OAK ST. HDSF 
 
ANSWER OF 
 
 State Industrial Commission 
 
 TO 
 
 THE REPORT 
 
 OP 
 
 JEREMIAH F. CONNOR 
 
 Moreland Act Commissioner 
 
 ON 
 
 STATE INSURANCE FUND 
 
 ALBANY 
 
 J. B. LYON COMPANY, PRINTERS 
 1919 
 
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 https://archive.org/details/answerofstateindOOnewy 
 
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 A/<3-89 a. 
 
 ANSWER TO REPORT OF JEREMIAH F. CONNOR 
 
 July 9, 1919. 
 
 Hon. Alfred E. Smith, Governor of the State of New York, 
 Albany, N. Y.: 
 
 Dear Sin.— Under date of June 7th the State Industrial Com¬ 
 mission received a communication from you transmitting a copy 
 of a report on the State Insurance Fund by Jeremiah F. Con¬ 
 nor, Esq., commissioner appointed under the provisions of the 
 Moreland Act to investigate the management and affairs of the 
 State Industrial Commission. After careful consideration by 
 the Industrial Commission of the various criticisms and sug¬ 
 gestions contained in the report of your Commissioner the In¬ 
 dustrial Commission instituted an investigation, and in conjunc¬ 
 tion therewith adopted a resolution referring the report to the 
 manager of the State Insurance Fund with instructions to submit 
 to the Commission as speedily as possible a statement regarding 
 the various matters referred to therein. 
 
 On July 2d the manager of the State Insurance Fund sub¬ 
 mitted to the Industrial Commission a comprehensive statement 
 in which he quotes and makes answer to every charge, statement, 
 and recommendation contained in the report of the commissioner 
 appointed under the Moreland Act. This answer of the manager 
 of the State Insurance Fund is attached hereto as a part of the 
 report of the State Industrial Commission of its administration 
 of the affairs of the State Insurance Fund, and we respectfully 
 commend to your consideration his categorical answers to and 
 explanations of all matters referred to in the report of the More¬ 
 land Act Commissioner. 
 
 In preparing its report the Industrial Commission assumes that 
 you, as Governor of the State of Mew York, are vitally interested 
 in ascertaining whether or not the State Insurance Fund is 
 efficiently and honestly administered; whether or not the fund is 
 solvent beyond all question of doubt and whether or not injured 
 workmen or the dependents of workmen who have been killed are 
 
4 
 
 State Insurance Fund 
 
 receiving and are certain of continuing to receive the fuii amount 
 of compensation and benefits they are entitled to under the law; 
 whether or not employers are paying higher premiums for insur¬ 
 ance in the State fund than are required to meet incurred losses, 
 to set up adequate reserves, and to pay expenses of administration; 
 whether or not the system of grouping is lawful, and whether or 
 not the methods of crediting and distributing dividends, when 
 earned, are legal and sound as matters of efficient administration. 
 
 In order that the present status of the State Insurance Fund 
 may be fully and accurately understood it is necessary to review, 
 briefly, the history of the establishment and existence of the 
 fund, its growth, its resources, and the embarrassments under 
 which it has labored from its inception. 
 
 The present Workmen’s Compensation Law, which provides for 
 the establishment of an insurance fund, was first enacted at the 
 extraordinary session of the Legislature in December, 1913. 
 Owing to some question as to the legality of this action the law 
 was re-enacted at the regular session in January, 1914, and 
 although originally intended to become effective on January 1, 
 1914, so far as the creation of a compensation commission was 
 concerned, was not approved by the Governor until March 16, 
 1914. The members of the State Workmen’s Compensation Com¬ 
 mission were appointed by the Governor on March 20th and 
 qualified on the 24th day of that month. The first meeting of 
 the Commission was held on the 31st of March. At this time and 
 for some time subsequent thereto the Workmen’s Compensation 
 Commission had no employees, no offices, and no organization, and 
 it was not until the 8th day of May, 1914, that a man satisfactory 
 to the Commission was found to fill the position of manager of 
 the State Insurance Fund. 
 
 Our purpose in reviewing these events is to emphasize the fact 
 that while the provisions of the law requiring the payment of 
 compensation and death benefits and compelling employers to 
 carry workmen’s compensation insurance became effective July 1, 
 1914, the Workmen’s Compensation Commission was unable to 
 set in motion the machinery which would permit it to sell work¬ 
 men’s compensation insurance until May (less than two months 
 prior to the date upon which the compulsory features of the law 
 went into effect), whereas private insurance companies had the 
 
Answer to Report of Jeremiah F. Connor 
 
 5 
 
 opportunity of soliciting and selling compensation insurance from 
 the day the law was first enacted. The result was that the whole 
 field had been canvassed and large volumes of business secured 
 by private companies prior to the date upon which the members 
 of the Workmen’s Compensation Commission were appointed and 
 long prior to the date upon which it was possible for the Com¬ 
 mission, when appointed, to create an organization to manage 
 and operate the State Insurance Fund. 
 
 Despite this manifest handicap in securing business, the State 
 Fund has shown in each year a substantial increase in net pre¬ 
 miums written, as will be seen by the following table: 
 
 Net 
 
 Year ending Dec. 31 Premiums Written 
 
 1914 (six months’ business only). $689,764 94 
 
 1915 . 1,293,613 15 
 
 1916 . 1,892,561 27 
 
 1917 . 2,694,851 17 
 
 1918 . 3,332,841 88 
 
 Total .:. $9,903,632 41 
 
 As indicated above, during the entire period from July 1, 1914, 
 to December 31, 1918, the aggregate net premiums written by 
 the State Fund were $9,903,632.41. During the same period 
 dividends to policyholders were earned and credited in the sum 
 of $968,003.47, and there was reserved for dividends $235,558.19, 
 making a total of dividends declared, credited, and reserved of 
 $1,203,561.66. In addition thereto the State Fund has accumu¬ 
 lated a catastrophe surplus of more than one-half a million dollars. 
 
 From the foregoing, and as attested in the report of the com¬ 
 missioner appointed under the Moreland Act, it will be seen that 
 the State Fund is in an absolutely sound financial condition. 
 
 The members of the Workmen’s Compensation Commission 
 and of its successor, the State Industrial Commission, have had 
 an especially keen appreciation of the responsibility resting upon 
 them with respect to the affairs of the State Insurance Fund. 
 When the fund was established it had no capital or assets; the 
 State did not provide any moneys which could be utilized for the 
 payment of compensation claims; the only subsidy granted by 
 the State was an obligation to pay for the first two and one-half 
 years of the fund’s existence the salary of the force and the 
 expenses necessary to administer its affairs — and even this sub- 
 
6 
 
 State Insurance Fund 
 
 sidy was withdrawn at the end of two years. The members of 
 both of these commissions felt, and the Industrial Commission 
 now feels, that the security of injured workmen and of the depend¬ 
 ents of workmen who are killed is a matter of primary and funda¬ 
 mental importance. The obligation to protect and safeguard the 
 interests of the victims of industrial accidents can be discharged 
 only by setting up reserves of unquestionable adequacy. This 
 the manager of the State Insurance Fund has done, with the full 
 approval and authority of the State Industrial Commission. 
 
 As is indicated by the attached report of the manager of the 
 fund, the years 1916 and 1917 were years in which all insurance 
 carriers had adverse experiences. As a matter of fact, many 
 insurance carriers, and perhaps all stock companies writing com¬ 
 pensation insurance, lost money. The State Fund suffered with 
 other insurance companies. The year 1918 was a period of 
 unparalleled industrial and commercial activity; wages and pay¬ 
 rolls rose to unprecedented heights; industrial accidents, we are 
 proud to report, decreased in number and severity; the result was 
 that all insurance companies, including the State Fund, earned 
 large profits; dividends to policyholders in the general groups of 
 the State Fund -— which had been suspended in 1916 and 1917 — 
 were resumed, but, as shown by the report of the manager of the 
 fund, the dividend declarations which were made in the beginning 
 of 1919 for the policy period ending December 31, 1918, were 
 not as large as the Commission would have been justified in 
 declaring could it have foreseen the return to normal industrial 
 conditions so speedily following the termination of the war. 
 
 We submit that no man or set of men charged with the respon¬ 
 sibility resting upon the State Industrial Commission could have 
 justified their action had they, during the uncertain period follow¬ 
 ing the signing of the armistice and preceding the signing of the 
 treaty of peace, disbursed in the form of dividends all the surplus 
 earned under the extraordinary industrial conditions which 
 obtained during the year 1918. However, now that the treaty 
 of peace has been signed and now that normal industrial and com¬ 
 mercial conditions seem assured, the Industrial Commission feels 
 justified in distributing in the form of dividends a larger part 
 of surplus earnings of the various groups than was distributed 
 by its direction in the early part of this year for the policy period 
 
Answer to Report of Jeremiah F. Connor 
 
 ending December S'lst of last year; and steps to this enj have t 
 been taken. 
 
 As the question of first importance is the solvency of the fund 
 and the undoubted adequacy of its reserves, so the question of 
 second importance is the premium which employers should pay 
 to secure insurance in the fund. 
 
 As indicated in the report of the manager of the fund, which 
 report is certified to by the actuary of the Commission, during 
 the years 1916 and 1917 the general groups in the fund earned 
 no surplus, whereas the special groups, with few exceptions, have 
 earned profits each year since the fund was established; and these 
 surplus earnings of the special groups have been distributed to 
 the groups earning them. During the year 1918 all groups, with 
 two exceptions, showed considerable and in some cases large 
 profits, part of which have been distributed in the form of divi¬ 
 dends and a larger part will be so distributed. 
 
 The Industrial Commission has appointed a committee to make 
 an intensive study of the experience of the State Fund with 
 respect to its rates, and should this study satisfy the Commission 
 that State Fund rates—which are now on the average about 15 
 per cent lower than the rates of stock and mutual insurance com¬ 
 panies — could be safely reduced, this rate reduction will be 
 made effective as of January 1, 1920. This revision of rates, 
 should the experience of the State Fund justify a revision, will 
 be made strictly in conformity with the law, which provides that 
 on January 1, 1915, and every fifth year thereafter, and at such 
 other times as the Commission in its discretion may determine, 
 a readjustment of the rates shall be made for each of the several 
 groups of employment or industries and of each hazard class 
 therein which in the judgment of the Commission shall have 
 developed an average loss ratio in accordance with the experience 
 of the Commission in the administration of the law, as shown 
 by the accounts kept. 
 
 In common with all men acting in the capacity of directors of 
 an insurance institution we have, as we should, relied very largely 
 upon the scientific knowledge of our actuary in determining the 
 insurance rate which should be charged employers for coverage 
 in the State Fund. To have disregarded the advice of com¬ 
 petent actuaries would have stamped the Commission as reckless 
 
8 
 
 State Insurance Fund 
 
 and unworthy of public confidence. It is proper, of course, that 
 the Commission should determine the margin of safety after the 
 actuary has determined the rate which is necessary to pay losses 
 and to set up required reserves. And in this connection it is 
 important to remember that the Compensation Law provides that: 
 
 (i The commission shall make reports to the superintendent 
 of insurance concerning the state insurance fund at the same 
 time and in the same manner as is required from mutual 
 employers’ liability and workmen’s compensation corpora¬ 
 tions by section one hundred and ninety-two of the insurance 
 law, and the superintendent of insurance may examine into 
 the condition of such state insurance fund at any time, either 
 personally or by any duly authorized examiner appointed 
 by him, for the purpose of determining the condition of the 
 investments and the adequacy of the reserves of such fund.” 
 
 The fact that the State Insurance Fund labored under great 
 handicaps in securing a large volume of business, or even a reason¬ 
 able share of the business, during the early part of 1914 because 
 it had no organization through which business could be secured 
 and policies issued, resulted in what is termed the best business, 
 from an insurance standpoint, being placed with private com¬ 
 panies. In innumerable instances the State Fund was compelled 
 to accept classes of risks which its competitors did not want or 
 refused to take. Since that time the fund has each year increased 
 its volume of business and, with the exception of the year 1918, 
 has increased the number of its policyholders. In proof of the 
 statement that larger risks are being attracted to the State Fund 
 each year we submit the following table, which demonstrates 
 clearly the transition from an insurer of small risks to an insurer 
 of large risks which has been going on year by year from 1914 
 to the present. In other words, while the average premium 
 income for each policy issued in 1915 was $152.06 the average 
 premium income for each policy outstanding in 1918 was $379.50. 
 
 Average 
 
 Year ending Net premiums Policies premium per 
 
 Dec. 31 written in force policy 
 
 *1914. $689,764 94 7125 $96 80 
 
 1915 . 1,293,613 15 8507 152 06 
 
 1916 . 1,892,561 27 9966 189 90 
 
 1917 . 2,694,851 17 9984 269 91 
 
 1918 . 3,332,841 88 8782 379 50 
 
 * Six months’ business only. 
 
Answer to Report of Jeremiah F. Connor 9 
 
 It is true that in the year 1918 the total number of outstanding 
 policies fell from 9,984 to 8,782. This decrease of approxi¬ 
 mately 1,200 policies in the year 1918 would, unless there were 
 a satisfactory explanation, be a very serious matter. It is not 
 difficult, however, to understand the net loss of approximately 
 1,200 policyholders when consideration is given to the fact that 
 many thousands of employers, especially employers on a small 
 scale engaged in the so-called nonessential industries, suspended 
 operations because there was no demand for their products, or, 
 more particularly, because their employees either entered the mili¬ 
 tary service of the country or were attracted to war industries 
 in which wages were abnormally high. While we do not have 
 access to the records of private insurance companies we neverthe¬ 
 less feel confident that an inspection of the records of all other 
 insurance carriers, competitors of the State Fund, would show 
 a corresponding decrease in the number of policies outstanding 
 for the year 1918. As a matter of fact, the records of the State 
 Insurance Fund show that 49 per cent of the policies cancelled 
 in 1918 were cancelled because the employer had discontinued 
 business; 28 per cent were cancelled because of failure to pay 
 premiums, and only 11 per cent were cancelled because the 
 employer transferred his insurance to other carriers. 
 
 Having considered and recorded our opinions in a general way 
 with respect to the history, management, and condition of the 
 State Insurance Fund and its affairs, we desire to record our 
 opinion and our judgment and to report our action with respect 
 to certain specific matters referred to and in some instances 
 criticized by the commissioner appointed under the provisions of 
 the Moreland Act. 
 
 Under the caption te Collection of Premiums ” the Moreland 
 Act Commissioner states that the State Fund is woefully weak 
 in respect to the collection of premiums on account of cancelled 
 policies. The manager of the State Fund explains that the delay 
 which has occurred in this matter is due to the fact that the fund 
 does not have a sufficient number of payroll auditors and account¬ 
 ants to keep this work up to date at all times during the year. 
 What the manager of the fund states as to his request for an 
 increased force is strictly in accordance with the fact. Hot only 
 
io 
 
 State Insurance Fund 
 
 did the manager of the fund each year request the Legislature 
 to provide additional payroll auditors, but he appeared, with 
 members of the Industrial Commission, at hearings of the Legis¬ 
 lative Budget Committee and urged as strongly as it was possible 
 to do, that the request of the Commission for additional employees 
 for the State Fund he incorporated in the appropriation bill. 
 
 What the Moreland Act Commissioner says with regard to the 
 failure of the American Locomotive Company to pay a balance 
 of nearly $9,000 on account of a policy which it held during the 
 year 1916 is true, and the explanation made by the manager of 
 the fund of the cause of failure to refer the collection of this 
 account to the Attorney-General seems reasonable. While the 
 Commission has no doubt of the willingness of the American 
 Locomotive Company to pay any balance which may be due the 
 fund, it has, nevertheless, directed that an examination be made 
 of all outstanding claims against the State Fund covered by the 
 policy issued to the American Locomotive Company, and when the 
 liabilities of the fund under this policy are ascertained to set 
 up or to modify reserves already set up, in accordance with the 
 requirements, and if it is then found that a balance is due the 
 fund from the American Locomotive Company a final accounting 
 will be asked for. Should the company fail to remit in accord¬ 
 ance with the facts as ascertained the Commission has directed 
 that this result he reported to it, when it will refer the collection 
 of the account to the Attorney-General, in accordance with the law. 
 If, on the other hand, it is found that a balance is due the 
 American Locomotive Company a check for the amount so ascer¬ 
 tained will be forwarded to the company and the account closed. 
 
 Regarding the plan of grouping adopted in the State Fund we 
 desire to say that the question of the legality of the establishment 
 of individual employments as special groups under certain con¬ 
 ditions was submitted several years ago to the Attorney-General 
 for advice and opinion. The Attorney-General held that under 
 conditions which he enumerated a single employment could he set 
 up as a separate group. It follows, therefore, as a matter of 
 logical sequence, that if an individual employment could be con¬ 
 stituted as a separate group a number of employments similar 
 in character could he combined and constituted as a special group. 
 
Answer to Report of Jeremiah F. Connor 11 
 
 This has been done and our action in doing it is authorized by the 
 law, as we are advised, and conforms to the rules laid down in the 
 interpretation of the law by the Attorney-General of the State. 
 
 The commissioner appointed under the provisions of the More¬ 
 land Act raises a question as to the legality and propriety of the 
 Commission’s method of distributing dividends when earned by 
 various groups. The facts are that dividends have been dis¬ 
 tributed, when earned, exclusively to the groups earning such 
 dividends. In no case have the earnings of the general groups 
 or any of them been utilized to offset deficits in the special groups 
 or any of them. However, in order that there may be no ground 
 for criticism, the Commission has directed that hereafter, when 
 approved by the Commission, dividends for the last completed 
 policy period in any group shall be credited out of surplus earned 
 in such group and period after deducting from the earned pre¬ 
 miums losses (including reserves computed as nearly as may be 
 on a uniform basis for all groups), expenses, and catastrophe 
 charges, less any deficit arising out of previous periods, and that 
 these dividends shall be such percentages of the premium as may 
 be agreed upon by the manager and actuary of the State Fund, 
 subject to the temporary retention for future distribution of not 
 less than 5 per cent nor more than 10 per cent of the semi-annual 
 premium, provided that the total surplus remaining to the credit 
 of the group shall in no case be reduced below $2,500; further, 
 whenever in the making up of the accounts there shall be found 
 surplus accumulated from periods other than the last completed 
 policy period amounting to $10,000 (or such less sum as in the 
 judgment of the manager and actuary constitute a safe margin 
 for contingencies) additional dividends, when approved by the 
 Commission, may be credited in respect to such earlier periods, 
 provided that such additional dividends shall not reduce the bal¬ 
 ance retained as a margin of safety, including the balance retained 
 from the surplus of the last completed policy period, below $2,500. 
 After any group has been discontinued more than two full years, 
 if in the judgment of the manager and the actuary conditions war¬ 
 rant it, a final accounting may be made and in such final account¬ 
 ing the margin above provided for need not be retained. And, 
 further, the Commission has ordered that in the future the same 
 
12 
 
 State Insurance Fund 
 
 methods, as far as practicable, shall be adopted for all groups, 
 general and special, with respect to the computation and distri¬ 
 bution of dividends and the maintenance of reserves. 
 
 In the report of the commissioner appointed under the pro¬ 
 visions of the Moreland Act considerable space is devoted to a 
 discussion of Group 17, a miscellaneous metalware group treated 
 by him under the head of “ The Wynkoop Service.” The ques¬ 
 tion of the legality of this particular group has been submitted to 
 and passed upon by the Chief Counsel of the State Industrial 
 Commission. The Chief Counsel has given it as his opinion that 
 Group 17 was legally constituted; that its constitution is entirely 
 consistent with the opinion of the Attorney-General. Counsel 
 does, however, make the reservation that Group 17 should be open 
 (1) to any employer in the same trade who can qualify for mem¬ 
 bership by complying with conditions as to size of payroll and 
 medical and safety organization that aj)ply to the group as a whole. 
 “ Membership,” he says, “ in the group should not be limited to 
 any one particular service;” (2) the contingent character of the 
 compensation paid to Mr. Wynkoop should be eliminated; (3) 
 employers in the group should receive from the Commission 
 directly periodical statements of the accident experience, earnings 
 and dividends declared for the group. 
 
 Acting upon this legal opinion the Industrial Commission 
 instructed the manager of the State Fund to mail directly to each 
 of the employers constituting Group 17 notice of the amount of 
 dividend earned by the group for the policy period ending Decem¬ 
 ber 31, 1918, and credited to them for the policy period beginning 
 January 1, 1919. This was done, notwithstanding the fact that 
 employers in Group 17 had on file with the manager of the State 
 Insurance Fund letters instructing the manager to send all notices 
 to and to transact all business regarding their insurance with the 
 Wynkoop company. 
 
 The Commission has also decided to announce that Group 17 
 is open to every employer in the miscellaneous metalware industry 
 who can qualify with respect to size of payroll and safety and 
 medical service. These qualifications will be expressly defined 
 by resolution of the Commission. And, further, the Commission 
 has decided that any broker or service organization placing busi- 
 
Answer to Report of Jeremiah F. Connor 13 
 
 ness in any group in the State Fund, including Group 17, if com¬ 
 pensated at all must be compensated by the employer upon a fixed 
 and not upon a contingent basis. 
 
 It is important to say, in connection with this action, that the 
 Commission has no evidence which would justify it in believing 
 that the Wynkoop service has ever attempted to reduce the cost 
 of insurance or to profit in any way at the expense of injured 
 workmen; on the contrary, a comparison of the experience of 
 employers who were insured in the State Fund prior to the estab¬ 
 lishment of Group 17 and prior to the time when they availed 
 themselves of the Wynkoop service with their experience after 
 the establishment of the Wynkoop service, clearly indicates that 
 the acceptance of the Wynkoop service by employers has been 
 followed by a marked reduction in the number of accidents and 
 of the serious consequences thereof to workmen in plants having 
 the Wynkoop service. In view of this record the Commission, 
 whose highest duty it is to prevent industrial accidents, should 
 not deny to employers the privilege of placing their business in 
 a special group solely upon the ground that they engage the 
 Wynkoop service or any other organization to install a safety and 
 medical service and to represent them in compensation matters, 
 and it is doubtful whether the Industrial Commission has the 
 authority so to do. 
 
 Furthermore, the Commission holds it to be self-evident that 
 the State Fund could not, unless it had a very large force of 
 safety inspectors, engineers, and physicians, provide for every 
 plant insured in the State Fund a service at all comparable to the 
 intensive service which has been furnished by private organiza¬ 
 tions having only a limited number of clients. 
 
 In connection with the Wynkoop service the commissioner ap¬ 
 pointed under the provisions of the Moreland Act calls attention 
 to a “ transaction ” whereby an automobile was presented by Mr. 
 Wynkoop to a member of the family of an officer of the State 
 Insurance Fund. The officer referred to appeared before the 
 Industrial Commission and explained this “ transaction ” sub¬ 
 stantially as follows: A member of his family had been seriously 
 ill. During a social call made at the officer’s home by Mr. Wyn¬ 
 koop, who is an intimate friend of himself and his family, Mr. 
 
14 
 
 State Insurance Fund 
 
 Wynkoop offered to purchase and pay for an automobile and 
 present it to the one who had been ill. The gift was accepted 
 and, by the dealer who sold the car, was registered in the name 
 of the officer referred to. 
 
 The tender of this gift, its acceptance and the circumstances 
 attending them were not concealed in any way from the friends 
 and associates of the officer; in fact, the matter was reported to 
 the chairman of the Industrial Commission by the officer himself. 
 The chairman of the Industrial Commission felt and still feels 
 that it was purely a personal matter, that it had no relation to 
 the affairs of the State Fund or of the Industrial Commission; 
 and while the Commission feels that the acceptance of this gift 
 is open to criticism, it has full confidence in the integrity and 
 honesty of the officer concerned and it cannot find that there was 
 any improper motive or unfortunate result in his consenting to 
 its acceptance. 
 
 In passing judgment upon this incident it must be home in 
 mind that the State Insurance Fund pays no commissions to any¬ 
 one, that it gives no business to any broker or service organization. 
 On the contrary, Mr. Wynkoop has placed a large volume of 
 business in the State Fund — business that has been profitable 
 and helpful to the fund. 
 
 It may be suggested that Mr. Wynkoop’s revenues were in¬ 
 creased by the system of experience rating of certain risks placed 
 in the State Fund, but this suspicion, if it exists, would have little 
 justification for the reason that his compensation from the em¬ 
 ployer upon all risks in Group 17 is precisely the same whether 
 the risk be experience-rated or not. As a matter of fact, however, 
 no risk in Group 17 enjoys the benefit of experience rating, and 
 not all of the risks placed by Mr. Wynkoop in the general groups 
 are experience-rated. Furthermore, none of the risks placed by 
 Mr. Wynkoop in the general groups receives an experience rating 
 unless upon inspection by the Safety Division of the State Fund 
 such risk is shown to have installed a safety and medical service 
 and to have complied in every way with the experience rating plan 
 of the State Fund. Moreover, experience rating of insurance 
 risks is not limited to business placed in the general groups by the 
 Wynkoop service. As a matter of fact, other employers who 
 
Answer to Report of Jeremiah F. Connor 
 
 15 
 
 qualify with respect to size of payroll, safety and medical service 
 receive the beneht of the experience rating plan. The Commis¬ 
 sion has directed that all employers who qualify with respect to 
 size of pay roll, safety and medical service shall be offered the 
 advantages of the experience rating plan. This will remove any 
 possible ground for criticism and will, we hope, encourage the 
 installation of improved safety devices and first aid and medical 
 service in plants which have not at the present time adopted these 
 measures. 
 
 A section of the report of the commissioner appointed under 
 the provisions of the Moreland Act deals with and criticizes the 
 medical service provided for injured workmen by the State Insur¬ 
 ance Fund. This part of the report is answered and explained 
 at length in the statement submitted to the Industrial Commission 
 by the manager of the State Fund. It is not the desire of the 
 Industrial Commission to excuse errors that may have been made 
 or to defend improper conduct on the part of anyone connected 
 with the affairs of the Commission. If any improper practice 
 has developed in connection with the medical service we are 
 anxious to have concrete information regarding it, in order that 
 correction may be made and improved methods be introduced. 
 
 The treatment of injured employees has been from the very 
 beginning a question of importance second only to the prevention 
 of accidents. The law provides that medical service shall he fur¬ 
 nished to injured workmen by the employer. It is of the highest 
 importance that this medical treatment shall be prompt and ade¬ 
 quate. This the Commission has tried to insure. The average 
 family practitioner is not well equipped to treat accident cases 
 and such physicians are not always free to respond promptly to a 
 call to render medical and surgical treatment to an injured em¬ 
 ployee. Therefore the manager of the State Fund, with the 
 knowledge and consent of the Industrial Commission, has arranged 
 with Dr. Wolff for the treatment of a great many injured work¬ 
 men within the confines of Greater Yew T York. This service is 
 utilized as well by other insurance carriers. 
 
 Dr. Wolff has established a large number of dressing stations 
 located at convenient points throughout the greater city. Sur¬ 
 geons and physicians are at these dressing stations ready at all 
 
16 
 
 State Insurance Fund 
 
 times to treat patients brought to them or to visit patients who 
 are unable by reason of their injuries to reach the dressing sta¬ 
 tions. This medical service the Commission believes to be 
 efficient, to say nothing of its economy. As a matter of fact, 
 however, the cost of this service is much less than the cost to the 
 State Fund of medical service when patients are treated by other 
 physicians and surgeons. If it were, as is suggested in the report 
 of the commissioner appointed under the Moreland Act, the pur¬ 
 pose of the State Fund to give business to favorites it would fol¬ 
 low, it seems to us, that the cost of such service would be greater 
 than is the cost when service is rendered by physicians who are 
 not classed as favorites and who are not connected with the dress¬ 
 ing stations. Yet, as a matter of fact, the cost is considerably 
 less in cases treated by the Wolff service than in cases treated by 
 physicians not connected with this service. Furthermore, the 
 records of the State Insurance Fund demonstrate beyond the 
 shadow of a doubt that the total cost on account of all medical 
 service rendered by the State Fund is less in proportion to the 
 revenues of the fund than is the cost of medical service to all 
 other insurance carriers, based upon the revenues received by 
 them. 
 
