Thursday, August 22, 2019

Workers’ compensation Insurance Arrangements: Does the model make a difference? Part 2


 [For the first part of this discussion, see “Workers’ Compensation Insurance Arrangements:  Does the model make a difference?  Part 1” at  http://workerscompperspectives.blogspot.com/2019/07/workers-compensation-insurance.html    or   https://workerscompperspectives.wordpress.com/2019/07/11/workers-compensation-insurance-arrangements-does-the-model-make-a-difference-part-1/ ]   

In my previous post, I described the range of public policy insurance arrangements governments use in the workers’ compensation insurance market.  As noted, the market for workers’ compensation is not a free market but one that is altered by government interventions and oversight.  The most common active intervention in the market (after mandating compulsory workers’ compensation insurance coverage for most employers) is the legislative creation of a “state” fund for workers compensation. 

Analysis of the state, provincial and federal jurisdictions in the US, Canada, and Australia shows that the majority of jurisdictions use competitive or exclusive state funds to provide some or all of the workers’ compensation insurance needs within their respective jurisdictions.  Provision of workers’ compensation insurance solely by private or mutual insurance is common in many jurisdictions either as the only option or in a market competing with state funds. 

I concluded the last post by grouping jurisdictions into three categories:
  • Private and mutual insurers only jurisdictions
  • State Fund and Private Insurance competitive jurisdictions
  • Exclusive “State” Fund Jurisdictions




The purpose of this examination is to determine if the categories of workers’ compensation insurance arrangement are associated with different worker benefits, employer costs, or the ratio between these important measures. 

For this analysis, “worker benefits” refers to benefits paid per $100 of payroll (payments to injured workers and to providers of medical care in the calendar year, regardless of year of injury); “employer costs” are represented as costs paid by employers per $100 of payroll referring to calendar-year insurance premiums paid plus any annual deductible or self-insurance costs including administration.  

Note:  Although the ratio between worker benefits paid and employer costs is often expressed in dollar terms [e.g., “Total Benefits per $1 Employer Cost”], mathematically the ratio between these two measures is a unitless value, independent of currency or consideration of exchange rates. Whether derived directly from cash flow analysis or indirectly from published rate per $100, the ratio is the same:


[(Worker Benefits Paid)/payroll*100]/ [(Employer Cost)/payroll*100]=
(Worker Benefits Paid)/ (Employer Cost)    

This ratio represents the proportion of employer costs (mainly premiums paid for workers' compensation insurance) in a year that are paid out in cash benefits (compensation and medical costs, regardless of year of injury) in that same year.    


If the workers’ compensation insurance arrangement is irrelevant, the ratio of worker benefits paid to employer cost should be similar regardless of the insurance arrangement category.  Individual states within each category may vary but collectively, the ratio of “worker benefits paid” to “employer costs” over time should be similar for each of the three categories noted above.  However, this analysis shows substantive difference associated with these three models. 

Main Findings



US jurisdictions in the exclusive state funds category are associated with a higher worker benefits paid to employer cost ratio [WBP/EC ratio] than categories of jurisdictions without a state fund (relying on private workers’ compensation arrangements), or jurisdictions with a competitive state fund and private insurance.  The category of jurisdictions with competitive state funds has a WBP/EC ratio greater than the private provision category but lower than exclusive state fund category. 

A similar calculation methodology was applied to Canadian workers’ compensation boards, all of which are in the exclusive category. Collectively, Canadian workers’ compensation boards have a WBP/EC ratio similar to the US exclusive state category.  A sample of Australian exclusive, publicly underwritten workers’ compensation insurers collectively produce a similar ratio.  

The category or US jurisdictions served by private or mutual insurance with no competitive state fund had the lowest WBP/EC ratio, i.e., the lowest proportion of current year employer costs going to pay workers cash compensation, related medical bills and other benefits. The WBP/EC ratio was also below the average for the three categories considered and the ratio for the exclusive state fund category.  The private  category also had the lowest worker paid benefit per $100 payroll and the lowest employer cost per $100 payroll.  

Some background on workers’ compensation insurance finance

Workers’ compensation insurance has both similarities and differences with other insurance lines.  Insurance transfers much of the financial risk of rare but costly events from the insured to the insurer in exchange for a premium.  Workers’ compensation insurance has the added feature of being an exclusive remedy in most jurisdictions; employers are protected from legal action for most work-related injuries—a feature not present in most other insurance lines.  Workers may lose the right of tort or common law action but (in theory if not practice) gain assured access to defined benefits for work-related injury, illness and death.  Access to benefits is based on “work-relatedness” [injury arising out of and/or in the course of employment] rather than fault.

As with most other lines of insurance, premiums are paid to cover a specific period of time, typically a policy year (usually a calendar year); claims against the policy must meet well-defined events.  Workers’ compensation differs from many other lines in that benefits are paid in accordance with levels set by legislation. 

A major difference between workers’ compensation and other lines of insurance relates to the time it takes for the full cost of a claim to be paid out.  The full cost of most property and casualty insurance claims usually developed quickly.  For example, you pay insurance for your home or your car on an annual basis; if your home burns down or your car is stolen in the coverage period, you can claim the loss to the agreed upon value of your loss shortly thereafter.  The insurer makes the payment and the claim is closed. The full claim cost under these types of insurance agreement develop quickly and definitively.  Not necessarily so for workers’ compensation insurance.

With workers’ compensation, work-related injury, illness or disease may or may not occur quickly; disability may carry on for many months or years beyond the policy year, the period covered by the insurance agreement.  The premium must be sufficient to take into account both the immediate and long-term liabilities associate with a claim.  In workers’ compensation insurance terms, every accepted claim “incurs” costs. The money is not paid out immediately but the liability can be estimated (and notionally funds “reserved” to cover these future costs).  The true, full cost of the claim will develop over time and known definitively once the claim is concluded or "finalled".  The conclusion of an accepted clam may be days, weeks, or years after the date of injury (when the workers’ compensation insurer’s financial liability for the claim was incurred). 

