the problem of lack of enthusiasm to renew leases to present leaseholders who had made improvements. There was no further discussion and Co-Chair Sharp requested a roll call. Amendment #3 failed by a vote of 2-3. Senators Pearce and Adams cast yea votes. Senators Donley and Parnell were absent. Senator Adams said that with the failure of Amendment #3, he wanted to note for the record that this particular legislation had the potential of being unconstitutional by the fact of the articles he listed before. With that he moved for adoption of Amendment #4. Senator Torgerson objected for the purpose of discussion. Senator Adams spoke to the amendment; saying that the language said the leases could not extend beyond 55 years. His amendment would add the provision, "for each land lease" and he felt that the department should look at each land lease. He explained that a company might have a multitude of contracts, one in Anchorage, one in Kotzebue, etc. and that the department should review each lease holders' contract. That is what this amendment would accomplish, he stated. Co-Chair Sharp read the amendment language and asked if this would limit to one lease extension. Senator Adams replied by reading the language. "... The commissioner shall approve the application for new land leases or one extended term..." He felt if each land lease titles were reviewed, there needed to be proper language. He offered the committee could have the DOL or the DOT&PF representatives speak to the matter. Representative Rokeberg wished to comment on the amendment. He said if the senator's intent was to allow for extensions within an existing lease and then only allow one new lease, the language was erred. Senator Adams replied that his intention was to allow the department to look at each of the land leases, because one leaseholder might have multiple lease holdings around the State Of Alaska. He was also interested in the leaseholders capitalizing on their investment. Representative Rokeberg had concerns about the language not meeting the intent of the amendment. He suggested an amendment to the amendment. Under the current language, the statute would allow only one extension of the lease. He felt the wording needed to be moved to accomplish that. Senator Adams concurred with the intention Representative Rokeberg surmised. He said the amendment was in a format drafted by Legal Services. Representative Rokeberg stated he had been in this business for 25 years, he wrote the bill and suggested if Senator Adams wished to accomplish his intent, the language should be adjusted. He detailed the changes. Page 1 line 14, should contain the words, "an application for one new lease" and the extended term would be inside an existing lease. There was further discussion on the exact wording changes to be made. Senator Phillips clarified the change to be, page 1 line 14, before the word "extended" delete the word, "an" and insert the word "a". It was determined that this was grammatically incorrect and no change should be made here. Representative Rokeberg read the amended language to be, "...the commissioner shall approve the application for one new land lease or an extended term..." Senator Adams moved to amend Amendment #4 page 1 line 14 as detailed above. Co-Chair Sharp clarified the exact language of the amendment to the amendment, which would change "a" to "one" before "new land lease..." Senator Pearce didn't understand how that would work with the language on page 2, lines 1 and 2. Senator Adams asked Mr. Steiner to assist. Mr. Steiner said the DOL would find the change of "a" to "one" preferable. He agreed with Senator Pearce, that it would appear to be inconsistent with the changes proposed for page two. He felt it would appear that the intent would be for each particular lease, one extension could be granted and it would then become important how many prior leases had been held. Representative Rokeberg asked Mr. Steiner if the intentions of Senator Adams would be carried out by this language. Mr. Steiner said it would, but that one question would still remain vague. The word "an" before "extended term" could mean a one-time only extension or it could mean for each application there could be another application for an extended term. While it was clear there could only be one new land lease, it was not clear to him whether the intent of the Legislature would be for a single opportunity for extension only. Senator Adams asked that if the change was made to page one, if the language on page 2 would also need to be changed to make the legislation read correctly. He asked if on page 2, lines 1 and 2, after the word "leasing", "and without regards to the number of leases, prior leases or lease extensions for the same land..." needed to be deleted. Mr. Steiner affirmed that recommendation. Representative Rokeberg suggested the amendment be made conceptual to allow the drafter to make the proper adjustments. As the language read currently, he didn't feel it was clear as to the Legislature's intent. There was no further discussion on the Amendment to Amendment #4 and Co-Chair Sharp ordered it adopted. Senator Parnell objected to the amended amendment. Because it was commonly known that the lease would go no longer than 110 years, the way it was currently drafted he thought it was limited to only 55 years. Representative Rokeberg corrected him that the total would be 110 years. Senator Parnell asked Representative Rokeberg's intent with respect to the amendment. Representative Rokeberg again voiced his advice to the committee to make sure the drafter be given the authority to write the language to ensure the intent be carried out. He didn't want people to need to guess what the statute said. Mr. Steiner said he might have misunderstood the question. As he understood it, this would allow extension of a given lease up to 55 years and a request for a new lease for an additional 55 years. To the extent that a new lease was granted, the total tenancy would be 110 years under two separate leases, he said. Senator Parnell thought he understood what they were trying to get at. Representative Rokeberg requested Senator Adams make his amendment conceptual. Senator Adams response was undecipherable, but Co-Chair Sharp's statement was that the amendment would be made conceptual. There was no objection to adopting Amended Amendment #4 as a conceptual amendment and it was approved. Co-Chair Sharp suggested that once the amended CS came back before the committee, they add an item three and make it clear that the cumulative and consecutive total years of the lease contracts could not extend 110 years. Senator Adams felt that in order to make the language read according to what the attorney said was acceptable, the language from page 2 lines 1 and 2 needed to be deleted. He re-read the language to be deleted. Representative Rokeberg objected to the removal of that language because typically the airports did enter into shorter-term leases and for those, he felt it was important to allow multiple extensions within the 55-year period. He thought this portion needed to be part of the conceptual allowances given to the drafter. Senator Adams didn't mind letting the drafter work on the language and offered no further changes. Co-Chair Sharp said he would grant the drafter leeway