 However, in order that there may be no ground for justifiable 
 criticism the Commission will undertake to make a minute study 
 of the medical service of the State Fund and if defects are found 
 to exist or develop the Commission will correct them and endeavor 
 to institute a system of medical treatment in accident cases that, 
 so far as is humanly possible and consistent with the law, shall be 
 proof against attack or criticism. 
 
 From what has been said herein the Industrial Commission 
 has indicated its disposition to act favorably upon every construc¬ 
 tive suggestion which has been made by the Commissioner 
 appointed under the provisions of the Moreland Act and its 
 willingness to scrutinize with open mind every criticism which 
 has been embodied in his report. We believe that a perusal of 
 the statement prepared by the Manager of the State Insurance 
 Fund will show clearly that many of the conclusions arrived at 
 by the Moreland Act Commissioner are at variance with the 
 facts as the facts are reflected by the records of the fund. Fur- 
 
Answer to Report of Jeremiah F. Connor 
 
 17 
 
 thermore, we believe to have demonstrated that the State Insur¬ 
 ance Fund is efficiently, honestly, and economically administered; 
 that the fund is solvent; that its reserves are adequate beyond 
 peradventure; that on the whole the premiums which employers 
 have been required to pay for insurance in the fund were not 
 higher than necessary to give adequate protection to injured work¬ 
 men and to the dependents of workmen who have been killed; 
 that considering the handicaps under which the fund was estab¬ 
 lished and has operated a satisfactory volume of business has 
 been secured; that the system of grouping is both legal and advan¬ 
 tageous; that the medical service of the fund is economical, 
 prompt, and efficient; that, on the whole, the interests of work¬ 
 men and employers alike have been safeguarded and promoted, 
 and that the wisdom of the people of the State of New York 
 in establishing an Insurance Fund operated without profit has 
 been vindicated. 
 
 Respectfully submitted, 
 
 JOHN MITCHELL, Chairman, 
 EDWARD P. LYON, Commissioner 
 JAMES M. LYNCH, Commissioner, 
 HENRY D. SAYER, Commissioner, 
 FRANCES PERKINS, Commissioner, 
 State Industrial Commission. 
 
18 
 
 State Insurance Fund 
 
 Statement of Manager of Insurance Fund as made to 
 Industrial Commission 
 
 July 2, 1919. 
 
 Gentlemen.— In accordance with your request, I have exam¬ 
 ined carefully the report to Governor Alfred E. Smith by 
 Jeremiah F. Connor, Esq., Moreland Act Commissioner, on the 
 State Insurance Fund of the State of New York, in connection 
 with the management and affairs of the State Industrial Com¬ 
 mission, and I respectfully submit the following statement con¬ 
 cerning the matters discussed in this report. 
 
 Condition of State Fund 
 
 The financial condition of the State Fund at the present time 
 is conceded by Mr. Connor to be u in an enviable position.” Yet 
 he contends that the State Fund is badly managed. The ad¬ 
 mittedly enviable condition of the State Fund would appear to 
 create at least a presumption that the management has been in 
 no way incompetent. 
 
 The last semi-annual report of the State Fund shows assets 
 of roundly five and one-half million dollars and a surplus of over 
 $800,000, with reserves of unquestionable adequacy for losses, 
 expenses and contingencies. The premium writings for 1918 
 amounted to $3,33*2.841.88. The State Fund is the second largest 
 carrier of compensation insurance in the State; its premium 
 volume is larger than that of any of the twenty-one stock com¬ 
 panies, with a single exception, and approaches the combined 
 premium income of all the fifteen mutual companies. 
 
 The State Fund has been built up to its present imposing size 
 and enviable financial condition in less than five years. It began 
 business July 1, 1914, with no capital stock and no initial fund 
 contributed by the State. The only assistance given it by the 
 State was the payment of the management expenses for the first 
 two years. The State Fund has had to meet ceaseless and re¬ 
 sourceful competition on the part of stock and mutual companies, 
 with their army of agents, brokers and field representatives. While 
 
Answer to Report of Jeremiah F. Connor 
 
 19 
 
 these companies compete to some extent among themselves, they 
 are virtually united in their operations against the State Fund. 
 The representatives of the private companies have not hesitated 
 to circulate the most damaging misrepresentations concerning 
 the condition of the State Fund, its terms of insurance and the 
 service to policyholders. 
 
 The State Fund has been unable to employ solicitors for the 
 purpose of getting new business and protecting old business against 
 raids by its competitors. 
 
 The State Fund has been handicapped by its inability to write 
 other forms of insurance needed by employers, in addition to com¬ 
 pensation coverage, such as public liability. 
 
 The State Fund has had to overcome the natural prejudice and 
 scepticism on the part of many employers toward a State-con- 
 ducted enterprise — a difficulty which has been aggravated 
 enormously by the persistent misrepresentations of its competitors. 
 
 Notwithstanding these handicaps, the State Fund has grown 
 and prospered. It came safely through the extremely critical 
 period of 1916 and 1917, when the number and frequency of 
 industrial accidents increased sharply, in consequence of war 
 conditions, and the stock companies, as a whole, either lost money 
 or barely broke even. When the crisis was passed and the ex¬ 
 ceptionally favorable experience of 1918 produced large surplus 
 earnings, it was wisely determined to use these earnings for the 
 purpose of strengthening the reserves in various ways, buttressing 
 the State Fund at every angle against a possible recurrence of 
 adverse experience, with a view to making it absolutely secure 
 and solvent beyond the remotest chance of financial embarrass¬ 
 ment in the future. 
 
 Now the State Fund is criticized because its reserves are too 
 high and its surplus too large. 
 
 The record of the State Fund is in itself a concrete answer to 
 the general charge of mismanagement made in Mr. Connor’s re¬ 
 port. Such results do not ordinarily connote bad management. 
 Indeed, the accomplishment of such results is not compatible with 
 bad management. Nor can such results be explained away, as 
 occurring through sheer good luck even in spite of bad 
 management. 
 
20 
 
 \ 
 
 State Insurance Fund 
 
 Collection of Premiums 
 
 Mr. Connor declares: 
 
 u The success of any company writing compensation or 
 liability insurance depends upon the ability to collect 
 premiums. The State Insurance Fund is woefully weak in 
 this respect.” 
 
 The ability to collect premiums is unquestionably a large factor 
 in the success of a compensation insurance company. It must 
 he frankly conceded also that the State Fund is unable to collect 
 premiums with as much promptness and thoroughness as could be 
 desired, by reason of an inadequate working force in the account¬ 
 ing and payroll auditing division. The manager has repeatedly 
 emphasized the need of additional employees in this division in 
 presenting his annual budget recommendations. 
 
 Mr. Connor refers to the matter of collections on cancelled 
 policies, and states: 
 
 “For example, the State Fund has approximately 1500 
 cancelled policies covering a period from July 1, 1914, to 
 date, in which the payrolls have not been audited nor bills 
 rendered for the amount due. In addition, about a month 
 ago there were 500 cases of these cancelled policies in which 
 the payrolls had been-audited but in which bills had not been 
 sent out. These cases had been ready for bills for an aver¬ 
 age period of about four months and the man in charge of 
 the work admitted that one man could have sent out the 
 entire number of bills in eight days, notwithstanding which 
 nothing was being done. The following is an example of 
 the ways this work is done. The policy of the Ansonia 
 Clock Company was cancelled December 31, 1917. The 
 payroll was audited in November, 1918, showing a balance 
 due the State Fund of $958.64. Up to April 1, 1919, a 
 bill for this amount had not been sent out.” 
 
 This statement is considerably overdrawn. At no time during 
 the past twelve months have there been 1,500 cancelled policies 
 which had not received the necessary attention. About April 1st, 
 when Mr. Connor visited the office of the State Fund to inquire 
 into this matter, there were approximately 800 cancelled policies 
 
Answer to Report of Jeremiah F. Connor 
 
 21 
 
 on which audits and collections had not been made. Of this 
 total, about 200 accounts had been audited and prepared for final 
 billing, and approximately 600 had not been audited. At that 
 time the office force was engaged in sending out the six months’ 
 bills on the current active accounts, and this work had been given 
 the right of way. Later in the month of April, three temporary 
 clerks were assigned to the office of the State Fund to assist in 
 clearing up the arrears on cancelled policy accounts, and the 
 situation with respect to this matter has been greatly improved. 
 On June 10th there were approximately 250 cancelled policies 
 on which final bills had not been sent. These accounts, however, 
 had all been examined within the preceding ten days in the 
 accounting and payroll auditing division and had been assigned 
 to auditors or had been followed up with letters to the policy¬ 
 holders requesting the necessary data for closing the accounts. 
 The case of the Ansonia Clock Company is exceptional, not 
 typical. The delay in auditing this account was due to a shortage 
 of payroll auditors. A bill for the balance due the State Fund 
 has been sent to this company, and the amount has been paid 
 in full. 
 
 Reports to Attorney-General 
 
 Mr. Connor charges that “ there is much laxity in obtaining 
 statements from the employers in relation to. payrolls as required 
 by section 101, and there is also much laxity in referring unpaid 
 premiums to the Attorney-General for collection, as required by 
 section 99 of the act.” 
 
 Any delays in obtaining payroll reports from policyholders 
 are due to lack of a sufficient number of employees to keep fully 
 abreast of the office requirements at all times. It is the practice 
 to refer accounts in which payment is not made within thirty 
 days after final billing to the Attorney-General for collection, 
 as required by law. The State Fund co-operates with the office 
 of the Attorney-General in locating the policyholders and serving 
 summons. After a conference with the Deputy Attorney-General, 
 in charge of State Fund matters, it was decided that the serving 
 of summons in this city could be performed more effectively by 
 persons assigned from the office of the State Fund than from the 
 office of the Attorney-General, as the employees from this office 
 are able to locate policyholders more quickly than process servers 
 
22 
 
 State Insurance Fund 
 
 from the office of the Attorney-General, who could not devote alL 
 their time to this work. The Deputy Attorney-General has 
 repeatedly commended the work performed through the office of 
 the State Fund in assisting in the collection of overdue accounts 
 and the service of summons. 
 
 As an incident of alleged laxity in referring unpaid accounts 
 to the Attorney-General, Mr. Connor cites the case of the American 
 Locomotive Company, which, he states, has “owed the State 
 Insurance Fund nearly $9,000 since December 31, 1916, and this 
 amount has never been referred to the Attorney-General for 
 collection. ” 
 
 It is true that the account of the American Locomotive Com¬ 
 pany, which was insured in the State Fund for the year 1916 
 and then withdrew, shows an apparent balance of $8,726.86 due 
 the State Fund. This balance is small as compared with the 
 amount of premium paid to the State Fund, which was 
 $103,494.60. The final adjustment on this account, which was 
 carried in a special group, has not been made, as certain accident 
 cases on which reserves had been set up provisionally have not 
 been closed so that the exact amount of the necessary reserves 
 could be determined. It is quite possible that the final adjust¬ 
 ment, when all cases have been closed, will show a small balance 
 due to the American Locomotive Company. It is necessary for 
 the State Fund to set up on open cases sufficient reserves to pro¬ 
 tect it against unfavorable developments, and a later revision 
 of the reserves, when the exact extent of the liability in such cases 
 has been fixed by final awards of the Commission, usually results 
 in the release of some part of the provisional reserves. Under 
 the circumstances, it would have been hasty and ill-advised to 
 report this account to the Attorney-General ‘ for collection. It 
 should be added that this case is exceptional. Only one other 
 account has been allowed to stand without being reported to the 
 Attorney-General. That was the account of the Standard Oil 
 Company, which was held open, pending final adjustment, for 
 some time, in the same manner and for the same reasons. 
 
 Need of More Payroll Auditors 
 
 Mr. Connor concedes that the State Fund may not have a 
 sufficient force of payroll auditors, but intimates that the manage- 
 
Answer to Report of Jeremiah F. Connor 
 
 23 
 
 ment has not taken the proper steps to remedy this condition. 
 He states: 
 
 “ The State Insurance Fund pleads in extenuation of these 
 conditions that it has insufficient help to properly audit pay¬ 
 rolls, and that appropriations for additional payroll auditors 
 have been denied by the Legislature. This may be true to 
 some extent, but the State Fund has never reported its exact 
 condition justifying its appeal for additional help. It is 
 one thing to ask for payroll auditors and another to disclose 
 the exact condition requiring the same.” 
 
 The manager of the State Fund has made requests for addi¬ 
 tional payroll auditors, bookkeepers and clerks in his annual 
 budget recommendations, and has appeared each year before the 
 Legislative Finance Committee to urge the adoption of his recom¬ 
 mendations. In any statement concerning office conditions, used 
 for this purpose, the manager has naturally had some regard 
 for the fact that every disclosure regarding the handicaps of the 
 State Fund is seized upon and exploited by its competitors. It 
 may be interesting here to review the recommendations of the 
 manager with respect to increase of force and the results as shown 
 by the number of additional employees granted in the annual 
 appropriation bill. For the fiscal year, July 1, 1917, to July 1, 
 1918, the manager asked for 23 additional payroll auditors, book¬ 
 keepers and clerks; 16 were granted. For the year 1918 to 1919 
 the requests called for 18 additional employees of these classes; 
 the number provided was 15. For the year 1919 to 1920 23 
 additional employees were requested, and not one was granted. 
 The requests of the manager for each year represented the absolute 
 minimum of the office requirements. The following extracts 
 from the statements accompanying the budget recommendations 
 of the manager are presented as illustrating the urgency with 
 which he has stressed the recommendations in successive years: 
 Budget of 1916-1917: 
 
 “ With respect to the proposed additions to the force, it 
 should be pointed out that, while the business of the State 
 Fund has nearly doubled in the last two years, the number 
 of employees has been reduced through lack of adequate 
 appropriations. The present force can hardly be termed 
 
24 
 
 State Insurance Fund 
 
 more than 75 per cent efficient, not because of the shortcom¬ 
 ings of individual employees, hut because of the numerical 
 insufficiency of the staff, as a whole. The problem imme¬ 
 diately confronting the State Fund is how to improve the 
 efficiency of the service. The State Fund has secured a large 
 volume of business, hut it cannot retain the best portion of 
 this business unless the service that it renders to policy¬ 
 holders is on a par with that of well managed private 
 companies.” 
 
 Budget of 1918-1919: 
 
 “ The State Fund has suffered much injury in the past 
 through lack of appropriations adequate to enable the man¬ 
 ager to take proper measures to keep down the disbursements, 
 on the one hand, and to bring in the full premium income, 
 on the other hand. The lesson brought home by the report 
 of its financial condition, recently submitted, should be 
 heeded, and the management should be given every dollar 
 that is requested to meet the present needs of the situation. 
 There should be no paring down of the requirements as set 
 forth in the budget proposals for the coming fiscal year. 
 Unless these requirements are met in full, the management 
 of the State Fund cannot be held responsible for the 
 consequences.” 
 
 Budget of 1919-1920: 
 
 u The present force of the payroll auditing division is not 
 sufficient to enable the State Fund to make the number of 
 audits required to bring in the full premium income. Experi¬ 
 ence has shown the vital importance of systematic auditing 
 in order to collect the premiums due from employers. Each 
 additional auditor of payrolls brings in approximately ten 
 times the amount of his salary and expenses. Indeed, there 
 seems to be almost no limit to the possibility of increasing 
 the premium income through more frequent and intensive 
 auditing of policyholders 7 accounts. 77 
 
 Notwithstanding this plea, the State Fund was refused by the 
 Legislature any additional payroll auditors or other employees 
 for the coming fiscal year. 
 
Answer to Report of Jeremiah F. Connor 
 
 25 
 
 Efficiency of Office Force 
 
 Mr. Connor furthermore expresses his belief “ that much better 
 work could be performed by the present force.’’ 
 
 This is merely a matter of opinion. It is the opinion of the 
 manager that the efficiency of the State Fund force will compare 
 favorably with that of any insurance office. 
 
 Mr. Connor also criticizes the practice of assigning employees 
 for work not covered by their civil service titles. He states: 
 
 “ The employees in this department are not as a general 
 rule, performing the work indicated by their civil service 
 titles. In an emergency any employee can be called upon 
 to assist in the collection of premiums.” 
 
 It is true that employees are not always doing work that cor¬ 
 responds to their civil service titles. It is necessary and proper 
 to distribute the available working force among the different 
 divisions according to the immediate and urgent needs of each. 
 There is no other way to get the work done with any degree of 
 promptness and thoroughness. 
 
 Again, Mr. Connor charges that “ there is an apparent over¬ 
 loading of employees in some directions,” and cites the following 
 case: 
 
 “ One Raymond Appolonio was appointed as a statistical 
 clerk during the past year. Prior to his appointment this 
 man was a resident of Boston, Mass. In his application 
 for the examination he said, however, that he had resided 
 in Hew York State for a period of five years and he gave 
 as his residence the street and number of the manager of 
 the State Insurance Fund. I found upon examination that 
 he was designated as a person to serve summons sent down 
 by the Attorney-General in actions to collect unpaid pre¬ 
 miums. The following, received from his immediate 
 superior, is an example of the work performed by him as a 
 statistical clerk: 
 
 “‘Mar. 10, 2 trips to 618 W. 58th St., Purcell and Gil- 
 feather — to serve summons. 
 
 “‘1 trip to 29 Broadway, General Contracting Co.— to 
 make collection.’ 
 
 “The service of summons is work which should be per- 
 
26 
 
 State Insurance Fund 
 
 formed by the Attorney-General, and a telephone communi¬ 
 cation to a responsible employer would be just as efficacious 
 in making a collection as a trip to 29 Broadway.’ 7 
 
 The appointment of this employee was entirely regular in every 
 respect. He was formerly a resident of Boston, but had not lived 
 there for six years. Tie gave his residence as Hew York State, 
 for he made his principal headquarters here for at least five years. 
 At the time his application for examination was made, he was 
 living in the family of the manager of the State Fund, who had 
 known him in Boston. He was appointed at a salary of $1,020, 
 later increased to $1,200. He was designated to serve summons 
 and to make collections, as he was particularly fitted for this work 
 by his past experience. It has already been explained that the 
 Deputy Attorney-General requested the co-operation of the State 
 Fund in the matter of serving summons and making collections. 
 The suggestion “ that a telephone communication to a responsible 
 employer would be just as efficacious as a visit” indicates a lack 
 of familiarity with the habits and tactics of some employers who 
 refuse to pay insurance premiums upon demand in writing. In 
 the particular case cited by Mr. Connor, the policy of the State 
 Fund had been cancelled as of January 6, 1918, and the final 
 adjustment of the account had been made May 21, 1918. The 
 employer failed to make payment and made no reply whatever to 
 several letters addressed to him by the State Fund. It became 
 necessary to send a collector, and no payments were made except 
 when the State Fund collector called. 
 
 With reference to the conditions in the office of the State Fund, 
 as alleged in Mr. Connor’s report, it is pertinent to call attention 
 to the effect of the war upon the office force. The State Fund 
 lost twenty-seven employees through voluntary enlistment or draft. 
 Among these were several of the most valuable members of the 
 organization. It was practically impossible to find competent 
 substitutes for the trained employees thus lost, especially as 
 appointments could be made only temporarily, for the duration 
 of the military vacancv in each case. The task of filling the mili¬ 
 tary vacancies was rendered doubly difficult by the restrictions of 
 the civil service and the budget. The State Fund is obliged to 
 compete with private insurance companies for employees, as well 
 
Answer to Report of Jeremiah F. Connor 
 
 27 
 
 as for business, and in such competition is severely handicapped 
 by restrictions from which its competitors are free. The lack 
 of elasticity and adaptability in the administrative conditions 
 imposed upon the State Fund under the budget and the civil 
 service was strikingly illustrated during the war period. Despite 
 these conditions a reasonable degree of efficiency was maintained. 
 
 The Question of Rates 
 
 Mr. Connor declares that “ the State Fund has been a failure 
 as a check on the rates of the insurance companies.” 
 
 This is a matter of opinion. It should be pointed out here that 
 the rates of the State Fund are approximately 15 per cent lower 
 than the rates of private companies ; that the State Fund did not 
 apply the 5 per cent increase of rates put into effect by the com¬ 
 panies January 1, 1918; that the State Fund has declared divi¬ 
 dends of 10 per cent in all the general groups, and supplementary 
 dividends of 20, 10 and 25 per cent in three of these groups, as 
 will hereafter be explained. 
 
 Mr. Connor complains that the State Fund rates “ remain at 
 the same high level.” 
 
 The fact is that the present rates have been in effect on all of 
 the business of the State Fund only since January 1, 1918. The 
 experience of 1916 demonstrated the inadequacy of the old rates 
 and called for a general increase. The year 1918, during which 
 the new rates were in operation, was an exceptional year. For 
 that year these rates yielded a large surplus, due primarily to 
 abnormal conditions with respect to payrolls and wages. The 
 business outlook at the close of the year was most uncertain. 
 It would have been well-nigh foolhardy to reduce the rates at that 
 time on the basis of the unusual experience of the single year 
 1918. 
 
 At the present time the business outlook justifies the expecta¬ 
 tion that the rates may be safely reduced to some extent in the 
 next revision, which under the law must be made to go into effect 
 January 1 ? 1920. The Workmen’s Compensation Law provides, 
 in section 97, that “ on January 1, 1915, and every five years there¬ 
 after * * * a readjustment of the rates shall be made for 
 
 each of the several groups of employment or industries and of 
 
28 
 
 State Insurance Fund 
 
 each hazardous class therein which in the judgment of the com¬ 
 mission shall have developed an average loss ratio in accordance 
 with the experience of the commission in the administration of 
 the law as shown by the accounts kept as herein provided.” The 
 end of the live-year period following the first rate revision of 
 January 1, 1915, will fall on January 1, 1920. In the light of 
 the present industrial conditions and prospects it seems safe to 
 forecast a downward revision of State Fund rates in the readjust¬ 
 ment that must he made in accordance with this requirement of 
 the law. 
 
 With further reference to the matter of rates, a comparison 
 between the rates of the Hew York State Fund and the Ohio 
 State Fund, which was worked out by the manager and the 
 actuary of the Hew York State Fund, in reply to an inquiry by 
 Mr. Connor, is extremely interesting. In this comparison due 
 allowance was made for certain differences in operating conditions 
 of the two State Funds, such as the fact that the manual rates 
 of the Ohio State Fund are, in general, minimum rates, subject 
 to penalty increases for adverse experience, while the manual 
 rates of the Hew York State Fund are maximum rates, subject 
 to merit reductions for safety equipment and favorable experience. 
 It appears that on this basis of comparison the rates of the Hew 
 York State Fund average somewhat less than the corresponding 
 rates of the Ohio State Fund. In short, the result of this com¬ 
 parative analysis of rates indicates that, under the same operating 
 conditions, the net cost to policyholders of the Hew York State 
 Fund would have been slightly less than the net cost to the policy¬ 
 holders of the Ohio State Fund. The details of the comparison 
 are embodied in a communication to Mr. Connor by the manager 
 of the Hew York State Fund which is appended to this report. 
 
 Number of Policyholders 
 
 Mr. Connor calls attention to the decline in the number of 
 policyholders of the State Fund in 1917. “ While the volume 
 
 of premium income increased very much during the past year, 
 due to war conditions, the number of employers insured in the 
 State Fund are about 1,000 less than in 1917.” 
 
 In the annual report of the manager of the State Fund for 
 1918 this phenomenon is explained as follows: 
 
Answer to Report of Jeremiah F. Connor 
 
 29 
 
 “ In one respect it would appear that the State Fund 
 lost ground during the year, as the number of policyholders 
 fell from 9,984 to 8,782. When the causes of this falling 
 off are examined, however, the loss is found to be apparent 
 rather than actual. The decline was due mainly to two 
 causes; first, the retirement from business of small 
 employers in non-essential industries on account of war con¬ 
 ditions; second, the cancellation of policies for non-payment 
 of premiums, in consequence of more systematic attention 
 to overdue accounts. Notwithstanding the decline in the 
 number of policyholders, the volume of semi-annual pre¬ 
 miums in force increased from $810,576.79 to $940,902.83. 
 That is, measured by the volume of premiums, the new busi¬ 
 ness written during the year more than offset the loss of 
 business through withdrawals and cancellations. In short, 
 there took place a substitution of large for small risks.” 
 
 Individual or Special Groups 
 
 It may be well before taking up the criticisms of Mr. Connor 
 concerning the individual or special groups, to offer a general 
 explanation of the special group plan as operated by the State 
 Fund. 
 
 The Workmen’s Compensation Law (section 2) divided hazard¬ 
 ous employments subject to the law into forty-two groups. The 
 law provided further (section 95) that employments coming under 
 its provisions should be divided for purposes of the State Ffind 
 into the groups set forth in section 2, and that separate accounts 
 should be kept of the amounts collected and expended in respect 
 to each such group for convenience of determining equitable rates. 
 The Commission was empowered (section 95) to rearrange any 
 of the groups set forth in section 2 by withdrawing any employ¬ 
 ment embraced in it and transferring it wholly or in part to any 
 other group, and from such employments to set up new groups 
 at its discretion. Provision was made (section 97) for the decla¬ 
 ration and distribution of dividends according to groups. 
 
 The Commission, exercising the authority conferred by 
 section 95 of the law, to rearrange the original groups has com¬ 
 bined the forty-two groups into six large groups for purposes of 
 keeping accounts and computing dividends, and has also set up 
 
30 
 
 State Insurance Fund 
 
 various special groups composed in some cases of individual risks j 
 and in other cases of a number of related risks. The special j 
 groups, which at present number twenty, fall into three classes: ! 
 First, purely individual groups, such as the International Paper j 
 Company and the Lackawanna Steel Corporation; second, trade : 
 groups, including all employers in the same branch of industry, 
 such as the furniture manufacturers’ group and the cement manu- ] 
 facturers’ group; third, trade groups, including a number of 
 employers in the same branch of industry who have taken special j 
 measures for accident prevention and have a safety organization | 
 approved by the State Fund, such as the miscellaneous metal- | 
 ware group and the foundry and machine shop group. 
 
 The method of keeping accounts and computing dividends for 
 the special groups is, in brief, as follows: Each member is 
 charged an initial premium based on the manual or schedule rates 
 of the State Fund applicable to the risk. After each policy period 
 the State Fund charges against the group premium, first, the 
 amount of the loss payments on account of accidents occurring 
 during the period; second, the amount of the loss reserves 
 required to carry all claims on account of such accidents to full 
 maturity; third, the proportionate share of all expenses incurred 
 by the State Fund; fourth, the contribution to the legal catas¬ 
 trophe surplus, amounting to 5 per cent of the premium. At 
 the end of each policy period the premiums of the members are 
 readjusted on the basis of their actual payroll expenditures as 
 ascertained by report or audit. Any balance of the earned pre- 
 mium of the group remaining after deduction of the charges 
 enumerated is credited pro rata to the members on the next install¬ 
 ments of premium due the State Fund, in accordance with the 
 provisions of section 97 of the law relating to the declaration 
 and distribution of dividends. It is the practice in making this 
 adjustment to credit a partial dividend in the first statement to 
 the members of a special group, and at a later date to determine 
 the final dividend credit after the experience has developed suffi¬ 
 ciently to disclose the exact extent of the liability in each case, 
 and thus to afford a basis for setting up the proper amounts of 
 loss reserves. That is, the account is held open subject to further 
 readjustment until such time as all cases can be closed and final 
 reserves set up. 
 
