Arkansas Legislative Council, Executive Subcommittee
January 15, 2025
Senator Ben Gilmore Good morning. I'm calling to order the Executive Subcommittee. Really quick before we begin, since this is my first Executive Subcommittee to chair as the newly elected chair of ALC, I just would like to say thank you to my immediate past co-chair from the Senate, Terry Rice, for his steady hand and leadership. Appreciate that. And certainly Representative Wardlaw as the House co-chair as well.
And I would like to welcome my House co-chair, Les Eaves. And Les, if you have any any words-- okay. Well, again, thank you so much for being here. We'll begin with Representative Lundstrum. I think we have Scott, Peter and David online to discuss a contract that we will be considering. So Representative Lundstrum, I'll go ahead and begin with you. And you're recognized.
Representative Robin Lundstrum Thank you. Today is a really exciting day for me. Every time you go to run a bill, you get a DFA sheet that tells you, this is how much it's going to cost, or what's going to be a loss to the budget. But we never find out what besides static scoring do we need? We really need dynamic scoring. We need to see not only the front of the picture, but the back of the picture, the side of the picture.
Because we're asked to make multimillion dollar decisions with one economic impact statement, and that's simply not enough. With me today is Dr. Peter Evangelakus-- and I'm sure I just butchered his name, so I'm sorry, Peter-- and David Ingram. And they're going to help answer questions. I would ask that we consider purchasing this so that we can make better decisions as legislators that have a better economic impact.
I want to run the absolute best bill I possibly can and never leave here and look back and go, no, I didn't have all the information that I could have accessed. So with that, I'll allow Peter and David to introduce themselves for a moment. And Scott. Sorry.
Senator Ben Gilmore Yeah, whichever one would like to begin, you're recognized if you would introduce yourself for the record.
Peter Evangelakus Yes. Thank you. I'll begin. Dr. Peter Evangelakus, senior vice president of economics and consulting at REMI. And I've worked with Arkansas and with BLR in the past, and we certainly hope to continue that in the future. Thank you.
David Ingram Likewise. My name is David Ingram. I'm a senior economic associate with REMI. I'm very excited to be part of this.
Scott Lehrer I'm Scott Lerer. I'm an assistant business administrator at REMI. Stoked to be part of this as well.
Senator Ben Gilmore Thank you.
Representative Robin Lundstrum Thank you. I'll open it up to questions. I think everybody pretty much understands the difference between dynamic and static scoring. But if you don't, I'll be glad to give you a couple of good examples. So any questions from members?
Senator Ben Gilmore Any questions?
Representative Robin Lundstrum Okay. I also want to thank members Senator Hester and Senator Dismang and also Representatives David Ray and Howard Beaty and Les Eaves and Speaker Evans for getting on conference calls and spending a lot of time-- and Marty, too-- just asking questions and digging deep on how we can use this type of computer programing to assist us. With that, I'll open it up to any questions.
Senator Ben Gilmore If we have any questions.
Representative Robin Lundstrum If we have any questions.
Senator Ben Gilmore Members, do we have questions? Co-Chair Eaves. We'll come back to you.
Representative Les Eaves Representative Lundstrum, I don't know if you can answer this or one of the fellows there, but I noticed that one of the things that was added to it that I didn't remember in the beginning was a command line interface. Can you explain what that is and why we need it?
Peter Evangelakus So I'm happy to jump in from the REMI side. We'll defer, of course, to Representative Lundstrum, if you want to say anything. But I'll go ahead. So we had not anticipated that this would be a request. But when the BLR team was brought in, one of the one of the analysts has previous experience with REMI in a previous role and he was aware of the command line interface capability and has requested to at least explore it as an option.
It's a way to essentially make the process more efficient for running a number of analyses as efficiently as possible. I think their thinking is to try to be able to address as many bills as they need to be able to during a session. So that's the request. That's something that we've been exploring with them this week to see if they would like to have it just to make sure that they understand the full technical capacities. We're certainly happy to work with them either way. Whether they use it or not, we'll be there with full support.
I think their thought is that potentially could make their job a little bit more efficient. And again, that's something that we hadn't anticipated. So that's why it was an addition late in the game when they asked about it. Anyway, we're happy to discuss this.
Representative Les Eaves That's fine. Thanks.
Senator Ben Gilmore Senator Hester, you're recognized.
