A key initiative of the Labour Government’s renationalised ACC scheme is for employers to fully or partially self-insure their ACC costs in exchange for discount on their premiums.
It’s been met with enthusiasm by many of the larger employers, with view to saving on their workplace accident costs. However, choosing to self-insure is not light commitment and employers should analyse whether the programme is suitable for their own situation before embarking on it.
In deciding to self-insure, some employers cite good claims experiences in the past year and expect this to continue in the future. But they need to closely examine the main financial risks and issues involved to determine if they will save or lose money under the various self-management options.
Self insurance options
There are two main self-insurance options available to employers in New Zealand:
* the Discount Plan, where the employer assumes liability for one or two years’ claim payments; and
* the Full Self Cover Plan, where the employer assumes liability for the cost of all claim payments.
With both plans, the employer can limit liability to 150 percent or 200 percent of the industry premium by paying an extra “stop loss” premium.
In the long term, employers who choose the Full Self Cover Plan and put in place best practice procedures that will almost certainly save money. In fact, there are many cases, both in New Zealand and overseas, where employers with effective practices have more than halved their workplace accident costs compared with industry averages.
Briefly, the main requirements are:
* senior management commitment;
* good health and safety procedures;
* effective injury management and rehabilitation; and
* striking the right balance between making individual business units financially responsible for their claims and not exposing them to volatility.
Although many employers will save money through self-insuring, others will lose money, particularly in the short term. Individual employers can influence their own experience through instituting good workplace measures, but they cannot influence the random element of claims occurrences and, even with best endeavours, accidents still do occur. Workplace accident costs vary widely from year to year and best practice procedures will not eliminate this. Employers choosing to self-insure therefore assume financial risk.
Discount: In the case of the Discount Plan, the financial risk is limited to the one or two years’ claim payments and the main risks relate to the occurrence of one or more serious injuries.
Full Self Cover: In the case of the Full Self Cover Plan, the employer is liable for the full cost of all claims up to the selected “stop loss” limit of 150 percent to 200 percent of the industry premium. Many employers do not appreciate the nature and variability of this liability.
Broadly speaking, the variability of the claims cost is related to the size of an employer. The more employees — the less variable the cost. This means an employer with 10,000 employees has considerably reduced risk of adverse cost outcomes than an employer with 2000 employees and even more so in relation to company with only 200 employees.
Variability
Many employers should therefore consider carefully the issue of variability before joining the Full Self Cover Plan because those who do will take some liability onto their balance sheet.
The full liability to make claim payments for any accident occurs at the time of the accident, even though the payments may be made over many years. Therefore, provision should be made for these future claim payments which is known as the Outstanding Claims Liability.
For employers with high risk profile and who have elected five-year self management period, the total Outstanding Claims Liability for all years of cover could be as much as 10 percent of payroll. At this level, the Outstanding Claims Liability will be significant part of the employer’s liabilities and needs careful management.
This all comes under the heading of “random” risk which is largely related to the number of employees and risk profile of each individual employer. However there is also “systemic” risk, which is the risk of adverse changes affecting the portfolio (in this case the ACC scheme) as whole.
One example of scheme that has experienced systemic risk change in recent times is the Workers’ Compensation Scheme in Western Australia. Legislative changes were made to the scheme in 1993 to restrict access to common law claims to “serious” injuries only. As result, insurers started to reduce premiums in anticipation of the cost savings and also to meet fierce competition.
However, the legislative changes were ineffective in delivering the intended changes to claims behaviour and this went unnoticed for some time. Regulators, insurers and employers were caught unawares and those parties holding outstanding claims liabilities saw rapid increase in their liabilities.
The most important message that can be taken from the Western Australian example is that this type of liability is volatile and subject to systemic risks such as legislative change.
Other than changes to scheme design, there may be currently unknown issues that may emerge to cause potential blow-out in claims costs. In such event, employers who choose to self-insure will likely be the first to bear the effect of unforeseen costs, and it would pay to be alert for any signs or emerging trends.
Asbestosis and OOS were two issues that had major cost implications in the past two decades. So what might be the next big emerging issues?
With an ageing workforce, musculo-skeletal and other age-related disorders in the workplace could have major impact on workers’ compensation costs, given that one of the most common and most expensive problems experienced by New Zealand companies is back sprains and strains.
Another issue that has received recent press coverage is workplace stress caused by factors like: the shift to more mental work, uncertain employment, learning new technologies and increasing time pressures.
If test case should arise that defines “workplace injury” to include stress, it may well cause flood of stress-related claims.
In conclusion, those who then make the decision to self-insure should have in place objective monitoring systems to pick up any warning signs and ensure the continued suitability of the programme for their own financial circumstances and employees’ well-being.
Christine Ormrod is in the Global Risk Management Solutions division of PricewaterhouseCoopers in Auckland and is Fellow of the New Zealand Society of Actuaries and the Institute of Actuaries of London.
