DEFINITION of ‘Expense Constant’
A fixed amount added to a policy to cover the cost of administering the policy. Expense constants are most commonly associated with workers’ compensation insurance policies, but may also be found in other types of policies that have small premiums.
INVESTOPEDIA EXPLAINS ‘Expense Constant’
The premium for some types of group policies, such as workers’ compensation policies, may be so low that it would not cover both the cost of issuing and administering the policy itself. Because of this, insurance companies are permitted to add a flat fee to policies in order to account for the premiums that are below a certain dollar value, typically those policies with premiums under $500. The expense constant is ultimately added to all policies, including those that have premiums above the $500 threshold.
The types of insurance company costs that are supposed to be covered by the expense constant include the cost of issuing the policy, the cost of maintaining proper records of the insured and any claims made, as well as any auditing of the policy that may be required. The expense constant is applied at the same rate across all policies because administrative costs associated with underwriting a policy are not expected to vary according to the premium charged for the policy. This means that a policy with a $250 premium costs as much to underwrite as a policy with a $500 premium.
This fee is only charged once per policy period, and may vary according to state regulations. Some states allow insurers to charge a fixed rate that the state sets, while other state insurance regulators permit companies to compete openly on this rate. In the latter case, the expense constant may vary according to the insurance company administering the policy. If the state sets the expense constant, it may be applied at the same dollar value for several years.