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State-sponsored workers' compensation insurers fall into one of four categories that we'll label "monopolists," "formers," "temps" and "permanents."

Monopolist funds embody a model popular in the 1910s and 1920s in the United States and are still used today in other countries. This model is anchored in an overarching state agency, which controls all regulatory, insurance, and dispute-resolution functions.

Another group of funds are the formers. They are insurers who used to identify themselves as state funds. But now, these funds behave like private insurers. Such funds include the Accident Fund of Michigan and Nevada's Employers Mutual Insurance Co.

These funds operate today without any state affiliation. The number of them may even grow, depending on the strategy and business intentions of management. The West Virginia fund, for example, will shed its monopolist label and in 2008 join these so-called formers.

Then there is the group of state funds we'll label the temps. A fourth group, we'll call the permanents.

Temps and permanents compete with private carriers. Yet they differ from one another in key aspects of the business mission.

The temps were created mostly in the early and mid-'90s to offer employers insurance at a time when private insurers were fleeing the marketplace as claims inflation collided with premium price controls. These funds can be found in Hawaii, Kentucky, Maine, Missouri, Louisiana, New Mexico, Rhode Island and Texas. They were founded to respond to a specific, temporary crisis in the market.

When pricing stability returned to the marketplace after insurers, employers and medical providers began to manage injury risks better, premium price controls were lifted, creating opportunities for growth.

Temp funds are most likely to recruit senior executives from private insurers. As a result, these funds are run by managers most likely to think like entrepreneurs. Maine's state fund, for instance, founded in 1992 to absorb the state's bloated assigned-risk pool, recently decided to expand into other New England states. New Hampshire, over Liberty Mutual's objection, granted it a license, as did Vermont and Massachusetts.

Temp funds, which usually downplay their state affiliation, sometimes serve as insurer of last resort and as a full-fledged market competitor. A few--shrewed animals that they have become--have even learned how to exploit this duality.

In managing a large voluntary volume alongside an assigned-risk pool, for example, the insurer exerts lots of influence in the market. As a result, it can set different prices and conditions for clients on the voluntary side of the business, as well as for clients on the assigned-risk side of the business.

Bob Dove, CEO of Hawaii Employers Mutual Co., and Russell Oliver, the CEO of Texas Mutual Insurance, for example, claim their ventures can balance the interests of both sets of customers, coaxing employers toward better practices.

Many successful insurers began in the same manner as funds carrying the temp label. As a rule, these insurers were born when a government, trade association, union or company, seeking to resolve a pressing risk crisis, created a risk management entity. Then, sooner or later, they began writing insurance. Before long, they found themselves in the insurance business. Leaving behind strong balance sheets and disciplined leadership, these ventures sometimes enter larger markets. Liberty Mutual, for example, began life in 1912 as an employer's mutual. Within two years it began writing auto insurance. Today, its reach is global.

The group of funds labeled "permanents" compete with private carriers but are less entrepreneurial. They usually don't recruit from private insurers, and retain a more explicitly "public" image. Their leadership may be vetted through the governor's office. Their employees may come from the ranks of civil servants. State funds operating in Colorado, New York, California and Oregon are the largest. Others exist in Arizona, Idaho, Maryland, Minnesota Montana, South Carolina and Utah.

Some funds have a history of transiting across types, moving from one label to the next. The Oregon fund began as a monopolist, for example. Then, in response to a financial crisis, it joined the permanent category about 15 years ago, a move which didn't sit well with Liberty Northwest, a subsidiary of Liberty Mutual. Liberty Northwest has been waging a campaign, unsuccessfully so far, to force the Oregon fund to completely privatize.

To the southeast, Utah's state fund is shedding its permanent label, and aligning itself with the companies wearing the label of the formers. The Utah fund is doing so after it acquired an insurance company, and through it, now writes business in Idaho. It began a few years back, when a Utah court determined that the fund was not a state agency. That allowed Idaho regulators, who despite having their own state fund, gave the Utah fund the green light to write insurance in Idaho under the name of its affiliated insurer. True to its new label, it is behaving more like a private insurer. Thus, it's no surprise that the fund is now seeking to penetrate other states.

PETER ROUSMANIERE, a Vermont-based consultant and writer, is a regular columnist for Risk & Insurance®.

April 1, 2005

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