SIFs are designed to reduce the financial impact of a workers’ compensation claim in the event a worker with a disability, injured on the job, aggravates a pre-existing impairment.
Maintaining healthy workers’ compensation systems is a continuing challenge for states. The American Insurance Association believes that one important reform that can benefit employers, carriers and ultimately, employees, is the elimination of state second (or subsequent) injury funds (SIFs).
While originally a laudable concept—encouraging the employment of disabled employees— there never has been any demonstrable evidence that SIFs ever met their intended purpose. Furthermore, in light of the financial trouble many funds have encountered and the more direct (and modern) remedy for protecting disabled workers available through the Americans With Disabilities Act (ADA), SIFs should be eliminated.
In recent years almost 20 states have eliminated SIFs. Two states, Georgia and South Carolina continue to debate the viability of SIFs.
AIA has been successful in getting legislation introduced in both legislative bodies that would do away with these outdated and costly mechanisms, but some still resist this move, despite ever-increasing costs and the development of alternative remedies that will achieve the policy objective SIFs never did.
SIFs are designed to reduce the financial impact of a workers’ compensation claim in the event a worker with a disability, injured on the job, aggravates a pre-existing impairment. Insurance carriers and self-insured employers receive reimbursements from the fund to cover eligible indemnity and medical costs. The costs sustained as a result of these second injuries to workers are then distributed among all employers in the state., through annual assessments.
SIFs violate a key tenet of sound insurance pricing: internalizing losses. Internalizing an employer’s own insurance losses encourages safe workplaces.
An employer with no responsibility for injuries occurring in another employer’s workplace should not subsidize that employer’s losses. SIFs are especially unfair to small employers. Larger employers have more opportunity to benefit from SIFs because they experience considerably more claims. Nonetheless, small employers are assessed to cover these losses, although they may never have a loss qualifying for SIF coverage.
SIFs have been argued as justified for the social purpose of encouraging the hiring/retention of workers with disabilities. However, there is no demonstrable evidence accumulated over the decades in which SIFs have operated that they have ever achieved the societal purpose of fostering the employment or retention of disabled individuals.
AIA believes the ADA is a more direct remedy for promoting employment of disabled workers because it prohibits certain inquiries about the existence or nature of a disability prior to an employment offer.
Financially speaking, SIFs are a ticking time bomb.
All SIFs are financed on a pay-as-you-go basis, through assessments on self-insured and insured employers. SIF assessments are based only on claims paid during the current year, even though acceptance of a claim for payment also involves accepting the liability to pay future costs on the claim that have not yet become due. This unfunded liability for future payments means that assessments, as a tax on the cost of injuries, will be with us for years, if not decades. Current accounting principles require insurers and self-insurers to recognize these liabilities as losses on their financial statements.
States use a variety of funding sources for their SIFs. Of the jurisdictions with SIFs (active or in run-off), 15—including Georgia’s and South Carolina’s—are financed through assessments on insurers and self-insured employers based on paid losses, i.e. insurers and self-insureds make payments to the SIF based on their preceding year medical and/or indemnity loss payments. Those assessments are included in the rate base, so theoretically, at least, insurers recover these costs from their policyholders.
The unprecedented growth of the funds in both states over the past few years indicates growth of a substantial unfunded liability. These ever-rising liabilities, coupled with incentives to dump cases into the fund and increasing assessments, mean that a tax on the cost of workers’ compensation injuries will continue in an upward spiral for decades unless the SIFs are abolished.
SIFS have become bottomless financial holes. It is time to stop digging.
Ray Farmer is assistant vice president of state affairs, for the American Insurance Association’s Southeast region, a position he has held for 24 years. Farmer previously was on the staff of the Georgia Department of Insurance and is a member of the State Bar of Georgia.