By principals Rex Bashford and Dr. Phil Greer from WC20 – workers’ compensation cost reduction specialists
Over the past 10 years WC20 has helped reduce the workers compensation premiums of some of Australia’s leading companies by more than $250-million. Based upon our experience we have found that around 90% of organisations can legitimately reduce the premiums that they pay – even when they’re convinced that they are paying the optimum or minimum amount.
Many employers are confused by the various premium formulas which apply under the workers compensation systems around Australia, and this leads to effort being placed in the wrong areas to achieve ongoing reductions in their premium costs.
The three most important elements used in all the premium formulas in the systems in Australia are the cost of claims, size of payroll and the WIC classifications of the activities of the employer. Each one of these is crucial in calculating the actual premium cost of the employer. The importance of each will be determined by the combination of these elements in each employer’s situation. Taking each in turn, the position is as follows.
The cost of the claims made against an employer’s policy affects the premium cost in different ways in each of the systems. In NSW and Vic the cost of claims used includes the cost of two years’ prior costs and an estimate of the future cost of open claims based on a projection made by the insurer. The total cost of each claim is subject to a maximum above which the cost is excluded from the calculation of the employer’s premium. So to a degree, the employer is shielded from the impact of catastrophic claims. In Qld the cost of claims is also impacted by a separate calculation regarding the cost of common law claims which can include claims going back up to five years. In SA the cost included is different again, because the premium calculation only includes the amount paid on each claim. In the commercially underwritten systems – WA, ACT, Tas and NT – the authorised insurers are allowed to offer products which vary in the way the cost of claims impacts premiums. So if a client has a good claims record then the underwriter may offer a “claims experience discounts policy” which gives a refund of the premium up to a specified amount if the claims don’t exceed a specified percentage of the payroll. Or it may offer a “claims paid retro policy which gives the client the chance to minimise the premium paid depending on its claims performance in the particular year in question. However, these types of policies need to be closely managed to ensure that the cost of claims is managed and if this does not occur, the premium cost could be higher than might apply under other types of policies.
The size of payroll is important for a number of reasons. In all the state run systems, there is a sizing factor which affects the way in which the cost of claims impacts the amount of premium. In other words, there is a factor which loads the premium of larger employers so that the cost of claims impacts the premium cost more than the basic WIC code as the payroll gets larger. The other way of stating this is that the lower the payroll, the more the premium is affected by the WIC code. This can have a positive or a negative impact on employers. If the employer has a large payroll and a comparatively good claims experience, then it would pay a lower premium than the WIC code would otherwise seem to imply. In the commercially underwritten states, the size of the payroll affects the types of policies which the insurers are willing to offer and the flexibility of the terms as well. It is also possible to combine all the payrolls in the commercially underwritten states into one policy and thereby obtain the benefits of the larger payroll for all those jurisdictions. Generally speaking then, the larger the payroll the employer has, the more options it has to manage the premium it pays.
Each of the systems has a series of WIC classifications which set out the rates at which the payroll of employers engaged in various activities attract. The classifications have been adopted in most of the jurisdictions across the country. It is possible for employers with more than one type of business activity to have different rates applying to different parts of their payrolls. It is extremely important that employers are correctly classified with respect to their payroll classifications. If there is an error then the employer could be required to pay a penalty at the correct rate for a period prior to when the error was detected where the rate is lower than otherwise should have been paid. Where the employer is paying too much as the result of an incorrect classification it is obviously detrimental to the employer’s profitability. Great care should be taken by the employer to ensure that the activities which are used to determine the classification used by the agent or insurer are accurate and that applications for insurance are correctly provided, as the penalties imposed by employers can be significant.
If it all sounds complex – that’s because it is! And unfortunately we frequently find a lot of misinformation regarding this complex field out in the marketplace from so called experts – resulting in employers paying more than they should on their workers compensation costs.
However, the good news is that, particularly for large employers, there are almost always ways in which premiums can be reduced, even if employers may be convinced that they are paying the minimum amount. For example, this year we worked with a well known ASX listed company who three years prior had tried to reclassify their payroll but were knocked back by WorkSafe. We revisited the case and after much to-ing and fro-ing achieved a credit of more than one million dollars for them by backdating their premiums for a four year period; they were both shocked and delighted.
WC20 offers 30-minute obligation-free consultations with employers who are spending at least $1 million on their workers compensation premiums. Simply send an email to firstname.lastname@example.org to book a meeting or obtain further information.