Many students I encounter assume that workers’ compensation
is simply another variant of traditional insurance. However, the traditional
insurance model, which involves transferring financial risk for specific perils
over a set period in exchange for a premium, may only encompass around half of the
total workers’ compensation and benefits paid in the US.
To understand this conclusion, let's recap the public policy
objective workers’ compensation is designed to achieve and how legislators have
formulated the most common workers’ compensation arrangements in North America
and Australia.
The Public Policy Objective
Most developed economies have systems of social protection
that offer cash benefits in case of work-related injuries. While many countries
have national programs to achieve this objective, in North America and
Australia, the preferred approach is to provide coverage through “workers’
compensation,” primarily enacted at the state or provincial jurisdictional
level. [For a concise summary of the evolution of workers’ compensation, see Guyton
GP. A brief history of workers' compensation. Iowa Orthop J. 1999;19:106-10.
PMID: 10847524; PMCID: PMC1888620 Available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1888620/
]
The public policy objective was not met in the free
market. Market failures including
adverse selection issues, information asymmetries and externalization of social
and other costs lead to government market interventions in most
jurisdictions. In North America and
Australia, the intervention of choice was workers’ compensation.
Exclusive Remedy
Workers’ compensation is considered a form of “social
insurance” and operates based on a social contract between management and labor.
It stipulates that workers’ compensation serves as the “exclusive remedy” for
occupational injuries and diseases. This means:
- Employers are shielded from legal suits for work-related injuries in exchange for funding the costs of statutory compensation and benefits specified by the relevant workers’ compensation statute.
- Workers are entitled to prescribed cash compensation for disability and the payment of medical and rehabilitation benefits for work-related injuries, regardless of fault.
- This system fulfills the public policy objective with less friction and provides greater certainty compared to the alternative model of litigating fault.
Legislation Determines the Mandate, Rules, and Arrangements
Legislation in the United States, Canada, and Australia defines
the mandate of workers’ compensation at both the state/provincial and federal levels.
This includes coverage extent, benefit definitions, dispute resolution rules,
and more. Regulations and policies governing workers’ compensation in specific jurisdictions
stem from these statutes.
Which employment is covered varies by jurisdiction although
coverage percentages vary. Workers’
compensation legislation mandates coverage for most, if not all, employers. Coverage
calculation methods vary [note the denominators carefully]; according to the National Academy of Social Insurance (NASI)
in the US, 91.7% of total employment and 87.3% of all jobs (2020 data) are covered by workers’ compensation. The International Labour Office (ILO)
estimates about 72% of the working-age population has work-injury
financial protection (2020-22 data) in Australia. The Association of Workers’ Compensation Boards of Canada (AWCBC) reports
that 83.4% of the employed workforce
is covered by workers’ compensation (2022), with coverage levels in the range
of 91-98% in more than half of the jurisdictions.
Legislation also determines how the workers’ compensation
will be provided. While there are many
variations, the two most prevalent arrangements are traditional insurance and
self-insurance.
Traditional Insurance Arrangements for Workers’ Compensation
Most legislative frameworks primarily rely on a “traditional
insurance” model, mandating and regulating the market for insurance buyers and
sellers.
Statutes in
the US, Canada and Australia define two main alternative arrangements to
provide workers’ compensation insurance :
- Competitive insurance (including mutual insurers, private insurers)
- State Fund or Provincial workers’ compensation insurers (exclusive or competitive)
Legislation
typically mandates employers to obtain workers’ compensation insurance
from a private insurer, mutual insurer, or a state/provincial fund (competitive
or monopolistic entity).
Besides the traditional insurance model, legislation or
administrative arrangements may also prescribe another arrangement for workers’
compensation coverage: Self-insurance.
Differentiating Insurance and Self-insurance
Traditional insurance involves transferring financial risk
in exchange for premiums paid to an arms-length entity, such as a private
insurer or state fund, where the risks of multiple employers are pooled. However,
not all workers’ compensation coverage aligns with this definition; certain
forms of workers’ compensation constitute “self-insurance.”
In self-insurance, authorized or mandated by jurisdictional
authority, a self-insured firm retains financial risk rather than transferring
it to an arms-length insurer. The employer remains liable for the workers’
compensation and benefits prescribed by the governing workers’ compensation
statute.
The retention of financial liability presents a risk to the self-insuring
entity. Firms approved by the state for self-insurance have an incentive to
develop robust health and safety, disability management, and return-to-work
programs. This choice may make sense for firms believing that their robust loss
prevention programs limit financial risk more effectively than the pooled
alternative offered by traditional workers’ compensation insurance through premium
payments. Self-insured entities may also
mitigate some risk through re-insurance arrangements.
While self-insured employers may contribute to oversight,
regulation, dispute resolution, research, enforcement, and other system costs
through assessments, the liability for their own workers’ compensation claims
costs is retained. Generally, self-insured entities will have to post security
or other financial undertakings as part of the approval process.
Categories of Workers’ Compensation Self-insurance
Self-insurance in workers’ compensation does not fit one
standard form. The following categories
account for most workers’ compensation self-insurance models.
Self-insurance with Self-administration: Many large
employers operating across multiple jurisdictions see advantages in
consolidating their workers’ compensation administration in-house or with an
external private third-party administrator (TPA). Subject to jurisdictional
approval and oversight, this approach may streamline services, particularly in
returning injured employees to work.
