In what has become an annual tradition, the Illinois General Assembly has again presented Gov. Bruce Rauner with legislation that would require insurance companies to submit workers’ compensation rates to be reviewed by state bureaucrats. Rauner could veto the bill, as he has each of the past two years, but there are reasons he might not. Should it become law, it would effectively mean the end of the one area of business regulation where the Land of Lincoln traditionally has offered a remarkably free market.
Illinois is known for many things, but a reputation as a business-friendly state isn’t one of them. In 2017, it placed just 31st in CNBC’s annual rankings of the top states to do business. But it does have the distinction of being the only state without a law to regulate property and casualty insurance rates. Illinois trusts the forces of supply and demand to be the sole regulator.
What began as something of a legislative accident in the early 1970s has proved a lasting success. Today, Illinois’ experiment with competition in insurance markets is frequently cited as a national model. In the six years the R Street Institute has published its Insurance Regulation Report Card, Illinois has placed among the top four states four times and never finished with worse than a B grade. Its 2017 ranking was No. 8, with a grade of B+.
But state lawmakers have heard an earful in recent years about the high cost of workers’ comp insurance and predictably turned to command-and-control regulation as the easy solution. While Illinois’ workers’ comp rates are higher than average, a biannual study from the Oregon Department of Consumer & Business Services shows that they are 31 percent lower than California’s and 21 percent lower than New York’s.
Nonetheless, in 2016 and 2017, the General Assembly passed bills that would require the state Department of Insurance to review rate filings for workers’ compensation insurance and to create a state-chartered workers’ compensation insurer that would compete with private carriers. Rauner vetoed both measure both years, and veto override votes fell short.
This year, legislation that proposed to create the Illinois Employers Mutual Insurance Co. cleared the state House but got bogged down in the Senate. However, a modified version of the rate-review measure, requiring carriers to file rates at least 30 days before they take effect, was attached as an amendment to SB 1737, otherwise uncontroversial legislation liberalizing restructuring plans for the state’s insurers and reinsurers. The amended version was approved by both chambers as they wrapped up this year’s regular session earlier this month.
Proponents of mandatory rate review assert it is needed to address an uncompetitive market for workers’ comp. In fact, the data show unequivocally that Illinois has the most competitive workers’ comp market in the country. In 2017, the state’s workers’ comp market had an HHI score—the index used by the Federal Trade Commission to assess whether markets are subject to monopolistic concentration—of just 347. Markets with HHI scores less than 1,500 are considered “competitive” by the FTC. As points of comparison, Missouri and Kentucky, the only neighboring states that have workers’ comp state funds like the one the Legislature was pondering, have HHIs of 928 and 1,208, respectively.
With that in mind, it’s worth asking what problem rate review would solve. It isn’t excess profits that are driving up the cost of workers’ comp; it’s trends in claims and medical costs. Forcing insurers in a competitive market to lower their rates could impact their long-term solvency. That risks shifting those costs onto the state-backed guaranty fund, a perilous proposition for a state that already ranks at the bottom of the list for fiscal stability.
It remains to be seen whether Rauner will decide the final SB 1737 package is worth endorsing. For the sake of the continued success of the one market where Illinois actually has a proven model, we hope he will take out his veto pen once again.
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