MINUTES OF THE ASSEMBLY COMMITTEE ON LABOR AND MANAGEMENT Sixty-eighth Session May 16, 1995 The Committee on Labor and Management was called to order at 3:30 p.m., on Tuesday, May 16, 1995, Chairman Saundra Krenzer presiding in Room 119 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. Douglas A. Bache Mr. John C. Carpenter Mr. Pete Ernaut Mr. Brian Sandoval COMMITTEE MEMBERS EXCUSED: Mr. Bernie Anderson Mr. Mark Manendo STAFF MEMBERS PRESENT: Mr. Vance A. Hughey, Senior Research Analyst Mr. Fred W. Welden, Chief Deputy Research Director OTHERS PRESENT: Mr. Charles Knaus, senior actuary for the Division of Insurance Ms. Alice Molasky, Commissioner of Insurance Mr. Glenn Shippey, actuary for the Division of Insurance Mr. Ron Swirczek, Administrator of Department of Industrial Relations Mr. Darryl Capurro, Nevada Motor Transport Association and Nevada Franchised Auto Dealers Association Chairman Krenzer informed the committee the first order of business would be to address the unanswered questions from a previous meeting concerning A.B. 552. See (Exhibit C). ASSEMBLY BILL NO. 552- Makes various changes to provisions governing industrial insurance. Ms. Alice Molasky, Commissioner of Insurance, testified. She drew attention to the informational packet the Division of Insurance created in order to answer the committee's questions. See (Exhibit D). The questions regarding sections 179 and 180 would be addressed in amendments proposed by the Division, not included in (Exhibit D). In response to the first question, Ms. Molasky explained while there is no requirement to select an advisory organization on the basis of a request for proposal (RFP), she does believe the more fair process would be to issue a RFP and then consider the responses. Chairman Krenzer inquired of the committee, if they felt this was the legislative intent in regards to the advisory organization selection. The committee answered yes. She asked Mr. Vance Hughey, Legislative Counsel Bureau, to draft this as an amendment, clarifying she wants to make sure it is an open competitive bid for the advisory organization. Ms. Molasky introduced Mr. Charles Knaus, a property and casualty actuary for the Insurance Division of the Department of Business and Industry. She informed the committee he would go through Exhibit D. Mr. Knaus pointed out the answer to the technical question about subsection 3 of section 153, could be found on page three of the packet. Before looking at this however, he referred the committee to page two. He explained the advisory organization will do a lot of things that will help make private carriers function effectively and efficiently. One of the things the Insurance Division has to do and this law does is make insurance available to every employer. Section 158 of this law allows insurers to refuse any individual risk. The assigned risk plan, which the advisory organization prepares, is one of the mechanisms that will make sure insurance is available to every Nevada employer. Following the chart down, Mr. Knaus explained the rate making process for workers' compensation insurance requires gathering of the best data and then making the best interpretation of the data. All of the boxes in the second row of the chart are steps that ensure all of the data will be available. Subsection 3 of section 153, states an advisory organization shall formulate a manual of rules. This will contain the rules for the recording and reporting of data according to the uniform statistical plan, the uniform plan for rating experience, and the uniform system of classification. Mr. Knaus continued with page four of (Exhibit D). The advisory organization will file basic rates with the Division of Insurance (DOI) and its members. The members are the private carriers who will be authorized by DOI and certified by the DIR. Under a system of loss costs, the advisory organization will file the loss component of the rate and the private carrier will supply the other components, listed on page four. He explained the private carriers are allowed to adopt the rates filed by any other insurer. What was not shown on the chart was that DOI had the authority to put out rate filing instructions that the private carriers will have to follow. They could add a statement to the instructions which would require each private carrier to address how their rates are intended to be competitive and what part of their rates relate to being competitive as opposed to following what the advisory organization did or another insurer did. Mr. Knaus stated under section 154, subsection 4, it stated the advisory organization may prepare and distribute manuals of rules and schedules for rating which do not permit calculating the final rates. This is the kind of loss cost procedure that he previously referred to. The addition of each private carriers' component expenses enhances competition. Assemblyman Goldwater inquired if the rate structure and the way it is classified is similar to the way automobile insurance is handled. Mr. Knaus replied it is similar in the sense there is a licensed rate service organization called the Insurance Services Office (ISO). It files loss cost rates on behalf of its members. The primary companies in the Nevada auto insurance market are independent of rate service organizations. They are generally bigger than the ISO and they have their own data but to the extent the ISO functions