Proponents of state-controlled funds in Michigan and elsewhere frequently assert that state funds are valuable because they guarantee the availability of insurance during "hard" markets. During periods of high loss ratios, workers' compensation insurers often must restrict the amount of business they write. Allegedly, when private carriers restrict their premium writings, the state fund can fill the gap and keep insurance available at relatively low cost.

This argument is based on one of two theories: state-controlled funds are not subject to the same market pressures as are private insurers; or private insurers are likely to restrict more sharply their writings in Michigan than in others states in which they do business, while the state fund's capacity is "locked in" in Michigan.

The first argument is patently false. State-run competitive funds, by definition, operate in the market. Assuming no tax subsidies are made available to finance its activities, a state-controlled fund is not immune to market downturns. Of course, some well managed state-controlled funds are able to perform better than the industry as a whole and need not restrict their premium writings in hard markets. The same can be said of many well managed private insurers.

The second argument is more complex. Typically, when insurers begin to restrict their premium writings, they first limit writings in those markets deemed less important to the company's long-term goals and prospects, or in less profitable markets. It is true that the Accident Fund, because it is limited to writing only workers' compensation insurance and only in Michigan, would be forced in hard markets to use all of its capacity to write insurance in Michigan.

However, other variables affect this simple equation. First, while a state-controlled fund would use all of its capacity in Michigan, that capacity itself could be limited by losses incurred in the market. Private insurers, on the other hand, typically write policies in many states, and poor performance in one state can be temporarily sustained by good performance in others. Second, if the state-controlled fund were looking after the best interests of its policy holders (as most observers believe it should), it might choose to restrict its writings, rather than to write business at a loss. Such a policy would work to protect existing policy holders at the expense of new business seeking insurance, but such a tradeoff is inevitable, even for the state-controlled fund. Finally, because the Accident Fund is "captive" in Michigan and may not write insurance in other states, it is unable to provide insurance, in hard or soft markets, to large employers with employees outside of Michigan.

Perhaps a better means by which to guarantee the availability of insurance in hard markets would be to encourage the growth of domestic insurance companies. Insurance companies, for reasons of both pride and simple logistics, tend to regard their home state as a vital market, and tend to restrict premium writings in that state only as a last resort. Similarly, efforts to improve Michigan's insurance climate will make it less likely that multistate insurers will restrict their premium writings here. Indeed, a better-than-average insurance climate would tend to increase the capacity devoted to the Michigan market in both soft and hard market cycles.

Traditionally, Michigan has not been perceived as having a favorable climate for insurers. Many market observers feel the very presence of the state-controlled Accident Fund is a significant barrier to an improved market climate. These observers claim that insurers are reluctant to commit to Michigan so long as the possibility exists that the insurance commissioner will order the Accident Fund to write insurance at what private companies believe are below market, actuarially unsound rates. It is widely believed that the current confusion surrounding the Accident Fund has hampered private companies' interest in writing workers' compensation business in the state.

Data from the insurance commissioner's office shows a slight decline in the number of private insurance companies writing workers' compensation in the state in recent years. As is depicted in Table 2, a net of twelve insurance groups withdrew completely from the Michigan market between 1983 and 1986, with a net of seven groups leaving the market in 1986 alone. (A group may include several insurance companies in some form of consolidated ownership.) Other companies have reduced their premium writings while remaining active in the market.

Table 2

Exit from and Entry into Michigan's Workers' Compensation Market by Private Groups

Entries

Exits

 

Year

Number

Percent*

Number

Percent*

Net Number

Change Percent*

1983

6

4.9

11

9.0

- 5

-4.1

1984

7

6.0

5

4.3

+ 2

+1.7

1985

4

3.4

6

5.0

- 2

-1.6

1986

3

2.6

10

8.4

- 7

-5.8

Total

20

---

32

---

-12

 

*of previous year's groups

Source: 1983 unit statistical reports of insurers and 1984-86 policy declarations of insurers, as cited in "Preliminary Certification of the State of Competition in the Workers' Compensation Insurance Market," Commissioner of Insurance, January 15, 1987, p. 15.


Deputy Insurance Commissioner Dominic D’Annunzio, the Michigan insurance Bureau’s designated representative to the Accident Fund, disputes the notion that Department efforts to control the Fund and its rates are causing insurers to pull out of Michigan. "I don't see any evidence to support that contention, no evidence whatsoever." D'Annunzio points out that no insurers have made public statements to that effect.[26]

Fritz Lewis, president of the Independent Insurance Agents of Michigan, disagrees with D'Annunzio. Lewis spent October and November of 1986 traveling the country with Insurance Commissioner Herman Coleman in an effort to convince private insurers to write more business in Michigan. Says Lewis, "Michigan has turned itself from a state perceived as one of the worst to one perceived as a good place to do business. Still, many of the insurance companies we talked to cited confusion over the Accident Fund as one of the remaining problems in Michigan."[27]

The burden of proof would seem to fall on those who claim that a state-controlled fund is necessary to assure workers' compensation insurance availability in a hard market. State-controlled funds are neither more nor less vulnerable to capacity shortages than are private insurers. The state-controlled Accident Fund is, however, unable to serve a significant number of Michigan employers with employees in other states. It is also a fact that the number of private insurers writing workers' compensation in Michigan has declined since the state stepped up its efforts to control the Fund and lower its rates. It appears unlikely that the presence of a state-controlled accident fund has any positive effect on capacity available in a state.