MINUTES OF THE ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT Sixty-eighth Session May 2, 1995 The Committee on Labor and Management was called to order at 3:30 p.m., on Tuesday, May 2, 1995, Chairman Dennis Nolan presiding in Room 321 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Ms. Saundra (Sandi) Krenzer, Chairman Mr. Dennis Nolan, Chairman Mr. David Goldwater, Vice Chairman Mr. Lynn Hettrick, Vice Chairman Mr. Bernie Anderson Mr. Douglas A. Bache Mr. John C. Carpenter Mr. Pete Ernaut Mr. Mark Manendo Mr. Brian Sandoval STAFF MEMBERS PRESENT: Mr. Vance A. Hughey, Senior Research Analyst Mr. Fred W. Welden, Chief Deputy Research Director OTHERS PRESENT: Ms. Alice Molasky, Commissioner of Insurance Mr. Charles Knaus, Property and Casualty Actuary for the Division of Insurance (DOI) Ms. Eloise Koenig, Coordinator of Self-Insurance, Division of Insurance (DOI) Mr. Paul Aakervik, W.R. Gibbens Inc. Chairman Nolan explained today the committee would continue to address A.B. 498, reminding everyone sections 6, 7, and 8 were addressed on Thursday, April 27. He pointed out , (Exhibit C), A.B. 498 including amendments proposed by the Commissioner of Insurance and (Exhibit D), A.B. 498 including amendments proposed by the Commissioner and Assemblyman Hettrick. He stated the committee would be working off (Exhibit D). ASSEMBLY BILL NO. 498 - Makes various changes related to industrial insurance. After turning the gavel over to Vice Co-Chairman Hettrick, Assemblyman Nolan, District No. 13, gave a brief introduction to A.B. 498 section by section: Section 1 refers to language set forth in the following two subsections. Section 2 refers to the financial condition of the associations which will be group self-insured. Section 3 addresses a member of an association who is returning to the State Industrial Insurance System (SIIS). It states the member will be required to remain insured by the system for at least two years before it may exit and join another association. Section 4 defines an "association" as five or more private employers engaged in the same or similar classifications of employment. Section 5 again defines an "association" but as it relates to public employers. Being sections 6, 7, and 8 had previously been addressed, Mr. Nolan briefly reviewed their main concepts and continued with section 9. Section 9 refers to the board of trustees and its duties. Section 10 refers to the insolvency of an association. Mr. Nolan pointed out this section defines "insolvency" as, "if it is unable to pay its outstanding obligations as they mature in the regular course of its business." Mr. Nolan concluded by stating sections 11, 12, 13, 14, and 15 deal primarily with cleaning up the language as it applies to the previous sections of the bill. Referring to Ms. Molasky, he told the committee she would now cover the sections more in depth. Alice Molasky, Commissioner of Insurance, testified section by section, reviewing prepared testimony. See (Exhibit E). She began with section 3, explaining currently, nothing exists in the statutes to prevent a member of an association who's lost experience has been excessive or who has not performed under his obligations from returning to the SIIS for a short period before finding another association to join. This provision will protect the SIIS and the Division of Industrial Relations (DIR). It will also provide a mechanism by which employers can be tracked in order to make certain they are maintaining their obligation to provide compensation for employees and in case they incur assessments which need to be collected. She stated the two year waiting period will hopefully deter members from making hasty decisions about withdrawing from an association. Assemblyman Goldwater questioned what would be the procedure if a member was to change his name. Ms. Molasky responded this is not addressed in this bill. Chairman Nolan inquired if a member leaves one association are they allowed to instantly join another. Ms. Molasky explained an employer can voluntarily leave an association and join either the SIIS or another association as long as continuous coverage for compensation of his employees is maintained. Section 3 addresses a member who has been terminated or who's membership has been canceled. Mr. Nolan further asked how their outstanding claims would be paid. Ms. Molasky replied one of the statutes does require the commissioner be notified of any change in membership so it is clear outstanding debts will be taken care of. It would be the employer's responsibility to cover the losses incurred. Chairman Nolan then inquired if an employer has very few losses or no losses at all, would they be able to take their deposits with them and reapply them to another association and can they receive a dividend from the commissioner's office. Ms. Molasky stated she would have to refer to the statutes. She is unsure as to where it is but there is a provision on dividends. After a brief moment Ms. Molasky explained she had found the section and it was under NRS chapter 616.3796. It allows a dividend to be paid only to a member who had been a member for the entire fiscal year of the association. In response to another