as a rate service organization for its members, Mr. Knaus stated yes, it is similar. Assemblyman Carpenter questioned how many advisory organizations would there be. Mr. Knaus responded for workers' compensation, there would be one. The law states "select one". Reiterating Ms. Molasky's testimony, the DOI would do a request for procurement and then ask for any organization interested in being the Nevada advisory organization for workers' compensation to give them a list of their expertise and why they believe they could do the job. The DOI would then analyze all the submittals and select one based on the criteria in the RFP. Mr. Knaus continued his presentation returning to page four of (Exhibit D). He reminded the committee of the question posed, why section 157, subsection 1 stressed the word "every". He justified this was a case where they were a lot tighter than necessary. It means that all material related to rates, every piece of paper distributed to members or anyone else, will come through the DOI. He stated there is probably some redundant language but he feels it does not leave any room for mistakes, stressing the DOI wants to see everything. Referring to page five, he expounded on the uniform plan for rating experience. An ideal insurance rate is a rate that will only respond to "reasonably significant and permanent" changes. The rate should also change "reasonably" as the experience changes. The plan will take the manual rate for an individual risk and turn it into a rating method consistent with the loss experience of the individual risk to which this plan for experience is being applied. Like any plan, including the plan SIIS uses now, there are reasonable standards for eligibility. Mr. Knaus explained if small employers are put into it their year to year premium would fluctuate too much. One of the things the plan for experience rating is supposed to do is give incentive for employers to prevent losses. The design of the plan DOI will ultimately approve will have factors that relate to both loss frequency and loss severity. The effect of large losses in experience rating plans are dealt with in two ways. First, there is a maximum ratable single loss which means if there is a $500,000 loss in your experience period, only as much as $100,000 will go into your individual formula. There are other safeguards. One of the purposes of the plan is to promote differences in premium that will be consistent with safety plans. Mr. Knaus moved on to page six, drawing attention to the advantages of a single advisory organization and continued with the sources of revenue for an advisory organization. He pointed out the insurers that join them will pay some membership fees. There will also be licensing agreements and fees for individual services that the advisory organization will do. One example of this is, each experience rating could be priced on a fee for service for doing that one calculation. Mr. Knaus reiterated all revenue for the advisory organization will be derived from fees to its member insurers. There should be no costs to the Nevada general fund. The SIIS will be a member of the rate service organization and therefore will have a cost just like any other member. Mr. Knaus summarized (Exhibit D), page eight, pointing out the insurance commissioner currently has the authority to examine insurers and will have the authority to examine the advisory organization. This is an extra control the commissioner needs to make sure everything is running smoothly. The assigned risk plan will be devised by the advisory organization, subject to approval by the insurance commissioner. Because any insurer can refuse any risk wishing to buy insurance from it, the assigned risk plan is the ultimate market for Nevada businesses that cannot buy insurance. In regards to the advisory organization, Mr. Knaus explained the commissioner will examine the same range of activity as they do with currently licensed insurers and rate service organizations. He or she will investigate complaints of employers, medical providers and injured workers. He or she will do financial examinations of the insurers to evaluate solvency and market conduct. One of the larger responsibilities will be to determine competition. This will be the primary determinant of what the insurance division does with rates. Mr. Knaus proceeded to review page nine, pointing out how the current prior approval system works for medical malpractice insurance being it applies to any line of insurance currently subject to prior approval. Mr. Goldwater asked for Mr. Knaus' opinion in regards to any areas of the bill which could be improved in hopes of deterring insurers from manipulating their rates. Mr. Knaus responded he did not see any. The ultimate test would be the examination authority. In this instance, an examiner is sent into a company and will ask very pointed questions in order to determine if the company is playing games or not, in regards to their rate filing. Mr. Knaus admitted no test is fool proof but most of the time the system of checks and balances works well. Chairman Krenzer inquired if the deductibles will remain as incentives for the employers. Mr. Knaus replied the Division will probably instruct the advisory organization that deductibles should be available however, there are certain employers where the deductibles are mandatory with the SIIS. It is Mr. Knaus' opinion