Senator Bart Hester So I'm going to be supporting this. But I do want to clarify a few things that we've asked in the past. Your information is only as good as the information that you're able to put into the system. Are you confident with the information that you're able to with the inputs that you have in the system or the software?
Peter Evangelakus Yes, we are. We use the best data available from a variety of official data sources. So that populates a very detailed baseline forecast and very detailed parameters of the model. The model is also built from decades of academic literature and the model is re-estimated to make sure that the parameters are up to date regularly. The data is updated every year. So yes, we are confident in the model and the mechanisms behind the model.
Senator Bart Hester Okay. And how quick, if I have a bill I send to you, what is the estimated turnaround that I can communicate to members? To get a response?
Peter Evangelakus Yes. So just to clarify, so this will be, obviously, with our great support, but this will be the BLR officially running it. But in terms of a turnaround, I can speak to what it would be if it were our team. Again, I can't speak for the BLR. But generally speaking, a bill that's on the more straightforward side with, for example, a decrease in the top income tax rate as an example. That's something that I worked on a few years ago.
That would be something there's a static score that's inputted into the model and that's run and it can be turned around in probably maybe a day, maybe less, maybe a little bit more, but in that range. If it's a bill that's a little bit less turnkey, it may take another day or so to do a little bit of appropriate background research or to develop estimates to develop the model inputs.
Senator Bart Hester From our perspective, our workload that we're putting on our staff also will affect that. I recognize we have the software, so there's no cap that we have? If we want to use it a thousand times or 20 times this session, there's no cap on the amount of inputs or impact studies we can run, correct?
Peter Evangelakus That's correct. There's no cap.
Senator Bart Hester Yeah. Thanks.
Senator Ben Gilmore Speaker Evans, you're recognized.
Speaker Brian Evans Thank you, Mr. Chair. I concur with Senator Hester. Supporting this issue is something. It's something that I have appreciated the diligence of REMI in answering all the questions on the many different Zoom calls and conference calls that we've had. And the questions that have been sent to you, I appreciate the promptness of always returning those answers back. One thing that I'd failed to ask earlier is, in the event-- because how you've addressed the modeling is once that model for us is built, in the event that something were to happen, whether it be a natural disaster, whether it be some big turn in the local economy, some big shift in population, anything, how fast can we get a an update to that model to better reflect current times as opposed to setting the model up today?
Peter Evangelakus Yes, certainly. So I'll note in the model that will be delivered, there is that business as usual forecast that's built in. There are, if needed, capabilities that we can assist with updating that. Each year, the model will be updated and a new version will be sent out as long as the maintenance payments are current. So that will be an automatic thing once the new version of the model each year is ready to be sent out. In between deliveries of different versions of the model, we can assist with any major updates.
I will just note that those updates will be more relevant in understanding the levels of any key economic metrics. They generally don't have as much of an effect on the size of an impact in the economic impact or fiscal impact analysis. And the idea there, just to say, is an impact is what is the difference between that business as usual scenario and a new scenario, for example, a decrease in the top tax rate, looking at metrics before and after that.
And if you were to change that business as usual forecast to reflect a new major event, there may be kind of a level change in that baseline, but that will generally raise-- or, the new forecast that would come after the policy would generally move with that. Not exactly, but pretty close. So there may or may not be always a need to make that forecast update in terms of doing the impact analysis, but we're always happy to help with that. As I indicated, some clients do require those changes to be made even if they don't have a large effect on the impact analysis part of the mission.
Speaker Brian Evans So simply outside of a special session where this body convenes in the odd years for General Assembly and even years as fiscal, these models could easily be updated with the business as usual changes from some type of occurring event so that when this body did convene outside of a special session, we would have complete updated modeling to be able to make more accurate decisions.
Peter Evangelakus That's correct.
Speaker Brian Evans Okay, great. Thank you very much.
Senator Ben Gilmore All right, members, any additional questions? Senator Rice, you're recognized.
Senator Terry Rice I have a motion. Mr. Chair.
Senator Ben Gilmore All right. Seeing no questions, let's hear your motion.
Senator Terry Rice I move that the Bureau is authorized to enter into a contract with REMI for modeling program at a price not to exceed $192,000 plus taxes for the first year and $48,000 plus taxes for annual maintenance.
Senator Ben Gilmore All right. I have a motion. Do I have a second? Second. All right. All in favor, say aye. Are any opposed? Ayes have it. All right.