Answer to Report of Jeremiah F. Connor 
 
 31 
 
 The general purpose of this plan is to segregate large individual 
 risks and to combine smaller risks of identical or similar hazard 
 in such way as to enable the employers to obtain the benefit of a 
 favorable experience, particularly of any reduction in insurance 
 costs effected by their individual or co-operative efforts and thus 
 to bring to hear an effective incentive to adopt measures for acci¬ 
 dent prevention. The general groups are miscellaneous in their 
 composition and employers placed in these groups are forced to 
 share the benefit of improved safety equipment and organization 
 in their own plants with other employers whose risks are inher¬ 
 ently more hazardous, and who may give little or no attention 
 to safety matters. It is equitable that employers who are willing 
 to incur large expenditures for purposes of reducing the hazards 
 of their plants and the cost of their insurance, should be placed 
 in special groups under an arrangement that will enable them to 
 secure some return from such expenditures in the form of divi¬ 
 dends based on their own experience. The special grouping sup¬ 
 plies a constant incentive to further efforts to prevent accidents 
 and reduce insurance costs. The plan is thus equitable in prin¬ 
 ciple and beneficial in practice, through its stimulative effect upon 
 accident prevention. Further information concerning this plan 
 will be found in a memorandum appended to this report. 
 
 Advantages of Plan 
 
 The question of the advisability or expediency of special group¬ 
 ing should be judged in the light of the all-important considera¬ 
 tion that the New York State Fund is competitive and not 
 monopolistic. The State Fund is in open competition, not only 
 with stock insurance, but with mutual insurance and self-insur¬ 
 ance. If the State Fund is to get and hold any considerable 
 volume of the desirable class of business that is naturally attracted 
 toward mutual and self-insurance, it must be able to offer to 
 employers so inclined a proposition that will compete with the 
 advantages which are promised by mutual and self-insurance. 
 
 The chief attraction of self-insurance for a large employer is 
 that it enables him to pay his own compensation costs without 
 contributing anything to the costs of others, and also to get the 
 exclusive benefit of any reduction in his own compensation costs 
 
32 
 
 State Insurance Fund 
 
 which he may be able to bring about through better safety equip¬ 
 ment and organization. Similarly, the main advantage of mutual 
 insurance for a number of employers insured on this basis is that 
 it gives them the opportunity to share their compensation costs 
 collectively without taking chances in a common insurance pool, 
 and, further, to obtain the collective benefit of any savings which 
 they may be able to effect through co-operative measures of acci¬ 
 dent prevention. The individual group plan in the State Fund 
 offers to a large employer the principal advantage which he sees 
 in self-insurance, and, besides this, gives him at a comparatively 
 low additional cost, real insurance protection and complete release 
 from his liability under the Workmen’s Compensation Law. In 
 the same way, the trade group plan in the State Fund provides 
 for a body of employers in the same trade the essential advantages 
 of mutual insurance without its great drawback in the form of 
 an assessment liability. The State Fund has been able to com¬ 
 pete effectively with mutual and self-insurance through its group¬ 
 ing system. If all risks in the State Fund were merged in the 
 general groups, it would be extremely difficult to maintain effective 
 competition with mutual and self-insurance. 
 
 While the special group plan is highly advantageous for 
 employers so grouped, it is also advantageous for the State Fund, 
 as a whole, and for employers in the general groups. It is desir¬ 
 able in the interest of security and economy of State Fund 
 insurance that large employers and good risks be attracted into 
 the State Fund. Under the competitive conditions prevailing 
 in this State the requisite attraction can be supplied, as has been 
 pointed out, only through the special group plan. The volume 
 of business that has been attracted on this basis benefits the State 
 Fund and its policyholders, in general, in the following ways: 
 The large premium accounts in the special groups make heavy 
 contributions to the catastrophe surplus, which serves for the 
 protection of all policyholders. Hot only do the special groups 
 contribute largely to the expenses in a direct way, but they help 
 indirectly to lower the cost of insurance to every employer in the 
 general groups, by giving the State Fund a much lower expense 
 ratio than could otherwise be attained. The extremely low 
 expense ratio of 7% per cent for 1918, was made possible only 
 by the presence of the special groups. A favorable experience in 
 
Answer to Report of Jeremiah F. Connor 
 
 33 
 
 the special groups, as a whole, tends to lower the loss ratio of 
 the State Fund and thus to keep the cost of insurance on a lower 
 basis than would otherwise be possible, for in the long run a 
 higher loss ratio would necessitate higher rates. The special 
 group plan thus helps to make the State Fund a safer and cheaper 
 carrier of insurance for employers at large. 
 
 Legality of Plan 
 
 With respect to the legality of the special group plan, the 
 authority to establish and maintain special groups is clearly con¬ 
 ferred by the provisions of section 95 of the Workmen’s Compen¬ 
 sation Law. The Commission is given power to rearrange any 
 groups as originally constituted by section 2 of the law, “ by 
 withdrawing any employment” “ embraced in it and transferring 
 it wholly or in part to any other group, and from such employ¬ 
 ments to set up new groups at its discretion.” This language is 
 very broad and sweeping. The use of the words “ in part ” seems 
 clearly to justify the creation of an individual group, as a part 
 of an employment may be either one branch of the industry in 
 question or one employer or establishment. The opinion of the 
 Attorney-General, rendered January 25, 1916, recognizes the 
 legality of setting up a single employer as a group under certain 
 conditions or limitations. The right of the Commission to set 
 up a group composed of a number of employers or risks would 
 appear to be even clearer, or less open to question, than the right 
 to create a purely individual group. 
 
 The conditions or limitations set forth in the opinion of the 
 Attorney-General are defined in the following extracts from that 
 opinion: 
 
 “ The only way in which a single employer in the State 
 Insurance Fund can be separately grouped by the State 
 Industrial Commission for rating and dividend purposes, 
 under Sec. 95 of the Workmen’s Compensation Law, is 
 where the nature of his business and the degree of risk of 
 injury is such that he, in fact, represents a group by him¬ 
 self, subject, however, to the opportunity of other employers 
 in the State Fund who come within its limitations to be made 
 members of that group. 
 
 2 
 
State Insurance Fund 
 
 34 
 
 “ The law thus seems to permit the commission to create 
 new groups, but each group should be available to all 
 employers coming within its limitations, and if a group is 
 divided into classes, each class should be available to all 
 employers within the group, who come within the limitations. 
 To make a group or class by himself, the commission should 
 be able to point to the peculiar hazard of the individual risk 
 which justifies its separation as such. If the commission 
 can justify any of its individual groupings upon the above 
 basis, I can see no objection from the standpoint of its 
 legality.” 
 
 The Attorney-General thus held that the test for the creation 
 of an individual group is to be found in the nature of the business 
 and the degree of risk of injury, which must be such as to con¬ 
 stitute a peculiar hazard on the part of the individual risk, so 
 that the employer in question represents a group by himself; the 
 Attorney-General held, further, that the creation of an individual 
 group must be subject to the opportunity of other employers in 
 the State Fund who come within its limitations to be made mem¬ 
 bers of the group. In accordance with this ruling, it would 
 appear that the Commission is justified in creating special groups, 
 including a number of risks as well as individual groups, in cases 
 in which the risks in question are differentiated from others of 
 a similar general character insured in the State Fund by reason 
 of special conditions inherent in the nature of the business and 
 the degree of risk of injury. The latter factor, the degree of 
 risk of injury, it should be noted, is necessarily conditioned by 
 the safety organization and service provided by the employer. 
 
 Importance of Special Groups 
 
 The special group plan is the very foundation and framework 
 of the State Fund. The entire structure would fall apart if the 
 special group plan were abolished or seriously disturbed. The 
 importance of the special groups may be appreciated from the fact 
 that the premiums of the special groups, in 1918, amounted to 
 $1,403,627.78, out of total premiums for the State Fund of 
 $3,282,965.24. In other words, approximately 45 per cent of 
 the total business of the State Fund is carried in special groups. 
 
Answer to .Report op Jeremiah F. Connor 
 
 35 
 
 The total volume of premiums of the special groups from the 
 beginning, July 1, 1914, to December 31, 1918, amounted to 
 $3,841,148.13. These groups contributed, during this period of 
 four and one-half years, $253,644.35 to the expenses and 
 $211,689.24 to the catastrophe surplus of the State Fund. 
 
 Dividend Credits and Deficits 
 
 It now remains to comment on the particular criticisms of the 
 special groups made in Mr. Connor’s report. He states, concern¬ 
 ing the dividend credit to the special groups: “ This credit is 
 
 made without regard to the condition of the State Fund generally, 
 whether solvent or insolvent. In 1916, for example, dividends 
 were declared in the special groups, although the losses of the 
 State Fund exceeded its income.” 
 
 This statement is wholly erroneous. It is definitely stipulated 
 in submitting the special group proposition to an employer and 
 in accepting business on this basis, that dividends shall be credited 
 only in case the State Fund, as a whole, is solvent. As the State 
 Fund has never been insolvent, it has been possible from the 
 beginning to credit dividends in special groups whenever earned. 
 It is true, however, that the losses and expenses of the State Fund 
 for 1916 were slightly in excess of the earned premiums. This 
 was due to the fact that in the general groups, as a whole, and in 
 each one of these groups, the losses exceeded the earned premiums, 
 and that at the end of the year every one of the general groups 
 showed a deficit on the cumulative experience to date. As the 
 State Fund still remained solvent, because of the earnings of the 
 special groups, it was possible to continue to credit dividends in 
 special groups out of the surplus earned by such groups. 
 
 Again, Mr. Connor states: 
 
 “ If the losses of the special groups exceeded the premium, 
 and they have in several cases, these losses are paid from the 
 State Fund generally. The other special groups are not 
 even called upon to help make up such deficiencies.” 
 
 This is not true. In a few cases deficits in special groups 
 have developed in particular policy periods, but in such cases the 
 deficits have been absorbed by the surplus earned in succeeding 
 policy periods, with the single exception of one individual group, 
 
36 
 
 State Insurance Fund 
 
 made up of a large contracting concern. With this single excep¬ 
 tion, each of the special groups shows a surplus on the basis of 
 the cumulative experience to date. It is likely, moreover, that 
 the deficit in the one group mentioned will be wiped out before 
 the contract is completed and the account closed. In no case has 
 any deficit in a special group been charged against the State 
 Fund, as a whole, or against the general groups. The deficit in 
 the case of the single group cited was due to an explosion which 
 killed four persons and seriously injured four others, and cost 
 approximately $30,000. In case the premium earnings of this 
 group in the final accounting should prove insufficient to take care 
 of the deficit, it is the intention of the manager of the State Fund 
 to recommend that the amount of the deficit still remaining be 
 charged against the catastrophe surplus of the State Fund. This 
 disposal of the matter would be entirely proper, as the accident 
 which caused the deficit was really of the proportions of a catas¬ 
 trophe, and, therefore, could reasonably be made a charge against 
 the catastrophe surplus, to which all the special groups, as well as 
 the general groups, contribute proportionately to premium. 
 
 Mr. Connor further cites the following illustration of alleged 
 discrimination in favor of the special groups: 
 
 “At times some of the six general groups showed a surplus 
 and others showed losses. Instead of enjoying a dividend, 
 the groups showing a surplus were charged with deficiencies 
 in other general groups, whereas the special groups were 
 charged with no part of the deficiencies, but some of them 
 still received dividends.” 
 
 No such discrimination has been practiced. It is true that 
 no dividends were declared in the general groups during the years 
 1916 and 1917, and the first six months of 1918, for the reason 
 that these groups, collectively and individually, failed to earn a 
 sufficient surplus to warrant dividend distribution. No one of 
 the general groups earned a surplus on the business of 1917 and 
 1918. At the close of the year 1916 the cumulative experience to 1 
 date showed a deficit in each of the general groups. At the close | 
 of the first six months of 1918 four of the general groups still 
 showed a deficit to date, and while two of the groups showed a 
 surplus, the amount of the surplus in each case was too small 
 
Answer to Report of Jeremiah F. Connor 
 
 37 
 
 to justify any dividend distribution. Meanwhile the special 
 groups, as a whole, continued to earn a surplus available for 
 dividend purposes throughout this period of two and one-half 
 years, and dividends were credited accordingly, in so far as they 
 were earned. It should be observed here that the State Fund 
 keeps a continuous cumulative account with each of the groups, 
 general and special, and in the long run the entire surplus earned 
 by each group will be returned to its members as dividends, in the 
 case of the general groups, precisely as in the case of the special 
 groups. Ho part of the funds of the general groups has been used 
 for the benefit of the special groups, nor will it be so used in the 
 future. The surplus of the general groups and that of the special 
 groups may be said to be kept in entirely separate compartments, 
 and neither is called upon to contribute to the support or benefits 
 of the other. 
 
 Mr. Connor also offers this criticism: 
 
 “ The State Fund, in one of the semi-annual reports to 
 the commission, described the insurance in these special 
 groups as catastrophe insurance, something which was never 
 contemplated by the law itself.” 
 
 The individual group plan has been characterized by the man¬ 
 ager of the State Fund as a form of catastrophe insurance for 
 large employers at low cost, because this description emphasized 
 one phase of the plan which renders it especially attractive as 
 an alternative to self-insurance. But. as a matter of fact, insur¬ 
 ance in the special groups is no different from insurance in the 
 general groups in respect to the kind and scope of the protection 
 given an employer. The policy of the State Fund gives the 
 employer insured in a general group, as well as one insured in 
 a special group, complete compensation coverage, including unlim¬ 
 ited catastrophe insurance. 
 
 Mr. Connor declares that while an individual group may be 
 created, under certain circumstances as outlined in an opinion 
 by the Attorney-General. “ the Attorney-General has never passed 
 upon the method employed for the declaration of dividends,” 
 and, further, that “the 'State Industrial Commission itself was 
 not familiar with this method until after this investigation was 
 started.” 
 
38 
 
 State Insurance Fund 
 
 The method of distributing dividends in the special groups 
 was fully explained to the Attorney-General in conferences held 
 at the time the question of the legality of the individual groups 
 was before him, and in memoranda submitted by the manager 
 of the State Fund. The matter has repeatedly been considered 
 and discussed by the full Commission in connection with recom¬ 
 mendations of the actuary and the manager of the State Fund 
 for the approval of dividend credits in special groups. 
 
 Dividends in General Groups 
 Mr. Connor asserts: 
 
 “ Under the present method of doing business the State 
 Fund endeavors to pay all the dividends possible to employers 
 in the special groups, and to keep as much as possible away 
 from the employers in the general groups.” 
 
 There is not the slightest justification for this assertion. It 
 has already been pointed out that for the period of two and one- 
 half years, during which the general groups received no dividends, 
 not one of these groups earned any surplus out of which a divi¬ 
 dend could be declared. When the payment of dividends in the 
 general groups was resumed for the last six months’ policy period 
 of 1918, it was at first decided to declare a uniform dividend of 
 10 per cent for all the six general groups. The first statement of 
 the experience for the policy term ended December 31, 1918, as 
 made up by the actuarial division of the State Fund, showed 
 that a surplus had been earned in each group, and it was deemed 
 .advisable by the management to recommend at once a 10 per cent 
 dividend for all employers in the general groups, and to notify 
 policyholders of the dividend declaration at the earliest possible 
 date. It was known that the rates of dividend earnings had 
 varied somewhat between the six general groups, but it would 
 have required a considerable investigation to determine what the 
 different rates were so that they could be properly recognized in 
 the declaration of dividends. Moreover, the uncertainty with 
 respect to the future of business conditions after the war indicated 
 the wisdom of conservative action in distributing surplus earn¬ 
 ings of 1918. These conditions led the manager of the State 
 
Answer to Report of Jeremiah F. Connor 
 
 39 
 
 Fund to recommend to the Commission and the Commission to 
 approve a conservative dividend of 10 per cent in all six general 
 groups. 
 
 Later analysis of the experience of the several groups disclosed 
 that there was an available surplus in some of them which would 
 justify a larger dividend than the 10 per cent previously declared, 
 and a due regard for the equitable treatment of the different 
 groups appeared to call for a further distribution of dividends to 
 the groups showing a considerable surplus remaining after the 
 first dividend credit of 10 per cent. It was evident that such 
 further dividend distribution would not in any way adversely 
 affect the financial standing of the State Fund. Moreover, later 
 developments in the business world seemed to guarantee a con¬ 
 tinuance of industrial activity and prosperity for the immediate 
 future. Accordingly, the management of the State Fund recom¬ 
 mended to the Commission that supplementary dividends he 
 declared, and such dividends were duly approved by the Com¬ 
 mission. These additional dividends amount to 20 per cent in 
 the first group, known as the light manufacturing group; 10 per 
 cent in the second group, known as the heavy manufacturing 
 group, and 25 per cent in the fifth group, known as the excavation 
 and tunnelling group. It is probable that a further distribution 
 of special dividends will be made in some of the general groups 
 in the next dividend declaration, after the close of the current 
 policy period. 
 
 In short, the first declaration of a 10 per cent dividend for all 
 six general groups, which was made in February of this year, 
 was provisional and tentative, and in later dividend distributions 
 each of these general groups will receive the full amount of the 
 surplus earned, less a small amount, not in excess of 10 per cent 
 of the semi-annual premium, which will be held temporarily as 
 a margin for safety. It should be borne in mind that prior to 
 the last policy period of 1918, not one of these groups earned a 
 sufficient surplus to warrant a dividend for the two and one-half 
 years preceding. The State Fund was not withholding dividends 
 from the general groups, but these groups were not earning divi¬ 
 dends. Now that they are earning dividends, precisely the same 
 method of dividend distribution will be followed in the case of 
 
40 
 
 State Insurance Fund 
 
 the general groups as in the case of the special groups. This 
 policy with respect to dividend is embodied in the following 
 resolutions of the Commission, adopted June 4, 1919: 
 
 “ Resolved , That dividends for the last completed policy 
 period in any group shall be credited out of surplus earned 
 in such group and period, when approved by the Commission, 
 after deducting from the earned premiums, losses (including 
 reserves computed as nearly as may be on a uniform basis 
 for all groups) expenses and catastrophe charges, less any 
 deficit arising out of previous periods, and shall be such 
 percentages of the premium as may be agreed upon by the 
 Manager and Actuary, of the State Fund, subject to the tem¬ 
 porary retention for future distribution, of not less than 5% 
 nor more than 10% of the semi-annual premium, provided 
 that the total surplus remaining to the credit of the group 
 shall in no case he reduced below $2500. Further, when¬ 
 ever in the making up of the accounts there shall be found 
 surplus accumulated from periods other than the last com¬ 
 pleted policy period amounting to $10,000 (or such less sum 
 as in the judgment of the Manager and Actuary constitute 
 a safe margin for contingencies) additional dividends, when 
 approved by the Commission, may be credited in respect 
 to such earlier periods, provided, that such additional divi¬ 
 dend shall not reduce the balance retained as a margin of 
 safety, including the balance retained from the surplus of 
 the last completed policy period below $2500. After any 
 group has been discontinued more than two full years, if 
 in the judgment of the Manager and Actuary conditions 
 warrant it, a final accounting may be made and in such final 
 accounting the margin above provided for need not be 
 retained. 
 
 “Further resolved , That it is hereby declared to be the 
 policy of the Commission that in the future the same 
 methods, as far as practicable, shall be adopted for all groups, 
 general and special, with respect to the computation and dis¬ 
 tribution of dividends and the maintenance of reserves.” 
 
Answer to Report of Jeremiah F. Connor 
 
 41 
 
 Assets mid Reserves 
 
 Mr. Connor declares: 
 
 “ The State Fund has so much money on hand that it has 
 omitted as an asset the item for audit additions and has set 
 up a new liability for experience fluctuations amounting to 
 $200,000, and carries an unassigned surplus of $279,928.18.” 
 
 It was deemed advisable to omit the item for audit additions 
 from the assets, as this amount is variable and somewhat uncer¬ 
 tain. The private companies, moreover, are not permitted to 
 include this item as an asset in their reports to the State Super¬ 
 intendent of Insurance. There is now no good reason why the 
 State Fund, in its reports to the same Insurance Department, 
 should not conform with the usual requirement in this respect. 
 
 With reference to the reserve for experience fluctuation, which 
 Mr. Connor terms unnecessary, it should be explained that this 
 reserve was set up for the first time in the financial statement 
 of December 31, 1918. As the designation of the reserve implies, 
 it was intended to serve as a buffer against unforeseen fluctua¬ 
 tions of experience. The year 1918 had been a phenominally 
 good year in compensation insurance. The loss ratio of the State 
 Fund was only 50.5 per cent for 1918, as contrasted with 91.4 
 per cent for 1917. The improvement was due mainly to substan¬ 
 tial additions to the premium receipts resulting from larger pay¬ 
 rolls produced by wartime wages, and the reduction in the number 
 and severity of industrial accidents by reason of more settled 
 business conditions in 1918, as compared with the preceding year. 
 When the management of the State Fund made the first survey of 
 the experience of 1918 and took an appraisal of the prospects 
 for the year 1919 at the time the annual statement was in prepara¬ 
 tion, it seemed most unlikely that the extremely favorable experi¬ 
 ence of the recent past could be expected to continue for the 
 immediate future. Indeed, the confusion attendant upon busi¬ 
 ness readjustments, in a transition from a war to a peace basis, 
 pointed to the probability of a rise in the accident rate, while 
 at the same time it was naturally to be expected that the increase 
 in the premium income for 1918, due to the abnormally high 
 wage scale then prevailing, would show some falling off in the 
 next year. In order to guard against such contingencies, it 
 
42 
 
 State Insurance Fund 
 
 seemed wise to set aside from the surplus earnings of 1918 a 
 special reserve of $200,000, for experience fluctuation. The par¬ 
 ticular object in setting up this reserve was to insure the payment 
 of dividends in the general groups for future policy periods. The 
 payment of dividends in these groups had been resumed for the 
 last policy period of 1918, after an interruption of two and one- 
 half years. It seemed advisable to take measures to guard against 
 a suspension of dividend payments in the general groups if the 
 experience of 1919 should develop unfavorably. It was thus 
 intended that the reserve for experience fluctuation should be used, 
 if at all, for the payment of dividends in general groups, in case 
 the experience in some succeeding policy period should not be 
 sufficiently favorable to yield a surplus available for dividends. 
 
 With respect to the unassigned surplus of $279,928.18, which 
 Mr. Connor also characterizes as unnecessary, it has already been 
 explained that the situation at the time the financial statement 
 was prepared and the 10 per cent dividend declaration in the 
 general groups was recommended, was such as to call for a policy 
 of cautious conservatism with reference to dividends and reserves, 
 and it was not to be forgotten that the surplus of the State Fund 
 has been seriously depleted by the unfortunate experience of 1916 
 and 1917 common to all compensation insurance carriers. Under 
 the circumstances the management of the State Fund would have 
 shown itself utterly lacking in prudent foresight if the surplus, 
 just replenished by the gain of 1918, which might be termed a 
 windfall, had been distributed at once in dividends. Since the 
 first provisional distribution of dividends in the general groups 
 on the 10 per cent basis, the business outlook has cleared to such 
 an extent as to warrant a declaration of additional dividends in 
 the general groups from the unassigned surplus, as previously 
 stated. A further declaration of special dividends out of this 
 surplus is contemplated in connection with the semi-annual dis¬ 
 tribution of dividends at the close of the current policy period, 
 June 30, 1919. 
 
 Mr. Connor also characterizes as unnecessary the reserve for 
 deferred claim expenses of $266,011.49 and the reserve for securi¬ 
 ties fluctuation of $124,454.58. The reserve for deferred claim 
 expenses is set up to provide for the expense of paying compensa¬ 
 tion on outstanding claims that run beyond the period of the year 
 
Answer to Report of Jeremiah F. Connor 
 
 43 
 
 during which the accident occurred. That is, in addition to the 
 loss reserve covering the amount of each claim, an expense reserve 
 for the cost of distributing compensation until the maturity of 
 the claim is maintained by the State Fund. This deferred claim 
 expense reserve is computed on the basis of 4 per cent of the loss 
 reserve. The State Insurance Department requires the mutual 
 companies to maintain a reserve for deferred claim expenses and, 
 as the department also has supervision of the reserves of the 
 State Fund, the necessity of the reserve in question is obvious. 
 Further discussion of this reserve and others maintained by the 
 State Fund will be found in a memorandum of the actuary 
 appended to this report. 
 
 The reserve for securities fluctuation is necessitated by the fact 
 that the State Fund must report its investments to the State 
 Insurance Department on the basis of market valuations. This 
 reserve represents the difference between the book value of the 
 investments and the market value at the date of the financial 
 statement. It was first set up in the financial statement of 
 June 30, 1918. At that time the valuation of the securities of 
 the State Fund, according to the market quotations as required 
 by the State Insurance Department, showed a nominal deprecia¬ 
 tion of $121,183.15, and a reserve of that amount was accordingly 
 set up for investment depreciation. While there is no likelihood 
 that the State Fund will be called upon to liquidate any part of 
 its investments, nevertheless by reason of the requirements of 
 the State Insurance Department and the practice of competing 
 casualty companies, it seems desirable and proper that the State 
 Fund should at all times be able to show a satisfactory financial 
 condition upon a market value basis. In order to make this pos¬ 
 sible a sum equal to the excess of the book value of the invest¬ 
 ments over the market value was set up as an item in the liabil¬ 
 ities of the State Fund in the financial statement of June 30, 
 1918. This reserve was again included in the liabilities as of 
 December 31, 1918, and the amount was increased slightly, to 
 $124,454.58. 
 
 Supervision and Competition 
 
 The fact that the reserves of the State Fund are subject to 
 supervision by the State Superintendent of Insurance is of great 
 importance in its bearing on the policy that should be adopted 
 
44 
 
 State Insurance Fund 
 
 by the State Fund with reference to reserves. Another con¬ 
 sideration that carries great weight in this case is the fact that 
 the State Fund has no monopoly, but, on the contrary, is in active 
 competition with the private casualty companies. It is obvious 
 that the reserves of the State Fund must be ’maintained in ac¬ 
 cordance with the rules and requirements of the State Insurance 
 Department, and, furthermore, that the reserves must be so clearly 
 adequate that the financial statement issued by the State Fund 
 cannot be fairly criticized by its competitors, as indicating any¬ 
 thing less than an absolutely sound condition. These conditions 
 were called to the attention of Mr. Connor in communications 
 from the manager of the State Fund, under date of February 28 
 and March 29, 1919, as follows: 
 
 “In this connection, let me call particular attention to 
 the fact that the reserves of the State Fund are subject to 
 the supervision of the State Insurance Department. The 
 Workmen’s Compensation Law, in section 92, provides that 
 the reserves for losses ‘ shall be computed in accordance with 
 such rules as shall be approved by the superintendent of 
 insurance’ (section 92) and authorizes the Superintendent 
 of Insurance to examine into the condition of the State 
 Fund at any time ‘for the purpose of determining the con¬ 
 dition of the investments and the adequacy of the reserves 
 of such fund’ (section 106). The fact that the reserves 
 of the State Fund are thus subject to supervision and ex¬ 
 amination by the State Insurance Department is of much 
 importance in its bearing on the question of the policy that 
 should be followed by the State Fund in setting up its re¬ 
 serves. The reserves for losses must be set up in accordance 
 with rules approved by the State Insurance Department. 
 
 It is obvious that the other reserves should be set up accord¬ 
 ing to the requirements laid down by the State Insurance 
 Department for the private insurance companies. The State 
 Fund cannot afford to take any chance that the State Insur¬ 
 ance Department, after examination, may pronounce its re- jj 
 serves to be inadequate in any particular. You are doubtless 
 aware that prior to the first examination of the State Fund 
 by the State Insurance Department, as of June 30, 1916, 
 
Answer to Report of Jeremiah F. Connor 
 
 45 
 
 insinuations were made freely by the representatives of the 
 casualty companies that the State Fund was not maintain¬ 
 ing adequate reserves. The report of the examination, 
 which stated that the reserves were adequate, greatly 
 strengthened the competitive position of the State Fund. 
 If any time in the future an examination hy the State In¬ 
 surance Department should disclose any deficiency in the 
 reserves of the State Fund, as tested by the rules of that 
 department, ihe report of such findings would he exploited 
 to the serious detriment of the State Fund. It is obvious 
 that, under these conditions, an extremely conservative policy 
 is the only one that is safe or prudent for the State Fund. 
 