From the workers’ compensation insurer’s perspective, cash flow accounting is not really the most appropriate way to look at accounts.  Liabilities that are incurred need to be projected well into the future; premiums collected in the policy year must meet those projected costs.  Factors such as the rate of inflation, required rate of return on investments, changes in claim or claimant life expectancy, and potential increases in medical costs can have major impacts on future costs of claims incurred.  The current premium must cover all current year and expected future costs associated with claims that arise from the policy year.

I mentioned investment returns as a factor. The “long tail” of costs associated with a work injury means the eventual value to be fully paid out may be discounted to take into account anticipated gains.  Notionally, the premium collected in a year will be used to pay medical and indemnity costs arising from injuries in the current year and in many years to come.  Insurers set aside or “reserve” funds from each policy year’s premiums to pay these future costs.  Those reserves may be invested to generate income and growth in value that can be used to pay claims.  An expected rate of return is taken into account in premium development but excess gains or losses often occur.

On an annual operating basis, considering all cash payments made in the policy year to workers or their families, a portion of those payments will relate to injuries that arose in that year while the rest of the cash paid will relate to claims for injuries that occurred in the prior and previous years.  Notionally, these payments are accounted for by drawing down reserves established each year for “unfinalled” claims. 

This disconnect between the benefits paid to workers in the year and the employer costs including premiums paid in the year can lead to divergent patterns of expenditures.  For this reason, the National Academy of Social Insurance (NASI.org) advises the following in its reports on Workers’ Compensation: Benefits, Costs and Coverage (October 2018) [page 41]:

The reader is cautioned that the ratios represent benefits and costs paid in a given year, but not necessarily for the same claims. The benefits measure includes payments for all injuries/illnesses that occurred in the given year and for some injuries that occurred in prior years. The costs measure (premiums paid to insurers and state funds) includes projected future liabilities for injuries/illnesses that occurred in the given year. In other words, the costs and benefits paid in a given year are not tracking the full costs of a particular set of claims.

NASI cautions against using individual state differences in their reported measures as a way of identifying relative differences as favorable or unfavorable.   The NASI report provides data on workers benefits paid, employer costs and the ratio between them on a jurisdictional level.  It also provides and charts the data at an aggregate level as an indicator of trends. 

The following analysis acknowledges the cautionary advice and does not examine individual jurisdictional data.  Instead, it disaggregates the NASI data and re-aggregates the same data in accordance with the three main categories of workers’ compensation insurance arrangements described in detail in the previous post.  This allows a direct comparison with additional jurisdictions outside the US.  Canadian data from the Association of Workers’ Compensation Boards of Canada (AWCBC.org) and from a sample of Australian jurisdictions reflect two additional sub-groupings in the exclusive state fund category and can be compared with the US data.

Employer Costs and Worker Benefits Paid

Workers’ compensation insurance collects premiums from employers and pays compensation and benefits (essentially the cost of medical diagnostics, treatment, rehabilitation, and a portion of worker financial losses) to workers (families or estates in the event of a work-related fatality).  There are other insurance costs, of course, including the cost of administration, underwriting, adjudication, adjusting, and loss prevention to name a few.  The human and social costs associated with work injuries are real and significant but are not consistently calculated, tracked or reported; consequently, these important and real costs are not included in this analysis. 

Generally, workers’ compensation insurance premiums are the main employer cost.  As noted above,  employers pay the premium to transfer to the insurer a defined portion of their financial risk associated with work-related injury, illness, disease and death for a specified period; each work-related injury, illness and death occurring in that period (typically a policy year) creates a liability-- an “incurred” claim expense that will be paid out as worker compensation (amounts toward income loss or non-economic losses based on temporary and permanent disability) and benefits(including medical treatment, rehabilitation, vocational rehabilitation, prosthetics, medications, funeral expenses, survivor benefits) in the year of injury and potentially for many years beyond that.  Also as noted above, those benefits recorded as being paid out to workers on a cashflow basis in a given year in the NASI report, AWCBC data and Australian annual reports (cashflow statements in financial reports), relate to claims from many prior years as well as the current year. 

This actuarial “long tail” of payouts means insurers must have sufficient funds set aside to cover the future costs of the worker compensation, benefits and administration.  These funds and reserves are invested with the returns providing revenue and securing entitlements.  Excess returns may allow for lower premiums or rebates/dividends to employers (effectively reducing employer costs); less than required income from premiums and investments may also require premium rate increases (reflected in higher employer costs).

There are other employer costs.  Some states allow for employer deductibles, effectively a form of self-insurance.  These are included in employer cost estimates in the US.  Some Australian jurisdictions require employers pay the initial time-loss compensation and medical costs before workers’ compensation takes over, although the amounts and durations vary by jurisdiction. [Note:  there are no similar employer deductibles in Canada].  Employers also have many costs associated with investigation of injuries, disability management, and return to work.  These are not included in the estimates of employer costs.  

Workers also have costs that are not directly accounted for in this analysis.  Workers and their families pay the human cost in pain, suffering, and quality of life; they also pay in terms of differential between earnings above the compensation rate and  “worker deductibles” such as the non-reimbursed waiting period common in the US and two Canadian provinces (New Brunswick and Nova Scotia).  [Australian jurisdictions have no worker waiting periods].

Drivers of worker benefits and employer costs

Legislatures set the parameters of compensation and benefits—the main drivers of overall worker benefit expenses and, consequentially, workers’ compensation premiums.  The parameters include maximum insurable earnings (or maximum benefit that may be paid), compensation rate, duration of waiting periods, provisions for retroactive periods, cost of living adjustment provisions, entitlements to vocational rehabilitation, funeral expenses, and many other elements of workers’ compensation coverage.  These provisions vary widely in the US (see NASI data Table C;  IAIABC/WCRI, Workers’ Compensation Laws as of January 1, 2019, April 2019. WC-19-22;  U.S. Chamber of Commerce,  Analysis of Workers' Compensation Laws (2018 Edition)).  Analogous provisions in Canada also vary but less widely (see AWCBC Summary Tables). Theoretically, jurisdictions with identical industrial mix, wage distribution and injury rates could have vastly different employer costs and worker benefits paid as a result of differences in legislative provisions. 

