Literature review-i 14 2 Workers Compensation Insurance in Construction 2.1 Chapter outline This chapter presents the findings of a literature review on workers compensation insurance for construction projects. Firstly, the historical background of the origin of the workers compensation system is described, followed by a detailed review of the workers compensation system in Singapore. Subsequently, the purpose of the workers compensation insurance is outlined, followed by an exploration of premiumrating variables for workers compensation insurance for construction projects. 2.2 Background of workers compensation system In the early days of the industrial revolution, injured workers had to prove the negligence of their employer to recover medical expenses, lost wages and other damages caused due to occupational accidents. Employers had three primary defences against liabilities for these injuries. The first was the concept of contributory negligence, which prevented the employee from recovering any damage if he/she contributed to even in a small way to the cause of the accident. Another defence was the fellow-servant doctrine. If the injury resulted from the contributing actions of fellow employees, the employer was not considered liable for the injuries. The third defence was the assumption of risk doctrine. It could limit a worker s recovery of damages if he/she knew of the hazards in the workplace and assumed those risks by going to work (Clayton, 2004). In addition to overcoming those common law defences, injured workers faced other problems too in bringing suits against the employer, viz: Filing suits often resulted in injured workers losing their jobs;
Literature review-i 15 The lawsuits were expensive and time-consuming, thus workers had difficulty finding lawyers to represent them; and There was no guarantee that the employee would win the suit and collect a damage that is sufficient to recover the loss and the cost of the suit (Newman and Hancher, 1991). Due to these circumstances, injured workers received no compensation, lost the current job or lost the ability to find another job due to disability. Thus, their families were becoming an increasing burden to the society. To overcome this unfair situation, the workers compensation system was designed as a trade-off between the employer and the employee. The underlying principle behind the system is that the cost of onthe-job injuries, regardless of fault, should be borne by the employer, not by the injured worker. In exchange of the guaranteed settlement, the injured worker forfeits the right to sue the employer. The basic objectives of the workers compensation are to (Everett and Thompson, 1995): Provide sure, prompt and reasonable benefits to work accident victims or to their dependents, regardless of fault; Provide a single remedy and reduce court delays, costs and workload arising out of personal injury litigations; Relieve public and private charities of financial drains incident to uncompensated industrial accidents; Encourage maximum employer interest in safety and rehabilitation; and Promote frank study of causes of accidents, reducing preventable accidents and human suffering.
Literature review-i 16 2.3 Workers compensation system in Singapore The Workers Compensation Act of Singapore 1 (MOM, 2005) covers all "workers" engaged under a contract of service. A "worker" refers to a person engaged in manual labour, regardless of how much he/she earns per month or a non-manual labour whose average monthly earnings do not exceed S$1,600 2. The following types of workers are excluded for workers compensation under the Act: A non-manual worker whose average monthly earnings exceed S$1,600 per month; A worker whose work is of casual nature and whose work is not connected with the employer's trade or business; A domestic worker; A police officer or any other person engaged to perform police duties; An outworker, i.e. any person who does work on materials or articles given out by another person and who does such work in his/her own home or in some other premises which are not under the control or management of that other person who gives out the materials or articles; and Any member of the family of the employer who dwells with him/her in his/her house. 2.3.1 Costs recovered under the workers compensation system The Workers Compensation Act of Singapore enforces the entitlement of five types of benefits to victims of on-the-job accidents as described below. 1 To avoid gender bias, Singapore s Workmen s Compensation Act is described as the Workers Compensation Act of Singapore in this thesis to accommodate readers from other countries. 2 At the time of writing, US$1 is approximately S$1.56.
