New NSW Premium Model to Target High Risk Industries

High risk industries such as agriculture, construction and fishing are likely to be hard hit by the new premium model currently under consideration by the NSW Government, which will be announced immediately following the State election in March.

In a move welcomed by SMEs (small to medium companies; those which pay $30,000 or less in basic tariff premium), the premium methodology was amended in 2013 such that much of the uncertainty of the previous system was removed.  The reforms were aimed at making premiums fairer, affordable and easier to understand.

Following the 2012 amendments to the way that workers compensation benefits are provided, the cost of the NSW workers compensation system has slumped.  This cost reduction has now prompted the Government to consider introducing changes to the premium model for medium and large business.

According to Finance Minister Dominic Perrottet, WorkCover is moving towards simpler, easier to understand premiums that provide certainty for medium and large business.

Industry sources are saying that the new premium model will be based on an industry rate which will be modified by an employer’s cost of claims, together with a scheme average cost of claims rate.

Simply put, a basic premium will be assessed depending on the employer’s industry and its wages.  This basic premium will then be modified using an adjusting factor which will weight the proportion of the basic premium which is added into the final premium.  The final premium will also include a claims costs component.

An employer’s paid claims costs (in the current model, estimated future costs are used as well) will be divided by its wages to assess the employer’s claims cost rate (ECCR).  This ECCR is then further modified by a scheme claims cost rate (denominator).  Therein lies the risk to the high risk industries, because the lower the denominator, the larger the quotient.

In the current model, industry claims cost rates (ICCR) are used as denominators; thus an employer in a particular industry is compared with other members of the industry.  For example the Bricklayers ICCR is currently 1.5567%.  If a scheme wide claims cost rate is 0.8877 and is used in place of the current ICCR then the quotient will be significantly higher.

The importance of the results of this calculation is that they are then applied to the basic premium and added into the final premium, potentially doubling it (we understand that there may be a system of capping introduced but have no confirmation of this).

Amongst other things this will no doubt jeopardise employment in high risk industries and perpetuate the cross subsidisation in the scheme flowing from the large employers to SMEs.

At the time of writing there has been no consultation between the Government and employer representatives; thus some of the information contained in this article may be incorrect.