“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–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 state funds have at least three advantages over private insurers. “State funds don't have to be profitable in order to survive. 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.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 18, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.