Premium Rates and Scheme Insights

d finitive [ workers compensation ] Keeping you informed. June 2013 Premium Rates and Scheme Insights In this edition of Finity s Workers Compensation d finitive we look at movements in premium rates across Australia and New Zealand. We also provide a snapshot of recent developments across the schemes. In this Edition: >> Premium rates >> Work related mental stress Premium Rates in 2013/14 Most schemes have released their premium rates for 2013/14, and the news is mixed. Rates generally remained stable in the centrally funded schemes, the exceptions being NSW where rates decreased following significant reforms in the past 12 months, and Comcare where rates have again been increased. Suggested premium rates have also increased for two of the privately underwritten states, Tasmania and the ACT, but fell slightly in Western Australia. The following graph shows premium rates* over the last three years. >> Recent developments across Australia and New Zealand www.finity.com.au Sydney +61 2 8252 3300 Auckland +64 9 363 2894 Melbourne +61 3 8080 0900 Wellington +64 4 460 5213 1 d finitive June 2013

Premium Rates Movement in premium rates for 2013/14 have been mixed. 3.0% 2.5% Premium Rates % of Wages 2.0% 1.5% 1.0% 0.5% 0.0% NSW VIC QLD SA Comcare NZ WA TAS ACT Centrally Funded Jurisdiction Privately U/W 2010/11 2011/12 2012/13 * For centrally funded schemes, target rate set by regulator; for privately underwritten schemes suggested/recommended rates (rates achieved by individual insurers may vary). Change 2013/14 Commentary ACT TAS WA NZ Comcare SA QLD VIC NSW Down 7.5% on average Reductions follow significant reforms in 2012 Almost two-thirds of employers will receive rate reductions of up to 15% Not available Lowest workers compensation premium of any australian jurisdiction in 2012/13, at 1.298% Unchanged at 1.45% Rates had increased over each of the three previous years but experience has improved due to steady claim numbers and favourable investment performance Unchanged at 2.75% Strong investment returns offset deterioration in claims liability Up 3% to 1.82% Third successive year of rate increases due to increasing claims costs and reduction in funding ratio Premiums for 13/14 include a recovery margin designed to return the scheme to fully funded in 10 years Unchanged at 1.15% Rates remain at a historical low Rates maintained due to volatility and uncertainty in global financial markets, and a desire for sustainable premium reductions in future Scope for future reductions flagged Down 1% to 1.668% Removal of one-off adjustment for 2011 reforms has more than offset upward pressure from higher claim frequency and lower interest rates Up 4% to 2.36% Increases due to higher claim frequency and lower interest rates Suggested and achieved rates increased each year since 08/09 Achieved rates remain 20% lower than suggested rates Up 2% to 2.42% Increases reflect lower interest rates 2 d finitive June 2013

Mental Stress Claims Costing Employers Billions A recent Safe Work Australia report has found mental stress claims to be the most expensive workers compensation claims, resulting in around 10 times longer off work and costing around 11 times more than the average claim. While the incidence of mental stress claims has declined since the early 2000s, research indicates that the data on compensated claims underestimates the size of the problem, with some 70% of workers experiencing work-related stress not applying for workers compensation. A study by Medibank Private estimated the annual cost to the economy of work related mental stress was almost $15 billion in 2007, with the costs to employers alone being over $10 billion. However the true costs are likely to be much higher as these figures do not include the cost of other (physical) illnesses brought on by mental stress. Research suggests that it is work which is the main cause of stress, ahead of other factors such as finances, concerns about the future, health and relationships. Mental stress is therefore a real problem for employers. Key Findings: Mental stress workers compensation claims are the fifth most common, making up 3.4% of accepted claims in 2009/10, behind physical injuries caused by body stressing (38%), falls, trips and slips (19%), being hit by moving objects (18%) and hitting objects (10%). The incidence of mental stress claims was highest among professionals. The highest risk occupations were law and order, professional carers, teachers, and public transport drivers. Women were more likely to make a mental stress claim. The main causes of mental stress claims were work pressure (33%), work-related harassment and/or workplace bullying (22%) and exposure to workplace or occupational violence (21%). The report suggested that mental stress was best dealt with at an organisational level. While support for the individual is crucial, this generally only provided a short-term solution. Managing the sources of stress in the workplace would prove better in the long run. At the scheme level, recent reviews of a number of schemes (Comcare and Queensland) have recommended tightening coverage for psychological claims. June 2013 d finitive 3

