WorkCoverSA
Stakeholder consultation
Introducing a
Retro-Paid Loss System
for large employers
January 2011
Author: Corporate Affairs & Strategy
Stakeholder consultation: Introducing a Retro-Paid Loss System
CONTENTS
1. INTRODUCTION ..........................................................................................................................4
1.1 Overview.....................................................................................................................................4
1.2 The consultation process.............................................................................................................4
1.3 Aim of this paper .........................................................................................................................5
1.4 Providing your feedback..............................................................................................................6
2. The Retro-Paid Loss System ......................................................................................................7
2.1 Guiding principles of a Retro-Paid Loss System ..........................................................................7
2.2 What is a Retro-Paid Loss System? ............................................................................................8
3. Questions for feedback.............................................................................................................11
An entry threshold will be set for the Retro-Paid Loss System. What are your views? ..................11
Written commitment will be required from an employer’s CEO and/or Board to participate in the
Retro-Paid Loss System. What are your views? ..........................................................................12
In a Retro-Paid Loss System, employers will be required to provide a financial guarantee. What
are your views?...........................................................................................................................14
Should employers be able to choose between two different large claims cap amounts? Should
there be a cap for a single event with multiple claims? ................................................................15
A Retro-Paid Loss System requires minimum, deposit and maximum premium amounts to be set.
What are your views? .................................................................................................................16
Adjustment factors will be applied to an employer’s claims costs. What are your views on this?...18
Adjustment assessments will be made throughout the policy run-off period. What are your views
on the frequency of these assessments and the length of the run-off period? ..............................20
What are your views on the proposed conditions for employers leaving the Retro-Paid Loss
System? .....................................................................................................................................22
4. Attachments ..............................................................................................................................23
4.1 The current employer payment system ......................................................................................23
Workers rehabilitation and compensation in South Australia........................................................23
History of employer payment methods in South Australia: the Bonus/Penalty Scheme ................25
4.2 Glossary of terms used in this paper..........................................................................................26
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Stakeholder consultation: Introducing a Retro-Paid Loss System
DISCLAIMER
The information produced by WorkCover Corporation of South Australia in this publication is correct
at the time of printing and is provided as general information only. In utilising general information
about workplace health and safety and injury management, the specific issues relevant to your
workplace should always be considered. This publication is not intended as a substitute for the
requirements of the Workers Rehabilitation and Compensation Act 1986 or the Occupational Health
Safety and Welfare Act 1986.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
1. INTRODUCTION
1.1 Overview
WorkCoverSA provides for the rehabilitation and compensation of injured workers following a
workplace injury, to help them to remain at work or to return to work and the community as soon as
possible. It is important that the funds collected from employers to provide this service ensure a
financially sustainable Scheme. It is also important that employers feel that levies are allocated in a
way that equitably reflects their risk of making a workers compensation claim.
Providing employers with a payment allocation approach that is closely linked to their level of risk can
be an effective way of encouraging employers to focus on workplace safety and injury and claims
management in their business, which ultimately leads to better outcomes for their workers.
This discussion paper is part of the first stage in developing a new employer payments system that
enhances the allocation approach and promotes better outcomes for injured workers.
Consultation on a new approach to employer payments
WorkCover is exploring two related approaches within a new employer payment system in South
Australia:
• a Retro-Paid Loss System for large employers
• an Experience Rating System for medium and large employers
This discussion paper focuses on the Retro-Paid Loss System for large employers. There are some
elements of the WorkCover Scheme that affect all employers, that may need to change to support a
new employer payment approach. These elements are addressed in the Experience Rating System
discussion paper.
It is recommended that you review the Experience Rating System discussion paper first to gain some
context to the contents of this paper. To review and provide your feedback on the Experience Rating
System for medium and large employers, go to the consultation page of the WorkCover website:
www.workcover.com/consultation.
1.2 The consultation process
In September 2010 the WorkCover Board gave approval for consultation to begin on a new employer
payments system. This has been approached as a phased consultation process, beginning with a
series of stakeholder consultation workshops held in October, November and December 2010.
Eleven workshops were held in October, November and December 2010 and attended by close to
150 representatives of employers, , employer associations, unions, insurance companies and
insurance brokers. Including insurance agents and brokers, helped to give credibility to the models
being discussed.
At these workshops a set of guiding principles for the design of a Retro-Paid Loss System was
developed, and key design issues including the structure required to support it were discussed.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
These workshops provided valuable insight into the employer community’s appetite for some form of
a Retro-Paid Loss System. The feedback and comments that were received during these workshops
have formed the basis for the discussion and issues included in this paper.
WorkCover is proposing to hold further workshops with the stakeholders who attended the initial
workshops to refine the employer payments approach based on the feedback received on this
discussion paper. To stay updated with the progress of the consultation, go to the Consultation page
of the WorkCover website at www.workcover.com/consultation
At this stage, WorkCover is not seeking a commitment from stakeholders on the introduction of a
Retro-Paid Loss System. At the moment we are identifying and exploring what such a system could
include and the structure that would be required to support this.
