The state of Maine's response to its crisis of high workers' compensation costs in the 1980s and early 1990s suggests some possibilities for re-imagining insurance. This article does not attempt to answer the question whether Maine's insurance changes have actually improved health and safety or injury compensation for workers, and indeed it presumes that Maine is not likely to be exempt from the general concerns about shortcomings of occupational health and safety and compensation for injured workers in the U.S. More narrowly, this essay examines how Maine's experience may challenge the view that controlling workers' compensation costs is primarily a matter of controlling benefit levels. Like most states, Maine enacted legislation restricting benefits in the 1980s and 1990s in response to rising insurance costs [McCluskey, 1998]. Nonetheless, that state's insurance restructuring was crucial to reducing employers' costs while maintaining a stable and solvent insurance supply.
The Standard Story of Maine's Crisis: Control Benefits, Not Insurance Pricing
In the conventional view of workers' compensation insurance, Maine became the “most egregious” violator of sound insurance principles when state regulators repeatedly denied or reduced private insurers' requested rate increases during the 1980s, despite rising benefit costs [Kerr, 1992]. This view explains Maine's actions as an example of “rate suppression” that unsuccessfully attempted to scapegoat insurance companies to avoid the tough policy tradeoffs between workers' benefits and employers' costs. In a 1992 op-ed essay for the New York Times, the chief executive of American International Group (a major Maine workers' compensation insurer) charged the state's insurance regulators with substituting politics for economics, using insurers to “artificially” cover the “true costs” of a system that he described as bloated by benefit fraud [Greenberg, 1992].
Consistent with this story of excessive price controls making workers' compensation insurance unprofitable, Maine's private insurers increasingly refused to insure the more costly employers. Because workers' compensation is mandatory, as employers were rejected from this regular “voluntary” insurance market, they had to obtain coverage from the “residual market” pool as the insurer of last resort. Maine, like most states at the time, relied on the National Council on Compensation Insurance (NCCI, comprised of private workers' compensation insurers) to operate its residual market pool, which spread its risk among the state's private insurers [Burton, 1994]. In Maine, as in many other states during the late 1980s and early 1990s, the projected and highly uncertain costs of the residual market pool threatened to outstrip revenue, despite typically higher premium rates. Without sufficient profit to offset these losses, private insurers threatened to withdraw from the state. In an attempt to sustain this private insurance market, in 1987 state law reforms restricted workers' benefits, partly protected insurers from the growing residual market liability, and adopted regulatory changes that led to a series of substantial rate increases [McCluskey, 2001]. Despite these reforms, insurers did not significantly increase their voluntary market coverage in Maine, and in 1992 private carriers took steps to withdraw from the state entirely.
The private insurers returned to the state after 1992 legislation further limited benefits, deregulated prices, and bailed out the residual market deficit to alleviate insurers' exposure to losses from past insurance coverage. The rate suppression story concludes by explaining that the impending insurance market collapse and the growing deficit created the political pressure needed to shift focus from controlling insurance prices to controlling excessive benefit claims costs.
The Alternative Lesson of Maine's Crisis: Control Insurance More Effectively
A more complete picture of Maine's crisis shows the opposite: that regulators did not give sufficient attention to controlling insurance costs as the route to a system that better protects workers and employers. First, the high insurance costs were a problem of insurance management and design, not simply price pressure from expanding benefits and benefit claims. Second, the collapsing insurance supply was a problem of the structure, not simply the pricing, of the residual market in Maine and in many other states. The crucial step in resolving Maine's insurance crisis for employers was not lifting price controls on insurers or cutting benefits to workers, but instead was the establishment of a new source of insurance structured to respond more directly and effectively to employers' interests in reducing workers' compensation costs. This raises the question whether further changes in insurance structures might create a system that better reduces costs for workers as well for employers, without sacrificing insurance affordability or solvency.
Insufficient cost management, not insufficient benefit pricing
The picture of benefit prices in Maine's crisis period of the 1980s through the early 1990s is more complicated if we look beyond the floundering commercial insurance market to the flourishing market for alternative insurance forms. As traditional commercial insurance coverage shrank to about 10% or less of Maine's workers' compensation market, employers turned not only to the insurer-run residual market but also to self-insurance. By 1991, various forms of self-insurance constituted over 40% of the state's total workers' compensation premium volume, up from 29% in 1989 [McCluskey, 2001, p. 115]. In effect, these alternative insurance structures were successfully competing with traditional commercial workers' compensation insurance (which also changed to offer more risk-sharing arrangements).