the availability of deductibles will be kept as an option but not imposed. Ms. Krenzer summarized in theory, if an employer had a $1000 deductible with SIIS they could go with a private carrier and not have the deductible requirement. Mr. Knaus responded that is the way he envisions it. Mr. Knaus continued with page ten of (Exhibit D). This page shows the prior approval rate review for industrial insurance. The only difference between page nine and page ten is the first box. In order for prior approval to be effective for industrial insurance, the commissioner has to hold a hearing and determine if the market is not competitive. Mr. Knaus commented the natural question is what the insurance division intends to do with the initial filing. He explained with the initial advisory organization filing, the Division will have no information. They will probably presume there is competition and hold enough meetings with the organization that is selected to make sure they have complete data. The Division will have to agree with all of the rate options they present in their manual. Mr. Knaus proceeded with page 11, explaining it was representative of an environment where the commissioner was holding a hearing and making a determination on competition. If no competition exists, the right side of page 11 applies. Under this side, the insurer has to file rates before they are effective and the commissioner either approves or disapproves of them. If it is determined competition exists, then the insurers can actually implement their rates before they file. Mr. Knaus expounded the proposed law is flexible enough to give the Division some authority in this environment. It can require filing of supporting data for the rates. He also drew attention to the fact that any finding stays in effect for one year and then they have to go through the whole process all over again. Assemblyman Hettrick asked Mr. Knaus to define the meaning of competition. Mr. Knaus answered there are tests in the law which determine whether or not competition is in effect operative in the marketplace. He noted these could be found on page 68 of A.B. 552. It states, "In determining whether a reasonable degree of competition exists the commissioner shall consider all relevant tests including the number of insurers, rate differences, customer knowledge..." These are the same tests that the Division generally applies to other insurers in other kinds of rate making activities. The change would be item (f) which says "for policies of industrial insurance the performance and conduct of insurers". Mr. Hettrick then asked if Mr. Knaus would explain lines 12 and 13 on page 68 which state, "Whether long-run profitability for insurers generally of the class of business is unreasonably high in relation to its riskiness". Mr. Hettrick is concerned this can be interpretated in different ways. "It appears if you have a very risky insurer, somebody insuring relatively high risk, you would want them to be fairly profitable so you would know they could insure the risk. You could read it the other way, it is unreasonably high because they have no risk and they are making too much money because they are insuring low risk." Mr. Knaus explained there are a few dimensions to measuring long-run profitability. One standard is profitability as return on equity. Equity is nothing more than assets minus liabilities in an accounting sense. The way he runs it through their formula and has done it in automobile insurance hearings is a two-step process. One measure of the riskiness of business for an insurance company is the leverage ratio they write at. The leverage ratio is the ratio of their written premium to their equity. Mr. Knaus offered as an example one company that writes at a two to one ratio and another that writes at three to one ratio. The company that writes at a two to one ratio has designed their rates to return between eight and nine percent on equity which he believes is reasonable. The company that writes at a three to one ratio, he would allow to have a return on equity in their rate formula of twelve to fourteen percent because if something goes wrong it is going to go wrong on a very big scale. The next measure of riskiness of business would be, does the line of business lend itself to very large claims that cannot be predicted. In workers' compensation insurance the medical side of the benefit is virtually unlimited. This is a kind of catastrophe which would have to be considered. Mr. Knaus continued to expound on the parameters that would measure return on equity and the exposure to large claims. Mr. Knaus returned to his review of (Exhibit D), summarizing rate changes in a competitive market for industrial insurance and comparing it to rate reviews for commercial auto insurance. Mr. Carpenter called attention to page 62 where it states the advisory organization shall submit to him, presuming "him" is the commissioner, supplementary rate information. He inquired how this works in with the rates the actual companies will submit. Mr. Knaus replied there is another section of the law that requires each private carrier to file their own rates with the insurance commissioner. Reiterating his earlier testimony, he stated the Division would instruct the companies to submit a statement as to what they are doing to make their rates competitive. Mr. Carpenter and Mr. Knaus engaged in a discussion