For updates on the progress of this consultation, visit www.workcover.com/consultation
1.3 Aim of this paper
This paper forms the next stage in the consultation process in designing a Retro-Paid Loss System.
A Retro-Paid Loss System would be introduced as a partner to the Experience Rating System, and
would not be introduced as a standalone system. To provide your feedback on the Experience Rating
System, go to www.workcover.com/consultation.
Many of the elements of the system discussed in this paper are modelled on the premium system
that was introduced in New South Wales in 2009, which is a similar managed-fund scheme to South
Australia.
However, as there is a degree of flexibility in determining some features of the system, WorkCover is
seeking input on how to customise these to best reflect the South Australian employer community’s
needs, taking into account Safe Work Australia’s approach to achieving greater consistency across
schemes.
The workers compensation system is complex and comprised of many variables. While
acknowledging these complexities and challenges, this paper focuses on design elements of a RetroPaid Loss System and for the most part will not address broader aspects of the Scheme, for
example, claims management.
General feedback previously provided through the workshops on the broader aspects of the Scheme
has been taken on board and will be considered as part of future improvement strategies.
WorkCover is now inviting your feedback on the Retro-Paid Loss System.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
1.4 Providing your feedback
It is recommended that you first read through this consultation paper in full and then consider the
questions outlined.
When you are ready to provide us with your feedback, either fill in the feedback form or provide a
submission to the contact details below.
If you want to comment on the introduction of an Experience Rating System, there is a separate
feedback form for that consultation paper (you can find both consultation papers and feedback forms
on the Consultation page of the WorkCover website at www.workcover.com/consultation).
Where you see this symbol, there will be a place to provide your opinion on the
questionnaire feedback form.
Post, email or fax your feedback to:
Employer Payments Project
WorkCoverSA
GPO Box 2668
ADELAIDE SA 5001
Email: employerpayments@workcover.com
Fax: 08 8233 2044
Please provide your feedback no later than 5pm Tuesday 15 March 2011.
If you have any questions, you can email employerpayments@workcover.com or call WorkCover’s
service centre on 13 18 55
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Stakeholder consultation: Introducing a Retro-Paid Loss System
2. The Retro-Paid Loss System
2.1 Guiding principles of a Retro-Paid Loss System
It was important that any changes to the employer payments system be guided by agreed principles.
During the workshops there was broad agreement that the following principles should guide the
design of a Retro-Paid Loss System.
The Retro-Paid Loss System should:
1. Be transparent and easily explained
2. Be a privilege, not a right – employers will have to meet pre-determined
criteria to participate
3. Require commitment from an employer’s CEO/Board
4. Align an employer’s premium more closely to an employer’s own claims experience
(both upwards and downwards)
5. Be available to employers that are of sufficient size to demonstrate
capability, experience and commitment in OHSW, injury management and
return to work practices
6. Minimise potential for ‘gaming’
7. Offer some protection for employers within the system
8
Protect other registered employers from adverse financial impacts
Would you support these principles?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
2.2 What is a Retro-Paid Loss System?
A Retro-Paid Loss System is a form of experience rating that calculates the premium (levy) an
employer pays in a manner that closely reflects the actual costs the employer has incurred. This
system has limited association with industry experience.
The purpose of a Retro-Paid Loss System is to more closely align the premium paid by an employer
to their individual experience in occupational health, safety and welfare (OHSW) and injury
management over a period of several years.
A Retro-Paid Loss System will therefore only be available to large employers with demonstrated
capacity and resources to manage the inherent risks of such a system.
Due to the highly responsive nature of its formula, it provides employers with a strong financial
incentive to reduce the number and cost of workers compensation claims.
The Retro-Paid Loss System encourages employers to assist injured workers to recover, remain at
work where possible or return to work earlier, as this system exposes the employer to the cost of a
claim for up to five years, which is a longer period than under the Experience Rating System.
Retro-Paid Loss schemes are often referred to as ‘burning cost’ arrangements. That is because
employers can get ‘burnt’ by a high premium if they don’t manage their claim numbers and costs
effectively.
In the South Australian workers compensation scheme, the money payable by employers is referred
to as a levy. This discussion paper uses the language of ‘premium’ rather than ‘levy’ when referring
to the Retro-Paid Loss System. This is because the system being discussed is based on an
insurance model where ‘premium’ is more appropriate terminology than ‘levy’.
South Australia’s employers
The Retro-Paid Loss System will not replace conventional experience premium arrangements.
Rather, it would be an option available to large employers that qualify to enter into such
arrangements. The table below indicates the number of employers there are in South Australia
paying above $350,000 or $500,000 in industry-based premium.
Given that a Retro-Paid Loss System will only be available to large employers, you can see that this
approach will only be an option for a limited number of employers. Note that the entry threshold has
not yet been determined and these numbers should not be taken as an indication of what the entry
threshold should be.
