The extent of the waste involved in the payment of commissions and profits upon workmen's compensation insurance is staggeringly large. It may be measured by the difference between the expense ratio of the stock companies and that of the state fund. The expense ratio of the former on the business of 1916 was 38.6 per cent; that of the state fund was 9.2 per cent. The difference in favor of the state fund is approximately 30 per cent. The amount of saving that could be effected by the elimination of the stock companies may be estimated approximately as 30 per cent of their premium income. That is, if the insurance now carried by the stock companies were transferred to the state fund, the 30 per cent of the premiums which now goes for unnecessary overhead, chiefly acquisition cost, would be saved. The figure for premiums received by the stock companies on workmen's compensation insurance in this state for 1917 has not yet been given out by the State Insurance Department, but the amount may be computed roughly on the basis of the figures for 1916. The amount of premiums received by the stock companies in 1916 on workmen's compensation business was $11,275,049.10. If we allow an addition of 20 per cent for the rate increase in 1917, we get $13,530,058 as the amount of premiums received in that year. Taking 30 per cent of this amount, we have over $4,000,000, as the total of the saving that could be effected by excluding the stock companies from this field. The total waste during the first four years under the Workmen's Compensation Law in consequence of stock company participation in this business may be set down as not less than $12,000,000.

Let me show the comparative economy of stock and state fund insurance in another way. Out of every dollar of a stock company premium, 40 cents approximately must go for expenses, leaving 60 cents available for losses. Of the state fund premium, less than 10 cents on a dollar is needed for expenses, leaving 90 cents available for losses. On this basis, it costs the stock companies about 65 cents to distribute a dollar in compensation, while it costs the state fund about 10 cents to pay one dollar in benefits.

The saving that would be effected through the elimination of commissions and profits, which has been emphasized in the discussion thus far, is not the only economy to be achieved through the exclusion of the stock companies. In addition to the negative saving on this account, there is also the positive economy through the substitution of a single centralized and coordinated

governmental control for the present competitive system. This economy would be accomplished through the avoidance of needless duplication of work and expense. At present there are over forty companies in the field, each maintaining its own independent organization for the purposes of safety inspection, claim investigation and payroll auditing. Taking the matter of payroll auditing, for example. Each company has its staff of payroll auditors, who travel throughout the state, crossing each other's routes, visiting regularly the same cities and towns and the same buildings. The waste thus entailed is obviously great. It is analogous to the waste that would be involved in a competitive postal system. This waste, which has been illustrated in the case of the payroll auditing, extends to the inspection and claim service. In this connection, it may be pointed out that the centralization of workmen's compensation insurance in the state fund would make it possible to establish better coordination and cooperation between this service and the work of the Inspection Bureau of the Labor Department, on the one hand, and of the Compensation Department, on the other, as these three branches of service are most intimately related.

In this connection, let me point out further that there are various characteristics of this business of workmen's compensation insurance which combine to render it particularly adapted to exclusive governmental administration. It meets the tests or standards which have been generally recognized by economists as determining the adaptability of an enterprise to state management. An English economist, W. S. Jevons, laid down four principles to determine this question, and these have been accepted by later writers. The first is: "Where numberless widespread operations can only be evenly connected, united, and coordinated in a single all-extensive government system." The business of workmen's compensation insurance is of this character, as has been pointed out particularly with reference to the matters of payroll auditing, claim investigation and safety inspection.

The second condition is: "Where the operations possess an invariable routine-like character." This also holds true of workmen's compensation insurance. When the administrative machinery once installed and put in operation, the business follows a well established routine. There is little opportunity for initiative, innovation and experimentation.

The third test is: "Where they are performed under the

public eye, or for the service of individuals who will immediately detect and expose any failure or laxity." The business of workmen's compensation insurance conforms to this requirement in a conspicuous degree. Its service is performed under the watchful eyes of employers and employees. There is no opportunity to cover up wastefulness or inefficiency.

The final criterion is: "Where there is but little capital expenditure, so that each year's revenue and expense account shall represent, with sufficient accuracy, the real commercial conditions of development." Here again the business under consideration satisfies the condition laid down as a requisite for successful government management. It calls for comparatively small investment or expenditure of capital. The mutual companies with no capital investment whatever are now competing successfully in this field.

