Presumably, the insurance companies will be strongly motivated to teach their clients how to stay out of trouble.
Why? If your clients don't stay out of trouble, you get free indentured servants. It seems to me there is incentive to make it harder to stay within the confines of your contract.
The indentured servants aren't free and probably aren't profitable. These are people who can't make enough money on the open market to pay their premiums, so it seems unlikely that the workhouse will be able to generate more profit per worker than that. Given that insurance companies will lose money for everyone that converts from paying premiums into a workhouse laborer, they'll be highly motivated to get them back into the real world with a job, modulo the risk of them getting into trouble and causing another fine. So I don't see the incentive you mention to get them to break the contract.
It's more than that. The requirement to have such a contract with an insurance company gives people an incentive to not engage in behaviors that will make it more expensive for them to obtain such a contract, just as the requirement to have auto insurance in order to drive gives people an incentive to not engage in behaviors that will make it more expensive for them to obtain such insurance.
