PROBLEMS PECULIAR TO COMPETITIVE

SYSTEM1

Certain problems confront commissions in competitive insurance states which do not exist under an exclusive state fund system. In the last analysis a comparison of different types of insurance carriers resolves itself into a comparison of exclusive with competitive systems. From an administrative standpoint a competitive state fund is not much different from a private insurance company. Under an exclusive fund system the commission does things. There are no technicalities to nurse, no interminable squabbles, no long delays waiting for the insurance companies to report on a case, no wasting of the commission's time in long drawn out hearings. The commission simply ascertains the facts from reports and investigations and then awards compensation. In a competitive state the commission, instead of doing things, sees to it that somebody else does the work. The commission supervises, follows up, and checks up the insurance carriers who are supposed to make the payments. It takes almost as much time and costs as much money and requires as many employees to do the follow-up work, if it is to be done adequately, as it does to do the work originally.

Under a competitive system the commissions are inclined to govern their administrative practices and to propose statutory amendments to suit the convenience of insurance carriers and employers rather than the interests of the injured workers. We are inclined to forget that a compensation law is a workmen's compensation law. It is not an employers' compensation law, nor a physicians' compensation law, nor an insurance companies' compensation law, nor a compensation law for the benefit of those who administer the law. It is for the employee, and the interests of everyone else should be subordinated. Yet these questions continue to crop out, "How will this affect the insurance company? If we don't have a definite provision in the law, we can't do this or that." Under the exclusive state fund it does not make any difference. Rates can be increased or decreased to meet contingencies as they arise and nobody is seriously affected. As an illustration, Oregon this year increased its benefits 30 per cent. This was a flat increase, retro

1 From Workmen's Compensation and Social Insurance, by Carl Hook stadt. Monthly Labor Review. 11 1255-78. December, 1920.

active, and applied to all persons receiving compensation benefits at the time. The additional cost was met, I believe, out of the surplus of the fund. But had there been no surplus the commission might have increased its rates. This could not be done under a competitive system, because the premiums were collected on the basis of the former benefits.

Again, under the competitive plan you have a dual system of administration. In an exclusive fund state, accidents are reported to the commission only; under a competitive system, accidents are reported by the employer to the insurance company and also to the commission. Furthermore, under the latter system both the insurance company and the commission must receive and investigate compensation claims, which results in unnecessary duplication of effort. In discussing the question of getting prompt and uniform accident reports, compensation commissioners argue somewhat as follows: "The insurance company wants its accident report first. We don't need it right away. We can't expect the employer to make reports to two different bodies or at two different times; therefore, we don't require it." Again, you see it is the idea of serving the employer or the insurance company. The interests of the workman are subordinated. These problems-these difficulties of administration-do not exist under an exclusive state fund system. While the exclusive state fund systems have their problems, which they have by no means solved, they do not have this additional insurance problem which the competitive states have.

State's Assumption of Liability

Another point is that in some of the exclusive fund states, especially the Canadian Provinces and Washington, the state assumes responsibility for compensation payments in case of accident. If an accident occurs within the industry covered by the law, the state pays. It gets its premium later or in advance. The workman does not lose out because the employer has not paid his premium. Of course, in most states, if the employer has not insured, the employee can bring suit for damages, but in many cases a judgment is valueless.

Public-service Ideal

Another thing which impressed me was the public-service ideal that I found in so many of the states. We may talk of the evils of politics in state administration, but nevertheless one

finds a large proportion of state officials and employees imbued with a high sense of public service. The commissions may not always do their work properly; they may be inefficient -some of them are; but, after all, there is an ideal to follow, to serve one's fellow man, to serve the employee. I was impressed with that, in spite of all the inefficiencies, or many of the inefficiencies, I found.

STATE FUND VS. CASUALTY INSURANCE COMPANIES 1

1

The exclusion of the stock companies may be urged principally on the ground of economy. There is no economic justification for commissions and profits on workmen's compensation insurance. This insurance is made compulsory by law, and the justification for agents' or brokers' commissions, which exists in connection with voluntary insurance, as the price paid for the needed function of distribution of the insurance commodity, does not hold in the case of workmen's compensation insurance. There is a growing conviction that no one ought to be permitted to make money out of the necessity of the employer and the misfortune of the employee. The moneys which employers are required by law to contribute for the relief of injured workmen and their dependents should not be subject to any toll of commissions or profits. The payment of commissions and profits on workmen's compensation insurance, lacking as it does all economic justification, must be regarded as sheer waste. This waste is cut out, and the cost of insurance is reduced to a minimum when it is carried in the state fund.

