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Currently, the state's Workforce Safety and Insurance agency is the only legal provider of workers' comp coverage in North Dakota. The bill, H.B. 1408, would permit employers to self-insure for workers' comp coverage or purchase insurance coverage from outside companies.

North Dakota is one of four states -- including Ohio, Washington and Wyoming -- that does not permit commercial insurance carriers to provide workers' comp coverage. In addition, the state does not presently permit self-insurance. Wyoming, on the other hand, does so in very limited circumstances. Both Ohio and Washington make the self-insurance option more available. However, according to proponents of the bill, Ohio and Washington have economies that are significantly larger than those of either North Dakota or Wyoming.

• Higher premium rates. The agency said the introduction of self-insurance in North Dakota will likely generate a need for higher premium rates for employers that continue to purchase insurance coverage through the WSI. Officials attribute the increased costs to several factors. The agency's fixed expenses, the report stated, would not likely decrease to the same extent as premium income. Thus, expenses as a percentage of premiums would likely increase, thereby generating the need for higher rates.

In addition, the agency said that accounts with the best underwriting results would be the ones most likely to self-insure.

"As carrier of last resort, WSI will likely experience an overall decrease in underwriting results for its remaining book of business," the agency said. "Though WSI attempts to reflect such differences among employers through application of its experience rating plan, such formula-driven approaches cannot reflect the more subtle differences in exposure to loss that a well-trained risk manager would be able to identify."

• Third-party administrators. The agency also said that the legislation does not clarify how self-insured claims will be handled.

"We would recommend that issues surrounding the possible introduction of third-party administrators be resolved prior to the start-up of self-insurance," the report stated.

• Prior claims. The agency noted that the Legislature is considering several bills that increase benefits for prior claims. The existence of self-insurance, the report concluded, will make the type of legislative reform related to past workers' comp claims much more difficult.
• Guarantor of loss. The legislation would require that the WSI serve as the program's ultimate guarantor if loss reserves and any additional escrow accounts, letters of credit, or bonds prove to be insufficient to cover the defaulting employer's workers' comp liabilities. The agency said that the result would be that employers who purchase insurance from the WSI -- most of which would not be qualified to self-insure -- would be ultimately responsible for the shortfall in funding.

"The potential for default on the part of self-insureds is very real," the report concluded. "Even states that have significant oversight of self-insurance programs and the associated requirements for additional security funds often find that the retained funds from a defaulting employer are not sufficient to cover workers' compensation claims liabilities."

• Oversight. The legislation would require the WSI to provide oversight of the self-insurance program, including the determination of a potential self-insured's financial ability to meet its workers' comp obligations. Because of this, the agency said administrative expenses for the WSI would likely increase further as individual account oversight expands.

"It is not our goal to discourage self-insurance in North Dakota," the agency said in its report. "That said, we believe that there are several issues that deserve consideration by the Legislature."

February 23, 2009

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