Legislature(2015 - 2016)BARNES 124

03/25/2015 03:15 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Moved HB 164 Out of Committee
<Uniform Rule 23(a) Waived>
+ Bills Previously Heard/Scheduled TELECONFERENCED
         HB 164-INSURANCE; RISK MG'T; HOLDING COMPANIES                                                                     
4:07:16 PM                                                                                                                    
CHAIR OLSON  announced that the final  order of business  would be                                                              
HOUSE BILL  NO. 164,  "An Act relating  to insurance;  relating to                                                              
risk based  capital for  domestic insurers  and fraternal  benefit                                                              
societies,  including provisions  related to  insurers subject  to                                                              
risk based capital  and action level event  requirements; relating                                                              
to  review by  the  director of  insurance  of  an insurer's  risk                                                              
based capital  plan; relating  to confidentiality  and sharing  of                                                              
certain information  submitted  to the director  of insurance  for                                                              
evaluating insurance  holding companies, risk based  capital, risk                                                              
management,  and own  risk  and solvency  assessments;  clarifying                                                              
provisions  related  to  risk based  capital  plans;  relating  to                                                              
exemptions by the  director of insurance for certain  domestic and                                                              
casualty insurers  from risk based capital  requirements; relating                                                              
to  insurance holding  companies,  including filing  requirements,                                                              
divestiture,  content of  statements,  and  hearings; relating  to                                                              
registration  requirements;  relating  to transactions  within  an                                                              
insurance  holding  company  system or  transactions  involving  a                                                              
domestic  insurer;  relating  to  management  and  examination  of                                                              
domestic insurers  that are part  of an insurance  holding company                                                              
system;  adding  provisions  relating   to  participation  by  the                                                              
director  of  insurance  in a  supervisory  college;  relating  to                                                              
civil  and  criminal   penalties  for  violations   of  provisions                                                              
related  to insurance  holding companies;  relating to  provisions                                                              
for  risk  management  and  own  risk  and  solvency  assessments;                                                              
relating  to  operating  requirements  for  controlling  insurance                                                              
producers;  relating to producer-controlled  insurers;  adding and                                                              
amending  definitions related  to insurers;  and providing  for an                                                              
effective date."                                                                                                                
4:07:50 PM                                                                                                                    
The committee took an at-ease from 4:07 p.m. to 4:12 p.m.                                                                       
4:12:21 PM                                                                                                                    
LORI WING-HEIER,  Director, Division  of Insurance, Department  of                                                              
Commerce,  Community, &  Economic Development  (DCCED), began  her                                                              
PowerPoint on HB  164, related to insurance.  She  stated that the                                                              
mission  of  the   Division  of  Insurance  is   to  regulate  the                                                              
insurance industry to protect Alaskan consumers [slide 1].                                                                      
4:13:48 PM                                                                                                                    
MS. WING-HEIER  stated that individual  state governments  are the                                                              
primary regulators  of insurance.  In Alaska,  the state regulates                                                              
seven  domestic  insurance  companies,  including  Alaska  Vision,                                                              
Sunderland  Insurance  Services,  Inc.,  Alaska  Timber  Insurance                                                              
Exchange that  are domiciled  in Alaska.   The division  regulates                                                              
close to 1,100 foreign insurance companies.                                                                                     
CHAIR  OLSON interjected  that  foreign insurance  companies  does                                                              
not mean outside the country, but outside Alaska.                                                                               
MS. WING-HEIER  agreed.  She named  a few major  foreign insurance                                                              
companies,  including  State  Farm, Geico,  Safeco,  Premera,  and                                                              
Aetna  qualify but  they  are not  domiciled  in the  state.   She                                                              
indicated   it  was   due   to  the   way   these  companies   are                                                              
incorporated.   The ones [HB  164 would address]  under discussion                                                              
today are those domiciled within the state.                                                                                     
MS. WING-HEIER  said that in  1945, Congress passed  the McCarran-                                                              
Ferguson  Act  (15  U.S.C.  1011   -  1015)  which  exempted:  the                                                              
business of  insurance from most  federal regulation, and  to this                                                              
date  insurance  has been  regulated  by states,  and  state-based                                                              
regulation works [slide 3].                                                                                                     
MS. WING-HEIER  said that the  act provided  that, " ...  [n]o Act                                                              
of  Congress  shall   be  construed  to  invalidate,   impair,  or                                                              
