Beacon Mutual: Where We Are and How We Got Here, Part 1

The story of how Beacon Mutual began is a familiar one -- Rhode Island paying too much into a broken, unsustainable system, in this case, the workers' compensation system.

At the start of the 1990s, there were about eight private insurers providing workers' compensation insurance to Rhode Island, the largest being Liberty Mutual with about 25% of the total market share. Workers' compensation was divided into two categories. There was a "voluntary" market where insurance companies directly entered into contracts with employers. There was also an "assigned-risk" pool, comprised of companies deemed too risky to insure. The state would assign insurance companies operating in Rhode Island the task of writing insurance policies for the employers in the assigned-risk pool. Insurers regularly lost money on their assigned-risk pool commitments while beneficiaries complained that benefits paid on assigned-risk policies weren't enough to live on.

By 1990, the ratio of employers in the voluntary pool to employers in the assigned-risk pool was seriously out of balance. Liberty Mutual, for instance, was insuring only 155 companies through the voluntary market, while insuring about 2,900 through the assigned-risk pool. The assigned risk pool had become this large because, statistically speaking, Rhode Island had become a very risky place to work. Rhode Islanders were getting injured more often than workers in the rest of the country and staying out of work for longer when injured. They were also paid more for their injuries than the national average.

To cover the costs of Rhode Island's assigned risk pool, the National Council on Compensation Insurance asked for a 123% rate increase in the state. When it was not granted, Liberty Mutual announced it would pull out of Rhode Island on December 31, 1991. The pullout would have required the remaining insurers to assume responsibility for Liberty's 2,900 assigned risk policies. Instead, most remaining insurers also left Rhode Island to avoid incurring huge financial losses.

The creation of Beacon Mutual was part of the response to this. Beacon took over insuring the assigned risk pool (now called the "residual market"). Because it would be taking on the entire burden of the high-risk residual market, the state granted Beacon some competitive advantages. Beacon was given a tax-break and an exemption from paying into the state's insolvency fund. The insolvency fund is insurance on insurance, a pool of money that insurers contribute to so that there will still be money available to pay claims if an individual insurance company goes under. Since Beacon Mutual didn't have to pass insolvency fund or taxation expenses along to its customers, it could offer lower premiums than it otherwise would. Beacon would also be allowed to compete in the voluntary market, but its tax breaks and exemptions applied -- on paper -- only to its residual market policies.

Creating Beacon Mutual wasn't the only workers' compensation reform measure. The state streamlined the administrative and legal procedures associated with workers' comp. In just a couple of years, Rhode Island became a much safer place to work. Here's Governor Bruce Sundlun touting some of the successes in a 1994 Projo op-ed...

The state's costs are down $ 4 million - 17 percent just between fiscal 1992 and fiscal 1993. The state's workers' compensation rolls have already been reduced 25 percent from 1200 to 900 employees....

Workers' compensation injuries that occurred in December 1990 cost Rhode Island more than 50,000 days of work lost in the first six months of 1991, at a cost of over $ 2,000 per injury. Last December's injuries caused only 35,000 work days lost in the first six months of 1993.

Not only did we save 15,000 productive work days, the average cost per claim fell from over $2,000 to $1,510. The annual number of claims involving time lost from work has dropped from an average of 15,000 claims between 1987 and 1990, to 10,000 claims a year today.

Even when related to changing statewide employment levels, the frequency of workers' compensation claims is down 25 percent....

Particular credit must go to the Workers' Compensation Court. The court has seen 9,355 petitions filed in the first three quarters of 1993. This is down from 11,860 petitions in the like period of last year. Of these 9,355 petitions, the court has made a final disposition of and closed more than 8,000 petitions within 50 days of filing.

Until recently, it took an average of five months before petitions even got their first hearing. The court's speed in disposing of these cases saves employers millions of dollars in unnecessary costs, and eliminates unfair gamesmanship both by employees and employers taking advantage of delays.

Here's the weird and amazing part -- the state government of Rhode Island did something right! Rhode Island employers were able to afford workers' compensation isurance AND the process reforms once again made worker's comp insurance a profitable business, so much so that private insurers made plans to return to the state. In 1994, Liberty Mutual announced its intention to return to the Rhode Island workers' comp market. In 1995, ITT Hartford, at the time the 3rd largest workers' comp insurer in the country, also announced its intention to start doing business in Rhode Island.

Yet we know that the private insurers never came back, and Beacon Mutual maintained its near monopoly in the now-profitable workers' comp business in Rhode Island. What happened?

Coming in part 2: What did happen...