MINUTES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR Sixty-eighth Session February 20, 1995 The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 9:30 a.m., on Monday, February 20, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Randolph J. Townsend, Chairman Senator Ann O'Connell, Vice Chairman Senator Sue Lowden Senator Kathy M. Augustine Senator Raymond C. Shaffer Senator John B. (Jack) Regan Senator Joseph M. Neal, Jr. STAFF MEMBERS PRESENT: Scott Young, Senior Research Analyst Vance Hughey, Senior Research Analyst Molly Dondero, Committee Secretary OTHERS PRESENT: Alice Molasky, Commissioner of Insurance, State of Nevada, Department of Business and Industry, Insurance Division Eloise Koenig, Self-Insurance Coordinator, Workers' Compensation Section, State of Nevada, Department of Business and Industry, Division of Insurance Charles, Knaus, Property and Casualty Actuary, State of Nevada, Department of Business and Industry, Division of Insurance Douglas Dirks, General Manager, State Industrial Insurance System Daryl Capurro, Managing Director, Nevada Motor Transport Association, Executive Director, Nevada Franchised Auto Dealers Association Ray Bacon, Executive Director, Nevada Manufacturers Association Wayne Carlson, Executive Director, Nevada Public Agency Insurance Pool John Madole, Executive Director, Nevada Chapter, Associated General Contractors, Northern Nevada I.R. Ashleman, Attorney, Lobbyist, Southern Nevada Home Builders Senator Townsend began the meeting with the presentation of a bill draft request (BDR). BILL DRAFT REQUEST 54-971: Regulates practice of dietitians. SENATOR O'CONNELL MOVED TO DO PASS BDR 54-971. SENATOR LOWDEN SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. ***** Alice Molasky, Commissioner of Insurance, State of Nevada, Department of Business and Industry, Insurance Division, explained the interpretation to be applied to the regulation which had been heard regarding the association of self-insured employers. She stated there was a dilemma as to whether there was an intent by the Legislature to include only homogeneous classifications of employment or whether there was an intent that the associations be heterogeneous. She stated she had reviewed the statutes and could find no impediment for the creation of heterogeneous groups. She commented it creates an incongruity between the section of the law that allows for merger of two associations, because the law is clear and states that only those associations which have businesses of the same or similar classification may merge. Ms. Molasky stated they are amending the regulation and are adopting it as a temporary regulation. She stated she felt the regulation should be heard by the public before it is adopted. Senator Shaffer asked how long it would take to adopt the regulations. Ms. Molasky acknowledged they were in the process of drafting the regulation and hoped it would be completed within the next 1 to 2 weeks. Ms. Molasky discussed security deposits and what types of financial statements must be provided by the members of the insurers' associations. She suggested group-insured members have an audited financial statement. Senator Townsend asked what requirements are in place at this time for self-insured employers. Ms. Molasky stated they have an audited financial statement. Senator Townsend asked why a group could not have the same. She stated the association would have an audited financial statement, but the individual members would have a certified financial statement. She stated the members combined net worth must be $2.5 million. Senator Townsend asked the purpose of the $2.5 million self worth. Ms. Molasky stated it is to ascertain they have sufficient assets to pay compensation among them. Senator Townsend asked why they would not have the same rules. Ms. Molasky stated the single self-insured are regulated by statute. She stated there is no similar requirement for associations. Senator Townsend asked since there is no statutory regulation pertaining to the associations, why would Ms. Molasky assume the regulation is different from that of the self-insured. She stated the statutes are different. She is concerned that the members should be in a position to rely on the financial statements of the other members. She stated in response to Senator Townsend's questioning that she is not comfortable with the employers in a group doing unaudited financial statements. She recognized it creates a burden for businesses to submit audited financial statements. Senator Shaffer asked if a financial statement submitted by a certified public accountant (CPA) would be accepted. Ms. Molasky stated that would be a certified financial statement, which is different from the audited financial statement. She stated an officer of a business could then certify the financial statement. Senator Townsend asked Ms. Molasky what her plan was for an insurance group which loses a member and the net worth drops below $2.5 million. She stated it would be necessary for the group to bring more money into the association to reach the $2.5 million requirement. If they could not, the association would be terminated. She stated there is a 30-day notice for the termination. Senator Townsend stated Ms. Molasky is asking to rewrite a regulation for heterogeneous groups. To better understand the time frame for final adoption and implementation of the new regulation, Senator Townsend asked if the draft would be ready in 2 weeks. She stated the hearing would be noticed in 2 weeks; the hearing would be held 30 days from the notice of hearing. Senator Townsend commented the applications would be based on the new regulations, providing there are no changes to the proposed regulations, and questioned how long it would take for someone to receive certification based on the application. Ms. Molasky stated it would take 60 days for review, then 90 days allowed for an extension, if needed by the agency. Senator Townsend asked when applications would be accepted. Ms. Molasky commented, though they would be accepted immediately, the