Industry-based
premium
Number of registered
employers
% of all registered
employers
$350,000 and above
251
0.50%
$500,000 and above
155
0.31%
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Operational features
The Retro-Paid Loss System being considered would include the following characteristics:
• Employers will be required to pay a deposit premium when the policy period commences. A policy
period in South Australia is the financial year that the premium covers and includes all the claims
that have a date of loss relating to that financial year.
• Adjustments would be made to the deposit premium on a periodic basis during the run-off period.
In New South Wales there is a run-off period of four years following the policy period. In New
South Wales adjustments are made at 15 months, 24 months, 36 months and 48 months to reflect
changes in the actual and expected claims costs of the claims incurred in the policy period.
Expected claims costs would be calculated using a manual claims estimate approach as detailed
in the Experience Rating System discussion paper. A final adjustment is made at the end of the
run-off period (at 60 months in New South Wales) and the policy is closed. Adjustments can
fluctuate from year to year, for example requiring an additional payment one year followed by a
refund the next year.
• Retro-Paid Loss policies operate independently for each policy period. Accordingly, during the fifth
year under the retro-paid loss method, an employer would have one active retro-paid loss policy
and four retro-paid loss policies in run-off.
• Premium rules are put in place to protect the employer. In New South Wales, there is a cap on:
(a) the total cost of a single claim
(b) the total cost for a single event that results in multiple claims
(c) the maximum amount of premium an employer can pay.
• Written employer commitments are required each year to ensure there is ongoing commitment at
the Board/CEO level and the capacity to manage the financial risk as well as ongoing
improvements to OHSW and injury management.
This graph illustrates five policy periods and their corresponding policy run-off periods:
Illustration of how Retro-Paid Loss policies work over five years
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Retro-paid loss arrangements and the WorkCover Scheme
The claims experience and remuneration of Retro-Paid Loss System participants would be included
in the calculation of the relevant WorkCover Industry Classifications (SAWIC), so that industry
categories are not distorted by the removal of large employers and continue to represent the
performance of the industry as a whole.
As the Retro-Paid Loss premium model contains strong incentives for improving workplace safety,
injury management and return to work performance, it is expected that this approach would have a
positive impact on industry experience and therefore on individual industry rates throughout the
WorkCover Scheme.
Advantages
The advantages of a Retro-Paid Loss System when compared to conventional premium
arrangements may include:
•
greater visibility of the direct business and financial implications of an employer’s
management of claims numbers and costs
•
an increased incentive for large employers to effectively manage claim numbers and
costs, leading to better outcomes for workers and improved industry rates.
•
greater rewards for proactive injury prevention, injury management and assisting injured
workers to remain at work where possible or return to work
•
a premium that is more closely linked to claim costs for the period of insurance coverage
in question
•
less reliance on claims estimates in setting the final premium to be charged, as more
than four years will have expired from the date of injury before the final premium is
determined
•
improved cash flow options
•
less reliance on industry performance.
Disadvantages
Potential disadvantages of a Retro-Paid Loss System when compared to conventional premium
arrangements may include:
•
significantly higher premiums than in the conventional premium system if the employer’s
workplace safety, injury management and return to work performance deteriorates
•
a longer time period elapsing before the premium costs for a period of insurance are
known for certain.
The following pages explore some of the key elements of a Retro-Paid Loss System, and we would
welcome your feedback.
For an overview of the current levy collection scheme, and the previous employer payment
systems in South Australia (the Bonus/Penalty Scheme), see Attachment 4.1.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
3. Questions for feedback
This section outlines key issues that must be considered in establishing a Retro-Paid Loss System.
The feedback form provided on the WorkCover website at www.workcover.com/consultation includes
space for you to respond to all questions in this section.
QUESTION 1
An entry threshold will be set for the Retro-Paid Loss System. What are your
views?
The size of an employer is not only linked to their likelihood of an injury occurring, but also their
capacity to administer effective OHSW practices and help injured workers to remain at work or return
to work as soon as possible.
The entry threshold for a Retro-Paid Loss System will need to ensure that only those large employers
with the capacity and resources to manage the inherent risks of such a system are eligible to apply.
In New South Wales the entry threshold is equivalent to $500,000 base premium. We are interested
in your views on an appropriate threshold for a Retro-Paid Loss System in South Australia.
Advantages:
•
By setting an appropriate entry threshold, only employers of an appropriate size and financial
capacity to cope with the associated level of risk are able to apply.
Disadvantages:
•
Employers who believe they have capacity, but are below the threshold, are unable to be
considered.
Workshop feedback:
•
General agreement that an entry threshold will need to be set.
•
Wanted to give further consideration to the threshold level.
An entry threshold is required – what are your views on the threshold level?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 2
Written commitment will be required from an employer’s CEO and/or Board to
participate in the Retro-Paid Loss System. What are your views?
Participating in the Retro-Paid Loss System would be an option for large employers who are
committed to achieving ongoing improvements in their OHSW, injury management and return to work
practices. An employer’s eligibility is therefore subject to an assessment of their commitment and
performance in these areas.
