Legislature(2003 - 2004)

04/02/2004 03:35 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 540-WORKERS' COMPENSATION INSURANCE RATES                                                                                  
CHAIR ANDERSON  announced that the  next order of  business would                                                               
be HOUSE BILL NO. 540,  "An Act relating to workers' compensation                                                               
insurance rates; and providing for an effective date."                                                                          
Number 1057                                                                                                                     
CRAIG  NOOTTVEDT, Alaska  National  Insurance Company,  explained                                                               
that HB 540  establishes a mini-hearing and  other procedures for                                                               
the  filing, reviewing,  and  approval  of workers'  compensation                                                               
loss  cost.   Loss  costs  are the  projected  costs of  workers'                                                               
compensation claim benefits in Alaska  and constitute the largest                                                               
component of  workers' compensation rates.   Loss costs  apply to                                                               
all insurers  and the Alaska  assigned risk pool.   Mr. Noottvedt                                                               
provided  the  following  analogy,  "Workers'  compensation  loss                                                               
costs are  the raw  material costs  of the  workers' compensation                                                               
system."    He  noted  that Alaska  law  requires  that  workers'                                                               
compensation  loss costs  be  neither  excessive nor  inadequate.                                                               
The  current system  for filing,  reviewing,  and approving  loss                                                               
costs involves  the following two  parties:  National  Council on                                                               
Compensation  Insurance (NCCI),  a  national filing  organization                                                               
based in Florida, and the Alaska Division of Insurance.                                                                         
MR.  NOOTTVEDT  explained  that   NCCI  compiles  data  into  its                                                               
computers, reviews the  data with actuaries based  in Florida and                                                               
Southern California, and then makes  its filing with the director                                                               
[of   the  Alaska   Division  of   Insurance]  who   approves  or                                                               
disapproves the  filing.  He  specified that the  current process                                                               
doesn't provide for  any active involvement of  insurers or other                                                               
interested  parties  actually  doing  business in  Alaska.    The                                                               
aforementioned, he noted,  was not always the system.   Until the                                                               
early  1990s  other  key parties  with  local  Alaska  knowledge,                                                               
including   insurers,   employers,   and  brokers   were   active                                                               
participants  in  the review  and  approval  process through  the                                                               
Classification  and   Rating  (C&R)  Committee.     However,  the                                                               
aforementioned system was abandoned  due to heightened anti-trust                                                               
concerns.   This legislation  is designed  to bring  insurers and                                                               
other key parties  with strong local Alaskan  knowledge back into                                                               
the process.                                                                                                                    
Number 0922                                                                                                                     
MR. NOOTTVEDT  turned to  the question of  what's wrong  with the                                                               
current system.   The  system hasn't been  working for  some time                                                               
and   workers'  compensation   loss  cost   has  been   seriously                                                               
inadequate and has contributed to  a growing crisis in the Alaska                                                               
workers' compensation  system, he  explained.  He  specified that                                                               
inadequate  loss cost  results in  the following  three problems.                                                               
One, insurers lose money.  In  fact, the director of the Division                                                               
of Insurance has recently been  showing legislators that workers'                                                               
compensation insurers have  been losing a lot of  money in Alaska                                                               
for a  number of years.   He noted that although  inadequate loss                                                               
costs aren't the sole reason  for recent carrier insolvencies and                                                               
the Alaska Insurance Guaranty Association  (AIGA) mess, they have                                                               
been a contributor.                                                                                                             
MR.  NOOTTVEDT turned  to a  homebuilder analogy.   He  explained                                                               
that the homebuilder first determines  the raw material cost, the                                                               
labor  costs,   and  profit.     After  the   aforementioned  the                                                               
homebuilder sells the  home and makes the profit.   However, what                                                               
if the material  supplier comes to the homebuilder  the next year                                                               
saying that  the raw  material costs increased  by 3  percent and                                                               
thus  tells the  homebuilder that  he or  she has  to pay  that 3                                                               
percent increase, and the same  scenario is played out year after                                                               