for ultimate clarification to meet the intent. He would work with the drafter to do what it took to clarify the language. Representative Rokeberg voiced appreciation for the work the committee was doing on the bill, but objected to the amendments for the record only. Co-Chair Sharp ordered the bill held in committee. HOUSE BILL NO. 197 "An Act relating to libraries." Co-Chair Sharp noted the bill had been heard in committee the week before but was held because of considerable concerns about establishing new regulations and mandating certain requirements for libraries across the state. Since then, a new CS had been drafted which he hoped would alleviate the problems. Senator Torgerson moved for adoption of CS HB 197, version "F" as a working draft. Senator Adams objected, asking for an explanation. He wanted to know how it compared to the present statute and how it would affect communities with the "in-kind" services. Co-Chair Sharp said it was addressed in the changes proposed on page 2 lines 19 and 20. He referred back to the previous bill and noted that it didn't change anything from the original bill. Senator Adams found the language he was looking for on page 2 lines 13-28 and removed his objection. The CS was adopted without further objection. Senator Donley felt the CS was a big step forward. He did still have a few concerns he wished to address in an amendment on page 2 line 16 by deleting "...less than $5000 or..." Senator Adams had a question that the sponsor was saying, from zero to $7000. Senator Donley affirmed. Co-Chair Sharp named the change Amendment #1 and ordered it adopted since there was no objection. Senator Torgerson offered a motion to report CS HB 179, version "F" as amended from committee with accompanying fiscal notes. There was no objection and Co-Chair Sharp so ordered. Tape #148 Side B, 10:00 a.m. SENATE CS FOR CS FOR HOUSE BILL NO. 116(JUD) "An Act relating to workers' compensation self- insurance." Co-Chair Sharp noted this was the first hearing for this bill in the Senate Finance Committee. The bill sponsor was not yet present and the committee took a short recess at 10:05 a.m. REPRESENTATIVE PETE KOTT was invited to join the committee and speak to the legislation. His testimony was as follows: "I appreciate your taking the opportunity to hear this measure... "Mr. Chairman, members of the committee, what this proposal does is allow a group to set up a mechanism for self insuring workers comp." "Probably the best way to help you with the understanding of the bill is - walk you through it. Show how it's set up in the provisions of the bill. Again, this is a proposal that allows a group to establish workers comp self insurance group. And the best way to understand it again is to walk you through it." "In order to set up this group, there are certain requirements that must be met. And this is during the application period to the Director of Insurance. There must be proof, compliance with the remaining sections of the bill. There are articles of the group that are afforded to the director. The - there is an agreement that must be forwarded to the director - director approved by the director regarding the administrator of the group. And that provision and arrangement between the group and the individual administrator. There must be proof of payment to the group by each member not less than 25 percent of that member's first year's annual premium. That becomes important a little bit later, but we're talking about at least so keep that in mind. We're not at a maximum, we're at a minimum threshold." "In order to obtain and maintain that particular certificate or application, the group must prove that they have a combined net worth of at least $1 million. There must be a security that is filed in the amount of $450,000 and that can be in the form of a bond, indemnity or other mechanism, only approved by the division. There must be specific and aggregate insurance in the amount that is acceptable to the director and I think there'll be some additional testimony a little bit later on to give you an understanding of the specific and aggregate insurance and how important that concept is to the overall scheme." "Again, there must be an annual premium of at least $1 million and the more the members and based on the actuarial determination of what each member will have to pay, that amount will fluctuate higher and not lower." "There is a - must be an indemnity agreement jointly severally binding to the group and each member. This is pretty much standard procedure when you look at the other states who have implemented similar procedures." "There is a fidelity bond [undecipherable] and mission insurance policy for the administrator and professional liability insurance policy for the trustees that guide the group through their efforts. There's also a fidelity bond in errors in mission insurance policy for the service company itself in the event that there's some corruptness we are protected there." "At this point, when all the data is assimilated and provided to the director, then the director must take some action on it and based on an evaluation and then either reject it with cause, or approve the application." "Mr. Chairman, members of the group - members of the committee, the group is operated by a board of trustees. This is a responsible way to do it. They are in fact responsible for the collection and disbursement of funds. All be it, taxes or payments to injured workers." "A - Once they are established segregate the fund mechanism into two distinct categories. One is the claims fund, which at least 70 percent of the premiums enter into that fund. The other fund is the administrative fund, which is generally going to be looked at as no greater than 30 percent. Now both of these can be adjusted but it must be adjusted based on the approval of the director of insurance." "In Section 21.47.070 of the bill it details how employers may join the group after the certificate has been issued and also termination procedures. So we set out some guidelines based on this group being certificated on how another employer can join the group and how one can terminate their membership in the group." "The group is subject to an audit by an independent CPA. That audit provision and final analysis is then filed with the director." "In Section 21.47.110, the group is subject to the required contribution provisions of the second party injury fund." "21.47.130, the group is required to adhere to the uniform classification system experience rating plan, which is the plan that is currently used to determine your individual worker's comp rates. That rating process as it is determined how much each individual member will pay is also subject to an annual audit to make sure that there's nothing wrong-doing going on with the amount that is being applied to each member." "Section 21.47.140, there's a - that section deals with refunds and it is expected that at some point this group will be in a position to refund any excess monies over and beyond what is needed to maintain the personal injury fund in the administrative account. Now this may not occur for several years, but it its expected based on the other states who have implemented similar procedures that it will occur. So that's the reason why that particular section was