Document Yj24Lqm6rGE1D4YMv1xx9Rj4y

8--Workmen's Compensation Insurance account the general occupational classifica tions ot industrial activities of the insured About 15 percent of the employers, paying about 85 percent of the premiums, are ex perience rated That is, their premiums are modified to reflect their loss experience in the past relative to others m the same class Also, the statistical reliability of that experience is taken into account, the larger the business, the more credible its experience Since em ployers with a small number of workers are likely to experience volatile changes m injury rates from year to year, only employers of large numbers arc expenence rated Another factor in the premium setting pro cedure is that discounts are given according to the size of the risk, this is an advantage to large companies Their rates thus reflect the economies of scale which result from spread ing certain fixed costs over a larger amount of premium Finally, large companies by retrospective rating may have their premiums adjusted at the end of a policy year to match their actual expenence Most insurers use rates developed by a rating bureau In some states, the rates de veloped by the bureau are mandatory, in others, advisory only Almost half the pre miums are written on a participating basis Participating policyholders receive periodic dividends that reflect insurer expenence and sometimes their own Financing self-insured benefits Firms that cover workmen's compensation risks through pnvate insurance companies or state funds pay a premium in advance In contrast, self-insurers have several options for financing They may simply pay for liabili ties as they are experienced, directly from operating funds, or they may provide some advance funding m one or more ways In those states requiring deposits of funds by selfinsurers, part or all of the funding for out standing liabilities is provided for in advance mandatonly Even if not requned, a selfinsurer may set aside reserves, or even formally insure its risk through a wholly owned sub sidiary insurance company created for this purpose Such advance funding prevents severe dis ruptions in cash flow from unforeseen loss experience oi accumulated liabilities Insurer administrative costs One of the recurring issues in evaluating workmen's compensation is the financial ef ficiency of the insurance mechanism for pro viding benefits A major part of the issue is the comparison between private and state fund insurance The premiums collected by pnvate insurers aie used not only to pay benefits but also for expenses associated with claims such as in vestigation and legal fees, for sales, supervi sion, and collection, for administration, for safety programs, and for taxes, licenses, and other mandatory fees as well as for earnings In 1970, stock insurers that do not pay divi dends to policyholders had expenses totaling 31 percent of premiums earned, their under writing gain was 5 percent of premiums paid For stock insurers that pay dividends to pol icyholders, the expense ratio was 25 percent, the underwriting gain, 14 percent Mutual insurers had an expense ratio of 24 percent and an underwriting gain of 13 percent The dividend-paying stocks and mutuals returned part of their underwriting gam to their policy holders In addition to their underwriting gains, these insurers had investment profits State funds have much the same costs as private insurers with these exceptions lower (or no) taxes and fees to the state govern ment, no margin for private profit, and lower selling costs Consequently, although the variation among individual funds is great, ex penses have averaged less than 10 percent of total premiums paid, well below the ratio for pnvate insurers Some state funds incur smaller expenses for administrative and legal services, which may be financed from other government funds On the other hand, state funds m some instances may insure greater proportions of high-nsk companies than pnvate earners and incur proportionately heavier charges for benefits Other administrative costs Another aspect of financing workmen's com pensation relates to the cost of supporting the public agenev that administers the program The cost of operating the industrial commis sion (or other admimstenng agency) is borne either by assessments upon insurers and selfinsurers or through appropnations from public 184