Ranking the Cost of Comp

Sometimes we want to know how a state is doing relative to others with regard to the cost of workers insurance, the efficiency of the insurance system and the adequacy of benefits. In this issue we present a snapshot. The findings will surprise you.

Each year, Actuarial & Technical Solutions Inc. publishes a ranking of the cost of workers' comp insurance by state. It ranks all states except those with monopolistic state funds. You will find on page 8 of this month's issue a table showing the rankings as of Jan. 1, 2006.

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Actuarial Solutions gives to each state a specific ratio to the average of these 45 states. For example, Wisconsin's costs are 82.8 percent of the average, or 17.2 percent below average. The table ranks states by the cost of insuring the same hypothetical manufacturing employer. The actuaries create a basket of manufacturing class codes based on the distribution of manufacturing jobs in the entire country.

Thus, if 2.3 percent of all manufacturing employment is in, say, glass production, 2.3 percent of the market basket would be for the class codes for glass production. Then it goes to state insurance departments, as it has done since 2002, to find out what insurers would charge on average for this market basket. It then calculates the average of all the 45 comparable states.

Actuarial Solutions' reports are snapshots, produced year after year by a proficient team of analysts. For more in-depth analysis, read the Workers Compensation Research Institute's reports on a much smaller set of states.

For 2006, the average cost is $4.19 per $100 of payroll. That is up 1.7 percent from 2005 and 32 percent above 2002, the year in which costs went up for the first time after a long decline.

Say you are a typical employer, with $10 million in payroll. If you locate in Arizona, you'd be paying $186,000 in premium; in California, $834,000. Discounts, deductibles and other contractual nuances might obscure this enormous disparity.

Here's a surprise: If you want your workers to be well-compensated and well-treated while on injury, don't locate them in California, nor even in Arizona. Pick a state with relatively high statutory benefits and low medical reimbursement costs.

A better choice is Massachusetts, with relatively low insurance costs but much higher-than-average benefits. Since 1992, the Bay State has enjoyed the greatest relative decline in insurance costs of all 45 monitored states, a trend that is continuing. You can pay injured workers well but keep claims costs down through superior system design and market practices. Other states delivering high benefit and low-to-moderate insurance costs include New Mexico, Oregon, Rhode Island and Wisconsin.

Contrast that with California, with low benefits but high insurance costs. It still is the most expensive state. Due to reforms, insurance costs there have declined since 2004 by 38 percent relative to the national average. Recently an attempt to roll back some permanent award cuts was killed by gubernatorial veto. I suspect we're going to hear from that state more about real hardships due to stingy benefits.

Vermont has turned in the worst relative performance since 1992 for the cost of insurance. I've been struck by the state's climate of passivity among business and government. The state is way behind in promoting innovations in market practices. Bring your ideas here, and stop by for a walk among the hills with me.

PETER ROUSMANIERE, a Vermont-based consultant and writer, is the workers' comp columnist for Risk & Insurance®.

November 1, 2006

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