Representative Robin Lundstrum Thank you, colleagues. Thank you very much.
Senator Ben Gilmore Yes. All right. And then I'm going to turn it over to Director Garrity to discuss some of the procedures related to this.
Marty Garrity Thank you, Mr. Chair. Marty Garrity. In your packet, there is a sheet that's titled Dynamic Scoring Fiscal Impact Statements Procedure discussion Points. So with the adoption of this program authorizing us to enter it, there are procedural questions that we need answered from this body in terms of how we're going to go about performing these fiscal impacts, including is it going to be for only bills filed or bills that are draft bills? Is it going to be considered each bill in its own or in relationship to other bills?
So there is a list of questions that we will need to be answered in order for the Bureau to begin to process these fiscal impacts once we get the modeling program. I think REMI indicated in our conference call last week that we should be able to have it either by the end of this week or early next week. So you do have a little bit of time before we have the program to start performing this fiscal impacts.
One of the bigger items on here, and Senator Hester alluded to this, is the workload. Right now, Carlos is responsible for static impacts, which he will continue to do. In addition, we will have these dynamic fiscal impacts. REMI indicated in our conference call that we are similar to the Office of Finance, I think ,Office of Budget in Pennsylvania, and they have three persons doing these dynamic fiscal impacts. So the contract as we received considers two. So I think that's a good guideline. So I think that's something we're going to need to look at in terms of providing Carlos with some assistance in this area in order to turn around these fiscal impacts in a timely manner.
Senator Ben Gilmore Co-chair Eaves.
Representative Les Eaves Along with that, I think we ought to also consider who would request the scoring impact and also would that member decide if they're asking for a static impact from DFA or BLR or a dynamic impact? Some may or may not know the difference. I think that's a question we need to also talk about.
Marty Garrity I think there's a meeting scheduled next week for Executive Subcommittee. It may be a good time at that point to finalize these procedural points.
Senator Ben Gilmore Thank you, Director Garrity. Members, review those discussion points and then I'm sure we will have a further discussion at a later date, as Director Garrity stated. Thank you, Representative. Appreciate you being here.
Representative Robin Lundstrum Thank you for having me. And I look forward to having some input on those. I just appreciate your time and go for better bills. Thank you.
Senator Ben Gilmore Thank you. All right. Up next, presentation by Perr & Knight. If you guys would come to the table. And Scott, Peter, David, thank you so much for being on Zoom with us. Thank you for your time.
Peter Evangelakus Thank you very much.
Senator Ben Gilmore And gentlemen, as you get placed, if you would just recognize yourself and you may proceed.
Charlie Lenz I am Charlie Lenz from Perr & Knight.
Kyle Hales And I'm Kyle Hales, principal and consulting actuary at Perr & Knight.
Charlie Lenz All right. So what I'd like to do is just present the key findings of the updated actuarial report as of 9/30/24. Let me go to the first page. So the key findings are, number one, that the 7/1/23-24 insurance claims insurance costs were higher than expected based on the updated information as of 9/30. The main driver of that is that there were some large claims that were incurred at the end of the 23-24 year before the June 30th, 2024, evaluation that were not reflected in the June 30th, 2024, data yet.
And that will happen from time to time because when large claims come in at the end of a period, it takes a while for them to be adjusted and to know what the claim costs are and then to record those expected claim costs in the claims data that we then get and use in our analysis.
Then I'll talk for a couple of minutes about catastrophe modeling and some observations on the average annual loss from the catastrophe modeling reports that each of the three entities receive annually and some differences between those results and what we've seen over the past 20 some odd years in actual experience. So this slide shows in the top section the the estimated cost in millions for the latest six fiscal years as of 6/30/24 on the top and as of 9/30/24 on the bottom. And if you look at the second bar from the right, you'll see that costs more than doubled going from just one quarter from 6/3/024 to 9/30/24.
And because we use historical experience to make estimates for future policy periods, that impacted our view of looking forward costs, and you could see those estimates for the 24-25 year. On the right, that's the rightmost bar on the top section. And then the rightmost bar on the bottom section is the 25-26 fiscal year estimated claim costs. And you could see that's a sizable increase.
