The State of The Massachusetts Workers’ Compensation Insurance System

Each year, the MA Workers’ Compensation Advisory Council issues an annual report

In February of this year, the Massachusetts Workers’ Compensation Advisory Council (“WCAC”) issued its annual report on the workers’ compensation system in Massachusetts for fiscal year 2015.

The Council is a statutory body established by the Legislature to monitor, recommend, give testimony, and report on all aspects of the Massachusetts workers’ compensation system. Also, by law, the WCAC must issue an annual report evaluating the operations of the Department of Industrial Accidents and the condition of the Massachusetts workers compensation system.

The WCAC’s full 163 page report, which Agency Checklists has attached below, provides a complete summary for interested Massachusetts insurance professionals. Among other things, the report outlines the operations of the Department of Industrial Accidents (DIA), including a summary of legislative initiatives and current statistics related to occupational illness and injury.

Of most interest perhaps, to the readers of Agency Checklists, would be the various pages of the WCAC report dedicated to the insurance component of the Massachusetts workers’ compensation system.

The following contains summaries of selected sections and graphic information from the report detailing the state of the Massachusetts workers’ compensation system for the fiscal year 2015. Agency Checklists also has linked the 9 pages relevant to insurance issues below for easy access by its readers.

Mandatory coverage by commercial insurance, qualified self-insurance, or qualified self-insurance group

Almost all private employers in Massachusetts are required to maintain workers’ compensation insurance for the benefit of their employees. Employees can satisfy this legal requirement by purchasing a commercial insurance policy, becoming a member in a self-insurance group, or maintaining a license as a self-insured employer.

Commercial insurance market: Five new carriers approved in 2015

The overwhelming majority of Massachusetts businesses satisfy their legal obligation under the Worker’s Compensation Act by purchasing commercial insurance. As a result, commercial insurance carriers provide the bulk of all benefits paid to injured employees and their medical providers. In addition, the majority of funding for worker’s compensation benefits comes directly from the commercial insurance market. As a result, a healthy insurance market directly benefits both employers and employees.

The WCAC report states that in fiscal year 2015, the Division of Insurance approved a total of five new licenses for carriers to write workers’ compensation insurance in Massachusetts. In addition to these five, two additional carriers were approved to amend their licenses to add the authority to write workers’ compensation insurance. Unlike last year, there were no carriers who requested the deletion of its authority to write workers compensation insurance.

While, the WCAC report does not include a list of the largest writers of workers’ compensation insurance in the Commonwealth, Agency Checklists has an updated list courtesy of the Division of Insurance. For a look at the Top 20 Workers’ Compensation writers in Massachusetts for 2015, see Agency Checklists’ January 5, 2016 article “The Top 20 Workers’ Compensation Insurers in Massachusetts“. Alternately, you can view the “Top 10 Worker’s Compensation Insurers in the U.S. v. the Top 10 in Massachusetts” in our April 8, 2016 article.

Massachusetts workers’ compensation insurance rates remain constant for 2015

In Massachusetts, workers’ compensation insurance rates must be approved by the Commissioner of insurance. In December 2015, the WCRIB submitted a rate filing requesting a state-wide increase in workers’ compensation insurance rates by an average of 6.4%. While the Division of Insurance hearings continue to review the rate request, if ultimately approved, the new rates will be effective as of July 1, 2016.

As of 2015, however, the rates have remained constant. As a result, in terms of workers’ compensation rates, Massachusetts continues to be ranked among the lowest in the nation for workers’ compensation insurance and the cheapest in New England. For more information on the biannual ranking report, see the October 29, 2014 Agency Checklists’ article: “Mass. Worker’s Compensation Rates Continue To Be Among The Lowest In the Country”.