New South Wales requires annual employer commitment to be evidenced by:
•
written commitment from the Chief Executive Officer and/or Board
•
establishment of a OHSW and return to work program
•
setting key performance targets for OHSW and return to work
•
reporting against these performance targets.
The intention of seeking written commitment from each organisation’s CEO and/or Board is to ensure
that the most senior decision-makers in each organisation:
•
understand the commitment required to participate in a retro-paid loss premium arrangement
•
are aware of the financial costs arising from poor claims experience
•
are confident that the organisation meets minimum standards for workplace safety, injury
management and return to work
•
make improving workplace safety, injury management and return to work an organisational
priority.
Financial sustainability is important. The written commitment would include statements regarding the
ability of the organisation to continue trading for the duration of the retro-paid loss policy and run-off
years (entities under administration or in liquidation will not be allowed entry).
Additional commitments
Employers participating in the Retro-Paid Loss System will have to prove that they are continuing to
effectively manage any claims they have incurred in the two years prior to joining this system.
As the Retro-Paid Loss System only considers claims in the four years after the policy period in the
premium calculation, it is important to give employers an incentive to focus on those workers injured
before the policy period commenced.
Employers who do not provide evidence through their performance of effectively managing prior
claims will not be able to renew their Retro-Paid Loss policy, and will return to the Experience Rating
System.
In a Retro-Paid Loss System, employers would also be required to attend quarterly networking
sessions with other Retro-Paid Loss employers to be facilitated by WorkCover. These sessions
would provide an opportunity for sharing ideas and mentoring between organisations and would be
attended by employers and, when relevant, their insurance brokers, WorkCover and claims agent
representatives.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Advantages:
• Ensures the senior decision-makers in each organisation understand the implications of
participating in the system.
• Employers would have opportunities to share ideas at networking sessions.
• Ensures prior claims continue to be managed effectively.
Disadvantages:
• None identified.
Workshop feedback:
•
Agreed that these were important features of a Retro-Paid Loss System.
Written commitment from an employer’s CEO and/or Board will be required. What
are your views on this? Should employers be required to participate in quarterly
networking sessions facilitated by WorkCover?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 3
In a Retro-Paid Loss System, employers will be required to provide a financial
guarantee. What are your views?
A financial guarantee provides protection for the Scheme in the event that a participant’s business
fails. The financial guarantee would be equal to the maximum premium payable less the deposit
premium or premium paid to date for a particular policy period.
The overall guarantee level will be reviewed at the time of each policy renewal and adjusted
accordingly. A financial guarantee would be required for each policy. This means that after five years,
there will be five active financial guarantees, one for each of the five policies in force or running off.
It is proposed that a financial guarantee could be provided in the form of a security deposit, a bank
guarantee or insurance policy provided by an organisation that holds an AA credit rating. The credit
rating would need to be issued by a credit rating agency with an Australian Financial Services
licence.
Advantages:
•
Other registered employers are not financially impacted through higher premiums if an
employer’s business in the Retro-Paid Loss System fails.
Disadvantages:
•
Some employers in the Retro-Paid Loss System could find it difficult or cost-prohibitive to
obtain an appropriate financial guarantee.
•
Aggregation of five financial guarantees may be viewed as a large expense.
Workshop feedback:
•
Agreement that financial protection is required for the system to be viable.
Employers will be required to provide a financial guarantee to participate in the
Retro-Paid Loss System. What are your views?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 4
Should employers be able to choose between two different large claims cap
amounts? Should there be a cap for a single event with multiple claims?
Placing a cap on the costs that can be attributed to a single claim or event is an effective way to
protect employers from the potential premium increase associated with a significant injury, or if
several workers are injured in a single event.
Example:
Entitlements associated with a claim where there has been a work-related fatal accident:
Lump sum payment
$426,255
Funeral payment
$7,470
Weekly payments
$400 per week
A claim such as this would significantly increase an employer’s incurred claims costs.
Employers within the Retro-Paid Loss System are expected to assume a greater degree of risk.
Within a Retro-Paid Loss System the claims costs associated with a significant claim can have an
even greater significance on an employer’s premium than under the Experience Rating System.
In New South Wales’s Retro-Paid Loss System:
•
employers are able to choose between two large claim costs caps: $350,000 and $500,000
•
a cap of double the chosen large claims cap applies in the event of multiple significant claims
arising from one event.
The level of the large claim costs cap has implications for the minimum and maximum premium that
an employer may pay (see Question 5).
Advantages:
•
Employers have protection for significant claims and events.
•
Reduces the volatility of the employer premium.
•
Provides employers who are willing to accept risk with the opportunity to choose the level of
risk they can manage.
Disadvantages:
•
Exposure to risk may be seen as too high.
Workshop feedback
• Broad support for some form of large claims cap as part of the Retro-Paid Loss System.
Should employers be able to choose between two different large claims cap
amounts? Should there be a cap for a single event with multiple claims?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 5
A Retro-Paid Loss System requires minimum, deposit and maximum premium
amounts to be set. What are your views?