Recent Scheme Developments Comcare Hanks Review Recommends Over 100 Changes The review by Peter Hanks QC into the Safety Rehabilitation and Compensation Act 1988 (SRC Act) was released on 30 March 2013, with over 100 recommendations for substantial changes to almost every area of the scheme including eligibility, benefits, claims administration, dispute resolution and even the structure of the Act itself. Also included were the recommendations of Allan Hawke AC, taken from his review of scheme performance, financials and governance. While the terms of reference stated no reduction to benefits would be considered, benefit changes were recommended, including: Tightening up coverage of mental injuries and manifestations of diseases (such as heart attack and stroke). Coverage for journey claims for on-call workers. Provisional liability for up to 12 weeks of incapacity payments and $3,000 in medicals. Weekly benefits changes to step downs, payment periods, and maximum duration (to be up to pension age), and the inclusion of superannuation. Medical benefits specified rates, and services to be provided only by qualified or accredited practitioners. Impairment benefits reductions for lower impairment levels and increases at higher impairment levels. Multiple impairments arising from a single injury may be combined. Hawke recommended a number of changes designed to improve the transparency of Comcare s financial position, including: Establishing a clear role for Commonwealth funding of Comcare when in deficit or in case of a catastrophe. Increasing the risk margin on outstanding claims to a 75% probability of sufficiency. Separating funds for Commonwealth and ACT premium payers. Both reports recommended lifting the moratorium on new self insurance licencees, and replacing the current competition test with a new national employer test of eligibility. 4 d finitive June 2013

In response to the review, Bill Shorten, Minister for Employment and Workplace Relations, announced that the Government will prioritise 21 recommendations, focussing on those relating to early intervention and rehabilitation and those which correct anomalies in the Act. The Government has also moved to tighten up coverage of mental injury claims. The Government is still considering the remaining recommendations of the review. Queensland Review Recommends No Major Change The Finance and Administration Committee review of the Queensland scheme was released in May 2013. The Committee was tasked with reviewing, among other things, scheme performance and WorkCover s financial position. Recommendations generally favoured maintaining the status quo, with no change to the definition of worker or injury and no change to journey claim coverage. The review also recommended maintaining existing common law provisions, noting the reforms implemented in 2010 were yet to be fully realised as claims for damages can continue to be lodged up to three years after injury. The Committee did however recommend no-win-no-fee and other such arrangements be reviewed, in order to reduce the prevalence of speculative claims. The committee also recommended limiting coverage for psychological injuries such that employment must be the major significant contributing factor, for this type of claim only. The review concluded that while current self insurance arrangements were working effectively, increased flexibility was desirable to make it easier to extend licences for existing self insurers and with respect to exit requirements for certain self insurers. What is a Worker? A bill tabled in Parliament on 30 April 2013 proposed changing the definition of worker to be consistent with the Australian Taxation Office, with clarification that independent contractors (who supply substantial equipment of their own) are not covered while contractors supplying mostly labour are covered. Improving Claim Trends Statutory claim frequency has remained stable over the past three years, with claims keeping pace with employee growth. Statutory claim payments however increased by more than 11% in 2011/12, due mainly to an increase in weekly compensation. Common law lodgements decreased by almost 5% in 2011/12, and the average cost of finalised claims reduced by 7%. June 2013 d finitive 5

