The goal of government intervention is to ameliorate these potential market failures by protecting workers against work-related risks and by inducing employers to invest more resources in safety.(Krallj, Boris, “Occupational Health and Safety: Effectiveness of Economic and Regulatory Mechanisms”, Workers’ Compensation Foundations for Reform , Edited by Morley Gunderson and Douglas Hyatt, University of Toronto Press, 2000)
In theory, regulation is designed to address market failures that would otherwise impair economic performance and reduce social welfare. The purpose of regulation is to correct market failures, or at least minimize their negative effects, and improve allocative efficiency. …Insurance markets, including workers' compensation, are subject to several types of market failures that insurance regulators seek to counteract.(Hunt, H. Allan, and Robert W. Klein. "Workers' Compensation Insurance in North America: Lessons for Victoria?" Upjohn Institute Technical Report No. 96-10. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 1996.).
- excess risk-taking,
- pricing decisions to lower premiums to gain market share without regard to the actuarially required funding level
- insufficient reserving
- Excessive costs (administration, monitoring, marketing, etc.)
The new year—1992—was only hours old when five insurance companies representing 40 percent of the private insurance market in Maine surrendered their licenses to sell workers’ compensation insurance in the state. The companies included three well established insurers: Hartford, Travelers, and American Fidelity. In making their announcements, the companies cited the high cost of paying compensation claims in Maine compared to revenues collected from premiums.Later that year, another seven smaller companies filed plans to leave the workers’ compensation market in Maine. The state’s remaining insurers demanded that Maine provide protection from the potential liability of millions of dollars in workers’ compensation claims from employees covered by the residual pool.(Gold, Susan Dudley, MEMIC: A Maine Miracle, Custom Communications: Saco, Maine, 2013)
Is there a strong economic rationale for workers' compensation? We believe there is. Absent some form of no-fault insurance for workplace injuries, a large number of accidents would be handled by the courts using a negligence standard. The joint costs of determining liability under these circumstances would be large, substantially larger than the indemnity and medical costs of most accidents. Only a minority of workers would be compensated for injuries if it were necessary to prove company (or co-worker) negligence, and payment would be received long after most medical expenses occurred and wages were foregone.(Addison, John T. and Barry T. Hirsch, “The Economic Effects of Employment Regulation: What are the Limits?” Government Regulation of the Employment Relationship Bruce E. Kaufman, ed. IRRA 50th Anniversary Volume, Madison, WI: Industrial Relations Research Association, 1997).
Absent workers' compensation, much of the medical costs and some of the indemnity costs from workplace injuries will be shifted to others. Indeed, an advantage of having workers' compensation rather than other forms of health insurance pay for the medical cost of workplace injuries is that it shifts costs to parties whose behavior can affect safety.(Addison and Hirsch, ibid.)