Gaining market share

Study says state workers comp funds perform well, are preferred over private insurers

By Phil Zinkewicz

We usually think of residual market mechanisms as markets of last resort, places to go for particular insurance coverages when the voluntary insurance marketplace turns the business away. Apparently, however, state funds for workers compensation insurance are another matter.

According to at least one study, state comp funds are not only doing well in terms of performance, but some of them are preferred by workers compensation insurance buyers over private insurers. In fact, workers compensation state funds have achieved a significant share of the overall insured workers compensation market, with market share increasing in many of the states in which they write, according to the study by Conning Research and Consulting.

“Workers compensation state funds currently write approximately 25%, or $11.3 billion in net premiums written, of the workers compensation insurance market, the total of which accounts for more than $45 billion in net premiums written as of 2008,” according to Mark Jablonowski, an analyst at Conning Research and Consulting. “In many states, state funds are now the largest writers of workers compensation. It is clear that state funds constitute a competitive force in the workers compensation market.”

Jablonowski says that the primary mission of state funds is to support 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, he points out.

Says Jablonowski: “The growth of state funds to approximately 25% of the insured workers compensation market is driven by increases in market share in most of the 25 states in which they now exist. Some of those states are: Ohio, Washington, California, Colorado, Utah and Oregon. State funds now write 50% or more of the market in eight states, whereas this number was only four in 1997.

“State fund loss ratios are above those of the industry as a whole,” Jablonowski says. “However, they do not tell the whole story of profitability. An interesting feature of state fund performance is how all other components of profitability—expenses, dividends, investment income—fit into the overall profitability picture. State funds report lower expense ratios, which could be a factor of both efficiencies from combining loss prevention and health services with other state agencies, and favorable tax structures. Those favorable tax structures are by virtue of their quasi-public status in many cases.”

The Conning analyst says that policyholder dividend ratios are significantly higher for state funds than the general aggregate of workers compensation insurers. “Dividends can provide an important part of the incentive for safety for insureds,” he says.

Other findings from the study, according to Jablonowski, are:

• Over the past 10 years, state funds’ reserves have been relatively more stable than the industry as a whole, especially during the hard market years, 2001 to 2004. The general pattern of restatements of reserves reflects a more conservative attitude toward reserving as well.

• Investment income for state funds has been strong. This may be due to what appears to be stronger reserve positions. Reserves for the study’s sample of state funds also have shown more stability over the underwriting cycle. So, while combined ratios for state funds are higher than the industry composite, superior investment income means better bottom-line results.

• Financial results, however, don’t tell the whole story behind state fund success. State fund charters reflect a variety of non-financial goals as well, including fair access to workers compensation insurance for all state businesses that require it, an overall healthy workforce in the state and the promotion of economic efficiency and development of business in the state. These goals can be attractive to insureds when choosing an insurer.

Says Jablonowski: “The key to state fund success, both financially and in achieving significant market share in many of the states in which they operate, may be their dedicated approach to loss prevention and control. A dedication to controlling loss costs may provide a link between alternative markets based on self-insurance and the traditional insurance world. While most workers compensation insurers offer some sort of loss prevention and control services and advice, the states funds’ close geographical focus and ability to work with other state agencies can provide the important edge.”

In Conning’s 2007 study, “Workers Compensation—Getting a Handle on Severity,” the research firm identified a variety of factors that are behind increasing severity trends in workers compensation. All are related to increases in injury severity. Injury severity can be treated with a variety of risk management approaches, including increased attention to safe workplace design and a concentration on employee health and wellness, over and above job activities. Demographic factors such as an aging workforce, growth in higher severity occupations and the increased incidence of detrimental general health conditions such as obesity and diabetes can have a major impact on future loss growth.

Says Jablonowski: “A key factor in the ability to implement effective health and safety programs in the workplace is the ability of many state funds, through dividends and other programs, to link financial rewards directly to loss performance. Most small and medium-sized insureds still value reduction in overall premiums the most. Dividend programs allow state funds to reward insureds directly through effective reductions to premiums in the form of policyholder dividends, thereby building a loyal base of loss-conscious customers.”

Finally, the study points out that the goals of state funds may differ from those of private insurers in that most state funds were created under specific public mandates to preserve the public and economic health of their constituencies.

“While many state funds operate as mutual business organizations whose goal is financial self-sufficiency, they are still in many ways public rather than private enterprises,” says Jablonowski. “By all indications, this public focus, combined with sound business judgment and practice, makes for a form of workers compensation risk finance that serves its customers, covers its operating expenses and is able to provide consistent returns to those customers for proven safety improvements.”