question from Mr. Nolan, Ms. Molasky answered the indemnity agreement would apply to those claims which had been incurred at the time an employer is a member of that association. It would not apply to any claims incurred after his membership ceased or was terminated. A discussion developed between Assemblyman Ernaut and Ms. Molasky concerning aspects involved in an employer leaving an association. His concern rests with, "a maverick employer" deciding to use the SIIS as a safe harbor between associations. He wondered if safeguards which could prevent this type of situation from happening should be included in the bill. Ms. Molasky reiterated currently, there is nothing in statute which would prevent a member from voluntarily departing from one association and going to another. She admitted an employer jumping from one association to another will make tracking very difficult for both the SIIS and DIR. Assemblyman Krenzer suggested, in order to avoid micro managing these associations, could a SIIS re-entry fee or some financial disincentive be set up in order to save SIIS from the potentially overwhelming administrative costs if an employer decided to jump back and forth between the system and an association. Chairman Nolan confirmed these were all very valid issues and the committee, with the help of research, would attempt to bring back some alternative language to address them. The next section Mr. Nolan asked the committee to address was section 10 being it related to section 3. Ms. Molasky explained section 10 contains an amendment to include sections 2 and 3 of the bill. The other change is found in subsection 3 which is a technical change of wording. As Mr. Nolan pointed out, section 10, by existing statute, defines the solvency of an association under subsection 2. Mr. Ernaut questioned if the language in subsection 1, "unable to pay its outstanding obligations as they mature", is a standard definition used for different insurance companies as well. Ms. Molasky replied yes, it is. It is contained in chapter 696B of NRS as one of the definitions of insolvency. The other definitions are specific as to mutual insurers and to stock insurers which would not directly apply to an association. Mr. Ernaut clarified an association would not be deemed insolvent until the day comes when they cannot pay a bill. Ms. Molasky stated, "It is the inability to pay. It does not mean they are actually not paying. It is the inability which would be demonstrated in a financial statement to pay those obligations." Mr. Ernaut wanted to make sure it was understood it could be a paper insolvency. Mr. Hettrick inquired if this section pertains to the association and if there is a separate section regarding the insolvency of the individual members. His concern is with a member who cannot pay his assessment. Ms. Molasky replied no, there is not. Mr. Hettrick stated a procedure will have to be addressed. Ms. Krenzer asserted the situation brought forth by Mr. Hettrick is a function of the by-laws of the association. She is not sure it needs to be included in legislation. Mr. Carpenter questioned in regards to subsection 3, and the ability of a licensed surety being able to terminate its bond by giving 90 days notice, how would she handle this if there was a large obligation to be fulfilled. Ms. Molasky explained she is able to collect on the bond which represents the security deposit of the association. Chairman Nolan recognized those in Las Vegas and reminded them to sign in if they intended to testify. Moving on to sections 4 and 5, Ms. Molasky remarked both of these sections require the members of associations be within the same or similar classifications of employment. Section 4 applies to associations of self-insured private employers and section 5 refers to associations of public employers. She reiterated from previous testimony there is nothing in existing statutes which prohibit "heterogenous" groups from forming. She expressed her belief the long term survival of an association is dependant on adopting the provisions found in sections 4 and 5. Ms. Molasky emphasized her testimony is not an endorsement for the implementation of associations. She declared in fact, her professional opinion is associations should not commence until there are complete alternative coverages available for employees or employers in the state of Nevada. Ms. Molasky expounded on her previous statements referring back to (Exhibit C), page 5 and pointed out a memorandum from Charles Knaus, senior actuary for the Division of Insurance. He addressed the request for actuarially supported grounds for the likelihood of failure of self-insured associations, including so called homogeneous employer associations compared to homogeneous employer associations. See (Exhibit G). She stated per Mr. Knaus, even with the Division's 14 to 15 years of experience with individual self-insured employers, there is still not enough data to truly test their long term success or failure. Ms. Molasky summarized Mr. Knaus' findings. Associations are three times as likely to fail as individual or entity self- insured employers. With respect to heterogeneous associations, the maximum probability