If employers could save money by self-insuring, covering the same statutory benefits to workers at lower cost, that suggests insurance prices could be inflated rather than suppressed. It is true that self-insurance systems can duplicate or exacerbate problems of insurance price suppression, if inadequate regulatory protections lead to underfunding. Recent insolvency problems have cast doubt on the viability of New York's group self-insurance system, for example [Task Force on Group Self-Insurance, 2010]. Furthermore, self-insurers' economic advantage over commercial insurers may come from their increased incentives to suppress workers' injury and illness, not from delivering similar benefits at lower costs. Nonetheless, Maine's self-insurance market so far appears to have remained largely stable for employers and insurers, raising the question that traditional insurance systems may have some disadvantages in delivering and funding benefits.
Proponents of the rate suppression theory of state workers' compensation crises have tended to implicitly acknowledge that employers' flight to self-insurance reveals some degree of rate inflation in commercial workers' compensation insurance. However, the rate suppression story explains this cost-savings as a problem of improper cross-subsidy that has unfairly penalized commercial insurance. One version of this story explains that adverse selection occurred when employers with particularly low costs turned to self-insurance to escape rates reflecting the broader pool's higher risks, so that insurers were stripped of the most profitable policies [Kramer and Briffault, 1991]. But if rates were inflated for a substantial volume of workers' compensation coverage, in a competitive market enterprising insurance companies would presumably seek to identify and seize the profit opportunities posed by those better-than-average risks (by cherry picking or by creating risk-sharing arrangements), rather than ceding those risks to self-insurance. If insurers nonetheless lost market share, whether due to inadequate risk information or other shortcomings, it could suggest not that government regulators or the insurance market failed, but that the regulated market worked well to select for more cost-effective systems.
A more revealing argument reconciles growing self-insurance with the rate suppression story by pegging the problem to inadequate residual market rates. Under the standard NCCI residual market system, traditional insurers faced a competitive disadvantage because of their obligation to cover the costs of growing residual market deficits. As rates increased to cover those losses, many employers moved to self-insurance to avoid that residual market “tax” [Kramer, 1991]. Indeed, a number of insurers paid large settlements in litigation charging that major insurance companies fraudulently shifted as much as one billion dollars of residual market costs to employers in several states during the 1980s and early 1990s, circumventing regulatory restrictions and hiding residual market charges in complex risk-sharing arrangements used for some voluntary market policies [Bradford, 1996, 1999]. Furthermore, in 2006, New York's Attorney General Eliot Spitzer obtained a $343 million settlement from litigation with American International Group (AIG) on charges that the insurer had underreported its voluntary market premium volume from 1985 through 1996 in order to escape residual market deficit assessments, which typically are based on market share [Ceniceros, 2009], thereby making that market appear less profitable than it actually was and inflating charges to other insurers and employers. In related ongoing racketeering litigation, AIG and other major insurers have accused each other of widespread and intentional underreporting of up to one billion dollars of residual market costs [Best Wire Services, 2010].
But aside from questions about the legality and accuracy of insurers' charges for residual market deficits, the rate suppression explanation fails to account for the fact that much of Maine's exodus into self-insurance came from businesses in the residual market. If the problem was that regulators kept residual market prices too low to cover costs, employers in that pool would be particularly unlikely to self-insure. In Maine, employers moving to self-insurance during that time were to a great extent subject to similar price constraints for coverage of the same benefits, with self-insured employers required to set aside funds at levels based on insurers' premium rates and risk classifications, in addition to satisfying comparable capital reserve requirements [McCluskey, 2001, p. 115]. Moreover, self-insurance typically involves substantial start up expenses and ongoing administrative costs, lacking the economies of scale and scope enjoyed by Maine's typical commercial insurers.
