Workers compensation is a major expense for any corporation, but the good news is that effective risk management strategies can lower costs. Stuart Fagg weighs up the options and investigates the growing unease in the insurance industry over the power of the States in workers compensation terms
Workers compensation is a major expense for any corporation, but the good news is that effective risk management strategies can lower costs. Stuart Fagg weighs up the options and investigates the growing unease in the insurance industry over the power of the States in workers compensation terms
Workers compensation, alongside employee salaries, remains the biggest workplace-related cost for Australian employers. Around $6 billion is paid in workers compensation premiums annually in Australia, but the total cost of workplace accidents to workers, employers and the community is more than $31 billion, or 4.3 per cent of gross domestic product.
The bottom line of reducing workers compensation costs is simple enough – safety and proactive risk management. “In the workers compensation class, the costs are driven by the experience of the employer,” says Tony Vaile, national manager, workers compensation, at Vero Insurance. “The lower their claims frequency and the less injuries they have, the less they will pay.”
But, Vaile adds, creating a robust safety risk framework can also lead to cost savings outside the workers compensation arena. “By reducing injuries you will reduce the premium, but there are a lot of other indirect costs associated with workers compensation. A lot of those costs are not insurable.”
These costs include increased employee turnover, high absenteeism, equipment damage and poor morale. The evolving area of brand and reputation risk management would also benefit from fewer workplace accidents. “For bigger employers, reputation and public image is more and more of an issue with workers compensation,” Vaile says.
Stephen Loomes, national workers compensation and CTP portfolio manager, at Zurich adds that technological developments can also change the workers compensation risk environment for the better. “We’ve seen traditionally in some industries, such as hospitals, that they have been considered a very bad underwriting risk,” he says. “The fact that people lift people and make beds means back injuries are common. In that environment in the past few years we’ve seen mechanised beds introduced and that changes the aspect of the risk. That gets back to people looking at where they have issues and addressing them.”
If companies had a greater understanding of the benefits of effective OHS risk management, Vaile believes their workers compensation premium costs would fall. “I would say there are a lot of employers that are operating at a sub-optimal level, and if they made a greater investment in OHS, they would get a higher financial return,” he says. “If businesses financially understood the real cost of injuries, they would make the right kind of investment decisions.”
One of the biggest issues in workers compensation is the case for a national framework. At present, there are eight State and Territory workers compensation schemes, two Australian government schemes and while the underlying objectives of each scheme are essentially the same, a national employer working across States and Territories must comply with each framework and buy separate policies in each State.
Insurance Australia Group told the Productivity Commission’s report on national workers compensation and OHS frameworks released last year, that the existence of multiple schemes added $10 million to the cost of setting up a single national IT platform. It added that a national framework had potential for cost savings of $1.2 million annually and savings of $400,000 in actuarial costs.
The State and Territory system, which has been heavily criticised by business groups, insurers and the Productivity Commission, and the fact that 85 per cent of premium revenue goes to the States, has led self insurance to become an increasingly popular option for national employers.
Self insurance is particularly attractive to large corporates with robust risk management cultures and frameworks. “Over the past four years, the trend toward self insurance has developed significant momentum across Australia,” says Peter Bishop, associate director at Richard Oliver International. “Self insurance offers larger employers the prospect of greater control, better longer term outcomes and almost certainly lower annual costs.”
However, despite its increasing popularity, self-insurance is not the silver bullet it might appear. “My background was in industry for 15 years with BHP and in the US for a company that ran nuclear power plans and in those roles I managed workers compensation self insurance,” Vaile says. “I thought it was the way to go for large businesses that have strong financial positions, and well managed risks. Since coming to the insurance industry, I have changed my view.
“There are a lot of risks in workers compensation that are not known. We underwrite the business and take on liability for exposures associated with workplace injuries and illness and we actually don’t know what they are. There are things that can come out of the woodwork 15 years later. We have a big problem with asbestos at the moment, which is well known, but there are other potential risks out there. With a 20–30 year latency period for some diseases, things crop up.”