supersede any law  by any State for the purpose  of regulating the                                                              
business of  insurance ...."   However,  in 2010, Congress  passed                                                              
Dodd-Frank  with a  provision establishing  the federal  insurance                                                              
office.   Although it  was currently  set up  as a  non-regulatory                                                              
agency,  it  is  poised  to step  in  and  take  over  state-based                                                              
regulation.  She  acknowledged that this wasn't  something that is                                                              
being  addressed every  day; however,  the division  is very  much                                                              
aware of  its existence and the  authorization it could  hold over                                                              
the states  with federal regulation  of insurance.   Again, state-                                                              
based regulation has been very successful for over 100 years.                                                                   
4:15:55 PM                                                                                                                    
MS.  WING-HEIER  directed  attention  to  slide  4,  stating  that                                                              
during  the  2007-2009   financial  crisis  which   hit  hard  the                                                              
financial  services industry  of which  insurance is  a part,  the                                                              
insurance industry was  held as a shining example  of what worked.                                                              
The  Independent Insurance  Agents  & Brokers  of America  (IIABA)                                                              
agreed  stating in  a 2011  letter to  the FIO:  "Even during  the                                                              
most tumultuous  of times, state insurance regulators  ensure that                                                              
insurers are  solvent, that  claims are  paid, and that  consumers                                                              
are protected.  The IIABA  remains dedicated  to preserving  state                                                              
insurance  regulation."     She  said  that  this   statement  was                                                              
powerful  enough   that  the  federal  Government   Accountability                                                              
Office put it in its 2013 report to Congress.                                                                                   
4:16:53 PM                                                                                                                    
MS.  WING-HEIER  directed  attention   to  slide  5,  stating  the                                                              
National  Association of  Insurance  Commissioners  (NAIC) is  the                                                              
U.S.  standard   setting  and   regulatory  support   organization                                                              
created and  governed by the  chief insurance regulators  from the                                                              
50 states,  the District  of Columbia  and five U.S.  territories.                                                              
Through the NAIC,  state insurance regulators  establish standards                                                              
and best practices,  of the protocols of the  insurance companies,                                                              
the  producers, the  brokers,  and the  adjustors.   Through  peer                                                              
review, the division  monitors companies, brokers,  and ourselves,                                                              
she said.                                                                                                                       
MS.  WING  HEIER  acknowledged  while  much  of  the  business  of                                                              
insurance  is local  in  nature due  to  differences  of risk  and                                                              
other  factors  particular  to  a   local  area,  the  elected  or                                                              
appointed state  government officials  who oversee the  regulation                                                              
of  insurance   companies  and   producers  in  their   respective                                                              
jurisdiction  -  the members  of  the  NAIC recognize  that  there                                                              
often is a need for national standards and uniformity.                                                                          
4:17:41 PM                                                                                                                    
MS. WING-HEIER  said the NAIC,  working with regulators,  promotes                                                              
national standards,  uniformity,  reciprocity, and consistency  at                                                              
the  national level  through  the development  of  model laws  and                                                              
MS. WING-HEIER  said much  of the  work of  the NAIC is  conducted                                                              
through   its  committees,   task  forces,   working  groups,   or                                                              
subgroups.    Alaska sits  on  two  subcommittees:   Property  and                                                              
Casualty  Insurance, and  Market Regulation  and Consumer  Affairs                                                              
C&D)  committee,  and  14  task   forces,  3  liaison  committees,                                                              
including   the  American   Indian  and   Alaska  Native   Liaison                                                              
Committee,  which she chairs;  and numerous  working groups.   The                                                              
committee  level is  where the  discussion most  likely begins  in                                                              
the consideration of a new model law.                                                                                           
MS.  WING-HEIER  said the  NAIC  members dedicate  significant  to                                                              
educating consumers  and the industry to support a  model that has                                                              
been  adopted  by the  membership.  Model  laws are  developed  by                                                              
drafting  procedures  that  entail a  rigorous  process  providing                                                              
notice  and  opportunity  for  consumer  groups  and  industry  to                                                              
comment.   She said  they take years  to develop  to the  point at                                                              
which they are presented to groups such as this committee.                                                                      
MS. WING-HEIER  said that both the  parent committee, such  as the                                                              