 “ It occurs to me to offer a further comment on the matter 
 of the policy that should he adopted hy a competitive State 
 Fund with reference to reserves. The matter of maintain¬ 
 ing adequate reserves at all times is vastly more important 
 for a competitive than for a monopolistic State Fund. If a 
 monopolistic State Fund incurs a deficit in any policy period 
 it can meet the situation hy advancing rates; a competitive 
 State Fund could not take this means of relief, for the in¬ 
 crease of rates would result in a loss of business that would 
 defeat the object of the rate advance. In fact, the very 
 existence of a deficit in itself would drive business away from 
 a competitive State Fund. The way in which a monopolistic 
 State Fund is able to wipe out a deficit of large proportion 
 by manipulating rates, in the absence of competition, is well 
 illustrated by the history of the West Virginia State Fund. 
 This State Fund incurred a heavy deficit in the first two 
 years, chiefly on account of two catastrophes in the coal mine 
 industry, costing approximately $500,000. The deficit on 
 June 30, 1914, amounted to $300,299.60, and on June 30, 
 1915, it had increased to $621,938.99. Within three years 
 this heavy deficit was wiped out, and on June 30, 1918, the 
 Fund showed a surplus of $165,649.95. This result was 
 accomplished by advancing rates, on an average about 60 
 per cent in 1916, and maintaining the rates at a high level 
 in 1917 and 1918, notwithstanding the low loss cost. It 
 would have been utterly impossible for the West Virginia 
 
46 
 
 State Insurance Fund 
 
 State Fund to accomplish this remarkable transformation 
 if it had been subject to competition. No competitive State 
 Fund could rehabiliate itself after the fashion of the West 
 Virginia State Fund. It is a vital matter for any com¬ 
 petitive State Fund to maintain ample reserves and surplus, 
 and in this way to protect itself against the possibility of a 
 deficit, for such a fund could not extricate itself from a state 
 of temporary insolvency by advancing rates.” 
 
 • 
 
 Method of Charging Reserves 
 
 Mr. Connor not only criticizes these reserves as unnecessary, 
 but he also contends that the special groups have not been charged 
 for their proper share in these reserves. The State Fund, he 
 declares, “ carries as liabilities the following reserves, all of which 
 
 are unnecessary: 
 
 Reserve for deferred claim expenses. $266,011 49 
 
 Reserve for experience fluctuation. 200,000 00 
 
 Reserve for securities fluctuation . 124,454 58 
 
 Which together with the unassigned surplus. . 279,928 18 
 
 Totals . $870,394 25 
 
 u No part of the above with the possible exception of a small 
 portion of the unassigned surplus is charged against the special 
 groups.” 
 
 This statement is partly erroneous and wholly misleading. 
 The intimation is that the State Fund practices discrimination 
 in favor of the special groups by charging practically all these 
 reserves against the general groups, thus increasing the dividends 
 of the former and diminishing those of the latter. This criticism 
 is wholly unfounded. In accounting and distributing of divi¬ 
 dends to the special groups, the State Fund charges against these 
 groups the full proportion of all reserves properly and equitably 
 chargeable against these accounts. The special groups from the 
 beginning have contributed their full share to the expenses of the 
 State Fund, including not only the current expenses, but also the 
 deferred claim expenses, and the amount of the Commission’s 
 
Answer to Report of Jeremiah F. Connor 
 
 47 
 
 expenses apportioned to the State Fund in the distribution of 
 these expenses among the various insurance carriers. The reserve 
 for experience fluctuation is not a proper charge against the 
 special groups. As has been pointed out, the particular object 
 of this reserve was to enable the State Fund to continue the pay¬ 
 ment of dividends in the general groups, even in spite of an un¬ 
 favorable experience in some future policy period. There was 
 no intention of using any part of this reserve for the payment 
 of dividends in the special groups. This reserve was set up 
 solely for the benefit and protection of the general groups, and 
 no part of it, therefore, should be charged against the special 
 groups. 
 
 Furthermore, the occasion for creating this reserve, as has 
 been set forth, was the uncertainty as to the business outlook at 
 the time the financial statement for December 31, 1918, was pre¬ 
 pared. In view of the assured prospect of continued industrial 
 activity and prosperity which the developments of recent months 
 have brought, the need of maintaining this reserve may be said 
 to have passed, and it is the intention of the management of the 
 State Fund to recommend that it be eliminated in the next 
 financial statement as of June 30, 1919. 
 
 In the case of the reserve for securities fluctuation or invest¬ 
 ment depreciation, it should be pointed out that depreciation is 
 properly a charge against interest. This reserve, therefore, should 
 be charged against the interest earnings of the State Fund. No 
 part of the interest earnings as yet has been credited to the special 
 groups, and there is no reason why any part of the investment 
 depreciation reserve should be charged against these groups. The 
 interest earnings of the State Fund exceed the amount of this 
 reserve by over $100,000. 
 
 Finally, as to the unassigned surplus, it is sufficient to state 
 that this is made up of contributions in the form of surplus earn¬ 
 ings from all the groups, general and special. 
 
 In brief, the only one of the reserves named by Mr. Connor 
 which has been charged wholly against the general groups is the 
 temporary reserve for experience fluctuation, and this reserve is 
 not properly chargeable in any part against the special groups 
 for the reserve stated. 
 
48 
 
 State Insurance Fund 
 
 Attitude Toward Claimants 
 
 Mr. Connor further criticizes the special groups as furnishing 
 a motive for employers so grouped to keep down the payment 
 of compensation. He states: 
 
 “ Some employers in the special groups treat the claimants 
 with absolute fairness. Others are more interested in keep¬ 
 ing down the payment of compensation because the amount 
 saved is returned to them in the form of dividends. Such 
 employers are sometimes represented by claim agents before 
 the Commission and as to these the result in special groups 
 is probably as bad as under direct settlement. A case in 
 point is as follows: 
 
 “ Hick Schemelia (Case Ho, B-4500) was injured Janu¬ 
 ary 20, 1918. He was paid under an award from the State 
 Insurance Fund the sum of $125 up to the time he resumed 
 work. The injury resulted in a permanent deformity of 
 one arm. The case was closed March 28, 1918. About a 
 year later he obtained a rehearing through an attorney and 
 was awarded compensation for partial loss of use of the arm 
 in the sum of $2,215 in addition to the amount he had already 
 received.” 
 
 As respects the general criticism that employers in the special 
 groups have a particular interest in keeping down the payment 
 of compensation, it is to be observed that this motive is 
 present in even greater degree in the case of a self-insured em¬ 
 ployer. The same incentive exists, but in a less degree, in the 
 case of employers insured in mutual associations. The employer 
 is one of the parties in interest and has a right to be represented 
 at hearings before the Commission. Such representation does 
 not enable the employer to control the procedure and dictate the 
 award. It devolves upon the commissioner or deputy in charge 
 to dominate the situation and to dispense even justice in the face 
 of pressure from conflicting interests. In fact, this is a general 
 administrative question and not one specifically touching the State 
 Fund. 
 
 With reference to the particular case cited by Mr. Connor, it 
 appears that this case was duly closed by the Commission in the 
 •usual manner after award had been made for the duration of the 
 
Answer to Report of Jeremiah F. Connor 
 
 40 
 
 disability up to the time the employee returned to work. The 
 employer made no attempt to block the award, and neither the 
 employer nor the State Fund was represented at the hearing. 
 Later a permanent partial disability developed in consequence 
 of the injury. The case was then reopened and an additional 
 award was made for partial loss of the use of the arm. It was 
 not necessary for the claimant to place the case in the hands of 
 an attorney in order to secure the reopening of the case and the 
 award to which he had become entitled by reason of the subse¬ 
 quent permanent disability. 
 
 Windoiv Cleaners' Croup 
 
 Mr. Connor closes his discussion of the special groups with 
 some comments on the group for employers engaged in the window 
 cleaning business. These comments contain several inaccuracies, 
 lie refers to this group as composed of “ employers engaged in 
 the window cleaning business in Hew York city.” The member¬ 
 ship of the group is not confined to employers in Hew York city. 
 It includes all window cleaning contractors in the State who are 
 insured in the State Fund. Further, Mr. Connor says: “ These 
 employers are supposed to join a window cleaners’ association 
 and are then permitted to obtain insurance in the State Fund in a 
 special group.” This group is not confined to members of any 
 association; employers are permitted to obtain insurance in this 
 group without regard to such membership; in fact, the group 
 includes a considerable number of employers who are not members 
 of any association. It is true that the Window Cleaners’ Pro¬ 
 tective Association was formed for the purpose of improving 
 conditions in the trade and enabling members to obtain insurance 
 on better terms. The association co-operates with the State Fund 
 in matters of pay-roll reporting and accident prevention to the 
 common advantage of the State Fund employers and employees. 
 
 Mr. Connor continues: 
 
 te The rate established for this insurance is $14.92 ner 
 $100 of payroll. When the group was created, it was under¬ 
 stood that the advance premium was to be collected on the 
 basis of $5 and the balance should be paid at the close of each 
 six months’ policy term.” 
 
50 
 
 State Insurance Fund 
 
 This was not the understanding. It was, however, agreed that 
 the State Fund would accept an advance installment of the 
 premium on the basis of five dollars in recognition of the deposit 
 of a bond for $12,500 by the Windows Cleaners’ Protective Asso¬ 
 ciation to secure the State Fund in the event that the losses and 
 other charges against the group exceeded the amount of the install¬ 
 ment premiums, and it was further stipulated that in such event 
 the State Fund could call upon members for additional install¬ 
 ments of premiums, and in the case of their failure to make good 
 the deficit, should use surety bond for this purpose. It is of 
 interest to state that the cash premium paid by the members of 
 this group for the six months’ policy term amounted to $16,528.67, 
 and in addition to this amount the State Fund has the $12,500 
 bond deposited by the association. 
 
 Mr. Connor proceeds : 
 
 “ The State Fund now has under consideration a plan to 
 waive the collection of the balance of the premium and make 
 an adjustment with these employers on the basis of their 
 actual losses. In other words, because the experience for 
 six months has been favorable, the State Fund does not 
 intend to collect the additional premiums to guard against 
 future losses. It is well known that window cleaning is one 
 of the most hazardous employments in the State. Most of 
 the accidents result in death. Carrying such insurance upon 
 the basis of the current losses for six months is about the 
 poorest insurance proposition that can be advanced. In the 
 next six months the losses might be fifty times the premium 
 and the practice employed by the State in respect to this 
 group of employers cannot and would not be undertaken 
 were it not for the fact that the general groups are back 
 of the special groups to pay the bills in case the premium 
 in the special group is insufficient.” 
 
 It has already been explained that the arrangement with the 
 Window Cleaners did not call for the payment of the entire bal¬ 
 ance of the premiums at the close of each six months' policy 
 period, but merely for the payment of additional amounts as 
 needed to cover the incurred losses, with security for such pay¬ 
 ment in the form of a bond deposited by the association. The 
 
Answer to Report of Jeremiah F. Connor 
 
 51 
 
 State Fund, therefore, has never had under consideration any 
 plan to waive the collection of the balance of the premiums, hut, 
 on the contrary, reserves its right to call for additional premiums 
 as needed to cover incurred losses and other charges. Mr. Con¬ 
 nor’s further reflection upon the unsoundness of this plan and 
 the danger of a deficit are, therefore, unwarranted. In particular 
 his remark that the practice with respect to this group “ cannot 
 and would not be undertaken, were it not for the fact that the 
 general groups are back of the special groups to pay the bills in 
 case the premium in the special groups is insufficient,” is a 
 groundless insinuation. It has already been shown clearly that 
 the general groups are not supporting the special groups and that 
 the former will never he called upon to pay any deficit for the 
 latter. 
 
 Mr. Connor concludes with this assertion: 
 
 “ The State Fund also proposes to discriminate as to divi¬ 
 dends between the employers in this group who have joined 
 the Window Cleaners’ Association and those who have not.” 
 
 Ho such discrimination is practiced or contemplated, and divi¬ 
 dends in this group will be distributed equitably among the mem¬ 
 bers on the basis of their premiums. 
 
 The establishment of the Window Cleaners’ group was entirely 
 justifiable from every point of view. Before this group was cre¬ 
 ated, the rates and terms of insurance for this trade were prac¬ 
 tically prohibitive. Many members of the trade were unable to 
 provide insurance, and their employees were without protection 
 under the law. An appeal was made to the Chairman of the 
 Commission by the employees’ union, and after conferences with 
 the committee representing the employers, the plan of a special 
 group was formulated. This plan brought about a solution of a 
 most difficult problem, enabling employers in this hazardous busi¬ 
 ness to obtain insurance on reasonable terms, protecting the State 
 Fund through the deposit of a surety bond, in addition to the 
 cash payments, and opening the way to an effective co-operation 
 between the State Fund and a responsible association representing 
 the employers. It would seem that this arrangement really de¬ 
 serves commendation rather than criticism. 
 
52 
 
 State Insurance Fund 
 
 The WynJcoop Service 
 
 The Wynkoop Service is a compensation service and insurance 
 brokerage organization which has placed a considerable volume 
 of business in the State Fund. The service includes medical and 
 hospital care for employees, safety engineering and accident pre¬ 
 vention work, supervision of claim matters and, in some instances, 
 general efficiency service for the employer. This service is fur¬ 
 nished under a contract providing for a division between the 
 employer and the Wynkoop Service of the amount of any saving 
 in the cost of compensation insurance below a certain maximum 
 cost, which is usually the amount of the premium according to 
 the manual or schedule rates of the State Fund applicable to the 
 risk. 
 
 It is important to note that the Wynkoop Service is authorized 
 by its contract with the employer to represent the latter in all 
 matters relating to his compensation insurance. Under this con¬ 
 tract Mr. Wynkoop is the duly authorized representative of the 
 employer in all dealings with the State Fund or any other com¬ 
 pensation insurance carrier. It is obvious that the State Fund 
 could not fairly or reasonably refuse to deal with an agency thus 
 duly authorized to represent the employer, provided that the 
 methods of such agency are legal and proper. Indeed, the co¬ 
 operation of a legitimate and reputable service organization in 
 bringing business into the State Fund and supervising risks so 
 insured should be welcomed and facilitated, as a valuable factor 
 in the upbuilding of the State Fund both with respect to the quan¬ 
 tity and the quality of its business. 
 
 Some of the risks supervised by the Wynkoop Service are placed 
 in one of the special groups, Group 17, Miscellaneous Metalware 
 Group; others are subject to the State Fund plan of experience 
 rating; still others are placed in the general groups. 
 
 There has been no favoritism or discrimination in the rating 
 and grouping of these risks. "No arrangement has been offered in 
 the case of the Wynkoop Service that is not open on equal terms 
 to any other broker or service organization. The State Fund has 
 treated risks under contract with the Wynkoop Service precisely 
 as it treats other risks placed in the State Fund by any similar 
 agency. These risks have been put into a special group, or have 
 
Answer to Report of Jeremiah F. Connor 
 
 53 
 
 been given a special experience rating, or have been placed in one 
 of the general groups, in accordance with the particular arrange¬ 
 ment properly applicable in each case under the rules. There is 
 nothing unique or peculiar in the treatment of the risks having 
 the Wynkoop service. 
 
 Miscellaneous Metalware Group 
 
 The Miscellaneous Metalware Group is not the only one of its 
 kind in the State Fund. Another group, Group 15, Machine 
 Shop and Foundry Group, is precisely similar to Group 17 in its 
 composition and operation. This group is made up of a number 
 of large employers in the Buffalo district, who have combined to 
 provide special medical, safety and claim supervision for their 
 plants. Also the State Fund experience rating plan has been 
 applied to numerous risks not under the Wynkoop Service. Even 
 the special group for employers using the Wynkoop Service is not 
 closed to all other applicants; on the contrary, this group is open 
 to any employer in the same trade who could qualify for member¬ 
 ship by complying with the conditions as to the size of payroll, 
 and medical and safety organization. As a matter of fact, there 
 is only one other risk in the State Fund that could qualify for 
 admission to this group. A proposition to join the group upon 
 due compliance with specified conditions for membership has been 
 offered to this employer, who has the matter under consideration. 
 The statement of Mr. Connor that Group 17 “ is exclusively for 
 employers having the Wynkoop Service,” and that • “ no other 
 employer in the State Fund or in any other industry in the State 
 carrying on a similar business is allowed in this group,” is not 
 in accordance with the facts. 
 
 With respect to the legality of Group 17, it should be pointed 
 out that employers in this group are all engaged in related 
 branches of iron and steel manufacture, involving a similar haz¬ 
 ard of industry. The classifications represented in the group 
 include steel foundries, drop forging, bolt and nut manufacture, 
 tin and teme plate manufacture, ornamental brass, bronze and 
 iron work, malleable iron work, wire cable manufacture, and wire 
 drawing. Authority to establish a trade group of this character 
 is conveyed by the provisions of section 95 of the Workmen’s Com- 
 
54 
 
 State Insurance Fund 
 
 pensation Law empowering the commission to “ rearrange any 
 of the original groups in the law by withdrawing any employ¬ 
 ments embraced in it and transferring it wholly or in part to any 
 other group, and from such employments to set up new groups 
 at its discretion.” The creation of special trade groups is also 
 in harmony with the principles and conditions laid down in the 
 opinion of the Attorney-General of the State January 25, 1916, 
 in which he sustained the right of the Commission to set up even 
 a single employer as a special group, provided that the nature of 
 the operations and the hazard of the business were such as to 
 differentiate the risk in question from others of a similar general 
 character insured in the State Fund in such a way as to justify 
 separate classification. 
 
 With respect to the propriety of establishing trade groups, 
 such as Group 17, it should be observed that this arrangement is 
 justified in recognition of the reduced hazard of risks having the 
 benefit of a properly organized system of medical and safety 
 supervision. The trade group plan enables a body of employers 
 who are sufficiently progressive to provide an expert medical and 
 safety organization for their plants, to obtain the benefit of the 
 saving effected in this way, and not to share it with other em¬ 
 ployers who may be indifferent or negligent with respect to safety 
 matters. The arrangement thus brings to bear a direct incentive 
 to prevent accidents and to reduce insurance costs, to the mutual 
 advantage of the employer and the insurance carrier. The plan 
 has the further advantage for the Insurance Fund that it enables 
 it to secure and hold desirable business that under the keenly com¬ 
 petitive conditions in this State would tend to leave the State 
 Fund for mutual or self-insurance. 
 
 Special Experience Rating 
 
 With reference to the State Fund experience rating plan, which 
 is applied to some risks under the Wynkoop Service, as well as 
 to various others not having this service, it should he stated that 
 this plan was formulated for use in connection with large-size 
 risks, having an approved safety and medical organization, and 
 was put into operation at the time when the experience rating plan 
 of the Compensation Inspection Rating Board was highly unsatis- 
 
Answer to Report oe Jeremiah F. Connor 
 
 factory, that plan having later been abolished. The application 
 of the plan is limited to approved risks paying a premium of not 
 less than $1,000 for six months. The plan provides for a read¬ 
 justment of rates at the end of each policy period. The method 
 of readjustment is described in a memorandum attached to this 
 report. 
 
 This experience rating plan is actuarially sound and is a justi¬ 
 fiable method of giving recognition to the reduced hazard of a 
 risk in consequence of a proper organization of medical and 
 safety service. The plan is based on the same principles and is 
 designed to accomplish the same objects as the special group plan. 
 The main object of formulating and applying the experience rat¬ 
 ing plan was to enable the State Fund to attract and hold a 
 desirable class of risks, to which the special group plan is not 
 applicable. This class includes large-size risks, having a safety and 
 medical organization and showing a generally good loss experi¬ 
 ence, which, however, cannot be assigned to special groups because 
 of the inability to furnish a sufficient volume of premium to 
 warrant separate grouping. Employers of this class when placed 
 in general groups become dissatisfied with the cost of their insur¬ 
 ance, which seems to them unduly high as measured by their own 
 favorable experience, and it becomes increasingly difficult, as time 
 goes on, to secure a renewal of such business. Such employers, 
 who have equipped and organized their plants for safety work, 
 and have, consequently, developed a low loss ratio, feel that they 
 are entitled to a lower rating on this account, and are not satisfied 
 with the terms offered by the State Fund to employers in the 
 general groups. The experience rating plan was devised to meet 
 the requirements of such high-class large risks. 
 
 The plan was applied at first tentatively and cautiously. It 
 has been extended gradually as new risks have presented them¬ 
 selves for consideration, through notice of withdrawal, which leads 
 sometimes to an offer of this plan, as it means the holding of 
 employers who otherwise would leave the State Fund; through 
 requests by field representatives of the State Fund for permission 
 to offer the plan to an employer who would not be attracted by 
 the proposition to insure in one of the general groups; and through 
 applications on behalf of risks submitted through the Wynkoop 
 
56 
 
 State Insurance Fund 
 
 Service and others. It should be noted that the plan has been 
 offered to a considerable number of employers who have declined 
 to accept it, chiefly because of the liability to pay an additional 
 premium in the case of a deficit. It would not be possible, for 
 this reason, to put the plan into operation uniformly for all em¬ 
 ployers having the requisite amount of premium and meeting 
 the other conditions. In order that there may be no basis, how¬ 
 ever, for any charge of discrimination or unfairness in the use of 
 the plan, it has been decided recently by the Commission that the 
 plan be offered to every policyholder having a semi-annual pre¬ 
 mium of not less than $1,000, and on the further conditions that 
 the experience record and the moral hazard of the risk be satis¬ 
 factory and that the employer install a safety equipment and 
 organization according to a standard to be fixed by the State Fund. 
 The Manager of the State Fund has been instructed to offer the 
 plan to policyholders in general groups on this basis. It is be¬ 
 lieved that the extension of the provisions of the plan to all 
 employers having the required amount of premium who may be 
 willing to conform to the other specified conditions will obviate 
 the only criticism against the plan, as hitherto applied, which has 
 valid basis. 
 
 Some Corrections 
 
 Some of the statements made by Mr. Connor concerning this 
 experience rating plan call for correction. Mr. Connor states that 
 “ the plan was promulgated by the State Insurance Fund without 
 authorization by the State Industrial Commission.” 
 
 It is true that the experience rates determined under this plan, 
 and also those fixed under the plans operated by the Compensa¬ 
 tion Inspection Rating Board at different times, have not been 
 reported to the Commission for specific approval by resolution, 
 as all matters of merit and experience rating have been treated 
 as a part of the underwriting office routine. Two different plans 
 of merit rating, and three different plans of experience rating, 
 have been in operation for the State Fund, no one of which has 
 been referred to the Commission for a resolution of approval. It 
 has not been the practice of the Commission to pass resolutions 
 on matters relating to underwriting and actuarial procedure in 
 the office of the State Fund. 
 
Answer to Report of Jeremiah F. Connor 
 
 57 
 
 Mr. Connor states: “ Employers receiving this special rating 
 
 plan are supposed to have safety and medical organizations. To 
 say the least, these organizations are somewhat loose and do not 
 appear to he checked up hy the State Fund.” 
 
 This statement is not warranted hy the facts. Each risk offered 
 for special experience rating is carefully scrutinized with respect 
 to its past experience and present hazard, and, in particular, the 
 arrangements for medical treatment of employees and the safety 
 equipment and organization are examined, to insure that they com¬ 
 ply with the standards of the State Fund. 
 
 Mr. Connor characterizes the provision for an additional pre¬ 
 mium charge, not exceeding 50 per cent, in the event of a deficit 
 as “ more or less of a gentleman’s agreement,” and cites the 
 refusal of the Cutler Desk Company to pay the additional charge. 
 “ In the case of the Cutler Desk Company,” he declares, “ which 
 operated under this plan under the Wynkoop Service, in which 
 the losses were far in excess of the premium, the employer refused 
 to pay the excess premium, and the matter has been referred to 
 the Attorney-General for collection. The Cutler Desk Company 
 is one case at least in which the Wynkoop Service did not prevent 
 accidents.” 
 
 The provision with respect to the 50 per cent additional pre¬ 
 mium charge is embodied in the rules of the experience rating 
 plan and is explained to every employer who elects to come under 
 the provisions of the plan. The plan was applied to the risk of 
 the Cutler Desk Company at the request of the Wynkoop Service, 
 which had been duly authorized in a communication addressed hy 
 the Cutler Desk Company to the State Fund to represent the 
 company in all its transactions with the State Fund. The experi¬ 
 ence on this risk for the two policy periods during which the State 
 Fund carried it was unfavorable and resulted in an additional 
 premium charge. The Cutler Desk Company withdrew from the 
 State Fund at the close of the second policy period and refused to 
 pay the additional premium charge. The matter was then reported 
 to the Attorney-General. 
 
 It should he noted that in this case, and in all others in which 
 the experience rating plan produces a deficit, the plan works for 
 the protection of the general group in which the experience-rated 
 
State Insurance Fund 
 
 risk is placed and of the State Fund, as a whole, for it imposes 
 upon the employer a part of the deficit, to the amount of 50 per 
 cent of the semi-annual premium, whereas, if the risk had not 
 been experienc&rated, the entire amount of the deficit would have 
 fallen upon the group and the State Fund. 
 
 It should also he stated in justice to the Wynkoop Service that 
 the unfavorable experience on this risk was due to war conditions. 
 The Cutler Desk Company engaged in the manufacture of aero¬ 
 plane parts, and, in order to rush the work, took on inexperienced 
 employees in large numbers, as the labor situation was such that 
 trained operatives could not be found. Safety provisions were 
 neglected; machine guards installed by the Wynkoop Service were 
 removed over night. In short, labor conditions made it impossible 
 to carry on effective accident prevention work. 
 
 Mr. Connor further states that the experience rating plan “ is 
 supposed to apply only to employers having a premium of $1,000, 
 hut even this rule is not enforced.” 
 
 This statement is wholly without foundation. Ho risk yielding 
 a sem-annual premium of less than $1,000 has ever been subject 
 to experience rating. It would be impossible for a risk that 
 failed to produce an earned premium of $1,000 to get any rate 
 readjustment under the experience rating plan, as each experience 
 statement for risks subject to the plan must be checked and 
 approved by the actuary and the manager of the State Fund 
 before it passes through the routine of rate readjustment. It has 
 happened in one or two cases that a risk accepted provisionally 
 for a special experience rating, on condition that it should pro¬ 
 duce an earned premium of not. less than $1,000, failed at the 
 end of a policy period to qualify for a rating because the actual 
 earned premium fell short of the required minimum. Hot a single 
 instance can be cited of the grant of a special experience rating 
 to a risk producing a semi-annual premium below the $1,000 
 minimum. 
 
 Charge for Deficit 
 
 Mr. Connor also cites the case of the Hiagara Alkali Company, 
 to show the alleged unfairness of the experience rating plan in 
 its effect on other employers in the State Fund. u In this case,” 
 he states, “ the premium from July 1, 1918 to January 1, 1919 
 
Answer to Report of Jeremiah F. Connor 
 
 5,9 
 
 was $9,905.91. The losses were $24,000 which together with a 
 charge of 5 per cent, for catastrophe, 7% per cent for expenses 
 and 5 per cent for excess risk, made the total charge against the 
 premium, $25,712.86, a deficiency of $15,806.95, chargeable 
 against the general employers in the State Fund. Under the 
 special rule this employer should have been charged an excess of 
 50 per cent and even then the deficiency would have been about 
 $10,000. The State Fund, however, has not in this case billed 
 the employer for the excess premium of 50 per cent. This is 
 probably due to a desire to “ ascertain whether the experience 
 will not eventually become so favorable that the State Fund may 
 decide not to collect the excess premium.” 
 
