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:
· 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.
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