Rousmaniere: What Are State Funds For?

State workers’ compensation funds exert a broader impact on the workers’ comp market than most people assume. In 1990, there were about 20 state sponsored insurers, virtually entirely active only in their state of origin. Today there are 28 current or former but recent state funds. In 40 states, they rank among the top 10 insurers.  

Their share of total premium in the country has not changed much – roughly one/fifth. But they dominate the ranks of what I have called state powerhouses: insurers with at least 10% market share and $100 million in premium. And their market shares within the states they participate have, on balance, recently increased.  They account for roughly two/thirds of monoline workers’ comp premium sold nationwide.

It’s time to ask, what are these funds for?  After many years of observing them, I’ve come to think that while these funds can perform very well, formal state sponsorship is a story that has become tired. State sponsorship is a public policy fossil that delivers scant value and has nothing to do with outstanding performance.

Were all state sponsorships removed tomorrow and replaced with private governance, say by becoming mutual insurers, their core competence would not be adversely affected. That competence is rooted in their primary focus on their state of origin, their persistence as monoline carriers and (for most) their large absolute size. They are, in fact, similar to regional monoline carriers founded by business associations, such as in Massachusetts, New Jersey and Pennsylvania.

I am told that the state funds aim to expand further outside their original markets. It’s therefore timely to ask:  Are there any attributes of state funds which make them better managers of work injury risks? If so, can these talents cross state lines if they expand?

There is a perfect match between insurers currently operating under a special act of their legislature and membership in the American Association of State Commissions and Insurance Funds.  I add recent but no longer state funds. They are, with their origin states, the Accident Fund (Michigan), Brickstreet (West Virginia) and Employers (Nevada).

Three types of risks arise in work injuries.  The first is the risk of injury. The second is the risk that the worker fails to recover adequately. The third risk is that the cost ---such as insurance costs – veers disruptively. 

In the 1990s eight states created state funds, in response to a collapse in insurance markets.  Importantly, these new state funds were tasked with not only their initial assignment, which was to stabilize insurance markets, but also to make work safer and to improve claims outcomes. The goal, stated with varying degrees of fervor, was that state funds were a model solution of availability, affordability, and service that would impact beneficially the entire state.

Looking down today from a 10,000-foot level, one cannot find any telling evidence that states with large state funds are associated with calmer insurance markets, lower cost of insurance, or lower statewide injury rates.  We checked with the Oregon ranking system and with state injury rate tables.

Except for periods of special uncertainty in insurance markets (such as prevailed at the birth of workers’ comp in the 1910s and around 1990), there is no evidence that state funds ensure more available and affordable insurance.  California’s rampaging, predatory pricing state fund destabilized the largest state market until its leadership was replaced about 15 years ago.  

But state funds potentially share, along with private regional monoline carriers, a culture formed out of their all-consuming bet for survival in one key state in line of insurance, which forces them to acquire deep knowledge of how injuries happen and claims resolve there. Local know-how is immensely valuable. Ask any insurer which expanded unprepared. An appetite for this know-how can persist after carriers change their governance structure.  

Signs of know-how will show up in responses to three questions:

First, what are the state’s iconic high-risk occupations and what is the state fund doing about them? Second, how does the medical community, especially surgeons, treat injured workers and what is it doing to promote use of the best? Third, what are the judicial patterns in litigated cases, and how realistically does the insurer fashion its claims resolution strategies accordingly? 

State funds and former state funds need large size and market shares to successfully answer these questions. If they can answer them well--which is not assured—they probably have a successful operating model.

But being yoked to state government does not help their executive leadership, their policyholders, their injured workers, or their state. 

Gyana Singh will enter Grinnell College this Fall as a freshman

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