 This statement rests on a misconception of the operation of the 
 State Fund experience rating plan. In this case, as in the case 
 of the Cutler Desk Company, an additional charge of 50 per 
 cent of the premium was imposed on account of a deficit. The 
 Niagara Alkali Company is still insured in the State Fund, and 
 the additional premium charge, which was incurred for the policy 
 period ended December 31, 1918, will be deducted from the sur¬ 
 plus earned in succeeding policy periods, in accordance with the 
 rule of the experience rating plan. This adjustment will be made 
 in the statement rendered for the current policy period ending 
 June 30, 1919. The status of the account for the preceding 
 policy period, which produced the deficit, has already been 
 explained to the policyholder, and no objection to the imposition 
 of the additional premium charge has been raised by the Niagara 
 Alkali Co. Mr. Connor speaks of the deficit “as chargeable 
 against general employers in the State Fund.” He overlooks the 
 fact that the experience rating plan in a case like this as has been 
 pointed out, works to the advantage of the other policyholders, 
 as it imposes a part of the deficit upon the employer subject to 
 the experience rating plan and affords proportionate relief from 
 this burden to the general group in which his risk is placed, and 
 the State Fund as a whole. In the case under consideration the 
 Niagara Alkali Company paid precisely the same premium that 
 it would have paid as a member of a general group not subject to 
 the experience rating plan, as the plan failed to yield any rate 
 reduction at the end of the policy period, and besides this the 
 
60 
 
 State Insurance Fund 
 
 company incurred an obligation to contribute 50 per cent of the 
 amount of such premium toward the incurred deficit in the form 
 of a charge against any surplus earned in succeeding policy 
 periods. Had the policyholder withdrawn from the State Fund at 
 the end of the period preceding the deficit, the amount of the 
 additional premium charge would have been payable in cash, as 
 in the case of the Cutler Desk Company. 
 
 In short, instead of working a hardship to other employers 
 in the State Fund, as Mr. Connor mistakenly represents, the 
 experience rating plan, in the event of a deficit, operates to the 
 pecuniary benefit of the State Fund and other policyholders in 
 the group carrying an experience-rated risk, as it helps to absorb 
 the deficit, at least in part, which otherwise would fall wholly 
 upon the general surplus of the group in question. 
 
 Cost and Value of Service 
 
 Mr. Connor contends that “ every service performed by ” the 
 Wynkoop Service for the employer should be performed “ by the 
 State Insurance Fund itself.” 
 
 The State Fund could not possibly furnish to policyholders the 
 type of specialized, intensive, individual expert service which a 
 private organization can supply. The number of policyholders 
 is too large and the available and obtainable force of safety 
 engineers and other experts is too small. The State Fund is 
 forced to operate under the rigid restrictions of the budgetary 
 system and the Civil Service. Under the limitations and handi¬ 
 caps imposed upon the State Fund by conditions inherent in the 
 public service, it would be impossible to build up an expert service 
 organization that would meet fully the needs of all policyholders 
 in this respect. It would obviously be inequitable to provide 
 special medical and safety service for some policyholders and 
 some groups, without extending it to all. There is, therefore, 
 ample room for a compensation service agency of the type which 
 the Wynkoop Service represents, to do much more for employers 
 than the State Fund can possibly do for all of its policyholders, or 
 for any of its policyholders, with due regard to an equitable 
 treatment of all. 
 
 In this connection Mr. Connor charges that the cost of the 
 
Answer to Report of Jeremiah F. Connor 
 
 61 
 
 Wynkoop Service, estimated at one-half of the 40 per cent, divi¬ 
 dend to policyholders in Group 17, or 20 per cent, of the premi¬ 
 um, is “ ridiculous and excessive.” 
 
 It should he borne in mind that the 20 per cent, of the pre¬ 
 mium received by the Wynkoop Service is not clear profit, but 
 must provide for the salaries of inspectors, physicians, investi¬ 
 gators, statisticians, and other expenses of the service organiza¬ 
 tion. It is pertinent to point out here that the average ratio of 
 management expenses to premiums for the mutual insurance com¬ 
 panies in this State, in 1917, was 22.1 per cent. The remunera¬ 
 tion of the Wynkoop Service, whether excessive or not, is based 
 upon contracts with the employers using this, service. The pro¬ 
 vision of the contract with respect to the division of saving in the 
 compensation costs between the employer and the service organi¬ 
 zation would seem to be purely a private concern as between these 
 two parties. It should perhaps be stated here that the Wynkoop 
 Service has under consideration a plan for modifying the present 
 system of charges for the service which will do away with the 
 contingent feature and place the charges upon a fixed basis. 
 
 Mr. Connor intimates that the Wynkoop Service is not only 
 excessively costly, but also is practically valueless to employers, 
 or, in other words, that the Wynkoop Service does very little if 
 anything in return for the alleged high cost of the service. He 
 states: “ I firmly believe that the high dividends and the income 
 of the Wynkoop Service is due largely to the special group plan, 
 and that the same employers would receive nearly as high divi¬ 
 dends in the special group without the Wynkoop Service. As a 
 matter of fact, other employers in special groups, who do not have 
 this service receive as high, and probably in some cases, higher 
 dividends.” 
 
 It is not the purpose of this review of Mr. Connor’s report to 
 hold a brief for the Wynkoop Service, but as statements of this 
 kind reflect indirectly upon the State Fund and the Commission, 
 it is pertinent to present some facts bearing on this question. 
 
 If the Wynkoop Service is of real value in preventing acci¬ 
 dents and reducing compensation costs for the employer, this 
 ought to be reflected in reduced losses or improved experience of 
 risks supervised under this service organization. An exhibit of 
 
State Insurance Fund 
 
 62 
 
 the comparative loss ratios of the group for employers using the 
 Wynkoop Service and of the general groups of the State Fund, 
 in which these risks would otherwise be placed, is significant here. 
 The combined average loss ratio of the two general groups con¬ 
 taining metalware risks, for the three policy periods, beginning 
 July 1, 1917, the date of the establishment of the Miscellaneous 
 Metalware Group, was 65.2 per cent. In computing this loss 
 ratio, due allowance has been made for the distribution of metal¬ 
 ware risks as between the two groups. The loss ratio of the mis¬ 
 cellaneous metalware group, made up of risks having the Wyn¬ 
 koop Service, for the same period, was only 43.6 per cent. The 
 loss ratio of the special group using the Wynkoop Service was 
 thus 35% lower than the loss ratio of the general groups contain¬ 
 ing risks of similar character. 
 
 Comparison may also be made between the accident experience 
 of risks insured in the State Fund before and after taking the 
 Wynkoop Service. Mr. Connor remarks that among the employ¬ 
 ers in the group having Wynkoop Service are some who were 
 already insured in the State Fund. It is interesting to compare 
 the experience of such risks prior to their contract with the Wyn¬ 
 koop Service with their experience thereafter. One large concern 
 engaged in metalware manufacture has been with the State Fund 
 since July 1, 1914, and since July 1, 1917, has received the Wyn¬ 
 koop Service as a member of the Miscellaneous Metalware Group. 
 During the three-year period, from July 1, 1914, to July 1, 1917, 
 when this risk was not under the Wynkoop Service, the total pre¬ 
 mium receipts were $16,705.49, and the incurred losses were 
 $14,630.46, giving a loss ratio of 87.6 per cent. During the 
 eighteen months period, from July 1, 1917, to December 31, 
 1918, the premium receipts were $21,349.96, and the incurred 
 losses were $7,485.53, giving a loss ratio of 35.1 per cent. The 
 loss ratio in the second period under the Wynkoop Service was 
 thus considerably less than one-half of that for the prior period 
 without that service, and this, notwithstanding the fact that 
 under the increased pressure of operations, attendant upon rapid 
 expansion during the second period, a higher loss ratio would 
 naturally have been expected. If objection be raised to this com¬ 
 parison on the score that it takes no account of changes in rates, 
 
Answer to Report of Jeremiah F. Connor 
 
 G3 
 
 it may be well to point out that a comparison of the net loss cost 
 per $100 of payroll, yields substantially the same result, and in 
 such a comparison, of course, there is no factor of error due to 
 rate changes. The net loss cost per $100 of Manufacturing pay¬ 
 roll in the first period was 82.2 cents; in the second period it was 
 46.5 cents. 
 
 Another concern, operating a large freight terminal, was in¬ 
 sured with the State Fund from September 30, 1914, to Septem¬ 
 ber 30, 1917, when the insurance was cancelled, and later re¬ 
 turned to the State Fund for one period, from November 30, 
 1917, to May 30, 1918, under the Wynkoop Service. This policy 
 was again cancelled at the close of the six months’ period desig¬ 
 nated, in consequence of the assumption of control of the opera¬ 
 tions of the insured by the United States Railroad Administration. 
 During the first three years of insurance with the State Fund, 
 the premium receipts were $31,900.69, and the incurred losses 
 were $33,154.90, giving a loss ratio of 103.9 per cent. The net 
 loss cost per $100 of payroll was $3.79. During the last six 
 months period under the Wynkoop Service, the premium receipts 
 amounted to $7,817 and the incurred losses were $314.17, giving 
 a loss ratio of 4 per cent. The net loss cost per $100 of payroll 
 was 17 cents. It should be noted that the State Fund assumed 
 the medical liability during the first period, but not during the 
 second. The medical cost was accordingly included in the loss 
 ratio for the first period, but not for the second. This made the 
 figures for the loss ratio and net loss cost for the first period rela¬ 
 tively higher than the figures for the last period. The loss ratio 
 for the first period, exclusive of medical, was 94.4 per cent., and 
 the net loss cost on the same basis was $3.45. 
 
 These comparisons would appear to indicate that the Wynkoop 
 Service has been of some value to employers and employees in the 
 way of preventing accidents and bringing about an improved 
 experience. 
 
 Inspection Work 
 
 Mr. Connor further intimates that the inspection work for 
 risks under the Wynkoop Service is really performed largely by 
 the State Fund. He states: 
 
 “ One would naturally assume that the inspection work 
 necessary to install safety guards for preventing accidents 
 
64 
 
 State Insurance Fund 
 
 would be performed by the Wynkoop Service. It appears, 
 however, that in most of the cases, this part of the Wynkoop 
 Service is performed by the State Insurance Fund itself 
 through its safety engineer. 77 
 
 A report upon the inspections made by the State Fund for 
 twenty-live risks using the Wynkoop Service was furnished Mr. 
 Connor at his request by the safety engineer of the State Fund. 
 This report showed that no inspection had been made by the State 
 Fund in the case of eleven of these risks; that seven inspections 
 had been made at the request of the underwriting division of the 
 State Fund, such inspections being solely for the purpose of 
 determining the proper method of classifying and underwriting 
 the risk; that four safety inspections had been made prior to 
 July 1, 1917, the date of the formation of the special group for 
 employers having the Wynkoop Service; that only five safety 
 inspections had been made subsequent to that date, two of which 
 were at the request of the policyholder, and three of which were 
 inspections of risks using the Wynkoop Service, but not included 
 in the special group. Only one of the inspections was made at 
 the request of the Wynkoop Service. In transmitting his report, 
 the chief safety engineer stated: 
 
 “All of the risks listed are clients of the Wynkoop Service. 
 This service maintains a Safety Inspection Department 
 which co-operated with us in the inspection of these risks. 
 For this reason we have not inspected these risks as fre¬ 
 quently as risks not having the benefit of such service. As 
 mentioned above, our force of safety inspectors has never 
 been sufficiently large, and in view of the fact that the Wyn¬ 
 koop Service makes safety inspections of its clients 7 plants, 
 it seemed to me that it would be duplicating their work, to 
 some extent, for us to inspect the risks in question as fre¬ 
 quently as we try to inspect the majority of our risks. 
 
 “ There appears, therefore, to be no foundation for the 
 charge that the State Fund is really doing for the Wynkoop 
 Service the safety inspection work which the latter is sup¬ 
 posed to perform. 77 
 
 Indeed, in the next paragraph of the report following the com¬ 
 ment upon the inspection work of the Wynkoop Service, Mr. Con- 
 
Answer to Report of Jeremiah F. Connor 
 
 65 
 
 nor remarks that “ Mr. Wynkoop has done well in some cases, the 
 work tending to prevent accidents, work which the State Fund 
 should have done for nothing.” That is, in one paragraph it is 
 charged that the Wynkoop Service has not done this work in 
 most cases, hut has depended upon the State Fund for its inspec¬ 
 tion service, and in the next paragraph it is stated that this work 
 has been done well by the Wynkoop Service in some cases, but that 
 it ought to have been done by the State Fund for nothing. 
 
 Policy Toward Claimants 
 
 Mr. Connor, while conceding some merit to the accident pre¬ 
 vention work performed by Mr. Wynkoop, declares: 
 
 “ His energies are devoted far more toward keeping down 
 the payment of compensation after an accident has occurred. 
 He gets the claimant to pursue other remedies wherever pos¬ 
 sible and when compensation has to be paid he gets the em¬ 
 ployee back to work at the earliest possible moment. He 
 told me of one case in which he required a man with a broken 
 leg to work as a watchman while the fracture was healing.” 
 
 This case is the only one cited by Mr. Connor in substantiation 
 of the accusation that the Wynkoop Service pursues reprehensible 
 methods for the purpose of keeping down the payment of com¬ 
 pensation. Ho evidence of such tactics has ever come to the 
 attention of the management of the State Fund, and it is needless 
 to state that a policy toward claimants of the character intimated 
 by Mr. Connor would not for a moment be tolerated by the State 
 Fund or the Commission. 
 
 So far as the pursuit of other remedies by claimants is con¬ 
 cerned, it is ordinarily in the interest of the claimant to elect 
 to sue a third party, if he has ground for action, as the law pro¬ 
 tects him fully in the exercise of this right by assuring him the 
 amount of the difference between the damages recovered in such 
 an action and the compensation to which he is entitled under the 
 law. It is impossible for a claimant pursuing his remedy against 
 a third party in the courts to lose anything by taking this course, 
 as he is guaranteed in any event the full amount to which he is 
 entitled in the form of compensation, and he may recover in the 
 form of damages a larger amount, if his suit is successful. From 
 3 
 
66 
 
 State Insurance Fund 
 
 the point of view of the State Fund, it is obviously desirable that 
 a third party action should be brought whenever there is a reason¬ 
 able chance of recovery, as the liability of the State Fund is 
 reduced by the amount of damages so recovered by claimants. 
 
 Furthermore, it is desirable, other things equal, that injured 
 employees should be gotten back to work at the earliest possible 
 date, provided, of course, that the employee in each case is 
 physically fit to resume employment. In reference to the broken 
 leg case cited by Mr. Connor, investigation of the records of the 
 Wynkoop Service discloses that the employee was not put to work 
 at all. The suggestion was made by Mr. Wynkoop that he be 
 put to work as a watchman, with the understanding that this 
 should be done only with the consent of the employee himself 
 and with the approval of the physician in charge. This was not 
 done, however, as a medical examination disclosed a constitutional 
 disease that necessitated special treatment. 
 
 Mr. Connor stated: 
 
 “ The Wynkoop Service in most cases prepares the reports 
 of the employer, the reports of the attending physician, and 
 the papers for the claimant to sign.” 
 
 This statement is incorrect. Both the employer and the attend¬ 
 ing physician prepare their own reports of accidents, but the 
 claimant in many cases is assisted in making out the claim papers. 
 In this connection Mr. Connor refers to the “ Facts Agreed ” 
 calendars that are used for some State Fund cases. This calendar 
 was devised for the purpose of expediting the disposal of claims 
 and getting money into the hands of workmen with the least 
 possible delay. To this end the practice was adopted of placing 
 upon the “ Facts Agreed ” calendars cases in which the State 
 Fund acquiesced in the proposed award according to the claim 
 folder prepared by the Bureau of Claims of the Commission. In 
 such cases where the Claims Division of the State Fund and the 
 Bureau of Claims of the Commission were in entire agreement 
 regarding the facts, there seemed to be no occasion for hearing 
 with its attendant delay. On the other hand, cases in which the 
 State Fund had reason to question or contest a proposed award 
 were placed on special calendars for a hearing. It should be 
 stated that the “ Facts Agreed ” calendar is used only for con¬ 
 tinued cases; no cases are closed on this calendar. 
 
Answer to Report of Jeremiah F. Connor 
 
 67 
 
 Mr. Connor further affirms his belief (i that many of the Wyn- 
 koop cases are underpaid.” 
 
 No cases are cited in support of this contention. It would 
 doubtless be possible to find some cases in any list taken from 
 the files of the Commission in which the claimant had been under¬ 
 paid, but an impartial scrutiny of all the cases in such an examina¬ 
 tion would, with equal certainty, disclose many in which the 
 claimant had been overpaid. The sweeping statement that “ many 
 of the Wynkoop cases are underpaid ” is accompanied by no evi¬ 
 dence whatever, and the State Fund has no knowledge of the 
 existence of any evidence that would substantiate the broad 
 assertion. 
 
 Again, Mr. Connor declares that the Wynkoop Service 
 
 “ endeavors to have all notices in relation to claims sent to 
 the employee and the employer in care of the Wynkoop 
 Service, in which event they would never reach the real par¬ 
 ties in interest. This practice was not permitted by the 
 Industrial Commission.” 
 
 The Wynkoop Service never requested that notices to employees 
 he addressed to the Wynkoop Service. Such a request was made 
 with reference to notices to employers as the contract with the 
 Wynkoop service gives it full charge of correspondence relating 
 to compensation matters. This latter request, however was 
 denied, and notices of hearings and awards are sent by the State 
 Fund directly to the employer in all cases. 
 
 Rates and Dividends 
 
 Mr. Connor complains that no reduction of rates have been 
 granted to the risks in Group 17, notwithstanding the favorable 
 experience, and that these risks have not been reported to the 
 Compensation Inspection Rating Board for the usual experience 
 rating. Incidentally, he states that the State Fund pays $30,000 
 per year to the Compensation Inspection Rating Board for the 
 purpose of adjusting rates. The State Fund has never paid 
 such an amount for the services of the rating hoard. The total 
 amount paid in 1917 was $22,970.61 and in 1918 $7,558.31. 
 
 Mr. Connor cites the case of the Habirshaw Electric Cable 
 
68 
 
 State Insurance Fund 
 
 Company, a risk which the State Fund declined to submit to the 
 rating board, and states: 
 
 “ Neither this risk nor any other risk in Group 17, how¬ 
 ever, does receive an experience rating. The premium is 
 kept at its high level, notwithstanding the favorable experi¬ 
 ence. It is perfectly obvious that this practice by the State 
 Fund results in higher dividends, one half of which goes 
 to the Wynkoop Service at the end of each six months.” 
 
 The State Fund does not submit any risks in special groups to 
 the Compensation Inspection Fating Board for experience rating, 
 for the reason that the special group plan in itself is in effect a 
 method of experience rating, and it would not be consistent or 
 proper to superimpose the experience rating plan of the rating 
 board in the special group plan of the State Fund. This practice 
 is not confined to Group 17. It is desirable, from the point of 
 view of the State Fund that the premium income of a special 
 group should be kept on a reasonably high level in order to 
 minimize the possibility of a deficit. Furthermore, the larger 
 the group premium the greater the contribution to the expenses 
 and the surplus of the State Fund, which are prorated on the 
 premiums to group members. 
 
 This practice is of no advantage whatever to the Wynkoop 
 Service. Mr. Connor’s statement that the refusal to apply experi¬ 
 ence rates on the risks in Group 17 increases the profit of the 
 Wynkoop Service is based on a misconception. It makes no 
 difference whatever in respect to the profits of the Wynkoop 
 Service whether a risk is subject to experience rating or not. 
 Under the contract with the Wynkoop Service, any saving below 
 a certain maximum cost, the basis of which is usually the amount 
 of the premium according to the manual or schedule rates of 
 the State Fund in force at the time of the contract, is divided 
 between the employer and the Wynkoop Service. It is immaterial 
 whether the saving takes the form of a rate reduction for favor¬ 
 able experience or a dividend. If no experience rating is applied, 
 the saving is all in the form of a dividend. If it is applied, the 
 saving is partly in the form of a rate reduction and partly in the 
 form of a dividend, smaller in proportion to the amount of the 
 rate reduction. For example, assume a case of a risk with a 
 
Answer to Report of Jeremiah E. Connor 
 
 69 
 
 payroll of $500,000, and a rate of $2, yielding a premium of 
 $10,000. If the total charges for the policy period amounted 
 to $6,000, the dividend would be $4,000, or 40 per cent, one-half 
 of which would go to the Wynkoop Service. If an experience 
 rating reduction of 25 per cent were granted to the risk the rate 
 would then he $1.50, yielding a premium of $7,500. The divi¬ 
 dend would be $1,500, or 15 per cent. The total amount of 
 saving to be divided between the employer and the Wynkoop 
 Service would be 40 per cent, including 25 per cent of rate reduc¬ 
 tion, and 15 per cent of dividend, exactly the same as if no 
 experience rating had been applied. 
 
 In general, the insinuation that the State Fund keeps up the 
 manual rates in the interest of the Wynkoop Service is absolutely 
 without foundation. Fo suggestion to this effect has ever come 
 from the Wynkoop Service, and no such consideration has ever 
 entered remotely into the determination of the policy of the State 
 Fund respecting rates. 
 
 Further Corrections. 
 
 Mr. Connor charges that one of the employers having the 
 Wynkoop Service received a reduction of 17% P er cent for the 
 exclusion of medical liability from the policy, whereas he was 
 entitled only to 12% per cent. He states: “ Some employers are 
 only entitled to a reduction of 12% per cent. One of these having 
 the Wynkoop Service, is the Brooklyn Eastern District Terminal. 
 The State Fund, however, allowed the Wynkoop Service the full 
 reduction of 17% per cent resulting in a loss to the State Fund of 
 about $400 for a policy period of six months and a corresponding 
 gain to the Wynkoop service.” 
 
 Mr. Connor is wrong in his contention that the risk in question 
 was only entitled to a 12% per cent reduction for the medical 
 liability. The reduction of 17% per cent is properly applicable 
 to a risk of this type, having a permanent and central location, as 
 this enables the employer to make effective provision for the medi¬ 
 cal and hospital treatment of employees, precisely as in the case of 
 a large manufacturing plant. The Brooklyn Eastern District 
 Terminal does a freighting and stevedoring business, but it has a 
 permanent and central location and operates warehouses and 
 
70 
 
 State Insurance Fund 
 
 shops. The underwriting of this risk in this particular by the 
 State Fund was correct. 
 
 Mr. Connor states that “ among the employers enjoying special 
 treatment because of the Wynkoop Service is one engaged in the 
 business of scow trimming. This business is regarded as ex¬ 
 tremely hazardous and should never receive rebates or dividends 
 based on current experience.” 
 
 This statement is incorrect. The special experience rating 
 plan has not been applied on any risk of the class described. 
 
 Mr. Connor has this to say concerning the origin of the Wyn¬ 
 koop Service: 
 
 “ The Wynkoop Service originated in the State Insurance 
 Fund about four years ago at which time the State Fund 
 insured the construction of the Speedway at Sheepshead 
 Bay. Wynkoop placed this insurance in the State Fund 
 under an arrangement by which the employer was to pay the 
 cost of treating injured claimants and under which the 
 amount saved over and above the amount of claims for com¬ 
 pensation was to be returned to the employer and divided 
 with Wynkoop. This Sheepshead Bay transaction was never 
 submitted to the Workmen’s Compenation Commission nor 
 is there any record of the same in the minutes of the 
 Commission.” 
 
 It is true that the insurance on the contract for the construction 
 of the Sheepshead Bay speedway was placed in the State Fund 
 by the Wynkoop Service. But no arrangement, such as Mr. 
 Conner outlines, was proposed or applied on this risk. The 
 usual reduction was granted for the exclusion of medical liability, 
 which was not carried by the State Fund. The risk was placed 
 in the general group in which it belonged, and the final adjust¬ 
 ment was made in the usual manner. There was no special group¬ 
 ing or rating of any kind. As this was a matter of ordinary 
 underwriting routine, there was no reason for reporting it to the 
 Commission. 
 
 The following statement concerning the Wynkoop Service also 
 calls for correction: 
 
Answer to Report of Jeremiah F. Connor 
 
 71 
 
 “ When this service was first instituted a circular letter 
 was sent out from the office of Mr. Wynkoop representing 
 that only through the Wynkoop Service could an employer 
 receive large dividends from the State Insurance Fund. 
 This practice was condemned and stopped by the Superin¬ 
 tendent of Insurance.” 
 
 The communication to which this refers was not a circular 
 letter sent out when the Wynkoop Service was first instituted 
 and did not represent that an employer could get large dividends 
 from the State Fund only through this service. The letter was 
 a communication addressed to an employer by an assistant in the 
 office of the Wynkoop Service in November, 1917. It did, how¬ 
 ever, contain an unfortunately worded and possibly misleading 
 statement, which led to complaint to the Superintendent of Insur¬ 
 ance. The following extract from a communication to the Wyn¬ 
 koop Service by the Superintendent of Insurance will give the 
 true version of this matter: 
 
 “April 17, 1918. 
 
 *********** 
 
 “As you doubtless know, the particular complaint to 
 which I have been giving consideration has to do with 
 the following statement contained in the third para¬ 
 graph of a letter which you addressed to Messrs. Stein¬ 
 way & Sons of 107 East 14th Street, New York City, 
 under date of Nov. 16, 1917: 
 
 ‘ The State Fund offers through us an experience 
 rating under which you will be repaid a dividend 
 amounting to all of the premium which is not actually 
 used/ etc. 
 
 The complaint is made that this statement contains a strong 
 inference that only through you can such large dividends be 
 obtained, and that there is an implication that you have some 
 kind of an arrangement or connection with the State Fund 
 by which you can obtain the payment of large dividends 
 which others cannot obtain. This, of course, is not true, since 
 you have no connection with the State Fund in any way and 
 can make no better arrangements with it than anyone else. 
 
72 
 
 State Insurance Fund 
 
 I must, therefore, request that you immediately discontinue 
 the use of any such statement as that recited above, in your 
 future correspondence, so that all possibility of misconstruc¬ 
 tion may he eliminated. 
 
 (Signed) Jesse S. Phillips, 
 
 Superintendent 
 
 No Tipping System 
 
 Mr. Connor intimates that the Wynkoop Service is tipped off 
 concerning the expiration of favorable risks in the State Fund. 
 He states: 
 
 “ Included among the employers in the Wynkoop Group 
 are some who were already insured in the State Fund. 
 Numerous other employers in the State Fund have been 
 approached by representatives of the Wynkoop Service just 
 as their policies were about to expire. This suggests at least 
 a system under which the Wynkoop Service is tipped off by 
 someone when favorable risks in the State Fund are about 
 to expire.” 
 
 The “ suggestion ” of a system of tipping off for the benefit 
 of the Wynkoop Service is wholly unwarranted. The Wynkoop 
 Service is, of course, free to solicit business at all times, and 
 does solicit large risks insured in the stock companies, the mutual 
 companies and the State Fund. It is well known that most State 
 Fund policies expire July as the Workmen’s Compensation 
 Law went into effect on that date. It should be stated here that 
 80 per cent, of the business now in the State Fund under the 
 Wynkoop Service is new business brought to the State Fund by 
 this organization. 
 
 Finally, Mr. Connor states: 
 
 “ I feel it my duty to also report the following transac¬ 
 tion: An officer of the State Insurance Fund filed with the 
 Secretary of State last year an application for registration 
 of a Peerless coupe automobile. Mr. Wynkoop informed 
 me that he paid for this automobile with his personal check 
 and that it was a gift to a member of this official’s family.” 
 