A Retro-Paid Loss System requires three specific premium elements: a minimum premium amount, a
deposit premium amount and a maximum premium amount.
The minimum premium would be determined for each employer based on the claim cost cap
selected and their industry based premium. A minimum premium amount ensures adequate funds
are collected to cover:
•
significant injuries across the Scheme
•
general scheme costs (such as administrative costs, amounts paid to SafeWork SA, and
Medical Panels SA, Workers Compensation Tribunal, WorkCover Ombudsman)
In New South Wales:
Minimum premium = (base premium x (1 – sizing factor)) x adjustment factor
Where,
Base premium
is the industry rate x estimated remuneration
Sizing factor
is (0.9 x the base premium) ÷ (the base premium + 225,000)
Adjustment factor
is the fifth adjustment factor of the chosen large claims cap (see Question 7)
A deposit premium is paid by the employer at the beginning of each policy period.
In New South Wales:
Deposit premium = minimum premium x 1.25
A maximum premium amount would also be set for each policy period to protect employers from
significant increases in premium. In New South Wales:
Maximum premium = base premium x 2.5
Below is an example of how these rules would apply in New South Wales to an employer with a base
premium of $1 million.
Minimum premium
Deposit premium
Maximum premium
$350,000 large claims cap
$464,286
$580,357
$2,500,000
$500,000 large claims cap
$443,061
$553,827
$2,500,000
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Stakeholder consultation: Introducing a Retro-Paid Loss System
The way that these premium amounts are calculated would need to be modelled specifically for
South Australia in order to reflect the state’s claims experience profile. This modelling would begin
after we have considered the consultation feedback from this paper and if there is support from
stakeholders for work to continue.
Advantages:
•
There is significant financial incentive for employers in the Retro-Paid Loss System to
prevent and manage work-related injury effectively.
•
Protection for registered employers to ensure the Scheme does not face any financial
exposure.
•
Opportunity for employers in the Retro-Paid Loss System to choose what level of risk they
will assume (by choosing the amount of the large claims cap).
Disadvantages:
•
Any costs above the maximum premium are spread across all other registered employers
through an increase in premiums.
•
The maximum premium is a significant cost for employers if they incur substantial claim
costs.
Workshop feedback:
•
Agreed that these premium rules should be part of the Retro-Paid Loss System.
We will include a minimum premium, deposit premium and maximum premium
amount as part of the Retro-Paid Loss System. What are your views?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 6
Adjustment factors will be applied to an employer’s claims costs. What are
your views on this?
In a Retro-Paid Loss System, adjustment factors are applied to an employer’s cost of claims (both
paid and outstanding). This is done to make allowance for the following:
•
the costs associated with managing the policy, claims and injury prevention activities
undertaken on behalf of the Scheme by the claims agent and WorkCover
•
the costs associated with cross-subsidisation (that is, claim caps, maximum premium, etc)
•
the costs associated with funding Government entities that provide services in the South
Australian workers rehabilitation and compensation system (that is, The Workers
Compensation Tribunal, Medical Panels SA, WorkCover Ombudsman, Safe Work SA)
•
the expected level of accuracy of outstanding claims estimates
•
claims incurred but not reported or costs that have been under-reported.
Adjustment factors are established at the beginning of the policy period and applied throughout the
run-off period (refer to question 7 for further information and the formula). Different adjustment
factors are established for different large claim caps.
This table shows an example of factors used in New South Wales for the 2010-11 policy period.
Adjustment factor
Month
$350,000 claim cap
$500,000 claim cap
15
3.05
2.95
24
2.10
2.00
36
1.80
1.70
48
1.75
1.67
60
1.75
1.67
As can be seen from the above table, the adjustment factor reduces over time. This is because the
number of outstanding claims reduces, and estimates of those claim costs become more certain over
time.
Adjustment factors would be determined and set by WorkCover before the commencement of each
policy period to reflect the Scheme experience at that point in time.
The way that these factors apply will need to be modelled specifically for South Australia,
depending on the finalisation of other design features in this paper.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Advantages:
•
Adjustment factors provide a more realistic estimate of costs over time.
•
Employers can influence their premium each year by effectively reducing their claim
numbers and focusing on injured workers remaining at work where possible or returning to
work, which in turn will reduce their claim costs.
Disadvantages:
•
None identified.
Workshop feedback:
• Acceptance of the need for adjustment factors in a Retro-Paid Loss System.
In the Retro-Paid Loss System, adjustment factors will apply to an employer’s
claims costs. What are your views?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 7
Adjustment assessments will be made throughout the policy run-off period.
What are your views on the frequency of these assessments and the length of
the run-off period?
Under the Retro-Paid Loss System in New South Wales, employers have a policy period for one year
followed by a four-year run-off period. A South Australian system could include a similar five-year
system with periodic assessments to adjust the deposit premium as required and we would like to
know your views.
A premium adjustment is made at specified intervals during the run-off period. For example, New
South Wales has intervals at 15 months (to ensure claims from the first 12 months are captured),
followed by assessments at 24, 36, 48 and 60 months (finalisation date).