NSW New Discounts for Small Employers Small employers are now eligible for the following premium discounts: >> A 10% upfront Employer Safety Incentive (ESI) discount, which the employer will retain if all workers injured during the period return to work within four weeks. >> A Return to Work Incentive of 10% of hindsight premiums, for employers who lose their ESI at the end of the year but manage instead to get all injured workers back to work within 13 weeks. The small employer premium threshold has increased to $30,000 (with no wages threshold) which moves more employers outside of the experience rating scheme. In addition, the discount for premiums paid in advance has increased from 3% to 5%. The retro paid loss methodology for certain approved large employers has also been amended with the claims run-off period reducing from four to three years. The methodology for recalculating premiums for groups has also been standardised. South Australia New Management Team There have been a number of new appointments at WorkCover: >> Rob Cordiner, a former Q-Comp executive, has been appointed GM Insurance. >> Michael Francis, also a former Q-Comp executive, has been appointed GM Scheme Improvement and Regulation. >> Julia Oakley continues in her role as GM Corporate Services. Victoria Return to Profitability in H1 2012/13 WorkSafe s half year results show a turnaround in scheme performance, with a net profit of $487 million, following losses in 2011/12 of $676 million. Results in the six months ending 31 December 2012 were buoyed by more favourable economic conditions, with higher investment returns and lower than forecast inflation. The scheme s funding ratio also improved to 100%, up 4% since 30 June 2012. 6 d finitive June 2013

Changes to Premium Calculations After a recent review of its premium system, WorkSafe has proposed a range of changes: Experience rating for smaller employers. A 10% no-claim discount for employers with no claims during the experience period. Remuneration deductible of $7,500 (down from $15,500). Changes to the apprentice and trainee exemption to make it fairer for employers. No cap on premium rate increases for labour hire employers (currently capped at 30%). The last major review of workers compensation premiums in Victoria was completed more than 10 years ago and, other than minor adjustments to address anomalies as they have arisen, the premium system has remained largely unchanged in this time. If the changes are adopted, some will commence in the 2013/14 policy year. Western Australia Transitioning to ANZSIC 2006 WorkCover WA is moving to industry classifications based on ANZSIC 2006, with insurers required to code all new or renewed policies to both ANZSIC 2006 and ANZSIC 1993 from September 2013. Recommended premium rates are expected to transition to ANZSIC 2006 by March 2016. While the mapping from ANZSIC 1993 is expected to be relatively straightforward for around 60% of policies, WorkCover expects additional input may be required from brokers and/or employers in some cases. Public Sector Workers Compensation Audit A recent audit of the workers compensation experience of public sector workers in WA showed a 3% increase in claims incidence, compared to a general downward trend observed across other schemes. Total claim payments also increased, by 13% in real terms in the two years to 2011/12. Public sector premiums rose by more than 30% over the same period, with agencies paying $166 million to RiskCover (the government s insurer) in 2011/12. June 2013 d finitive 7

The report also found that: All but one of the agencies failed to follow best practice when developing RTW plans for injured workers. While most agencies carried out some monitoring and reporting of their injury management performance, most could improve. Half the agencies did not meet mandatory reporting requirements. The report also found that mental illness accounted for 10% of all claims in the public sector which compares to a nationwide average of 3.4%. Tasmania Review of Injury Management Program Guidelines Injury Management Programs were introduced in July 2010 as a part of the Return to Work and Injury Management Model. The WorkCover Tasmania Board is now commencing a review of its Injury Management Program Guidelines and has invited comments on their effectiveness, deficiencies and opportunities for improvement. Proposed Presumptive Cover for Fire Fighters Tasmania has introduced a bill to establish presumptive workers compensation coverage for fire fighters, with automatic coverage for 12 types of cancers (subject to qualifying employment periods and exposure to fire incidents). The bill proposes coverage for all current career and volunteer fire fighters, as well as cover for former fire fighters for up to 10 years following retirement (or last incident attended in the case of volunteers). The costs of the scheme are expected to be covered through existing workers compensation provisions. The move follows the introduction of similar legislation for Commonwealth fire service workers in 2011. A similar bill has also been introduced in Victoria, but has so far failed to gain the support of the government. 8 d finitive June 2013 Australian Capital Territory Levy to Fund the Cost of Regulation A new levy designed to fund the cost of regulating workers compensation in the ACT will be payable by all ACT insurers and self insurers from 2013/14. At the same time, the Default Insurance Fund (DIF) levy, which covers the cost of claims from uninsured employers, has been reduced. The amount of the new levy is capped such that premiums will not increase by more than 0.015% of wages as a result of the levy (net of the reduction in the DIF levy). The new levy is expected to increase from 1 July 2014 in order to also fund the costs associated with the Territory s work health and safety legislation.

