1. © 2008 Property Casualty Insurers Association of America CAS Spring Meeting June 17, 2008 Second Injury Funds: From the Beginning to the End? Keith Bateman, Vice President, Workers Compensation Property Casualty Insurers Association of America (PCI)

2. © 2008 Property Casualty Insurers Association of America Will Cover  Philosophical Tension Underlying Second Injury Funds  History of Second Injury Funds  Variation in SIFs  Pros and Cons  Recent Developments  Future Influences?

3. © 2008 Property Casualty Insurers Association of America Philosophical Tension Balancing Interests of Employer and Employee

4. © 2008 Property Casualty Insurers Association of America Employee Interest  Socializing (Spreading) Cost of Industrial Injury  Non-Fault  (Limited) Income Protection  Taking Worker As He Walked Through Plant Gate

5. © 2008 Property Casualty Insurers Association of America Employer Concerns  Compensate Only Industrial Injury  Don’t Penalize Employer Good Citizenship  Maintain the Limited Income Protection Concept

6. © 2008 Property Casualty Insurers Association of America History  Rationale for Creation  Growth Number Scope and Size  Changing Nature  Movement to Repeal  Impact of Changing External Environment

7. © 2008 Property Casualty Insurers Association of America Rationale  Encourage Employment of the Handicapped  Provide Economic Relief to Employer

8. © 2008 Property Casualty Insurers Association of America Growth  Number A Rose by Any Other Name First New York 1916 By Start of World War II, 12-14 By End, 34 By Early 1950’s, 41 States

9. © 2008 Property Casualty Insurers Association of America D.C. SIF High Water Mark Wyoming was the only state not having Second Injury Fund

10. © 2008 Property Casualty Insurers Association of America Growth  Scope and Size Changes in Pre-existing Conditions Covered Elimination of Knowledge Requirement Move Away from Permanent Total Soft Tissue/Cumulative Injury Rather than Traumatic Weakening of Impact on Employment Requirements 1970’s Expansion of Workers Compensation Changes in Life Expectancy

11. © 2008 Property Casualty Insurers Association of America Movement to Repeal – The Drivers  Assessment Growth  Unfunded Liabilities  ADA and State Anti-Discrimination Laws  Contraction of System  Accounting Standards

12. © 2008 Property Casualty Insurers Association of America Movement to Repeal – How Far To Go Repeal/Close v. Tightening Entry  Example of Tightening Restore Knowledge Requirement Massachusetts 1991, South Carolina 2003 Increase Employer Retention New York 1996  Also, some funds closed because little used – tough entry requirements or inadequately funded

13. © 2008 Property Casualty Insurers Association of America D.C. Closures 1990-94 1995-20002001-2005 2006-Present No Fund Closed in 2000, but reopened Repeals/Closures UT CO NM SD NE KS OK MN AR KY AL GA FL SC WV NY VT CT RI

14. © 2008 Property Casualty Insurers Association of America Impact of Changing External Environment In addition to those mentioned earlier, the following have been suggested as factors influencing SIF: Factors Leading to Fund Expansion  Expansion of Compensability  Expansion of Benefits Lifetime or Long Duration (Indemnity and Medical) Medical Treatment Improvements and Technology Indexing Benefits Limits on Settlement

15. © 2008 Property Casualty Insurers Association of America Factors Leading to Fund Contraction  Contraction in Compensability  Limits on Duration  Cut Backs in Indexing  Moving PPD to Impairment Basis  Apportionment Unfortunately, don’t know of any credible studies that have tested these

16. © 2008 Property Casualty Insurers Association of America Variations in SIFs Differences  Treatment of Pre-existing Conditions  How Combined Effects are Treated  Knowledge Requirement  Conditions Covered  Impact of Employability  Degree Disability/Impairment Increase  Thresholds

17. © 2008 Property Casualty Insurers Association of America Differences (continued)  Relief Provided to Employer  Financing/Administration  Single Purpose v. Multi-Purpose  Multi-Purpose Concurrent Employment Uninsured Employer Cost of Living/Supplemental Benefits Occupational Diseases or Special Disease/Injury Provisions

18. © 2008 Property Casualty Insurers Association of America Pros and Cons Arguments For  Need Hasn’t Changed  Provides Employer Incentive to Hire  Protects Income Maintenance While Removing Employer Perception of Unfairness  ADA and Anti-Discrimination Acts Have Had Limited Impact  Funding Problems may not be due to Second Injuries  Closing Funds and Running Off Likely to Increase Employer Short Run Costs  Encourages Anti-Worker Legislation

19. © 2008 Property Casualty Insurers Association of America Arguments Against  No Evidence Hiring of Handicapped Encouraged  ADA and Anti-Discrimination Laws make SIF Obsolete  Undermines Internalization of Cost/Safety Incentive  Because Pay-As-You-Go, Unfunded Liabilities Build Up  Apportionment Eliminates Need  Financial Impact Of Combined Effect Overstated  Negative Impact of Loss-Based Assessments on Insurers  Increase Transaction Costs  Funds Subject to Legislative Raids

20. © 2008 Property Casualty Insurers Association of America Recent Developments  Repeal Verses Reform Differences Among Employers and Among the Industry  Alternatives to Second Injury Funds The Oregon Approaches  State Activity Limited Activity in 2008 Fewer Enactments

21. © 2008 Property Casualty Insurers Association of America The Future Is the Second Injury Fund Era Ending? Can’t answer, but here are some questions to think about.  Have been several decades of greater concern about employer costs than about benefits. What if: Political climate moves to the left? Will it matter if economy doesn’t grow rapidly? Has the move to a world economy changed the political environment?

22. © 2008 Property Casualty Insurers Association of America The Future (continued) What impact will an aging workforce and population have on both politics and the views about pre-existing conditions? Will science allow us to better separate out occupational and nonoccupational factors in impairment, disability, and causation or will it complicate determinations? Which produces more transaction costs – apportionment or second injury funds? Will the return of our citizen soldiers from the Middle- East produce the same pressures as World War II? How will the movement from national to international accounting standards impact how liabilities must be recorded?