Workers’ compensation jurisdictions in Canada tend to have higher maximum insured earnings,  benefits payable,  and compensation rates than their US counterparts.  Compensation rates in the US are typically 66 2/3rds of gross earnings while Canadian compensation rates are typically 85-90% of net (spendable) earnings—the latter often providing a greater level of income replacement across all income classes, particularly where progressive tax regimes are in place.  Most US workers’ compensation jurisdictions have a waiting period of three to seven days while most Canadian provinces have no waiting period.  These differences in legislative design of worker compensation and other benefits are reflected in both employer costs and worker benefits per $100 of payroll. 

Industry mix is a big driver of differences in workers’ compensation cost differences among states.   States vary in their concentration of covered employment in sectors such as agriculture, manufacturing, construction, transportation, medical services, and advanced technologies.  Each industry has its own risk of injury and loss potential.  States with higher concentrations of work-related injuries in skilled employment with higher earnings within a high legislated insurable earnings or benefits payable cap may have higher individual claim costs compared to a state with a higher proportion of work-injured in lesser skilled and compensated categories.

Many other factors may also influence these costs including the severity and frequency of injuries, demographics such as workforce age, distribution of wage earner incomes, medical fee costs, etc.   Given this background, it is not surprising that the value of worker benefits paid and employer costs vary from state to state and even from year to year in the same state. 

Comparing employer costs across jurisdictions

Few studies have examined the how employer costs vary with the category of workers’ compensation insurance arrangement across jurisdictions.  Challenges to analysis include the difficulty of controlling for industry mix, demographic differences, and the many variables related to legislated worker benefits.  In theory, for jurisdictions where all external conditions (industry mix, demographics, medical cost structure, etc.) and experiential conditions (injury rate, duration, severity, earnings distribution, access to medical care, etc. ) are similar,  the jurisdiction with the legislation that defines greater worker benefits will likely have both greater worker benefit and employer cost per $100 payroll.  Employer costs per $100 payroll will likely be higher for jurisdictions with unfunded liabilities and lower for jurisdictions using excess market returns to moderate or discount premium costs for policy holders. 

Complex analysis that controls for most of these factors is limited but exists.  Work by the late Terry Thomason and John F. Burton Jr. in particular stand out.  For more information on their approach and findings, see Terry Thomason, Timothy P. Schmidle, and John F. Burton, Jr., Worker’ Compensation: Benefits, Costs, and Safety under Alternative Insurance Arrangements, WE Upjohn Institute, January 2001 and Terry Thomason and John F. Burton, Jr, The Employers’ Costs of Workers’ Compensation Insurance in Ontario and Selected Other Canadian and U.S. Jurisdictions, Workers’ Disability Income Systems, Inc., December 2001 [Revised June 2002].

NASI and AWCBC Data

The National Academy of Social Insurance (NASI.org) publishes an annual report that covers most of the US jurisdictions noted in the above table (Puerto Rico is not currently in the NASI dataset).  The Association of Workers’ Compensation Boards of Canada (AWCBC.org) publishes data on all the Canadian jurisdictions.  In the most recent NASI report, several tables provide a standardized measure for both costs and benefits. 

In the NASI report, Table 12 Workers' Compensation Total Benefits Paid Per $100 of Covered Wages, by State   provides a standard comparator for 2012 through 2016.   Each year’s figure for each state is an “observation”.  Any one observation is subject to a lot of variability so multiyear data for each state tends to smooth out some of these issues.  For example, a court ruling or legislative change could result in large cash payouts one year.  Across many observations, these anomalies tend to “average out”.  

Table 14 Employer Costs for Workers' Compensation Per $100 of Covered Wages, by State provides a similar set of observations.  The figures in this table represent a cost for each state for each year based on a standard $100 payroll basis.  Note, the values in Tables 12 and 14 are actual dollar amounts calculated against a standardized $100 payroll base (essentially, a percentage expressed in dollar terms). The values are standardized to the but not normalized, that is, the values for each jurisdiction do not control for differences in legislation, wages, industry, risk, demographic, or any other factors. 

These two tables are limited in what they reveal about the jurisdictions they describe.  Together, these tables are more akin to statements of cash flows against a common denominator of $100 of payroll.  Table 12 figures represent outgoing dollars to workers toward covering lost wages and medical costs.  Table 14 represents incoming dollar amounts paid by employers (cash expenditures in a typical financial statement) relative to the same $100 of payroll base. [Note:  Source data for each states in these tables are contained in the Sources and Methods document on the NASI.org website].

Individually, these figures tell us nothing directly about administration costs, sufficiency of reserves, return rates on investments or system performance.  At best, on an individual jurisdiction basis, the ratio between the worker benefits paid and employer cost figure for each year create an “observation pair” that can be tracked over time, grouped with other observations from other jurisdictions and used in analysis like this.  The observation pair ratio reports the proportion of premium income (employer cost paid for workers’ compensation coverage) that equates to cash payments made to workers.  The complement of this ratio represents the proportion of employer costs that are expended on things other than worker benefits.  This ratio is a cash-flow rather than an actuarial calculation. 

Any one observation or even a set of observations from one jurisdiction has limited value because it does not track the full costs of any set of claims.  Across all states, like the results for employers’ costs and worker benefits, the ratio provides a reference amount that helps visualized the long-term relationship between benefits and costs for workers’ compensation in the US.  Disaggregating the national averages into the three categories of insurance arrangements provides an opportunity to determine if any of the insurance arrangements are associated with a higher or lower WBP/EC ratio.  
If the arrangement is irrelevant then this ratio should be similar across the three categories.

Figure 1 in the NASI report summarized the aggregate data from these two tables into points on in a timeseries chart.  The reported line includes federal workers’ compensation.  Disaggregating the combined data for the five-year period into the Private, Competitive and Exclusive categories and adding a line that excludes the federal results produces the following:



The Competitive state fund jurisdiction category mirrors the overall NASI totals for both worker benefits and employer costs.  Removing federal employees from the NASI total shifts both employer costs and worker benefit lines marginally lower.  The Exclusive state fund jurisdiction category is associated with markedly higher worker benefits and accordingly higher employer costs.  The Private insurance jurisdiction category tracks well below the average NASI result with or without federal employees. 

