Workers’ compensation in NSW is very tightly controlled by the WorkCover Authority of NSW (WCA). The scheme is a managed fund into which premiums are deposited and from which claims for benefits and administration expenses are paid. Insurance companies are paid fees by the WCA to manage the system, they take no risk and are not underwriters in the true sense, they are agents. Currently there are 7 agents in the NSW scheme (see below).
Because the scope of cover and the premium costs are both fixed by the WCA, agents have been forced to compete on services’ provision and therein lies a dilemma, which confronts each employer whenever they renew their workers’ compensation insurance policy, need to contact the insurer for administrative or other matters or have a claim.
If you are a large employer with a hefty premium and large numbers of claims, the agent community will bend over backwards to secure your business and then manage it according to agreed service levels (they will earn more fees from your business). You have a great deal of buying power and can expect to be treated favorably. You are also able to compare the services each agent offers with your individual needs and when you do decide on particular agent, you have an expectation that the promises made by them will be kept. (If they are not, you use the threat of change.)
If you are a smaller employer with few claims and modest premiums, then you are at the mercy of a market which traditionally treats its customers with little respect. Many agents seem to take the view that if the customer doesn’t like what they offer, then the customer must look elsewhere. The upshot of it all is a mediocre service delivered by many of the agents if and when they feel up to it.
Workers compensation insurance is the ultimate grudge purchase. All employers in NSW must have a policy or risk gaol terms of 6 months, fines of $55,000, double the premium avoided and the cost of any claim incurred during the period of un-insurance.
The premium for workers compensation insurance is assessed using a WCA prescribed formula and all agents must use the same algorithm. The policyholder (employer) is rarely the claimant; claimants (injured workers) are often regarded by the policyholder as “bludgers” and responsible for their own injuries (in most cases this is not justified).
Claims payments are subject to the provisions of the NSW Workers Compensation legislation which in turn are interpreted by the agents’ claims staff. The services provided by agents are generally regarded as sub standard, leading to frustration by claimants and policyholders alike.
According to the Workers Compensation Commission 2007 Annual Review, (this is the judicial body which resolves disputed claims), 8,175 applications to resolve disputes were registered in 2007. The Workers Compensation Statistical Bulletin 2006/07, Key Findings, lists 41,231 serious claims lodged (claims which last for more than 5 days) which means that 20% of claims are disputed. The data from 2006/07 has been used as this is the most current at the time of writing (November 2008).
For more than a decade, NSW workers compensation experienced an underwriting loss and had accumulated massive deficits with only three years out of 11 in surplus. Following a major restructure of the scheme in 2012 a surplus in the order or $1.3 billion has emerged (as at 2014).
The attraction to this business by agents has long been considered to be its cross marketing potential, the remuneration alone just manages to cover costs, averaging 9.65% of premiums over the last 15 years.
According to the Australian Prudential Regulation Authority’s Half Yearly General Insurance Statistics June 2006, private insurance companies allowed up to 25.31% of premiums as underwriting expenses and operating costs, lending weight to the contention that the remuneration from the WCA is not particularly attractive.
Traditional insurers have taken on the role of agents in the scheme because of the opportunities to cross market more profitable risk products. If an insurer is unable to offer workers compensation it is at a disadvantage from a market retention and growth perspective.
In terms of its life cycle, workers compensation insurance would be classified as mature with some small organic growth potential.