included. And again, the refund is approved by the director." "In 21.47.150, that deals with the premium payments and the reserves. Again there must be a[n] established premium payment plan. That plan must establish and maintain the actuarial appropriate loss reserves. And those reserves must be at least enough to pay out known claims and associate expenses and those claims that are incurred but perhaps not yet reported." "In Section 21.47.160. the group is required to establish a workers compensation self-insurance guarantee fund. That basically is five percent of the first year's premium. Based on the initial amount of money that we're looking at to get this group going for the first year of a million dollars that would be $50,000 if that were the base. Again that's the minimum amount that would be required." "In Section 21.47.170, it deals with deficits and insolvancies. If the group is unable to meet it's legal liabilities and their other obligations and maintain - which would require them to maintain sufficient reserves and the group must immediately make up that deficiency and levy an assessment upon the group. That's the first major category that they must look to if there are any insolvency's or deficiencies or deficits in the ability to pay." "The section further sets up procedures to make up those deficits. It goes through a litany of issues and how to make up those deficits. If the group does not make up its required deficits to meet the obligations, then it is considered to be insolvent. If this were to occur, then the director shall levy an assessment upon its members in the amount determined by the director necessary to discharge its liabilities to the group - for the group - to the members that may be affected through workers compensation claims against the group." "Now that particular section was included because I think it was necessary and it gave some comfort that if this were to ever happen, and I think there'll be some testimony a little later on that will indicate and clearly show that this would not happen except under such a rare case, one in hundreds of thousands that it's probably not necessary but it did at least raise the level of comfort for many that had been involved in this process along the way." "In Section 21.47.180, we have the penalty section. The penalty section is pretty much standard with the other self- insurance groups around the country. And this provides for a civil penalty to be applied to either an individual member or the group if there are any wrongdoing. If somebody commits fraud or whatever the case might be. But if there's any violation within the act they are subject to a civil penalty." "And finally in Section 21.47.190, there is a provision there that will allow the director to revoke a certificate and there are reasons for that revocation." "Mr. Chairman, I do have a handout I'd like to at least pass around to the members for your perusal. What this handout is, is the model act that was supported by the National Association Insurance Commissioners. It was passed in '93. So the NAIC is - has endorsed this. It is their product." "And just briefly, I want to illustrate that we have not departed substantially from the model act that is being employed by the other states who have used this particular mechanism to set their workers comp rates. And I'd like to use as a way of illustrating this, the page numbers on the top of the right corner of each individual page. And I'm using the fax page so I will start off with page three under subsection "H". Everybody with me? In this particular case, it calls for a minimum of five employers. Generally we're looking at quite a bit more than that in this particular state. We have set a fairly low minimum." "On the next page, on page four, section "B", where it talks about to obtain and maintain a certificate of approval, under "B-1" it says a combined net worth of at least a million dollars. And that's essentially where we're at. So we meet that threshold with this particular bill. In "B" subsection two, it talks about a security in the form an amount prescribed by the commissioner. And in fact, that's what we have in this bill as well, where we have determined that a $450,000 security was appropriate." "On the next page, page five, and it's periphrasis number three, where it talks about specific and aggregate excess insurance in the amount in a form and in an amount as prescribed by the commissioner. We also have that contained within the language of this bill. In periphrasis number four talks about an annual estimated premium of at least $250,000, which each subsequent year being a half million dollars. We have met and exceeded that threshold by establishing a million dollars of annual premium for every year. So we don't segregate that amount. It's the same year after year." "You also see in subparagraph five and indemnity agreement. We also have included that. And again, that is been pretty consistent throughout the states in using that particular concept." "You'll see in six and seven, where it talks about the fidelity bond, the administrative and service company as I mentioned, we do have a provision in the bill that covers that. Skipping over and if you peruse the in-between pages you'll see that it's very, very similar to what we have in the bill." "But skipping over to page eleven where I think these are the issues that have been debated substantially. In Section 18, where it talks about the premium payment and reserves it says there each group shall establish to the satisfaction of the commissioner, a premium payment plan, which shall include. We have that. Initial payment plan and subparagraph periphrasis number one, of at least 25 percent. That's what is required by each member to get going before this group can get off the ground for each member to show that they will be able to provide the 25 percent of their annual premium up front." "And then in subparagraph periphrasis number two, payment of the balance of each member in a monthly or quarterly installment. What our plan calls for is monthly, so we have eliminated the quarterly so there's a consistent flow of funds coming into the premium - coming in the form of a premium to either and or the administrative account and the pay-out account for claims." "You'll notice in section 19 it talks about deficits and solvency's. We've basically extracted the same procedures if there was a deficit or insolvency occurring within this group." "Mr. Chairman, members of the committee, that basically compares the plan that we have before you with the NAIC model plan. And of course every plan is just that. There are some deviations. Other states have taken different approaches. They've lowered increase and I just wanted to point out that in most every case with this plan, we have in fact made it more stringent." "Just for the [undecipherable] and clarification of the committee, I'd be - the program itself when implemented would not change historically what is occurred in the payment of monies out to those injured workers in the form of workers comp. An injured worker would file a claim and the same process would essentially occur if the group were solvent, which I expect under every circumstance they would be, the premiums would in fact cover that particular workers comp claim. And