It is important to note that the points on the chart tell only part of the story.  The range of employer costs and worker benefits per $100 payroll is very wide.  For 2016, the range in worker benefits per $100 payroll was $0.26 to $1.57 and employer costs ranged from $0.48 to $2.32.

AWCBC provides a publicly available data reporting tool that allows for the extraction of data necessary to create similar ratios from the provincial workers’ compensation system.  Using Key Statistical Measures 5.1-Benefits Paid During the Year ($ millions)($), 10-Assessment Revenue for Assessable Employers ($ millions)($), and 12-Assessable Payroll ($ billions)($)for Canada for 2012 to 2016, values for worker benefits and employer costs per $100 payroll were calculated and added to the NASI data for comparison.   Note, for this analysis, worker benefits and employer costs related to federal employees are excluded. 



The Canadian results track higher than the US results for both employer costs and worker benefits and are most similar to the results from the US Exclusive state fund jurisdictions.
SafeWork Australia (safeworkaustralia.gov.au) advises that similar data are not directly available for comparison. 

Ratio of Worker Benefits to Employer Costs

The primary source of cash paid to a workers’ compensation insurer is through the premiums (and/or assessments) paid by employers.  The primary outflows of cash are for worker compensation (indemnity, permanent disability payments) and medical expenses (including payments to physicians, hospitals and for medical-related expenses including pharmaceuticals, physiotherapy, etc.) paid to workers or to healthcare and rehabilitation providers for their treatment and care.   The NASI data expresses the worker benefits paid and employer costs relative to $100 payroll, mitigating many of the effects of system and jurisdictional economic differences.  The ratio between the two is analogous to the claims loss ratio often used as an indicator of the financial health of an insurer.  More complex ratios such as the combined ratio require additional data not included in the NASI data set. 

The ratio between these worker benefits paid and employer costs per $100 payroll will differ from jurisdiction to jurisdiction and fluctuate from year to year.  Premiums are generally prospectively determined while expenditures resulting from work injuries are retrospective, covering claims that occurred from many past years.  Economic cycles can also play a role in the relationship between the benefit paid out and the premiums received.

There is no established benchmark or threshold for the workers’ compensation benefits paid to employer cost ratio.  While paid benefit to cost ratios are frequently used in financial analysis, their applicability to workers’ compensation insurance are subject to the cautions and context outlined in the NASI report (2018, page 41-45).  One possible comparator reference could be the Medical Loss Ratio for healthcare insurance in the US.    

The US federal Affordable Care Act of 2010 (ACA) set first the Medical Loss Ratio (MLR) standard. The ACA-MLR standard requires insurers spend at least 80% (85% for larger insurers)  of premium income on medical care and health care quality improvement. The remainder of premium income is not constrained and goes to cover 20% (or 15%) for administration, promotion, and shareholder profits.  As noted earlier, there is no comparable standard in workers’ compensation insurance.  In the absence of any other benchmark, the MLR may provide a reasonable external reference value.  

Although workers’ compensation insurance medical benefits expenditures now exceed other cash 
benefit payments in the US [see NASI 2018, page 20], workers’ compensation insurance covers more than medical and healthcare-related costs.  The multi-year timeframe of more serious work-injuries may mitigate against a similar 80/20 rule.  That said, the relatively narrow range of observed ratios in the following analysis suggests a 75/25 split is typical for workers’ compensation insurance.

The ratio between these two measures at the aggregate level across all workers’ compensation systems in the US has fluctuated in a relatively narrow range over time.  Looking at the historical data in the NASI report, the ratio between Employer Costs and Worker Benefits has averaged    0.71  within a range of 0.54 to 0.88.  The higher the ratio, the greater the proportion of collected employer premiums go to worker benefits as opposed to other costs (including administration, underwriting costs, advertising, etc.).  The ratio may be an indicator of overall system efficiency.  


Each pair of observations (Worker Benefits Paid and Employer Cost) from the five years of data for the three categories of insurance arrangements in the US, the Canadian Boards and a sample of Australian publicly underwritten workers’ compensation insurers provide the data for the table at the top of this post.  

Note:  The observations from Arizona 2012 were omitted from the observation data for the US as the state fund was transitioned to a private insurer Jan 2013.  Arizona data 2013-2016 are included in the private jurisdiction analysis.   Data points from Ontario 2013 and Prince Edward Island 2012 are omitted from the Canadian observations because of incomplete data for those particular years.

As noted above, SafeWork Australia advises that similar data are not directly available for comparison.  Annual reports from the all but one of the jurisdictions that fall into the exclusive category (Queensland, Victoria, Comcare and South Australia, omitting New South Wales) do contain enough information in roughly parallel financial statements to calculate a similar ratio.  Using 2012-2016 published results from financial statements of cash flows and averaging the ratio of the workers’ compensation payments made (less recoveries) over premium income for each fund and year produces a ratio of 0.76.   Payroll data was not stated in these annual reports, therefore, no cost per $100 could calculated. 

The Australian data excluded the value of the “employer excess” applied in most jurisdictions (all jurisdictions in this sample except Comcare). Employers are responsible for the direct payment of the first 5 days (or 10 in Victoria) of time-loss or the initial set amount of medical cost ($667 in Victoria in 2016) that varies by jurisdiction.  This value is excluded from the denominator (employer costs) and the numerator (worker benefits).  This sort of individual claim employer deductible may contribute to a slightly higher ratio of benefits paid to employer costs as many claims within the excess level end up being paid directly by the employer.

The ratio between worker benefits and employer costs for workers’ compensation jurisdictions in the US is trending lower than the historical average, a possible indication of increasing costs of workers’ compensation insurance beyond the main cost of worker compensation and benefits. 

Exclusive and competitive state funds are associated with higher worker benefits and consequently higher employer costs but the ratio between worker benefits and employer costs for exclusive and competitive state fund jurisdictions tracks higher than for jurisdictions served by private insurers only.  Canadian workers’ compensation boards have both higher worker benefits and employer costs than US jurisdictions but have a WBP/EC ratio similar to US exclusive state funds.  Australian data for a sample of publicly underwritten schemes produces a ratio similar to the exclusive category in the US and to the Canadian workers’ compensation boards, also in the exclusive category. 