associations would not be ready to operate by July 1. He asked why it has taken so long to reach the point they are at today. He stated the regulation has been in effect since June 30, 1993. He asked for an answer as to why it has taken so long to have groups certified and asked for her to have an answer by the next time she testifies before the committee. Senator Shaffer asked how long it would take to change the regulation by statute. Senator Townsend stated it would be faster by statute than by regulation. Senator Townsend suggested they make the changes by statute. Senator Neal asked why there would be a financial burden for the businesses to be audited individually. Ms. Molasky stated the audited financial statement is more costly than the certified, uncertified, or unaudited financial statement. Senator Neal commented he felt the group is responsible for determining the solvency of any business brought into the group association. He commented there is a bond placed to ensure financial stability of the association. Eloise Koenig, Self-Insurance Coordinator, Workers' Compensation Section, State of Nevada, Department of Business and Industry, Division of Insurance, clarified that half of the self-insured employers submit bonds and half submit letters of credit or certificates of deposit. She commented the law requires a $2.5 million net worth and a security deposit. She explained net worth is a requirement to be part of an association and the association is required to put up the security deposit. Senator Neal expressed his confusion with the regulation. Ms. Molasky explained the members do not submit a bond in support of their financial statement. Senator O'Connell commented if the regulation is put in statute, the Governor might then be able to veto the bill and it might be vetoed after the close of session. Senator O'Connell stated she would rather use the regulation process rather than the statutory process. Ms. Molasky stated there is a definition in the statute of a service company and she would like to clarify that definition. She stated a service company performs much the same functions of an insurance company. Ms. Molasky continued with her presentation moving onto the subject of the State Industrial Insurance System (SIIS). She commented there are approximately 121 employers thinking of leaving the system, and there would be a financial impact on SIIS of the loss of $16 million in premiums. She stated her agency had conducted a survey of other states and found most surveyed allowed for three-way insurance. Senator Townsend asked if Ms. Molasky has an analysis on what she thinks it might take in staffing to accommodate those who would apply during a 60-90 day period. Ms. Molasky stated two management analysts were requested. Senator Townsend commented there are many qualified people in the private sector, and asked if they could be contracted for the 120 days to take in the applications. Ms. Molasky stated that would be possible because the Governor's budget did not include those two requested positions. Ms. Koenig expressed there would be ongoing monitoring of the associations. Senator Townsend asked about other states and their insurance policies regarding self-insurance. It was noted by Ms. Koenig that many municipalities entering the associations are the smaller ones (small school districts, small counties, small cities). She stated no public entity has contacted her about joining associations. Senator Lowden expressed her interest in the information sent to her about other states' insurance programs. Senator Neal asked Ms. Molasky to clarify the bond and the $2.5 million net worth. Charles Knaus, Property and Casualty Actuary, State of Nevada, Department of Business and Industry, Division of Insurance explained the $2.5 million is to prove the association has enough net worth to protect the employee. He stated the security deposit (bond, cash, securities) is an amount calculated by the agency as an estimate of what the association might pay out in claims over the next year. He explained demands can be made against the security deposit to pay claims. He explained if the security deposit is insufficient, then the agency attaches the net worth of the business. Senator Neal asked why it is necessary to have an audit. Mr. Knaus explained the audit is to prove the net worth, and the security deposit is an estimate of insurance needs. He said it is important to have both the net worth and the security deposit because the actual amount of loss for a year is not known ahead of time and if a company should close, it is important to have the deposit on hand to pay any existing claims. Senator Lowden asked if there is any difficulty with the $2.5 million net worth requirement. Mr. Knaus stated there has not been a problem to date. Ms. Koenig stated they have had a few correctable problems. She stated the $2.5 million requirement for the individual business is set by regulation, the $2.5 million requirement for the association is set by statute. Exhibit C was submitted as support material. Senator Townsend stated the insurance division estimates a $15 million to $16 million loss in premiums to the system. He commented the second year estimate of loss is $22 million. He asked Douglas Dirks, General Manager, State Industrial Insurance System (SIIS), to comment on the estimate. Douglas Dirks, General Manager, State Industrial Insurance System (SIIS), explained his agreement with the estimate of loss in the first year of $16 million. He stated the system estimates a 25 percent loss over a 5-year period which would be approximately $120 million. Senator Shaffer stated he feels most of the businesses desiring to leave the system will do so at the first possible opportunity allowed. He does not feel they would wait 2 or 3 years to leave. Mr. Dirks stated it takes approximately 18 months to put an association together. After the first 2 years the departure rate would decrease. He stated the heterogeneous associations are harder to put together than the homogeneous groups. Senator Neal asked