Financing

An efficient system of protection for industrial injuries and occupational diseases is not just seen as "a further class of insurance", but as an absolute necessity for a smoothly running industrial sector and as a basis for social peace and economic stability.

As an important component in a country's national social insurance system, workers' compensation insurance generally enjoys a position of special socio-political importance. For example, the constitution of many states anchors the duty on the part of government to ensure there is a smooth-functioning and reliable protection system for industrial injuries. Both in cases where the government organises workers' compensation insurance itself, and where it has delegated provision of such cover to third parties (semi-state bodies or insurance companies), the former is still responsible in the last analysis for ensuring that an efficient and long-term system is in place. Because of the long-term nature of claims settlement in the field of workers' compensation insurance, the latter point is of particular importance.

In countries where contributions to workers' compensation insurance are calculated on a pay-as-you-go basis, the responsibility of the state, which is anchored in the constitution, is met in a seemingly simple manner. At the end of each year, the burden from claims payments is calculated and then distributed among the salaried workers, broken down according to risk classes. It is thus the insured persons of the future that bear the claims burden of the current generation of insureds. With this calculation method, what is known as the "inter-generation contract" plays a crucial role. However, when the burden of future insureds reaches the limits of their capability (at least in political terms), the result can be deficits that need to be covered from other sources (e.g. by withdrawals from reserves from earlier years, or by government subsidies).

A further important role in this context is played by solidarity or subsidy features, for example if particular classes are no longer able to absorb the burden from claims and pension payments for earlier generations because of structural changes in the economic system. Classic examples of this include heavy industry and mining, where the steady drop in the number of people in paid employment, in conjunction with an excessive burden from past liabilities, have resulted in recent years in a dramatic increase in contributions from the present generation in paid work. This has necessitated cross-subsidies from younger classes with lower burdens, for example from the service sector.

In systems, on the other hand, where the premium payments at the start of the insurance period are the only source to finance the workers' compensation insurance scheme, in other words in systems with a straight or modified fully funded approach, the importance and necessity of regulating rating is clear. In such systems, in which there is a genuine insurance risk and rating risk, the state must ensure that funding calculations for the scheme follow sound actuarial principles. The premiums coming in must be adequate to cover the claims burden of the risks that were underwritten in the insurance period in question. The focus here is, therefore, more on allocation to the parties responsible for claims resulting from industrial accidents and occupational diseases. This is the case, both when the state itself is the insurance institution, and when third parties, generally private insurance companies, assume the insurance risk.

In principle, the government can make use of various instruments to discharge its responsibilities. For a start, it is crucially important to monitor the financial soundness of the players involved. This is normally one of the functions of solvency supervision. The solvency of the risk carriers is monitored at regular intervals, based on key figures and according to requirements that are generally established by law. If the risk carriers fall short of, or exceed, certain limits, the state can intervene in a variety of ways.

In addition, government bodies may often employ various instruments to supervise the system, which are provided for by law and which they can use to regulate the rating level on the market.