A decrease in self-insurance licenses this year

In fiscal year 2015, the number of licenses issued to self-insurers decreased by one license. It went from 90 total licenses in 2014 to 89 total licenses in 2015. The Department of Industrial Accidents also did not issue any new licenses this year. In addition, the number of business entities or units covered by the outstanding self-insurance licenses in fiscal year 2015 saw a substantial decreased from 513 to 392.

The Department of Industrial Accidents generally only approves a self-insurance license for employers who have at least 300 employees and $750,000 in standard premium annually. Also self-insured employers must file a bond that usually has a penal sum in excess of $1 million. These requirements, however, may be waived the DIA Director in those instances in which an employer can demonstrate strong safety records coupled with the necessary bond to cover any incurred losses. Any employer who is self-insured must also purchase reinsurance pursuant to Massachusetts law of at least $500,000. Self-insured employers must manage its own claims administration either through its own company or by engaging the services of a law firm or third party administrator (“TPA”)/

Self-insured employers are evaluated annually to ensure that a company continues to meet eligibility requirements and to set bond amounts.

Self-Insurance Groups continues slow membership growth in 2015

Before 1985, as a practical matter most business in Massachusetts only had the option of commercial insurance to satisfy their legal obligations to provide their employees workers’ compensation insurance. The law allowed companies to self-insure, but the requirements were so onerous that only the largest and most financially secure companies could qualify. In response, in 1985, the Legislature allowed for companies to form self-insured groups or SIGs. This law permits smaller companies to create an SIG provided the companies involved:

Have five or more employers;
Engage in the same or similar type of business;
Are members of the same bona fide industry, trade or professional association; and
The association has been in existence for not less than two years.

In the alternative to association membership, employers that are parties to the same or related collective bargaining agreements qualify for SIG membership.

A SIG may also be formed for qualifying public employers and non-profit groups as well as private employers.

While the Division of Insurance licensed its first SIG in 1987, the legislative reforms of workers’ compensation in 1991 spurred the formation of over 25 SIGs between 1991 in 1993. The attached chart shows the growth of SIGs in Massachusetts since 1991.

SIG premiums are calculated in the same manner as commercial insurance, with manual rates adjusted by an experience modification factor and the All Risk Adjustment Program.

The advantages that SIGs claim for their members are:

The ability for members to manage their own claims;
Reduced administrative costs compared to a commercially insured plan.
Reduced or eliminated commissions, premium taxes, and other insurance based costs: and
Dividends arising out of the SIGs operations returned to members and deviated rates

Two major risks to an employer becoming a member of a SIG relate to the other members of the SIG’s safety practices and financial strength. By law, the SIG’s must spread the cost of indemnities and operational expenses amongst the group’s members. While shock losses can be mitigated by a SIG’s excess workers’ compensation insurance or reinsurance, the cost of a member’s insolvency or bankruptcy cannot. The members of a SIG have joint and several liability for workers’ compensation losses and expenses owed by any insolvent or bankrupt member of the SIG. A bankruptcy filing by a member of a SIG that has above average claim frequency and severity could cost the other members of the SIG to pay substantially more than their fair share.

As of January 1, 2015, Massachusetts had 5,843 employers who were members of 21 separate SIGs. This reflects very little change from 2014 which also had 21 separate SIGs and 5,802 employers.

Assigned risk pool up over 19% in 2015

One natural consequence of the relatively low premium rates for workers compensation insurance in Massachusetts can be seen in the recent upward trend in the residual assigned risk market since 2011. Since reaching a low of 10.4% in fiscal year 2011, the workers’ compensation insurance residual market share has increased incrementally each year reaching 19.1% for fiscal year 2015. While 19.1% is markedly higher than 10.4% in 2011, the WCAC notes that the residual market continues to remain far below 1992 levels, when the market was 64.7%.

According to the WCAC report, the residual market burden that measures the assigned risk pool’s relative costs that each carrier writing workers’ compensation insurance must bear was estimated for the first quarter of fiscal year 2015 as .25 with an assumed loss ratio of 65%. (See page 99 of the WCAC 2015 report).