Literature review-i 17 1. Medical expenses: When a worker is injured in a work-related accident, his/her employer must arrange for a registered doctor to treat the injury. The cost of any medical treatment arising from the accident, including any fees for a medical report, will be paid for by the employer. If the worker is hospitalised in an approved hospital, the medical expenses are subject to the maximum prescribed limit according to the Act. 2. Temporary incapacity: Temporary incapacity, as the name implies, refers to injuries which incapacitates a worker from performing his/her normal duties for a limited duration. Examples of such injuries are sprains, minor cuts or bruises. In such instances, the worker is entitled to a paid medical leave of up to a year. For the first 14 days of the medical leave or 60 days if he/she is hospitalised, the worker is entitled to full wages. Beyond that, the worker is entitled to 2/3 of the wage. 3. Permanent incapacity: Permanent incapacity compensation can be for either total or partial incapacity. Total permanent incapacity refers to the injuries that incapacitate the worker from doing all work that he/she was capable of doing at the time of the accident and thereby permanently reducing the earning capacity of the worker in every employment. Examples are loss of both arms, either eyes or total paralysis. The amount payable for a total permanent incapacity is given by Average monthly earnings x multiplying factor subject to a maximum of S$147,000 and a minimum of S$49,000. If a doctor certifies that an injured person suffering from total permanent incapacity that needs the constant help of another person during his/her lifetime, an additional compensation of 1/4 of the amount awarded for total permanent incapacity can be claimed.
Literature review-i 18 Partial permanent incapacity reduces the worker's earning capacity in every employment. An example is the loss of one eye. The amount payable for partial permanent incapacity is calculated by using the following formula: Percentage incapacity x average monthly earnings x multiplying factor or Percentage incapacity x S$147,000, whichever is lesser The worker is also entitled to paid medical leave as in temporary incapacity. The multiplying factor for a permanent incapacity is determined by the age of the worker (on the next birthday at the time of the accident) as shown in Table 2.1(a). The percentage incapacity is determined according to Table 2.2. Table 2.1: (a) Multiplying factor - permanent incapacity; (b) Multiplying factor fatal accident. (a) Age Multiplying factor 40 and below 144 41 142 42 140 43 138 44 136 45 134 46 132 47 130 48 128 49 126 50 124 51 122 52 120 53 118 54 116 55 114 56 111 57 108 58 105 59 102 60 99 61 96 62 93 63 90 64 87 65 84 66 and above 72 (b) Age Multiplying factor 40 and below 108 41 107 42 106 43 105 44 104 45 103 46 102 47 101 48 100 49 98 50 96 51 94 52 92 53 90 54 88 55 86 56 84 57 82 58 80 59 78 60 75 61 72 62 67 63 63 64 58 65 53 66 and above 48 (Source: MOM, 2005)
Literature review-i 19 Table 2.2: Percentage incapacity Item Injury Percentage of loss of earning capacity 1 Loss of two limbs 100 2 Loss of both hands or of all fingers and both thumbs 100 3 Loss of both feet 100 4 Total loss of sight, including the loss of sight to such extent as to 100 render the claimant unable to perform any work for which eyesight is essential 5 Total paralysis 100 6 Injuries resulting in being permanently bedridden 100 7 Any other injury causing permanent total incapacity 100 8 Loss of an arm at shoulder 75 9 Loss of an arm between elbow and shoulder 75 10 Loss of an arm at elbow 75 11 Loss of arm between wrist and elbow 70 12 Loss of a hand at wrist 70 13 Loss of 4 fingers and thumb of one hand 70 14 Loss of 4 fingers 60 15 Loss of thumb (a) both phalanges 30 (b) one phalanx 20 16 Loss of index finger (a) three phalanges 14 (b) two phalanges 11 (c) one phalanx 9 17 Loss of middle finger (a) three phalanges 12 (b) two phalanges 9 (c) one phalanx 7 18 Loss of ring finger (a) three phalanges 7 (b) two phalanges 6 (c) one phalanx 5 19 Loss of little finger (a) three phalanges 7 (b) two phalanges 6 (c) one phalanx 5 20 Loss of metacarpals (a) first or second (additional) 8 (b) third, fourth or fifth (additional) 3 21 Loss of leg (a) at or above knee 75 (b) below knee 65 22 Loss of foot 55 23 Loss of toes (a) all of one foot 20 (b) great, both phalanges 14 (c) great, one phalanx 3 (d) other than great, if more than one toe lost, each 3 24 Loss of sight of one eye 50 25 Loss of hearing, one ear 30 26 Total loss of hearing 60 Note: (1) Total permanent loss of the use of a member shall be treated as loss of that member. (2) Where there is a loss of two or more parts of the hand, the percentage shall not be more than the loss of the whole hand. (3) Loss of remaining arm, leg or eye if one has already been lost, shall be the difference between the compensation for the total incapacity, and compensation already paid or that which would have been paid for the previous loss of limb or eye. (Source: MOM, 2005)
