01:00 AM EDT on Thursday, July 7, 2005

WE HAVE WATCHED with interest, and at times amazement, the inconsistent positions adopted by the Republican members of the Rhode Island General Assembly with respect to legislation designed to privatize workers' compensation insurance and enhance corporate governance of Beacon Mutual Insurance Co.

In November 2003, the administration of Governor Carcieri (through the executive director of the Rhode Island Economic Development Corporation, or RIEDC) approached Prof. Dennis Michaud of Brown University to assist in the development of a "corporate governance model" for the Quonset Development Corporation as a template for future quasi-public Rhode Island corporations.

The philosophy underlying his work was that Rhode Island quasi-public firms should conform to free-market business practices and be governed by strong, professional, depoliticized boards. The research produced a recommended mission statement and ethics policy, as well as criteria of best board-of-director practices and corporate by-laws.

Strong cooperation by members of the Carcieri administration (RIEDC, in particular) and senior leadership of the Rhode Island General Assembly ensured that the findings and recommendations were used in the legislation governing the separation of Quonset from the RIEDC.

Quonset now has a strong, depoliticized, professional board that conforms to governance best practices.

Subsequent to the efforts at Quonset, the corporate counsel of Beacon retained the authors of this letter to investigate that company's corporate strategy and business practices, as well as the regulatory environment in which it operates.

Over a 100-day period, we conducted over 30 interviews with Rhode Island employers, injured workers, workers' compensation lawyers, Rhode Island Workers' Compensation Court officials, local insurance brokers, actuarial consultants, and strategic partners of Beacon. We also undertook a quantitative analysis that investigated the dynamics of the Rhode Island workers'-compensation-insurance market to assess whether Beacon was engaging in any practices that might be construed, from an economic perspective, as anti-competitive.

Moreover, we investigated the history of the workers'-compensation-insurance market in Rhode Island in the late 1980s, before Beacon's establishment.

Our findings indicate that during the late 1980s and early 1990s, before Beacon was established, the market for workers' compensation insurance in Rhode Island was in chaos. Most employers in the state were forced into an assigned-risk pool, insurance premiums were spiraling out of control, and market incentives for workplace-safety practices were nonexistent.

We also found that Beacon has not been acting as a monopoly. In fact, the firm has cut workers'-compensation-insurance rates dramatically. Beacon has not increased workers'-compensation-insurance rates in over 12 years. Our quantitative analysis concludes that Beacon does not earn a rate of return above its cost of capital, indicating that the firm is not earning monopolistic economic rents. We discovered that there are at least 20 insurance companies able and willing to write workers'-compensation insurance in Rhode Island should Beacon increase premiums to earn excessive economic rents.

We found that Beacon has established a set of clear, rational and predictable market incentives that encourage Rhode Island employers to embrace safety engineering and use loss-prevention education. These services, provided by Beacon's extensive loss-prevention staff, have reduced workplace injuries dramatically. Over the past 10 years, workdays lost and job-related injuries in Rhode Island have declined 48 percent and 25 percent, respectively. Clearly, the effects of free-market policies used by Beacon have resulted in a favorable outcome for the state and the public.

As part of our findings, we recommended that Beacon relinquish its exemption from the state tax on insurance premiums, that Beacon be afforded relief from paying fees (at $400,000 a year) to a Boca Raton, Fla.-based workers'-compensation rating bureau, the National Council on Compensation Insurance (NCCI), and that the Beacon board be depoliticized (currently, the majority of its board is composed of political appointees). This last suggestion corresponds to the spirit of the recommendations for Quonset.

Thus, we are perplexed. Why would a Republican administration oppose enhancing the free-market forces that would ensure Beacon's continued success, enable the company to expand regionally, create jobs in Rhode Island, and increase state tax revenue? There is nothing contained in the new proposed legislation that would diminish the Rhode Island Department of Business Regulation's oversight of Beacon. This supervision, reinforced by pressure from potential competitors, has been quite effective during the past 12 years.

We can only conclude that Governor Carcieri has not heeded the advice of his key economic advisers, and that the governor's office has not taken the time to thoughtfully review our findings. Governor Carcieri's position on the Beacon legislation is not consistent with his positions on Quonset, and is not in line with the normative free-market positions that are the bedrock of Republican economic philosophy.

To an outside observer, it would appear that the Democratic leadership in the State House is in favor of the free market, while the Republicans are not.

George Borts is a professor of economics at Brown University, where he specializes in the economics of regulation. He is also the former editor of the American Economic Review. Prof. Dennis Michaud, also at Brown, specializes in corporate governance and the economics of strategy. Kate Magarama is a research analyst for the Brown University Corporate Governance Initiative. Laura Goodman is a research analyst for the American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies, in Washington.

This opinion is that of the authors alone and does not necessarily reflect the views of Brown University.