Konekt compares self-insurance vs state schemes

For many employers, the cost of workers’ compensation is the second highest personnel cost after wages. Poor claims performance and high industry premiums often see employers paying more than 10% of their total wages bill on premiums.

This is despite the fact that Australia has some of the most flexible arrangements in the developed world, which have been designed to provide organisations with choice and the ability to select the most financially viable option for them. Employers have the choice to have their claims managed by a workers’ compensation claims agent or opt for self-insurance and manage their own claims.

In this article, Konekt examines the differences between the self-insured and state-based insurance schemes.

Many employers still regard workers’ compensation as an enforced commercial tax over which they have little or no control. The reality is that many organisations have successfully implemented early intervention and other injury and illness prevention programs to contain and reduce claims costs, resulting in substantial premium reductions.

Beyond measures to contain and reduce claims costs, the option to apply for a self-insurance license may present further opportunities to reduce workers’ compensation costs by eliminating the premium paying cycle altogether. However, the decision to self-insure is not always a straightforward one, and many different factors will determine whether companies are suitable or not.

The financial realities of state-based workers’ compensation schemes can be harsh for some employers, particularly those with high wage costs. The “loss ratio” will become one of the key determining factors when considering self-insurance. When employers of a certain size and industry rating have a certain level of claims costs, the ratio of dollars paid on claims versus the cost of the premium begins to rise. It is not uncommon for employers to pay more than four times the cost of claims in insurance premiums as a future liability. This can also perpetuate across a three year cycle, making the cost of workers’ compensation considerable and even unsustainable.

Whilst this may seem inherently flawed, consider that roughly 10% of employers fund up to 90% of most jurisdictional workers’ compensation schemes, particularly in states such as NSW and Victoria. It is a case of the larger, claims-sensitive employers funding schemes that are predominantly made up of smaller employers who do not pay any extra compensation premiums for incurring claims. Is there any wonder that larger employers caught in the loss ratio cycle are looking to exit insured schemes and pursue a self-insurance license?

This was highlighted in the High Court decision involving Optus, who in 2004 were the first non-Commonwealth employer to exit their state-based schemes to become nationally self-insured under the Commonwealth’s Safety Rehabilitation and Compensation Act. The state of Victoria challenged the decision in the Federal Court on the basis that large employers leaving the scheme would threaten the viability of the scheme and potentially increase employer premium rates. Optus won their case in the Federal Court in 2005, and had the decision upheld in the Victorian government’s later High Court appeal. Their decision to adopt the one workers’ compensation legislation across all states and territories meant that the discrepancies and inconsistencies of working across multiple schemes were nullified.

When an organisation’s financial decision-makers are faced with this type of situation, the prospect of paying dollar for dollar under a self-insured arrangement can be enticing. The decision to self-insure may seem moot, until the actual pros and cons of self-insurance versus insurance are weighed up.

Self-insurers under state-based workers’ compensation schemes must continue to manage claims according to each jurisdiction’s legislation. Only employers that satisfy the government competition rule can seek self-insurance under the Commonwealth Act, allowing them to manage their workers’ compensation using the one nationally-based legislation. In the case of Optus, they were in competition with Telstra and therefore satisfied this major requirement.

Additional negatives of self-insurance include onerous licensing requirements, administrative costs, maintaining teams of claims managers and the need to manage claims according to state and territory standards. Furthermore, there is no capping against very high cost claims, with self-insurers requiring additional reinsurance arrangements to protect against major claims.

The main advantage for self-insurers is the freedom to fund and manage their own financial liabilities. When savings on premiums can be re-injected into wellness and injury prevention programs, further reductions in the cost of claims can occur through proactive prevention strategies.

Traditional state-based schemes do offer advantages for employers who are maintaining claims costs below industry averages. In these instances the loss ratio on claims experience is not so advanced resulting in a lower premium.

Many employers do not have the internal resourcing required, or the desire to build and maintain a team of claims handlers and their self-insurance licenses. They in turn benefit from using a claims agent.

Other advantages are provided through the state schemes such as bonuses for early notification. The NSW scheme exempts an employer from paying the first week of wages, and capping against very high cost claims where early notification is provided. Over recent years we have seen wholesale reductions for workers’ compensation – between 2004/05 and 2008/09 every single state and territory scheme reduced their premium rates for five years running. Victoria, Queensland, Western Australia and Tasmania are all experiencing their lowest ever premium rates.

There are pros and cons to both self-insurance and traditional workers’ compensation arrangements, and the right fit will always be determined by size, industry, claims experience and the willingness to invest in injury prevention and management programs.

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