Property  and  Casualty  Committee,   Finance  Committee,  or  the                                                              
Health Committee, with  oversight for the subject area  of a model                                                              
law  and  the  entire  membership  of  the  NAIC  must  adopt  any                                                              
proposed model  law by a two-thirds  majority vote.  The  state in                                                              
most cases  is not required to adopt  the model law except  in the                                                              
circumstances  such as  the one today,  which  is the adoption  of                                                              
the NAIC  financial regulation  standards & accreditation  program                                                              
[slide 6].                                                                                                                      
4:20:07 PM                                                                                                                    
MS.  WING-HEIER   said  the  mission   of  the  NAIC's   financial                                                              
regulation standards  & accreditation program is  to establish and                                                              
maintain  state regulator  standards  to promote  sound  insurance                                                              
company  financial solvency  regulation  [slide 7].   Although  it                                                              
seems simple, but  the state has seven domestic  and 1,100 foreign                                                              
insurance  companies it  monitors.   The  Department of  Commerce,                                                              
Community  & Economic  Development  is a  rather small  department                                                              
and with that  many insurers, the  state needs to be able  to rely                                                              
on its counterparts  in other states to ensure  that the insurance                                                              
companies who are  coming to Alaska to sell insurance  to Alaskans                                                              
meet a  certain standard  of financial solvency.   In  turn, other                                                              
insurance commissioners  or directors must  be able to  trust that                                                              
insurance  companies who  are domiciled in  Alaska doing  business                                                              
in the  Lower 48  are also  to financially  solvent.  Lastly,  but                                                              
equally  important is  consumer  protection  because an  insurance                                                              
company  must  be  financially solvent  to  meet  its  contractual                                                              
policy obligations  to pay claims  in the event  of a loss  to pay                                                              
4:21:39 PM                                                                                                                    
MS. WING-HEIER  directed attention to  slide 8, and said  that the                                                              
accreditation   program  provides   a  process  whereby   solvency                                                              
regulations  of multi-state  insurance companies  can be  enhanced                                                              
and adequately monitored.   As mentioned earlier,  it is important                                                              
for a small state  that the insurance companies  domiciled here or                                                              
those  operating here  but domiciled  in another  state are  being                                                              
adequately  regulated for  financial solvency  by the  domiciliary                                                              
4:22:16 PM                                                                                                                    
MS. WING-HEIER  said that  Alaskan consumers  could be  negatively                                                              
impacted as companies  may decide not to operate in  Alaska due to                                                              
the  duplicative  examination costs  incurred  by  operating in  a                                                              
non-accredited  state.  Thus,  if Alaska  loses its  accreditation                                                              
and  companies had  to  bear the  expense  of  having every  state                                                              
conducting  an examination  of their financial  records and  could                                                              
not accept  theirs, they  could elect  to not  to be domiciled  in                                                              
Alaska, which  would reduce  the number  of insurers, a  reduction                                                              
in employment and in premium taxes paid to the state.                                                                           
4:23:04 PM                                                                                                                    
CHAIR  OLSON asked  how much  income the  division generates  each                                                              
MS.   WING-HEIER    answered   that    the   division    generates                                                              
approximately $55  million plus $7 million in  fees collected from                                                              
producers in  the insurance companies.   In further response  to a                                                              
question,  she  said last  year  the  division's budget  was  $7.5                                                              
million and  that the  division is  receipt-supported by  the fees                                                              
collected from insurance companies.                                                                                             
4:23:48 PM                                                                                                                    
MS.  WING-HEIER  stated the  accreditation  was  for a  five  year                                                              
period.   One  of the  key components  of  the financial  solvency                                                              
regulation  accreditation review  will be  a determination  by the                                                              
NAIC accreditation  review team that  the state has  the necessary                                                              
solvency laws and  regulations to protect consumers  and guarantee                                                              
funds [slide  9].  She reported that  the division was  due for an                                                              
interim audit  in June  2015.   She feared  the division  will not                                                              
pass, which was why HB 164 is important.                                                                                        
4:24:43 PM                                                                                                                    