Nonetheless, during the time when Maine's residual market pool was plagued by dramatically rising deficits, substantial evidence showed that many employers in that pool could successfully cover their costs or even accumulate substantial surpluses by switching to self-insurance. For example, a number of group self-insured “pools” found their “rates” were sufficient to support “dividends” returned to their employer members, apparently without creating solvency problems [McCluskey, 2001, pp. 115, 120]. Moreover, contrary to the adverse selection theory, Maine's self-insured employers actually had higher than average risks during the crisis period. It is also true that an important spur to self-insurance during Maine's crisis period was a 1987 state law change shifting liability for residual market deficits from insurers to insured employers. Nonetheless, the surpluses accumulated by self-insured employers during the period of rising residual market deficits were not primarily attributable to avoiding residual market surcharges, most of which were not imposed until well after that time.
To explain the puzzle of how self-insurance could reduce the costs of the same benefit system for relatively risky employers during this crisis period, the director of Maine's self-insured employers' association offered evidence that self-insured individual businesses and business groups could operate effectively with much lower charges for general administration and capital (despite disadvantages in economies of scale). In addition, self-insured employers claimed to reap major savings in claims costs and litigation expenses due to better safety and loss control; better medical management; and a greater emphasis on returning injured workers to their jobs promptly [McCluskey, 2001, p. 120]. For example, an executive from a high-risk manufacturing company switching to self-insurance in 1990 testified in an insurance regulatory proceeding that their lost-time accidents decreased dramatically. When insured through the NCCI-run residual market, this company had no access to accurate records of their employees' claims. Upon self-insuring, they hired a risk management contractor who analyzed the company's accident experience and instituted a new cost control plan.
This is an example of the nationwide growth during the crisis period of “third party administrators” specializing in managing (but not underwriting) employers' workers' compensation insurance needs. These businesses often marketed their services to self-insured employers by highlighting their innovative loss control services and more efficient administration, and this marketing effort presumably helped many employers become more informed and attentive to loss control. Of course, that loss control tended to focus primarily on control of employers' losses, not necessarily on reducing workers' losses, since the services are hired by and accountable to employers rather than to workers. It is unclear how much the savings from loss control in Maine's self-insurance systems involved increased attention to safety and appropriate return-to-work rather than claims suppression. Instead, the more modest point of this example is to suggest that changes in control over insurance restructuring can dramatically change the costs of losses and of benefits, and that further changes in insurance control will be necessary to ensure that loss control protects workers as well as employers.
Inadequate residual market governance, not insufficient insurance supply
Maine's residual market's failure was a central cause of the cost disadvantages of traditional insurance in that state, but that failure was not simply a problem of inadequate rates. Along with over thirty states, Maine's residual market pool was part of a system operated by the NCCI, which structured those pools to separate responsibility for insuring from responsibility for servicing, which includes functions such as collecting premium and processing benefit claims. This separation posed the problem of “moral hazard,” where losses tend to increase when those who control the degree of loss are protected from the costs of that loss [Feldblum, 2010].
Exacerbating that problem, through the early 1990s, the NCCI's residual market system was governed by a board comprised of major insurance companies, typically including many of those companies most active in servicing the pool's policies [McCluskey, 2001, p. 101; Hoffman, 1991, p. 20]. This board assigned the pool's servicing functions to individual insurance companies without competitive bidding. Employers relegated to residual market coverage also had no choice about which insurer was assigned to manage their policies.
In addition, through the 1990s, the NCCI's pool compensated its “servicing carriers” by allowing them to retain a servicing fee typically fixed at 30% of the pool premium they collected, leaving the remaining 70% of premium dollars to cover claims costs. This fee level was higher than the amounts NCCI normally reported for comparable voluntary market servicing expenses during the same period, and more than double the reported expenses for comparable (and better) services to Maine's self-insured group programs [McCluskey, 2001, pp. 97–98].
This fee structure appears not only to have unreasonably drained the pool's reserves for claims, but also to have produced incentives for claims costs to increase. Without effective performance monitoring or competition, servicing carriers had incentives to profit by cutting expenses for services such as claims handling, safety instruction, careful accounting of losses and premium charges, or by fraudulently misreporting or withholding premium from the pool (according to charges in ongoing litigation).
