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Law Of Large Numbers – How It Ruins Small WC Funds


Law Of Large Numbers Catches Up To All Small Insurance Funds

The recent Affordable Care Act (ACA) going live is a reminder of how risk needs to be spread over a large numbers of participants to be viable.

Affordable Care Act Large Numbers Text Graphic
Wikimedia Commons – Careilly5801

The Law of Large Numbers is one of the concerns that the ACA is not really taking into account.   The same thing has happened with many smaller Workers Comp funds nationwide.The Law of Large Numbers is an interesting yet simple way to show how risk needs to be spread over a number of insureds such as in automobile insurance.  Workers Compensation requires the same type of larger pool of entrants so that the companies that are experiencing a bad claims year are offset by many safer companies.

There have been many adjustments over the years to guarantee that safe companies are not subsidizing the unsafe ones.  The recent move by NCCI to double the primary loss portion of claims was put into place for just that reason.  The WCIRB has turned their attention to smaller unsafe companies by removing any small company credits from their X-Mod equation.

Many self-insured funds and pools have felt the bite of The Law of Large Numbers.   The pools were initiated with a small group of employers looking to add on others.  Unfortunately, the employers had a large enough portion of their pool with bad claims years.   The self-insured pool failed as there were too few safe employers in the group.

Many participants in the self-insured pools have felt the sting many years after the funds were shut down due to assessments-after-the-fact.   These types of self insurance pools are sometimes covered by any type of insolvency fund as exists with normal WC carriers.

Picture Of Hand Holding Marker Pen Large Numbers With Dollars Growth

We all shall see how the ACA (Obamacare) makes itself viable.  However, one of the main groups that will carry the risk is the younger and healthier segment paying in, but only using a small part of the benefits.   Twenty five percent is the projected rate of non-participation.  However, the IRS fine is a premium payment of sorts for those 25%.

Carrier or self-insured insolvencies do not seem to be a hot news items as they once were less than 10 years ago.   If you are interested in seeing which insurance companies or self-insured pools have become insolvent, there is usually a list provided by the state’s Industrial or Workers Comp Commission.

One great example is the North Carolina list of self-insured insolvencies that you can find here.   NCSISA is one of the state associations that actually provide coverage for self-insured bankruptcies resulting in the inability to pay WC claims.

Also Read: What Is A Guaranteed Cost Program In Workers Compensation?

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications


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