Workers Compensation Insurance

The purpose of wokers compensation insurance is to help employees recover from work-related injuries and illnesses and get them back to work. Workers compensation insurance pays for the cost of medical care, as well as lost wages and death benefits for the dependents of those killed in work-related accidents. It also covers the cost to defend and possibly pay liability claims made against a business by one of its employees with a bodily injury. It is the largest segment of business for commercial insurers.

9 out 10 people in the nation's workforce are protected by workers compensation insurance and coverage is compulsory for full-time workers in all states except for Texas.

Some states, such as Colorado and Utah, have state-run Workers Compensation Funds that are competitive with private insurers.

Market Trends

According to A.M. Best, workers compensation premiums for 2009 dropped 14.5 percent to $12.3 billion, the lowest level in 10 years, while the combined ratio, the percentage of each premium dollar spent on claims and expenses, rose 8.8 percentage points to 120 percent. The deterioration in profitability was driven by a continuous decrease in premiums as poor economic conditions reduced the number of people in work force and intense competition for business reduced prices for coverage.

A study by the National Academy of Social Insurance (NASI) released in September 2010 shows that workers compensation payments for medical care and cash benefits that help cover lost wages increased 4.4 percent in 2008, the latest available data, to $57.6 billion. For the first time, but reflecting a long-term growth trend in medical spending for the past 30 years, medical benefits totaled more than half of all benefits paid, driven by an 8.8 percent increase in payments for medical care. The increase in wage replacement payments was minimal (0.3 percent). Overall, employers' costs declined by 6.7 percent to $78.9 billion. Per $100 of payroll, the basis for computing workers compensation, employer costs in 2008 were $1.33, a 0.11 percent decrease from the previous year. Cash benefits to workers per $100 of payroll dropped 0.01 percent to $0.48. This is the lowest level since 1980, according to NASI.

While the size of claims (dollar amount) has been climbing due to the increasing cost of medical treatment, the number of claims filed (frequency) has been dropping steadily as insurers and their policyholders focus on safety. The frequency of lost-time claims dropped by 54.9 percent from 1991 to 2008.

Benefits

Workers compensation insurance pays for medical costs, rehab costs, and disability costs resulting from an employee's work-related injury. It also pays death benefits if necessary.

Disability benefits are paid after a set waiting period (typically 3-7 days). It is paid as a percentage of an employee's weekly wages with minimum/maximum limits set by states.

State's workers compensation laws typically recognize a disability as meeting one of the following classifications:

• Temporary partial disability: a worker is unable to perform some of their job for a limited time.

• Temporary total disability: a worker is unable to perform any of their job functions for a limited time until they recover.

• Permanent partial disability: a severe injury that is permanent, such as the loss of sight in one eye, but where the worker will be able to resume some job functions.

• Permanent total disability: a severe, permanent injury, which prevents an employee from performing any work. Many state laws define these injuries as total blindness in both eyes or loss of both limbs.

Cost to Employers

Employers pay premiums as well as deductibles. Those that self insure also incur the costs of benefits and administration. The Bureau of Labor Statistics estimates that in 2009 workers compensation insurance amounted to 1.6 percent of total compensation costs. However, there is a wide variation in costs among states and industries, so that the highest rated (the inherently riskiest) groups could pay several hundred times that of the lowest rated (safest) groups, as a percentage of payroll. Also taken into account is the firm's own safety record.