Law of Large Numbers vs Association Work Comp Funds
The Law of Large Numbers ceased another association work comp fund. Please see my last post on the article about The Tennessee Restaurant Workers Compensation Fund Failure.
In my opinion, while there are accusations of mishandling of funds by the head of the Tennessee Restaurant Association, that is not the reason for the failure of their Workers Comp fund. He likely did not even mismanage the funds. What happened is the usual result of having a self-insurance pool for homogeneous employers.
As I have posted in the past, the Law of Large Numbers is the same as the old saying – “there is safety in numbers.” You cannot expect statistically over a long period for a group of safe employers (restaurants) to keep subsidizing unsafe restaurants by paying more than their fair share. For homogeneous employers, a group larger than just the restaurants is required to spread the risk.
As being in the Tennessee Restaurant Association Workers Comp Fund is voluntary, the restaurants that tend to be bad risks will stay in the pool. The restaurants that have better risks would look for Workers Comp insurance coverage elsewhere as insurance carriers would write them more easily than the bad risks.
I have seen association-based Workers Comp Funds for trucking, construction, manufacturers, and others fail due to the inability to spread the risk amongst enough members. There have been a few that never even got off the ground.
What do you do as an employer? Explore all the options by getting quotes from different insurance carriers and agents. There is nothing wrong with shopping your account out to the Workers Comp insurance market.
Violating the Law of Large Numbers should be avoided at all costs.
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