of failure is six percent. With regard to homogeneous associations, the maximum probability of failure is four to five percent. She explained his conclusion is based upon the lower credibility of loss experience of small employers and the resulting lack of confidence in the security deposit which is based on loss experience. Ms. Molasky concluded, "Nevada's venture into the realm of self- insured associations should be developed from experience and not by experiment." A discussion developed between Mr. Ernaut and Ms. Molasky concerning the implementation of group self-insured associations as compared to individual self- insurers and the effect of these alternative forms of insurance on the system. Mr. Goldwater inquired assuming A.B. 498 passes, does the commissioner have enough authority. Ms. Molasky stated sections 4 and 5 would provide the commissioner with more tools to regulate and review areas, specifically the solvency of licensees. Mr. Anderson recognized Ms. Molasky's disapproval of moving forward in this area but clarified, "if we are going to move forward you could see us doing so if the groups were homogeneous but not heterogeneous." Ms. Molasky replied this is correct. For a point of clarification, Mr. Hettrick commented the actual compensation portion of the insurance claim could be handled by the same successful third-party administrator for both an association and an individual self-insured employer. Ms. Molasky stated this is correct. With that answer, Mr. Hettrick stated with group self-insured, "we have to be able to control the tangible net worth, in some fashion, to make that as stable as it has been for the individual self-insureds. Beyond that, in terms of operating in a self-insurance mode, it does not matter whether they are a group or single company. The issue is how do we control some of these things we have been discussing here and that is how do we control the individual member of an association that goes in and out? How do we control the fact that this is a group of companies and they are jointly and severally liable?" Mr. Hettrick concluded by stating, the questions concerning group self-insurance are about the management of the assets, the liability between the companies and how this is settled. More discussion ensued between Mr. Hettrick, Ms. Molasky, and Mr. Ernaut concerning group self-insurance versus individual self-insurance and the necessary factors for avoiding failure. Ms. Krenzer clarified the purpose of the proposed legislation is not stop or prohibit groups from going self-insured but ensure, to the greatest capacity possible, they will remain solvent. Ms. Molasky replied this is correct. Chairman Nolan stated the committee would break for dinner, at this point, and return in one hour. After the break, the Chair called the meeting back to order. He explained he would like for Ms. Molasky to continue where she left off. Before that, Mr. Nolan drew attention to a list of SIC codes, Standard Industrial Classification codes, distributed to the committee for their information. See (Exhibit H). He explained DIR based their coding system on SIC codes and SIIS uses these classifications to classify businesses. These would be used when considering homogeneous businesses for group self-insurance. Chairman Nolan stated he would like for Ms. Molasky to move on to section 6 if there were no more questions on sections 4 and 5. There were none. Ms. Molasky stated before continuing she would like to clarify a couple points made in her earlier testimony. With respect to SIIS being considered insolvent under the definition provided in subsection 1 of section 10, she expounded from a regulatory standpoint the Division of Industry (DOI) looks at every financial statement of an insurer. The DOI asks the question what would the insurers position be if they had to close their doors today. Ms. Molasky continued to elucidate on the solvency of SIIS. Her next point of clarification was whether a member of an association who terminates his membership carries his tail. She stated no, he does not. The statutes presume the association will be aware of any incident that would cause an extraordinary claim. It presumes the management of the association has appropriately assessed incurred but unreported claims in its reserves. If it has not, it should be assessing. The association remains liable for the claim. Ms. Molasky elucidated in fact, it remains liable for any claims incurred for a 30 day period after a member ceases his membership. The joint and several liability agreement would come into play being the remaining members would be jointly and severally liable for the other member's loss. Mr. Ernaut stated this clarifies some of the questions he was asking earlier and feels these issues need to be addressed in the bill. Ms. Molasky responded she believes an association might address them in their by-laws. After more deliberation took place between Mr. Anderson and Ms. Molasky concerning the different aspects involved in a member leaving an association with a tail, Chairman Nolan told the committee the issue of solvency will be addressed again. Mr. Nolan asked Ms. Molasky to continue her presentation with