Workers’ compensation funds operate differently in each state. In states like Illinois, workers’ compensation insurance is provided exclusively through the private sector. Employers obtain Illinois workers’ compensation insurance by selecting among private insurance companies.
Roughly half of the states have a state fund for workers’ compensation insurance. Most of these states have competitive state funds. This means employers may select between a state fund for workers’ compensation insurance and private insurance companies. Four states only have a state fund, where a state fund is the exclusive provider of workers’ compensation insurance. Under certain circumstances, some companies may also be allowed to self-insure.
There is considerable debate about which system is most effective for providing workers’ compensation insurance. State funds began to emerge in the early 1900s when employers feared that insurance companies may impose excessive premiums and receive unfair profits.
The goal of state funds is to provide employers with fair and affordable access to insurance. State funds aim to be self-sufficient and may provide revenue for a state’s general fund. A majority of competitive state funds pay out dividends to policyholders. Both exclusive and competitive state funds consistently have lower overhead expenses compared to private carriers. Exclusive state funds also require no marketing and consequently save additional costs.
A report by Conning Research and Consulting found that while state funds sometimes have higher losses, these losses are more than offset by lower expenses, better workplace injury prevention efforts, more efficient use of technology, higher investment returns and bigger dividends to employers. Moreover, state funds were found to have more stable reserves and contribute to states’ economic development.
One researcher explained, “Our research indicates that a key to the state fund success may well be their dedicated approach to loss prevention and control. Their mission often includes shared responsibility for health and safety with other state agencies, and so they often incorporate state-of-the-art loss prevention initiatives with financial rewards tied to the insured’s loss performance.”
Two states in the Midwest, Ohio and North Dakota, have exclusive state funds for workers’ compensation. Minnesota has a competitive state fund. A strong case can be made that Illinois would also benefit from instituting a state fund. Currently, more than 400 insurance companies compete for business in Illinois. Advocates feel the adoption of a state fund would ultimately reduce workers’ compensation premiums and benefit both employers and workers.