Claim #3 — State-run competitive funds provide insurance at the lowest possible cost.

Perhaps the most frequently heard argument in favor of state control of the Accident Fund is that the state can use the Fund to assure low rates for workers' compensation insurance, particularly in an open rating system such as Michigan's.

Michigan's open rating law provides that the insurance commissioner will file an annual report detailing the state of competition in the workers' compensation market. If the commissioner finds competition to be inadequate, he is authorized to order the Accident Fund to develop "mechanisms to create competition or availability where it does not exist."[28]

In the more moderate view of most supporters of a state-controlled fund, this power to "create competition" is a safeguard provided in case the market fails to function. In the more radical view, which dominates the Michigan attorney general's office, this power is an absolute necessity—a precursor to competition. Says Assistant Attorney General Iwasko, "It is rather naive to believe that insurance companies will compete simply because you set up a competitive atmosphere."[29]

Since open rating took effect in 1983, this philosophy of contrived competition has motivated the insurance commissioner's and attorney general's efforts to require the Accident Fund to lower rates. In September 1983, Insurance Commissioner Nancy Baerwaldt ordered the Accident Fund to reduce its rates by 17 percent, which would result in the Fund's writing insurance at "pure premium" rates, sufficient only to cover current losses. Administration and contribution to surplus were to come from investment income. Accident Fund officials refused, but voluntarily lowered rates by 10 percent (as recommended by Fund actuaries) in January 1984. In 1986 and again in 1987, Commissioner Herman Coleman attempted to block rate increases by the Accident Fund. The propriety of his efforts is currently being litigated. In the meantime, the Accident Fund has been allowed to collect the higher rates, though it places the funds in trust pending a final ruling.

Would open rating more effectively lower costs for workers' compensation insurance if a state-run competitive fund were required to lower its rates? The evidence is admittedly scant, but to the extent it exists, it contradicts the notion that a state-controlled fund is needed to make open rating work.

As previously noted, it was the presence, not the absence, of intense competition in the market that first prompted the state government to promote joint pricing through WCRIAM. Further, Michigan has clearly benefited from the open rating system that replaced joint pricing in 1983, even though the Accident Fund has not been used to "create competition."

The best analysis of the effects of open competition on the market was included in a 1985 study by John F. Burton (a Cornell University professor and the nation's leading authority on comparative workers' compensation cost analysis), H. Allan Hunt (Upjohn Institute for Employment Research), and Alan B. Krueger (an associate of Burton). In the study, prepared for a review of Michigan's workers' compensation costs conducted at Governor Blanchard's request by University of Michigan professor Theodore St. Antoine, Burton analyzes the net impact of open competition in the eight states having open competition in 1984. Table 3 presents his results.

Of the states presented in Table 3, Minnesota and Oregon are of particular interest to Michigan policy makers, as they are the only states with both open competition and a state-run competitive fund writing workers' compensation insurance. In Oregon, rates fell 36.3% after the move to open competition, a greater decrease than that recorded in any other state. In Minnesota, conversely, open competition had less effect than in six of the other seven states. Michigan, despite the commissioner's inability to control Accident Fund rates, benefited more than any state except Oregon.

Table 3

Estimated Net Impact of Open Competition on Workers' Compensation Costs in Eight States with Open in Effect on January 1, 1984


Effective Date of Open Competition

Estimated Net Impact of Open Competition
(% decrease)






















Rhode Island



* States with state-run competitive funds. For purposes of this table, Michigan was not considered to have a competitive state fund, since the state was unable to exert control over Accident Fund rates.

Source: John F. Burton, Jr., et al., "Interstate Variations in the Employers’ Cost of Workers' Compensation, with Particular Reference to Michigan and the Other Great Lakes States," p. 71. Burton's calculations were made using data prepared in November 1984 by the National Council on Compensation Insurance.

The Minnesota data is probably not meaningful, since the Minnesota state fund was newly created in 1984 and did not have enough market presence to significantly affect rates. However, the Oregon case is also misleading, and a more careful analysis of that state fund suggests the long-term negative consequences of political rate setting.

When open rating took effect in Oregon on July l, 1982, SAIFCO adopted a policy of writing insurance at pure premium rates, exactly what the Michigan attorney general and insurance commissioner have tried to require the Accident Fund to do. SAIFCO, which controls almost 50 percent of the insured Oregon workers' compensation market, slashed its rates by over 40 percent. John Lewis, a workers' compensation consultant in Oregon, notes that private insurers no longer able to compete "left the market in droves."[30] Of 293 insurers licensed to sell workers' compensation in 1985, 104 wrote no business at all in the state; another 74 wrote less than $100,000 annually.[31]

In 1984, an independent audit found SAIFCO's reserves inadequate, and that year the public corporation increased its rates by 7.8 percent. A 14 percent increase followed in 1985, a 26.7 percent increase (half of which was due to changes in benefit levels) in 1986, and a 14.5 percent increase in January 1987.[32] Other insurers, chased out of the market in 1982 and 1983, were not immediately available to counter SAIFCO's rate increases. By the spring of 1987, two years after the Burton study, Oregon's savings from open competition have been almost entirely lost.

In Michigan, on the other hand, rates increased just eight percent in 1985 and 15.2 percent during the period January 1986 to June 1987.[33] These figures, based on an average of rates filed by all carriers, actually overstate the Michigan increases. Michigan employers have over 100 insurers from which to choose, and no insurer dominates the Michigan market; employers who shop around can often avoid all but minor increases. The possibility for rate-shopping is limited in Oregon, where SAIFCO writes nearly half of all workers' compensation business.

State control of Michigan's Accident Fund is likely to result in a less competitive market, as happened in Oregon. According to the commissioner's "Final Report on the State of Competition in the Workers' Compensation Insurance Market" (January 1987), the Accident Fund held a 15.6 percent market share in 1986. Another 13.5 percent of the market was in the Placement Facility, over which the commissioner has significant control.

With the Accident Fund's market share still growing rapidly, state authority over the Fund would give the commissioner control of over 30 percent of the Michigan market.

The statute authorizing open competition in Michigan specifically provides that a finding by the commissioner that a single insurer controls over 15 percent of the market would be considered evidence of inadequate conditions for competition. While the statute specifically excludes the Accident Fund from the 15 percent limit, the possibility of the commissioner's rate-making authority extending to over 30 percent of the market should be cause for concern among those who fear concentration in the industry.

According to professor Burton, "A competitive state fund can shape competition. But there are various ways to put pressure on the market. A lot of pressure is put on carriers through open competition."[34] Adds the Upjohn Institute's Hunt, "It basically comes down to whether you believe in the market or not. If you believe that carriers are subject to market pressures, you have to question the need for a state fund to reduce rates. The evidence seems to clearly indicate that open competition has reduced costs in Michigan."[35]

The notion that a state-run competitive fund can force lower rates in the market, yet remain actuarially sound, is not supported by logic or experience. The Oregon experience suggests that efforts to artificially force market rates down through a state fund can create long-term market distortions that lead to higher costs and more limited consumer choice.