fund facts II V BULLETIN OF COMPENSATION NEWS VND INFORMATION :: PUBLISHED BY THE STATE COMPENSATION^INSURANCE OF THE STATE OF CALIFORNIA APRIL, 1920 Though I may not be able to inform men more than they know, yet I may give them occasion to consider. Sir W. Temple. UNIVERSITY OF CALIFORNIA. ANGELES SEP 26 1952 LIBRARY GOVT. PUBS. ROOM FOREWORD This Bulletin is sent to California employers in the belief that those who are Fund policyholders will profit by a better understanding of the working of the cooperative institution to which they have entrusted their compensation risk, and in order that those who are not policyholders many have a better opportunity of judging state insurance under the California plan. It can hardly be expected that competitors of the Fund will present a true picture of the situation, and whether or not advantage is taken of the opportunity afforded for material say- ing in insurance cost, it is hoped that no recipient will fail to become acquainted with FUND FACTS. State Compensation Insurance Fund OF THE STATE OF CALIFORNIA EXECUTIVE OFFICES : Underwood Building, 525 Market Street, San Francisco BRANCHES: California Building, Second and Broadway, L,os Ange!e Forum Building, Sacramento Rowell Building, Fresno First Savings Bank Building, Oakland Spreckels Theatre Building, San Diego FUND FACTS A Bulletin of Compensation News and Information Edited by C. W. Fellows, Manager STATE COMPENSATION INSURANCE FUND RATING COMPENSATION RISKS MISINFORMATION regarding the origin of California compensation rates seems to be the rule rather than the exception. Since every employer is vitally interested in the subject, let us lift the veil of mystery which has seemed to sur- round this rate-making process. Heretofore the only national center for rate making was the National Workmen's Compensation Service Bureau, in New York. As that bureau was a purely stock insurance organization, and represented solely the stock company viewpoint in compensation insurance rating and practice, it could hardly be hoped that the interests of other insurance carriers, or of employers themselves, could be properly safeguarded in its rating procedure. The first outgrowth of dissatisfaction was the formation of a more repre- sentative body known as the Standing Committee on Workmen's Compensation and an advisory committee known as the National Reference Committee. The National Council on Workmen's Compensation Insurance was later organized, but until the fall of 1919 this council was advisory only and without machinery for constructive work in the establishment of rates. In September, 1919, a reorganization of that council was effected, and practically all compensation insurance carriers throughout the country became affiliated therewith. A complete actuarial and statistical organi- zation for the collection and study of statistics was employed and nonpartisan committees were elected to carry on the work of finally developing rates for all states. That work is now going forward and it is expected that a complete revision of California rates will be undertaken shortly. In this work the combined experience of all states will probably be employed for those classifications where the local experience is not sufficiently extensive to be indicative of future costs, but modification factors will be used to meet the pro- visions of the California law and local conditions. It should be remembered that any schedule of rates and classifi- cations proposed for California will be subject to the final approval of the Insurance Commissioner before becoming legally effective. With a nonpartisan body in control of basic rate promulgation and p. g e Two FUND FACTS the requirement for the California Commissioner's approval, after consideration in the light of local experience and conditions, there is no likelihood of exorbitant rates being established. The California law requires that any rate schedule approved for California shall be uniform for all carriers and the rates must, therefore, carry sufficient expense loading to meet the expense requirements of corporate insurance. The overhead expense of the State Compensation Insurance Fund is less than one-third the expense of corporate companies, and this saving, as well as under- writing profit and investment earnings, is returned to Fund policy- holders through dividends. In several eastern states it has been found that the increase in the average wage of industrial workers (premiums for insurance being computed upon workers' earnings) has resulted in an unusual profit for the carriers, especially during the past two years. This for the reason that compensation benefits have not increased in proportion in those states. There is grave doubt as to whether this applies to California because, while wages have increased, ah additional liability has been imposed through the reduction in the waiting period, the requirement for contribution to the Reha- bilitation Fund .in death cases with no dependency, the added cost for industrial