Concluding comments

The five years of data across US demonstrate higher ratios of workers’ compensation benefits to employer in jurisdictions with state funds.  As a group, US exclusive state funds had the highest WBP/EC ratio with Canadian workers’ compensation boards and the sample of Australian publicly underwritten schemes closely behind.  US Jurisdictions with competitive state funds were more similar to jurisdictions with private markets for workers’ compensation insurance for this ratio.  

The apparent similarity of competitive state fund to privately underwritten workers’ compensation jurisdictions is somewhat expected.  As competitors in the same market, both competitive state funds and their private counterparts face similar environmental factors.  The cost of land, labour, systems, transportation, medical services, prescriptions, etc. are part of the operating context; tax status and unique features of the state fund mandate are the only things separating state funds from private provision competitors in their respective marketplaces.  The slightly lower ratio for the private provision jurisdictions may relate to taxation effects that are diluted in the competitive state fund category by the market share held by the state fund.  To the extent that competitive state funds may be intended to widen the competitive field of private insurers, as a group, competitive state fund jurisdictions appear to be very similar to the private category. 

This analysis does not examine the underlying reasons for the observed differential.  The not-for-profit nature, exempt tax status, and the economies of scale of exclusive state funds may be significant factors contributing to this association.  This analysis did not address industry mix or benefit levels.  Given that exclusive state fund jurisdictions often provide higher benefits than many of the private jurisdictions, it is also possible that the higher WBP/EC ratio is at least partially related to the efficiency of making larger payments per unit of administrative effort.  Further research would be necessary to examine these possible explanations.  

It is not clear why the category of jurisdictions without a state fund have significantly lower worker benefits paid than the other two categories with state funds.  It may be that the existence of a state fund in the market is a cause or consequence of higher public interest in workers' compensation in these jurisdictions.  Further research into this association is necessary.  

The methodology applied to the Australian and Canadian data is analogous to but not identical to the NASI approach.  The Australian data does not have payroll denominators for comparative calculations of worker paid benefits or employer costs per $100.  Canadian values for these parameters may be higher than the NASI methodology determines for US jurisdictions because of differences in the denominator.  Canadian jurisdictions rely on "assessable payroll", which is analogous to "reportable payroll" defined in many jurisdictions.  Assessable or reportable payroll typically includes wages and other forms of compensation and remuneration but may also be subject to a "payroll limitation" or individual "payroll cap".  If the definition of payroll used in these calculations captures all wages and compensation without limitation, the lower the dollar value of worker benefits paid and employer costs per $100 payroll.  Conversely, a definition of assessable payroll that takes into account maximum insurable earnings, limitations or caps generates a denominator that is smaller than full payroll (wages and compensation).  As a result, the worker benefit paid and employer cost per $100 payroll noted in the table for Canada appear higher.  This topic requires additional research and may result in revisions if a common payroll definition applicable to both Canada and US can be devised and a reliable data source determined.  

The selection of an insurance arrangement to further the public policy objective is not simply a matter of one measure nor is it necessarily a decision that is set in stone.  As noted in part one of this series, jurisdictions have changed arrangements from time to time.  By disaggregating the NASI data into exclusive, competitive and private insurance categories, the data suggest exclusive and competitive state fund arrangements for workers’ compensation insurance provide higher ratios of worker benefits paid to employer cost than the private insurance provision category. Data from Canada’s exclusive workers’ compensation boards and a sample of Australian publicly underwritten schemes produce similar ratios to the US exclusive state fund category.

What this analysis suggests is that insurance arrangements are worth considering in comparative analysis.  Jurisdictions may find benchmarking against other insurance arrangements in the same category provides additional insights and more accurate assessment of their performance.  The insurance arrangement lens may be useful to policy makers and stakeholders in evaluating system performance and considering alternatives to their own public policy.  

This analysis looked at worker benefits paid, employer costs, and the ratio between these two measures.  Other parameters such as worker outcomes, denial rates, appeal or litigation rates, and stakeholder satisfaction may also be examined in a similar fashion in future research.  

Thursday, July 11, 2019

Workers’ Compensation Insurance Arrangements: Does the model make a difference? Part 1


For more than a century, governments have pursued a social policy objective:  to protect workers from work-related injury, disability, illness and death in a compassionate and sustainable way that still allows the economic activity and innovation necessary for societies to operate and thrive.  Requiring employers provide financial compensation to workers or their families for work-related injury, illness and death is central to achieving this objective.  In the US, Canada, and Australia (and New Zealand, in a comparable manner), workers’ compensation insurance arrangements meet that requirement, with each jurisdiction determining which insurance arrangement is most appropriate to its context.

The market for workers’ compensation insurance is far from a free market place.  Government interventions alter the market.  The most common interventions make workers’ compensation insurance compulsory and more or less universal.  Actions by the state determine not only who must carry workers’ compensation insurance but who may provide insurance in the jurisdiction.

Workers’ compensation insurance, like other insurance, transfers financial risk associated with specific losses from the insured to the insurer in exchange for a premium.  Where workers’ compensation coverage is mandated, insurance coverage must be available; if insurers are unwilling to underwrite the risk or the risk premium is greater than insured employers are willing or able to pay, businesses cannot operate.  If too few insurers are willing to enter, remain, and underwrite work-related risks in the workers’ compensation insurance market, the price of workers’ compensation and its availability may inhibit economic activity and growth, frustrating achievement of the public policy objective.

To address these and other actual or anticipated market failures, governments intervene in a variety of ways [see post, “What is the connection between market failures and workers’ compensation?, Workers’ Comp Perspectives, August 9, 2016].  Government interventions range from implementing rate-setting regulation to creating assigned risk pools to establishing “state funds” to fill some or all of the workers’ compensation insurance needs in a jurisdiction.  Interventions into the workers’ compensation insurance market through either regulation or the creation of a state fund alters the marketplace, changes the incentives, and influences costs (profit margins, administration, oversight and overheads)—all of which have consequences for system outcomes. 