year.  The  aforementioned is how inadequate loss  cost can work.                                                               
In the  year the loss  cost is charged,  one is told  those costs                                                               
are adequate.   However, if they're determined  to be inadequate,                                                               
the charges can continue.   From the workers' compensation public                                                               
filings  of 2001-2004  a chart  was  developed demonstrating  the                                                               
loss costs  for medical indemnity  components of loss cost.   The                                                               
aforementioned,  entitled  "Comparison  of the  Ultimate  Average                                                               
Indemnity per Time  Loss Claim Between 2001, 2002,  and 2004 NCCI                                                               
Filings," was  shared with  the Division of  Insurance.   Each of                                                               
the lines on  the chart simply took the filings  made by NCCI and                                                               
the  data points  for the  indemnity cost  and the  medical cost.                                                               
"What  happens to  the insurers  then is  they go  back and  say,                                                               
'Oops' each  year that those  items cost  more.  Even  though you                                                               
already  charged all  the premium  you  can get  for those  prior                                                               
years, we  got it  wrong; you've got  greater losses  that you're                                                               
having  to pay  for and  you cannot  get additional  premium," he                                                               
explained.   The  aforementioned is  a serious  financial problem                                                               
for insurance companies  and it has played a role  in why AIGA is                                                               
struggling with workers' compensation insolvencies today.                                                                       
Number 0690                                                                                                                     
MR. NOOTTVEDT  turned to the  second problem caused by  loss cost                                                               
inadequacy,  which is  that when  carriers lose  money they  slow                                                               
down  and even  stop  writing workers'  compensation business  in                                                               
Alaska.    The  aforementioned  results in  employers  having  no                                                               
choice  but  to  move  into   the  more  costly  Alaska  Workers'                                                               
Compensation Assigned Risk Pool, which  has exploded in growth by                                                               
over five fold to nearly $50 million  in the last few years.  The                                                               
[Alaska Workers' Compensation Assigned  Risk Pool] is approaching                                                               
25 percent of Alaska's total  workers' compensation market, which                                                               
is one of  the largest and worst market share  percentages in the                                                               
nation for an assigned risk  pool.  Moreover, because the [Alaska                                                               
Workers'  Compensation  Assigned Risk  Pool]  must  use the  same                                                               
inadequate  loss  cost   for  its  rates,  it   has  been  losing                                                               
tremendous amounts of money over  recent years.  Those losses are                                                               
passed on to insurers, which worsens the negative spiral.                                                                       
MR. NOOTTVEDT  turned to the  third problem caused  by inadequate                                                               
loss  cost, which  is that  employers are  eventually hit  with a                                                               
large shock  rate increase in  one year.  Employers  can't easily                                                               
pass through shock  rate increases into their costs  of goods and                                                               
services.  [Passing through shock  rate increases] could probably                                                               
be  achieved if  there were  modest  increases over  a number  of                                                               
MR. NOOTTVEDT explained  that HB 540 works to  remedy the problem                                                               
by  improving  the  public information  exchange  among  all  the                                                               
workers'   compensation    stakeholders.       Furthermore,   the                                                               
legislation  makes  NCCI  more accessible  and  more  accountable                                                               
through  a  mini-hearing  process  that is  attended  by  Alaskan                                                               
insurers,  employers, and  others who  better understand  what is                                                               
occurring in Alaska.  This  legislation works because it requires                                                               
the division to  detail all of its findings and  conclusions in a                                                               
written  order when  a filing  is approved  or disapproved.   Mr.                                                               
Noottvedt acknowledged  that determining loss cost  isn't easy to                                                               
do because the division and  NCCI are predicting tomorrow's costs                                                               
using yesterday's data.   In fact, the 2005 filing  will be based                                                               
on 2000-2002 policy  year data.  This legislation  will help them                                                               
do  a better  job.   He  noted that  to  use 2002  data to  [make                                                               
predictions  for 2005]  means that  NCCI  must make  a number  of                                                               
assumptions  and  select  key  trends.   However,  NCCI  is  only                                                               
comfortable  making assumptions  and  selecting  trends based  on                                                               