Premium adjustments are based on claims experience and changes in claim estimates and can
fluctuate from year to year. For example, an additional payment one year followed by a refund the
next. They are calculated in the following way:
Adjusted premium = cost of claims x adjustment factor
Where,
Cost of claims
takes into consideration any caps on costs or exclusions
Adjustment factor
is the relevant adjustment factor for that period (see Question 6)
Example:
For an employer who has actual and estimated claim costs of $1 million, the adjusted premium at 48
months with a selected claim cap of $500,000, would be calculated as:
$1,000,000 x 1.67 = $1,670,000
Before the finalisation date, an audit would be conducted of a sample of outstanding claims to review
and confirm the claim estimates.
If any under/over estimating is identified the audit would be extended. This assists in ensuring the
claim estimates are accurate at the finalisation date and enhances the transparency of the system.
This audit would be conducted by an external party.
Approximately only 2% of claims are still outstanding after five years, so it is anticipated that the
policy period plus a four-year run-off is sufficient for most claims to be finalised by the time the final
adjustment is calculated.
Advantages:
•
An employer has the opportunity to actively manage claims and improve return to work
outcomes over time and have their premium adjusted downwards.
•
Finalisation calculations are likely to be done with minimal outstanding claims.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
•
Transparency in how outstanding estimates are determined for the final adjustment at the
beginning of the policy period.
Disadvantages:
•
Employers can be financially impacted if their focus on injury management practices
deteriorates over time.
Workshop feedback
•
Agreement that a run-off period is required.
A run-off period and periodic premium adjustments would be part of a Retro-Paid
Loss System. What are your views?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
QUESTION 8
What are your views on the proposed conditions for employers leaving the
Retro-Paid Loss System?
The potential introduction of a Retro-Paid Loss System should include considerations on what rules,
if any, apply to employers leaving the system.
In New South Wales’s system, an employer wishing to exit the retro-paid loss arrangement is subject
to two conditions. The same conditions could be applied to employers exiting the Retro-Paid Loss
System in South Australia and we would like your feedback on these conditions:
1. Employers are required to run-off claims from existing retro-paid loss policy periods. This
means the employer will continue to pay the premium adjustments for the policy periods
where the employer was part of the retro-paid arrangements (that is, up to the 60-month
point)
2. Employers are not able to re-enter a new retro-paid loss arrangement until all previous retropaid loss policy periods have been run-off (that is, between four and five years after exiting).
Entities entering receivership, administration, voluntary administration or liquidation are required to
exit to conventional premium arrangements at the next policy renewal date.
Advantages:
•
This approach prevents employers from taking advantage of the system by opting in and
out to avoid the impact of poor claims experience.
•
Employers will continue to be financially accountable for the claims incurred during the
policy period relevant to their time in the Retro-Paid Loss System.
Disadvantages:
•
Employers exiting the Retro-Paid Loss System will need to participate in both systems for a
period of time.
Workshop feedback:
•
Agreement that these conditions should apply for employers exiting the
Retro-Paid Loss System.
What are your thoughts on the two conditions we are proposing
for employers exiting the Retro-Paid Loss System?
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Stakeholder consultation: Introducing a Retro-Paid Loss System
4. Attachments
4.1 The current employer payment system
Workers rehabilitation and compensation in South Australia
The South Australian Workers Rehabilitation and Compensation Scheme (the Scheme), provides
protection to workers and employers in the event of workplace injury.
WorkCoverSA is a statutory authority that manages the State's workers rehabilitation and
compensation scheme on behalf of more than 50,000 employers (referred to as registered
employers) and about 437,000 employees. There are currently 67 self-insured employers, as well as
the State public sector agencies, which manage their own claims but under the same laws.
Why levies are collected from individual employers
Employers are required to share the cost of the South Australian workers compensation scheme. At
30 June 2010, the actuarial assessment of the cost of the Scheme for the 2010-11 year was $610
million.
The graph on the following page shows how the money collected from employers in a particular
financial year is used to fund certain costs relating to that year. These costs include:
•
The claim costs for the claims that were incurred in that financial year (for example, a
claim that occurred on 2 July 2009 is included in the 2009-10 financial year):
The graph on the following page shows claim costs in two separate parts. One part is the claim
cost paid in the relevant financial year. The other is the outstanding claim costs/liability for that
year.1
•
Other costs such as administration of the Scheme and the Goods and Services Tax (GST):
WorkCover administrative costs include the operating budget that WorkCover has to fund its
regulatory and operational functions and payments to its claims agent, currently Employers
Mutual. It also includes funding of the following bodies:
Safe Work SA (50%)
Workers Compensation Tribunal
Medical Panels SA
WorkCover Ombudsman
1
These are an estimation of costs that will be paid in the future which could, for example, extend for 40 years or
more in respect of younger workers who never return to work.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Composition of annual levy collected
$700
$600
$ million
$500
$400
$300
Scheme administration
$200
Outstanding claims costs
$100
Claims costs paid to date
$0
2007-08
2008-09
2009-10
Financial year
WorkCover’s liabilities are long-term in nature, for example, a significant injury today may still incur
costs in 40 to 50 years’ time. As a result, the levy collected in any financial year will exceed the
amount paid for the claims incurred in that year to ensure adequate monies are available to meet
unpaid costs (that is, the outstanding liabilities) as they fall due in the future.
