Eliminating second injury fund would increase premiums

Eliminating second injury fund would increase premiums

By Frank Knapp Jr., GSA Business

Published March 6, 2006

The S.C. Small Business Chamber of Commerce supports efforts to lower workers’ compensation premiums for small businesses. It is because of this goal that we oppose the plan to dissolve the Second Injury Fund.

The SIF was originally created to encourage employers to hire previously injured workers by protecting the employer from excessive workers’ compensation losses if that previously injured worker experienced a subsequent injury. The SIF simply pays workers’ compensation claims from a pool of insurance carrier funds instead of having the employer’s insurance company pay for the claims.

The insurance carriers include the cost of the SIF in their overall premiums charged to small businesses. In 2005, this assessment increased dramatically due to a spike in losses and resulted in calls for doing away with the SIF.

While the success of the SIF in meeting its goal is questionable, the fact is the SIF exists, and to do away with it now would cost small businesses more than by keeping it. Here is why.

The National Council on Compensation Insurance, the state’s workers’ compensation rating organization, says in the short term the premiums associated with regular workers’ compensating losses (loss costs) would need to increase approximately 17.2 to pre-fund benefits related to second injuries occurring after the SIF’s elimination. Also in the short-term, NCCI says that the runoff of the current SIF claims will have to be paid until they are all closed.

As for the losses in the SIF if it is not changed, a recent actuarial analysis predicted the dramatic increase in losses in 2005 will be more than offset by more dramatic decreases in 2006. According to this study, the SIF losses will drop 70 percent and then stabilize for the foreseeable future below 2004 levels.

Fortunately, the Small Business Chamber and others were successful in convincing the House subcommittee, which was reviewing a bill to reform workers’ compensation, not to recommend the dissolution of the SIF. However, the subcommittee did recommend that the type of injuries covered by the SIF be reduced to cut future losses. While compromise is often good, this proposal would be almost as bad as dissolving the SIF altogether, requiring an estimated 15.4 percent increase in workers’ compensation loss cost premiums.

The bottom line is this. The spike in SIF losses in 2005 that caused all the hysteria and calls for eliminating the SIF is over. If the legislature does nothing, we could see a dramatic drop in SIF assessments charged to small businesses.

However, doing away with the SIF would increase premiums by 17.2 percent and adopting the subcommittee recommendation would increase premiums by 15.4 percent. Both of these increases would be on top of any normal rate increase. Yet, the premiums associated with the SIF assessment, according to NCCI, will be about the same as if the SIF were not eliminated.

In summary, eliminating the SIF or dramatically reducing the types of injuries ceded to the SIF will increase the total premiums small businesses pay for workers’ compensation insurance. These increased premiums – $67 million to $77 million- would go to the insurance carriers which would invest the money until it is needed to pay future claims. This is not in the best interest of small businesses.

What should we be doing to lower workers’ compensation premiums? We need to regulate what the insurance carriers add to their premiums for profit, expenses and SIF assessment. Amazingly, we now allow insurance carriers to simply charge what they like for these things. So even if the SIF losses decrease, insurance carriers are not legally required to pass along the reduced cost to businesses.

We need striker laws against workers’ compensation premium and claimant fraud. We need to control the fees paid for health care to injured workers. We need the Department of Insurance to truly regulated insurance carriers and not be just a rubber stamp. We need to give incentives to carriers to keep claim costs down in the Assigned Risk pool.

What we don’t need is a dramatic change in the SIF causing higher premiums for smaller businesses.