Literature review-i 20 4. Dependents death benefits: When a worker dies in a work-related accident, a compensation is payable to the dependents of the deceased. Dependents here include the spouse, parent, grandparent, step-parent, child, grandchild, step-child, sibling and half-sibling, irrespective of whether or not that person is actually dependent on the worker's earnings. The amount payable for a fatal accident is given by average monthly earnings x multiplying factor subject to a maximum of S$111,000 and a minimum of S$37,000. The multiplying factor for fatal accidents is determined by the age of the deceased worker (on the next birthday at the time of the accident) as shown in Table 2.1(b). 5. Compensation for occupational diseases: If a worker contracts a disease that is related to that occupation or if a worker contracts that disease within 12 months or in the case of silicosis or asbestosis within 36 months, after ceasing to be so employed, and if an incapacity or the death of the worker results from that disease, a compensation shall be paid as if the disease were a personal injury by an accident arising from that employment. Table 2.3 describes the occupational diseases that are related to various nature of occupation in construction projects.
Literature review-i 21 Table 2.3: Occupational diseases No Occupational disease Nature of occupation 1 Asbestosis Any occupation involving exposure to asbestos dust. 2 Barotrauma Any occupation involving subjection to compressed air. 3 Cataract produced by exposure to the glare of, or rays from, molten glass or molten or red-hot metal Any process involving frequent or prolonged exposure to the glare of, or rays from, molten glass or molten or redhot metal. 4 Chrome ulceration Any process involving the use or handling of chromic acid, chromates or bi-chromates or any preparation or solution containing any of these substances. 5 Compressed air illness or its sequelae 6 Epitheliomatous cancer or ulceration of the skin Localised new growth of the skin, papillomatous or keratotic Ulceration of the corneal surface of the eye Any occupation involving subjection to compressed air. Any occupation involving the use or handling of, or exposure to tar, pitch, bitumen, mineral oil (including paraffin), soot or any compound, product, or residue of any of these substances. 7 Industrial dermatitis Any occupation or process involving the exposure to or contact with cutaneous irritants or sensitisers such as alkalis and acids, solvents, mineral oils, synthetic and natural resins, certain woods, formaldehyde, nickel salts, chromates and bichromates, mercury compounds, chlorinated naphthalenes, rubber accelerators, fibre-glass and other chemicals. 8 Repetitive strain disorder of the upper limb 9 Inflammation, ulceration or malignant disease of the skin or subcutaneous tissues or of the bones, or leukaemia, or anaemia of the aplastic type 10 Leptospirosis or its sequelae Any process or activity involving frequent or repeated movements of the upper limb. Any process involving exposure to x-rays, ionising particles, radium, or other radio-active substances or other forms of radiant energy Any occupation involving contact with a source or sources of leptospiral infections e.g. abattoir, drainage and sewerage work, refuse collection, road sweeping and work with animals. 11 Liver angiosarcoma Any occupation involving the use or handling of, or exposure to vinyl chloride monomer. 12 Mesothelioma Any occupation involving the use or handling of, or exposure to asbestos. 13 Noise-induced deafness Any occupation involving prolonged exposure to a high level of noise. 14 Occupational asthma Any occupation involving the use of or handling of or exposure to a chemical or other agent which may irritate or sensitise the respiratory system, e.g. isocyanates, rosin, formaldehyde, proteolytic enzymes.
