Monday, October 5, 2009

Workers' compensaiton state funds: Are they comparable to private insurers?

Workers' compensation insurance is ubiquitous in developed nations but how that insurance is delivered varies greatly. In most of the world, workers' compensation is part of social insurance structures. In Canada, the United States, and Australia workers' compensation is generally legislated by individual states or provinces. In Canada, every province and territory has a workers' compensation act as does the federal government. The same holds true in the U.S. and Australia in that each state and the federal government has legislation governing workers' compensation. Options for administration delivery of workers' compensation, covery a wide spectrum from [mostly] private workers' compensation insurance markets [with varying degrees of state oversight and regulation] to [mostly] state delivery models.

In Canada, there is only one model: provincial workers' compensation boards or commissions each the primary insurer in their respective jurisdictions. Some people refer to this model as the "exclusive state fund" model or "monopolistic state fund" model. The latter is less accurate in that many jurisdictions allow for private disability insurance over and above the workers' compensation coverage and to serve populations outside the scope of coverage offered by the state.

In the U.S. there are two main types of state funds (each with two main subtypes): Exclusive state funds (with or without a provision for self insurance), Competitive state funds (which compete with private insurers across a broad market or who serve a more limited market of specific sectors and often acting as the insurer of last resort). In the U.S. there are about 25 state funds, four of which would be considered exclusive state funds and closest to the Canadian boards and commissions.

Are state funds comparable in terms of efficiency with their private insurance counterparts? This question is frequently raised, usually with the supposition that exclusive state funds will somehow be inefficient and therefore have higher costs. Defenders of state funds note that some state funds were create precisely because of private insurance market failures. They note that several states created competitive state funds to create a more vibrant market and to ensure all those who need (or were required by the state to carry) workers' compensation insurance would have a place to go. In order for state funds to compete, like any other competitor in a market place, they must face similar costs and obstacles as their competitors. If they were inefficient, by definition, they would be less competitive and lose market share. For exclusive state funds, the economies of scale and scope, absence of costs associated with gaining or retaining market share, and the presence of almost perfect information on risks and costs in the market are often cited as offsets any inefficiencies inherent in exclusivity.

One of the premier consulting firms in the industry, Conning, recently completed a study on state funds in the U.S. A summary of their findings is available at this link. The summary notes:

Workers' compensation state funds currently write a quarter of insured workers'
compensation net written premiums. Although sometimes thought of as a "market of
last resort," despite their higher loss ratios, state funds' financial results are on par with the industry as a whole....As we show in this study, the primary mission of state funds is support of their local economies. This includes not only promoting fair access to insurance, but also the maintenance of a safe and productive workforce. Their ability to provide effective loss prevention and control services, and link the outcomes directly to insured costs, has helped state funds succeed in their mission.

This finding adds to the weight of evidence in favour of the competitiveness of workers' compensation state funds. And the advantages of the state fund model in meeting other public policy objectives --particularly in regards to workplace safety/prevention [see my earlier post]--continues to make the creation and maintenance of such funds a viable alternative to a purely private market for workers' compensation.

Each model has its advantages and disadvantages; clearly each jurisdiction has something to learn from the full range of models out there.

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