of course with the premiums you have the reinsurance both the specific and aggregate that would also kick in under certain circumstances." "If the group were insolvent then you would use a surplus from the fiscal year other than the current year. You can go to the administrative funds, there is additional premiums a self-insurance guarantee fund, assessments by the - of the membership and any other method approved by the director and of course as a catch all, you still have the security of $450,000. So there's enough build in protection that would ensure that the injured party would receive their eventual payment." "And again you have to recognize that under any workers comp claim, whether it's generally a small or a large one, particularly the large ones because generally the small ones of five and six to ten thousand dollars there's generally not much rendition as far as debate over whether or not it should be paid or not. It's pretty fairly simple but the larger ones generally take quite a bit of time, I think two to three years is not unusual, and during that two to three year period, of course the premiums of this group will continue to flow to the administrator. And we also have provision in the bill that those premiums can be invested under the prudent man concept to ensure that there is growth within the both the administrative and the premium pool." "Now you might be asking yourself the question why there are there so many requirements that are basically left up to the - requirements placed on the group that are left up to the approval of the director. And I just want to cover just a couple of and again, the group applying for the self- insurance must be - must receive a certificate of approval from the director. And again there's a litany of things they must meet. The joint and several liability of the members is in fact approved by the director. The fidelity bond and errors and missions and performance bond is in fact approved by the director. The certificate may be revoked by the director. The director can examine the books at any time. The board of trustees must pay all the workers compensation benefits, 70 percent again of the premiums must be used for the payment of those claims. Anything that would bring that premium pool down below 70 percent if there were a reason must again be approved by the director. The annual audited financial statements are submitted to the director. The director may require other reports as he or she feels necessary. The director may require additional premium payments from a member. Refunds are made only after approval from the director. The reserve plan must be approved by the director. Workers compensation self- insurance guarantee fund must be established as required. Of course there's provisions regarding any deficits that must be made up and much of that is at the direction of director. The director may impose penalties for non- compliance as I mentioned earlier and of course the director has the final authority and revocation of any certificate that was issued earlier. So there's a number of requirements here that are placed before the director that ensures that there is a lot of centralization within the Division of Insurance." "I'll cut off my testimony right here, Mr. Chairman, members of the committee and there are probably some technocrats in the audience that will answer some of the specifics but certainly when we get down to the aggregate specific insurance that's a critical component because it is a - it's a failsafe mechanism that a lot of people don't understand completely. But it is an important and integral part of this part of this. And the other thing I want to mention again, is that we are establishing a minimum threshold of 25 percent and that must be at least a million dollars in premium for that first year." "I do have some other numbers here that I received from the Division of Workers Comp that I may use a little bit later. But I think based on looking at the pages, and there were - this is primarily dealing with the homebuilders and their loses for a period of five years from '92 to '96, when you add it up at the end and take out the self insurance that would have been in here inappropriately for Spenard Builders, the total losses for this group could in fact been paid by an insurance group that would have been established under this particular plan." "So with that Mr. Chairman, I'll turn it over to you and [undecipherable] answer any questions or yield to the next person." There were no questions of the sponsor and Co-Chair Sharp called upon a representative of the Homebuilders Association to testify. ALAN WILSON came to the table and said: "I am a general building contractor located here in Juneau. I think there's several representatives from the homebuilders today who will be speaking in addition to myself. I'm going to keep my testimony just short and brief and give you guys a few of the reasons why we have supported this legislation and that we - the reason we believe in it and feel that it will be one more ingredient that helps lower the cost of housing in this state." "There's about eight or nine of these and I'll just kinda go through them quickly: more direct control over insurance administrative costs; higher degree over claims reserves, which by the way is where a great deal of the money is made in this business. Self-audits can be done without negative repercussions, and to this we're referring to safety inspections. Pools are successful because they reduce their accident rate and they do this by having in-house safety people that will go out to the members at no charge. No repercussions in that there's no penalties if you're found to have an unsafe job site, they work with the employer to correct those and work with the employees as well to make the overall project a much safer place to conduct business." "Another item, control over aggressive investigation of fraud. Proactive claims management, by this we mean just not writing a check. A lot of times, with claims in big companies, it's much easier to just pay the claim. With small pools, we all have a vested interest in this. We know each other and it's much easier to detect fraud when it does arise." "Reduction of attorney's fees, quicker return to work for the claimants. And again if the employee and the employer are communicating one on one the accident happens, gets reported right away to the insurance company and you're working with the employee getting him back to work, getting him rehabbed. He's less apt to be disgruntled and stretch these claims out for a longer period of time. Again, better communication between the employer and the employee, which is another key aspect of it." "Then too, self-insured funds can be more readily adapted to the industry itself and we feel that that's another key to the success of the - what would become our homebuilders self-insurance fund." "Again, motivation in this is to put us in control or in control of another piece of the puzzle that goes into home construction and again lowering the cost of housing in this state. Thank you for your time. If there's any questions, I'd be glad to answer those." Senator Adams compared the changing of the threshold from $5 million to $1 million and asked Mr. Wilson if he felt it would protect the injured