Attention should be called to two other peculiarities of workmen's compensation insurance, which furnish additional reasons for state administration. The first is the compulsory nature of this insurance. In the case of other forms of insurance, such as life, fire and accident, the individual is free to insure or not to insure, but in the matter of compensation insurance the employer has no choice. This consideration necessitates the maintenance of a state insurance fund by any state having a compulsory compensation law. In short, the state that enacts a compulsory compensation law is obliged to go into the business of insurance under the law, and, this being so, it would seem to be sound public policy to exclude profittaking companies from this field and secure the full economies attainable under centralized governmental administration.

The second peculiarity is the collective character of workmen's compensation insurance-to use a somewhat cumbersome, term. It is designed to serve a social purpose. Life insurance, for example, is a purely individual matter. The same individual pays the premium and gets the benefit for himself, or for his family. In the case of workmen's compensation insurance, the benefit accrues not to the person who pays the premium, but to others. The premiums paid by the employers are distributed to injured employees and their dependents; the benefit of this insurance accrues not to the individual insurer or his family, but to the community at large. In short, workmen's compensation insurance is one form of social insurance, and,

as such, is differentiated from other forms of insurance carried by employers. This consideration, like the preceding, points to the advisability of state administration.

Thus far the proposal to exclude the stock companies from the field of workmen's compensation has been urged mainly on the ground of economy. The argument may be reinforced by considerations of a social and ethical character, which carry very great weight. The stock companies, with a few honorable exceptions, have small conception of the social opportunity and responsibility connected with the function of compensation insurance carrier. They regard themselves, in general, merely as agencies for fighting claims and paying damages. They cannot divorce themselves from the ideas, practices and traditions of the old liability regime. The function of disbursing compensation under a law providing payments that may run even for generations involves a great social trust, which can hardly be vested with safety in commercial companies operating for profit. The workmen's compensation laws were designed to serve the ends of social justice. No element should be allowed any part in the administration of these laws which does not square to the fullest extent with the requirements of social justice. It is to be feared that, so long as the element of profit taking is tolerated here, the ends of social justice will be served but imperfectly.

It has been urged against the proposal under consideration that employers themselves are opposed to the exclusion of the stock companies, as many of them prefer this form of insurance. This argument should carry no weight whatever. As a matter of fact employers, in general, are not sufficiently well informed concerning the comparative merits of the state fund and stock company insurance to understand their true interests in this matter. I do not doubt that it would be possible to bring to Albany trainloads of employers to protest against this proposed legislation. Indeed, I have seen in another state the spectacle of a large delegation of employers brought to the capitol to assist the casualty companies in defeating legislation that would have deprived them of the privilege of exploiting employers under the workmen's compensation law. By reason of business or personal relations with the companies or brokers, many employers stand ready at any time to help the insurance men pull their legislative chestnuts out of the fire. It is a case of give and take in the course of business.

Employers at large ought to be protected against this form of exploitation. The alleged preferences of individual employers should not be allowed to stand in the way of the elimination of the enormous waste involved in the participation of stock companies in the business of workmen's compensation insurance.

ADVENTURE IN STATE INSURANCE1

It was in the insurance literature of New Zealand that there was first found an idea which seemed to be capable of being whipped into practical form for meeting the requirements of insurance under a compulsory compensation insurance act. We borrowed the idea from New Zealand, but we dressed it in garments better suited to the industrial and political situation in California and presented the measure to the legislature of 1913. The bill passed both houses with large majorities, was signed by the governor, and went into effect January 1, 1914.

An idea incorporated in the fund was to create a model insurance carrier which other insurance carriers in competition with it would, by the logic of circumstances, be required closely to approximate on pain of having the business go to the state fund; and it required about four months of experience under the new act to enable them to appreciate the force of the argument. It was intended also that the policy of the fund should be influenced by the moralities involved in each situation rather than by the legalities alone; that is, it was purposed to make the fund a warm-blooded financial institution rather than a coldblooded one; and this policy has been consistently pursued ever since. It was also determined that as soon as the fund became strong enough its competition with private insurance carrier should become wholly fair; it should pay the same taxes that other insurance carriers were required to pay, and it should derive no direct advantage from the state's other activities not shareable by all other insurance carriers in competition with it in the compensation field.

The following were the chief arguments advanced against the adoption of the measure by the legislature:

I. That the insurance field belonged to private enterprise. The proponents of the measure dissented from this proposi

1 By A. J. Pillsbury, Chairman of the Industrial Accident Commission of California. American Economic Review. 9: 681-92. December, 1919,