regarding the purpose of both the individual companies and the advisory organization filing rates and the effects of the advisory organization, in the long-run, on SIIS. Mr. Nolan, referring to page 69, section 180, subsection 4, questioned if changing this provision to read "insurer's minimum profit" would be acceptable or does Mr. Knaus need to also regulate the cap on their profit. Mr. Knaus explained the year to year profit of an insurance company may be very volatile. A rate formula may contain a certain allowance for profit but it does not mean the profit will be realized. What it does mean is if the data is credible and the interpretation of the data is equally credible then the insurer has a high probability of making a profit consistent with their rate formula. Mr. Knaus further explained the wording about rates containing an allowance for profit that is not unreasonable, is in the current law. The change introduced by this law is the wording which states, "For policies of industrial insurance". He called attention to the fact the wording is not inconsistent with what the Division does currently. Mr. Nolan inquired what would happen if a company did realize the profit cap or exceeded it. Mr. Knaus replied it would depend on what their actual volume of premium was and how credible the data was. He pointed out an automobile insurance company which insures 200 cars in Nevada. Over the last three years they have made a profit that would be unreasonable by anyone's standards. Yet, it would take only one big claim to erase all of the profit. The Divisions actions for any individual case would depend upon the market share of the insurer. If a company was achieving profits for a number of years he would ask the company to make their best argument as to why he should not lower their rates. Mr. Hettrick stated it is his opinion in the long haul, unreasonable profit probably will not exist and sooner or later there is going to be a claim. It becomes a matter of subjective opinion as to whether or not it is unreasonable profit. He is concerned with whether or not the word "minimum" should be inserted. Mr. Knaus responded he does not believe "minimum" is necessary. He referred the committee to page 68, line 12. Line 12 talks about long run profitability being high and addresses the effects of year to year fluctuation. Mr. Hettrick stated line 12 says "high in relation to riskiness" but in line 14 it does not say "high in relation to riskiness" or "reasonable in relation to riskiness". It simply states "reasonable profit". He does not have a problem with tying it to riskiness but does not see how line 14 does. Mr. Knaus remarked one of the Division's recommendations on the bill is to delete some of the language on page 69. This might take care of some of the inconsistencies. Ms. Molasky called attention to her proposed amendments for A.B. 552. See (Exhibit E). Item 15 suggests deleting sections 179, 180 and 181 altogether. These new provisions are not necessary being they are either repetitive or refer to existing statutes which have "stood the test of time". Chairman Krenzer stated Ms. Molasky did not have to explain them individually. She did not have a problem with this suggestion but did express her interest in asking bill draft why they added this language, whether or not it was for technical changes. Ms. Molasky then reviewed (Exhibit F), additional written testimony explaining the proposed amendments found in (Exhibit E). In regards to the Division's proposed amendment, item 7 of (Exhibit E), Mr. Hettrick inquired how this would pertain to a carrier who offered a discount for a safety program. Ms. Molasky stated there can be discount rates requested from the Division. A discount offered by the insurer is for the purpose of motivation. She opined the same motivation is not achieved with a discount as with a penalty. Mr. Hettrick further inquired whether this section could be construed to have disallowed the discount in the sense that an insurer could say you did not allow me the discount therefore you imposed a penalty. He stated this was not the intent. Mr. Knaus drew attention to section 156, subsection c, on page 62. It reads, "The uniform plan for rating experience must permit sufficient differences in an insurer's premiums to encourage safety at the employer's place of business." He pointed out the best way to reflect a safety program in rates is in losses and therefore the insurer's actual experience will generate, through the experience rating plan, a premium decrease. If the rating manual, as filed with the Division, could be flexible enough to define the type of safety programs that have worked effectively and efficiently in other states, they might allow a going discount for a company that could show they could comply with the safety program. It would have to be part of the filed rule and rate. Chairman Krenzer stated she would like more time to review this proposed amendment for clarification. Mr. Hettrick further expressed his concern for some relaxation of the law in regards to the requirement of a safety program for the small "mom and pop" businesses. He suggested, "If operations of less than 25 or less than 10 have a safety plan, they should be entitled to a premium discount and if they do not they are not." He pointed out these type of businesses rarely have claims but they are in technical violation of the law as it