Northern Territory Legislative Review on the Horizon? The newly established Workers Rehabilitation and Advisory Council has begun consideration of a review into the Workers Rehabilitation and Compensation Act based on suggestions made to NT WorkSafe over the last 10 years and encompassing reforms, national consistency and affordability. The review follows amendments to the Act which commenced 1 July 2012. They included changes to the definition of a worker to clarify coverage for contractors, and extending the period for payment of weekly benefits up to pension age. New Zealand New CEO for ACC Former Willis International CEO, Scott Pickering, is the new CEO for the Accident Compensation Corporation from 1 May 2013. His appointment follows the departure of former CEO, Ralph Stewart, in December 2012. Premium Rates to Decrease in Future The NZ Government has indicated that it is budgeting for levy reductions of around $300 million in 2014/15. In combination, the rate reductions in 2011/12 and further proposed reductions of $1 billion in 2015/16, mean premiums will have reduced by around 40% for households and businesses in New Zealand. Sources ACT: WorkSafe ACT Guidance Note 0105 Comcare: Budget Statements 2013/14; Safety Rehabilitation and Compensation Act Review by Peter Hanks QC, Feb 2013. NSW: WorkCover NSW Small Employers Reforms Factsheet; NSW Premier s media release 1 May 2013. NT: WRCAC communique 21 March 2013. NZ: ACC media release 5 March 2013. QLD: Q-Comp 11/12 Statistics Report; WorkCover QLD media releases 1 May 2013 and 22 May 2013, Finance and Administration Committee Report No. 28. SA: WorkCover SA media releases 6 February 2013, 21 March 2013. TAS: Government media release 30 April 2013. VIC: WorkSafe media release 12 March 2013, Improving WorkSafe Victoria s Injury Insurance Premium System Discussion Paper October 2012. WA: PWC 2013/14 recommended premium rates report, April 2013; WorkCover WA media release 9 April 2013; WA Auditor General s Report Management of Injured Workers in the Public Sector May 2013. Other: Safe Work Australia report The Incidence of Accepted Workers Compensation Claims for Mental Stress in Australia, April 2013. June 2013 d finitive 9

www.finity.com.au d finitive [ workers compensation ] If you would like to be added to the mailing list for future editions of our workers Compensation News, please contact: Finity s Workers Compensation Team Melinda Hall on 02 8252 3356 or melinda.hall@finity.com.au Finity is one of Australia and New Zealand s leading actuarial and management consulting firms. Our dedicated Workers Compensation Team has extensive knowledge of accident compensation and is passionate about understanding both the financial dynamics and the social and community objectives of schemes. We combine our experience, industry insight and research with rigorous technical analysis to help you strengthen your business. Finity also specialises in general and health insurance, working closely with large and niche insurers as well as government agencies to deliver world-class actuarial, pricing and strategic advice. We provide Appointed Actuary services to around 35 APRA and RBNZ-regulated general insurers. Contacts Geoff Atkins geoff.atkins@finity.com.au +61 2 8252 3337 Karen Cutter karen.cutter@finity.com.au +61 2 8252 3386 David McNab david.mcnab@finity.com.au +61 3 8080 0903 Andrew McInerney andrew.mcinerney@finity.com.au +61 2 8252 3372 Please contact one of our workers compensation experts if you have any questions or comments on this newsletter. This article does not constitute either actuarial or investment advice. While Finity has taken reasonable care in compiling the information presented, Finity does not warrant that the information is correct. Further clarification can be sought from our consultants. Copyright 2013 Finity Consulting Pty Limited Australia & New Zealand Insurance Industry Award Service Provider of the Year 2006, 2007, 2008, 2009 and 2011. Australian Insurance Industry Awards - Inaugural Inductee into the Hall of Fame 2012. Australia Sydney Tel +61 2 8252 3300 Level 7, 155 George St The Rocks, NSW 2000 Melbourne Tel +61 3 8080 0900 Level 3, 30 Collins Street Melbourne, VIC 3000 New Zealand Auckland Tel +64 9 363 2894 Level 27, 188 Quay St Auckland 1010 Wellington Tel +64 4 460 5213 Level 16, 157 Lambton Quay Wellington 6140 Contact the Author Andrew McInerney Tel + 61 2 8252 3372 andrew.mcinerney@finity.com.au Sydney Office Finity Consulting Pty Limited ABN 89 111 470 270