disease, etc. This additional loss cost has been absorbed without any increase in the legal rates, the manual of rates now in effect having been adopted prior to this increase in liability under the law. At this point the reader should be reminded that the companies holding membership in the National Workmen's Compensation Service Bureau arbitrarily increased their charges on January 1, 1918, by an average of five per cent over the legally approved rates (to meet "war costs," so-called) after failing to secure approval of a general rate increase. The companies continued these increased rates in effect during all of 1918 and the greater part of 1919, while the Fund continued to charge only the legally approved rates. At present, statistical study has not progressed to a point where it can be said that the revised California rates will represent an average increase or an average decrease, but it is known that there are some inequities in the present schedule which are subject to correction. It is entirely safe to assume, however, that the rates finally developed will represent the best actuarial and statistical effort which can be put forth. The California Inspection Rating Bureau is an organization composed of all classes of insurance carriers operating in California. That bureau interprets the manual rules and proposes changes for the approval of the Insurance Commissioner from time to time. FUND FACTS P. 8 e Three It also inspects risks subject to merit (or schedule) rating and publishes the net rate applicable for the uniform use of all carriers. A card notice showing this net rate for each merit ratable risk is sent to all carriers simultaneously and the notice indicates the date upon which the net rate becomes effective. This bureau also checks copies of all policies issued by the carriers and is charged with the responsibility of seeing that the legal rates are applied in each instance. The business of the State Compensation Insurance Fund increased by more than a million dollars in 1918 and, again, by over three-quarters of a million dollars in 1919. WHAT IS STATE INSURANCE IN CALIFORNIA? THE SIMILE for a "Boomerang" is the "Chicken that Comes Home to Roost." IT has been said that patronage which tends to make state insurance successful may be the "boomerang" to drive the employer out of his own business through encouraging state competition in business generally. The presentation of that argu- ment sends forth the "chicken" on his "boomerang" flight. At first glance his plumage dazzles. When viewed more closely in associ- ation with his ORIGINAL SOURCE he is a drab bird minus tail feathers, spurs and all other regalia. If we look for the MOTIVE behind the argument we find it is SELF-INTEREST and not the employer's interest which prompts it. Let us go to the bottom and see just what interest the state actually has in this business of insurance : We find that the Legislature appropriated $100,000 to start the Fund; it provided that the Fund should be "fairly competi- tive," that it should be "self-sustaining," and that the state should not be liable beyond the amount of the fund appropriated. In short, the state simply took the initiative in organizing and pre- senting to California employers a medium through which they might cooperate in distributing their compensation losses on a mutual basis and under a scientific reserve system instead of an assessment plan. The very foundation of insurance rests upon the principle of "mutuality." There can be no scientific distribution of the world's adversity without a wide distribution of premium payment and risk exposure to equitably apportion the cost to each P. ge Four FUN?D FACTS one insured. If the true mutual principle is followed out there should be no more contributed than the actual amount neces- sary to meet the losses and expenses. Corporate insurance entered the field with the sole idea of collecting and retaining more than necessary to pay the losses and expenses in order to derive a profit from the undertaking. This may be a legiti- mate field of corporate enterprise, but for corporate insurance to take the "holier than thou" position and point to mutual insurance sponsored by the state as "radical," "socialistic," etc., is just about as consistent as to say that employers or others should not be per- mitted to affiliate with any association for their common protection and good, but should leave such interests to a third party for his pecuniary gain. It would also seem as consistent to say that the state, as an association of citizens, should be enjoined from build- ing highways for common use and economy in private and com- mercial transportation. As a matter of cold fact, the State of California, as such, is not actually engaged in the insurance business, because it does not pay the expenses of conducting the business and derives no profit what- ever from the transactions of the Fund. The assets of the Fund, beyond the reserves for paying losses incurred, are the property of the policyholders. The