workers within his organization. Mr. Wilson replied that he thought the amount of premium really had no bearing on protecting the worker. What would protect the worker, he believed was whether or not the re- insurance was in place and the excess insurances were there. Co-Chair Sharp next called upon BRUCE HOCKMAN, of Towers Perrin Reinsurance Company in Pennsylvania, to testify. Mr. Hockman spoke as follows: "Effectively, I've been brought here to review the piece of legislation that's in front of the body and to provide some comment on it as it relates to facilities operating around the country generally speaking as it relates to pooling of self-insurance." "My background allows me to bring some message to you from a number of different areas. My career started about 28 years ago in the insurance industry in workers compensation claims with Liberty Mutual, the largest writer workers comp in the country. Had a bit of a benefit late in the seventies, I worked for Dick Thornburg as he was governor in Pennsylvania and ran the Bureau of Workers Compensation during his first four-year term. Then went with the largest insurance company in the State of Pennsylvania, largest workers compensation writer, that being the Pennsylvania Manufacturer's Association and then became it's president. And joined Towers Perrin in January of 1996. My specialty is workers compensation and risk financing, which covers the whole gamut of individual self-insurance, captive insurance, risk pooling and workers compensation as a specialty." "When I reviewed the bill and I reviewed the bill not as it related to any one particular group although it was the homebuilders that asked me to come up and review this for them as we provide services for homebuilders in other jurisdictions involved in this type of situation. I was looking at it to see what type of mechanism was provided, what level of state intervention and oversight it provided and what opportunities it provided for people to do the business of risk sharing." "The first thing I did was to go back to the NAIC model, which Representative Kott had provided earlier to you to see where the levels of deviation were. And then to get an understanding of the system here in Alaska to see how this whole process fit." "Routinely, the whole issue of group self-insurance comes into play in one of two directions. It's either an extension of the individual self-insurance privilege to which most members of this size would not otherwise qualify. Now this body has already provided that individual employers can seek an exemption for the privilege of self-insurancing in Alaska if they meet certain privileges, or certain financial conditions. And that's been well established for some time." "As a practical matter, the next group down that may be well established in their own right and in their business lives, could not become individually self-insured because of the standards that were set aside as far as net worth, numbers of employees, whatever the case may be." "The question was not then historically whether or not self- insurance should be provided, the question was, is there a facility to allow smaller employers to have the same rights and privileges as a singular large employer as it relates to the liabilities of workers compensation. So it's a very simple question. The statute of workers compensation says here's what the benefits are. Injured workers should get their benefits on time in the amount prescribed, get as well as they can after an injury and get back to work and be part of the economy. And the workers compensation system doesn't have to be any more complicated than that." "The other side is who's responsible for that. And it's the employer. Now what are the employer's choices? They can insure with a licensed insurance company in the State Of Alaska or they can become individually self-insured." "This piece of legislation takes something not away from either of those two. But kind of extends the latter privilege, which is a privilege due individually self-insure and to say that while any one member of any trade association established for more than five years, that is homogeneous in nature. And I was taken by the mission statement that you work with and for other reasons. But it's a logical approach. And what are we trying to do here? Trying to take a group of people who all do the same thing for a living who know the risks [undecipherable] of that business who have an incredible knowledge of their employee base. And they're going to try to handle liabilities that are set forth in workers compensation." "And that's - I come to the conclusion straightforwardly that this bill meets all of those qualifications. And how do I say that? Well, I say it partly from experience. I see what's worked in other jurisdictions. I see what hasn't worked in other jurisdictions. I go back to the history of pooling, back probably into the late seventies in some jurisdictions and found why it didn't work at all." "Well one of the ways it doesn't work is because it was an exodus away from - seemed to be an exodus away from the insurance industry. Things weren't right. Prices were too high. Availability wasn't good. People were going into assigned risk plans and having surcharges. So the whole program was going away from something, not going to something. Not trying to build something, but trying to leave something. Well, that's always a bad idea. I mean, trying to build a mechanism where you don't know where you're going is probably going to get you someplace where you didn't intend to be. And quite frankly, that's what happened in a lot of jurisdictions. It became under funded. People thought they could get into to business of managing risk and they weren't prepared for it. The whole logic was, I want to do something cheaper than what I'm doing now. And it was misplaced and those programs blew up." "But legislators and regulators and business people learn from mistakes and over the years we have facilities across this country that start with the appropriate level, which is let's understand the risk, let's finance it appropriately and let's manage it for long term. Straight and narrow, I would stop quite frankly by saying if you bring some people together who know their business and know the risks, give them the necessary guidelines to protect the rights and privileges of their workers, which is why you have a workers compensation statute in the first place, and give it the oversight over the long term, things are going to work." "On the converse, if you say philosophically we just don't believe this is going to happen. Philosophically we don't think there should be another opportunity to manage risk. Well you can put whatever words and phrases you want in any legislation and to provide a vehicle without effective use of that vehicle over the long term. And I've seen it happen both ways." "So I would stop there. I don't think this has to do be complicated by any stretch of the imagination but I would certainly welcome the opportunity to respond to any questions that you may have or any changes in the bill. I was working from a version that had a "Z" attached to the end of it, which is what I saw when I came in here. I hope that's still the same version that you're working with and I'd be more than happy to help