Workmen’s Compensation Funds

admin — Mon, 05 Jan 2009 20:30:49 +0000

Workmen’s compensation funds existed in 18 states in the beginning. In seven of these states, the fund was monopolistic; that is, every employer operating under the workmen’s compensation act was required to insure in the fund. In two of these seven states, self-insurance was permitted under certain conditions. In the remaining 11 states, state funds operated side by side with private carriers in competition for business. In these states, however, the state funds usually had a monopoly on the insurance of public corporations.

The state funds were usually under the control of the same state board or commission which administered the workmen’s compensation act. The monopolistic state funds usually wrote only nonparticipating life insurance policies, whereas the competitive state funds wrote their insurance on a participating basis. In the monopoly funds, good experience simply meant lower rates in the future.

Monopolistic state funds obviously had little or no business-acquisition expenses. Competitive state funds had to actively solicit business. This was done by salaried employees. State funds did not use commissioned agents or brokers.

The state funds themselves had to be self-supporting from premiums collected. They did not have access to the general treasury of the state to bail themselves out. This lack of access to the general treasury was not an adverse factor, since the state funds appeared strong enough to withstand unusually excessive losses. State funds differ from state to state.

The bases of the differences center around: (1) whether they were taxed, (2) whether they were subject to the same rate regulations as private companies, (3) whether they were subject to the deposit-of-securities regulations of some states, (4) their freedom in risk selection, (5) how their expenses were regulated, and (6) the types of risks they were permitted to carry. To make a comparison among all eighteen state funds upon these bases would have in itself fill a volume. It is sufficient here simply to recognize that major differences did exist.

Unemployment insurance funds were created by the individual states after the passage of the federal Social Security Act. The impetus came from the federal act itself. The federal social security tax was so arranged as to encourage the states to pass unemployment compensation legislation. The federal government levied a tax on payrolls but provided that, if the employer had to pay a similar tax to the states for an approved unemployment no exam life insurance plan, he could credit this tax against the federal tax up to a limit of 90%.

Thus, he could charge up to 2.7 % in state taxes against the federal tax of 3%. Since the employer would be required to pay the tax anyway, it was to the advantage of the state to pass an approved act and thus provide benefits for the home folks. The costs of administering the state unemployment compensation laws were met by the federal government by grants-in-aid to states from a fund created by that part of the payroll tax which is not deductible. (All but 10 % was deductible.)

Thus, the states did not even have to bear the burden of financing the administration of the plan. Moreover, the states had no problem in the investment of the unemployment compensation funds, since one of the requirements for approval of the plan is that the federal authorities would have charge of investing the fund.

Unemployment compensation acts varied from state to state. In every state, however, the plan was financed by taxes on payrolls; and benefits were limited to the covered unemployed who were ready, willing, and able to work and who reported regularly to the public employment office. The benefit structure contained a minimum and a maximum indemnity and a required waiting period.

Disability or sick benefit funds were then set up in several states. Rhode Island was the first state to establish this type of fund. When that state designed its unemployment compensation system in 1936, it charged a 1.5% tax on employees in addition to the tax on employers.

These taxes brought in contributions in excess of need, so that heavy surpluses were quickly amassed in the unemployment compensation fund. In order to reduce these surpluses, a proposal was made in 1942 that the employees’ tax be eliminated. Instead, the final decision was to continue the tax and apply two thirds of it to build a sickness life insurance fund. Accordingly, Rhode Island passed its compulsory state sickness insurance law and set up its monopolistic state sickness fund, which began paying benefits in April, 1943.

The Insurance Needs of the People as a Whole

admin — Wed, 05 Nov 2008 14:59:03 +0000

What was behind the extraordinary success of the Metropolitan Life Insurance Company’s ordinary business plan? In the interplay of a number of fortunate factors, probably the most important was the wise decision of Mr. Fiske to concentrate on the insurance needs of people of moderate means through the issue of ordinary policies on the nonparticipating plan.

This was a complete departure from the prevailing practice of the leading mutual companies, which issued high priced policies coupled with extravagant promises of huge dividends. The Metropolitan took a firm position against the issuance of tontine or semi tontine policiesthat is, policies under which the dividends were deferred for a period of years, usually 20, and in which claims paid within the period did not share in the surplusboth a temptation and a gamble.

In announcing its return to ordinary business, the life insurance company formulated a principle which during the early years passed as its Creed:

“The Metropolitan believes the time has come when the plain, commonsense men who make up the bulk of the life insurance policyholders are looking for a plain business contract. By plain business contracts we mean those which tell their whole story upon their face; which leave nothing to the imagination; borrow nothing from hope; require definite conditions and make definite promises in dollars and cents.”

This decision was particularly opportune because of the character of the group among whom the agency force was operating. The Metropolitan organization then consisted of more than 4,000 agents working under the direction of nearly 700 superintendents and assistant superintendents in the leading population centers of the United States and Canada. Through industrial low cost life insurance they had already established close and cordial contacts with millions of peopleworking folk and small businessmen who had been almost entirely neglected by the leading life insurance companies.

As the country prospered and working conditions improved, more and more of these people were ripe for ordinary insurance, if it could be had at low cost; and obviously they would be interested in sound protection rather than in speculative “tontine” promises. Furthermore, the very character of the company’s sales organization made the decision all the more practicable.

The Metropolitan agent was constantly in the field reaching large numbers of people in all walks of life, rather than canvassing a small group of well to do businessmen, as did the usual ordinary agent. Perhaps more important was the fact that he was working full time for the company and already receiving an income from his industrial business.

Moreover, the Metropolitan agent, in constant contact with his prospects and policyholders, could service the different types of insurance better than the ordinary agent and help keep it in force. The company was careful to provide in its agency contract that commissions would be paid only to the men who either wrote or serviced the business. If a man left the employ of the company, all renewal commissions ceased. Under prevailing arrangements with general agents as practiced by purely ordinary companies, the man who wrote the policy received renewal commissions as long as the business was in force, even though he was not in a position to service it.

In the Metropolitan, on the other hand, the company retained the same degree of control over its ordinary as over industrial insurance, and the plan of compensation recognized not only the writing agent but also any other who might subsequently be entrusted with the care of the business on the debit. The result was to produce a close and mutually useful relation between the agent and his policyholders, which helped to keep the insurance in good standing and subject to continuous review as to adequacy.

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Workmen’s Compensation Funds

The Insurance Needs of the People as a Whole