State insurance funds play a critical role in workers’ compensation. State insurance funds are government-run organizations that offer workers’ compensation insurance to businesses, in order to provide coverage that private insurers (or the employer) would not otherwise be able to afford. 

Some states require employers to pay into state insurance funds (monopolistic funds), whereas other states allow state insurance funds as part of a competitive market (competitive funds) alongside private insurers. In the latter case, state insurance funds provide coverage to employees or employers that would not qualify for a private option. 

The goal of both a monopolistic and a competitive state insurance fund is to ensure that injured workers across all states have appropriate coverage – whether or not their employer would normally qualify for or be able to pay the competitive market price. For example, the state insurance fund in California is a non-profit organization, as is the state fund in Louisiana and Indiana. Due to these funds, workers in these areas do not need to worry about the financial stresses of obtaining coverage.

Monopolistic State Insurance Funds

Depending on where the business is located in the United States, its owners may or may not be required to pay into the state insurance fund. Monopolistic states include North Dakota, Ohio, Washington, and Wyoming, as well as territories like Puerto Rico and the U.S. Virgin Islands.

Monopolistic states do not allow any sale of workers’ compensation insurance from private insurers and require employers to purchase workers’ compensation coverage from a government-run insurance fund. It’s not always possible for employers in these states to shop around for a better price, but policies are typically mandatory in order to pay for workers who were injured on the job. 

For these reasons, although state-provided workers’ compensation insurance is mandatory, premiums are usually reasonable or even lower compared to competitive states. Even high-risk employers are guaranteed coverage. However, the lack of competition in monopolistic workers’ compensation states may lead to fewer options when employers need niche insurance products or may be more expensive in some cases.

Competitive State Insurance Funds

Competitive states in the United States include all other options besides North Dakota, Ohio, Washington, and Wyoming. In competitive states, workers’ compensation coverage can be purchased from either a private insurance company or a non-profit (or for profit) state fund. Employers will typically shop around for pricing in these states, which will vary based on hours worked and by the most common industry in the jurisdiction. 

According to a task force commission through the American Academy of Actuaries in 2018, wage level in a state as measured by the average weekly wage “is a fundamental ingredient in the rates employers pay.” Two states that both have a competitive market and would be otherwise similar in hours worked can have dramatically different workers’ compensation rates based on the actual amount its employees are paid. 

If the state’s private insurers are too expensive for a company to afford, or if the business is considered too risky to insure at all, the business may be able to get coverage via a state fund. 

Challenges of State Insurance Funds

State insurance is a vital piece of the workers’ compensation industry. Employers who struggle to find suitable insurance from private insurers can still have guaranteed coverage, and employees are protected from getting injured at work. The goal of each state insurance fund, competitive or monopolistic, is to protect workers injured on the job. State funds provide coverage even when private insurers will not, ensuring that every worker is covered. 

The mandate for many state funds, such as the New York, is to offer the lowest possible rate consistent with the maintenance of a solvent fund. This means competitive rates in some cases, and less competitive rates in others – but in all cases, employees benefit from a consistent source of coverage and employers do not need to negotiate with private insurers in order to have an affordable alternative. The presence of state insurance funds might also help with offering more consistent or reliable benefits to employees or employers who file a claim. 

However, the necessity of state insurance funds can also come with some financial pressure as state insurance aims to remain solvent while offering competitive rates. State funds provide insurance to businesses that private insurers won’t cover: which can potentially mean higher payout costs on those claims. State insurers, then, need to be careful when managing operating budgets – which makes it especially important to use technological assistance when processing workers’ compensation claims. 

Less manual paperwork frees up knowledge workers to do higher value tasks and improves margins long term. For state insurance companies, it’s more important than ever to develop and maintain the technological supports to help streamline workflows and process faster, cost effective claims.