Workers’ Compensation

To obtain worker’s compensation benefits, injured employees must only show that their injury is work-related—they do not have to prove that employer negligence caused the injury. Benefits available to injured workers may include medical care, partial wage replacement for any work time missed due to injury, permanent disability benefits, vocational rehabilitation services, and death benefits. In exchange for these benefits, workers cannot sue their employers for injuries that occur on the job. Employers who fund the workers’ compensation system—either by purchasing insurance on the market or self-insuring—are effectively shielded from tort liability arising from workplace injuries.

According to the Insurance Information Institute, workers’ compensation insurance premiums increased by approximately 50 percent across the nation from 2000 to 2003, and many California businesses reported increases of 100 percent or more.1 Insurance premiums also skyrocketed in the early 1990s.

Changes in insurance rates are not primarily influenced by the amount that insurance companies pay out in claims. Instead, rates are strongly affected by the business cycle, because insurers make most of their profits from investment income. In the late 1990s, insurance companies were making so much money in the stock market that they could afford to cut insurance premiums. When the stock market turned sour, insurance companies lost money on their investments, so they raised rates to maintain profits. An insurance “crisis” occurred as insurance companies scrambled to recapture lost profits.

Real workers’ compensation reform must focus on stabilizing the insurance market. In California and several other states, for example, deregulation led insurance companies to drop premium rates in the mid- to late-1990s.2 Insurers sought to undercut each other in pursuit of greater market share, and that competition drove two dozen workers’ compensation insurers out of business. The insurers that remained in the market then raised premiums from record lows to record highs. Some form of re-regulation can address high premiums.

States can mitigate premium increases while protecting benefits for injured workers by preventing insurers from charging either inadequate or excessive premium rates. This would help stabilize the price fluctuations to the worker’s compensation market that have occurred since industry deregulation.2 States could also institute a rate freeze for small employers that have not had any claims within the past five years and that provide health insurance coverage to their employees. This would provide relief to small companies that meet their responsibilities to protect the health and safety of workers.