Competition in Workers' Comp Insurance

There's an interesting article in the Insurance Journal today, about how "competitive" Florida's Workers' Comp insurance market is. This got me to thinking about this subject, about what it really means for a state's Workers' Compensation insurance marketplace to be "competitive".

Actually, my home state of Illinois is even more "competitive". We have around 400 different insurance companies admitted to write Workers' Compensation insurance here. This point was noted recently in a hearing at the Illinois Senate (which I attended) by different witnesses, to make rather different points.

Illinois appears to be the most "competitive" state in the union, by the way. We have more insurance companies admitted to write Workers' Compensation insurance than any other state. But what does it really mean, from an employer's point of view, to have such a number of insurers writing Workers' Comp?

As one witness at the hearing pointed out, one thing it means is that insurance companies find it profitable to write Workers' Compensation insurance in Illinois. That's why more carriers are active here than in other states.

Illinois is profitable for these insurers because Illinois has long had open rating for Workers' Compensation insurance premiums. Insurance companies have great flexibility in pricing Workers' Compensation insurance--even though rates are subject to review and approval by the department of insurance.

The reason is that, first off, insurers in Illinois are allowed to file and use "Schedule Rating" plans that give them the ability to make very large rate adjustments. These adjustments can be either credits (when an insurer wants to reduce premiums for an attractive account) or debits (when the insurer thinks it needs higher premiums than the usual rating procedures would produce).

Additionally, insurers in Illinois are free to file their own schedules of manual rates, so they can adjust the manual rates for various classifications to focus which kinds of employers they want to be competitive on.

But all this talk of a "competitive" marketplace for Workers' Compensation insurance misses some important points. For one thing, many smaller or newer businesses don't get the benefit of that rate competition. Many smaller or new businesses end up in the Assigned Risk Plan, where there is no competition, and rates can be double what they would be in the so-called "voluntary market" (that is, the non-Assigned Risk insurance companies.) But since those voluntary market insurance companies are free to compete only on those accounts they think will be most profitable, the small employers may not ever get the benefit of that theoretical price competition.

The Assigned Risk Plan is a very expensive place to get Workers' Compensation insurance, and it can severely penalize a small business just for being small.

The "Competitive" voluntary market tends to mainly interested in larger accounts, so smaller employers never see much benefit from the competitive market for Workers' Comp. And the current Assigned Risk plan is rather punitive towards small businesses (not to mention larger ones, who may have ended up there because of insurance market fluctuations).

And larger employers in the Illinois Assigned Risk Plan can really get clobbered if they become large enough to get forced into the Loss Sensitive Plan that is used for employers whose premium is over $200,000. It's a very unattractive Retro style plan that can make WC costs really, really painful.

All of which is not to say that there are not real benefits to having a competitive Workers' Comp market, such as in Illinois and Florida. Those benefits are quite real, it's just that they are not always as widely distributed among employers as they could or should be.