Competitive Pricing for Workers Compensation Insurance Needs Effective Regulatory Oversight

Recently, a former director of the Illinois Department of Insurance has written that proposed modest regulation of Workers Compensation insurance rates would produce undesirable results for the business community. With all due respect, I think the director is wrong. Here's why.

The theory of price competition is that the marketplace will enable consumers (in this case, employers who have to buy Workers Comp insurance) to see which insurer has the best price, and therefore make a ration decision and in the process exert control over insurance pricing (the more expensive insurers will lose business and be incentivized to reduce rates).

Couple of problems with that. One, the rules that govern computation of Workers Comp insurance premiums are dauntingly complex, and are largely written by the insurance industry itself. So there are ample opportunities for insurance underwriters and agents to "low ball" insurance proposals, making it seem that one insurer's cost is lower when it ultimately will not be.

The other problem is that the ultimate cost of Workers Comp insurance isn't known at the time the buying decision is made. When it starts, the premium is just an estimate. The real cost of the policy won't be known until after the policy ends, usually a year later. That's when the insurer does an audit, and determines what the insurance actually costs. And sometimes those audits can be much, much higher than the original estimate.

That's why effective insurance rate and premium regulation is so important for the business community. Left completely to their own devices, insurance company underwriters and auditors have a natural bias for higher premium charges. Sometimes they're right about that. But sometimes those higher premiums are based on, shall we say, somewhat self-serving interpretations of the rules.

In Illinois, our Department of Insurance has seen an exodus of personnel who were experienced and knowledgeable about Workers Compensation insurance pricing. And there has been a huge reduction in staff at the department over the course of the last decade as well, so the remaining staff are generally overworked and stressed. And the people who knew about Workers Comp premium issues are pretty much all gone, anyway. That's not to say that those who remain cannot help employers with disputes over Workers Comp premiums, but it does mean that the agency is having a harder time providing knowledgeable and effective oversight in this area.

Illinois is far from alone in this regard. In many states, the ability of insurance regulators to provide genuine an effective assistance in disputes over Workers Comp insurance premiums is limited, at best.

Competitive pricing of Workers Comp insurance does likely provide benefits to employers. But without genuinely effective regulatory oversight, those benefits can often be illusory.