Answer to Report of Jeremiah F. Connor 
 
 73 
 
 This transaction was purely a private affair connected in no 
 way with the business of the State Fund. Mr. Wynkoop, who 
 is an intimate friend of the family of the official in question, 
 requested a member of the family to select a car and asked the 
 privilege of paying for it. The gift was offered under circum¬ 
 stances and in a way that made the acceptance natural and 
 proper. There was no suggestion of any business consideration 
 or obligation. Hor was there any secrecy about the transaction. 
 It was reported by this official to the chairman of the commis¬ 
 sion at the time. The transaction had no relation to the affairs 
 of the State Fund. 
 
 In conclusion, it may be well to state that Mr. Wynkoop gets 
 no commissions or business or revenues from the State Fund. 
 On the contrary, he has brought a large volume of desirable 
 business into the State Fund through his service organization. 
 Ho special favors or concessions have been accorded him in con¬ 
 nection with this business. As has been previously stated, no 
 arrangement with respect to the rating and grouping of risks 
 placed in the State Fund by the Wynkoop Service has been 
 offered that is not open on equal terms to any other broker or 
 service organization. Indeed, a similar plan of rating and group¬ 
 ing is actually in operation for other business in the State Fund. 
 
 Treatment of Claimants 
 
 Mr. Connor charges delays and underpayments in the treat¬ 
 ment of claimants by the State Fund. He states: 
 
 “ I have received many complaints and I am satised that 
 there is an unreasonable delay in making payments of com¬ 
 pensation to injured workmen out of the State Insurance 
 Fund.” 
 
 No Unreasonable Delay 
 
 There is no unreasonable delay in the ordinary and usual pro¬ 
 cedure of the State Fund in the handling of claims. It is only 
 in rare and exceptional cases that any unreasonable delay occurs. 
 In extenuation of such delays as do occur, it should be stated 
 that the number of employees in the Claim Division is not suffi¬ 
 cient to meet the requirements of the work. Additional em¬ 
 ployees were requested by the management of the State Fund, 
 hut were not granted in the legislative appropriation for the next 
 
74 
 
 State Insurance Fund 
 
 year. The claim service is constantly growing. More investi¬ 
 gators are needed,— not for the purpose of fighting claims, hut 
 to explain the law, and to see to it that proper medical treatment 
 is provided, that the claims are filed promptly after the accident 
 and that claimants are not misled into delay in filing claims in 
 the hope of obtaining larger compensation. 
 
 The case of William Corcoran is cited by Mr. Connor, as an 
 example of delay in the payment of compensation. 
 
 “ This claimant,” he states, “ was injured December 13, 
 1918, and, although he was before the medical adviser of 
 the State Fund on December 16, 1918, and was again exam¬ 
 ined by a State Fund doctor on December 30, 1918, he 
 received no compensation until about March 1, 1919.” 
 
 The records of the Commission show that the claim in this 
 case was not received until January 23, 1919. The first award 
 of compensation was made February 29, and the check was sent 
 to the claimant promptly. The delay in this case, which amounted 
 to about one month, was due largely to the unreasonable attitude 
 of the claimant. It should he emphasized that this case is excep¬ 
 tional and not typical. It is not a fair example of the claim 
 service of the State Fund. 
 
 Mr. Connor quotes a letter from the American Hard Rubber 
 Company complaining that in many instances employees had to 
 wait sometimes as long as five months for the receipt of compen¬ 
 sation. Ho complaint concerning claim service was made by the 
 American Hard Rubber Company when this concern was insured 
 in the State Fund. A representative of the State Fund recently 
 made inquiry concerning this matter at the office of the American 
 Hard Rubber Company and was told by the manager that there 
 had been no dissatisfaction with the claim service of the State 
 Fund. 
 
 Cases of Alleged Underpayment 
 
 Mr. Connor states that he has received many complaints that 
 claimants are underpaid and cites two cases as follows: 
 
 “ In the case of John Carroll, which I had investigated, 
 an additional award was made of $400. In the case of 
 Jacob Rehm, who was employed by the State Department 
 of Public Works, an additional award of $119.38 was made.” 
 
Answer to Report of Jeremiah F. Connor 
 
 75 
 
 It appears from the records of the Commission that the Carroll 
 case, after a long period of temporary disability payments, was 
 settled May 18, 1918, by an additional final award of $1,100 for 
 the loss of the nse of the right leg and the partial loss of the use 
 of the right arm. This final adjustment was made in accordance 
 with the method approved by the Commission, and the award 
 was made on the basis of an agreement between the claimant, 
 the State Fund and the Commission. The attention of Mr. Connor 
 was called to this case by a letter from the claimant or a member 
 of his family asking for more compensation. The case was 
 accordingly put on for a rehearing. It was developed at the hear¬ 
 ing that the claimant had lost no time since the settlement and 
 was still working at wages equivalent to the pay received before 
 the accident. However, a medical examination disclosed that the 
 condition of the arm had grown worse instead of improving; 
 consequently, it appeared that the original settlement did not 
 represent fully the value of the claimant’s disability at the later 
 date, although at the time of the settlement it seemed equitable 
 to all parties concerned. An additional year’s compensation, 
 amounting to $400, was, therefore, offered by the State Fund and 
 accepted by the claimant, and the case was closed on this basis. 
 
 The Rehm case was closed by the Commission January 13, 
 1919, by an award of twelve weeks’ compensation. This case 
 was one of a double hernia, and the rule of the Commission has 
 been to award twelve weeks’ compensation for this type of dis¬ 
 ability. The case was brought to Mr. Connor’s attention by a 
 letter, and was placed on the calendar for a rehearing. Cor¬ 
 respondence had passed between the claimant and the Albany 
 office of the Commission, and negotiations were underway toward 
 a special hearing in this case before the matter was taken up 
 by Mr. Connor. At the rehearing a further award of eighteen 
 and two-thirds weeks’ compensation was made, with the approval 
 of the State Fund, and the case was closed on this basis. 
 
 Mr. Connor further states: 
 
 “ I have examined cases in which the State Fund appeared 
 unwilling to pay the amount recommended by the medical 
 adviser of the Commission or the medical adviser of its own 
 department.” 
 
76 
 
 State Insurance Fund 
 
 It is not the function of the medical adviser of the Commis¬ 
 sion or the medical adviser of the State Fund to fix the amount of 
 compensation. In some cases the facts developed by investiga¬ 
 tion'through the claim division of the State Fund may furnish 
 good ground for questioning the recommendation made by the 
 medical adviser. 
 
 Fair Play for Claimants 
 
 In general, the policy of the State Fund in its claim service 
 is to give absolutely fair treatment to every claimant. The man¬ 
 agement of the State Fund would not tolerate any practices not 
 in harmony with the spirit of fair play, justice and humanity. 
 At the same time it is most important always to scrutinize claims 
 with due vigilance in order to protect the State Fund, which is 
 a trust fund made up of moneys contributed by employers, against 
 fraudulent claims. 
 
 The intimation is apparently conveyed by Mr. Connor’s com¬ 
 ments upon the claim service of the State Fund that there has 
 been deliberate and intentional underpayment in some cases. 
 This implicit charge must be repudiated with emphasis. It is, 
 of course, possible, in examining into closed cases, some time after 
 a final award, to discover some in which the claimant has been 
 underpaid in the light of the later developments in the case, but, 
 as has been pointed out, it would be possible, if an impartial exam¬ 
 ination of a considerable number of cases were made, to show that 
 in numerous instances the claimant had been overpaid. The 
 amount to which the claimant is entitled is often a matter of 
 judgment, and absolute infallibility in all cases is beyond the 
 range of human attainment. In no single case, however, has the 
 State Fund intentionally and deliberately become a party to an 
 unfair settlement. 
 
 The Medical Question 
 
 Mr. Connor makes a charge of favoritism in connection with 
 the medical service of the State Fund: 
 
 “ The State Insurance Fund,” he declares, “ pays far more 
 attention to getting work for favored doctors than it does 
 in paying compensation to the claimants. For some time 
 the State Fund has endeavored to compel all its employers 
 
Answer to Report of Jeremiah F. Connor 
 
 77 
 
 in the vicinity of New York City to send all injured work¬ 
 men to ‘ State Fund Dressing Stations ’ for medical treat¬ 
 ment. What are called ‘ State Fund Dressing Stations ’ 
 are merely offices maintained by one physician to whom, 
 through this method, the State Fund attempts to send all 
 claimants for such treatment.” 
 
 The assertion that the State Fund pays more attention to getting 
 work for favored doctors than it does in paying compensation to 
 claimants is without justification. In dealing with this charge, 
 it is necessary first to outline the general policy of the State Fund 
 with reference to medical service. 
 
 A carefully directed system of medical treatment reflects itself 
 in reduced compensation cost. If the medical service of an insur¬ 
 ance carrier is not supervised properly, both the medical cost and 
 the compensation cost will be unduly high. Systematic provision 
 of competent medical treatment for injured employees helps to 
 prevent infections, to shorten the disability period, to reduce the 
 number of permanent disability cases, and thus to lower the 
 amount that must be paid for compensation. The unfortunate 
 and expensive results of incompetent medical treatment have been 
 paraded before trial commissioners in many cases. It must be 
 recognized that the treatment of industrial injuries has become 
 a special branch of medical practice. The average family physi¬ 
 cian has neither the experience nor equipment to give expert treat¬ 
 ment in compensation cases. In order to secure satisfactory 
 results, it is necessary to provide a system of dressing stations 
 with physicians trained in the treatment of industrial accidents 
 and familiar with compensation work. Practically every insur¬ 
 ance company in the compensation field has some system of this 
 kind in operation and recognizes that it is absolutely essential 
 to the satisfactory and economical administration of compensation. 
 
 The Dressing Stations. 
 
 A medical service organization for compensation cases exclu¬ 
 sively has been installed in the Greater Rew York territory by 
 Dr. Meyer Wolff. This physician, who specializes in compensa¬ 
 tion practice and maintains over thirty dressing stations for this 
 
78 
 
 State Insurance Fund 
 
 purpose, is the one to whom anonymous reference is made by 
 Mr. Connor. 
 
 The service provided by Dr. Wolff’s organization is used, not 
 only by the State Fund, but by various other insurance carriers. 
 The State Fund tried this service experimentally and found it 
 satisfactory as respects both the character and the cost. The 
 dressing stations maintained by Dr. Wolff are conveniently situ¬ 
 ated throughout the territory of Greater New York to serve the 
 needs of employers and employees. It would not be possible 
 for the State Fund or any single insurance carrier to provide a 
 system of dressing stations so complete and so well adapted to 
 serve the convenience of policyholders and claimants as that main¬ 
 tained by Dr. Wolff, for the reason that no single carrier could 
 furnish a volume of work sufficient to keep the stations in profit¬ 
 able operation. The central service station of Dr. Wolff’s organi¬ 
 zation is open night and day, and night service is furnished by 
 other stations when requested. The State Fund has received help¬ 
 ful co-operation from Dr. Wolff’s organization in various details 
 of the service. For example, each case is carefully followed from 
 start to finish and discontinuance of treatment is recommended 
 promptly when further treatment is no longer required. The prac¬ 
 tice of Dr. Wolff’s organization in this respect contrasts favorably 
 with a tendency noticeable on the part of some physicians to pro¬ 
 long the treatment of cases unduly and thus to impose needless 
 expense on the insurance carrier. Valuable assistance is also 
 rendered by Dr. Wolff in making special examinations and re¬ 
 ports, in co-operating with the medical and claim divisions of the 
 State Fund in the preparation of cases, and at hearings before 
 the Commission. 
 
 Low Cost of Service 
 
 With reference to the cost of this service, the records of the 
 State Fund show that the average amount of the bills rendered 
 by. Dr. Wolff: is about one-third of that of the bills rendered by all 
 other physicians in Greater New York territory. The total 
 amount paid by the State Fund for the services rendered by Dr. 
 Wolff’s dressing stations, during the year ended December 31, 
 1918, was $41,850.60, and the average bill was $5.51. The total 
 payments to all other physicians including specialists in New 
 
Answer to Report oe Jeremiah F. Connor 
 
 79 
 
 York, Brooklyn, Long Island and Staten Island for the same 
 period was $82,908.55 and the average bill was $15.97. It ap¬ 
 pears that Dr. Wolff received somewhat more than one-half of 
 the medical work of the State Fund in this territory, measured 
 by the number of cases, but received only one-third of the amount 
 of the money spent for medical services, for the reason that his 
 average charge was only one-third of that of the other physicians. 
 The cost of the medical service on two large government contracts, 
 furnished by Dr. Wolffs organization, amounted to less than 
 7 per cent, of the premium, as contrasted with the usual allow¬ 
 ance of 12% per cent, for medical cost on contracting operations. 
 
 In this connection, it may be pointed out that the general 
 economy of the medical treatment furnished by the State Fund 
 is shown clearly by the ratio of medical cost to compensation cost 
 for the State Fund and for the private companies. The ratio of 
 medical payments to compensation payments in the case of the 
 State Fund for four and one-half years, July 1, i914, to Decem¬ 
 ber 31, 1918, averaged 12.4 per cent. This ratio in the case of 
 the private companies, as shown by reports to the State Insur¬ 
 ance Department, on policies issued in the years 1914, 1915 and 
 1916, averaged 21.6 per cent. Part of this difference may pos¬ 
 sibly be due to a larger proportion of policies excluding the 
 medical liability in the case of the State Fund, and to other 
 factors, but the figures indicate unmistakably that the medical 
 service of the State Fund is comparatively less expensive than 
 that of the private companies. 
 
 A Complaint Examined 
 
 Mr. Connor declares that “ this medical service is not always 
 satisfactory, and because of it, some employers have cancelled their 
 policies in the State Fund.” 
 
 In general, this service has been highly satisfactory to em¬ 
 ployers and employees, and many expressions of commendation 
 have come to to the office of the State Fund. There have, of 
 course, been some complaints. It is impossible to satisfy every¬ 
 body. Mr. Connor cites two cases of alleged dissatisfaction and 
 consequent cancellation. The American Safety Razor Companv, 
 Brooklyn, and the American Hard Rubber Company, College 
 
80 
 
 State Insurance Fund 
 
 Point, L. I. With respect to the former, it is true that this 
 company has given notice of intention to withdraw from the State 
 Fund, but the real reason for the loss of their account was not 
 dissatisfaction with the medical service. Mr. Connor gives ab¬ 
 stracts from a letter of the American Hard Rubber Company, 
 received by him, which, he states, “ explains the situation in 
 concise language.” The substance of the complaint embodied in 
 this letter is that the State Fund insisted on cutting bills rendered 
 by physicians who treated employees of the company and later 
 installed a dressing station at College Point. 
 
 It is true that the State Fund refused to pay in full some bills 
 rendered by local physicians for treating employees of this com¬ 
 pany. This action was taken because the charges were plainly 
 excessive, ranging about 50 per cent, higher than the usual scale 
 of fees in compensation cases. The Workmen’s Compensation 
 Law limits the fees to the prevailing charges “ in the same com¬ 
 munity for the treatment of injured persons of a like standard 
 of living.” The physicians at College Point attempted to main¬ 
 tain a special standard of fees for that community which seemed 
 to the medical division of the State Fund to be unreasonably high. 
 Unfortunately, there are some physicians who appear to look on 
 the State Fund as a wealthy client and levy charges accordingly. 
 All insurance carriers have their difficulties in adjusting medical 
 bills, and the Commission has been obliged to establish a regular 
 calendar to arbitrate differences between physicians and insurance 
 carriers. In order to meet the difficulty at College Point, a State 
 Fund dressing station was established there, and the American 
 Hard Rubber Company was urged to send injured employees to 
 this station. The State Fund endeavors in all cases to secure the 
 co-operation of employers in the use of the dressing stations, 
 believing that such co-operation is a benefit to all concerned — 
 the employer, the employee and the State Fund. At the same 
 time the State Fund is always ready to defer to the preferences 
 of employer or employee with respect to the choice of a physician, 
 provided that the service rendered is competent and the charge 
 reasonable. In the case of the American Hard Rubber Company, 
 the complications were unusually difficult and proved to be impos¬ 
 sible of mutually satisfactory adjustment. The letter quoted by 
 Mr. Connor closes with an expression of extreme satisfaction with 
 
Answer to Report of Jeremiah F. Connor 
 
 81 
 
 the service of the company at present carrying the insurance. An 
 interesting side light is thrown on this situation by the announce¬ 
 ment made to a representative of the State Fund, who called at 
 the office of the American Hard Rubber Company, that the Com¬ 
 pany is now dissatisfied with the present insurance carrier and 
 intends to place the insurance elsewhere upon the expiration of 
 the policy. 
 
 Analysis of Cancellations 
 
 Mr. Connor intimates that other employers in the State Fund 
 have cancelled their policies by reason of dissatisfaction with the 
 medical service. He states: 
 
 “ During the past year, the State Insurance Fund was 
 obliged to cancel 2,710 policies. An analysis of the reason of 
 these cancellations would doubtless furnish an important com¬ 
 mentary in relation to the management of the Fund.” 
 
 The cancellation of the American Hard Rubber Company is 
 the only one known to the management of the State Fund that was 
 due to a complaint concerning the medical service. An analysis 
 of the general reasons for the cancellation in the case of 2,710 
 policies, cancelled in 1918, shows that 1,333 were cancelled 
 because the employer had discontinued business and employed no 
 labor, or had completed the operations covered by the policy; 774 
 policies were cancelled by the State Fund for non-payment of 
 premium; 310 cancellations were due to miscellaneous reasons, 
 such as self-insurance, bankruptcy, removal from the State, ina¬ 
 bility to locate policyholders, death, assured covered under another 
 State Fund policy; only 293 policies were cancelled because the 
 employer took other insurance. 
 
 It is interesting to note here that the new business written by 
 the State Fund during the year amounted to $188,018.71, which 
 was over 30 per cent more than the amount of business lost through 
 cancellation, $152,245. It is not remarkable that the State Fund 
 should have lost some business to the private companies in 1918, 
 when it is borne in mind that no dividends had been paid in the 
 general groups during the years 1916, 1917 and 1918, and during 
 these years its policyholders were persistently solicited not only 
 by the agents of the stock companies, but by the representatives 
 of the mutual companies promising substantial dividends. Under 
 
82 
 
 State Insurance Fund 
 
 the circumstances, the wonder is rather that the State Fund lost 
 so little business to its competitors. Even the comparatively small 
 loss of old business was more than offset by the volume of new 
 business written by the State Fund in 1918. 
 
 Employment of Specialists 
 Mr. Connor further states: 
 
 “ The State Fund also endeavors to compel all claimants 
 to patronize certain specialists. In the case of William 
 Corcoran, already refered to, who was being treated by a 
 specialist at the Manhattan Eye and Ear Hospital for an 
 injury to an eye, the medical adviser of the State Insurance 
 Fund tried to compel the claimant to abandon this treatment 
 and patronize Dr. Torok. This the claimant refused to do, 
 whereupon the medical adviser made this report on the case 
 which appears in the files: 
 
 “ ‘ Inasmuch as he steadfastly refuses to follow the treat¬ 
 ment advised by this office, I deem it wise to not even examine 
 the eye in this case. Ho medical bills are to be paid in this 
 case outside of Dr. Torok’s subsequent to claimant's first 
 examination or visit to Dr. Torek’s office.’ ” 
 
 The State Fund is accustomed to avail itself of the services 
 of certain specialists. These specialists are all experts of high 
 standing in the medical profession and can challenge any criticism 
 of their work. The State Fund is assured that claimants will 
 receive the best treatment at the hands of these specialists, and, 
 therefore, urges them to take advantage of the opportunity freely 
 offered them. In the case of William Corcoran, the action taken 
 by the medical adviser of the State Fund would appear to have 
 been drastic, but the circumstances in this case were peculiarly 
 irritating. It is unfortunate that Dr. Frederic A. Williams, 
 medical adviser of the State Fund, who made the report cited 
 by Mr. Connor, has since died, and a full explanation of the pro¬ 
 cedure in this case is, therefore, not obtainable. It is noteworthy 
 that the final outcome of this case was the complete loss of vision 
 in the right eye. It is the belief of the claim auditor of the 
 State Fund, who was familiar with this case, that, if the treat¬ 
 ment recommended by the medical adviser has been continued, 
 a part of the sight of the eye might have been saved. 
 
Answer to Report of Jeremiah F. Connor 
 
 83 
 
 Medical Examination of Claimants 
 
 The practice of the State Fund with reference to medical 
 examinations of claimants is also criticized by Mr. Connor as 
 follows: 
 
 “ In a large number of cases, the medical adviser of the 
 Fund, as soon as an accident is reported, requests another 
 favored physician to visit and examine the claimant. This 
 doctor calls on the claimant, makes a more or less superficial 
 examination, directs the claimant to come to the State Fund 
 for medical examination, and makes a charge ranging from 
 $5 to $15 per visit. Since January the bills of this physician 
 have been over $1,000. The work performed in this respect 
 is wholly unnecessary and is duplicated a few days later by 
 the medical adviser of the Fund, who receives an annual 
 salary. The medical treatment rendered by the State Insur¬ 
 ance Fund needs prompt and radical cure.” 
 
 It is the practice of the State Fund, upon the receipt of an 
 accident report, to send a physician to examine the injured 
 employee in serious cases. The purpose of the examination is 
 twofold: to obtain exact information regarding the nature of 
 the injury and the probable duration of disability and to enable 
 the medical adviser to see to it that proper medical treatment 
 is provided for the employee. It is impossible for the medical 
 adviser of the State Fund to make such examinations, as his full 
 time is needed for office work and executive duties. It is imprac¬ 
 ticable to bring all claimants to the office for examination. Many 
 claimants pay no attention to a letter requesting a call at the 
 office; others are unable to call because of their condition. In 
 order to secure information needed by the claim division and to 
 insure proper medical treatment for claimants, examinations are 
 made at the request of the State Fund by physicians, who visit 
 claimants in their homes, report their condition, and refer them 
 to the office of the State Fund or to dressing stations for further 
 examination and treatment. This practice is fully justified by 
 the results and should be extended rather than discontinued or 
 curtailed. 
 
 The practice is a distinct benefit to employees. In many 
 instances the visit of the examining physician results in short¬ 
 ening the period of temporary disability or reducing the extent 
 
84 
 
 State Insurance Fund 
 
 of permanent disability by enabling the State Fund to prescribe 
 proper medical or hospital treatment, which the claimant could 
 not otherwise receive. 
 
 The usual fee for an examination is $5. This is a reasonable 
 fee if competent service is to be obtained. Many of the visits 
 are in outlying sections and require considerable time. 
 
 This examination work is absolutely essential to effective direc¬ 
 tion of the claim and medical service of the State Fund. It does 
 not duplicate the work of the medical adviser, but supplements it. 
 In the absence of a salaried medical staff of the State Fund, the 
 only way in which this essential work can be performed is through 
 physicians specially assigned for this purpose. It is, perhaps, 
 worth noting in this connection, that the budget proposals of the 
 manager of the State Fund for the next fiscal year called for 
 the appointment of an assistant medical adviser. This provision, 
 however, was cut out by the legislative finance committee. In 
 the absence of some provision in the budget, the only way in 
 which the important work of making first examinations can be 
 carried on is under the present plan. 
 
 The “ favored physician ” to whom allusion is made in Mr. 
 Connor’s report, is presumably Dr. W. Knowlton, who had 
 been called upon to make many examinations for the State Fund. 
 This physician is thoroughly competent and has performed the 
 work assigned to him in a conscientious and painstaking manner. 
 The amount received by him for his services is not excessive. 
 
 Conclusion 
 
 The criticisms of Mr. Connor with respect to the collection of 
 premiums by the State Fund, the individual or special groups, 
 the Wynkoop Service, the treatment of claimants and the medical 
 question have been reviewed and discussed in detail. It now 
 remains to comment briefly upon some of the statements regarding 
 miscellaneous matters. 
 
 Volume of Business 
 
 With reference to the volume of business carried by the State 
 Fund, Mr. Connor makes the disparaging comment that as 50 
 per cent of the business, according to the manager, is carried in 
 
Answer to Report of Jeremiah F. Connor 
 
 85 
 
 special groups “ the State Fund generally carries only about 8 
 per cent of the compensation insurance of the State.” 
 
 It is true that nearly 50 per cent of the business of the State 
 Fund is carried in special groups, and it is also true that this 
 business could not have been secured and retained in any other 
 way. If the special groups were abolished — and the severe 
 criticism of these groups in Mr. Connor’s report would seem to 
 indicate an opinion on his part that they should be abolished — 
 this would be equivalent to an invitation to the employers in such 
 groups to withdraw from the fund. 
 
 Question of Dividends 
 
 With respect to dividends in the general groups, Mr. Connor 
 declares: 
 
 “As a matter of fact, the State Fund could declare addi¬ 
 tional dividends in favor of the employers in general groups 
 to the extent of a million dollars, in addition to the 10 per 
 cent dividend above mentioned and still be solvent beyond 
 a question of a doubt.” 
 
 Mr. Connor does not explain where the million dollars could 
 be found. To be sure, he refers to certain reserves now carried 
 by the State Fund amounting to $870,394.25, which he terms 
 unnecessary. The necessity or the desirability of these reserves 
 has been previously explained. The reserve for deferred claim 
 expenses is required according to the rules of the State Insurance 
 Department in the case of mutual companies. The remaining 
 reserves, for experience fluctuation, securities fluctuation, and 
 unassigned surplus, account for only $600,000 of Mr. Connor’s 
 million. 
 
 If the State Fund should declare additional dividends of a 
 million dollars to employers in the general groups at this time, 
 and were then subjected to examination by the State Insurance 
 Department, it would hardly be found “ solvent beyond the ques¬ 
 tion of a doubt.” As a matter of fact, additional dividends in 
 three of the general groups of 20 per cent, 10 per cent, and 25 
 per cent respectively, have already been declared. The reasons for 
 the first declaration of a provisional dividend of only 10 per cent. 
 
86 
 
 State Insurance Fund 
 
 in the general groups, and a later declaration of supplementary 
 dividends of higher percentage in three of these groups, have been 
 fully explained in a preceding section. In brief, the first divi¬ 
 dend was limited to 10 per cent, in view of the uncertainty of the 
 business outlook at the close of the year and the impossibility of 
 determining the exact percentages of surplus earnings in different 
 groups immediately after the end of the last policy period. When 
 the industrial situation developed favorably and the experience of 
 the different groups was definitely determined, additional divi¬ 
 dends were declared to a reasonable amount. The management of 
 the State Fund would have laid itself open to severe criticism if, 
 after only one year of favorable experience following upon the 
 heavy losses in the lean years of 1916 and 1917, a dividend distri¬ 
 bution of a million dollars in the general groups had been recom¬ 
 mended. Such a recommendation would have been properly criti¬ 
 cised as reckless in the extreme and would have deserved the em¬ 
 phatic disapproval of the commission as well as of the policy¬ 
 holders. 
 
 Sundry Comments 
 
 Mr. Connor complains that his investigation “ has been made 
 with little co-operation from the management of the State In¬ 
 surance Fund.” This statement is most unfair. At the begin¬ 
 ning of the investigation, the manager of the State Fund assured 
 Mr. Connor that he would have full co-operation in conducting his 
 inquiry, and that any requests from him for data, reports or infor¬ 
 mation from the records would receive prompt and careful atten¬ 
 tion. In the early days of the investigation, Mr. Connor availed 
 himself to some extent of the co-operation thus offered. But later, 
 he resorted to other methods for obtaining information. It is to be 
 regretted that Mr. Connor did not continue to make use of the 
 co-operation of the State Fund management throughout the course 
 of his investigation. 
 