subsection 4 of section 6, being subsections 1, 2, and 3, had been addressed. Ms. Molasky outlined the many requirements which need to be submitted with the application for certification. She referred back to (Exhibit D). One of the subsections she emphasized is subsection 4h. She pointed out the proposal is to delete this requirement which is a provision in A.B. 498 and which would propose a change to the existing statute. She commented she believes this was submitted by Mr. Hettrick. Ms. Molasky stated the DOI does support the provision for an audited financial statement of an association. The reasons being there will be confidence by the commissioner, the association, and each individual member about the financial condition being solvent. In response to Chairman Nolan's request for more information, Ms. Molasky expounded there are three levels of financial statements prepared by a certified public accountant (CPA). The first is the audited statement. It is the highest level and the most expensive. The next level down is a financial statement which has been reviewed by a CPA. It is less costly. The third level is a financial statement which is compiled by a CPA. In this instance, the CPA uses the records and the figures provided to him by the business. Mr. Ernaut noted the lack of a requirement for a resident agent. Ms. Molasky responded each association must appoint the commissioner as their attorney for the purpose of service of process. This exists in the current law. Mr. Hettrick pointed out audited financial statements are only as good as the day it was done. Therefore, he proposed bonding. He explained, "You let an insurance company come in and take this liability away from the state of Nevada. You have them purchase a bond. You do not care what his financial condition is. The insurance company will guarantee his financial condition. If they will not guarantee it, he will not get into an association." He would like to see this kept in the private sector and this is the reason for his proposal to delete the requirement of an audited financial statement. Ms. Krenzer stated she has no objection to his proposal. She inquired if he would concur with leaving the requirement for an audited financial statement in but adding, "unless proof of a bond of liability is in place." Mr. Hettrick said he had no problem with her suggestion. Ms. Molasky also expressed that would offer a proper alternative. She clarified there is continuing oversight under section 2, which requires an annual financial statement, reviewed by a certified public accountant. She referred to Mr. Knaus to explain what would be required of an employer to attain this type of bond. Charles Knaus, property and casualty actuary in the insurance commissioner's office, testified. He explained bonds can be valuable tools but in the real market place it is an idea which may or may not prove out. He spoke of his experience with the bonds that self-insured individual employers purchase to fund their security deposit. He explained the bonding companies largely require collateralization, either a portion or sometimes the full amount of the bond. He expressed his concern the bonds might not be widely available at a cost most people can afford. Mr. Hettrick commented he agrees with Mr. Knaus' analysis and noted he believes the insurance commissioner's office would be remiss if that same collateralization was not exactly what they demanded of these people in a financial statement to become self-insured. He continued we are talking about net worth to back up the effectiveness of their capability to do what they said they would do. He believes if Mr. Knaus is willing to do that, a bonding company would be willing to do the same. He believes going without a bond is setting the insurance commissioner's office up for a big fall in the case of a catastrophic situation, where a bonding company could solve this potential problem. Mr. Hettrick pointed out it also generates the tax on the other side and guarantees the other members that the individual company can bond and they are collateralized in one fashion or another. Mr. Ernaut stressed the question for group self-insurance is all about solvency. He stated he is uncomfortable with giving employers the option of a financial statement or a bond because a financial statement "is not worth the paper it is written on". There are too many ways to manipulate a financial statement to appear solvent. Ms. Molasky reminded the committee a bond would not remove all the liability for the members. She explained the $2.5 million of combined net worth is a minimum which must be maintained under existing statutes. A bond would only indemnify that portion represented in the bond. She also stated if the joint and several liability agreement must be invoked by either the association or the commissioner, then each member is liable up to the full extent of his net worth. Mr. Ernaut reiterated his belief that maybe the bond does not fully indemnify their loss but it is certainly better than a financial statement. The committee engaged in further discussion about the benefits of a bond versus a financial statement , with Mr. Knaus and Ms. Molasky. It resulted