exists. Mr. Hettrick believes something should be done so that they are not breaking the law. Assemblyman Anderson inquired what percentage of Nevada's business have fewer than 15 employees. His inquiry stemed from believing it is a sizeable number of business operations in the state. Ms. Molasky stated the Division of Insurance would not have this data available but SIIS or the Division of Industrial Regulations would. Mr. Anderson reiterated his concern this would apply to a large percentage of Nevada's businesses. He understands the concerns Mr. Hettrick has raised, but he believes overall costs are decreased by keeping safety as a constant factor, even for small businesses. Mr. Hettrick stated he agrees with Mr. Anderson but still feels the "mom and pop businesses" should receive a discount for putting in a plan because it is very expensive. Chairman Krenzer reiterated her request for this issue to be revisited at a later time. Ms. Molasky continued reviewing (Exhibit E). Item 8 requests the deletion of new subsection 6 of NRS 679B.310 because the Division would prefer to keep the standard hearing practice through out the regulation and hearing process under the insurance code. This amendment also relates to item 14. Item 9 would make clear the filings by the advisory organization would be subject to approval by the commissioner within 60 days after they are filed. Items 10 through 13 request rather than the 30 days period of filing or review, the period of 60 days be applied. This would conform with existing language in regard to existing standards for all other forms of insurance and allow the division the necessary time for appropriate review and collection of additional data if necessary. Chairman Krenzer inquired if there is a 30 day requirement for SIIS. Mr. Knaus responded there is a two-step filing requirement for SIIS. The first step is to inform the Division of their overall rate increase within 60 days. Second, they have 30 days to supply the details as to how the rate increase will be distributed to the various classes. Mr. Knaus clarified their proposal would change the two- step process to a one-step process so that it would be simpler and they would receive all the information at once. Ms. Molasky continued with item 16. This proposal was with respect to section 184 of A.B. 552 which addressed the referral to the Nevada Insurance Guaranty Association. There was testimony from the Association and a proposal to delete this section entirely. Ms. Molasky opined for purposes of clarity, it might be better to maintain this language. Rather than including it in a new subsection, she recommended it be added to the existing subsection 10. Ms. Molasky stated the remaining two amendments address sections 195 and 196 of A.B. 552. In regard to section 195, the Division is requesting the two month time requirement be changed to five months. This would allow them enough time to draft, hear and implement the regulations. Section 196 requires the commissioner to report monthly to the Legislative Counsel Bureau on all decisions made and the progress of all activities related to this bill. The amendment would change the monthly requirement to a quarterly basis. Chairman Krenzer asked for an explanation of this request. Ms. Molasky responded primarily because it is a burden on the Division to provide monthly reports. She stated she does not know if it would be beneficial because it takes a period of time for the implementation of all the activities and the regulatory oversight that the Division is required to conduct under this bill. Ms. Molasky called attention to one last document provided to the committee by the Division of Insurance. See (Exhibit G). It was their original assessment of what would be required of the Division as far as supporting staff. It covers the period beginning July 1, 1995 to July 1, 2000. Mr. Nolan asked if the $92,319 for the fiscal year 1996 could be absorbed within the Division's budget as it has been submitted. Ms. Molasky answered no, it could not. Being there were no other questions for Ms. Molasky, Chairman Krenzer asked for testimony from those wishing to speak in Las Vegas. Ms. Lynn Grandlund, an employer, was the only one to come forward but she stated she would hold her comments for a later time. Mr. Hettrick stated he had one more question. He commented the bill title calls for a legislative committee to study the solvency of the system and develop a formula for calculating the solvency. He inquired which section of the bill addresses this. Mr. Vance Hughey, Senior Research Analyst, Legislative Counsel Bureau, replied section 189 and 190. After a brief recess, Ms. Krenzer informed the committee of her intention to not take a dinner break and to continue working through the remaining issues of A.B. 552. Mr. Ron Swirczek, administrator of the Division of Industrial Relations (DIR), referred to documents before the committee outlining the additional duties the industrial insurance regulation section would have under A.B. 552. See (Exhibit H). He began his presentation by stating the additional duties would bring DIR into a new arena which, for the most part, was previously handled by the manager of SIIS. He emphasized the addition of hearings which would become effective July 1, 1999. In the immediate years, pursuant to all the conditions in the bill, the Division would begin a process of adopting regulations