Open Competition, Workers’ Compensation Costs, and Injury Rates
Property and casualty lines of insurance have traditionally been subject to more regulatory price control than most goods in the US economy. However, beginning in the 1970s, some states began to deregulate these lines of insurance, dropping either mandatory pricing in concert by means of rating bureaus or, additionally, dropping regulatory prior approval of premiums. Economic theory is ambiguous about the impact of deregulation on price and product quality. While pricing in concert by itself might lead to higher premiums with uncertain quality effects, the general theory of regulation suggests that higher or lower rates and quality may arise when regulators set prices. This paper assesses the impact of rate deregulation on one of the major property/casualty lines – workers’ compensation. The impact on price and one dimension of quality, loss control as measured by injury rates, is evaluated. Using longitudinal micro data on employers’ workers’ compensation premiums from the BLS Employment Cost Index program, the paper finds that the simultaneous elimination of rate bureau pricing and prior approval leads to a decline in premiums of 8.7 to 14.7 percent, while dropping only rate bureau pricing has little effect on premiums. Analysis of longitudinal injury data from the BLS Annual Survey of Occupational Injuries and Illnesses suggests that simultaneously dropping rate bureau pricing and prior approval reduces injury rates at most around 7 to 8 percent, with insignificant declines when only rate bureau pricing is eliminated.