Maryland could ‘privatize’ workers’ comp fund

by Matthew Glans on March 27, 2012

A new proposal that would privatize Maryland’s workers’ compensation fund is currently being considered in the Maryland General Assembly. The proposal, S.B. 745, would transform the state’s Injured Workers’ Insurance Fund quasi-state agency into a private, nonprofit insurance company. This new nonprofit insurance company, Chesapeake Employers’ Insurance Co. would take responsiblity for the policies currently held by the IWIF.

According to the Baltimore Business Journal, the IWIF is the largest workers’ comp carrier in Maryland, insuring about 21,000 businesses. The IWIF serves as insurer of last resort, writing policies for employers who cannot find policies elsewhere in the private insurance market.

S.B. 745 would require Maryland’s Injured Workers’ Insurance Fund to restructure itself into a private workers comp insurer named Chesapeake Employers’ Insurance Co. The fund has been Maryland’s workers comp insurer of last resort since 1914, according to a draft of the legislation.

The bill asks the Maryland Insurance Administration to conduct an independent study to determine what financial benefits the fund has gained from the state. Based on the study results, the state fund would need to pay at least $50 million to Maryland’s general revenue fund, plus any additional money determined by the insurance administration review.

Similar legislation privatizing IWIF failed in 2010 after strong opposition from the insurance industry. The current proposal has drawn concerns from the insurance industry as well. Private insurers have argued that a privatized IWIF — which still remains under the control of the governor, who would continue to name the members of the new companies’ board — would have a competitive advantage over private insurers and be free of many of the tax burdens other companies face.

Business groups also expressed skepticism about the new workers’ comp insurer. In his Baltimore Business Journal article, Gary Haber spoke with business groups, who were concerned that IWIF’s new independence could lead to workers’ comp rate hikes, which would hit businesses hard.

There are obvious questions about whether or not this proposal constitutes real privatization. A private workers compensation system, while creating more competition in the market, doesn’t mean automatic rate cuts for everyone. The track record of programs which opened up workers’ comp markets generally found that private competition lowers rates and improves service. Privatization has been implemented in several states, including West Virginia and Nevada.

A truly privatized workers’ compensation system would allow employers to shop around for their coverage and a wider range of products. The problem with insurers of last resort like the IWIF is that they inevitably become the primary providers of whatever insurance they cover. State-backed or state-run insurers are always faced with the political pressure to keep rates low, often below what the private market can afford to offer. These low rates may seem like a good deal to employers, but the insurers simply transfer the costs back to taxpayers. Privatization moves this risk back to the private market, where private insurance companies can better finance this risk.

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  • Bruce C. Wood

    You mischaracterize legislation to restructure IWIF as “privatization.” It is nothing of the sort.u00a0 Moreover, you miss the bigger picture of which the restructuring is only a part — siphoning $50 million in policyholder funds to help balance the Maryland state budget, a surplus raid that potentially jeopardizes IWIF’s solvency and exposes the private marketu00a0through IWIF’s participation in the guaranty fund.u00a0u00a0

  • Bruce C. Wood

    This restructuring retains indicia of government control and regulatory preference that are inconsistent with a bona fide privatization.u00a0 The Governor retains control over appointment of the Chesapeake Employers’ Insurance Company Board; “Chessie” retains a governmentally dedicated market — the residual market;u00a0″Chessie” is still exempted from participation in the rating law and rate approval process to which the private market is subject; andu00a0it’s authority to restrucuture in the future is circumscribed.u00a0 These are not indicia of privatization. u00a0u00a0u00a0u00a0

  • Bruce C. Wood

    In mischaracterizing this legislation as “privatization,” you have unwittingly adopted the lexicon of the bill’s proponents who need to sell this bill as a “privatization”u00a0in order to lend credibility to their primary objective: robbing policyholders of $50 million in IWIF’s surplus to balance theu00a0Maryland stateu00a0budget.u00a0 The American Insurance Associationu00a0opposes both the surplus raid, asu00a0well as the restructuring legislation, although we would endorse a bona fide privitization under otherwiseu00a0acceptable conditions.u00a0

  • Mman

    The comparison to West Virginia is inappropriate, since they had a system where the state fund had no competitors. nIt doesn’t sound like the reporter understands the nature of the market. Can’t employers shop around for their coverage now?

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