Literature review-i 22 No Occupational disease Nature of occupation 15 Poisoning by: Any occupation or process involving: Arsenic The use or handling of, or exposure to the fumes, dust or vapour of arsenic or a compound of arsenic, or a substance containing arsenic or exposure to any solution containing arsenic or compound of arsenic; Benzene or a homologue The use or handling of, or exposure to the fumes of, or vapour containing benzene or any of its homologues; Cadmium The use or handling of, or exposure to the fumes, or dust of cadmium or its compounds; Carbamate The production, use or handling of carbamate; Carbon disulphide The use or handling of, or exposure to the fumes or vapour of, carbon disulphide or a compound of carbon disulphide, or a substance containing carbon disulphide; Carbon monoxide gas The exposure to carbon monoxide, e.g. where blast furnaces and internal combustion engines are used; Cyanide The use or handling of, or exposure to the fumes, dust or vapour of, cyanide or compound of cyanide, or a substance containing cyanide; Halogen derivatives of hydrocarbon The production, liberation or use of any halogen derivative of hydrocarbon compounds; compounds Hydrogen sulphide The exposure to hydrogen sulphide, e.g. in oil refining, sewerage work and manholes; Lead The use or handling of, or exposure to the fumes, dust or vapour of, lead or compound of lead, or a substance containing lead; Manganese The use or handling of manganese or substance containing manganese; Mercury The use or handling of, or exposure to the fumes, dust or vapour, mercury or a compound of mercury, or a substance containing mercury; Nitrous fumes The use or handling of nitric acid or exposure to nitrous fumes; Organophosphates The production, use or handling of organophosphates; Phosphorus The use or handling of, or exposure to the fumes, dust or vapour of, phosphorus or a compound of phosphorus, or a substance containing phosphorus. 16 Silicosis Any occupation involving exposure to silica dust, e.g., in granite quarries and foundries with sand moulds. 17 Toxic hepatitis Any process involving the use or handling of, or exposure to tetrachloroethane, nitro-derivatives or amino-derivatives of benzene, vinyl chloride monomer, or other poisonous substances. (Source: Adapted from MOM, 2005)
Literature review-i 23 2.3.2 Workers compensation insurance (WCI) Construction projects are highly vulnerable to accident risks, thereby exposing contractors to definite risks. The quantum of these risks is uncertain; i.e. one project can have one or many occupational accidents. According to Singapore s Workers Compensation Act, the compensation to an accident victim can be as high as S$147,000. If a project has many of such victims, the burden on the contractor will be unbearable. This situation may lead to that contractor s insolvency, resulting in injured workers being uncompensated. Workers compensation insurance is a technique of shifting or transferring these risks to a professional insurer. In consideration of a specific payment (the premium) by the contractor, the insurer contracts to indemnify the contractor up to the full extent for the occupational injuries that may occur at unpredictable timing, frequency and severity. It is a statutory requirement in most countries for all the construction contractors to obtain the WCI for all their workers to eliminate such financial burden in the event of any worksite injuries/fatalities. Failure to do so is an offence punishable with a fine of up to S$10,000, imprisonment up to 1 year or both in Singapore. In the insurance industry s perception, the WCI is an integral part of the business. It is the third largest insurance class in Singapore (GIA, 2006), having an overall portfolio of 9.9% net for the first quarter of year 2006 (MAS, 2006). 2.4 Premium-rating variables for construction WCI In insurance, unlike other industries including the construction industry, the cost of the production is unknown when the contract is sold, and it will not be known until the policy has expired. Therefore, the pricing for insurance must be based on predictions of losses, expenses and income in future. Under the WCI, the commitment