Checks on this self-dealing residual market system appear to have been minimal. The NCCI was structured to serve as an advocacy organization representing the interests of its insurance company members, a role seemingly in conflict with effective investigation and monitoring of individual insurers' poor performance. Although the NCCI conducted limited internal audits of servicing performance in the pool (and though these audits showed pervasive problems in Maine's pool servicing), the NCCI appears to have focused on seeking rate increases and benefit cuts rather than on insurer accountability as the main solution to deficit problems. Employers insured through the residual market (disproportionately small or new businesses as well as high-risk industries) tended to focus their frustration on restraining workers' benefits or seeking voluntary market coverage (or self-insurance) rather than on probing the technical and opaque operation of the residual market. State regulatory agencies appear to have routinely approved rates incorporating the NCCI's asserted fee levels without requiring specific supporting evidence of expenses or performance. Further, as long as the “residual” market remained a small part of each state's insurance coverage, the pool's costs and operation typically remained at the margins of regulatory scrutiny.
Similarly, as long as residual markets were small and voluntary market profits generous, individual insurers had little incentive to reduce the risk of residual market losses. These conditions gradually eroded as claims costs rose during the 1970s and 1980s, following efforts to increase benefit adequacy, and as state regulatory agencies began to move from rubber-stamping insurance rates toward substantive and adversarial ratesetting proceedings [McCluskey, 2001, pp. 72–94]. This increased—and increasingly uncertain—voluntary market risk exposure likely induced insurers not only to be more selective in their voluntary market underwriting but also, under some circumstances, to substitute the virtually risk-free up-front gains of residual market servicing for regular insurance underwriting. While this response profited some insurers in the short run, it set the stage for an eventual “death spiral” as projected shortfalls in growing residual markets accumulated and induced insurers to further reduce voluntary market share to avoid liability for those impending deficits, which the NCCI's pool system spread among insurers based on their portion of voluntary market business.
In Maine, the NCCI responded to the process of market collapse by successfully lobbying for legislative reforms in 1987 that shifted reinsurance responsibility for the residual market to employers. In exchange for this bailout, this legislation required insurers to increase voluntary market coverage to specified levels over a period of years or face assessment for a portion of the deficit liability. Though this legislation also included benefit cuts and rate increases, it failed to restore the state's voluntary market and provided only a temporary respite from the prospect of total market collapse. These law reforms failed not primarily because continued low insurance rates or high benefit costs made the voluntary market unprofitable on its own, but because even enormous profit opportunities would be insufficient to offset the risk of residual market liability for any one insurer contemplating increasing its voluntary market share [McCluskey, 2001, p. 110]. Even if insurers as a whole returned to that market en masse, the accumulating years of rising costs would pose substantial risk and uncertainty about its allocation. Further, that risk of residual market deficits was exacerbated by a regulatory deal giving one insurer, AIG, responsibility for servicing a large portion of the residual market business in exchange for special protection from any pool liability. Evidence of poor servicing (particularly by AIG) led to findings in ratesetting proceedings in 1990 and 1992 that insurers had substantial mismanaged the state's residual market through faulty premium collection, recordkeeping, and claims handling as well as inadequate investment practices; the state's insurance superintendent estimated that this mismanagement inflated residual market costs by 30% [Me. Bureau of Ins, 1990].
It was the possibility that insurers would finally face their first assessment for a portion of Maine's looming residual market deficits in 1992 that led insurance companies to then take steps toward withdrawing entirely from the state's market, forcing the legislature to enact more comprehensive changes that year, including further rate deregulation and major benefit restrictions. However, Maine's 1992 law reforms reflected agreement among otherwise divided political interests that residual market instability, not just benefit pricing, was at the heart of this insurance market collapse and its solution [Tri-Agency Report, 2010].
For that reason, along with several other states in the early 1990s, Maine withdrew from the NCCI pool system and solved the problem of insurance company flight by creating a new quasi-public insurance fund as the insurer of last resort beginning in 1993. That same year, responding to this rising competition and criticism, the NCCI began major changes in its residual market system, such as opening up residual market servicing to competitive bidding and rewarding servicing carriers for reducing fees and improving performance—with the result that pool servicing fees dropped while quality appeared to improve [Katten, 1995; NCCI, 1995]. Ultimately, deals struck through legislation and litigation divided financial responsibility for an estimated $220 million deficit in the remaining claims obligations of Maine's defunct pool among insurers (primarily servicing carriers), the state's guaranty fund, and employers (who bore the greatest share) [Fletcher, 1993; McCluskey, 2001, p. 113].