One to the next, so what this slide shows is five claims that were incurred in towards the end of the the July 1st, 23-24, policy period. This is the change in the claim cost that was in the claims data that we received for our analysis. And you could see these five claims increased the value that was placed on them by over $27 million over that one quarter. So that was the big driver of the increase in the 23-24 year, which then had an impact on our looking forward estimates that I spoke of a moment ago.
And then I wanted to, before I show a comparison of modeled claim costs versus actual claim costs, I wanted to just say a few words about catastrophe modeling. And all three entities M8, ASBA and APSIT, every year they get a cat modeling report, a catastrophe modeling report, from a firm called Cadence. And that information, what these reports do is they use a variety of data to simulate potential catastrophic events and estimate the resulting financial losses across a portfolio of properties.
And the reports are used for various purposes, but mainly to support insurance pricing and underwriting and reinsurance buying decisions. So for example, the insurers for the state, when they're looking at their renewal premiums, they're considering what these catastrophe models say because it tells them what to expect in a1 in 100 year event or a 1 in 250 year event. And then the reports also provide an estimate of average annual loss. And that's what I'll be focusing on. That is the expected costs for various types of catastrophes in a given year.
And the top row here shows severe storm. From the catastrophe models, the estimate is about $31 million on average per year for severe storms. And if we looked at the historical claims of all three entities and we had anywhere from 16 to 23 years of data, we calculated in current dollars what the historical average annual loss is. And that came in to about $27 million. And for the catastrophe losses, that's pretty close. That was kind of a good result. And severe storm losses are fairly frequent.
So the historical data is useful in predicting what average costs will be. But for the perils of earthquake and flood, those are less frequent events. Obviously earthquakes, you can have 100 years between severe earthquakes. And floods will be a little bit more frequent than that, but still not so frequent. And for those two perils over the history period that we're using in our work, the model average annual loss was over $35 million and their average was less than $1 million. And with really flood being the lion's share of the difference. And I thought that was a noteworthy result because it, I think, gives an opportunity for taking risk that the captive can take advantage of moving forward.
It wouldn't be something that a significant portion of the risk could be taken in the captive early on, but a small amount of risk could be taken early on and exposure increased over time.
Kyle Hales I'll just add one thing to that. So when we previously had done the actuarial reports and made estimates for the Captive and stuff like that, including catastrophe losses, was not necessarily something that we had originally looked into. But now after seeing this updated actual report, it seems like that's certainly something that I would consider on the table for potentially, as Charlie mentioned, including some additional risk in the captive that will help with catastrophe losses on an overall basis that should help to reduce the total cost of insurance because, as you can see-- I'll go back here a slide-- as you could see the estimates for what the losses would be on an annual basis are significantly higher than what the losses have been. Earthquake. That's not unexpected, but floods should be a little more common. So, again, it's certainly an opportunity to utilize a captive to kind of self-insure more of that risk and to on an overall basis kind of reduce the total cost of insurance.
Charlie Lenz And so this last slide is sort of just to recap the projected losses for the 7/1/25-26. The upcoming renewal period based on claims data through 9/30/24 are significantly higher than our prior estimate from the June 30th, 2024, report for the 7/1/24-25 year. That's because of a change in the cost associated with the 23-24 year and combined with the impact of increase in insurance values of 10.3%. And then the final point is the actual earthquake and flood losses over the past 16 to 23 years have been minimal and well below the nearly $35 million annual loss from the catastrophe models. And this represents an opportunity of retaining risk over time. Any questions?
Senator Ben Gilmore Senator Dismang, you're recognized.
Senator Jonathan Dismang And just to make sure, what is the dollar amount for severe? How do you get on this report? Does that make sense? What is calculated to be severe versus just an ordinary claim? I'm assuming it's a dollar threshold.
Charlie Lenz I think if it gets a catastrophe code assigned to it. So if it's deemed a catastrophe. So it would be major storms. I'm not sure what the criteria are for the assignment of a code to an event.
Kyle Hales But it's a predefined definition in terms of what that will be. It's either like a dollar amount or it's certain number of buildings damaged or it's, like in terms of hurricanes and that, it would be if there's a named storm and things to that effect.
Senator Jonathan Dismang On the 16 to 23 timeline that you looked at, is it pretty consistent year over year when you adjust for inflation or have those been going up even including inflation? Have we had more catastrophic or severe instances over the-- I understand in recent years that may be the case. People are saying maybe or maybe not.
Charlie Lenz No, there has been a trend. And really the 21-22 through the 23-24 periods have had a significantly greater share of catastrophic claims.
