John D. Worrall

Health conditions and job hazards: Union and nonunion jobs

Blue-collar union members are more likely than nonunion blue-collar workers to report health conditions caused by job accidents and by bad working conditions caused by noise, smoke, heat, and dust. This is consistent with blue-collar union members’ evaluation of hazardous job conditions and with their indemnity claims filing behavior for industrial injury or occupational disease. Union members are also more likely to be found in industries with higher injury rates. Age and marital status are positively associated and being female and education are negatively associated with a self-reported job related health condition.

Experience Rating Matters

Does the experience rating of workers’ compensation insurance affect employers’ provision of safety? It is possible that an experience rating system that provides some firms with other than the actuarially fair premium may result in a reduction of safety provision by some employers and a concomitant increase in job injuries. Despite the fact that one of the goals of the workers’ compensation system is to provide safety incentives, there has been very little empirical evidence provided to help us answer the public policy questions about the efficacy of safety provisions. By contrast, there has been a growing body of evidence that claim frequency (Bartel and Thomas, 1982; Butler, 1983; Butler and Worrall, 1983; Chelius, 1983, 1982, 1977; Ruser, 1985; Worrall and Appel, 1982) and severity (Butler and Worrall, 1985; Worrall and Appel, 1982; Worrall and Butler, 1985) are directly related to workers’ compensation benefits. Most of the claim frequency studies have focused on the risk-bearing or claim-filing behavior of employees. Using different specifications and time periods, these studies have provided evidence that benefit increases may raise workers’ compensation costs in at least three ways: an increase in the daily cost of each claim; an increase in claim cost due to increasing claim duration; and an increase in claim frequency. With the exception of Ruser (1985), the frequency studies cited above have actually provided crude measures of the net effect of benefit changes on claim filing or injury rates. This net effect arises from countervailing forces: the employee’s increased incentive for risk bearing and claims filing, and the employer’s increased incentive to economize on claims. Employee effects seem to be dominating. In this chapter, we shall follow Ruser (1985) and explicitly test for both employee and employer incentives. Before we consider our empirical scheme, however, we shall briefly describe the underlying choice-theoretic model that generates the claim-filing (employee) and safety-providing (employer) behaviors.

Labor Market Theory and the Distribution of Workers’ Compensation Losses

In recent years, a growing number of research papers have applied modern neoclassical labor economics to address incentive issues in the workers’ compensation system. How these incentives can be detected in distributions of workers’ compensation indemnity claims, and what they imply for those distributions, are the subjects of this research. We develop a simple statistical model that breaks down the observed distribution of indemnity payments into choice, chance and heterogeneity components, with particular attention given to how changes in the benefit structure (given market wage rates) and in experience rating affect claims. There is growing evidence (see our review in Worrall and Butler, 1985a) that the structure of benefits and experience rating may significantly change both the frequency with which claims are filed as well as the duration of a claim once it is filed. Given the dynamic changes taking place in this enormous social insurance program, even small response effects have large distributional and efficiency impacts.

Self Insurance in Workers’ Compensation

Employers can fulfill their obligations to provide for workers’ compensation coverage by purchasing insurance from a private insurance carrier, or from an insurance fund run by the state or by self-insuring. Eighteen states have state funds. Twelve of these compete with privace insurance carriers for business and are usually referred to as competitive state funds. The other states have exclusive state funds, and private insurance carriers are not permitted to sell workers compensation insurance in those states.

The Transition from Temporary Total to Permanent Partial Disability: A Longitudinal Analysis

There are more than 8 million workplace injuries per year compensated by private insurers or competitive state funds under the various workers compensation programs. Of these only 5 percent are sufficiently severe to result in permanent disability or the death of the injured workers, yet this subsample accounts for some 75 percent of all incurred claims costs. Identifying the more severe injuries is of substantial importance both in the estimating the costs of the workers compensation system, as well as in the effort to contain those costs.

Heterogeneity Bias in the Estimation of the Determinants of Workers’ Compensation Loss Distributions

The potential for someone covered by insurance either to have too many accidents, or to have too large a loss, is termed moral hazard in the insurance literature. In a world of perfect information and competitive markets for insurance, there should be no moral hazard with respect to workers’ compensation, since both job risk and risk severity would be observed exactly by the insurer, the employer buying insurance, and the workers receiving the benefits. Moral hazard arises because workers, insureds, and insurers do not have perfect knowledge of what the other parties are always doing. In the absence of moral hazard, an increase in benefits should probably have very little impact on either the frequency or the severity of a claim.

Workers’ Compensation Costs and Heterogeneous Claims

The distribution of Workers Compensation claims are known to have thick tails so that even though claims are of relatively short duration a substantial amount of the indemnity losses are accounted for by claims that are very long in their duration. The former types of claims can be reasonably characterized as “high frequency/short duration” claims, whereas the later are “low frequency/long duration” claims. Duration and frequency are, of course, highly correlated with the type of claim. Temporary Total claims arising from lacerations, strains, and sprains are likely to be relatively high frequency events of short duration so that the claim indemnity costs are small per individual claim. In contrast, a permanent partial spinal cord injury is a relatively low frequency, but long duration, type of claim whose costs per claim are inevitably very large.

Estimating ‘hedonic’ distributions using polynomials☆

Abstract There are many instances in both private and public insurance when changes in the underlying claimant ‘demography’ will have far reaching impacts on prospective insurance costs. Changes in the age distribution of policy holders in life insurance may significantly affect the total fixed costs of administering such policies (holding the total number of policies constant). Similarly, a change in the distribution of firm sizes will affect costs in unemployment insurance if costs per payroll vary by firm size (say due to experience rating). Changing the severity of automobile claims may have a measurably smooth impact on legal fees. In all of these cases total costs are observed, but the distribution of those costs across claim types (the ‘hedonic’ distribution) is not. We present a general technique for inferring the ‘hedonic’ distribution in these cases using a variant of the Almon distributed-lag technique. To illustrate its usefulness, we employ it to infer the distribution of premiums across different risk classes of firms. In our example, there appears to be a uniform distribution of dividends across risk groups though firms with lower losses receive relatively more dividends.

Leverage, Interest Rates, and Workers’ Compensation Survival

Potential insolvency has always played an important role in insurance regulation. In fact, concerns about the public interest are such that the insurance industry is required to establish guarantee funds so that, in the event a particular company is unable to meet its obligations to policyholders, the insureds would still be covered. Even so, the number and magnitude of insurance carrier insolvencies have risen dramatically in the past few years. Probably the most serious was the Mission Insurance Company in 1987. The original cost was estimated at

Premium and Loss Cycles in Workers’ Compensation

520 million, which has since grown to be in excess of