Determinants in Risk-Financing Choices : The Case of Workers Compensation for Public School Districts

Previous research into workers compensation risk-financing choice has considered only the alternatives of risk transfer in the form of full insurance and risk retention the form of self-insurance. However, self-insurance is only one of two forms of risk retention. How determinants influence the choice of the other form of risk retention, the large-deductible plan, was not examined in prior research. This study empirically examines all three risk-financing choices for public entities, using a sample of Texas school districts and their workers compensation coverage decisions. It finds that some determinants contribute differently to the two risk-retention choices: severity of loss, cost of insurance, and size of firm influence the choices of these two programs in opposite directions, relative to the choice of full insurance. Also, cost of insurance and frequency of losses were found to influence the choice of full insurance in the opposite direction from that expected. That these findings fail to agree with expectations suggests a need to refine the theory to differentiate between the two risk-retention programs, especially for public entities