Monday, May 23, 2011

The National Impact of Comp

Reading this morning's WorkCompCentral News on the conservation of Majestic Insurance in California, and the objections raised by the New York State Workers' Compensation Board (NYSWB) I am reminded of just how interwoven each state's workers' compensation systems are, despite the fact that each state has its own system.

Where carriers span state lines the impact of one financial situation spreads, causing disruption, challenges, and disputes between state agencies.

We saw this quite graphically in the early 2000's when a number of California carriers went under - the ripples of those failures spread across the nation and impacted many markets.

I don't espouse nationalizing workers' compensation - that is a certain recipe to disaster as each state has its own culture, its own needs, its own laws. But state Insurance Departments today have a much different job now than they did when workers' compensation was first introduced.

The financial considerations are much more complex. Holding companies domiciled off shore, public funding coming from the financial markets, broad based property & casualty companies using work comp as loss leaders to gain more profitable business, and a whole host of other complicating factors make the work comp market much more diverse and intricate than originally conceived.

At the same time, this complex structure of the work comp market is good because of the broad spreading of risk. Insurance, at its most basic function, is a risk management tool, and work comp is probably one of the biggest examples of the genius by which spreading the risk should work.

Yes, there are holes and there will be consequences when a financial situation goes awry, such as with Majestic, but think about how much more devastating this situation could become if the risk of one carrier were not so spread out.

It's not ideal, but the system essentially works as designed.

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