in general agreement amongst the members that a bond is the better and more simple requirement to make. The members continued to discuss whether $2.5 million is sufficient. Chairman Nolan pointed out there are other sections in the bill which address this issue of solvency. Being it is the most important part of this bill, he feels reviewing those sections might help the members come to a more solid opinion of what they should do. Paul Aakervik, senior account executive for W.R. Gibbens Inc., testified. He explained he is the first person ever certified in the state of Nevada as a self- insured, self-administrator at workers' compensation. He drew attention to something which has not been mentioned and this is there is a section in the bill for excess insurance. The bill states an employer may purchase excess insurance to go down to a self-insured retention of $100,000. They may elect to go to $200,000 or $500,000 if they can afford it. Chairman Nolan politely asked if Mr. Aakervik would hold that thought until the committee proceeded to reviewed that particular section. Mr. Hettrick stated it is his belief, a company can come into the state of Nevada as an insurance company and they are only required to have $1.5 million of assets. Ms. Molasky replied that is their minimum. Mr. Carpenter inquired what the largest claim filed in Nevada has been. Mr. Aakervik responded $800,000. "The excess carrier on that came in at $250,000 and picked up the entire liability for the self-insured employer." Mr. Knaus interjected he recalls Nevada Power having an explosion at one of their plants where there were several people injured. The claim ran into the millions of dollars. He also referred to claims filed by Washoe County and the MGM Grand. Mr. Knaus explained it has to be qualified, as to the biggest claim involving one individual claimant versus a claim involving a catastrophe. Chairman Nolan asked if anyone wished to testify on this section. There was no one. Mr. Nolan expressed his desire to move on to section 2 and section 11. He pointed out a suggestion has been to delete section 2 in its entirety. He asked if Ms. Molasky would review this part of A.B. 498 as if it was to remain. Ms. Molasky stated section 2 should be read together with section 6, subsection 4h, which refers to the audited financial statement. She explained section 2 requires each member of an association provide a reviewed statement of their financial condition on an ongoing basis. It provides two alternatives for the date on which it would be due in recognition of employers not keeping their accounts on the same annual basis. One alternative would provide for April 1, and the other would provide within 90 days after the end of the employer's fiscal year. Ms. Krenzer asked if it is Mr. Hettrick's intent to delete section 2 and instead put the language, "a member of an association or an association must show proof of a bond". Mr. Hettrick replied it is a possibility. Mr. Anderson expressed concern with the fact this is not one of Ms. Molasky's proposed amendments. He asked if she feels section 2 is no longer needed. Ms. Molasky replied if the committee was to impose the requirement of the net worth to be demonstrated in the form of a bond, without the alternative of each employer providing an audited financial statement, section 2 would not be necessary. Chairman Nolan asked if there were any further questions on section 2. There were none. Ms. Molasky elucidated section 11 would enable the commissioner, by regulation, to establish minimum requirements, with which either a private or public employer who wishes to become a member of a group, must comply. Mr. Ernaut expounded section 11 exemplifies a big policy statement. It includes giving the commissioner the ability and the authority to do his or her job. It is very necessary for the rest of the bill to work. Mr. Carpenter pointed out if section 2 is to be deleted, the reference to section 2 in section 11 would also have to be deleted. Chairman Nolan asked if there were any questions on section 11. There were none. He then proposed the committee begin a work session to review the previous discussion for the purpose of, not taking a motion, but to solidify some amendments and language in order to submit to staff. Eloise Koenig, self-insurance coordinator for the Division of Insurance, addressed the committee. She drew attention to (Exhibit Fa and Exhibit Fb). She explained (Exhibit Fa), a diagram of the overall structure of an association. She proceeded with (Exhibit Fb). It displays a hypothetical association with dollar amounts attached to claim types experience that she anticipates an association might have. She pointed out it illustrates not every member will be paying the same amount of money into each association. It will be contingent upon their classifications of risks, their payroll, and their rates. She explained from that the association will fund the claims account through the third-party administrator. Mr. Carpenter asked for clarification in regard to the money handled by the third- party administrator. Ms. Koenig responded it would be handled in a zero balance bank account. As the claims come in