The Bad Penny of Workers Comp Turns Up In Montana

When I was a kid, I remember the Red Skull telling Captain America, "Like a bad penny, I always turn up." I wasn't really sure what that meant, as I hadn't ever seen a bad penny, but nonetheless the phrase stuck in my head. Now, in Montana, a perennial bad idea in Workers' Compensation has turned up once again: denying illegal immigrants Workers' Compensation statutory rights and benefits.

This is a bad idea for a number of reasons, but the reason that I think might be most persuasive is this: it would encourage employers to hire illegal immigrants.

This would happen because if illegals were to be denied Workers' Comp rights and benefits, then injuries to such workers would not show up on the employer's experience modification factor. That would make Workers' Comp insurance premiums lower for employers who use illegals than for employers who follow the rules. Surely it cannot be the intention of legislators in Montana to encourage the hiring of illegal immigrants.

I would expect their intentions are merely to make it possible for some employers to maim and occasionally kill such undocumented workers with impunity, as a way (so they think) of discouraging such workers from migrating to their state. A little blood on the workshop floor, a few missing fingers or arms, would be a small price to pay for making a principled political stand to earn a few votes, as long as the blood and fingers belong to folks who won't vote anyway.

That's why I point out the economic flaw in their proposal, rather than the cold blooded disregard for human life that it entails. Their vindictive little proposal, if ever enacted, would actually serve to create an economic incentive to hire illegal workers over legal ones.

Even in Montana, unintended consequences can be the most long lasting ones.

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.

AIG Settles With Regulators For $100 Million

Troubled insurer AIG has reached a settlement with insurance regulators across the country and agreed to pay a $100 million fine for having systematically mis-reported Workers' Compensation insurance premiums as other kinds of liability insurance. In addition to the fine, AIG will pay $46.5 million in fees and assessments, and has agreed to a potential $150 million in further fines if the insurer does not follow a compliance plan.

This was the same kind of mis-reporting of Workers' Comp insurance premiums that was the basis of a major prior settlement with New York's then Attorney General Elliot Spitzer.

It's unclear at this point how this settlement may impact the ongoing federal lawsuit between other Workers' Comp insurers and AIG. In that lawsuit, the other major Workers' Comp insurers claim AIG damaged them because they had to pick up the slack when AIG dodged fees and assessments for Workers' Comp assigned risk programs by mis-reporting Workers' Comp insurance premiums.

AIG's defense in that lawsuit has been to claim that the other Workers' Comp insurers engaged in similar behavior. Which leads to the question: if that federal trial uncovers evidence that other insurers did engage in similar behavior, will regulators have other targets to pursue? Or does this settlement with regulators presage a similar settlement by AIG with the other insurers?

The other unanswered question is this: to what extent did AIG's misreporting of Workers' Comp premiums distort the ratemaking process for Workers' Comp insurance? Is it possible that the $2 billion in Workers' Comp premiums that AIG has now admitted to mis-characterizing as other kinds of insurance introduce distortions in the data used to compute premiums for all other Workers' Comp policyholders in the U.S.? Did AIG cause premiums for employers all over the U.S. to be higher than they should have been, because AIG was hiding these Workers Comp premiums?

Field Guide Now On Kindle

My latest book, Worker's Compensation: A Field Guide for Employers, is now available on the Kindle from Amazon. AllBusiness.com said: "...a book you absolutely should not be without." And who am I to disagree?

Seriously, the book has gotten very nice reviews. Workers Comp Law Judge David B. Torrey wrote, "His chapters on classification and experience rating, meanwhile, may be the most lucid currently available."

So if you have a Kindle, and are keen to learn the secrets of reducing Workers' Comp costs for your business, this may be a Christmas gift you want to give yourself. And if you don't have a Kindle, you may want to check out what you've been missing. I love mine.

(But if you prefer the feel of a real book in your hands, never fear, The Field Guide is also available as a regular book, also available from Amazon.)

Hearing on Illinois Workers' Comp

Yesterday, I attended a hearing chaired by Illinois Senate President John Cullerton at the State Capital building in Springfield. The subject of the hearing was Workers' Compensation, hence my interest and attendance.

Several employers gave testimony about how the cost of WC claims in Illinois is higher than in nearby states, and gave some anecdotes about some past claims situations that they felt had been unfair. Many of these employers were larger self-insured companies, so their focus was not on the cost of Workers' Comp insurance, but rather the cost of WC claims in Illinois.

Interestingly, it was the labor representatives who testified that focused on Workers' Compensation insurance issues.

I myself had submitted some written testimony to the panel that also focused on Workers' Comp insurance reforms, so I was keenly interested in the testimony provided by the AFL-CIO and some trial attorneys.

They pointed out, correctly, that for small and medium sized employers, the way they generally satisfy their Workers' Compensation obligations is to buy insurance. Thus, for most employers in the state, the cost of Workers' Comp is really the cost of Workers' Comp insurance.

The head of the Illinois Insurance Department testified that Illinois has a competitive Workers' Compensation insurance marketplace, but that really is only partially accurate, in my view. For some employers in Illinois, there is genuine price competition for Workers' Comp insurance. If an employer is the right size, and in the right line of work, and has a decent loss history, there are usually multiple insurance companies interested in competing for the account.

But for small or new businesses, or for those employers in many construction fields, there is little or no price competition for WC.

A lot of employers still end up in the Assigned Risk Plan in Illinois because they're small, or new, or have some bad losses in recent years. And our Assigned Risk Plan is a pretty bad deal for employers--premiums there can be double what premiums would be in the so-called "voluntary market". And the Assigned Risk Plan provides no real help for employers who need assistance in making their workplaces safer.

I offered to the panel some specific suggestions for Workers' Comp insurance reform (in the form of written testimony.) I'll detail those suggestions in a subsequent post.

SC Work Comp Commission in Audit Trouble

We've done a lot of work in South Carolina, helping employers recover Workers Comp overcharges resulting from insurers not reporting Second Injury Fund reimbursements, so we keep a weather eye on developments in the Palmetto State. And a news item from there has caught our eye. The Workers Compensation Commission has gotten in trouble when an audit found that the commission did not reporting in a timely basis fines the commission had collected. Reportedly, the commission was worried the SC legislature would learn of those fines and appropriate them for other uses. These fines came from employers who were found to be operating without valid Workers' Compensation coverage.

This actually is not an unheard of practice. In Illinois, our former Governor Blagojevich would raid the funds of the Department of Insurance and use the money for other purposes, even though the funds at the DOI came from fees on the insurance industry and not from taxpayers. Blago managed to starve the department, preventing it from being able to properly function, and in the process got money for other things.

But in South Carolina, the WC Commission tried to avoid a similar problem by collecting, but not depositing promptly, some $244,000 in fines. In the process, they managed to be in violation of state law.

Washington State Keeping State WC Monopoly Fund

Voters in Washington state decided to retain their state's monopoly fund for Workers' Compensation. This means that insurance companies will not be allowed to insure Washington employers for their Workers' Comp liabilities, and employers there will continue to have to use the state fund for that purpose.

Insurance companies had lobbied hard to change things--I guess the Workers Compensation insurance can't be completely unprofitable--but ultimately, the voters decided to keep the monopoly fund going. Only a couple of states and territories still operate monopoly funds for Workers Comp--the trend in recent years has been to shift away from monopoly funds and embrace a competitive private insurance system. But Washington won't be joining that trend, at least not for now.