 Mr. Connor continues: “It has been suggested to me that no 
 matter how bad the conditions are in the State Fund, they should 
 receive no public attention because it might result in the State 
 Fund losing some of its business. When it is generally known 
 that the employers in the State Fund, besides having ratings from 
 14 per cent, to 15 per cent, lower at the start, are now entitled to 
 
Answer to Report of Jeremiah F. Connor 
 
 87 
 
 a dividend of at least 33% per cent, those now in the State Fund 
 will not seek other insurance.’ 7 
 
 It is unfortunately true that public criticism of the State Fund 
 inevitably results in the loss of business, for statements reflecting 
 upon its condition or its management are eagerly seized upon by 
 its competitors and used in the solicitation of business. Even 
 when such criticism is shown to be not well founded, the correc¬ 
 tion never overtakes the criticism, which is circulated widely 
 among employers by the thousand of representatives of the casu¬ 
 alty companies. The simple question whether the investigation 
 and report by Mr. Connor will help or hurt the State Fund in this 
 respect can be answered in only one way by a person familiar 
 with the competitive conditions in the compensation insurance 
 field. A printed abstract of Mr. Connor’s report under the head¬ 
 line “ State Fund Scored ” has already been issued by one of the 
 mutual companies. 
 
 Mr. Connor expresses the opinion that “ if the State Fund had 
 been properly handled from the start, it would now be writing 
 from 25 per cent, to 50 per cent, of all the compensation insur¬ 
 ance in the State.” 
 
 It is to. be feared that if the policies with respect to reserves 
 and dividends and groups which Mr. Connor’s report appears to 
 suggest or sanction had been adopted in the beginning, the State 
 Fund would be to-day insolvent, and would be carrying only a 
 very small percentage of the compensation business of the State. 
 It has been a hard task to build up the present volume of business. 
 It would be an easy matter to drive the bulk of this business out 
 of the State Fund by injudicious interference with the policies 
 which have enabled the State Fund to secure and retain it in the 
 past. 
 
 Activities of Brokers and Agents 
 
 The main reason why the State Fund has not obtained a larger 
 proportion of the business is to be found in the activities of the 
 brokers and agents of the casualty companies. There are about 
 12,000 insurance brokers and agents in this State, and with rare 
 exceptions,— so few as to be practically negligible,— these repre¬ 
 sentatives of the private insurance companies industriously dis¬ 
 seminate all sorts of misinformation and misrepresentation con- 
 
88 
 
 State Insurance Fund 
 
 cerning the State Fund. The average employer relies upon his 
 insurance broker for advice about all insurance matters. He 
 needs various kinds of insurance aside from workmen’s compen¬ 
 sation — fire, theft, elevator, boiler, teams, automobile and public 
 liability. The usual practice is to turn over all this insurance to 
 be placed through a broker. Insurance brokers get no commis¬ 
 sions from the State Fund, and, consequently, are interested to 
 keep business away from it and to discredit it in every possible 
 way. 
 
 Moreover, there seems to be no standard of fair play on the 
 part of the fraternity of insurance brokers and agents in their 
 competitive tactics toward the State Fund. In general, they are 
 unscrupulous in their misrepresentations about the State Fund 
 insurance. Although the State Fund offers complete security at 
 minimum cost, employers are led to believe that insurance in the 
 State Fund is both insecure and expensive. Employers are told 
 that the State Fund maintains no reserves ; that its surplus is 
 exhausted; that it is bankrupt or about to become so; that its 
 policyholders are leaving it; that its policy affords no protection; 
 that it gives no service; that it charges the same rates as the old 
 line companies; that its policyholders are liable to assessment, 
 and so on, ad libitum. The State Fund is unable in most cases to 
 correct these misrepresentations and to place the facts regarding- 
 its terms of insurance, its service, and its financial condition 
 before employers, as it has not the facilities for reaching them at 
 first hand. 
 
 Another Charge of Favoritism 
 
 Mr. Connor also charges favoritism in fixing the premiums. 
 For example, he states: “A number of firms engaged in house 
 wrecking are insured in the State Fund and one of these, The 
 Hh in frank House Wrecking Company, is permitted to pay a pre¬ 
 mium more than 50 per cent, less than the others.” 
 
 This company has been insured in the State Fund from the 
 beginning. When the rates were advanced, January 1, 191Y, the 
 rates previously in force were retained for certain classifications 
 and risks for which the experience had proved these rates to be 
 adequate. The housewrecking concern in question has been car¬ 
 ried profitably at the old rates. The experience of this risk to 
 December 31, 1918, shows earned premiums of $12,206.86, and 
 
Answer to Report of Jeremiah F. Connor 
 
 89 
 
 incurred losses of $1,577.96, or a loss ratio of about 13 per cent. 
 The experience of other housewrecking risks insured in the 
 State Fund showed premiums to date $67,075.22 and incurred 
 losses of $72,948.42, or a loss ratio of over 100 per cent. 
 
 Previous Investigations 
 
 The concluding paragraph of Mr. Connor’s report reads as 
 follows: 
 
 “ What I have discovered is only a scratch on the surface. 
 The State Fund has never been properly audited by an out¬ 
 side actuary or accountant since first constituted. I recom¬ 
 mend that the whole State Fund be investigated from start 
 to finish by a competent actuarial accountant.” 
 
 With reference to Mr. Connor’s statement that the State Fund 
 has never been properly audited by an outside actuary or ac¬ 
 countant, it should be recorded that the State Fund was examined 
 and audited in 1917 by the State Insurance Deparment, which is 
 authorized by law “ to examine into the condition of the State 
 Fund at any time.” The report of this examination was issued 
 as a public document. Incidentally, it may be remarked that the 
 State Fund has been investigated three times, in addition to the 
 examination by the State Insurance Department and the investi¬ 
 gation by Mr. Connor. These investigations were made by the 
 State Comptroller’s office, by the Legislative Civil Service Com¬ 
 mittee, and by the Rew York Bureau of Municipal Research. 
 It may be said with truth that the life of the State Fund has 
 been just one investigation after another. The report of each of 
 these investigations, prior to the last, was generally favorable and 
 commendatory. 
 
 Another investigation of the State Fund “ from start to finish 
 by a competent actuarial accountant ” is now recommended by 
 Mr. Connor. Such an investigation would be welcome by the 
 management of the State Fund. 
 
 A Summary with Comments. 
 
 Mr. Connor’s report might be characterized not unfairly as 
 critical and negative. It is lacking in positive and constructive 
 suggestions. It may be of interest to marshal such suggestions 
 
90 
 
 State Insurance Fund 
 
 or recommendations as are expressed or implied in the report. 
 The summary would run about as follows: 
 
 Declare additional dividends of one million dollars in the 
 general groups. 
 
 (This would impair the financial stability, if not endanger the 
 actual solvency of the State Fund.) 
 
 Expedite the collection of premiums. 
 
 (The need of additional employees for this purpose has been 
 urged repeatedly by the manager of the State Fund.) 
 
 Curtail the dividends in the special groups, and preferably 
 abolish such groups. 
 
 (This would force the withdrawal of employers in such groups 
 which represent nearly one-half of the premium income of the 
 State Fund.) 
 
 Abolish the special group for employers using the Wynkoop 
 Service and refuse to do business with the latter. 
 
 (This would result in the loss of desirable accounts amounting 
 to over $100,000.) 
 
 Expedite the settlement of claims and pay one hundred cents 
 on the dollar to every claimant. 
 
 (This is the present policy of the State Fund.) 
 
 Stop sending employees to State Fund dressing stations. 
 
 (These dressing stations are rendering satisfactory service at 
 low cost.) 
 
 Discontinue the practice of examining claimants outside the 
 office through physicians assigned to this work. 
 
 (These examinations are absolutely essential to the proper con¬ 
 duct of the work of the claim and medical divisions of the State 
 Fund.) 
 
 Let the State Fund be investigated again by a competent actu¬ 
 arial accountant.) 
 
 (While such an investigation would be welcomed, it should not 
 be forgotten that an investigation necessarily hampers greatly the 
 work of the office, already handicapped by lack of adequate force.) 
 
 Real Needs of State Fund 
 
 In conclusion, it may be pointed out that there is no mention in 
 Mr. Connor’s report of certain difficulties under which the State 
 Fund now labors. He criticises the State Fund for its failure 
 
Answer to Report of Jeremiah F. Connor 
 
 91 
 
 to secure a larger volume of business, but he says nothing about 
 the real obstacles which impede the progress of the State Fund. 
 
 Mr. Connor does not refer to the grave evil of the practice on 
 the part of insurance brokers and agents of circulating gross mis¬ 
 statements concerning the State Fund. 
 
 A serious handicap of the State Fund, which received no men¬ 
 tion in Mr. Connor’s report, is the difficulty of satisfying employ¬ 
 ers as to the protection under the State Fund policy on account of 
 the limitation of the coverance to liability under the Workmen’s 
 Compensation Law only. This limitation is a severe discrimina¬ 
 tion against the State Fund in competition with the stock and 
 mutual companies. It is true that the liability under the Work¬ 
 men’s Compensation Law is exclusive for an employer carrying 
 on a hazardous employment within the State and not subject in 
 any way to the jurisdiction of the federal statutes or the laws of 
 other states. But liability may arise under the laws of other 
 states in connection with traveling salesmen, and liability at ad¬ 
 miralty may arise through the operation of some vessel, which 
 could not be covered specifically by the State Fund policy. Many 
 employers desiring to insure in the State Fund are deterred from 
 doing so through the apprehension that some action for damages 
 may be successfully maintained by an injured employee. Repre¬ 
 sentatives of the casualty companies make effective use of the 
 argument that the State Fund cannot cover liability outside the 
 Workmen’s Compensation Law. Even when all the operations of 
 an employer are clearly within the scope of the law, he may, nev¬ 
 ertheless, be disturbed by the fear of a suit on some liability not 
 covered by the law. The State Fund will always be at a great 
 disadvantage in this respect until it is authorized by law to issue 
 a policy covering any collateral liability at common law, under 
 the federal statutes, or under the laws of other states, which may 
 arise in connection with a workmen’s compensation risk. 
 
 Another handicap of the State Fund is the difficulty of con¬ 
 ducting a competitive business enterprise under the present rigid 
 restrictions of the budgetary system. The method by which the 
 State Fund is financed out of a legislative appropriation is cum¬ 
 bersome and unbusinesslike. The budget of the State Fund must 
 be prepared months in advance of the beginning of the fiscal year 
 
92 
 
 State Insurance Fund 
 
 and no departure from the narrow limits of the budget is per- i 
 mitted, to meet any emergency however urgent. Ho business can ; 
 be conducted with the highest degree of economy and efficiency I 
 under such a fiscal regime. The State Fund, it should be recog- j 
 nized, differs from the ordinary State department in two impor¬ 
 tant respects: it is subject, to a competitive check on expendi¬ 
 tures, which must be kept within proper limits if the business is 
 to survive and develop, and it is wholly self-sustaining, all ex¬ 
 penses being paid by the policyholders and not by the taxpayers 
 at large. The State Fund, therefore, should not be subjected j 
 unconditionally to the restrictions of a fiscal scheme designed for 
 non-competitive, tax-supported State departments. 
 
 The enactment of legislation to relieve the State Fund of these I 
 handicaps would do much toward enabling it to obtain the 25 per 
 cent, to 50 per cent, share of the compensation insurance in the 
 State, which Mr. Connor thinks that it ought to have secured; 
 while compliance with the suggestions expressed or implied in 
 his report would, it is to be feared, result in the withdrawal of 
 25 per cent, to 50 per cent, of the business now insured in the 
 State Fund. Respectfully submitted, 
 
 (Signed) F. Spencer Baldwin, 
 
 Manager State Insurance Fund . 
 
Answer to Report of Jeremiah F. Connor 
 
 93 
 
 APPENDIX 
 
 I. Memorandum In re Reserves Held December 31, 1918 
 In accordance with your request, I am pleased to give you the 
 following information with respect to the several reserves held 
 on December 31, 1918, as noted in my report dated February 5, 
 
 1919: 
 
 I. Loss Reserve .— This amounted to $3,316,116.40, and cov¬ 
 
 ered the anticipated future payments on account of accidents 
 which had occurred prior to December 31, 1918, which were not 
 fully closed out. These deferred payments fall under five heads: 
 
 1. Payments to beneficiaries in death cases 
 
 and funeral benefits in recent death 
 
 cases where there were no beneficiaries $1,764,006 10 
 
 2. Future payments to injured employees 
 
 permanently and totally disabled. . . . 254,612 51 
 
 3. Deferred payments to injured employees 
 
 on account of permanent partial dis¬ 
 ability . 492,520 53 
 
 4. Deferred payments on account of tempo¬ 
 
 rary total disability cases presumed 
 
 not to be permanently disabled. 659,736 92 
 
 5. Probable future expenditures for med¬ 
 
 ical aid under past accidents. 145,240 34 
 
 Total reserve . $3,316,116 40 
 
 The following is the explanation of the way the amount of 
 reserve was arrived at under each of these items: 
 
 1. Death Cases .— This represents the present value in such 
 cases based upon the Survivorship Annuitants’ Mortality Table 
 and the Remarriage Table of the Dutch Royal Insurance Insti¬ 
 tution, assuming interest at 3% per cent. The benefits in case 
 of death, to the widow, continue for life during widowhood, with 
 
94 
 
 State Insurance Fund 
 
 a provision for two years’ compensation in a lump sum on remar¬ 
 riage, and to minor children until age of 18 is reached. The 
 benefits to other dependents continue during life and dependency, 
 which theoretically may terminate prior to death, but in actual 
 practice rarely, if ever, does. It is obvious that the present value 
 of these cases should be determined on the basis of a suitable 
 mortality table and some statistical table giving probabilities of 
 remarriage. The tables used in this case, as also the rate of 
 interest, have received legislative sanction through embodiment 
 into the statute as the basis of commutation of cases to be paid 
 into the aggregate trust fund. Of course, no one can say with 
 assurance that the probabilities of death and remarriage shown 
 by these tables will actually be accurately realized in American 
 experience. Up to the present time, however, we have no more 
 dependable tables to use, and sufficient experience has not devel¬ 
 oped to form the basis of an American table. It is my expecta¬ 
 tion during the coming year to further investigate this matter, 
 and I hope that we may in the near future, with the co-operation 
 of the Insurance Department and the Commission, make some 
 investigation which may lead to the development of distinctly 
 American experience tables. I believe the above reserve is prob¬ 
 ably adequate, and there is no reason for believing that it is 
 excessive. Of course, if we have sufficient facilities the claim 
 department can investigate these cases, and it may be found that 
 some widows have remarried, and the cases may, therefore, 
 require a less reserve than has been set up; but the reserve at 
 any time can only be set up on the basis of facts as known at that 
 time. 
 
 2. Permanent Total Disability .— The compensation to an 
 employee sustaining a total permanent disability is likewise a 
 life pension and must be valued upon the basis of a mortality 
 table. The Survivorship Annuitants’ Mortality Table has been 
 used in this case also and the same rate of interest, 3% per cent, 
 has been used. In this connection, if you will refer to the table 
 on page 9 of my report, you will see that it is hardly safe to 
 assume a higher rate of interest. 
 
 3. Permanent Partial Disability .— The law prescribes a fixed 
 compensation for a definite term in the case of permanent partial 
 
Answer to Report of Jeremiah F. Connor 
 
 95 
 
 disability, and the reserve has been set up in those cases at the 
 amount of the fixed compensation less actual payments made. 
 Of course, we have had to use some discretion in this item where 
 cases had not yet been definitely awarded permanent partial 
 compensation, but where the facts indicated such award was 
 probable. 
 
 4. Temporary Total Disability .— The reserve in this case is 
 in accordance with the table prepared by Mr. Woodward and 
 approved by the Superintendent of Insurance. This table is not 
 the same one as used by mutual companies, for the reason that 
 they do not make up their reserve until after the expiration of a 
 month following the end of the year, when their knowledge of 
 cases is more complete than is ours at the time our reserves are 
 made up. In the natural run of things, a certain proportion of 
 the cases open on December 31st are closed within one month of 
 that time. Therefore the values in our table are somewhat 
 smaller than those in the Mutual Company table. The aggregate 
 result is probably substantially the same. 
 
 5. Medical Aid .— This is based upon taking an average per 
 case where our accident record cards do not show that the medical 
 expense has been entirely liquidated. 
 
 If there is any question as to the sufficiency or excess in the 
 reserves, it must be with respect to the last two items, which relate 
 almost wholly to cases arising during the last calendar year and 
 largely to cases arising during the last policy period of six months. 
 For example, of the reserve for temporary total, amounting to 
 $659,736.92, $532,214.26 was in respect of cases occurring during 
 the last policy period and $67,012.66 during the policy period 
 immediately preceding, at total of over $599,000 during the last 
 calendar year and less than $60,000 for the entire preceding time, 
 of which $57,000 was for twenty-one serious cases arising during 
 the seventh period; that is, the last half of 1917. Naturally, the 
 cases in the latest period are those about which least is known, 
 and which are, therefore, most liable to adverse development. 
 There are also more such cases. As the periods become older and 
 the cases become better known, we are able to fix a more accurate 
 reserve, and the excess reserve, if any has been held, is imme¬ 
 diately freed for surplus. 
 
96 
 
 State Insurance Fund 
 
 Of the reserve for medical expense, amounting to $145,240.34, 
 $84,231.57 was for cases arising in the last policy period of six 
 months and $61,008.77 for cases arising during the preceding 
 six months, the entire amount, therefore, being for cases arising 
 during the last calendar year. 
 
 You will note from page 2 of my report, under the discussion 
 of this item, that the increase in reserve for the last policy period 
 was approximately $150,000, and was due to the conflicting opera¬ 
 tion of two causes — reserve on account of accidents arising in 
 that period and reserve released by a re-estimation of the earlier 
 periods. The incurred losses of the ninth period were $1,034,799, 
 approximately $100,000 less than for the eighth period and 
 $200,000 less than for the seventh period. The payments during 
 the period on account of accidents occurring during that period 
 and preceding periods amounted to $680,230, leaving a net excess 
 of the incurred losses of the period over the total payments for the 
 period of $354,569. The amount of reserve released by a revalua¬ 
 tion of the preceding periods was $204,810, of which $112,916 
 was oh account of revaluation of the eighth or last period and 
 $82,141 of the seventh period. There was a very slight release 
 indicated on accidents occurring in the fifth and sixth periods, 
 which were almost wholly compensated by necessary slight 
 increases in reserves on account of accidents occurring in earlier 
 periods. This result is consistent with the revaluation of earlier 
 periods on June 30, 1918, and December 31, 1917, and, it seems 
 to me, indicates that our reserve rules are upon a very sound 
 basis. The only cases of which we have really precise knowledge 
 are valued upon standards which, as the cases grow older and are 
 settled, prove accurate to a remarkable degree. The more recent 
 cases are valued upon a conservative basis so adjusted that if the 
 estimate has proven too conservative it would promptly be released 
 on the next valuation, and in any event will not be held beyond 
 one year from the time of original valuation. It seems not 
 unlikely that on revaluation June 3'0th the record as of Decem¬ 
 ber 31st will be repeated and there will be released for surplus 
 a small amount, less, however, than 10 per cent of the total reserve 
 on December 31st. 
 
 It requires but little study of the history of liability and com¬ 
 pensation, less reserves, to convince any one that the tendency in 
 
Answer to Report of Jeremiaii F. Connor 97 
 
 the past in this respect has been viciously to underestimate reserve 
 liabilities, and, in view of that tendency and fact, most conserva¬ 
 tive students would view with not a little suspicion the reserve 
 which upon successive revaluations showed so slight a margin 
 as 10 per cent. From having made a careful study of the State 
 Fund’s reserves over its entire history I am fully satisfied that 
 it can safely operate in its reserve system. I very gravely ques¬ 
 tion whether it can operate with safety upon a system which did 
 not have this tendency, and you will recall that an unfortunate 
 error made in one earlier valuation of the fund resulted in a 
 deficiency of reserve of more than this amount, which ultimately 
 had to be made up from the future earnings of a period when, 
 due to other conditions, it was exceedingly difficult and unfor¬ 
 tunate for the State Fund to have to do this. 
 
 II. Deferred Claim Expense.— This item is 4 per cent of the 
 loss reserve, being the same percentage that is required under the 
 rules for depositing with the aggregate trust fund to cover the 
 expenses of operating the trust fund. It is for the purpose of 
 meeting the current running expense of paying these claims. It 
 is true that this expense comes out of our annual appropriation, 
 and that if the State Fund never has to liquidate it will not have 
 to call upon this fund, as such, to pay out these cases. It seems 
 to me, however, that this is not the only or controlling reason 
 which should govern the treatment of this item in the State Fund 
 balance sheet. Under the statute, the State Fund is subject to 
 the supervision of the Insurance Department as respects its 
 solvency and will be expected by that department to meet the 
 tests required of its competitors. While the Superintendent of 
 Insurance might not attempt to prohibit the State 'Fund from 
 operating, if it could not meet this test, the intimation from his 
 office that it did not meet it would be a most fatal blow to the 
 fund in its competitive existence. Therefore, whether or not the 
 State Fund is liable ever to have to liquidate, it is as a business 
 proposition highly advisable for it, if it can, to maintain reserves 
 at least equal to those required by the Superintendent of Insure 
 ance of its competitive mutual companies. In this respect the 
 fund is in a very different position than if it were operating as a 
 monopoly. It is true that the superintendent’s requirement of 
 
 4 
 
98 
 
 State Insurance Fund 
 
 mutual companies is but 3 per cent of their reserve, whereas the 
 reserve we have set up is 4 per cent, which makes a difference in 
 actual money of about $30,000. I will discuss this a little 
 further later. 
 
 But there is another reason why it seems to me highly desirable 
 for the State Fund to maintain this reserve. Although the 
 expenses of the State Fund are paid initially out of an appro¬ 
 priation of the Legislature, that appropriation is reimbursed into 
 the State treasury out of the premium income of the State Fund; 
 that is, the policyholders are charged with the State Fund’s 
 expenses. If this reserve is set up on an adequate basis and the 
 expense ratio of the State Fund is computed upon the basis of 
 incurred expenses ; that is, of payments plus increase in outstand¬ 
 ings, then the policyholders of each period pay all of the expenses 
 of liquidating the claims which arise during that period and of 
 maintaining the State Fund during that period. This is as it 
 should be. If these reserves are not set up and policyholders 
 are charged for expenses only on the basis of expenses paid, then 
 each succeeding period of policyholders leaves for future policy¬ 
 holders to pay certain expenses in connection with claims which 
 arose under their policies. If the State Fund’s premium income 
 continues uniform and its expenses otherwise do not increase, 
 there will, nevertheless, by reason of a piling up of deferred claims 
 to be handled, be a necessary increase in its total expenses which 
 would show an increasing expense ratio for the State Fund. If 
 the State Fund had a monopoly of the business, so that its policy¬ 
 holders each succeeding year were the same body, this would not 
 be injurious to the State Fund, nor could it generally be con¬ 
 sidered inequitable. Such is not, however, the case. The State 
 Fund must secure its business in the keenest kind of competition 
 with stock and mutual companies, and a rising expense rate of 
 the State Fund, from whatever cause, would be eagerly seized 
 upon by its competitors and effectively used against it in com¬ 
 petition. Further, it would be inequitable to require new policy- 
 holders coming into the State Fund to take up burdens created 
 for them by existing or former policyholders, and likewise be 
 inequitable to permit policyholders to leave the fund for any rea¬ 
 son and leave these burdens to be borne by others. Equity and 
 
Answer to Report of Jeremiah F. Connor 
 
 99 
 
 business foresight in the light of competitive conditions, therefore, 
 seem to require that these reserves be set up upon a basis as nearly 
 adequate to cover their purposes as can be determined. It seems 
 to me that the same reasons calling for a 4 per cent loading in 
 the case of deposits into the aggregate trust fund justify the 4 per 
 cent reserve in this case. 
 
 III. Premium Reserve. — This reserve represents the unearned 
 portion of premiums actually received and probably calls for no 
 further comment. 
 
 IV. Reserve for Industrial Commission Expenses (Section 77). 
 — This reserve represents two items — an anticipation of the 
 amount shortly to be billed for the Commission’s year from July 1, 
 1917, to June 30, 1918, and a reasonable estimate of the same 
 item for the remainder of the calendar year 1918. These are 
 immediate liabilities which the State Fund must be prepared to 
 meet when the bills are presented. In addition to this, there is 
 also reserved 4% per cent of the loss reserve, deducting the reserve 
 for medical payments. The last assessment for the expenses of 
 the Commission was at 4^4 per cent of the payments, excluding 
 medical payments, and inquiry from Mr. McDermott indicates 
 that the assessment for the fiscal year ending June 30, 1917, will 
 be at about the same rate. The same reasons for setting up the 
 deferred claim expense reserve would seem to entirly justify and, 
 indeed, require the treatment of this item along the same lines. 
 
 V. Accrued Administration Expense. — The State Fund has 
 not yet been billed by the State Treasurer for its expenses for 
 the fiscal year ending June 30, 1918. Mr. Fondiller was informed 
 some time ago from Mr. McDermott’s office that these amounted 
 to $168,559.47, and we have added for the remaining six months 
 of 1918 $85,000 (substantially half that) to make up this item 
 of liability. I have since been advised that Mr. McDermott holds 
 that he told Mr. Fondiller at the time that this $168,559.47 did 
 not include certain expenses, and he now makes the figure sub¬ 
 stantially $20,000 greater. If this be the case, and the rate of 
 expense for the last half of 1918 is upon the same basis, this 
 item would require to be increased by some $30,000. 
 
 VI. Reserve for Investment Depreciation. — As of December 
 31, 1918, the Special Committee on Securities Valuation of the 
 
100 
 
 State Insurance Fund 
 
 National Convention of Insurance Commissioners issued an an¬ 
 nual pamphlet giving valuations of securities as of December 31 
 of each year. It is my understanding that the Insurance Depart¬ 
 ment of this State will publish the statements of the various com¬ 
 panies to it, basing the value of securities upon the valuations in 
 this table; and in the case of the State Fund, due to a curious 
 resolution of the National Convention of Insurance Commissioners 
 prescribing par as the value of all Liberty bonds, regardless of the 
 price at which they were purchased (the State Fund bought 
 during the last half of 1918 a considerable amount of bojids well 
 below par), the Department valuation will probably exceed the 
 book value of the State Fund, which in all cases is purchase price. 
 On June 30, 1918, however, the Insurance Department required 
 the quarterly statement to he filed valuing the securities at actual 
 market basis notwithstanding that an average value substantially 
 above the market was used December 31, 1917, and that the De¬ 
 cember 31, 1918, value is substantially above the market. It 
 would be a serious misfortune for the State Fund, after having 
 paid dividends or otherwise disposed of its apparently free sur¬ 
 plus on the basis of the Department valuation, to suddenly he 
 compelled to mark down its securities to a low market value. In 
 order to he safe, therefore, it would appear wise for the State 
 Fund not to carry its securities above actual market values, and 
 the reserve for investment depreciation was determined by taking 
 the actual market value; hut certain securities having shown a 
 tendency to further recede, values slightly lower than the market 
 were taken and fractional values were dropped. 
 