Restructuring the residual market
Easing Maine's insurance supply crisis involved confronting a perennial social insurance dilemma. Affordable guaranteed coverage requires spreading costs from higher to lower risks, but that risk-spreading can destabilize the insurance pool (or the insurance coverage) as resistance mounts from those forced to bear costs outweighing their own gains from the pool. Maine's reforms solved the immediate collapse of the voluntary insurance market by freeing its private insurers (prospectively) from responsibility for the costs of the insolvent residual market and instituting a new guaranteed source of insurance. Nonetheless, the basic insurance supply problem remained. How could the new pool act as an insurer of last resort without undergoing a new death spiral?
The mere fact of eliminating the insurance industry from residual market cost-spreading would simply have set the stage for lower-risk employers to avoid subsidizing the pool by escaping into the now-unencumbered voluntary market (aided by benefit cuts and deregulated rates). As the shrinking residual market pool's risk-spreading capacity diminished, it would either squeeze the remaining employers through ever-escalating prices or run up huge deficits, requiring further bailouts from employers or taxpayers and likely inducing more sacrifices from injured workers through additional benefit restrictions. Or, the public fund might attempt to maintain its market share by underpricing risks below sustainable costs, which (in a deregulated market) might destabilize the voluntary market by inducing a rash of competitive price-slashing, leading to mass insolvencies and further bailouts and benefit cuts, as in California's recent experience [Dixon et al., 2009].
Contrary to these scenarios, Maine's reconfigured market has provided a stable, seemingly solvent insurance supply, with dramatically lower loss costs for employers and insurers (down 47% since 1993 [Tri-Agency Report, 2010]). Reported lost time injury rates, as well as compensation claims for disabling injuries, decreased substantially during the mid-1990s in Maine, though the degree to which this decrease accurately reflects reduced injuries is somewhat uncertain [Conway and Svenson 1998, Tables 6, 7]. Although private insurers quickly returned to the market, the new insurer of last resort, the Maine Employer's Mutual Insurance Fund (MEMIC) has held between 60% and 65% of the insured premium volume since 2002, maintaining an overwhelming lead since its 1993 inception. Originally capitalized through annual assessments from its employer policyholders (presumably a competitive disadvantage compared to private insurers), it accumulated this capital (set to be comparable to private insurers' surplus requirements) in half the expected time and then refunded the entire capital investment to employers by 2001. MEMIC has received consistently high financial ratings, and its apparent financial strength has allowed it not only to price its policies at or below those of private insurers, but also to return $110 million in dividends and capital repayments to its insured employers since 1998. In a similar example, Kentucky's quasi-public insurer and provider of last resort, established in 1994, has maintained a dominant market position along with excellent financial ratings and—in a reversal of the residual market bailout problems—recently had to fend off political attempts to control its large surplus accumulated even while regularly lowering employers' rates [Insurance NewsNet.com, 2010]. Self-insurance has also maintained its position since Maine's crisis period, covering 44% of the premium volume in 2008 (ranging from 40% to 49% since 1998) due especially to the persistent market strength of self-insurance groups [Tri-Agency Report, 2010].
MEMIC has not only out-competed traditional insurers in Maine's insurance market, despite being required to cover the market's riskiest and costliest employers, but it has expanded (through a subsidiary) into the private workers' compensation market nationwide and into other lines of business insurance as well. By 2009, the MEMIC group was among the nation's 50 largest workers' compensation insurers [National Underwriter, 2009].
Though MEMIC is primarily designed to prioritize reducing costs for employers, rather than for workers, it offers some clues about how further, more worker-centered, insurance reforms could substantially reduce the costs of expanded benefits while solving the risk-spreading dilemma of guaranteed coverage. First, Maine's reconfigured market suggests that workers' compensation insurance often may be less costly for employers when structured to maximize direct ownership and control by stakeholders (rather than capital shareholders or political leaders) and when structured to allow for substantial specialization.
Second, this potential for cost-savings seems to stem from a more diffuse shift in insurance culture to focus on reducing risks rather than selecting, spreading, and pricing risks (or reforming benefits) as the route to financial strength. That risk reduction could potentially include improved safety and worker-oriented rehabilitation, though the extent to which that potential has been realized is unclear and would require further study.
