There are some differing opinions on this issue; I heard from several colleagues with different views on wage replacement caps; two somewhat different perspectives are provided below. [original post and reader comments are here]
From Bruce Wood – former Vice President and Associate General Counsel at AIA; retired after 27 years, currently consulting (AIA is a client):
The amount of the maximum weekly benefit amount (WBA) is a major cost element in workers’ compensation. Industry (surely, AIA) policy has always deferred to business and labor on the amount of the maximum WBA, lest the insurance industry be accused of seeking to inflate insurance premiums by supporting more generous benefits. It would be interesting to see if many others in the business community go along with increasing the maximum, much less completely eliminating it even for workers with annual incomes of hundreds of thousands of dollars, who typically have alternative sources of income support. I would expect policyholders to be reluctant to accept this increased expense.
All states have a maximum WBA, in nearly all instances indexed to a percentage of the statewide average weekly wage (SAWW). Most – 36 — today cap benefits at 100 percent of SAWW. Sixteen states exceed 100 percent, with one at 200 percent. Eleven states fall below 100 percent; and the maximum temporary total disability benefit in two states is a fixed dollar amount that can be changed only by the legislature. In the early 1970s, when the National Commission issued its report, many states did not use a maximum WBA equal to even two-thirds of SAWW. The Commission recommended an immediate step-up to two-thirds, with a phased increase thereafter, to 100 percent (by 1975), 133 1/3 percent (by 1977), 166 2/3 percent (by 1979), and 200 percent (1981); and it further recommended the maximum be indexed annually (for new injuries) to the state’s current average weekly wage. After the Commission report, the states all raised their maximums, but as noted few were willing to go above 100% because a higher maximum is very costly. Nowhere in the Commission’s narrative is there consideration for eliminating any cap. Thus, the Commission seems to have accepted the premise that some cap on benefit levels was essential in balancing overall system costs and in lending greater actuarial predictability to those costs. Public policymakers need to obtain actuarially credible pricing estimates before reaching any conclusions about raising, let alone eliminating, any cap.
It should be noted that any serious consideration to significantly increasing benefit caps should necessarily include examination of the wage replacement rate (typically 2/3 of gross pay) as well as using net pay rather than gross pay as the wage base. The National Commission recommended that states adopt a net pay basis for benefits, at 80 percent of “spendable income.” The Commission’s recommendation took cognizance that workers’ compensation indemnity benefits are not subject to income and payroll taxes, and thus a more generous WBA for higher income individuals may reduce return to work incentives by replacing a higher percentage of pre-injury net pay, or in some cases, exceeding it. Replacing a percentage of net pay would better-preserve return-to-work incentives and more equitably pay benefits to workers in different income tax brackets.
As with everything in comp, it is all more complex than might appear.
From a current C-suite Executive and former Chief Claims Officer:
I’ve been asking this question [why is there a limit pegged to AWW] since I was a 22 year old claim trainee and have pissed off a number of insurance executives and mid-level managers in the process of simply being honestly curious. The pricing argument is a red herring – with loss data and payroll data available to the level of detail it is, I don’t buy it. I’ll take the question a step further…why do some states limit the number of weeks of indemnity for someone who remains off work and is legitimately disabled? Seems to be against the concept of equity and the ‘grand bargain’ that was originally intended.
Wonder why we as an industry have the reputation we do????
What does this mean for you?
It’s always helpful to hear different opinions from folks with deep, relevant experience.