Senator Jonathan Dismang But in my mind, is that an expected trend that's going to continue really, or did something happen, even aside from what we're calling severe and what we're not. I mean, did the definition change in some ways or were there other factors even outside of just the fact we've had more storms or whatever that may be that led to this higher number? Because we go years with almost nothing. And then I had a hard time believing that the climate changed so much in three years that it led to all of this change. I'll just say, is it do we have older roofs that are subject to greater damage even on a smaller storm, but still considered severe or?
Charlie Lenz I've seen this in multiple regions of the United States. And it is, to the best of my knowledge and training, it is related to there just being more severe events in recent years.
Senator Jonathan Dismang Just in the last few years. Did you see that in any of your other 16-23, were there bumps in where maybe you have--
Charlie Lenz Sure. There were some years with high losses, but none as high as any of the most recent three.
Senator Jonathan Dismang Even adjusted for inflation?
Charlie Lenz Even adjusted for inflation.
Senator Jonathan Dismang And I want to make sure I understand. So when you're saying there's a place to have savings and when you're looking at severe storms, earthquake, flood, earthquake and flood, we're going to delineate those out and we're going to buy insurance just for flood. We're going to buy insurance just for whatever. Whereas you're saying we were buying too much potentially or at this point there's just an opportunity for us.?
Charlie Lenz I think it's just an opportunity at this point.
Kyle Hales I would agree with that. I think really what you're trying to do is look at to see how the market is pricing the risk versus what we think the risk would be kind of if you were to look at a longer run average. And so there's a potential for some savings there if we could self-insure that where, again, instead of going out and paying the market price for that, bring that risk in-house, still charge ourselves a market price or something a little bit more of a reasonable dollar amount. And again, if the losses aren't there, that's surplus that's retained within a captive.
Senator Jonathan Dismang All right, so 35 million generally reoccurring and severe storm damage annually?
Charlie Lenz Well, that's just flood and earthquake. And I will say that the costs in the latest three years are almost all wind losses. They aren't flood. Flood has been pretty even across the 20 some odd years. Flood losses, there haven't been very many.
Senator Jonathan Dismang What are total losses? Do you all have that? A total loss average if we're counting severe and even the minor claims that come in.
Charlie Lenz So we're estimating current ground up, unlimited loss of $55 million. Okay.
Senator Jonathan Dismang Thank you. So $55 million is what we should expect to lose or having claims every year. Lose may not be the right word.
Charlie Lenz Yeah. And it's going to be highly variable because.
Senator Jonathan Dismang We hope it would be, right? Yeah.
Charlie Lenz Yeah, right.
Senator Ben Gilmore Thank you, Senator. Representative Brooks, you're recognized.
Representative Keith Brooks Thank you, Mr. Chair. Charlie, good to see you guys again. Couple of questions on page three and then at the end on slide three. Looking at the lost data, I want to clarify that the 22-23 cycle 7/1/22 to 7/1/23 which was inclusive of the Wynne school loss, is that total dollar amount in there? Because my understanding kind of this entire time has been that I think they reserve like 120 million-ish for that loss. So what's the status of that?
Charlie Lenz You know what? I don't know the answer to that. I don't know why the full $120 million isn't in there. I think for that loss, the claims data that we had had 90 some odd million. So I don't know why it wasn't the full amount.
Representative Keith Brooks Like I said, all along, that's the number I've kind of heard. But let's say that is an accurate amount, $120, $125 million. That's a significant higher amount than what we have in here. So how might that affect our modeling when we bump it up by an additional 30 million?
Charlie Lenz Well, that event on its own doesn't have a significant impact on the projection. That's just one event in one year.
Representative Keith Brooks Okay. So an additional 30 million in claims in any potential given year wouldn't have a significant impact?
Charlie Lenz Not significant, no. It would nudge it up, but it wouldn't be a significant increase.
Representative Keith Brooks And then, a question relative to what you're talking about, retaining a large amount for earthquake and flood. So if I understood what you're saying to Senator Dismang, we are looking at self insuring more under the captive for flood and earthquake.