original appropriation is still intact and the Fund is paying interest to the state thereon. The State Compensation Insurance Fund exists solely as a mutual insurance institution for cooperative protection of Cali- fornia employers and employees, without liability on the part of employers beyond the premiums paid. These premiums carry the necessary loading for emergencies and the excess over the actual amount required is returned in dividends to policyholders. The Fund is, therefore, nothing more nor less than a mutual association with which California employers may or may not affiliate at their pleasure. Can you see anything "radical" in that? INCREASE IN INITIAL DIVIDEND THE initial dividend on policies issued by the Fund in the year 1919 has been increased to seventeen and one-half per cent. This dividend, which is a flat percentage, is being paid to each policyholder as the policy expires and actual earned premium is ascertained. Heretofore the initial dividend to Fund policyholders has been based upon an average return of fifteen per cent and has been FUND FACTS apportioned in accordance with the loss ratio of each individual risk, with a maximum of seventeen and one-half per cent and a minimum of ten per cent. Experience under this plan has demonstrated that inequities have occasionally resulted. It is impossible to determine the actual loss ratio of each risk at the end of a year or at policy expiration, because many of the open claim cases have not then progressed to a point where the actual incurred loss can be definitely determined. As the initial dividend really represents a saving in overhead alone, it has been decided that in future the initial dividend will be appor- tioned as a uniform percentage of the premium for each risk. Final dividends, payable when the difference between the legal loss reserves and the actual losses is released to surplus, represent underwriting profit and the final dividends are to be apportioned in accordance with the experience under each policy. (Average savings effected for policyholders through dividends paid by the Fund OVER THIRTY PER CENT maximum 38.5 per cent, minimum 10 per cent.) Dividends are not paid under Policies earning only the "minimum premium." Policies where the Insured has allowed premium due the Fund to remain flagrantly delinquent. Policies where premium collection has been enforced through legal proceedings. CHARACTER THE English servant girl seeking a "situation" is in a bad way indeed if she can not carry a letter of recommendation, which she terms a "character," from her previous employer. It has always been the practice, in solicitation of business for the Fund, to refer prospective insurance buyers to "any employer having had experience with the Fund." Commendatory letters have never been sought, but it is a source of gratification that the files contain many hundreds of such letters, sent voluntarily by policyholders. Such a letter was received from one of California's largest employers while "copy" for this issue was being prepared and we take the liberty of reproducing it below. The name of the insured corporation will be furnished any one interested upon request. Page Six FUND FACTS Dear Mr. Fellows: It has occurred to me that perhaps you would be interested in knowing that from time to time we are asked to give other companies our opinion as to the service and benefit to be derived from insurance with the State Compensation Fund; we were asked to give such recommendation just a day or so ago, and I am enclosing herewith copy of our reply, as well as a reply to a previous request, which comes to my mind just at the moment. It always gives us pleasure to be able to give these recom- mendations, as we feel that your service gives us ample justi- fication to do so. EXTRACTS FROM LETTER TO INQUIRER: "Our dealings with the said Fund to date have been of the very best." "We have found that the injured man has always been given the benefit of any doubt." "Service has been very prompt and free from the lengthy cor- respondence prevalent in previous insurance." "Our refund on premiums has been as high as 37 per cent." MR. EMPLOYER: The agent or broker takes twice as much of your valuable time in taking your application for an insurance company as you would spend in submitting application direct to the Fund. You are also charged with the time of the agent or broker through expense loading in your rate. You can "win" two ways by placing your application direct with the Fund save your own time and save the unnecessary overhead represented by commission to agent or broker. HOME INDUSTRY THE Home Industry League of California, we understand, is engaged in the business of promoting California industry and is encouraging the use and consumption of California products. From the viewpoint of all true citizens, that should be a worthy pursuit. In this same connection, what becomes of the premiums paid for compensation insurance by California FUND FACTS PageSeven employers? In the report of the Insurance