Last month, Conning Asset Management (an insurance industry research, management & advisory firm) presented a Peer Review analysis to the Workers' Compensation Advisory Committee at the Department of Labor & Industries. Conning compared Washington's state-run industrial insurance program to fifteen private insurers and eighteen state funds.
Based on this peer analysis, it appears that L&I is the worst performing insurer in the country – state fund and private -- by its premium to expense ratio.
L&I has "by far the highest loss ratio" of any private insurer or other state fund. As you can see on this chart, the average loss ratio for private insurers is 59%. For other state funds, it's 82%. For L&I, it's 161%. This means for every dollar collected in premiums, $1.61 is paid out in benefits.
According to Scott Daniels from Conning, this is "higher than can be sustained over the long term."
L&I argues they can operate with this much of a premium deficit because they are an exclusive state fund (which means they can wring the extra tax dollars out of employers whenever they need them). But what this analysis also reveals is the sheer extent to which the true costs of the system have recently been hidden from the taxpayers via "inadequate by design" premiums. Obviously no one thought the bottom would fall out and expose it.
In response to questions about the unsustainable loss ratio, Daniels said L&I can:
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Accept the huge losses and allow a big deficit to build up;
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Increase revenue by increasing taxes or taking more risk in L&I's investment portfolio;
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Cut benefits (which can really only be done by the Legislature), or
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Cut the costs of operating the program.
Based on the Legislature's refusal to allow a conversation about how to lower costs and the labor unions' threats to withold campaign contributions to any legislator who supports employers on this issue, business owners should probably start preparing for Option #2.