Literature review-i 24 of an insurer is extremely broad unlike other classes of insurance; there are no exclusions and there is no maximum limit on the insurer s liability (Vaughan and Vaughan, 1996). Setting an appropriate cost for some future contingency of unpredictable timing, frequency and size requires the estimates of future cash flows including claims, investment income, administrative expenses, profit and tax. In addition, the price can profoundly influence the volume of business attracted (Booth et al., 1999). Hence, WCI premium-rating is a critical management function for any insurer, which should decide premiums that are high enough to cover all the future costs, yet low enough to meet the market competition. The premium-rating is regarded as a two-stage process (Booth et al., 1999): 1. The costing exercise this is a scientific method that calculates the cost of future claims from the insured risks and all associated expenses. 2. The pricing exercise this is a commercial adjustment to technical costs that considers broader corporate and market factors. 2.4.1 Predicting future claims in construction WCI The scientific approach to determine the cost of future claims of a WCI policy entails an assessment of project and contractor related variables. Under the project-related variables, the following were identified by various authors: Worrall and Buttler (1988) noted that the following variables need to be accounted for predicting claims: 1. Wage roll; 2. Expected workers compensation benefit per wage roll unit; and 3. Project duration. The Canadian Wood Council (2005) observed that base rates are influenced by the following variables:
Literature review-i 25 1. Location of the project; 2. Type of construction; and 3. General industry experience on loss history for the projects of similar type and location. Lambrinoudakis et al. (2005) suggested that an insurance company must seek answers to the following questions in order to calculate the premium: 1. What is the financial loss that the insurer will incur as a result of every possible incident? 2. How secure is the site against potential risks? Lee and Halpin (2003) commented that the site safety condition at the time of insurance application should be assessed to predict potential claims. Lott (2005) added that the workers compensation cost is correlated with the workers risk management in organisations. Thus, an assessment of workers risk management programme will lead to an effective assessment of cost to be incurred. This assessment should include the following aspects: 1. Identification of workers risks by considering hazards in the workplace, population demographics and previous incident rates; 2. Implementation of pertinent risk/safety programmes; 3. Management commitment and employees participation in workers risk control; 4. Training of supervisors and workers; 5. Incident investigation methods.
Literature review-i 26 As for the contractor-related variables, Groth (1996) commented that WCI premium-rating must consider contractors claims history. Coble et al., (1998) noticed that the contractor s size has a bearing on premium rates. The Canadian Wood Council (2005) suggested that insurers must consider the following variables: 1. Contractors knowledge, experience and safety-consciousness; 2. Compliance with loss control and underwriting recommendations by the insurer; 3. Acceptance of a deductible, that is, a retention of part of the claims cost/accident cost by the contractor; 4. Potential future business; and 5. Placement of multiple policies with the same insurer (for example, contractors all risk policy and general liability policy) - this reduces the insurer s concern regarding overlapping of exposures and the insurer may offer a volume discount. 2.4.2 Determining the mark-up for construction WCI The adjustment of the technical costs of risks (expected claims) for commercial interests necessitates the consideration of insurers corporate and market factors. The variables pertinent to insurers were recognised by many authors in the literature, viz: Vaughan and Vaughan (1996) identified three variables that influence the markup: 1. The expenses of acquiring and administering the business (overhead costs); 2. The profit required by the insurer; and 3. The return from the investment of premiums by the insurer. Young (1997) quoted that WCI premium rates are adjusted on account of the following variables: 1. Profit/loss experience of the insurer in WCI business in the past; and 2. Outstanding claims to the insurer from all projects insured.
Literature review-i 27 Booth et al. (1999) reported that the corporate objectives of insurance companies will have a significant bearing on mark-ups. The objective of an insurer can be one or many of the following at a particular time: 1. Ensuring the survival of the company; 2. Achieving an adequate level of profitability or return on equity; 3. Achieving a minimum market share; 4. