Retro-Paid Loss Premiums
WorkCover NSW has introduced a Retro-Paid Loss premium model for large employers (sometimes
called a “burning cost” model) with South Australia, and other states, reportedly looking to follow suit.
The retro-paid loss methodology provides large employees with an alternative to traditional Scheme
insurance or self insurance.
The key features of the NSW premium model are:
Premiums are tied to actual claims experience over a five year period.
A loading is added to the incurred claims to cover scheme costs.
Don’t be fooled by a lower deposit premium. The deposit premium is a percentage of the tariff
premium, which may give the impression of a lower total premium. However, adjustment premiums
in later years are more likely under a Retro-Paid Loss, increasing the final premium paid.
Total premiums will be more volatile because they are based on a single year’s claims rather than
an average of the last three years. A single “bad” year will mean a higher premium, similarly a
“good” year will mean a lower premium.
March 2011
It is our experience from costing this arrangement for a number of employers, that the benefit, or
otherwise, of a Retro-Paid Loss premium will vary significantly from employer to employer. It is
important to look at a number of years of your historical experience to get a complete picture of how
your retro premium might look. In NSW, it will take at least five years of a Retro-Paid Loss before a
“true” premium comparison is possible.
This article demonstrates the more technical aspects of how a Retro-Paid Loss model works in practice.
In a follow up article, we will investigate how premiums under a Retro-Paid model compare to the
premium under the Scheme and to the cost of self-insurance.
How it works
Unlike regular experience-based premiums, the premium payable under the Retro-Paid Loss model is
not related to the size of the employer (unless minimum or maximum premiums are payable) nor to
their relativity to their own industry’s experience. Under this methodology an employer’s premium is
equal to their claims cost for the period plus a loading for development of claim costs plus expenses.
Large claims are capped at the discretion of the employer – the choice impacting the claim cost
loading. Maximum and minimum premium rates provide some security for the employer against higher
than expected frequency of claims, cost of claims or multiple large claims in a single year.
One of the key requirements is that an employer has no undue volatility in claims history and is able
to demonstrate a satisfactory history of OH&S and workers’ compensation compliance. Organisations
are also required to commit to a Retro-Paid Loss premium arrangement for a minimum of three policy
years.
The details of the NSW retro-paid loss methodology are available at: http://www.workcover.nsw.
gov.au/formspublications/publications/Documents/retro_paid_loss_premium_model_participation_
guidelines_2716.pdf
The timing of premium payments is summarised in the following diagram:
March 2011
Retro-Paid Loss Premium Commences
Deposit Premium Paid
Year 1
1st adjustment premium/refund
Deposit premium for second policy year paid
Year 2
2nd adjustment premium/refund
1st adjustment premium/refund for second policy year paid
Deposit premium for third policy year paid
Year 3
3rd adjustment premium/refund
2nd adjustment premium/refund for second policy year paid
1st adjustment premium/refund for third policy year
Deposit premium for fourth policy year
Year 5
Final adjustment premium/refund
4th adjustment premium/refund for second policy year
3rd adjustment premium/refund for third policy year
2nd adjustment premium/refund for fourth policy year
Deposit premium for the 6th policy year paid
An Example
The following is an example of how a Retro-Paid Loss policy works in practice under the NSW scheme
(ignoring the impact of Dust Disease and other levies). Note that in the following example:
The Policy Year and wages are for the period 1 July 2011 to 30 June 2012.
The Reported Claims Cost is determined in much the same way as for the existing experience
premium calculation. Large claims are capped at an agreed level ($350,000 or $500,000 in NSW)
and journey and recess claims are excluded.
The Adjusted Premium is calculated as the Reported Claims Cost times the Adjustment Factor
(specified by WorkCover NSW).
The Adjustment Premium Paid is equal to the Adjusted Premium less the total premium paid up to the
adjustment date.
March 2011
Policy Year
Wages
Initial Deposit Premium
1/07/11 - 30/06/12
$25,000,000
$500,000
Adjustment Premium - Year 1
Claims cost at 15 months
Adjustment Factor
Adjusted Premium
Adjustment Premium
180,000
305%
549,000
49,000
Adjustment Premium - Year 2
Claims cost at 24 months
Adjustment Factor
Adjusted Premium
367,500
210%
771,750
Adjustment Premium
222,750
Adjustment Premium - Year 3
Claims cost at 36 months
Adjustment Factor
Adjusted Premium
Adjustment Premium
740,000
180%
1,332,000
560,250
Adjustment Premium - Year 4
Claims cost at 48 months
Adjustment Factor
Adjusted Premium
Adjustment Premium
845,000
175%
1,478,750
146,750
Final Adjustment Premium - Year 5
Claims cost at 60 months
Adjustment Factor
Premium
920,000
175%
1,610,000
Final Adjustment
131,250
1,610,000
Total Premium Paid
Under this example the employer pays an initial deposit premium at the commencement of the
insurance premium of $500,000. At the first adjustment date (15 months after the policy inception) an
adjustment premium of $49,000 is paid.
Additional adjustment premiums are paid at each adjustment date until a total premium of $1,610,000
has been paid over the five year period. The premium under the Retro-Paid Loss premium model of $1.6 million; more than three times the
initial deposit premium and compares to claims cost for the policy year of $920,000.
March 2011
Advantages of Retro-Paid Loss
Premiums more closely reflect the actual claims costs (plus a share of expenses) during the policy year.
Good claims experience impacts actual premiums immediately rather than taking three years to work
through the premium formula. Conversely, a “bad year” only affects that year’s premium rather than
three year’s worth of premiums.
There is an opportunity for employers to pay lower premiums through more direct rewarding of their
good claims experience. Savings do depend on actual claims experience and vary from employer to
employer. Each employer should consider their own circumstances before deciding to enter the RetroPaid Loss premium model.
There is less cross-subsidisation of premiums between large and small employers (although Adjustment
Factors may still contain a level of cross-subsidy).
Disadvantages
Premiums can be volatile from year to year. The example above shows that adjustment premiums can
vary significantly from one year to the next depending on the actual claims experience during the year.
The final premium paid is unknown until the end of the run-off period which makes the actual cost
more uncertain. Traditional insurance premiums are known with certainty sooner (albeit not until the
experience adjustment premium is paid at the end of the one year policy period).
The retro-paid loss premium model spreads the premium over the five year retro period. This may
give a (misleading) impression that premiums have reduced in the initial few years. A “true” premium
comparison will not be meaningful until the end of the first five year retro period when a deposit
premium and five years of adjustment premiums will be paid in the same year (see earlier diagram).
There are additional costs to be incurred, such as bank guarantees.
Final Word
You should consider your own experience prior to deciding whether a retro-paid loss premium is right
for your organisation. Premiums can vary considerably from year to year. It is important to look at
a number of years experience to get a complete understanding of the final premium payable. In the
above example the premium payable in year 1 was only $500,000 but this grew to $1.6 million over
the five year term of the retro-paid loss policy (all relating to 2011/12 only!).
In our next newsletter we will show the Retro-paid loss premium for a variety of portfolios to show what
type of experience is rewarded by this option and what type is not.
March 2011
Outlook for Scheme Premiums
At the recent National Council of Self Insurers Conference we gave a presentation titled “Self Insurers:
Are you doing the right thing?”. The presentation provides a high level comparison of the claims
experience for self insurers v insured employers.
View the presentation: http://www.finity.com.au/our_publications.php?category=25&subcategory=68
The presentation also included an outlook for Scheme premiums as they are a key component in the
decision whether or not to self insure. An update on our outlook based on i) the funding ratio of each
Scheme ii) recent premium changes, and iii) recent Scheme changes is set out in the following table.
Recent and possible future trends
The following table summarises recent Scheme performance together with our thoughts on possible
future trends in premium rates.
State
Funding Position
Premium Rate
Frequency
NSW
2009/10 funding ratio
remains below 90% for
the second year in a row
Continued premium rate
decreases since Nov
2005
Claim frequency reduced
in 2009/10
Victoria
Funding ratio back above
100% at June 2010 after
deficit post GFC
Premium rates stable in
2009/10, decreased for
2010/11 (1.39% of
wages to 1.34%)
Lowest injury rate on
record - 10.6 claims per
1000 workers
Queensland
$1.3 billion deficit past 2
years. Funding ratio has
fallen in recent years
from 183% in 2006/07
to 114% in 2009/10
Premium rates increased
in 2010/11 - first
increase in 13 years
(1.15% of wages
to 1.30%)
Reported statutory claim
frequency in 2009/10 is
the lowest level since
2005/06. Common Law
claim frequency increasing
SA
Long term deficit, though
funding position
improved to 66% as at
December 2010
Rates decreased in
2010/11 for the first time
in 7 years
(3.0% of wages to 2.75%)
Claim frequency reduced
slightly in 2009/10
-
Gazetted 2010/11 rates
decreased by 14% to
1.497% of wages
Claim frequency reduced
significantly in 2008/09
-
Suggested rates increased
by 2% in 2009/10
Claim frequency declined
by 6% in 2009/10
Funding ratio reduced in
2009/10. Small surplus
Continued premium rate
decreases since 2005/06
Scheme incidence rates
reduced by 36% in period
2005/06 to 2009/10
WA
Tasmania
Comcare
March 2011
The table continued...
State
Return to Work
Scheme changes
Possible future
premium trends
NSW
RTW rate of 85% in line
with national average
Some change to death
benefits - minimal impact
Pressure to increase
premiums to improve
funding ratio?
Victoria
RTW rate of 85% in line
with national average
Legislative changes
introduced in 2010 increased weekly benefits,
lump sum and death
benefits
Recent benefit changes
potentially limits scope
for major rate reductions
in the near future
Queensland
RTW stable, and slightly
higher than national
average
Reforms aimed at
controlling common law
costs became effective 1
July 2010
Reforms implemented premium rates to remain
stable?
SA
RTW rate declined slightly
in 2009/10 and sits
below the national
average
Final phase of legislative
reforms complete by 30
June 2010. Redemptions
phased out
Pressure to maintain rates
given long term funding
deficit?
WA
WorkCover WA to survey
RTW outcomes in 10/11
Drafting of amendments
underway - minimal
impact expected
Reductions in rates to
reflect improving
frequency/wage trends
Tasmania
Better than average RTW
rates
Legislative changes
effective 1 July 2010 expected to increase claim
costs by around 15%
Premium rates could
increase depending on to
what extent insurers factor
in legislative changes
Comcare
RTW rates significantly
above national average
Some future changes
flagged - minimal impact
expected
Remain stable, as long as
surplus maintained
March 2011
State Update
Comcare
Moratorium continues
The moratorium on private sector companies joining the Comcare scheme as self insurers is expected to
remain until 2012, when uniform work, health and safety laws will be in effect.
Legislative changes
Following a review of the Comcare scheme in 2009/10, and subject to the passage of legislation,
Comcare intend to implement the following changes:
introduction of statutory time limits for claims determinations
reinstatement of coverage during off-site recess breaks
continued payment of medical and related costs where weekly benefits have been suspended for
refusal to participate in the rehabilitation process.
NSW
Recent developments in the NSW Workers compensation scheme include:
Removal of apprentice wages from the calculation of premiums
Increase in the lump sum death benefit to $449,850 on 1 April 2010, and broadening of the
circumstances in which the benefit is payable
Increase to the lump sum asbestos death benefit paid to dependants from $245,700 to $311,050
(via three annual increases)
Automatic coverage for employers who pay annual wages of $7,500 or less.
March 2011
Victoria
Legislative Reform
In response to the Hanks Review, a package of legislative changes was introduced in 2010, including:
provision of superannuation for eligible injured workers
increased weekly benefit payments
increased lump sum benefits for spinal impairment
increased death benefits
enhanced return to work obligations for employers
clarification on the eligibility requirements for stress claims.
Common Law and Legal Costs
WorkSafe implemented a range of strategies designed to control their legal costs, and have begun
a process aimed at curbing continued above inflation growth in plaintiff legal costs also. Measures
include a focus on encouraging earlier settlements, and amendments to legislation to enable a more
predictable model for plaintiff lawyer remuneration.
Queensland
Scheme financials
Queensland WorkCover reported a 2009/10 loss of $259 million, which follows a loss of $567 million
in 2008/09. The scheme’s funding ratio for 2009/10 was 114%, down from 127% in 2008/09.
Premium rates
Premium rates in Queensland increased from $1.15 to $1.30 per $100 wages for 2010/11, the
first rate increase in 13 years. Queensland still maintains the lowest average premium rate of any
Australian state scheme.
Common Law and Legislative Reform
Common law lodgements have increased significantly in recent years, and this continued with an 18%
increase in 2009/10. Just over a third of these lodgements related to strain or sprain injuries, while
psychiatric and psychological claims represent 5% of common law lodgements (which compares to only
3.7% for statutory claims). The majority of common law lodgements (77%) were from claimants with a
Work Related Impairment (WRI) less than 20%.
March 2011
As a consequence of the recent common law experience, in 2009/10 the overall cost of common
law claims increased by 40%. This experience prompted the Queensland Government to announce a
number of reforms to the Queensland workers’ compensation scheme effective 1 July 2010, including:
harmonisation of the workers compensation common law arrangements with the Civil Liability Act
2003, including the strengthening of liability provisions and capping of certain damages (i.e. pain
and suffering capped at $300,000, economic loss payments at three times Queensland’s ordinary
time earnings and use of the ISV scale to determine general damages)
increased onus of proof on workers to demonstrate employer fault
allowing for costs against plaintiffs whose cases are dismissed
increasing the employer excess from 65% to 100% of the Queensland ordinary time earnings or one
week’s compensation.
South Australia
Scheme financials
SA WorkCover achieved a profit of $77 million in 2009/10 – the first full year profit in the past 10
years. The scheme’s unfunded liability fell to $982 million, and scheme funding at 30 June 2010
was 61.5%, up from 56.7% in 2009. The average levy rate for 2010/11 decreased to 2.75% of
remuneration.
Bonus Penalty Removal
During 2010, WorkCover commenced consultation with employers on a new employer payment
system for the scheme. Options being considered include a system which reflects the employer’s size
and experience. Also being considered is a ‘retro-paid loss’ model for employers paying more than
$500,000 in levy.
The bonus-penalty scheme was removed from 1 July 2010, with all employers now paying the
published industry rate. Previously employers with low claim expenses could get premium discounts of
up to 30%, whilst poor performers paid penalties of up to 50% of the base premium.
March 2011
Redemptions
One of the intentions of the legislative reforms has been to limit redemptions. A report by Finity
Consulting, published in September 2010, showed redemption activity increased in the 6 months to
June 2010 as claims were finalised prior to the phasing out of redemptions. Future new redemptions
are expected to be negligible.
Other Developments In Brief
In June 2010, cabinet approved the new Workers Rehabilitation and Compensation Regulations
2010. The new Act commenced on 1 November 2010. The main change is the consolidation of
most of the existing regulations into a single simplified document.
An independent review of the SA WorkCover scheme and Workers Compensation and Rehabilitation Act
1986 by Bill Cossey and Chris Latham opened for submissions on 24 January 2011. This review is to look
at the impacts of the 2008 legislative changes on (i)injured workers, (ii)levy rates, or (iii)the scheme fund.
A recent Workers Compensation Tribunal finding (delivered January 2011) in the case of Davey
v SA WorkCover found that SA WorkCover failed to provide the injured worker an opportunity to
make submissions before discontinuing weekly benefit payments. The finding raises the potential for
workers who had weekly payments discontinued in similar circumstances to revisit their claim.
The SA Government rejected a recommendation by the SA Parliament’s Statutory Authorities Review
Committee that WorkCover stop charging scheme exit fees for employers leaving the scheme to
pursue self insurance.
Western Australia
Legislative Review
The 2009 Legislative Review of the Workers’ Compensation and Injury Management Act 1981 was
completed in December 2009, and the majority of the recommendations were approved by Cabinet in
March 2010. The aim of the review was to create a more flexible, responsive and modern legislation.
The review did not involve an examination of entitlements or other fundamental aspects of scheme
design. The approved recommendations include:
Redrafting and change to the structure of the statute
Amendments to address legislative anomalies and inefficiencies
Increased entitlement to weekly payments from one to two years
Removal of all age based limitations on entitlements
Access to common law for injured workers employed by uninsured employers
Changes to dispute resolution arrangements.
Drafting of legislative amendments is currently being undertaken.
March 2011
Recommended Premium Rates
In 2009/10, WA’s economic recovery lead to continued wage growth and a fall in workers’
compensation claims. As a result, the 2010/11 recommended average premium rate reduced by
13.9% to 1.497% - the lowest in scheme history. The average recommended rate has reduced by 52%
since 1999/00, with the amendments in 1999 and more recently, high wage growth, being the main
drivers of these reductions.
Tasmania
No major developments since our previous newsletter
Australian Capital Territory
Proposed Legislation Changes
On 5 October 2010, the Workers Compensation Amendment Bill 2010, amending the workers
compensation legislation in the ACT, was released for public consultation. Submissions were due on 30
November 2010, and are currently being considered by Government. A similar Bill amending the CTP
legislation was tabled in Assembly in February 2011.
The Bills propose amendments that are intended to improve the performance of the scheme and health
outcomes for injured people while reducing the cost of insurance premiums for Territory residents and
businesses.
The main features of the Workers Compensation Bill are:
Lump sum entitlements to be based on the concept of Whole Person Impairment (WPI) determined
using the American Medical Association’s Guides (5th Edition) and NSW WorkCover Guides (3rd
Edition).
The creation of a Permanent Impairment Assessment Panel and the introduction of a streamlined
process for medical assessment (including peer review) to arrive at a single, independent assessment
of a worker’s WPI.
Impairment benefits
The introduction of WPI thresholds for access to permanent impairment lump sums
Changes to the lump sum impairment benefit amount, such that the benefit payable is linked
to the works WPI
March 2011
Common law benefits
The introduction of a WPI threshold for access to common law
Future economic loss awards will need to be justified. Discount rate to be prescribed as 5%.
Commutations
Workers are no longer entitled to commute permanent impairment benefits, but may continue
to commute other statutory benefits (i.e. weekly, medical and other costs). We understand that
further guidance on commutations will be provided at a later date.
Introduction of a compulsory dispute resolution process, which requires parties to participate in a
settlement conference and exchange mandatory final offers of settlement prior to proceeding to
hearing.
Restriction on the advertising of legal services and amendments to allow the Minister to determine
the maximum expenses and fees that may be charged by or paid to legal service providers.
Increase in the lump sum death benefit from $150,000 to $450,000 (CPI indexed).
Increase in the maximum compensation for funeral expenses from $4,000 to $9,000 (CPI indexed).
Northern Territory
The 2009 actuarial review of the Northern Territory Workers’ Compensation Scheme completed by
Marsh showed the premium rate charged by insurers in 2008/09 was 2.2% of wages. The report also
noted a downward trend in claim frequency for insured employers, but an increase in average claim
sizes in recent years.
The reported funding ratio for the scheme as a whole (i.e. including insured and self-insured
employers) was 100.9%.
March 2011
About Finity
Self insurance
Finity is the largest independent general insurance
actuarial and consulting firm in Australia,
with around 80 staff in Sydney in Melbourne.
We provide analysis to advise and assist
organisations with their strategy and financial
management related to risk management and
insurance issues.
The features of our self insurance (and specialised
insurer) experience includes:
We are Appointed Actuaries to more than 30
general insurance companies within Australia.
Finity has been awarded ‘Service Provider of the
Year to the Insurance Industry’ by the Australian
and New Zealand Institute of Insurance and
Finance for the past 4 years.
Workers’ compensation
Within Finity, we have a dedicated Workers
Compensation Team which specialises in workers’
compensation insurance consulting. We have
provided strategic and analytical advice and
support to most workers compensation schemes
in Australia and New Zealand. We currently
provide strategic advice, as actuarial advisors,
to the South Australian, Queensland and
Tasmanian WorkCover Schemes plus the ACT
Chief Minister’s Department as well as having
experience as peer review actuary to the NSW
WorkCover Scheme in recent years.
The Workers Compensation Team includes a
number of experienced self insurance specialists
from both Sydney and Melbourne. Our self
insurance specialists include Mark Hurst, Estelle
Pearson, David Minty, Andrew Cohen, Adam
Payne, Gillian Harrex and David McNab. All are
Fellows of the Institute of Actuaries of Australia.
actuaries to a number of large employers
self insured with state workers’ compensation
schemes
actuaries to three NSW Specialised Insurers.
We assisted with the licensing process for two
of these insurers
actuaries to three large employers self insured
with the Comcare Scheme. We assisted with the
licensing process for two of these employers
we have performed numerous self insurance
feasibility studies for employers, in relation to
both State Schemes and/or Comcare
we are actuaries to a number of council
pools that self insure their public liability and
professional indemnity risk.
advising several energy companies with regard
to their self insurance programs including
estimating the annual cost of self insurance for
inclusion in their submission to the Australian
Energy Regulator (AER).
We keep up to date with scheme requirements,
and other factors, affecting self insurers through
our ongoing research and development. We have
written a number of papers for seminars which
are available on our website:
“The Comcare Self-insurance Option” - presented
to the Institute of Actuaries of Australia Accident
Compensation and National Self-insurance
Seminars in 2007. This paper looked at the
issues facing national employers considering the
Comcare self-insurance option.
“Assessing the Financial Viability of Moving to
Self Insurance” – presented to the Australian
Self Insurance Summit in 2008. This paper
documented the process an organisation would
go through to estimate whether self insurance is
financially viable.
March 2011
Contacts
Sydney:
Mark Hurst (02) 8252 3358
Melbourne:
David McNab (03) 8080 0903
We are grateful to everyone who has responded with comments about the previous issue - as ever, we
appreciate your feedback. Any suggestions for topics that you would like to see addressed in greater
depth in future newsletters are welcome. mark.hurst@finity.com.au
Copyright © 2011 Finity Consulting Pty Limited
Sydney
Melbourne
Auckland
ph: +61 2 8252 3300
fax: +61 2 8252 3399
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ph: +64 9 363 2894
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