 VII. Reserve for Experience Fluctuation .— The period ending 
 December 31, 1918, was an unusually profitable one for the State 
 Fund, due to the collection of large amounts of additional pre¬ 
 miums and audits for that and preceding periods. With the 
 readjustments of industry to a peace basis, it must be evident 
 that the State Fund will not have this source of income much, if 
 any, longer. On the other hand, hills are now pending in the 
 Legislature whose purpose is to increase the benefits under the 
 act, and it would he inexpedient for the State Fund to immedi¬ 
 ately increase its rates. Indeed, in appearing before the Com¬ 
 mission when the bills were under consideration, as you will 
 
Answer to Report of Jeremiah F. Connor 
 
 101 
 
 recall, we stated that the policy of the State Fund would be to 
 carefully study the matter and make no increase in rates which 
 did not seem to be required. If these increased benefits and the 
 industrial conditions we must face during the readjustment period 
 are such that in actual effect the present rates are not sufficient, 
 then, the State Fund would be faced with the alternative of 
 decreasing or omitting its dividend or decreasing its surplus. 
 From the business point of view, therefore, all these actions would 
 be very detrimental to the best interests of the State Fund. It, 
 therefore, seemed a much wiser course, and one looking more to 
 the safety and stability of the State Fund as a permanent going 
 concern, to set aside a reserve for this item which might be drawn 
 upon to meet these conditions without the necessity of reducing 
 or discontinuing the State Fund’s dividend. The American busi¬ 
 ness man, in making contracts for the future for insurance or any 
 other service or commodity, naturally makes his contract with a 
 view to what service he will get and what it will cost in the future, 
 and without much consideration for the past. Therefore, no 
 matter how much the State Fund’s past dividends may have been, 
 if the indications were that those dividends could not be main¬ 
 tained or must be omitted entirely, the business man promised a 
 dividend from a competing mutual company would not feel neces¬ 
 sarily bound in gratitude to remain with the State Fund. Indeed, 
 his own business success in the competitive world depends on his 
 keeping his eye on the future rather than the past. Therefore, it 
 seems that the permanence of the State Fund depends more upon 
 its establishing a satisfactory dividend that it can maintain 
 rather than attempting to distribute too closely the actual earn¬ 
 ings of a definite period, and this reserve has been set up in accord¬ 
 ance with this policy. 
 
 It might have been possible to omit this reserve and allow the 
 amount to remain in the surplus, but the American public has 
 been educated to the general theory that the surplus of insurance 
 institutions ought not to decrease, at least until it has reached 
 a very substantial proportion, and that a decrease in surplus is a 
 sign of weakness. Thus, this amount carried in general sur¬ 
 plus would not be so freely available for the purposes for which 
 it was designed as it is when set up as a separate reserve. In 
 
102 
 
 State Insurance Fund 
 
 any event, the effect on policyholders’ dividends would be no 
 different whether this is carried as a separate reserve or simply 
 used to increase the surplus shown in the statement, if that sur¬ 
 plus is not distributed. In this connection, might I point out 
 that the Ohio State Fund generally considered very radical in its 
 management, having a monopoly of the business in Ohio so that 
 it is not necessary to give the careful attention to competitive con¬ 
 ditions that we must give, yet deemed it expedient, with a surplus 
 over and above catastrophe reserve of over one million dollars, to 
 distribute but little more than $300,000' in the way of dividends ? 
 
 VIII. Reserve for Dividends to be Paid. — Technically, this is 
 not a liability, as the dividends had not been voted prior to De¬ 
 cember 31; but the setting up of this item is in accordance with 
 the general practice of insurance companies and the requirement 
 of the Superintendent of Insurance where the dividends had actu¬ 
 ally been voted. 
 
 IX. Statutory C atastrophe Surplus. — This is the surplus re¬ 
 quired by the statute to be accumulated until, in the discretion of 
 the Commission, it is sufficient. I do not believe that the State 
 Fund can successfully operate competitively, without reinsurance 
 (the stock companies have their own mutual reinsurance pool and 
 the mutual companies either have such a pool or take reinsurance 
 from London Lloyds) on a catastrophe surplus any less than this 
 amount, and I believe that this surplus should be built up prob¬ 
 ably until it reaches approximately one million dollars. After 
 this time is reached, I do not believe there will be any necessity 
 for further charges against policyholders for this purpose, although 
 I think probably a small free surplus such as shown in the state¬ 
 ment should be maintained to cover various contingencies, such 
 as further depreciation of investment securities, a sudden change 
 in conditions such as was experienced in 1915, when war contracts 
 of European countries gave such a stimulus to industry that acci¬ 
 dent costs increased very substantially before it was possible to 
 revise rates to take care of them. 
 
 X. Unassigned Surplus. — This amount is less than 10 per cent, 
 of the State Fund’s premium income and would all be gone within 
 a ye ay should industrial conditions, rating plans, or other unfore¬ 
 seen contingency make rates inadequate. In this connection I 
 
Answer to Report of Jeremiah F. Connor 
 
 103 
 
 might point out that the experience rating plan, which was 
 expected to adjust rates to the individual risks without substantial 
 change in the companies’ premium income, has shown a tendency 
 to produce substantial reductions. I do not believe it is the part 
 of ^wisdom for the State Fund to operate upon a general contin¬ 
 gency surplus much smaller than that held on December 31, 1918. 
 Of course, circumstances in the past have left no choice in the 
 matter, but I sincerely trust we will not be so unfortunately placed 
 again. In this respect, might I again call attention to the very 
 conservative attitude of the Ohio authorities in the matter ? 
 
 (Signed) A. H. Mowbray, 
 
 Actuary. 
 
 February 28, 1919. 
 
 II. Comparison of Ohio and New York Rates. 
 
 March 4, 1919. 
 
 Jeremiah F. Connor, Esq., 80 Maiden Lane, New York City. 
 
 Dear Sir.— I have received your communication of February 
 26 relating to the comparison made by the actuary of the Ohio 
 State Fund between Ohio and Yew York workmen’s compensation 
 insurance rates. 
 
 In commenting upon this comparison, I have no desire to place 
 myself in the role of a critic of the Ohio State Fund. Unfortu¬ 
 nately, however, the comparison would appear to warrant the 
 inference that the rates of the Yew York State Fund, which are 
 approximately 15 j>er cent, lower than the Yew York manual rates 
 of the casualty companies, are unduly high in comparison with 
 the rates of the Ohio State Fund. This inference is not war¬ 
 ranted by the facts, and, in justice to the Yew York State Fund, 
 I wish to point out certain errors or oversights in the comparison 
 of rates as presented by the actuary of the Ohio State Fund. 
 
 The actuary of the Ohio State Fund recognizes certain differ¬ 
 ences in the operating conditions in the Ohio State Fund and in 
 the stock companies doing business in Yew York State and ac¬ 
 cordingly proposes that the Ohio rates be increased by 20 per 
 cent, in order to equalize the conditions of comparison. However 
 the case may lie as respects the stock companies, this 20 per cent. 
 
104 
 
 State Insurance Fund 
 
 multiplication of the Ohio rates cannot be accepted as constituting 
 a fair basis of comparison as between the rates of the Ohio and 
 Yew York State Funds. The proper method of comparison here 
 is to modify the rates of both the Ohio and the Yew York State 
 Funds, respectively, in allowance for various factors of difference, 
 and then to compare the resulting modified rates. I shall there¬ 
 fore proceed to point out the factors of difference for which 
 allowance should thus he made in the two cases. 
 
 Modifications of Ohio State Fund Rates: 
 
 1. The treatment of the office payroll in the two Funds is differ¬ 
 ent and operates to give the Ohio Fund a higher rate on its several 
 classifications than the manual rate as adjusted by it for merit 
 rating. In the Yew York Fund the office payroll is separately 
 classified and rated. In the Ohio Fund the office payroll up to 
 10 per cent, of the operating payroll is included at the operating 
 rate. Except in very low-rated classifications, the office classifi¬ 
 cation is only from 5 to 10 per cent, of the operating classification 
 rate, and, therefore, the Ohio Fund gets substantially the oper¬ 
 ating classification rate upon a larger payroll running up to 10 
 per cent, greater. Mr. Watson estimates that this difference is 
 equivalent to an increase of 9 per cent, in the Ohio rate, and I 
 accept his estimate. 
 
 2. The rates quoted in Mr. Watson’s communication are mini¬ 
 mum rates and are not subject to any discount for merit rating, 
 but are subject to charges for adverse experience. According to 
 the Ohio manual provisions (Rules IV, V, VI, VII, VIII, pages 4 
 and 5, and Appendix B, pages 178-187), the employer does not 
 enjoy the manual rate if his loss ratio has exceeded 60 per cent., 
 but in such cases he pays a surcharge equal to 30 per cent, of the 
 excess loss over 60 per cent, of his premiums up to a maximum 
 charge of 24 per cent, above the manual rate. Under Rule II, 
 page 3, it appears that a new risk pays an initial premium equal 
 to 124 per cent, of the manual rate. How much the average 
 increase will be it is difficult to tell. 
 
 In Mr. Watson’s communication the total premiums of the Ohio 
 Fund up to May 15, 1918, amounted to $25,269,532.85. Of these 
 there were unearned on that date $1,540,662, leaving a balance 
 earned of $23,728,870.85. 
 
Answer to Report of Jeremiah F. Connor 
 
 105 
 
 In the same statement there was recorded as disbursed for 
 “ warrants cashed,” which I understand to be for loss payments, 
 $13,791,522.77, and there is under liabilities a “ reserve set aside 
 to bring all claims to full maturity ” of $8,449,478.40; this would 
 giye total incurred losses, $22,241,001.17. This would give a 
 loss ratio of 93.7 per cent, or an average excess over 60 per cent, 
 loss ratio of 33.7 per cent. 30 per cent, of this is 10.1 per cent. 
 But, of course, in this average loss ratio there must be many risks 
 whose individual loss ratio was well below 60' per cent., and there 
 will undoubtedly be some whose individual loss ratio exceeded 140 
 per cent., so that the 24 per cent, limit of extra charge became 
 effective. The indication would seem to be that the Ohio State 
 Fund would probably receive, as additional premiums under its 
 merit rating provision, more than one-half of the maximum, but 
 in the absence of precise knowledge and in order to take a very 
 conservative view of the matter, I shall assume that this gave an 
 average increase of 11 per cent., which with the 9 per cent, addi¬ 
 tional through the treatment of office payroll would indicate that 
 the collectible rates of the Ohio Fund are on the average 20 per 
 cent, above their manual rates. 
 
 Modifications of Neiv York State Fund Rates: 
 
 1. In the case of the Yew York State Fund, the manual rates 
 are subject to reduction by schedule rating and experience rating. 
 In his annual report for the year ending December 31, 1918, Mr. 
 Senior showed that the average reduction from schedule rating 
 was 6.3 per cent. I have recently had a list prepared of experi¬ 
 ence rated risks of the Yew York State Fund and this showed an 
 average reduction on these risks of 6.6 per cent. Taking these 
 together, the Yew York State Fund collectible rates, therefore, 
 at the present time may be considered to be 12.9 per cent, below 
 the Yew York State Fund manual rates. A comparison of these 
 rates makes a showing much more favorable to the Yew York 
 State Fund than is the implication of the comparison in Mr. Wat¬ 
 sons communication; yet such a comparison would be distinctly 
 unfair to the Yew York State Fund, because this takes no account 
 of two other conditions wherein, through no fault of the Yew York 
 State Fund, the Ohio State Fund has a distinct advantage. 
 
106 
 
 State Insurance Fund 
 
 2. The expenses of the Ohio State Fund are paid by the State. 
 The expenses of the Yew York State Fund are paid out of its 
 premiums and it is further subjected, through no fault of its own, 
 to the sharp competition of stock and mutual companies, so that 
 it has at considerable expense to itself to secure its business in 
 competition with those companies and hold its business in the face 
 of such competition. The incurred expenses of the Yew York 
 State Fund for the year 1918 were $246,639.75. The incurred 
 expenses of the Ohio State Fund for the year ending May 15, 
 1918, are given as $327,806.04. But in the case of the Yew 
 York State Fund this expense includes over $30,000 as its share 
 of the expenses of the State Industrial Commission. If the Yew 
 York State Fund were relieved of the burden of competitive 
 expense imposed upon it and any contribution toward the expenses 
 of the State Industrial Commission, and further had the entire 
 volume of the business of the State over which to spread its 
 expenses, as has the Ohio Fund, even though the staff of the Yew 
 York Fund would have to be somewhat increased to care for the 
 larger volume of business, I am satisfied that the Yew York State 
 Fund’s expense ratio would not exceed the very low figure of 
 3% per cent, shown by the Ohio State Fund. Under such circum¬ 
 stances, it would seem that the fair basis of comparison would be 
 to deduct from the collectible rates of the Yew York State Fund 
 its expense ratio as shown on its 1918 business (7% per cent.) 
 rather than to add to the Ohio State Fund’s rates its realized 
 expense of 3Y2 per cent. A comparison on this basis assumes that 
 the expenses of the State Fund in each case are paid by the State. 
 
 3. The Ohio State Fund has the benefit of revenue from a source 
 not available to the Yew York State Fund, as the rules of the Ohio 
 State Industrial Commission require self-insurers to pay into the 
 Ohio State Fund a premium equal to 5 per cent, of what their 
 premium for a full coverage in the Ohio State Fund would be. 
 This premium, as I understand it, goes to the catastrophe surplus 
 of the Ohio Fund. The statutory provision as respects catas¬ 
 trophe surplus in the Ohio State Fund is the same as the statu¬ 
 tory provision in this State, but, due to its larger volume of busi¬ 
 ness and its non-competitive situation, the Ohio Fund has been 
 
Answer to Report of Jeremiah F. Connor 
 
 107 
 
 able to accumulate more quickly than the New York State Fund 
 the statutory surplus deemed sufficient by its Commission, so that 
 further accretions to it are not necessary. In the statement as of 
 May 15, 1916, this is given as $624,850.62, and in the statement 
 of May 15, 1918, as $887,282.82. Without definite knowledge 
 on the subject, it seems highly probable that this entire increase 
 came from the revenue from self-insurers. The New York State 
 Fund is not yet in that fortunate position where it is deemed expe¬ 
 dient to discontinue the further accumulation of catastrophe sur¬ 
 plus. Indeed, with the greater congestion of business in certain 
 parts of New York State as compared with Ohio, there is reason 
 to believe that the New York State Fund will require a somewhat 
 larger catastrophe surplus than the Ohio Fund. The New York 
 Fund rates, therefore, provide a margin of 5 per cent, for catas¬ 
 trophe surplus, and, in order to make them directly comparable 
 with the collected rates of the Ohio Fund, this 5 per cent, should 
 also be deducted. This makes a further reduction in New York 
 State Fund rates below its manual rates of 12% per cent., or a 
 total reduction for the three factors of difference amounting to 
 25.4 per cent. 
 
 I have not attempted- the comparison on this basis for all of the 
 rates quoted in Mr. Watson’s communication. I have, however, 
 selected twelve representative classifications common to both 
 States, and made such a comparison, and upon this basis the rates 
 of the New York State Fund are found to be about 7% per cent, 
 less than the corresponding rates of the Ohio State Fund. If it 
 is desired, the range of classifications included in the comparison 
 can be readily extended. 
 
 I am appending to this memorandum two tables, the first show¬ 
 ing the manual rates of the two Funds, and the actual collectible 
 rates, and the second showing the collectible rates after adjust¬ 
 ment of the New York State Fund rates as above outlined, in 
 order to make them properly comparable. 
 
 Of course, these comparisons are of advance rates only and not 
 of net costs to policyholders. For the policy period just closed 
 the New York State Fund has declared a dividend of 10 per cent., 
 and we have every expectation of maintaining that dividend. The 
 
State Insurance Fund 
 
 108 
 
 Ohiot State Fund, according to Mr. Watson’s communication, was 
 to declare as of May 15, 1918, dividends aggregating $336,452.46. 
 It is not clear whether this is for a year or a six-months’ period. 
 If for a year, the rates would be about 3% per cent., and if for 
 a six-months’ period, about 7 per cent. Upon this basis of com¬ 
 parison, it would appear that, under the same operating condi¬ 
 tions, the net cost to policyholders of the Yew York State Fund 
 would have been slightly less than the net cost to policyholders 
 of the Ohio State Fund. 
 
 Very truly yours, 
 
 F. Spencer Baldwin, 
 Manager, State Insurance Fund. 
 
 TABLE I. 
 
 Manual and Collectible Rates of the Yew York and Ohio 
 State Funds Without Adjustment for any Difference 
 in Operating Conditions to Bring Them to a Comparable 
 Basis. 
 
 (For which see Table IT.) 
 
 
 Ohio 
 
 manual 
 
 rate 
 
 Minimum 
 estimate 
 of Ohio 
 collectible 
 rate 
 
 New York 
 State 
 fund 
 manual 
 rate 
 
 New York] 
 State 
 fund 
 average 
 collectible 
 rate 
 
 Machine shop — no foundry. 
 
 1.25 
 
 1.50 
 
 1.89 
 
 1.65 
 
 Machine shop — with foundry. 
 
 1.45 
 
 1.74 
 
 2.18 
 
 1.90 
 
 Foundry, iron. 
 
 1.55 
 
 1.86 
 
 2.18 
 
 1.90 
 
 Malleable iron works. 
 
 1.65 
 
 1.98 
 
 *2.18 
 
 1.90 
 
 Blast furnaces. 
 
 3.25 
 
 3.90 
 
 *5.00 
 
 4.36 
 
 Sheet metal works. 
 
 1.85 
 
 2.22 
 
 2.07 
 
 1.80 
 
 Planning and moulding mills. 
 
 1.90 
 
 2.28 
 
 3.43 
 
 2.99 
 
 Cotton spinning and weaving. 
 
 | .65 
 
 ye 
 
 / 1.15 
 
 1.00 
 
 Woolen spinning and weaving. 
 
 . 4 O 
 
 \ 1.01 
 
 .88 
 
 Boot and shoe manufacturing. 
 
 .24 
 
 .29 
 
 .57 
 
 .50 
 
 Bakeries. 
 
 1.15 
 
 1.38 
 
 1.45 
 
 1.26 
 
 Breweries. 
 
 1.95 
 
 2.34 
 
 2.99 
 
 2.60 
 
 * Exception to usual rule that State Fund rates are 14.3% below the stock com¬ 
 pany manual rates. 
 
Answer, to Report of Jeremiah F. Connor, 
 
 109 
 
 TABLE II 
 
 Comparison of Rates of the New York and Ohio State 
 Funds — New York Rates Adjusted to Allow for Dif¬ 
 ference in Operating Conditions as Compared with the 
 Ohio State Fund. 
 
 New York 
 
 Machine shop — no foundry. 
 
 Machine shop — with foundry. 
 
 Foundry, iron. 
 
 Malleable iron works. 
 
 Blast furnaces. 
 
 Sheet metal works. 
 
 Planning and moulding mills. 
 
 Cotton spinning and weaving. 
 
 Woolen spinning and weaving. 
 
 Boot and shoe manufacturing. 
 
 Bakeries. 
 
 Breweries. 
 
 Average of 12 representative classifications 
 
 Minimum 
 estimate 
 of Ohio 
 collectible 
 rates 
 
 State fund 
 collectible 
 rate, less 
 loading for 
 expenses and 
 catastrophe 
 surplus 
 
 1.50 
 
 1.41 
 
 1.74 
 
 1.63 
 
 1.86 
 
 1.63 
 
 1.98 
 
 1.63 
 
 3.90 
 
 3.73 
 
 2.22 
 
 1.54 
 
 2.28 
 
 2.56 
 
 .78 
 
 .86 
 
 .78 
 
 .75 
 
 .29 
 
 .43 
 
 1.38 
 
 1.08 
 
 2.34 
 
 2.23 
 
 1.754 
 
 1 623 
 
no 
 
 State Insurance Fund 
 
 APPENDIX ITT 
 
 MEMORANDUM ON SPECIAL GROUPS 
 
 March 4, 1919. 
 
 The fundamental condition for the creation of a special group, 
 regarded solely from the point of view of sound insurance manage¬ 
 ment, is a sufficient payroll exposure to afford a satisfactory 
 insurance distribution or a proper insurance average. In deter¬ 
 mining what amount of payroll exposure should be taken as afford¬ 
 ing such a distribution and average, the State Fund, in the begin¬ 
 ning, laid down the requirement of a payroll of approximately 
 2,500 employees, and an annual expenditure of at least $1,000,000. 
 Later, an additional requirement of a premium of at least $7,500 
 for six months was adopted in order to insure an adequate group 
 premium on the basis of low-rated classifications, as the experi¬ 
 ence showed that the rate of premiums was more important than 
 the size of the payroll in determining the proper basis for special 
 grouping. In short, an individual employer or a number of 
 employers in the same trade having 2,500 employees and an 
 annual payroll of $1,000,000, yielding a premium of $7,500 for 
 six months may be regarded as an insurance unit for the pur¬ 
 poses of the State Fund and may, therefore, be properly set up 
 as a group within the meaning of the law. It would obviously not 
 be proper to recognize as a group any individual employer or any 
 number of employers whose total exposure, having regard to the 
 number of employees and the size of the payroll and the amount 
 of the premium, was too small to afford a satisfactory insurance 
 distribution. On the other hand, it is entirely proper to set up 
 as a group within the meaning of the law an individual employer 
 or number of employers, having an exposure with respect to the 
 number of employees, and payroll and premium sufficiently large 
 to constitute a real insurance unit. The limits for the establish¬ 
 ment of special groups have been fixed, with due regard to this 
 fundamental consideration, with a view to securing a reasonable 
 uniformity of experience in such groups over successive policy 
 periods and minimizing the possibility of a deficit in any period. 
 
Answer to Report of Jeremiah F. Connor 
 
 111 
 
 The objection has been brought against the special group plan 
 that it involves discrimination in favor of employers so grouped, 
 as it enables .them to get a low rate of insurance in contrast to 
 employers in general groups who are compelled to share the bur¬ 
 den of other employers in such groups. It is contended that the 
 plan is not consistent with the theory of workmen’s compensation, 
 which requires that the cost of industrial accidents be distributed 
 over the entire field of industry and borne collectively by the 
 employers, as a whole. It is held that employers who are placed 
 in special groups are relieved of their proper share of this col¬ 
 lective burden and are enabled to obtain insurance at special low 
 rates. 
 
 In answer to this argument, it may be pointed out that dis¬ 
 crimination is written into the Workmen’s Compensation Law 
 itself. By permitting self-insurance, the law discriminates in favor 
 of the large employer by giving him the opportunity to carry his 
 own risk — an opportunity not open to the small employer. By 
 permitting mutual insurance, the law again recognizes discrimina¬ 
 tion, as it enables groups of employers insured in mutual associa¬ 
 tions to obtain insurance at the net collective cost of carrying their 
 particular trade risk, and thus to escape their contribution toward 
 the cost of insuring the more hazardous plants excluded from the 
 mutual associations. As long as the options of mutual insurance 
 and self-insurance are left open to employers under the law, it is 
 not consistent to condemn the special group plan of the State Fund 
 as discriminatory. Furthermore, the group plan, as embodied in 
 the original provisions of the law, involved discrimination as 
 between employers placed in different groups. The composition 
 of these groups was more or less haphazard. Two of the original 
 groups contain only a single employment each — tanneries and 
 pulp and paper mills. The dividend percentages are not always 
 the same for all groups. The employer who receives a dividend 
 of 20 per cent, in one group, as combined before the original forty- 
 two groups were combined into six, might be held to enjoy the 
 benefit of a special discriminative rate, as contrasted with the 
 employer who gets a dividend of only 5 per cent. The law goes 
 even further than this in permitting discrimination, as it legalizes 
 discrimination between individual risks through the provision of 
 
112 
 
 State Insurance Fund 
 
 section 95, authorizing the Commission to adopt a system of 
 schedule rating in such manner as to take account of the peculiar 
 hazard of each individual risk. In short, the objection to dis¬ 
 crimination that has been urged against the special group plan 
 applies also to self-insurance, mutual insurance, to the group sys¬ 
 tem itself, and to schedule rating as authorized by law. 
 
 The objection under consideration is not well taken in any 
 event, for it is desirable and proper to discriminate between em¬ 
 ployers and between groups in the matter of dividends, since this 
 recognizes differences in hazard, especially as influenced by safety 
 equipment and organization of plants and puts a premium on the 
 improvement of risks and the prevention of accidents. The em¬ 
 ployer of a group that is offered the prospect of an increased 
 dividend, to be obtained only by the reduction of insurance costs, 
 is stimulated by such incentive to exercise proper care in the 
 matter of safety organization and accident prevention, to improve 
 the safety standards of plants and to reduce the preventable toll 
 of industrial accidents. A discrimination that is based on differ¬ 
 ences in trade hazards and individual risks is entirely justifiable. 
 In this connection, the Attorney-General of the State, in an 
 opinion on the question of individual groups, January 25, 1916 ; 
 pointed out that “ the commission is permitted to discriminate ” 
 in the making of rates, but the nature of so doing is not arbitrary 
 “ but is presumed to take into account some hazard or protection 
 against some hazard.” 
 
Answer to Report of Jeremiah F. Connor 
 
 118 
 
 APPENDIX IV 
 
 MEMORANDUM ON STATE FUND EXPERIENCE 
 RATING PLAN 
 
 The advance premium is computed in the usual manner accord¬ 
 ing to the State Fund schedule rates. The plan then provides for 
 the readjustment of rates at the close of each policy period on the 
 basis of the following charges: the incurred losses, including cash 
 payments and loss reserves ; the catastrophe contribution of 5 per 
 cent of the premium; the charge for management expenses, accord¬ 
 ing to the actual expense ratio of the State Fund for the policy 
 period in question; the amount of the dividend in the general 
 group in which the experience-rated risk is placed, if any such 
 dividend has been declared; and an additional reserve for excess 
 risk, graduated according to the size of the premium, from 25 
 per cent for a semi-annual premium from $1,000 to $2,000, down 
 to 5 per cent for a semi-annual premium of over $7,500. The 
 rules of the plan further provide that if the total amount of the 
 charges in any policy period amount to more than the earned pre¬ 
 mium, the State Fund may charge the amount of such deficit 
 against any surplus earned in succeeding policy periods, or in the 
 event of the withdrawal of the policyholder, require the payment 
 of such amount in cash; provided, however, that the amount so 
 chargeable against the policyholder for any policy period shall be 
 limited to 50 per cent of the earned premium for that period. 
 
 The amount of the dividend, if any, is included in the charges 
 on which the rate readjustment is made, for the reason that each 
 risk subject to this experience-rating plan is a member of one of 
 the general groups, and would, therefore, receive credit for any 
 dividend declared in such group. Account should, of course, be 
 taken of such group dividend in the rate readjustment under the 
 experience-rating plan, and accordingly, the dividend credit, if 
 any, is offset by a charge of the same amount in computing the 
 experience rate. 
 
 The reserve for excess risk is intended to provide for losses 
 through death and serious disability cases which "distribute them- 
 
114- 
 
 State Insurance Fund 
 
 selves unevenly over policy periods. As risks subject to this plan 
 are not large enough to yield a proper insurance distribution and 
 average for a single policy period, it is necessary to establish a 
 reserve that will take care of excess losses in any one period. The 
 percentages of such reserves are determined by careful actuarial 
 computations and estimates. Further protection against unusual 
 losses above the amount of the excess risk reserve is afforded by 
 the provision for charging against the policy account the amount 
 of any deficit in a policy period up to 50 per cent of the earned 
 premium for that period. The State Fund is amply protected by 
 these provisions for excess risk and additional premium charge. 
 
 It will be seen that this experience-rating plan is based on two 
 principles. First, it is applicable only to large-size risks. Experi¬ 
 ence rating is not properly applicable to small risks for the 
 experience of such risks is sure to fluctuate widely, and no experi¬ 
 ence-rating plan could be devised that would work satisfactorily 
 either for the insurance carrier or insured. Only large-size risks, 
 moreover, can assume the expense of installing a safety equipment 
 and organization necessary to insure a favorable experience. 
 Second, the experience rating is based on the current experience 
 of each policy period and not on prior experiences. It is obvious 
 that current experience alone correctly reflects the existing 
 physical and moral hazard of a plant, as prior experience may be 
 the reflex of past conditions that have been changed completely. 
 
Gaylord Bros. 
 
 Makers 
 
 Syracuse. N. Y. 
 PAT. JAN. 21.1901