It is important to note that the Scheme needs to collect a predetermined dollar amount each financial
year to cover the actuarially assessed costs of the Scheme, including administration and the cost of
claims.
The key driver of the amount of levy required to be collected is the cost of claims for that year from
registered employers.
How levies are currently calculated for individual employers
WorkCover has an industry-based classification system – the South Australian WorkCover Industrial
Classification (SAWIC). On the basis of an employer’s predominant activity (from information
recorded on their registration form), each employer location is assigned an appropriate industry
class.
There are 512 SAWIC industry classes, and each of these industry classes has an industry levy rate
that reflects the risk of injury associated with their type of work.
The industry levy rate is based on the claims history of all employers in that industry class over a
number of years, so that the levy paid by all employers within a particular industry reflects their
associated risk.
Levies paid by all employers registered with WorkCover are determined by a calculation based on
the employer’s industry levy rate and their estimated remuneration paid to their workers.
This provides the base levy payable. The GST component and OHSW fee are then added to the
base levy payable.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
Example: Medium employer
A furniture company pays approximately $2,500,000 a year in remuneration and has an industry levy
rate of 2.80%.
The total rate for the company including GST and OHSW fee is 3.098%. This is calculated in the
following way:
Industry levy rate (ILR)
2.800%
+ GST (10% of ILR)
0.280%
+ OHSW Gov fee (0.65% of ILR)
0.018%
Total rate
=
3.098%
The total amount due is calculated in the following way:
Estimated remuneration $2,500,000 X Total rate @ 3.098%
= Total Payment due $77,450.00
Further information on how levy rates are calculated is available on the WorkCover SA website at
www.workcover.com > Employer > Levy information.
History of employer payment methods in South Australia: the Bonus/Penalty Scheme
WorkCover had a Bonus/Penalty Scheme in place for registered employers from 1990 until 30 June
2010. The Bonus/Penalty Scheme was a form of experience rating that rewarded or penalised
employers through the levy system based on claim payments for the previous two years.
The Bonus/Penalty Scheme was a large-scale program affecting about 90% of employers in South
Australia. It affected all employers paying more than $200 in base levy per annum, and provided high
maximum bonuses and penalties to the smallest employers (10% and 17% respectively), increasing
to 30% and 50% respectively for employers paying more than $40,000 in base levy per annum.
The Bonus/Penalty Scheme was weighted towards most employers receiving bonuses due to small
employers, with inherently low claim rates, being included within the scheme. In 2009, employers
eligible for bonuses received reductions totalling approximately $75 million in levy payable, while
employers who received penalties received increases totalling approximately $25 million in levy
payable. So that the Scheme collected the overall required amount, the net $50 million undercollection in bonuses was spread across all employers by artificially increasing individual employer
levy rates by about 8%.
In July 2008 the WorkCover Board decided not to renew the Bonus/Penalty Scheme after its natural
expiry on 30 June 2010.
While the Bonus/Penalty System was a type of experience rating, there were flaws specific to its
design that meant it had little influence on employer behaviour or improving outcomes for injured
workers.
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Stakeholder consultation: Introducing a Retro-Paid Loss System
4.2 Glossary of terms used in this paper
This list will help to clarify some of the terms used in both of the consultation papers. For a full
glossary of all terms you may encounter through WorkCoverSA, go to www.workcover.com >
Employer > Reference library > Glossary, or click here: link to Glossary.
adjustment factor
applied within the Retro-Paid Loss System to an
employer’s cost of claims to calculate the premium
adjustments during the run-off period. These factors
ensure sufficient funds are collected for the
administration of the Scheme and to cover those
claims costs that are excluded from all employer’s
cost of claims (for example, costs above the large
claims cap)
average levy rate
is assessed annually by the Scheme actuaries to
ensure that sufficient premium is collected to cover
the anticipated claims costs and Scheme expenses
for the year and used to set the industry rates
average weekly earnings
includes salary, overtime, shift and other
allowances, bonuses, commissions, payments to
working directors, payments for public and annual
holidays, payments for sick leave and other noncash benefits. See section 4 of the Workers
Rehabilitation and Compensation Act 1986
base levy / premium
calculated by multiplying the employer’s
remuneration by the industry rate of the applicable
South Australian WorkCover Industrial
Classification (SAWIC)
Bonus / Penalty Scheme
an experience based system that rewarded or
penalised registered employers through the levy
system – ceased on 30 June 2010
certificate of currency
issued annually to registered employers at the start
of each policy period. Includes the calculation of the
employer’s premium, details of individual claims and
their estimated total cost, performance relative to
other employers in their industry class and
insurance coverage
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Stakeholder consultation: Introducing a Retro-Paid Loss System
claims agent
an agent appointed by WorkCover to manage
claims
claims costs
see costs of claims
claims estimate
an estimate of the future payments arising from the
claim and taking into account the severity and
details of the claimant’s injury
Claims Estimation Manual
a guide for calculating a claims estimate
claims excess
generally, an employer is required to pay the first
two weeks of weekly payments for each claim by a
worker
claims excess waiver
employers may have the claims excess waived if
they notify the claims agent of the injury within two
days of the injury occurring
claims experience
the claims incurred by an employer in the policy
period
costs of claims
all payments made by a claims agent in respect of a
claim and the estimated costs of all future payments
arising from that claim
deposit premium
calculated at the beginning of the Retro-Paid Loss
policy period, using an estimate of remuneration
and adjusted by their size and the claim cost cap
selected
Employer Claims Cost Rate (ECCR)
the employer’s claim costs divided by remuneration
paid by the employer
employer size
generally assessed according to the employer’s
base levy or remuneration
experience adjusted premium
a mix of the employer’s base premium and claims
experience
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Stakeholder consultation: Introducing a Retro-Paid Loss System
income maintenance
the weekly benefits payment made to an injured
worker unable to work as a result of a workplace or
work-related injury, in place of their income
hindsight adjusted premium
is calculated at the end of the Experience Rating
System policy period, based on the actual
remuneration paid
Industry Claims Cost Rate (ICCR)
industry claims cost based on past experience over
a number of years, divided by the total
remuneration of the industry over the same period
industry classification
these are set out in the South Australian WorkCover
Industrial Classification (SAWIC) system. The
sectors are: Agriculture, Forestry and Fishing;
Mining; Manufacturing; Electricity, Gas and Water;
Construction; Wholesale and Retail Trade;
Transport and Storage; Communication; Finance,
Property and Business Service; Public
Administration and Defence; Community Services;
Recreational, Personal and Other Services.
industry levy / premium rate
see South Australian WorkCover Industrial
Classification (SAWIC) rate
large claim cap
the maximum cost of an individual claim used in
calculation of an employer’s experience adjusted
premium, or Retro-Paid Loss premium
levy
the funds collected from employers
levy payable
the total levy due, including GST and the OHSW fee
manual claim estimates
an estimate of a claims future cost, generally
carried out by the claims manager using a Claims
Estimation Manual
Medical Panels SA
a statutory authority established under Part 6C of
the Workers Rehabilitation and Compensation Act
1986 to answer medical questions that arise when
there is a disagreement or uncertainty about
aspects of an injured worker’s medical condition
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Stakeholder consultation: Introducing a Retro-Paid Loss System
new employer
an employer who has recently commenced
business and where there has not been a transfer
of business
OHSW
Occupational Health, Safety and Welfare
policy of insurance
issued to an employer when they first register with
the Scheme. Premium notices are then issued each
subsequent year, to renew the policy
policy period
the relevant financial year that the premium payable
relates to
policy renewal year
the financial year in which the policy period
commences
premium
the funds collected from employers
premium adjustment
calculated at specific points during the Retro-Paid
Loss run-off period to reflect the costs of claims
paid and estimated, including an adjustment factor
relative to the chosen large claims cap
premium notice
issued annually to an employer to renew their policy
of insurance
premium payable
the total premium due, including any adjustments
for the employer’s size and including GST and the
OHSW fee
related employer
an employer is currently related to another
employer if they are related corporations as defined
in the Corporations Act 2001 of the Commonwealth
remuneration
a payment made to or for the benefit of a worker by
an employer, further details of inclusions and
exclusions can be found on WorkCover’s website
run-off period
the period following the Retro-Paid Loss policy
period, in which premium adjustments are made to
the deposit premium
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Stakeholder consultation: Introducing a Retro-Paid Loss System
SafeWork SA
responsible for administering occupational health,
safety and welfare laws and certain industrial
relations laws in South Australia
SAWIC
see South Australian WorkCover Industrial
Classification
sizing factor
determines the relative weighting placed on an
employer’s experience and base levy
South Australian WorkCover Industrial
is the industry classification system used to classify
businesses for the purpose of setting and
calculating levies / premiums
Classification (SAWIC) system
South Australian WorkCover Industrial
Classification (SAWIC) rate
the levy percentage rate applicable to the South
Australian WorkCover Industry Classification
(SAWIC) of the employer
the Act
Workers Rehabilitation and Compensation Act 1986
total levy
see levy payable
unfunded liability
where the balance of the liabilities exceeds the
assets of the WorkCover Scheme
WorkCover Ombudsman, Office of the
an independent Office that investigates complaints
about the operation of the WorkCover Scheme and
reports problems with the Scheme to the Minister
for Industrial Relations
WorkCover Scheme
the South Australian workers compensation
scheme, which does not include self insurers and
most government employers
Workers Compensation Tribunal
an independent dispute resolution providing a forum
for the appropriate, fair, just, timely and costeffective resolution of workers compensation
disputes
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