Each jurisdiction determines which insurance arrangement best meets the public policy objectives in its own social, political, economic and historical context.  There is no one “right way” or “best” insurance arrangement.  The choice of a particular insurance arrangement is a jurisdictional decision; as long as the legislation enabling the arrangement is constitutional and supported by the society it serves, the choice of one model over all other arrangements is strictly a jurisdictional issue.  With that in mind, the purpose of this discussion is to provide a framework for describing, organizing and categorizing workers’ compensation insurance arrangements that exist in the US, Canada, Australia and New Zealand. 

Workers’ Compensation Insurance:  Arrangements and Markets

Insurance arrangements for workers’ compensation coverage are arrayed along a continuum between completely private provision by insurers (with varying degrees of regulation and oversight) to exclusive “state funds”, where a single, government-created, controlled, or mandated agency is the sole provider of workers’ compensation insurance within the state or province.  Competitive state funds, non-competitive state funds, and certain mutualized former state funds are in between these two anchor points (private insurance underwriting and exclusive state funds). 




The market for workers’ compensation typically covers all employers either mandatorily compelled to carry workers’ compensation insurance or voluntarily opting in to coverage where statutes allow.  In markets served by private insurance or competitive state funds, employers unable to obtain coverage from competing workers compensation insurers constitute a residual market.  Jurisdictions may designate a particular insurer, a rotation of insurers, or other mechanism to serve this residual market (often through an “assigned risk pool”).  A state fund may be required to serve this market segment as the “insurer of last resort”.  In exclusive state fund jurisdictions, the sole insurer must insurer all employers requiring (or qualified to opt in to) coverage. 

Governments may restrict public employers’ options for providing workers’ compensation coverage to a state fund.  Self-insurance pools in a particular sector or “carve outs” allowing employers and unions to negotiate an alternative to workers’ compensation also restrict the market for workers’ compensation insurance.  In jurisdictions other than those with exclusive state funds, these arrangements remove segments from the overall marketplace for workers’ compensation insurance.

Ancillary agencies or state guarantee funds may be created to ensure work-related injuries to workers of employers with no insurance or lapsed coverage still receive compensation. Second injury funds may be created to encourage employment of persons with previous disabilities [for example, see Missouri Department of Labor and Industries Second Injury Fund]  and state guarantee funds may protect both workers and employers in the event of carrier failures or bankruptcies [for example, see California Insurance Guarantee Association (caiga.org)].
  
Categorizing Workers’ Compensation Insurance Arrangements by jurisdiction

Legislators in the US, Canada, Australia and New Zealand have mandated workers’ compensation coverage across most if not all sectors (including government and quasi-governmental agencies) in their respective jurisdictions.  The coverage for work-related injury, illness, disease and death is typically mandated at the state or provincial level but with some exceptions; the coverage is provided through a variety of insurance arrangements. Workers in some sectors such as agriculture and small businesses may not be covered in all states (see NASI, Workers’ Compensation: Benefits, Costs and Coverage, 2018 Table A.1, columns (3) and (4)).  There are other exceptions, exemptions and “carve outs” in various jurisdictions. 

Jurisdiction may be grouped under three main headings that describe the primary workers’ compensation insurance arrangements allowed or in place for most employers:

·          Exclusive:  Jurisdictions with a single, legislatively-created provider of workers’ compensation insurance (with or without provisions for self-insurance and/or self-administration)
·         Competitive state funds and private insurers: Jurisdictions with a legislatively-created provider of workers’ compensation insurance that mandatorily and/or competitively insures a portion of the market for workers’ compensation insurance.  This category includes state fund insurers that act as the “insurer of last resort” within the jurisdiction.
·         Private and mutual insurance only:  Jurisdictions where privately held or mutual insurance companies provide workers’ compensation insurance where there is no exclusive state fund.  Mutualized former state funds may be present in the market.   


Categorizations jurisdictions by workers’ compensation insurance arrangements

The American Association of State Compensation Insurance Funds (AASCIF.org), lists the types of workers’ compensation insurance arrangements in the US and Canada in four jurisdictional clusters.  According to their website, workers’ compensation insurance is offered by the following arrangements:
  • Exclusively by state fund: North Dakota, Puerto Rico and Wyoming.
  • Exclusively by workers' compensation board: each Canadian province.
  • By either state fund or authorized self-insurance: Ohio and Washington.
  • By private insurance, state fund, or authorized self-insurance: California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas and Utah.
Federal governments in Canada, the US and Australia have many employees.  These are employed directly by governments and indirectly through a multitude of agencies and quasi-governmental entities that have employees.  To provide insurance for these employees, most federal governments have decided not to engage private insurance to fill the workers’ compensation insurance needs of their employees. 

The workers’ compensation coverage for US federal employees does not fall easily into these three categories.  US federal government employees are covered under the Federal Employees Compensation Act (FECA), administered by the Department of Labor’s Office of Workers’ Compensation Programs (OWCP).  There are arguments for this to be considered as a state-fund analogue or as a form of self-insurance with self-administration by the government for its employees. For the purposes of this analysis, the similarities to state funds with a mandate to cover employees of government and quasi-governmental agencies favour inclusion as a state fund.   

Federal employees in Canada have workers’ compensation under the Government Employees Compensation Act (GECA)—again, something that could be considered as self-insurance or analogous to a state fund.  However, administration of workers’ compensation claims is carried out under contract with the provincial workers’ compensation boards in the respective provinces where injured federal workers are employed.  The variety of agencies and quasi-governmental entities covered by the federal statute suggest it is most like an exclusive state fund insurer for all employees under its jurisdiction.

In Australia, federal employees and employees in federally statutory agencies and corporations are covered the Safety, Rehabilitation and Compensation Act 1988 (SRC Act).  The Act is administered by ComCare—essentially an exclusive state-fund insurer, although there is some competition within certain sectors particularly with former federal corporations now privatized. 

Australian and New Zealand workers’ compensation systems include exclusive, centrally funded and privately underwritten workers’ compensation “schemes” [a term used in Australian/New Zealand, analogous to insurance system or arrangement].  There are no jurisdictions with competitive state funds.   New Zealand’s ACC is technically an “accident compensation system” but maintains data and accounts related to claims attributable to work injuries comparable to workers’ compensation scheme.   

The states of South Australia, Victoria and New South Wales are also exclusive, centrally funded schemes and primarily outsourced claims administration.  The states of Tasmaina, Western Australia, Norther Territory and the Australian Capital Territory are private markets.  Queensland operates a monopolistic scheme as a government owned statutory agency, WorkCover Queensland.  Federal employees and employees in federally regulated sectors are covered by ComCare, essentially an exclusive insurer although there is some competition with certain sectors.  There is also a national Seacare scheme of occupational health and safety (OHS), rehabilitation and workers' compensation for seafaring employees.  While legislatively mandated, the workers’ compensation component is privately underwritten by authorized Seacare scheme insurers. 

Self-insurance may be present in any jurisdiction that allows it but there are two sub-types: 
         
  • Self-insurance with self-administration
  • Self-insurance without self-administration. 

The self-insurance with self-administration is typically allowed for larger, stable entities (governments, large corporations).  Administration may be in-house or contracted to a third-party administrator (TPA). Entities that are self-insured with self-administration may still be subject to oversight and reporting requirements to ensure compliance with workers’ compensation requirements guidelines.  In the exclusive state fund states and provinces where self-insurance is allowed without self-administration, claims administration is conducted by the exclusive state fund. 

Available data from the National Academy of Social Insurance (NASI.org) are recorded by jurisdiction and include the worker benefits and employer costs on a state by state basis.  The dataset includes the District of Columbia and federal workers but excludes Puerto Rico and other US territories.  Estimates for self-insurance are included on a state by state basis.  Exclusive state fund jurisdictions, by definition, represent the full insured data for the state.  NASI identifies the following state funds:

·       Exclusive State Funds:  North Dakota, Ohio, Washington, and Wyoming

·      Competitive State Funds:  California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maryland, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Utah.

·       Non-competitive State Funds:   South Carolina

The South Carolina State Accident Fund (SCSAF) covers employees of state and local government entities and agencies mandated by legislation and competes with private with private insurers to cover “quasi” state government businesses for workers’ compensation purposes.  The existence of this legislatively created entity reduces the competitive market for workers’ compensation.  In the absence of SCSAF, the 700 employers it covers would have to seek coverage in the voluntary or residual workers’ compensation market place.  For this reason, South Carolina may be classified as a  jurisdiction with a semi-competitive state fund.   

The classification of jurisdictions by workers’ compensation arrangements is not static over time.  [for an overview, see  “The Life Cycle of a State Workers Compensation Fund: Change, Challenge and a Review of Mission,” Emphasis 2013/4, TowersWatson,  pages 16-19].  Jurisdictions have switched from state fund to private provision (Nevada, Arizona), created, mutualized entities (Utah’s state fund, WCF, is currently in the process of converting to a mutual insurer; see legislation at https://le.utah.gov/~2017/bills/static/SB0092.html), created private not-for-profit mutual insurer (Maine and Hawaii in the1990s),  and even privatized their state funds (Maine) allowing for shareholders or policy holders to share in profits.  

In some cases, despite essential privatization or mutualization, governments retain influence or control through legislation.  In the case of Maine, legislation mandates the Maine Employers Mutual Insurance Company (MEMIC) to insure Maine employers and provides that the governance of MEMIC include two public interest directors appointed by the governor.  Beginning in 2013, Maryland’s Injured Workers’ Insurance Fund converted to essentially a private insurer and rebranded as Chesapeake Employers’ Insurance.  The change move this formerly competitive state fund towards the private end of the spectrum of insurance arrangements but it retained its exemption from corporate income taxes, governor appointed board of directors, and mandate to insure Maryland employers as the insurer of last resort.  These unique hybrid arrangements complicate the taxonomy and categorization of state funds.

The delineation between a state fund and a private insurance entity is often decided on the basis of federal tax status.  National Association of Insurance Commissioners (NAIC.org) includes some state fund data in its presentations.  Entities that pay federal taxes are considered private while those entities reporting to NAIC that do not pay federal taxes are included in the state fund category.  NAIC does not have data on exclusive state funds but has data on the following states with state funds:
 
Arizona (to 2012), California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maryland, Missouri, Montana, New Mexico, Oklahoma, Oregon, Rhode Island, Texas, and Utah.

The Association of Workers’ Compensation Boards of Canada (AWCBC.org) provides similar data to the NASI report for each jurisdiction’s exclusive fund on a provincial or territorial basis with one exception.  Data from the Northwest Territories and the territory of Nunavut are reported together; although each territory has its own legislation, all workers’ compensation claims are administered by a single workers’ compensation authority, the Workers’ Safety and Compensation Commission (wscc.nt.ca) 

Consolidated List of Jurisdictions by Workers’ Compensation Insurance Arrangement

To simplify the range of workers’ compensation insurance arrangements, jurisdiction may be grouped under three main headings that describe the workers’ compensation insurance arrangements allowed or in place:

·      Exclusive:  jurisdictions with a single, legislatively-created provider of workers’ compensation insurance (with or without provisions for self-insurance and/or self-administration)
·      Competitive state funds and private or mutual insurers: Jurisdictions with a legislatively-created provider of workers’ compensation insurance that mandatorily and/or competitively insures a portion of the market for workers’ compensation insurance.  This category includes jurisdictions with state fund insurers that act as the “insurer of last resort” within the jurisdiction or serve as the workers’ compensation insurer for employees of the public service or quasi-governmental entities.
·      Private and mutual insurance only:  Jurisdictions where privately held or mutual insurance companies provide workers’ compensation insurance where there is no exclusive state fund or competitive state fund.  Mutualized former state funds may be present in the market but operate and are federally taxed as private insurers.