Kyle Hales Potentially. That's not something that we specifically looked at previously because we didn't have the data broken down by catastrophe versus non catastrophe previously when we had done this. But now that we have that a little bit better, it's an opportunity to put some of that risk, I wouldn't say 100%, but it'll be a portion of that-- you would want to look through to see kind of what that opportunity would be and kind of what the risks are, of course, with including that in there. But again, the numbers seem to be pretty telling that the models are showing for flood and for earthquake, they're showing significantly higher average annual losses than what the state has experienced over the last two decades.
Representative Keith Brooks Follow up, Mr. Chair. And so would we look at transferring, when we look at premium basis for the different school districts, would we will look at transferring that onto them as a part of the premiums that they're paying, possibly an increase for premiums for the schools for the self-insurance. I guess where I'm going is that we have a significantly different risk profile when you look at Pocahontas, Arkansas, for earthquake as opposed to Ashdown, Arkansas, in proximity to New Madrid fault. So would there be an evaluation of almost a per school district risk profile?
Kyle Hales Right. Yes. So you'd want to allocate that exposure as appropriate. So to go through and to kind of update to say, okay, if it's an area that's more flood prone versus not, if it's an area that's more earthquake prone versus not, to adjust those premiums so that it more appropriately reflects the risk. At least we could set it up that way. Now, it doesn't mean that it has to be charged that way, but we'll at least have that information available. So if the decision is made to allocate the risk that way, clearly there's going to be some looked at to see how much of a change in premium on a school district by school district basis that's going to incur and then see if there's appropriate adjustments that need to be made.
Charlie Lenz And I believe the current underwriting is done on an individual school district basis. So I don't think that would represent a change.
Representative Keith Brooks And then just thinking about the flood flood issue, I'd asked a question in December relative to Tennessee, because I know we're basing this on their captive model relative to Tennessee and some of the challenges they're having with flood losses and FEMA. I know y'all are going to be talking with them. What additional clarification have we gotten in terms of the relationship of FEMA and their captive?
Kyle Hales Yeah. Jill, do you want me to speak to that or do you want to? Okay, so we're having a meeting-- correct me if I'm wrong-- next week. Hopefully next week to just kind of make sure that we have any of the issues ironed out and make sure that there aren't any concerns with FEMA. Thank you, Mr. Chair.
Senator Ben Gilmore Thank you, Representative. President Hester, you're recognized.
Senator Bart Hester Thank you. When we say wind, tornadoes are classified as wind, right? Okay. Yeah. So we know what's happened with wind in Little Rock and northwest Arkansas on that. So with the new numbers, what is our estimated savings when we go forward with this? Do I tell the member sitting next to me we think we're going to save 30 million a year, 50 million a year, 70 million a year? I mean, you're an actuary. So what is that estimated with this update?
Kyle Hales Yeah. So unfortunately, we don't have a great answer for that yet. So what we would need to do is go through, see what the renewals come in and then see how they price at various retentions and see then which retentions are optimal for self-insurance versus not optimal for self-insurance. When we looked at it previously ,and now I'm not going to remember the numbers off the top of my head, but we had done presentations before where we went through and looked at what the figures were in terms of potential savings.
And there was certainly several million dollars where if you, again, looking at certain layers of risk, if the captive were to participate in some of those layers, what was happening is some of the carriers within those layers were charging, it was pretty obvious, significantly above what the the average of the remaining carriers were. So, again, those would be the opportunities for the captive to come in and kind of strategically replace a carrier that had above or significantly above market premiums on that.
We won't know an exact answer probably for several months until we go through, we get the renewals, we see how the reinsurance tower is structured, how everyone's charging, what their rates are, and then seeing where the captive could ideally come into play and what coverages could essentially be removed from the reinsurers and put back into the captive.
Senator Bart Hester Okay. And so most of the answers since we've been sitting in here, and I think the world would just assume it's going to get more expensive for insurance. I have a real concern that-- and after learning through this process that it really all comes down to just ultimately a handful of ultimate insurers-- that what's happening on the West Coast with their irresponsible management, I don't want the taxpayers of Arkansas to be subsidizing the irresponsibility of Californians.
And I feel like that's coming. And they're going to lose billions of dollars on the West Coast, which falls into this. We've talked all along about trying to get this done by July 1st. I want to get it done by July 1st if it's good policy. Can you tell me, not from like the Bureaucratic side, but from the insurance side, why can we not have this implemented by July 1st?
Kyle Hales The challenge is going to be this. We need to have the captive up and running, at least an idea in terms of what the structure could be. That's not overly difficult to do by July 1st. The challenge, though, is going to be when we go through and we combine the entities together, it's different than where we are right now because we're looking at three separate entities versus combining them.
