The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:10 a.m., on Wednesday, April 21, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Senator Randolph J. Townsend, Chairman

Senator Ann O’Connell, Vice Chairman

Senator Mark Amodei

Senator Dean A. Rhoads

Senator Raymond C. Shaffer

Senator Michael A. (Mike) Schneider

Senator Maggie Carlton

STAFF MEMBERS PRESENT:

Scott Young, Committee Policy Analyst

Crystal M. Lesbo, Committee Policy Analyst

Kathryn Lawrence, Committee Secretary

OTHERS PRESENT:

Lenard T. Ormsby, General Counsel, Employers Insurance Company of Nevada, referred to a handout (Exhibit C) showing that S.B. 37 will have no effect on the worker’s compensation environment. Chairman Townsend asked Mr. Ormsby to repeat this statement so everyone will be clear on this point. Mr. Ormsby continued by giving an overview of Exhibit C.

Senator Rhoads asked if the current policyholders with Employers Insurance Company of Nevada (EICON), which are going to be cancelled, will be notified prior to July 1, 1999. Mr. Ormsby replied that EICON had begun to adopt policy anniversary dates approximately 18 months ago dependent on when a company first started a policy. Mr. Ormsby continued by explaining that any changes to a policy, or decision by EICON not to reinsure, starting July 1, 1999 will be given a 60-day written notice per regulation.

Chairman Townsend commented there is a current bill being heard that dictates insurers cannot cancel a policy unless the insurance company can demonstrate an increase in risk or substantial change in requirements to cover a policyholder. Mr. Ormsby stated he is not familiar with the bill. Chairman Townsend asked Jack Kim, Lobbyist, Sierra Insurance Group, if he is familiar with this bill. Mr. Kim replied that he is, and stated it only applies to homeowners and will not affect the workers’ compensation environment.

Mr. Ormsby reiterated the three goals that Governor Kenny Guinn wanted to accomplish with S.B. 37, which are to remove the old debt through reinsurance, eliminate any future possibility of an unfunded liability by creating a mutual insurance company within the guaranty association, and provide a safety net for employees. Mr. Ormsby stated that EICON will take the steps necessary to create a mutual insurance company between July 1, 1999 and January 1, 2000. Mr. Ormsby outlined that these qualifications include consummation of the reinsurance transaction, having the insurance commissioner sign off on the prequalification financial analysis of the new company, and receive a favorable ruling from the Internal Revenue Service (IRS).

Chairman Townsend asked Mr. Ormsby to give an overview of the reinsurance process. Mr. Ormsby replied EICON has the finances available to pay for reinsurance and the reinsurance market has softened making it easier to get reinsurance at a competitive rate, and added they have numerous reinsurance companies looking at them right now. Mr. Ormsby pointed out that he believes this transaction will be completed before July 1, 1999. Chairman Townsend asked if the transaction will be to a single reinsurer or if it will be to numerous companies buying different parts of the company. Mr. Ormsby replied they have bids under both circumstances, but thinks it will probably be under the circumstance of numerous companies, and added that one of the conditions will require the trust fund stay in Nevada.

Alice A. Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry, testified that Assembly Bill 552 of the Sixty-eighth Session required an advisory organization to be responsible for a rating plan to be approved by the insurance commissioner to establish certain criteria.

Ms. Molasky-Arman pointed out these criteria included rating plans for a uniform system of classification for risk, for experience of employers, a manual that would be used by all insurers, and a plan to establish the residual market. Ms. Molasky-Arman stated that the National Council on Compensation Insurance (NCCI) submitted a residual market plan that had two choices, "Direct assignment to all insurers in the voluntary market of those employers who were to be in the assigned-risk plan, [and] the other option was a reinsurance pooling mechanism." Ms. Molasky-Arman testified that they chose the reinsurance pooling mechanism, which would make the NCCI the administrator of the plan, and pointed out this is a role separate from its services and support to the insurance commissioner and regulatory duties. Ms. Molasky-Arman explained they chose this plan because it has incentives to insurers to include all employers in the voluntary market, as well as operating under a national workers’ compensation reinsurance pool. Ms. Molasky-Arman added that all the insurers in the voluntary market are required to subscribe to the articles of agreement of the national workers’ compensation reinsurance pool.

William H. Malphurs, Director of Carrier Selection, National Council on Compensation Insurance Inc., explained that the residual market plan is a mechanism which accepts risks that are unable to find coverage in a voluntary market and the reinsurance pool is the financial aspect.

Senator O’Connell commented that the committee was supposed to receive a copy of the insurance rates. Clifford N. King, Supervisor, Property and Casualty Section, Division of Insurance, Department of Business and Industry, replied that they have the rates available and can accommodate both the whole manual or specific rate pages. Senator O’Connell asked if she could get more information on the surcharges.

Mr. King explained the traditional definition of three-way insurance is voluntary insurance, involuntary insurance and self-insurance, which is not like it is in Nevada, which has EICON, private carriers and self-insurance. Mr. King stated that there are over 232 licensed carriers in Nevada, which can write workers’ compensation policies, and are planning on adding these policies to their portfolio of accounts.