you." Senator Donley wanted to know if Mr. Hockman had the opportunity to deal with any self-insurance organizations similar to what was proposed in this bill. Mr. Hockman had. He stated there were about 22 funds that were specifically engaged in or around the business of homebuilders. Some of the funds started as pooled arrangements and migrated on to something else. He gave an example of Georgia, a very competitive environment. It was now known as one of the most homogeneous groups and it's members provided $58 million of annual premium and had a membership of approximately 70 percent of the homebuilders in the state, he told the committee. Another example he gave was New Mexico, which ended up building a trust. He said these mechanisms, as they became larger, had different investing and tax opportunities. They could therefore migrate from one place to another, but the genesis was all the same. They started as a pool of individual group self-insured members, he explained. Senator Donley asked if this plan had the same elements that other successful plans had. Mr. Hockman suggested that in half of the other jurisdictions the elements were less strict as far as the minimum requirements than proposed in this bill. Senator Adams asked in layman's terms, when changing the minimum threshold from $5 million to $1 million, what were the advantages and any disadvantages? He also wanted an explanation of joint and several liabilities, because some of the members were not educated in that field. Mr. Hockman responded by saying: "The premium size issue - let's start with a dollar. That dollar in workers compensation has to cover a whole bunch of things. The two biggest components are the amount of money that's going to go to an injured worker for wage replacement or disability rating and the medical providers: hospital, doctors, physical therapists, whatever the case may be. And that's generally known as the loss portion. And the second biggest pieces are the expenses: buildings, employees, taxes, whatever the case may be." "There's a rate that's established in Alaska that has to be filed by a licensed rating organization. And that rate has to be filed for each individual classification. And by classification, I mean you've got builders here, you've got real estate agents, you've got secretaries, you've got bankers, you've got timber people and each one of those has a separate classification because each one of those has a different risk level attached to it. It's not likely that a banker is going to be falling off a roof because not a lot of banking is done on a roof. So there's a different risk factor related to that than for a roofer or a logger. So that rate will be different. But whether the rate is high or low is immaterial as much as that the rate is adequate to cover the expected losses and expenses, the two buckets that I talked about." "So if you assume then that a dollar is the right number to cover all the losses and expenses contained in that dollar, you can also assume that $5 million is the right number to contain all the losses and expenses in that number. Except for the area of expense. There are certain fixed expenses that you know once you buy a building, you're going to have that same expense of running the building whether you have a million dollars in premium or five million. So there are certain fixed expenses that as a percentage of the premium are going to get small as the premium gets larger. You buy one sofa for your living room. Whether your living room was twice the size and 20 square feet or 15 square feet, you only needed one sofa so you're expense was the same." "Losses generally move the other direction. You would expect to have if your premium was five times - was $5 million versus a million, you'd expect to see proportionately larger of losses contained in that five million because that's the biggest portion of the rate level." "The joint and several issue is something that is specific to pooling. And absolutely it is paramount to a successful program. It's the biggest commitment that a business owner can make to sit side by side with a peer, but yet a competitor in the business of home - doing whatever they're doing because by the nature of this association, it has to be a homogeneous group of people. By definition they're all doing the same thing and probably competing with each other in active business. But for the purpose of controlling the workers compensation costs, they're willing to sign a contract saying that I will sign on to protect you and you will sign on to protect me for all of the liabilities of the pool whether or not I shared in - I presented those liabilities, if I didn't have any losses whatsoever, I'm going to share severally and jointly in all the liabilities presented to the pool." "Absent that agreement, self-insurance pooling has no beam period. I mean that's the first commitment..." Tape #149 Side A, 10:50 a.m. "...That's the insurance company's problem. That's all - it's a different process of risk sharing. This is peculiar to this nature of risk financing and it is critically important." There were no further questions of Mr. Hockman. Co-Chair Sharp then called upon DICK BLOCK of Block and Associates. Mr. Block testified as follows: "Good morning Mr. Chairman and members of the committee. Thank you very much. For purposes of the record, my name is Richard Block. I am here for the firm of Block and Associates, but I'm actually and my firm are here on behalf of a domestic insurance company that is the primary writer of workers compensation in the State Of Alaska, Alaska National Insurance Company." "Perhaps it might be useful some of the people around the table will recall that I've been in Juneau and around this table many times before and know a little of my background. But for the benefit of those that don't know me as well, I bring a certain amount of experiential background in this field that may be of value for you to know about. I have been involved in the insurance industry since about 1968. So that's about 30 years as an attorney, as a general council, as an assistant general council and as administrative officer for an insurance company. A large national insurance company that was primarily responsible for writing workers compensation." "I came to Alaska in 1975 and my primary role here at that time was to council the state government on dealing with workers compensation issues and also to deal with medical malpractice issues. And that's relevant to this discussion because what the state did at that time, was form a response - form a legislative response to what was then a very serious problem." "I was then asked to become the director of the Division of Insurance, which position I held until for three years here in Juneau. And left - leaving that position formed a consulting firm, which I still operate and which is still providing council to large risks, governmental and private and including on issues very similar to this. And that is how can I as an individual or we as a group or as an association of governmental entities, reduce our cost of workers compensation insurance through some imaginative alternative insurance mechanism to the standard insurance company mechanisms." "And then also was responsible for the formation of Alaska National, which is now one