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The nation’s 20 state-run workers compensation funds showed strong growth for the second straight year, according to a new A.M. Best report. The article in Property Casualty 360 says that state funds accounted for 44 percent of total net premiums written in 2012. Net premiums written increased 7.1 percent in 2011 and 13.5 percent in 2012, reaching $6.9 billion last year–the highest level since 2008. The report says the increases are an outgrowth of a hardening market as the economy returns to a growth mode. Rate increases accounted for some of the increase in NPW, but overall premium growth was only slightly higher than the 6.8 percent and 13.1 percent respective increases in the A.M. Best workers’ comp composite for 2012 and 2011. Premium income rose for state funds in both years despite a precipitous decline in the California state fund.

Excluding State Compensation Insurance Fund of California (SCIFCA) premiums, the premium increase of the 19 other competitive state funds rose a 18.3 percent in 2012, compared to 11.7 percent in 2011–an indication state funds may be fulfilling their role as residual market providers to a greater degree as workers’ comp markets harden.

The report notes one emerging concern: the Internal Revenue Service’s Exempt Orga­nizations division is reviewing the tax-exempt status afforded state funds. “While still in a preliminary and exploratory phase, any eventual IRS rulings in this regard could have significant impacts on affected state funds’ markets, business strategies and operations,” the report said.

One factor in premium growth is most of the funds predominately serve residual markets–small businesses, for example–while also competing with the private market. Typically during hardening markets, some businesses find it more difficult to afford or secure coverage in the voluntary market and turn to state funds. The report noted that each fund tends to develop its own, unique characteristics, largely depending on its business profile and growth initiatives.

The report said some state funds maintain a steadfast role in the residual market and often contend with political pressure that can affect surplus and rate levels. Others have undergone transformations toward becoming private, mutual insurers. Some funds have taken to writing business beyond their state borders, the report said.

The term “state funds” is used for the 20 U.S. competitive state compensation funds, the report said. It does not include the monopolistic funds operating in North Dakota, Ohio, Puerto Rico, Washington or Wyoming.