It will not happen tomorrow or even in the next few years, but the long run prospects for the survival of Michigan's private workers' compensation insurance industry are extremely slim. On December 19, 1988, the Michigan Court of Appeals issued an opinion of major import to the Accident Fund of Michigan, which, if not over-ruled or negated by an act to privatize the Fund, will ultimately result in the decline of our private sector workers' compensation insurance industry.
The Court's decision would reconstitute the Accident Fund as a state agency with its employees coming under the state's Civil Service, give the Commissioner of Insurance authority to set the Fund's premium rates, assign control over the Fund's assets to state authorities (though the assets could only be used to further the purposes of the Accident Fund) and thereby, in effect, fully socialize what has heretofore been--for all practical purposes--a private enterprise. The Accident Fund appealed to the Supreme Court in early January, and the Court's opinion on that appeal is still pending.
The Accident Fund experienced a relatively calm life as a private or quasi-governmental workers' compensation insurer from its organization in 1912 until December of 1976. Then, Democrat Attorney General Frank Kelley ruled that not only was the Accident Fund a state agency, but its employees were subject to the civil service code and its assets belonged to the state government. Insurance Commissioner Thomas Jones immediately ordered all fund assets turned over to the state.
The Accident Fund immediately turned to the courts for relief from these directives as well as subsequent ones from Commissioners Nancy Baerwaldt and Herman Coleman. Governor James Blanchard has made clear his belief that reducing workers' compensation costs is a top economic development priority, and that such reductions can best be achieved by state government manipulation of the workers' compensation insurance market. Governor Blanchard mentioned Accident Fund rates being reduced 17 percent and the Commissioner of Insurance ordered a 17 percent rate reduction. The Fund did not comply, and the lengthy legal morass is not drawing to a conclusion.
It increasingly appears that if the Accident Fund is to continue to operate as a private independent insurer rather than a state agency, the State Senate and House must amend or adopt legislation to specifically privatize the Fund. The Senate has passed such legislation on at least four occasions but the House has neither acted on the Senate legislation nor produced a proposal of its own. A 1987 Mackinac Center study made a strong case for privatization and serves to this day as the best work on the subject.
If the Michigan Supreme Court upholds the Court of Appeals opinion and if the Michigan House and Governor Blanchard do not approve legislation privatizing the Accident Fund, we may reasonably expect the following results. The Accident Fund, which already has significant competitive advantages over other Workers' Compensation insurers--such as not being subject to Federal income taxes and having access to over 3500 agents to sell their insurance without contracting with them--will, as a State agency, become exempt from premium taxes, real estate taxes and small business taxes. It is already Michigan's largest workers' compensation insurer, having approximately 25 percent of the market in 1988. Given these additional competitive advantages, private workers' compensation insurers will be at a comparative disadvantage and will lose market share.
Compounding the problem is the ability of the Governor and the Insurance Commissioner to control the Accident Fund's rates, assets and policyholders' surplus. Their past record includes ordering rate reductions and basing rates only on losses and loss adjustment expense and ignoring administration expenses. These types of actions, instead of increasing competition and lowering rates, will drive private insurers out of the market, leaving the Accident Fund in a monopolistic position. Precisely that has happened in Ohio, where the state's fund is $2 billion in debt.
The long-run ramifications of bureaucratic authority to set rates can not be minimized or over-emphasized. By holding rates artificially low for political reasons rather than basing them upon an accurate actuarial determination will inevitably eliminate competing insurers. Eventually, however, rates will have to be raised or taxes increased to subsidize the operation of the state agency. Instead of improving the business climate, industry will leave or not enter the Michigan market-place, with reduced employment opportunities for our citizens.
The time is long overdue that the Accident Fund of Michigan be made a private independent workers' compensation insurer. Failure of our policy makers to act will result in history holding them fully accountable for the profound ramifications which will result. The death of the private workers' compensation insurance industry, exit of industry and decreased employment will be among those ramifications.