Self-insured and self-administered employers may still have
to pay assessments or contributions to state funds, regulatory agencies (including health and
safety inspectorates), appeal structures, fraud prevention, research, and prevention programs.
Group Self-insurance: Multiple employers, usually from the
same industry, pool resources to provide workers’ compensation coverage for
their employees, contributing to a fund used to pay claims. Creation of such groups or associations must
meet regulatory authority requirements that vary by jurisdiction. New York State allows Self-Insurance Groups
with provisions that include the following:
The group must include two or more employers that perform related activities in a given industry.
The employers must have been in business for an “acceptable” period of time.
The group must meet and continue to meet the current legal provisions, including security deposit posting requirements.
[see Title
12 of the Official Compilation of Codes Rules and Regulations of the State of
New York, Chapter V, Subchapter B, Part 317 available at https://www.wcb.ny.gov/content/main/SelfInsureds/Part317.jsp
]
Self-insurance through State/Provincial Funds: In certain
jurisdictions, state governments self-insure workers’ compensation coverage costs
but contract with a state or provincial fund as an adjusting agent to deliver
workers’ compensation services, with the ultimate liability for payments remaining
with the government. North Dakota, Puerto Rico and California governments
are examples of this form of self-insurance.
This model
is not limited to government employers. In
British Columbia, WorkSafeBC covers a limited number of self-insured private employers
(including Air Canada, BNSF Railway, Canadian Pacific Railway, Teck Resources) in
addition to the provincial government and its corporate entities.
Unlike other
employers who pay premiums based on assessable payroll and pool their risk with
other similarly classified employers, these “deposit class” employers do not
pay premiums. Instead, each of these employers reimburses the cost of
all compensation and benefits associated with their workers’ claims plus a
share of administration and other assessments (prevention, appeal structures,
etc.)
Direct Self-Insured Governments: Entities like the US
Federal Government self-insure workers’ compensation under specific
legislation, with the government covering its own claims and expenses pursuant to the Federal Employees Compensation Act (FECA). The Office of Workers’ Compensation Programs (OWCP)
provides adjusting and legal services for the federal government’s workers’
compensation claims and provides benefits and services to injured employees.
The federal government reimburses the OWCP for the cost of these services.
Australia’s
federal no-fault workers’ compensation scheme is created under the Safety
Rehabilitation and Compensation Act 1988 (SRC).
ComCare handles the claims including payments, medical expenses, are
related benefits.
The
Canadian Federal Government also self-insures workers’ compensation for its
employees under the Government Employees Compensation Act (GECA) but contracts
with the provincial workers’ compensation boards to administer the claims for
workers in the respective jurisdictions where they reside.
Self-insurance through “Captive” Insurers and Related
Alternatives: Large corporations may retain risk through wholly owned subsidiaries
or captive insurers, while groups of entities can form captives, associations,
or other entities to manage risk.
Other forms
of self-insurance in this category include risk retention groups, risk
purchasing groups, trusts, and captives
sponsored by intermediaries.
“Carve-outs” as a Form of Self-insurance: Labor-management
agreements meeting specific requirements set and approved by the state, may seek
to state approval to exclude themselves from standard workers’ compensation
insurance mandates, provided they offer benefits equal to or better than those
mandated by the workers’ compensation system. Carve-outs generally provide
workers’ compensation benefits and dispute resolution under a collective agreement.
California has several carve-out plans in the construction sector. [see Department of Industrial Relations, Labor-management
(carve-out) agreements available at https://www.dir.ca.gov/dwc/carveout.html
]
Self-insurance through Deductibles: Many US states permit policies
with employer deductibles, where the employer reimburses the workers’
compensation insurer for cash compensation and benefits paid up to a specified
deductible amount on a case or overall policy basis. Employers are essentially self-insured for
the deductible portion of their policy.
In the US, these policies are generally called “Large Deductible” workers’
compensation policies. In Australia,
employers may pay a claim-based “employer excess” as a deductible. The specifics vary but generally employers
are financially responsible for the first five or ten days of work-related
losses and related medical expenses. [see SafeWork Australia, Comparison of
Workers’ Compensation Arrangements in Australia and New Zealand 2021 (28th
Edition), Table 3.9 available at https://www.safeworkaustralia.gov.au/book/comparison-workers-compensation-arrangements-australia-and-new-zealand-2021-28th-edition/chapter-3-schemes-glance/table-39-employer-excess
]
Self-insurance represents a significant aspect of workers’
compensation coverage, accounting for the following proportions of workers’ compensation
benefits paid in the US in 2020
[see Workers’ Compensation: Benefits, Costs, and Coverage (2020 data), Table 7
available at https://www.nasi.org/research/workers-compensation/workers-compensation-benefits-costs-and-coverage/ ]:
- Employer-paid deductibles (a form of self-insurance): 17.5%
- Self Insured : 24.7%
- Federal (government self-insurance): 5.5%
These three
categories of self-insurance alone account
for nearly half the workers’ compensation benefits paid in the US.
The prevalence of the self-insurance model has seemingly
increased over recent decades, although its impact on worker outcomes remains
unclear. That’s a topic for another day.
