As a business owner, you’re familiar with red tape, regulations, legal protections, and various forms of insurance. While managing these aspects of running a company may seem tedious, services like insurance are essential to protecting your business financially.
One type of insurance that all businesses have to purchase is workers’ comp insurance. Because the workers’ comp insurance shopping process differs across states, many employers find it complicated. As a business owner, the first thing you need to determine before starting your search for the right insurance provider is whether you live in a state with state-funded workers’ comp insurance or competitive funds. If you’re wondering how these policies differ and what your state requires, keep reading.
State-Funded Workers’ Compensation
A workers’ comp state fund is a state-run insurer, which acts as a means for companies to retain insurance coverage regardless of their risk or loss history. They are a specialized insurance provider that also operates on a non-profit model, which makes them a competitive source of insurance for businesses. Unlike many private insurers, state funds don’t have to use resources on ancillary agencies and structures like second injury funds, guarantee funds, and uninsured employer funds.
Even though state funds are non-profit-making entities, they are designed by law to be self-sufficient. They mostly operate under the same regulatory requirements as private companies, especially in terms of surplus and reserves. Whether they function as a department of the state or a separate non-profit entity, they can return dividends or safety refunds to their policyholders.
How do workers’ comp state funds work? They’re a repository of assets, reserves, and surplus of the state fund itself, not public funds. The funds are the property of the employer policyholders, or they are held in trust for the benefit of insured employers and their injured workers.
Workers’ comp state funds are an essential economic stabilizer; they enable businesses to retain insurance cover, thereby keeping them open when accidents happen and keeping jobs stable. Any employer will get coverage regardless of the size of their premium, the nature of their business, and loss history.
States With State-Funded Workers’ Comp
There are only a handful of states (North Dakota, Ohio, Washington, and Wyoming) that are state monopolistic workers’ comp insurance providers. In these states, the state fund is the only option employers have. These state funds have in-house actuaries and keep their administrative costs low as they do not issue renewal policies or require marketing programs.
Most state workers’ comp insurers operate in open competitive markets, meaning they compete for market share with private players. In most states (listed below), employers can choose between the state fund and private insurance companies within a voluntary market system. Competitive state fund markets include:
- New Mexico
- New York
- Rhode Island
In these markets, state funds are typically a good fit for employers who have a risk profile that is too high for private insurers. They also provide coverage for groups of employers that private insurers tend to avoid, such as trucking companies or temporary employment agencies.
In an open competitive workers’ comp market, employers can not only choose between the state fund and privates insurers, but they can also opt to self-insure.
Competitive State Funds vs. Monopolistic State Funds
Not only do state funds offer constant, reliable, and affordable workers’ insurance, but they also provide excellent service. Their large, geographically concentrated premium value enables them to serve large and small employers alike. They also offer add-on services that private insurers cannot, such as safety and loss prevention programs staffed by local safety professionals. These efforts reduce accident frequency, severity which benefits everyone involved.
As a single-purpose service provider, state funds are usually swift in delivering benefits to injured employees. The economies of scale can further be utilized in systems and automation, something that smaller insurers can’t typically offer.
As a publicly owned, non-profit entity, state funds also have a tax benefit, which lowers their expenses and, ultimately, their costs. In turn, state funds have large shares of the workers’ comp market in almost every state in many states.
When it comes to states with monopolistic state funds, the state fund typically has greater purchasing and negotiation power when dealing with medical services and equipment costs. However, there is a risk of having monopolistic issues like waste, inefficiency, and bureaucratic paralysis.
Monopolistic funds can also become less responsive to employer and worker stakeholders without leadership if the political and administrative will is not there. By nature, they are also likely to face political manipulation or pressure that can distort costs, benefits, and reserves for short-term political gains.
Private insurers have the advantage of autonomy when it comes to entering, remaining, expanding, contracting, or leaving a particular market or insurance line. Multi-line carriers may offer economies of scope and scale, where they offer a one-stop-shop for multiple insurance products which can share administrative costs. A market with multiple players creates competition, which can generally improve service provision and premium pricing.
Private or State-Funded?
If you live in a state where you have the choice between using the state fund and purchasing workers’ comp insurance from a private company, you have a bid decision to make. Be sure to shop around before making your choice to ensure you get the best deal available and the best protection for your business and your employees.