Examining organizational structure, MEMIC is designed as a mutual insurance company owned and governed by its employer policyholders. Furthermore, MEMIC is structured to enhance management's accountability to policyholders, giving more substance to the mutual form than is typical among insurers. MEMIC's authorizing legislation requires its nine member board of directors to include six policyholders along with two board members appointed by the Governor, subject to review by the legislature's insurance committee, and this law also prohibits lobbyists and workers' compensation service providers from board membership. In the beginning, company governance included a system of nine industry-specific employer advisory boards, each with nine members elected by businesses in that industry; though eventually abandoned as unwieldy, this initial system of intense employer involvement created a pool of loyal and informed policyholders aware of and committed to the company's distinct vision [Gold and Gold, 2003].
Further, MEMIC's authorizing statute insulates it from the general insurance industry not only by giving it sole responsibility to act as insurer of last resort, but also by excluding MEMIC from the general insurance guarantee fund and by limiting MEMIC's provision of insurance lines (or other products) not tied to its workers' compensation business. MEMIC is a “state fund” distinct from traditional private insurers by being subject to political oversight through this authorizing law, its public board members, and its need for legislative approval of major structural changes (like the creation of its subsidiary for business outside of Maine). Nonetheless, unlike some traditional state funds, its authorizing statute protects policyholders from conflicting political interests by stating that MEMIC is not a state agency or instrumentality and by prohibiting the state, the state's General Fund, or any state agency or division both from supporting MEMIC and also from borrowing or appropriating MEMIC's funds.
Along with this quasi-public mutual structure, MEMIC's specialization may help protect policyholders' long-term interests. Maine's workers' compensation system remains its core mission, with MEMIC as the parent company even as it has grown to other states and lines. In contrast, despite similar origins as an employer-focused workers' compensation mutual, Liberty Mutual (also a significant provider in Maine) has restructured into a complex conglomerate where a holding company owns numerous subsidiary stock companies and other entities focused on many kinds of insurance in numerous states nationwide as well as in numerous foreign markets [Sclafane, 2000]. The narrower purpose and design of MEMIC and similar state funds may be particularly useful in reorienting workers' compensation insurance from a focus on spreading and predicting risk to give more attention to reducing risk. Without this focus, insurers' long-term performance in a particular workers' compensation market may be undermined by opportunities for short-term gains from expanding into new markets, moving in and out of states as benefit laws change, and using workers' compensation as a loss leader to attract other more profitable lines of business. Expertise in safety, reemployment, and claims handling may require extensive and initially costly specialized knowledge of particular industries, occupations, workplaces and social contexts, as well as the benefit systems of each state. Further, this expertise may depend not just on technical knowledge but on building trusting relationships with employers and workers and on otherwise cultivating local good will, qualities that may be enhanced by strong and concentrated long-term commitment from top management and directors to a distinct and stable market.
As a result, the seemingly detrimental duty to serve as a state's insurer of last resort can create a competitive advantage by creating a stable market niche. To some extent, high-risk employers and small businesses generally deemed less profitable by traditional insurers appear to have been an untapped asset presenting opportunities for innovative service and profitable loss control (though again, it is unclear the extent to which this loss control actually represents improved safety or simply improved claims control). This loss control expertise may then have proved valuable when applied to a broader market. At the same time, a major factor in the competitive advantages (for employers) of MEMIC and similar new state funds was that they took over “residual” markets that had grown sufficiently large to broadly spread the start-up costs of covering high-risk policyholders and to amass sufficient funds to support early investments in cost containment.
Second, MEMIC's success in reducing costs for employers stemmed from a cultural change among influential business leaders. Maine's extended crisis and insurers' egregious servicing performance in the dominant residual market sparked widespread criticism of insurance companies by employers, leaving them at least to some extent open to changing their ideas about how to reduce costs, despite their usual political alignment with insurers to restrict benefits. Examples of cost savings from better insurance management and from professed attention to safety and reemployment among the many residual employers becoming self-insured reinforced this criticism.
From the start, MEMIC proclaimed a mission of promoting innovative loss control distinct from traditional insurance [McCluskey, 2001, at 125]. Of the founding group of incorporators and initial board members, none had insurance industry experience or ties; instead, it was comprised of managers, owners, or health and safety specialists from a diverse mix of businesses, along with several factory workers and a legislative aide. This group declared its goal as creating “an anti-insurance insurance company” that would prioritize improved claims handling, safety, and rehabilitation [Gold and Gold, 2003, p. 39, p. 46]. As with other insurers, MEMIC's sometimes lofty rhetoric about safety and concern for workers has coincided to some extent with a practice of opposition to workers' rights, both in individual claims proceedings and in public policy arenas. Nonetheless, the substantive composition and culture of the company's founders and directors suggests some differences from other insurance companies in the extent to which it approached workers' compensation insurance as a means for ground-level workplace change (whether detrimental or beneficial to workers) rather than primarily a matter of actuarial and underwriting expertise.