what the impact would be on SIIS. Mr. Dirks stated the system would experience a negative cash flow which could cause the agency to liquidate assets. He indicated this could lead to the end of SIIS. He stated the general manager of SIIS can adjust the rates, but the benefit levels are set by statute. Senator O'Connell asked what would happen if the deductibles were removed and the employer paid only the actual premium. Mr. Dirks stated the deductible generates approximately $4.5 million per year. If the deductible was changed, the premiums would have to be raised. The dollar effect would be the same. Senator Townsend asked if it were possible to find the $16 million in savings somewhere, then could the premium loss be offset. Mr. Dirks stated if they could break even, then have actuarial gains on the reserve, the impact would be neutralized. Mr. Dirks explained his first commitment is to increase the efficiency of the system. Senator Townsend stated he understands Mr. Dirks goals for the system, but they have to consider the needs of the businesses affected by the system. Mr. Dirks stated the Governor is supportive of the concept of group self-insurance. He commented the Governor has indicated he feels if the system is on a firm financial footing, it can weather any loss which might come from self-insurance. Mr. Dirks stated he feels if the system has 2 years to establish its financial base, then it will be able to better stand the loss of premiums. He stated he is committed to offering more options to employers. Senator Townsend asked why there is not a higher deductibility flexibility for both the system and the policy holder. Mr. Dirks stated the law, now, does permit more flexibility, but the system has not done so during the past 18 months, because of the financial condition of the system. Mr. Dirks stated he is supportive of the optional deductible program. Senator Neal commented he warned SIIS would suffer if businesses were allowed to leave the system. Daryl Capurro, Managing Director, Nevada Motor Transport Association, Executive Director, Nevada Franchised Auto Dealers Association, stated the two groups he represents are finalizing their plans for filing for association status in March. He stated they have spent $70,000 to develop their program plus $25,000 to $30,000 in staff costs and overhead to develop the program. He stated there is a $25,000- $40,000 minimum cost to provide certified audits. He stated the Internal Revenue Service (IRS) does not require an audited statement. He said he feels the law says the group has to be audited. He commented though SIIS may lose $16 million in premiums, it is taking in $415 million in revenue. He stated though the system will not be taking in the premiums, it will not be paying out the claims against the system for injuries. He said the self-insurers will be paying their own claims. He stated all of the research points to the self-insurers doing a better job than SIIS has done over the years. He commented a strong safety program, a good Managed Care Organization network, and a strong commitment to injured workers and businesses, is the heart of their program. Ray Bacon, Executive Director, Nevada Manufacturers Association, stated the $2.5 million of tangible assents is not a significant issue for the manufacturing sector. Senator Shaffer asked if the audited financial statements would be a problem for his group. Mr. Bacon stated it is an unnecessary expense. He stated a financial statement is needed, but once the net worth of a business is established, the audits are not needed. He said a simple financial statement should be all that is required. He commented there is no problem in requiring certified statements. Wayne Carlson, Executive Director, Nevada Public Agency Insurance Pool, stated the pool for property and loss insurance bears the first $100,000 in loss at this time. He commented some members are self-insured. He stated the members have deductibles ranging from $500-$100,000. Senator Townsend asked for a list of the self-insurers leaving the system in his association with a list of their projected savings over the next 3 years. Mr. Carlson commented that in the governmental sector, audited financial statements would not be a problem, because financial statements are audited anyway. John Madole, Executive Director, Nevada Chapter, Associated General Contractors, Northern Nevada, stated the certified financial statements would pose a hardship to the smaller companies in their association. He suggested the financial statements could be tied to the requirements of bonding companies, because bonding companies are a very important part of the construction business. He stated the $2.5 million net worth requirement would not be a problem for them. He mentioned the association is very cautious in accepting members into the group because of "deep pockets" judgements. I.R. Ashleman, Attorney, Lobbyist, Southern Nevada Home Builders, stated members of his organization are not going to be leaving SIIS at this time. He said they are moderately in favor of the moratorium on leaving the system. He said it is a matter of deep concern to them if the premiums are raised for those left in the system, to finance the system. He said they have hope that SIIS will improve, because they are not able to leave at this time. He expressed his concern that the insecurities in the system have kept SIIS from adopting improvements to make life easier for those who must stay in the system. He suggested the deductibles and choice of products could be improved. He commented there is no competing insurance system to give an alternative to SIIS, so the employers are trapped within the system. He stressed his concern that the "tail" issue would be addressed. Exhibit D (letter from Michael J. Mikula concerning workers' compensation). The hearing was closed by Senator Townsend at 10:55 a.m. RESPECTFULLY SUBMITTED: Molly Dondero, Committee Secretary APPROVED BY: Senator Randolph J. Townsend, Chairman DATE: Senate Committee on Commerce and Labor February 20, 1995 Page