what it considers to be visible  from the data, data that is old.                                                               
By contrast, Alaska insurers have  much more than what is visible                                                               
in 2002 and older  policy years.  By the time  of the filing next                                                               
fall, Alaska  insurers will have  already lived through  2003 and                                                               
most  of 2004.   There  will have  been experience  in new  claim                                                               
trends,  such as  new medical  treatments and  new drugs  and the                                                               
costs for both; new rulings  from the Workers' Compensation Board                                                               
and  the courts  and  the affects  on  the workers'  compensation                                                               
system.   Alaska  insurers will  have seen  many of  developments                                                               
that impact  the current loss  cost in Alaska.   As with  the old                                                               
C&R  Committee,  insurers  operating  in Alaska  are  in  a  good                                                               
position  to provide  extremely  valuable input  to the  workers'                                                               
compensation   loss    cost   review   and    analysis   process.                                                               
Furthermore,  Mr.  Noottvedt  opined  that  employers  and  other                                                               
interested parties  can contribute useful trend  information into                                                               
the   workers'    compensation   loss   cost    review   process.                                                               
Additionally,   the  mini-hearing   process  and   timely  public                                                               
disclosure  of   all  workers'  compensation  loss   cost  filing                                                               
information will  raise the  general awareness  and understanding                                                               
of the  true cost benefits  under Alaska's  workers' compensation                                                               
system.   The aforementioned will  create a greater  resource for                                                               
considering   any  needed   improvements  to   Alaska's  workers'                                                               
compensation system by everyone, including the legislature.                                                                     
REPRESENTATIVE  ROKEBERG inquired  as to  the definition  of loss                                                               
Number 0318                                                                                                                     
BARBARA   THURSTON,   Independent  Consulting   Actuary,   Alaska                                                               
National  Insurance  Company, explained  that  loss  cost is  the                                                               
portion of  the premium that goes  to pay claims.   The loss cost                                                               
is exclusive  of the portion  of the premium that  pays insurance                                                               
company expenses, commission, or  profit.  She, too, acknowledged                                                               
that the claim  portion is the hardest part to  predict, which is                                                               
why  the data  from  many insurance  companies  is aggregated  by                                                               
NCCI.    In  further  response to  Representative  Rokeberg,  Ms.                                                               
Thurston  addressed  the  graph   entitled,  "Comparison  of  the                                                               
Ultimate  Average Indemnity  per  Time Loss  Claim Between  2001,                                                               
2002, and  2004 NCCI Filings."   She highlighted that  above 1994                                                               
there  are four  different  points  on the  graph  and those  are                                                               
different estimates, ultimate average  cost per claim, from NCCI.                                                               
The term "ultimate"  means once everything is paid,  which may be                                                               
many years  for workers'  compensation.   She clarified  that the                                                               
triangle in the bottom is the  estimate of the final average loss                                                               
cost per claim  for 1994, which was made in  2001.  She confirmed                                                               
that the  aforementioned is  used to build  up the  rate filings.                                                               
The other  objects refer to  each year  after 2001 when  the NCCI                                                               
says  that the  1994 estimates  were wrong  and should  have been                                                               
higher.  Ms. Thurston said that  it's expected that there will be                                                               
errors  in these  estimates.   Theoretically,  the errors  should                                                               
jump  around and  be a  little  high one  year and  a little  low                                                               
another  year.   However,  this  graph  illustrates a  consistent                                                               
MR. NOOTTVEDT  remarked that although the  graph illustrates that                                                               
it's  leveling off  in 1999-2001,  if this  trend continues,  the                                                               
next filings  will be corrected up  even more.  The  leveling off                                                               
only occurs because that's where the prediction is now.                                                                         
REPRESENTATIVE ROKEBERG turned  to the 2004 filing  on the graph,                                                               
and asked if the back years estimate the actual cost.                                                                           
MS. THURSTON replied yes, and clarified  that as part of the 2004                                                               
filing the old  years are reviewed and the average  cost in those                                                               
old years is  estimated.  She confirmed that the  numbers for the                                                               
