Workers' Compensation Insurance Deductibles: The Effect on Claim Rates and Costs (August 1995)
Among the numerous workplace safety incentives inherent in the states' workers' compensation systems, loss-sensitive insurance arrangements seem to offer employers the greatest direct benefit from investing in injury prevention programs and improved claims management strategies. Retrospectively rated insurance policies and insurance policies with deductible options are among the more widely used loss-sensitve insurance products. This report focuses on the association between workers' compensation insurance deductibles and changes in total and indemnity claim rates and per-claim incurred losses for indemnity claims.
Texas served as an excellent state in which to test the safety and loss-control effects associated with workers' compensation insurance deductible policies because employers gained access to insurance deductibles on January 1, 1992, and self-insurance did not become an option for private sector employers until January 1, 1993. This unusual timing of dedu ctible access preceding self-insurance access created a large market for negotiated deductibles in Texas, allowing for a sufficient number of employers to statistically test the injury-prevention and loss-control effects.
The study included a total of 444 employers: 222 with large (negotiated) insurance deductible policies (the deductible group) and 222 that did not have a deductible policy (the control group). The control group was randomly selected to mirror the deductible group in terms of size and industry. In the analysis of workers' compensation claim rates, three distinct periods were analyzed: a pre-effect period, before employers could purchase deductible policies; an immediate-effect period, which included the first policy year deductible policies were available (1992); and a delayed-effect period, which included the second policy year deductible policies were available (1993). In the analysis of per-claim incurred losses, two time periods were used: a pre-effect period in which deductibles were not allowed (1991); and an immediate-effect period in which one group had a deductible policy and the other group did not (1992). The primary findings from the study are as follows:
- Employers who selected a negotiated insurance deductible in 1992 had significantly higher workers' compensation claim rates in 1991 than employers who did not select a deductible.
- The selection of a workers' compensation insurance policy with a negotiated deductible had no significant association with changes in either total workers' compensation claim rates or indemnity claim rates in the first year of the negotiated deductible insurance policy.
- Though the trend suggests that a subtle delayed safety effect may be present, the deductible effect in the second year was not significant at the .05 level.
- The selection of a workers' compensation insurance policy with a deductible had an immediate effect and a significant association with a reduction in per-claim losses for indemnity claims with incurred losses of $5,000 or more.
This study provides empirical evidence that an employer's selection of a workers' compensation insurance policy with a deductible option did not have an immediate impact on claim rates. However, the results suggest that the selection of a deductible policy may have had a subtle, though not statistically significant, association with a reduction in total claim rates during the second year the policy was in effect. This trend might reflect a learning curve on the part of employers in implementing an effective injury prevention program. As more time elapses, it will be possible to test whether that delayed safety effect strengthens over time.
An employer's selection of a negotiated deductible policy appears to have a much larger impact on the cost of indemnity claims after the injury has already occurred than on the ability to prevent the workplace injury in the first place. It may be that employers are able to implement postinjury loss-control strategies more efficiently than injury prevention programs, the latter of which might entail a philosophical shift in the way an employer does business. The significant association between negotiated deductibles and lower per-claim incurred losses is most likely the result of employers with negotiated deductibles implementing more effective claims management strategies (e.g., early return-to-work programs, better communication with injured workers) in response to taking on a larger portion of the policy risk.
This page was last updated on December 9, 2002.
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Last updated: 01/11/2010