of the larger writers in the state and was its president for six years. And so I do have a great deal of familiarity with this issue, great deal of familiarity with the industry, great deal of familiarity with the problem, which I believe the homebuilders seek to solve and a familiarity with how alternative mechanisms work. But I also think I have some local knowledge about the marketplace in this state and what would be satisfactory here and elsewhere." "It's been a little bit frustrating for me and for the people that I speak for to see this bill move along as deliberately as it has in the face of some very specific information that's been provided to the various committees over the time that this has been passing through the Legislature that has come from people opposed to the bill that have pointed out why there are serious problems with it and have documented that in footnoted testimony and so forth. And also a little frustrating to see that even though there's been very substantial opposition from the two most cognizant state divisions, that this bill keeps moving along." "Let me explain if I can. It must be a failure on my part or on the part of those that are trying to point out the problem to adequately demonstrate really what the fundamental problem is. And it is not the amount of premium that it's going to write. And it is not all the backup financial underpinnings that they keep tacking onto it. There's a fundamental thing that has not been addressed." "And perhaps I might explain what it is I'm driving at by asking you to join me in a little imaginative experiment. And that is to ask each of you to assume that you would like to form jointly around this table, some form of business enterprise. You have done a feasibility study and a business report and have determined that because of the front end costs, because of the risks involved, because of the nature of your business, because of how long it's going to take to build up to a break even point, that you're going to need an underlying capital base of a million dollars." "Now the way a normal private enterprise would go about that is they would in some way, form an enterprise, maybe a corporation and they would raise a million dollars before they would start - before they would sell one unit of product or service. So you decide among yourselves that each of you would like to participate. And you say, [pointing to members around the committee table] 'I have a certain amount of net worth,' and you say, 'I have a certain amount of net worth, and I'm willing to make a contribution.' But your net worth is made up out of land that you own someplace, and yours is fine art objects and someone else's is made up of pick-up trucks and tools and equipment. And so you say, 'I don't have the cash to actually put in, but I'll take my proportion of the share of stock, and what I will give you in lieu of that, what I will give you in exchange for that, is a promise - a promise that if anything goes wrong in this corporation, you can come and get money from me and I'll help you pay the deficit between the earnings or the revenue stream and the expenses that we've incurred.'" "Now I ask you from an accounting standpoint, if what you doe is you issue the stock in exchange for this promise, what is the net worth of the corporation? If you exchange the stock for these letters of promise, is the net worth, the combined net worth of all of you as you promised it to be? Or is it the combined net worth of your liquidation value when you sell your pick-up trucks or your art or your tools? Or is the net worth what we argue that it is, that in fact, it's zero even though these promises are sitting out there?" "Now the problem that we've tried to present here is that the proponents of this bill are attempting to establish an incredibly risky enterprise with no capital contribution. And their argument is it doesn't matter because we have all of these other things in place. We're looking for the million-dollar premium, 25 percent of which will be paid up front. We are looking for reinsurance. We are looking for a guarantee fund. We are looking for bonds. But the fact is that you start out with nothing in the till. And workers compensation is probably the most risky of all businesses in the insurance industry to undertake because of the long tail, because of the exposures, because of the potential for catastrophic losses. And that is the grommet of our concern." "Now, Senator Adams has asked several times, what is the impact of increasing the minimum premium requirement from 500,000 to a million. And interestingly enough the answers that have come are one, it really doesn't matter and that the increase in a million dollars is simply a reflective of increased exposure. And therein lies the problem. It's like saying, I've started my enterprise like you gentlemen and ladies starting your enterprise, with needing a million dollars and in trying to make it up by increasing the number of units of things you sell, which increase the burden on your operation." "A million dollars of premium is not a million dollars in asset. It's a million dollars of exposure to additional risk. That means more people are subjected - a million dollars worth of losses you're exposing to instead of $500,000 worth of losses. That's the problem here is we keep increasing the exposure and trying to stop-gap it with other things and we still have started with nothing in the till. And that is the critical issue." "The issues raised by the gentleman from Towers Perrin, who has extensive credentials and is a lot similar to mine in many respects, says, well, and I agree with him, that the Legislature should encourage competition, not only competition among insurance companies that meet the standards for insurance companies but should allow innovation." "And this is where my experience in helping form the Medical Indemnity Corporation of Alaska back in 1976 is useful to look at because there was a serious situation, a crisis that needed to be addressed. The insurance industry wouldn't respond and the physicians needed some sort of response. And the Legislature made a response. What was that response? It was form an alternative mechanism, but capitalize it adequately. And those that are around the table that were here then will remember that we required that there be $3 million plus an additional $3 million that was a standby fund in case that was needed put up by the State Of Alaska. Now I'm not arguing the state should fund this, but what I'm saying is there's got to be a recognition that you've got to start out with money in the till because the Medical Indemnity Corporation, like any insurance enterprise that starts out is going to lose money. The startup expenses are great. The losses have to be posted and reserved even though the premium may not be there that day. And there has to be a cushion for that." "And I believe there are others. I believe the director of insurance has done a more intimate financial analysis and can demonstrate how in fact there are these front end costs that are going to cause an invasion of the capital if the capital were there, simply because it's the nature of starting a new insurance enterprise - any enterprise, whether it's an insurance company, or a pool, or a government risk management