What Is an Expense Constant?
The expense constant varies by state based on whether the state follows the manuals and rate-setting policies of the National Council on Compensation Insurance (NCCI), or has its own independent rating bureau. In either case, expense constants do not change depending on the monthly premium of the policy in question.
- An expense constant is an administrative fee added to some insurance policies.
- Unlike the monthly premium, the expense constant is not related to the perceived risk of the insurance contract.
- In terms of the cost of the fee, some states follow a national advisory board's guidelines and others have their own independent agency that sets rates.
How Expense Constants Work
The purpose of expense constants is to cover the administrative costs associated with creating and servicing a new insurance policy. These tasks include obtaining and reviewing the necessary paperwork from the policyholder and maintaining accurate records during the life of the insurance contract. Because those costs are roughly the same regardless of the size of the policy in question, the expense contract does not vary depending on the size of the policy’s insurance premiums.
While some states allow insurers to charge a fixed rate that the state regulators set, others permit companies to compete openly on this rate. In the latter case, the expense constant sometimes varies according to the insurance company administering the policy. If the state sets the expense constant, it typically is applied at the same dollar value for several years.
Insurers must clearly display information about the expense constant, including the amount of the fee, on the workers’ compensation policy page. Companies that fail to make their policies and fees clear to policyholders may be accused of acting in bad faith. Generally, an expense constant ranges in price from $100 to $350 per policy.
Expense Constant Rates
The National Council on Compensation Insurance (NCCI) is a not-for-profit advisory founded by the insurance industry to standardize how workers' compensation insurance premiums and other associated fees are determined state-by-state.
The NCCI manuals, classification system, rating formula, and premium rate structure is used by 37 states and the District of Columbia. In these states, including Arizona, Colorado, Florida, and others, the expense constant is set by the NCCI.
In states that don't follow the NCCI, the expense constant will vary, such as California, which maintains its own rating bureau, the Workers' Compensation Insurance Rating Bureau of California. Massachusetts is another state that maintains its own independent rating bureau, which sets guidelines on how workers' compensation rates are computed.
California, Massachusetts, New Jersey, New York, and Wisconsin are among the select states that maintain their own independent rating bureaus.
Example of an Expense Constant
Michaela is the owner of a small construction company. Although she takes all available measures to reduce the risk that her employees could be injured while on the job, she understands that this risk can never be eliminated completely. Therefore, to help protect her business against the financial costs of lawsuits related to such an event, Michaela seeks out workers’ compensation insurance for her business.
After shopping around from various providers, Michaela finds an insurer willing to provide adequate coverage in exchange for annual premiums of $500. At the same time, she notices that her policy invoice includes an additional charge of $200. Concerned that the added charge may indicate a lack of confidence in her employee safety standards, Michaela calls the insurer to ask for an explanation.
In responding to her inquiry, the insurance agent explains that the added charge has nothing to do with the perceived risks or business practices of her company. Instead, it simply reflects the standard costs associated with administering all insurance plans.