and looking at the qualifications of private carriers. Everything else would become effective July 1, 1999. The only immediate impact would be to have one legal position and one legal research assistant in anticipation of the regulations and criteria. This would be a minor impact of the three months in this biennial period to have this additional staff. In the industrial insurance regulation section, they would have an immediate need for a manager of planning and research. This would be a report section which would handle all of the planning aspects for the planning, tracking and reporting of everything that has to do with employers and insurers. Mr. Swirczek summarized for this biennial period he would have the need for four positions. He continued to explain the additional costs which would be incurred with the implementation of A.B. 552. Chairman Krenzer asked if the committee had any questions for Mr. Swirczek. Mr. Swirczek wished to respond to Mr. Hettrick's earlier question in regard to the requirement of a safety program for small employers. He explained A.B. 316 not only required every employer to establish a written safety program but to put the program into effect. As soon as the Division got all the guides out, put the regulations in place and notified all the employers, his phones did not stop ringing. He explained the Division told these callers the Legislature had provided them with the tools to assist small employers through their safety consultation and training section to help them develop their programs. They also told the smaller employers their written work place safety programs could be as small as one page. Mr. Swirczek informed the committee in 1992, there was an average employed work force of approximately 637,000 employees. The reported lost time claims, meaning someone being out of work five or more days, amounted to 21,300. This was significant because the average cost was in excess of $315 million. In 1993, after the written work place safety program requirement was written, the average employed work force increased to in excess of 670,000 employees. The reported lost time claims went down to 18,900. In 1994, the safety program requirement was in place. The reported lost time claims went down to 14,600 and at the same time the work force went up to 729,400 employees. Because of the falling percentage of the reported lost time claims, had everything continued as it did in 1992, the additional cost in fiscal year 1993 would be close to an additional $51 million. In 1994 because of the significant drop, the additional cost to both SIIS and self-insured employers would have been $143 million. Mr. Swirczek declared these are hard dollars because of safety program drops. He explained if this continues the payoffs are going to be well worth it. Mr. Hettrick expressed his belief that all of the savings could not be attributed to safety plans. There were fraud laws, coverages covered, benefit payouts and several other things which had a significant impact upon those numbers. Chairman Krenzer explained the last order of business before the committee is a work session document. See (Exhibit I). She drew attention to items 3-8 regarding the SIIS board of directors, sections 4, 7-9, 45-52 and 98-99. Mr. Nolan explained because of the successful handling by the Governor and the general manager of SIIS one of the committee's proposals was to not create a board at all at this point in time. Being there are four years to go before it would even be initiated, he stated he would like to make a motion not to change it. This would entail leaving the Governor responsible for the next two years. The Legislature could then address this issue at a more appropriate time. ASSEMBLYMAN NOLAN MOVED TO ACCEPT AMENDMENT #5. ASSEMBLYMAN GOLDWATER SECONDED THE MOTION. Mr. Hettrick clarified the amendment was to strike the language relating to the board in its entirety from A.B. 552. Chairman Krenzer replied this was correct. She stressed the SIIS would continue under the direction of the manager until a board of directors was established, should the legislature decide at some future time to establish a board of directors. Mr. Anderson expressed his concern "we are ducking the bullet". Ms. Krenzer responded they are not "ducking the bullet" because there is a lot more information to be gathered in the next four years. THE MOTION CARRIED. Chairman Krenzer disclosed the reason she voted on this amendment is it has nothing to do with managed care. She works for Sierra Health Services and is free to vote on amendments. However, she will not be voting on the bill as a whole. Chairman Krenzer stated the meeting would continue in the form of a subcommittee meeting. Mr. Hettrick reminded the subcommittee of Ms. Molasky's earlier recommendations in regards to sections 184 and 185. He concurred with her suggestions. In regards to item 2 of (Exhibit I), he opined quarterly reporting rather than monthly was adequate. He suggested the subcommittee take her two provisions as amendments to the bill as it stands. Chairman Krenzer stated the remaining issues of the work session document would be addressed at a later date. Being there was no further business before the subcommittee, Chairman Krenzer adjourned the meeting at 6:00 p.m. RESPECTFULLY SUBMITTED: Jennifer Carnahan, Committee Secretary Assembly Committee on Labor and Management May 16, 1995 Page