The wastefulness of stock company insurance and the economy of state fund insurance can be seen clearly when the compensation premium is viewed in the light of a tax. That is what it is. A tax is simply a compulsory levy for public objects. The premium paid by an employer for workmen's compensation insurance is in the nature of a compulsory levy for the purpose of indemnifying injured workers and thus serving the ends of social justice. When this premium is paid to a stock company it

1 By Honorable F. Spencer Baldwin, Manager of the New York State Insurance Fund. From argument before the Senate Judiciary Committee in favor of eliminating companies organized for profit from doing business under the provisions of the Workmen's Compensation Law. New York State Federation of Labor. 15p. 1918.

is loaded with a heavy sur-tax, to provide agents' commissions and stockholders' profits; when it is paid to the state fund this sur-tax is eliminated. The natural and economical method of collecting this tax is through the direct agency of the state, precisely as in the case of other taxes. There is no sound reason why the collection of this particular tax should be farmed out to private companies, which, in the role of tax-collectors, levy upon employers an over-tax, to provide commissions for their agents and profits for their stockholders.

In fact the administration of workmen's compensation insurance through the agency of companies operating for profit is analogous to the old discarded system of farming out taxes in general. It is time to stop the business of farming out the collection of workmen's compensation premiums with the inevitable attendant waste and abuse.

The competitive plan of workmen's compensation insurance now in force in this state, under which employers are permitted to choose freely between stock, mutual, self, and state insurance, has broken down in practice. This plan looks attractive as a theoretical proposition, for it promises to secure the lowest rates and the best service to employers, to subject each form of insurance to the test of fair trial on its merits and to lead to the survival of the fittest. In practice, however, the competitive plan has failed to produce these desired results. It fails to protect employers in general against high cost and unsatisfactory service; it does not furnish a fair test of the economy and efficiency of the competing methods of insurance, and it tends to promote the survival of the unfit.

The breakdown of the competitive plan is due primarily to the impossibility of securing really fair and equal competition between the state fund and the stock companies. The chief difficulty here is the tremendous competitive advantage enjoyed by the stock companies in the control of the field which they exercize through their agency force, or business-getting organization. In New York State there are about twelve thousand insurance agents and brokers. These field representatives of the old line companies are constantly soliciting employers insured in the state fund, in the effort to persuade them to transfer their insurance to some one of the companies. Through this medium the companies have direct personal access to employers throughout the state, while the state fund must depend mainly on

correspondence to get its case before an employer. It would not equalize the competitive opportunity of the state fund to permit it to employ agents, for the thousands of brokers and agents who serve the companies operate virtually as a unit against the state fund, and the latter could never build up an agency force large enough to compete effectively with the enormous field staff of the companies. The employment of agents on an extensive scale by the state fund would, moreover, be a violation of the fundamental purpose of its creation, which is to furnish insurance to employers at bare cost exclusive of any acquisition expense.

The handicap of the state fund, in this respect, would not be so serious if the field representatives of the companies made a practice of presenting their case intelligently, honestly and fairly. There seems, however, to be no standard of integrity, responsibility or decency on the part of the fraternity of insurance brokers and agents in their competitive tactics toward the state fund. In general, they are absolutely unscrupulous and shameless in their misrepresentations concerning the state fund. Although the state fund offers complete security at minimum cost, employers are led to believe, by gross misstatements constantly circulated by insurance agents and brokers, that state fund insurance is both insecure and expensive. Employers are told that the state fund maintains no reserves; that its surplus is exhausted; that it is insolvent or about to become insolvent; 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; that its manager has resigned, and so on, ad libitum.

It ought to be a misdemeanor to apply characterizations of this sort to the state fund. The state fund is a necessary institution, a department of the state government, administered by the State Industrial Commission. No one of the private companies would dare to print with reference to a competing company the abusive matter which has been circulated freely about the state fund. There appears to be no way under the law of penalizing this sort of offense when committed against the state fund. The circulation of such abusive misrepresentations as have been cited constitutes in itself an indictment of the ethical standards of the officials of the companies who are responsible for competitive tactics of this low order.