Rate Regulation, Safety Incentives, and Loss Growth in Workers' Compensation Insurance

Abstract

We analyze the relationship between insurance rate regulation, inflationary cost surges, and incentives for loss control using state-level data on workers' compensation insurance for 24 states during 1984-90. Regulators often responded to rapid-loss growth during this period by denying rate increases or approving increases that were less than initially requested by insurers. We test whether rate suppression increased loss growth by distorting incentives for loss control. Our regressions indicate a positive and statistically reliable relationship between loss growth and lagged measures of regulatory price constraints, suggesting that rate regulation increased the frequency and/or severity of employee injuries.

JEL Classification: J28, L50