Tag Archives: history

Is Insurance Still For Policyholders?

Today we have a guest post by our colleague Roger Moore of Nebraska.

Insurance began in the Middle Ages, and policies could be written for almost anything. Policies were taken out to protect risks of trade, against the death of a head of state, and for many other forms of speculation. There was almost no limit on what a policy could be written for. Additionally, there was no shared risk as these policies were taken out only by individuals.

In the early 18th century, mutual insurance was created. Instead of individuals essentially placing bets that would pay off if tragedy struck, these policies created communities of members who were concerned with offsetting risk with reward. The lack of tragedy led to the payout of dividends to the members. Gradually, governments forced the transition of insurance from legal gambling on misfortune to companies behaving more like public utilities. Mutual-insurance companies helped the betterment of society with innovations like workplace-safety measures.

Over the last four years Edmund Kelly, former CEO of Liberty Mutual, has pocketed over $200 million in compensation.

In 1911, the first workers’ compensation insurance was written in Massachusetts in the form of a state-subsidized mutual-insurance company. Like most mutual insurance, the aim was the mitigation of risk by providing incentives to reduce risk and demanding small sums from each participant that were then combined into large sums for the victims or beneficiaries of the policy.

In the mid-1990s, insurance companies began pushing for legislation to authorize them to place their assets into holding companies that could then sell stock. Critics believed the policyholders were being divested of their ownership in such an arrangement, but little true resistance was brought to bear. What has transpired as a result of this shift is that increasingly the profits from insurance companies were being captured by its executive leadership instead of being reflected as profits and returned to its policyholders as dividends.

As such, 200 years after mutual insurance was created, history reversed itself. No longer was insurance sold to people who had a stake in the assets and risks on which they bet. The community no longer bore the rewards of mutual insurance as company profits were put in the hands of the elite leadership and not distributed across policyholders. One can surmise that policyholders also lost more control over how claims were handled than was anticipated when mutual insurance was created. Policyholders also likely see little incentive to follow risk-averse practices as they receive no return benefit in the form of dividends as they used to. When profit is the only goal in business only the business itself and, more specifically, its executives truly gain. One indication of this is Edmund Kelly, former CEO of Liberty Mutual. Over the last four years he has pocketed over $200 million in compensation.

Source: The Atlantic

“Opting In” to Worker’s Compensation: Wisconsin’s Very Good Idea

Wisconsin Capitol BuildingThis is part 1 of a 3 part series.

Oklahoma recently faced a proposal in legislative session that would have allowed employers to “opt out” of the State’s mandatory worker’s compensation system. The bill ultimately died but it was closely monitored by the business community. Similar bills may soon surface in several other states including Colorado, Kansas, Louisiana, and Tennessee.

Wisconsin’s initial efforts in workers’ compensation led the nation.

With several states proposing to “opt out” of worker’s compensation, it is important to revisit, after 100 years, why Wisconsin “opted in” leading the way for the other 50 states in worker’s compensation. The next several blog entries will tell that story.

Part I. Workers Denied Recovery

Wisconsin’s initial efforts in workers’ compensation led the nation. In 1911, Wisconsin became the first state in the nation to place a broad, constitutionally valid workers’ compensation system into operation.

Prior to 1911, Wisconsin workers who were injured on the job had to overcome three common law obstacles in order to recover from their employer. Under the contributory negligence doctrine, a worker could not recover from the employer if the worker had been negligent in any way and that negligence had contributed to the accident regardless of how negligent the employer may have been.

Under the doctrine of assumption of risk, if a worker knew or should have known of the danger inherent in the task at issue before undertaking it, the employer was not liable for an accident arising from the task even if the employee was not negligent.

Under the fellow servant rule, employers could not be held liable for accidents caused by fellow employees (i.e., co-workers) of the victim.

The combined effect of these common law defenses served to deny workers adequate remedies for their injuries.

Please visit our blog next week for part 2 of our series on states opting out of workers’ compensation.