MS. WING-HEIER  felt responsible  for three  provisions in  HB 164                                                              
that should  have been addressed two  or three years ago,  but she                                                              
was not  certain why  the division  did not  request the  changes.                                                              
She  referred to  pages 2-8  to AS  21.14, related  to risk  based                                                              
capital in  the bill.  Basically,  this language would  change the                                                              
method  of measuring  the minimum  amount  of capital  appropriate                                                              
for  an insurer  to  support its  overall  business operations  in                                                              
consideration of  its size and risk  profile.  Capital  provides a                                                              
cushion to  an insurer against insolvency  and RBC will  limit the                                                              
amount of  risk a  company can  take.   Thus these provisions  all                                                              
pertain to  solvency.   She said this  should have been  effective                                                              
January 1,  2015.  She acknowledged  other provisions  should have                                                              
been effective on January 2014 and January 2016.                                                                                
4:25:38 PM                                                                                                                    
REPRESENTATIVE LEDOUX  related her understanding that  in order to                                                              
be accredited the legislature must pass HB 164.                                                                                 
MS. WING-HEIER answered yes.                                                                                                    
4:25:52 PM                                                                                                                    
REPRESENTATIVE   LEDOUX  surmised  that   if  the  state   is  not                                                              
accredited all sorts of problems happen.                                                                                        
MS. WING-HEIER answered yes.                                                                                                    
CHAIR  OLSON acknowledged  that was  the  reason HB  164 is  being                                                              
4:26:04 PM                                                                                                                    
MS. WING-HEIER  said the risk-based  capital provides  the cushion                                                              
to protect solvency.   The risk-based capital compares  risk based                                                              
on a  ration of  the risk  to capital.   This  means the  division                                                              
knows  the company  has  enough  capital for  underwriting,  other                                                              
investments to  ensure claims can  be paid when  Alaskan consumers                                                              
submit the claims.                                                                                                              
4:26:36 PM                                                                                                                    
MS.  WING-HEIER  directed  attention  to slide  11,  to  insurance                                                              
holding  companies,  on pages  8-16  of the  bill,  which must  be                                                              
effective in  2016 in order for  the state to  pass accreditation.                                                              
Referring  back to  the financial  crisis  in the  Lower 48,  many                                                              
people  probably  heard  of AIG  [American  International  Group],                                                              
which was a holding  company.  She said what brought  down AIG was                                                              
not  its insurance  operations,  but  aircraft leasing  and  other                                                              
investments  that AIG had  made.   The foregoing provisions  would                                                              
allow the  state to  review other  operations insurance  companies                                                              
have  and not  allow them  to invest  insurance  dollars in  other                                                              
operations.   She  added  that this  language  does require  other                                                              
reporting  mechanisms, but  that  she essentially  described  what                                                              
the holding company provisions of this bill would accomplish.                                                                   
4:27:42 PM                                                                                                                    
CHAIR OLSON  asked whether  the financial crisis  was also  due to                                                              
substandard mortgages.                                                                                                          
MS. WING-HEIER answered yes.                                                                                                    
4:27:51 PM                                                                                                                    
MS.  WING-HEIER   directed   attention  to   slide  12,  to   Risk                                                              
Management  and   Own  Risk  Solvency  Assessment   (ORSA).    She                                                              
described this  as enterprise risk  management that  would require                                                              
insurance  companies  to  report  to  the  state  on  confidential                                                              
investments,  as  well  as their  risk  management  framework,  to                                                              
allow  the  state  to  see  the  how  the  companies  are  judging                                                              
themselves.   Although these  provisions are not  yet in  the NAIC                                                              
[National  Association  of  Insurance  Commissioners]  model  law,                                                              
they  have  been  proposed  and  the  division  anticipates  these                                                              
provisions will be adopted this fall.                                                                                           
4:28:41 PM                                                                                                                    
MS.  WING-HEIER stated  that  the controlling  insurance  producer                                                              
provisions  should  have  been  effective   on  January  1,  2014.                                                              
Basically,  these provisions would  provide additional  guidelines                                                              
