Administrative Costs

Summary

The delivery system costs of workers’ compensation (sometimes referred to as administrative expenses) include the expenses and profits of private carriers and state workers’ compensation funds, the costs for employers for administering self-insurance plans, the expenses of workers’ compensation agencies and courts, and other costs of delivering cash, medical, and other workers’ compensation benefits to disabled workers. The costs of individuals involved in the delivery system are included, such as attorneys, claims examiners, and doctors.

The chapter provides data on the expenses and underwriting gain as a percent of premiums for private carriers from 1956 thru 1970. In 1970, the expense ratio was 24.0 percent for mutual insurers, 25.2 percent for participating insurers (where policyholders share in favorable underwriting results), and 30.9 percent for nonparticipating stock insurers. Additional information on the underwriting expenses and profits of private carriers are presented.

The expenses of state workers’ compensation funds are also presented. During the past 20 years, expenses for all state funds averaged 9.1 percent. The expense ratio was 6.4 percent for exclusive state funds (states without private carriers) and 11.5 percent for competitive state funds (states with private carriers). For the Federal Employees’ Compensation Act, the administrative costs were 3.2 percent of benefits.

Data on the administrative expenses of self-insured employers are sparse. A rough estimate is that expenses are 5 to 10 percent of benefits. A similar paucity of data exists for the administrative expenses of state workers’ compensation agencies. One estimate is that delivery system costs for agencies represented about 3 percent of benefits in 1971.

The final section compares the delivery system costs as a percent of benefits for five U.S. social insurance programs. The percentages were 43.7 for workers’ compensation, 3.3 percent for social security (OASDHI), 1.0 percent for the railroad retirement system, 14.0 for state unemployment insurance, and 13.2 percent for state temporary disability insurance.

C. Arthur Williams and Peter S. Barth, “Administrative Costs,” Chapter 16 in Compendium on Workmen’s Compensation (Washington, DC: National Commission on State Workmen’s Compensation Laws, 1973.)