Rate regulation, safety incentives, and loss growth in workers' compensation insurance

We analyze the relationship between insurance rate regulation, inflationary cost surges, and incentives for loss control using state-level data on wor kers' compensation insurance for 24 states during 1984-90. Regulators often responded to rapid loss growth during this period by denying rate increase s or approving increases that were less than initially requested by insurer s. We test whether rate suppression increased loss growth by distorting inc entives for loss control. Our regressions indicate a positive and statistic ally reliable relationship between loss growth and lagged measures of regul atory price constraints, suggesting that rate regulation increased the freq uency and/or severity of employee injuries.