for  businesses between  the controlled  insurers and  controlling                                                              
producers  necessary  for  fiduciary and  oversight  reasons,  for                                                              
example,  when an insurance  producer owns  the insurance  company                                                              
[slide 13].                                                                                                                     
4:29:07 PM                                                                                                                    
MS. WING-HEIER  suggested that this  bill needs to pass  this year                                                              
since the provisions must be in place by January 2016.                                                                          
CHAIR OLSON commented  that the director has only been  on the job                                                              
for a little over one year, approximately 15 months.                                                                            
4:30:01 PM                                                                                                                    
REPRESENTATIVE  LEDOUX  directed attention  to  Section  1 of  the                                                              
bill and asked  whether maritime policies were  indemnity policies                                                              
and if they will be included in the bill.                                                                                       
MS.  WING-HEIER   answered  yes;   for  domestic  companies,   but                                                              
generally speaking  maritime insurance  falls under surplus  lines                                                              
placement, typically offered through Lloyds of London.                                                                          
4:30:56 PM                                                                                                                    
CHAIR  OLSON  commented  that  he did  not  believe  any  domestic                                                              
insurer writes maritime coverages for at least 15 years.                                                                        
REPRESENTATIVE  LEDOUX  asked whether  Alaska  National  Insurance                                                              
offers it.                                                                                                                      
CHAIR OLSON  offered his  belief the last  one was Pacific  Marine                                                              
Underwriting Managers Ltd.                                                                                                      
4:31:16 PM                                                                                                                    
MS. WING-HEIER said  some incidental policies may  be written, but                                                              
it was not  their main line of  business for any of  the foregoing                                                              
CHAIR  OLSON acknowledged  that Alaska  National Insurance  writes                                                              
some  incidental coverage,  and  Longshoremen  and Harbor  Workers                                                              
coverage, but he  did not believe they offered  offshore unless it                                                              
would  be workers'  compensation  for people  working  on the  oil                                                              
MS.  WING-HEIER  suggested  that  Sunderland  Insurance  Services,                                                              
Inc. may write some.                                                                                                            
CHAIR OLSON said he stands corrected.                                                                                           
4:31:45 PM                                                                                                                    
REPRESENTATIVE   HUGHES   asked   how  much   business   insurance                                                              
companies domiciled in Alaska provide outside Alaska.                                                                           
MS. WING-HEIER  answered that  Sunderland Insurance Services  does                                                              
some, but  Alaska National  Insurance probably  does the  most and                                                              
operates in Idaho,  California, Louisiana, and are  likely looking                                                              
to expand.   She suggested  that the others  are content to  be in                                                              
4:32:44 PM                                                                                                                    
REPRESENTATIVE  HUGHES noted  that obvious  this is needed  sooner                                                              
rather than  later.  She asked  whether anything in the  bill that                                                              
was not related for accreditation.                                                                                              
MS. WING-HEIER  answered no;  that the  bill was limited  strictly                                                              
to accreditation  and  financial solvency  for domestic  insurance                                                              
companies in Alaska.                                                                                                            
4:34:36 PM                                                                                                                    
CHAIR OLSON,  after first  determining no  one wished to  testify,                                                              
closed public testimony on HB 164.                                                                                              
4:35:00 PM                                                                                                                    
REPRESENTATIVE  HUGHES moved  to report  HB 164  out of  committee                                                              
with  individual  recommendations   and  the  accompanying  fiscal                                                              
notes.   There being no  objection, HB 164  was reported  from the                                                              
House Labor and Commerce Standing Committee.                                                                                    

Document Name Date/Time Subjects
HB164 ver A.PDF HL&C 3/25/2015 3:15:00 PM
HB 164
HB164 Sponsor Statement.pdf HL&C 3/25/2015 3:15:00 PM
HB 164
HB164 Sectional Analysis.pdf HL&C 3/25/2015 3:15:00 PM
HB 164
HB114 ver A.PDF HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Sponsor Statement.pdf HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Sectional Analysis.pdf HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Fiscal Note-DOA-DRM-03-20-15.pdf HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Fiscal Note-DOLWD-WC-03-27-15.pdf HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Supporting Documents-Research Report 2-4-15.PDF HL&C 3/25/2015 3:15:00 PM
HB 114
HB114 Supporting Documents-Intestate Statutes.pdf HL&C 3/25/2015 3:15:00 PM
HB 114
HB164 Supporting Documents-DOI Presentation-3-25-15.pdf HL&C 3/25/2015 3:15:00 PM
HB 164
HB164 Fiscal Note-DOA-DOI-3-24-15.pdf HL&C 3/25/2015 3:15:00 PM
HB 164