Loomes agrees that the unknown nature of some long tail workers compensation risks does cast an unpredictable shadow over the self-insurance option, but adds that there are significant benefits. “An advantage is you can manage your own destiny. It also makes you closer to your staff in relationship terms and how the staff are treated. There is more of a cultural bang for safety.”
Perhaps the biggest draw, though, is the perceived cost savings over the current system, which some insurance sources described as “a nightmare”. One source described the South Australian framework as “a basket case”.
Kevin Andrews, Federal Minister for Workplace Relations, says the Federal Government believes responsibility for workers compensation schemes should remain with the States.
“The Productivity Commission did recommend that the Australian Government develop an alternative national workers’ compensation scheme to operate in parallel to existing State and Territory schemes,”says Andrews.
“The Government did not support this recommendation, mainly because it would result in a substantial shift to the Commonwealth of responsibility for an area of the economy that is traditionally a State matter.”
According to Robyn Perkins, principal, workers compensation solutions, at Aon Australia, the Australian economy is not big enough to support multiple workers compensation schemes. “We currently have 10 different workers compensation schemes and there are critical differences across them all,” she says. “Costings, salaries and wages and remuneration generally are different. The time periods in which to lodge claims vary considerably – as do the requirements for returning to work and for termination. There are also 10 separate regulatory bodies – one per workers compensation scheme – all funded by taxpayers and employers.
Perkins says that workers compensation policies are even structured differently, with one state having a monopoly, several being government run with claims administrators, while four are privately underwritten and dictated by market forces. In some states, she says workers compensation has a cap or total amount of benefit a worker can receive. “This means people needing compensation after this point are forced to sue their employers under common law or rely on the already heavily burdened social security system,” Perkins explains.
The major issue of cost
“If you look at NSW, and you take a company that has a claim that costs a dollar, currently under the NSW environment, that claim will cost them around three dollars,” Loomes says. “Under a self insured environment that would cost you one dollar. On the downside there is a resource cost of doing something that isn’t your core business. You would also need a guarantee, normally you’d need to put money somewhere. You are still liable to all the regulations and would need reinsurance.”
Many believe the ideal solution to the workers compensation conundrum, however, would be the creation of a national framework. The Federal Government alluded to this when it announced plans to scrap the National Occupational Health and Safety Commission last year and announced the creation of a new body to advise on national workers compensation issues. Moreover, the Productivity Commission concluded that national consistency in workers compensation would ease the compliance and cost burdens on industry.
“The purpose of the new body will be very much an advisory role,” Vaile says. “If they don’t have any regulatory power, which it doesn’t look like they will, then it’s unlikely it will have a significant impact. There might be some efficiencies in sharing information. The states have a high level of ownership and don’t look likely to relinquish it.”
The status quo is even forcing some insurers to exit the workers compensation class. “We’ve sold out of our fund state environments,” Loomes says. “From our point of view, we feel it’s too hard to deal with the government and it’s not your own business. But we’d be happy to work in an environment where it was a risk environment and it was our business.
“You look at any location and it’s a political nightmare,” he adds. “They’ve taken it from a management-focused environment to a very prescriptive one. All we do is cross Is and dot Ts and forget about what we are there for which is to get the injured worker back to work. People are too busy with compliance rather than concentrating on managing the client properly.”
The likely cost efficiencies would be delivered to clients. “The industry wants to get into these markets and underwrite the business,” Vaile says. “I think there is undoubtedly major efficiencies through having a standardised scheme. The major efficiencies would be to the employers in terms of end costs.”
According to Aon’s Perkins, a national system would deliver efficiencies for all stakeholders. “I agree with the concept of a national system –one that meets the needs of workers, one that meets the needs of employers and one that is commercially sustainable,” she says. “Such a concept does not exist in Australia, as we know it. But once created, it would simplify the complexities of dealing with workers compensation, stop inequalities between states, decrease the drain on taxpayer funds and the market result would be more flexibility and less volatility.”