Senator O’Connell queried if there are 8,600 employers currently writing policies at the minimum $120 premium. Mr. Ormsby stated that EICON has between 7,500 and 8,600 employers paying this premium, and approximately 20,000 employers that have a premium of $1,000 or less. Senator O’Connell expressed concern with the assigned-risk surcharge, and having these 20,000 employers with small accounts being included in the risk pool. Mr. King replied that there are a number of carriers that have expressed interest in writing policies for these accounts.

Senator O’Connell pointed out that she is confused because NCCI has a set a minimum premium rate of $750, and has told EICON that they must graduate these lower cost accounts up to $750 before the 4-year rate transition. Barry Lipton, Vice President and Actuary, Western Region, National Council on Compensation Insurance Inc., explained that NCCI does have a standard of minimum premiums ranging from $400 to $750 that would be met after a 5-year transition. Mr. Lipton clarified that an employer paying the $120 under the EICON system will be paying $210 during the first year of the rate transition. Mr. King clarified that all carriers will be using the same rules and rates and all carriers will be charging the minimum $210.

Senator O’Connell asked if the process in determining the assigned-risk pool has been determined. Mr. Malphurs replied the risk pool has been divided and spread among among all of the carriers in the State of Nevada.

Mr. King stated rates are now structured by law to ease into the new three-way system, and there are carriers that would write policies under the current minimum rate if they were able. Chairman Townsend asked what statutory or regulatory hurdles are in the way of keeping these carriers from offering these cheaper rates. Ms. Molasky-Arman stated A.B. 609 of the Sixty-ninth Session established Nevada Revised Statutes (NRS) 686B.177, known as administered pricing for the period of July 1, 1999 to June 30, 2003, which would require the minimum premium of all carriers in the first year not to be deviated from, but can deviate by 5 percent each year thereafter.

Senator O’Connell asked what would happen if they had this provision sunset on July 1, 1999. Ms. Molasky-Arman replied that it would drastically increase the oversight of the Division of Insurance over the workers’ compensation insurance industry.

Senator Shaffer asked if an insurer could offer a cheaper workers’ compensation premium, but make up the difference in some other aspect of a package deal. Ms. Molasky-Arman stated that is possible because all other lines of insurance, other than workers’ compensation are open. Senator Shaffer stated that he thinks this would allow the monoline workers’ compensation insurers to be at a disadvantage.

Mr. Ormsby commented that the 4-year administered pricing was implemented to avoid predatory pricing. Chairman Townsend asked if there is a prohibition at selling insurance at below cost, and if not, why? Mr. King replied that the rates must be adequate and not discriminatory. Chairman Townsend pointed out if it would not be better to have an open market to let the competition bring the rates down. Ms. Molasky-Arman stated that the Division of Insurance investigates an insurance company’s financial solvency, marketing practices and any indication of financial impairment prior to being qualified for selling workers’ compensation insurance in Nevada.

Mr. Ormsby stated that A.B. 609 of the Sixty-ninth Session was meant to make a fully competitive system that will protect the injured worker. Chairman Townsend queried the sunset of this provision in 2001, and investigate the market at that time in the 2001 Legislative Session. Mr. Ormsby replied that this committee and the interim committees could investigate this issue during the entire time, and would be a more prudent approach.

Chairman Townsend noted that it is the concern of the committee that employers are not aware of the contents of their policies, and will not shop around for other choices until there is a free market. Mr. Malphurs replied that the chairman is correct because most people will stay with a provider if they are satisfied with the service, and are not forced to look elsewhere.

James R. York, Lobbyist, Nevada Independent Insurance Agents, stated that the independent insurance agents have been overlooked in this issue because they are not affiliated with a direct provider. Mr. York commented that the independent insurance agents would now be able to provide a full range of coverage for their customers that include workers’ compensation insurance combined with the other lines of insurance and to be able to compete with large carriers.

Chairman Townsend asked if the independent insurance agents are properly trained and licensed to sell workers’ compensation insurance, and expressed concern that small businesses that do not acquire a complete insurance package, including health care, will be discriminated against. Mr. York replied that training and certification is currently mandated, and believes there will not be any discrimination against the smaller employers. Mr. York added that he believes the current 4-year pricing is going to work, and if it is changed at this late date the process will slow down.

Mr. Lipton added that NCCI would be prepared to support any pace the state would like the workers’ compensation insurance industry to follow.

Robert A. Ostrovsky, Lobbyist, Nevadans for Affordable Health Care, explained that the administered pricing was put into effect to protect EICON from being devastated when the three-way system was to be put into effect. Mr. Ostrovsky added this would allow EICON to satisfy the debt it had accumulated, as well as maintain the claims they currently have. Mr. Ostrovsky pointed out that he thinks EICON will be left with a large amount of policyholders from the small- and medium-sized businesses. Mr. Ostrovsky asserted that he also thinks it would be in the best interest of employers to get rid of administered pricing as soon as possible, and thinks the phaseout should be around 2 years instead of the currently implemented 4 years.

Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, expressed concern with the accessibility of his organization to gain information on employers workers’ compensation records during this transition from either EICON or another insurance provider. Chairman Townsend stated that this issue was covered in another bill already passed through this committee. Mr. Ormsby added that an amendment being submitted tomorrow for this bill would contain information relating to this issue, which will state that the rules concerning this issue will stay the same.

Chairman Townsend adjourned the meeting at 10:25 a.m.

RESPECTFULLY SUBMITTED:

Scott Corbett,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

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