Commissioner for the year 1918 we find that thirty -three insurance carriers were com- peting for compensation business and that only three were Cali- fornia institutions, including the State Fund. The total premiums amounted to $8,569,904.93, of which $5,772,157.95 was sent away from California $2,875,041.72 going to corporations of foreign countries (this does not include American companies owned by foreign capital). Of the amount retained in California, the Fund wrote $2,459,086.08, and its entire assets available are now invested solely in California municipal bonds and United States liberty bonds. The investments of the State Compensation Insurance Fund since its organization in 1914 to February 2, 1920, have aggre- gated $3,854,962.50. The Fund contributed to the "win the war" program by invest- ing $1,330,000 in the five United States liberty loans and to the general upbuilding of the state by the investment of $2,524,962.50 in securities of the State of California and political subdi- visions thereof. An analysis of the investments shows the ownership of all or part of eighty different California issues, state, county, city, school district and irrigation. Investments have been made in three issues of state bonds, twenty-seven municipal issues (city or county), forty-nine school district issues and one irrigation issue. The moneys of the Fund have been invested in securities issued by twenty-four of the fifty-eight counties and bids have been placed for securities issued in practically every county in California. If California employers need any incentive other than insurance at net cost to prompt them in patronizing "home industry" we respectfully offer the above figures for what they may be worth. A letter or postal card giving name, address and nature of busi- ness will bring you full particulars also a binder if desired. A telegram will do the same if your requirements are urgent. Every Fund policyholder has a direct interest in increasing the business of the Fund for increased business means decreased over- head and greater dividends. Tell your friends of your savings through Fund insurance. p aB eE, g ht FUND FACTS NEW QUARTERS IN LOS ANGELES The growth of the business of the Fund in southern California has necessitated additions to the staff and larger quarters for the Los Angeles organization, headed by Mr. H. B. Humphry, Branch Manager. A large suite of offices has been leased on the fourth floor of the California Building, Second and Broadway, and the new quarters were opened for business on February 1, 1920. Employers in that district are cordially invited to call or write to the Los Angeles office for any information desired concerning compensation insurance, whether or not insurance is carried with the Fund. Most careful and courteous attention will be given to all inquiries. Insurance with the Fund provides the best protection obtainable and at lowest cost. If contrary statements are made by persons seeking your patronage, or others, please insist that such statements be reduced to writing; then give us an opportunity to reply and we will give you FACTS ONLY. UC SOUTHERN REGIONAL LIBRARY FACILITY A 001 320 394 8 The United State* government has adopted, as a permanent policy, active propagation of the national Thrift and Savings movement inaugurated during the war. No single heritage of our victory is fraught with such promise of lasting good to America as is this movement under direction of the Treasury Department, and it gives us pleasure to cooperate with our government in advocating Thrift and con- tinued investment in government securities. SAVINGS and INSURANCE are both protective measures which every man and woman should employ as opportunity affords. Will you therefore help stimulate in your community and among policy holders these Thrift principles? Increase production as a basis for larger individual earnings. Save systematically a part of all income received at the time it is received. Spend wisely and avoid extravagance. Invest savings promptly. Hold government securities now owned, as a mat- ter of good citizenship as well as personal advan- tage- Increase holdings of government securities, because a dollar thus invested releases a dollar for business expansion, which means general prosperity. The government provides a ready way to save through the 25-cent Thrift Stamp, the $5 War Sav- ings Stamp, the $100 and $1000 Treasury Savings Certificates and the Liberty Bond. These securities are on sale continually at all banks. Thrift and War Savings Stamps and $100 Treasury Savings Certificates can also be obtained at post offices. War Savings Stamps and Treasury Savings Certifi- cates pay 4 per cent interest, compounded quarterly. We will be glad to have you cooperate in every way to develop the habit of regular saving and safe investment as a great national force making for busi- ness stability and progress, as well as a practice of direct benefit to the man who saves. We urge you to give the widest publicity to these facts.