past years are more accurate because more time has passed.                                                                      
MR. NOOTTVEDT  highlighted that unfortunately the  premium has to                                                               
be charged based the year [the loss cost estimate] is set.                                                                      
REPRESENTATIVE  ROKEBERG  related   his  understanding  that  Mr.                                                               
Noottvedt's testimony was  that next year only the  data from the                                                               
past three years will be reviewed and there's a big gap.                                                                        
MS. THURSTON confirmed that there is a delay.                                                                                   
Number 0059                                                                                                                     
REPRESENTATIVE   GUTTENBERG   surmised   then  that   these   are                                                               
guesstimates with regard to what will  be paid out in claims over                                                               
the  years.   Some  claims  can  be  many  years old,  he  noted.                                                               
Therefore, these rates don't seem  to be self-correcting and thus                                                               
one can't, the next year, make  a charge because the estimate has                                                               
increased rather  "you get recharged  on something  that happened                                                               
last year."                                                                                                                     
MS. THURSTON  clarified that in  insurance it's not  permitted to                                                               
recoup past losses.                                                                                                             
TAPE 04-39, SIDE A                                                                                                            
MR.  NOOTTVEDT reiterated  the  need to  have  more current  data                                                               
[from] people living  in Alaska who see the trends  in Alaska and                                                               
to put  that in the review  process for NCCI and  the director to                                                               
consider.  He reminded the  committee that the aforementioned was                                                               
done under the C&R Committee  system, which hasn't been available                                                               
to the industry and the division  for over a decade.  In response                                                               
to Representative Guttenberg, he  confirmed that [putting the C&R                                                               
Committee system] back  in place is what is  being [proposed with                                                               
this legislation].                                                                                                              
Number 0063                                                                                                                     
REPRESENTATIVE ROKEBERG  pointed out  that the C&R  Committee was                                                               
disbanded due  to fears of anti-trust  actions.  He asked  if the                                                               
aforementioned fears "will  out in case law."  He  inquired as to                                                               
why this could be accomplished now.                                                                                             
MR. NOOTTVEDT clarified  that it's a different system  due to the                                                               
inclusion  of   the  public  hearing  and   question  and  answer                                                               
[period].   He pointed out  that the C&R Committee  was different                                                               
in its process,  including NCCI bringing a range of  rates to the                                                               
C&R Committee, which would set the filing for the division.                                                                     
REPRESENTATIVE  ROKEBERG surmised  then  that  the C&R  Committee                                                               
actually   participated  in   the   ratemaking  process   through                                                               
MR. NOOTTVEDT agreed and emphasized  that due to anti-trust fears                                                               
Alaska  has shifted  from a  ratemaking  process to  a loss  cost                                                               
filing practice.  Therefore, "we"  are no longer dealing with the                                                               
actual  setting  of   the  final  rates,  but   rather  with  the                                                               
underlying raw material costs.                                                                                                  
Number 0235                                                                                                                     
LINDA  HALL,  Director,  Division  of  Insurance,  Department  of                                                               
Community  &  Economic  Development,  said that  she  would  only                                                               
address the process in this  legislation, not the complexities of                                                               
ratemaking.   However, she noted  her belief that  the ratemaking                                                               
process  could become  more open.    Therefore, she  said she  is                                                               
willing  to  accommodate a  method  of  allowing more  input  and                                                               
review.  "So, on the surface  I don't have a problem conceptually                                                               
with  the bill,"  she  stated.   However,  she mentioned  serious                                                               
concerns with timelines and other areas in the legislation.                                                                     
REPRESENTATIVE ROKEBERG  suggested that Ms. Hall  could make some                                                               
recommendations to the committee and the sponsor.                                                                               
MS. HALL agreed to do so.                                                                                                       
CHAIR ANDERSON announced that HB 540 would be held over.                                                                        

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