While not evidence of its actual practice, MEMIC's aggressive marketing of its safety programs suggests its special attention to the relationship between workplace practices and insurance costs. Within a few months of its founding, it launched a half million dollar advertising campaign promoting workplace safety and branding the company's chief executive as “the safety guy.” The company brands itself using phrases such as MEMIC: Partners for Workplace Safety. The company's 2009 annual report web page features a series of case studies of the company's safety improvements in a variety of small businesses and non-profits, including a manufacturer, construction company, nursing home, and social service provider. These examples claim that safety services helped transform daily culture among both managers and workers, not just through specific training and equipment but by improving workplace communication and by building workplace trust. Managers touted the benefits of safety not only for saving insurance costs, but also for increasing worker retention and morale and for raising the competitiveness and quality of the business's product or services.
As Emily Spieler has incisively analyzed, incentives for innovative loss control often mean suppression of legitimate workers' claims, whether through fraud charges, delay, harassment, intimidation, or workplace penalties for reporting injuries and claiming benefits [Spieler, 1994]. It is unclear how much of MEMIC's professed attention to loss control actually works to benefit workers as well as employers, particularly since the company is not structured to directly protect workers' interests (reflecting insufficient political support for legislation that would have required labor representation on the board). Nonetheless, even if not the whole story or even an accurate representation of typical practices, such public relations efforts to promote enthusiasm for safety and workers' well-being “as a major social good” [Fletcher, 1995] may have significant indirect political and cultural impact by casting workers' rights in a positive light. In contrast, widespread negative public images (often promoted by insurers) blaming injured workers for high workers' compensation costs have helped support benefit cutbacks. The extent to which insurers' public relations efforts centered on the benefits of workplace safety can be effective in reducing injuries and the extent to which these can be the basis for coalition building in favor of workers' rights needs more exploration.
MEMIC claims to have supported its safety rhetoric through a number of substantive innovations, and research comparing the impact of such allegedly different insurance approaches could be an important step toward re-orienting insurance systems to better protect workers. MEMIC contends it made groundbreaking investments in loss control, starting with 5% of premium at its founding [Gold and Gold, 2003, p. 40]. In 2000, the company reported spending about 35% of operating expenses on safety and other loss control services, which it claimed was double the amount of most insurance firms [Gold and Gold, 2003, p. 89]. The company's founders explained that they rejected the easier route of subcontracting in favor of a building an in-house claims management department and underwriting database to avoid the accountability problems of the former residual market system. In its first year, the company began developing safety workshops tailored to each type of business, focusing especially on high-risk businesses like logging, where fatalities fell from up to five a year to hold at zero for at least several years [Gold and Gold, 2003, p. 90]. Training goals were enforced by a system of biannual workplace inspections by MEMIC staff. The company also designed and promoted individualized reemployment programs. Further, early MEMIC's innovations included substantial up-front price rewards (or penalties) and other incentives for individual employers based on their compliance with safety standards and participation in loss control programs (in addition to incentives based on actual loss experience) [Gold and Gold, 2003, pp. 50, 55, 60]. Note that these loss control efforts differ from the standard focus on risk-based pricing by targeting rewards more directly to safety rather than to claims reduction.
It is unclear the extent to which MEMIC's initiatives caused the state's subsequent drop in reported injury rates, and at least some of this drop may have been due to a concurrent OSHA initiative in the state as well as to the impact of changing economic conditions on the state's particularly high-cost industries. Other state insurance funds' claims to save money through improved safety have been found to be hollow; for example, in the early 1990s, Oregon's non-profit insurer, SAIF, was found to have used rhetoric of safety improvements to cover up widespread fraudulent suppression of workers' claims [Duin, 2005]. Without changes in the structure of these insurers, as well as in workplace regulation more broadly, such claims to safety programs and reducing injury rates remain unreliable.