mechanism. They all have the same financial characteristics." "So this has been the nature of our concern. Now we have some subsidiary concerns too. I'm concerned about some of the amendments that have come in as a result of the judiciary [Senate Judiciary Committee, committee substitute] bill. There's reference to the fact that this is a homogeneous group. My review of the bill, says that provision's been taken out and know its any people can come together and form a new group. I don't think that's my reading of the bill." "So this is our primary concern. I have one last concern that I'd like to share with you and then I will be available for questions. And that is, what is the impact on the marketplace of an enterprise like this? I told you up front that I represent an insurance company. As an insurance company, we always would prefer to see fewer competitors than more. But by and large, that's really not our concern. I mean I'm not concerned that there are other people coming in and writing insurance because that happens now and it's happened in the marketplace in the State Of Alaska during the 23 years that I've been here. Carriers have come in and carriers have left and carriers have come back and carriers have left. And it does have an impact on the marketplace that isn't as healthy as it might be, but we live with it." "But what happens when you have someone come in the marketplace and they are forced to leave, not because of competitive or because of market driven issues, but because they're financially unable to stick it out. What that does, is it leaves a group of employers in the state having to scramble at a time when they're least able to scramble for new replacement coverage and probably at a time when the rates are starting to move up and the pressure on competition - I mean the pressure on the marketplace is stiffer than it is right now." "The gentleman from Towers Perrin made an interesting observation and I'd like to just remind you of it. He pointed out that some of these - some of these groups in other states have been successful and indeed he's correct. They have been successful. And the one he cited and the one I cited to you at a previous hearing in New Mexico are successful because they're incredibly large. They work extremely well when they have large numbers. We don't have those large numbers." "But the other thing he said was some of them worked and some of them didn't but where the ones that were successful was when there was for whatever reason, there was restrictions in the normal marketplace. It was tough to get workers compensation insurance so it was natural to kind of move over into a market that could absorb that. In the State Of Alaska now, and I expect for well into the near future, we're in a very competitive market. We have a number of people writing and the prices are moving down rapidly and the homebuilders know that. They've seen it in their own rates. This is not a good time to start an enterprise that asks the homebuilders to expose their net worths to the losses of their competitors because there are alternatives available that are far less risky, far less expensive and just provide the same adequate protection." "With that I stand open for questions, Mr. Chairman." Senator Donley referred to the million dollars, which was much more than the Uniform Act required as a start-up premium to increase exposure. He questioned whether the whole idea was to expand the base and spread the risk, saying that was what insurance companies did. The more policies that could be written, the greater the reduction of the risk because the risk was spread out over a greater number of clients. He felt that just increasing exposure was not necessarily accurate because the chance for a catastrophic event was spread out over a much larger client base. Mr. Block agreed with part of what the senator was saying. The greater the exposure base, the more the risk was spread out, he conceded. However, he countered, the problem was it wasn't a matter of how many people were covered, but a matter of length of time. It wasn't known whether that initial major loss would come on day one of operation or on the last day of the policy year. He continued stating the problem as living with the exposure and a greater exposure when covering more workers. Therefore, there was a greater chance for invasion of the capital, he explained. That was why the law and regulations affecting insurance companies required that the more business written, the more capital the company be expected to have. There needed to be an ongoing ratio because, he stressed, it was known that the capital was invaded, even by the best of companies. Senator Donley had another question. He said as long as there was reinsurance and the director as provided in the bill approved the reinsurance, didn't that prevent the problems? He felt the reinsurance would also cover the increased exposure. Mr. Block responded that the senator's observation was correct, as long at the reinsurance was one hundred percent. In other words, if a financially responsible insurance company covered every dollar of exposure it wouldn't make any difference. However, he argued that was not the reinsurance proposed in this bill. This plan called for the reinsurance to be excess or aggregate insurance. Some of the information he had heard about the planned excess insurance contemplated would be excess of $900,000 of losses for the $1 million premium. What that meant, he explained, was the reinsurance would not pay a dime until the enterprise had paid out or incurred $900,000 in losses. The loss fund drafted in the bill was only $700,000 - 70 percent of the million-dollar premium. The remaining 30 percent would go toward administrative costs. That was his concern. Senator Donley felt the director of the DOI should address the reinsurance concern because the bill allowed such discretion to the director. Mr. Block had two responses to the suggestion. He said he agreed that a conscientious, knowledgeable and politically insensitive director could make the right decisions. However, in his experience, he knew there were directors of different capabilities and dedication. He felt that if the Legislature allowed that latitude that would leave a conscientious director in a vulnerable position. Senator Donley suggested the director was in the same situation with domestic insurance companies. The cash requirements were even less than the premium level required in this bill. Mr. Block disagreed and detailed the requirements for an insurance company to do business in Alaska. He continued voicing his opinion on why he disagreed with the legislation and the risks involved. Co-Chair Sharp noted the members were due in the Senate Chambers. He ordered the bill held in committee until the next day, when they would hear testimony from the DIV and others who had signed up. He announced the schedule for the near future. The committee would meet on Saturday at 9:00 a.m. to take up SB 350. After the floor session at 10:00, the committee would reconvene to hear SB 352. At 1:00 p.m. they would begin working on the capital budget and continue through Sunday. They would then address the AIDEA bill on Monday. ADJOURNMENT Co-Chair Sharp adjourned the meeting at approximately 11:10 a.m. SFC-98 (32) 5/01/98 am