Again, we've gone through this, we're in the process of going through the RFPs, looking to see kind of what that new structure is going to look like. And it's going to take time to get that into place. In the worst case scenario that we want to ever be in is a situation where it's not up and running but we've gotten quotes and everything under this new structure, but that new structure is not ready to go yet. And so if that's the case, then we're going to be really have our hands tied in terms of then going backwards and saying, well, okay, now if we need to extend the current structure, what does that look like?
And we're in a very disadvantageous position if we need to extend it that way. It's again, in my opinion, it's better to make sure that everything's up and running and structured properly and in place with the right vendors who are going to run this and oversee the whole operation just to make sure that we're not missing anything, there's no gaps in coverage, there's nothing that kind of falls through the cracks. The worst case scenario would be the state goes barren. And that's, in my opinion, that should never be an option.
Senator Bart Hester Yeah, that's not an option. Look, I'm a home builder. I don't know. But I'm not afraid to ask for things. I don't know how many bidders are looking at this. If it's four or seven or two or whatever it is, can you ask them through some of the responses or can you ask them, can anybody deliver? And if you say no, why?
And maybe the answer is all of them say no. But what if three of them or four of them say we can deliver by July 1st, we need this. I would like to know that if it's appropriate for you to ask the people considering the RFP can anyone deliver.
Kyle Hales Again, to get this switched over by July 1st, it's typically a six month process. I'll outline a little bit in terms of where we are with the RFPs in that there's two separate RFPs right now. One of them is for captive management, the other is for brokerage services. Where we sit right now, the RFPs are due by the end of January. So by February we're going to have to narrow down that group to a reasonable number that the Executive Subcommittee could review, have those entities go through and prepare their final presentations or pitches. Timing on that we're thinking is February to narrow them down, probably March to have them come in and do their pitches.
By the time contracts get signed and what have you, probably talking April at the absolute earliest. I'm estimating it's going to be at least a six month process out from the time that we have that up and running to being able to go out, get those vendors up to speed on everything, get the product, get the pitch decks and everything ready to go, get this pitch to the carriers, have the carriers understand all the ins and outs on everything that's going on here and be able to to place the coverage. I mean, in my opinion, realistically, we're talking more like a fourth quarter policy.
So that's kind of the situation that we're in. And you say, well, why isn't 7/1 possible? Because even now, as we speak, under the current structure, it's a six month timeframe. The pitch decks and everything are being worked on currently, that's my understanding, to pitch this to the carriers in February, to go out and have them, the carriers, end up coming up with their pricing and their rating on everything. They want to understand the statement of values, the total cost of risk, what their position is going to be.
And there's a lot of moving parts here. We may be able to place coverages for certain layers, but most insurance carriers, if there's, let's just say, for example, there's a $50 million layer, most of them don't take 100% of that layer. They might only take 25%. So now we need to place the other 75%, and that might require talking to two, three or four other carriers. Okay. Now we have that $150 million layer. Now we need to do another $50 million layer, see how that plays out.
And many times it's not the same carriers just taking a ladder all the way up. They'll take certain pieces of this and that. It's all based on their risk model and just kind of where they are on an overall what their risk appetite is.
Senator Ben Gilmore Thank you, President Hester. Members, just keep in mind that there's another committee that is scheduled to begin in this room shortly. So I ask that we keep our questions brief. Representative Brooks, coming to you. You're recognized.
Representative Keith Brooks Thank you, Mr. Chair. I'll make it brief. Two questions. Do we have anything relative to what change in statute is going to be needed for the captive?
Kyle Hales Jill, you might be able to answer that one.
Representative Keith Brooks While she's coming up, let me ask the other one. Bentonville is the only school that we have that's not included in this data, correct? Because they're the ones who aren't on any program.
Kyle Hales Yeah. If they're not on any program and we don't have the historical data, then you're absolutely correct.
Representative Keith Brooks And this may be a question more for one of the members who covers Northwest Arkansas. I know they had a tornado this year that was fairly significant. Did that impact? Do we know anything about those losses?
Senator Bart Hester I'm sorry. I was distracted.
Representative Keith Brooks No, my question was just relative to Bentonville. And because they're the ones who aren't on any program, but I know they had a tornado this year, so I didn't know what we'd known about any losses up there relative to that.
