The Impact of State Taxes on Self-Insurance: Workers’ compensation

4.6 Workers’ compensation
The preceding section shows that the results hold when premiums are employed as the dependent variable capturing insurance coverage. This section extends the robustness checks by employing a different dependent variable to test the relation between taxes and self-insurance of a specific line of property-casualty insurance, workers’ compensation. Workers’ compensation is essentially mandatory for all employers. Most states permit businesses to cover workers’ compensation through private insurance, government funds, or self-insurance (assuming the business can show sufficient wherewithal).
The dependent variable in this paper’s final robustness check is workers’ compensation benefits paid by private carriers and government funds (i.e., sources other than self-insurance) divided by all workers’ compensation payments (including self-insurance) for each state. In other words, the dependent variable captures the insured percentage of workers’ compensation benefits paid for each state. As in the earlier tests, if self-insurance is increasing in insurer taxes, a negative coefficient is predicted for TAX.
Workers’ compensation payments are collected from the Social Security Bulletin (1995). To our knowledge, data segregating property-casualty coverage between insurance and selfinsurance is limited to workers’ compensation. Of the three years examined in this study, data are only available in 1993. Unlike insured losses, which includes accrued expenses, this measure is limited to cash payments. This is potentially an important distinction because workers’ compensation is a long tailed line of business, i.e., benefits are paid for many years following a loss. Thus, payments in any year relate to coverage decisions made across several years. In addition, the dependent variable is measured with error because deductibles paid by employers are not classified as self-insurance, but rather included in the private carrier payment total.