State Funds Increase Market Share

By Gary S. Mogel

NU Online News Service, May 9, 11:35 a.m. EDT?Workers’ compensation state funds have garnered an increased share of the market at the expense of private insurers, according to a new study covering the years 1997 to 2001 by Conning Research & Consulting Inc. in New York.

Michael Weinstein, Conning’s director of research, noted that the funds’ share of the workers’ comp market in states with competitive funds increased from 24 percent to 32 percent from 1997 to 2001–the years covered by the study.

“The state funds wrote $7 billion out of the $31 billion in premiums in 2001,” Mr. Weinstein noted.

Only competitive state funds–those that compete for business with private insurers–were studied. Exclusive state funds, which are the only source of workers’ comp coverage in a few states, were not included.

“Insurers that have historically profited from the workers’ comp line are now facing a new major challenge,” Mr. Weinstein explained. “State funds’ presence is an entry of new capital into the industry, which will have implications well beyond the current pricing cycle.”

The study also found that, in the 21 states that have competitive funds, those funds have grown to be the largest writers of workers’ comp coverage in all but one of the states, with the exception being Pennsylvania.

Also, the funds have enjoyed superior investment income and combined ratios (5.4 points better in 2001) than their private counterparts and are more adequately reserved for losses. In fact, the study concluded that state funds are “redundantly reserved.”

Mr. Weinstein noted that there are at least three advantages that state funds have over private insurers that may account for their superior results.

“State funds don’t have to be profitable in order to survive,” Mr. Weinstein pointed out. “In addition, their geographic concentration gives them superior knowledge of the marketplace. Also, they share information among themselves, which private carriers generally don’t do.”

“If these continue to be viewed as successful models, particularly in the current environment of rising prices, other states may adopt state funds,” he added. This would result in “further altering the competitive situation in this important line of business.”

The study goes on to analyze the core issues affecting performance of state funds, including reasons for their premium growth, market position, underwriting results and reserve adequacy.

Conning said the study, titled “Workers’ Compensation State Funds–What You Don’t Know Might Hurt You,” can be ordered from the firm’s Web site, www.conningresearch.com.