Workers’ Compensation Jurisdictions by Insurance Arrangement Category


Exclusive “State” Fund Jurisdictions
Exclusive: No Authorized Self-Insurance
North Dakota
Puerto Rico
Wyoming

Exclusive: Authorized Self-Insurance with Self-administration
Ohio
Washington State

Exclusive: Federal
US Federal Employees (administered by the Department of Labor, Office of Workers’ Compensation Programs

Exclusive: Provincial Board or Commission with some authorized self-insurance but no self-administration
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut (Territory)
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon Territory

Canadian Federal Employees
Government Employees Compensation Act  (GECA) administered under contract by provincial workers’ compensation boards

Australian public, centrally funded
New South Wales (outsourced claims admin)
Queensland
South Australia (outsourced claims admin)
Victoria (outsourced claims admin)

Australian Federal Employees (and some others)
Comcare

New Zealand ACC

State Fund and Private Insurance Jurisdictions
California
Colorado
Hawaii
Idaho
Kentucky
Louisiana
Maryland
Minnesota
Missouri
Montana
New Mexico
New York
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Texas
Utah

Private and Mutual Insurance Only Jurisdictions
Alabama
Alaska
Arizona
Arkansas
Connecticut
Delaware
District of Columbia
Florida
Georgia
Illinois
Indiana
Iowa
Kansas
Maine
Massachusetts
Michigan
Mississippi
Nebraska
Nevada
New Hampshire
New Jersey
North Carolina
South Dakota
Tennessee
Vermont
Virginia
West Virginia
Wisconsin

Australian Capital Territory
Western Australia
Tasmania
Seacare




This categorization is based on the workers’ compensation arrangements permitted by government and available to the majority of employers found in most jurisdictions.  This categorization ignores any residual market, market exclusions or alternatives, and specialized state funds or similar entities that may be permitted by government and operational in the jurisdiction. 

Insurance Arrangements:  Pros, Cons, and Bureaucratic or Regulatory Failures

As noted in the introduction, governments alter the market for workers’ compensation insurance through a broad range of interventions including regulation and alternative insurance arrangements such as state funds.  These interventions have advantages and disadvantages, are subject to their own incentive-shifting, and carry risks including market failures, bureaucratic failures, and corporate failures (insolvency). 

Competition within a market can produce certain efficiencies particularly in the transfer of dollars to those who suffer work-related injury, illness, disease or death.  Although the quantum is set by legislation, the collective efficacy of administration, oversight and enforcement will be reflected in the proportion of expenditures that are paid out in compensation and benefits to those who suffer work-place injuries.  Competition among private insurers and/or state funds may provide market pressures toward improved service and efficiency; however, competition may also lead to rate under-cutting, and discounting to gain market share. 

Regardless of the workers’ compensation arrangement in place, political decisions to suppress rates while worker benefits are rising can inadvertently jeopardize the sustainability of public and private insurers.  Actions or market conditions that limit profitability or deplete reserves may generate huge unfunded liabilities, lead to private carriers exiting the jurisdiction, and even bankruptcy.  

Jurisdictions that allow self-insurance with self-administration may fail to adequately ensure worker rights are protected against cost shifting and human resource actions to effectively suppress work-injury reporting and data.

Competitive state funds face similar pressures to their private and mutual counterparts.  All other things being equal, an established competitive state fund’s operational and competitive context reflects that of private insures. Competitive state funds face cost pressures for personnel, office space, medical services, and claims expenses reflective of the overall market.  For governments, this provides an important insight into the market for regulatory and legislative purposes. 

Exclusive state funds have the added advantage of population-level data on work-injuries that can lead to rapid action on prevention and detection of serious trends.  They also have the potential to exploit economies of scale in terms of systems and automation that smaller insurers could not access.  The purchasing power of a single-payer workers’ compensation insurer may result in lower medical services and equipment costs.  Having one, universal insurer in the workers’ compensation space generally eliminates the need for ancillary agencies and structures such as Second Injury funds, guarantee funds, and uninsured employer funds.   Oversight may be direct by government (if the agency in is a department of the executive branch), government appointed leadership (as in an arms-length quasi-governmental agency), a separate insurance regulator, or through legislative committee. Historical data on employers and injured workers is centralized and may result in better information and outcomes.   On the other hand, the risks associated with any monopoly require administrative willingness to guard against waste, inefficiency and bureaucratic paralysis.  Exclusive state funds risk losing touch with and being responsive to both their employer and worker stakeholders without constant leadership and administrative efforts to the contrary—efforts that carry their own costs. 

Exclusive state funds can also be subject to political manipulation and pressures that distort costs and benefits or threaten reserves for short-term political gain.  For this reason, many state funds are established as statutory authorities operating at arm’s length from government, limiting (if not fully eliminating) political interference.  Nevertheless, state funds are often constrained by other public policy considerations and initiatives of governments in a way that private insurance entities would not be constrained.    

Tax structures can also create cost differentials.   The competitive and other state funds structured as not-for-profit entities or publicly underwritten insurers have a tax advantage over their private and mutualized counterparts.  This tax advantage may result in lower premium costs for state funds (assuming benefits, industrial mix, medical costs, etc. are equal).

Private carriers have certain advantages including autonomy regarding decisions about entering, remaining, expanding, contracting, and leaving a particular market or insurance line.  Smaller carriers may be more responsive to their chosen client base and multi-line carriers may offer economies of scope and scale.  Competition may help check potential excesses in premium pricing; the freedom of employers to change carriers can be an incentive to greater service to both employers and their injured employees.  On the other hand, the less favourable tax status, underwriting costs, switching costs, and advertising expenses to attract, retain and grow market share are higher than for exclusive and many other semi-competitive state funds.  Regulation and oversight of private markets imposes monitoring costs for government and complicate data acquisition and modeling required for analysis and legislative reforms.  Unless these costs are fully reflected in the premiums or assessments, they may be externalized to taxpayers. 

Concluding comments

Each insurance arrangement in the workers’ compensation world has its own advantages and disadvantages.  The variety of existing arrangements provides legislators and stakeholders with insights into alternative solutions necessary to achieve the social policy objective.  Understanding how other jurisdictions have designed their workers’ compensation insurance arrangements can inform outcome evaluation, allow for more appropriate comparative performance monitoring, and provide an important set of alternatives for consideration. 

In my next post, I will look more closely at the association between the three main categories of workers’ compensation insurance arrangements, worker paid benefits, and employer costs.