Senator Bart Hester Yeah. I can get an answer. I can get an answer to that. But yeah, a majority of our losses, and we saw it in this report, were at the Rogers Public schools and NWAC. But I will find out about Bentonville.
Senator Ben Gilmore Thank you, Representative. Senator Dismang-- really quick, really quick. Representative, did you have a question for Ms. Thayer?
Representative Keith Brooks Statute. Any changes to the statute. Because I'm thinking about the time frame that Cal was talking about. You know, as we think about the beginning of a time frame and having to push something out six months-ish, well, a lot of that depends upon what changes may have to take place.
Jill Thayer Yes, sir. Jill Thayer, Bureau of Legislative Research. Representative Brooks, there are several changes that will need to be made. There will be a package of bills that will need to be brought forward and discussed. They haven't been brought out yet. One of the changes would be to allow the state to own and run a captive. Currently, that's reserved for private businesses under the law. And then determining which entity of the state you all the General Assembly will want to take on running this entity.
Senator Ben Gilmore Thank you, Ms. Thayer. Senator Dismang, you're recognized.
Senator Jonathan Dismang It was really about the baseline we were kind of just referring to about the savings. And it was like, well, we'll have to see what they come back at when they rebid or they re-whatever. I mean, my only concern with that is I'm not sure that that's going to be an accurate baseline. I think we've already seen some discussion about the fact that we're having this conversation. Because this isn't a science. I mean, the purchase of insurance is, and the shocker to me is, it is not a science. It's an event. I don't know how else to characterize it. And they are very well aware of what we're talking about doing here. And I do believe that when we go to London or if we do go to London, then that will be a part of the conversation, and some of these higher payees that we have will probably take that into account when we're buying up insurance. And so I just don't believe that that's going to be an accurate reflection of what savings could be, because I think we're probably going to have an outlier year because we're about to get away from what's been the normal process.
Kyle Hales Yeah, I think I would just define savings as what we'll do is we're going to ask for multiple quotes from the carriers. So in other words, saying if it attaches above this dollar threshold, what would the cost be? If it attaches above a higher dollar threshold, meaning the captive retains more, what would the cost be? And looking at that model, looking at those scenarios relative to if we had to retain that gap layer scenario one versus scenario two, what do we think on an actuarial standpoint that would be. So in other words, it's not savings from year one to year two type thing.
Senator Jonathan Dismang But we have a bridge that we have to get us through to this new model. Right. And we're going to go and we're going to get renewals potentially, or we're going to get extensions, one of those two options, for what we have right now. And if we go over and get renewals, when we get those renewals, they are well aware of what we're doing here and what we're talking about doing. And I firmly believe that will be reflected in rates that will be adjusted based on what we're doing.
And so we talked about with some of the savings in the outliers, these people that we're paying more to fill what we need in insurance versus fully. And that's what we can take away from ,we can get away from, there's people way outside the averages. Those folks that were buying outside the averages are probably going to have a conversation that is different than they've had in the past because the goal is going to keep going down the same path we've always gone down. And so, again, that's why I'm not sure it's going to be apples to apples as far as how we define savings. Like I said, we're creating a totally different situation than that's occurred in the past because we're creating competition, if we are just going to be quite frank about it.
Kyle Hales Which I think is a good thing.
Senator Ben Gilmore All right. President Hester, you're going to have the final question. You're recognized.
Representative Keith Brooks I know we're out of time. Hey, I am currently, I've been very happy, very pleased with the work you guys are doing for us. I feel confident about the direction that we're going. And I know that you've answered this question. It's just going to make me feel better. I'm asking you to ask all the people bidding, can they perform by July 1? And if not, why? And when they all tell me the same things you said, I'm going to shut up and be happy with the next steps. Can you ask that? Just ask that question of them. And I'm good with that. Ask everybody the same question.
Kyle Hales Absolutely. We could certainly do that. You know, again, as we narrow the vendors down and they'll be here giving their pitches, that's a legitimate question.
Representative Keith Brooks Okay. Thank you.
Senator Ben Gilmore All right. Seeing no further questions, gentlemen, thank you for your presentation. You're excused. I know, Members, there will be additional conversations about this. This is going to be a big topic to discuss. So that will continue. And I hope members stay engaged in that. With that, seeing no other business, we are adjourned.
