What is an Expense Constant
An expense constant is a fixed amount added to an insurance policy to cover the cost of administering the policy. Workers’ compensation policies use expense constants most frequently, though other types of low premium policies also use them.
For most types of insurance, policyholder premiums cover the insurance company’s own expenses while ensuring that the company has enough funds to cover any claims against its policyholders. For policies such as workers’ compensation, insurance companies charge an expense constant to cover their own costs when premiums do not suffice.
BREAKING DOWN Expense Constant
Expense constants vary in price by company and by state. Insurance companies often charge expense constants as flat rates, regardless of the size of the policy. Say a company in Florida with 500 workers pays a $200 expense constant on its policy, as would a company with only 20 workers. This flat fee assumes that the administrative costs of managing both policies are roughly equivalent.
Expense constants cover costs to the insurance company such as those related to issuing the policy, the expense of maintaining proper records of the insured and any claims made, as well as any auditing of the policy.
Insurance companies only charge this fee once per policy period. Some states allow insurers to charge a fixed rate that the state regulators set, while other state insurance regulators 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.
Rules and Regulations Around Expense Constants
Insurance companies cannot use an expense constant as part of the calculation of standard premiums. Companies determine premiums based factors such as assessed risk. These do not affect the administrative cost of the policy. Likewise, expense constants usually do not qualify for premium discounts, retro adjustments or rating modification.
Insurance companies charge the full rate of an expense constant, even for short term policies. If the policyholder cancels the policy, the fee is generally pro-rated. If a policy stretches across more than one state, the policyholder pays the expense constant for the state with the higher set expense constant.
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 risk accusal of bad faith practices. Generally, an expense constant ranges in price from $100 to $350 per policy.