and the third-party administrator is paying the costs of the claims, the association administrator is depositing the appropriate amount into the payment account. The money comes from the $250,000. Ms. Koenig continued with page 2 of (Exhibit Fb). She explained the claims are filed with the third-party administrator and he then accepts or denies the claims. He makes the payments to the claimant and the medical providers. Page 3 illustrates the situation if a disaster occurs. There is a single claim with a total incurred cost of $1.3 million. She explained the first $100,000 of this claim is paid for in the normal course of events. It now gets to the point where the excess insurer is involved. In this hypothetical situation, the excess insurance carrier reimburses the third-party administrator for the costs of the claim so the third-party administrator keeps paying the indemnity payments to the injured worker and the providers. This continues until the insurance carrier has paid the maximum on this claim of $1 million. Page 4 illustrates the claim being returned to the responsibility of the association itself. Ms. Koenig expounded $200,000 remains on this hypothetical claim to close it. The claims account only has $87,500 in it and there are other claims being filed. It is estimated this association's claims account needs another $125,000. At this point, the association has to assess the members for the additional amount. Each member will proportionately pay their share back to the association, totaling $125,000. Mr. Carpenter inquired if the claim was for $1.3 million and the third-party administrator paid $100,000 and the insurance carrier paid $1 million, what happens to the remaining $200,000. Ms. Koenig explained the remaining balance is covered by the additional assessment to the members. Being it is the end of the year, the whole process would begin again. Ms. Molasky clarified this is a hypothetical situation and it would not necessarily be representative of what would be approved trade practices by an insurance company. Mr. Aakervik also clarified, in this example all of this claim would not be paid out in one year. It will be reserved in one year but not paid out. This is one of the differences in workers' compensation that has to be taken into consideration. In response to Mr. Carpenter, Mr. Aakervik explained once the excess carrier has excepted the risk and the loss occurs within that risk, he would be liable for that contract. He will be paying on this claim for a period of time and when his limits run out then the association will pick it up. Mr. Carpenter expressed concern with the fact the members of an association can leave or go bankrupt. He stated the limits should be very high so no liability is placed on someone else. Ms. Koenig clarified Mr. Aakervik's comments applied to individual self-insured employers. For the association, they are funding the incurred costs of claims during the time. The claim has to be fully funded and reserved the year of the accident. There would be no future assessments to handle it. Chairman Nolan stated it is his intention to try to wrap this up fairly quickly. He recognized Ms. Krenzer who would like to propose an amendment and after that, he would like to review the amendments discussed today. Ms. Krenzer suggested an amendment for consideration. This would be a new section which states, "The bonding agent must be licensed by the commissioner." She explained it can go where ever appropriate. Chairman Nolan asked the committee to turn to page 3 of (Exhibit Fb). He explained currently, excess insurance coverage is required. If the excess coverage is not sufficient, then the balance of the administrative account is drawn upon. At that point, an employer would, essentially, be considered insolvent. Mr. Nolan suggested an association be able to purchase a secondary excess liability policy which would cover any losses over and above. Mr. Ernaut concurred with this suggestion. He declared the risk is to great not to go in with the biggest umbrella policy one can afford. Chairman Nolan asked if there were any questions regarding this concept. Mr. Hettrick explained his reasons for agreeing with this suggestion. The committee proceeded to review the previously discussed amendments to the bill. Mr. Anderson declared his concerns are with "homogeneous groups" and "no bond, no certification." There was further discussion regarding the make-up of a "homogeneous group". Chairman Nolan asked if Ms. Molasky would be willing to prepare a list of what she would consider to be homogeneous classifications and the broadest level of classifications. Referring back to (Exhibit D), the committee finished reviewing what they discussed today. Chairman Nolan stated our research staff will work on these proposals and will bring back a draft of the bill with the proposed amendments included for the committee's final review. Section 16 will also be discussed at that time. Being there was no further business to come before the committee, Chairman Nolan adjourned the meeting at 8:40 p.m. RESPECTFULLY SUBMITTED: Jennifer Carnahan, Committee Secretary Assembly Committee on Labor and Management May 2, 1995 Page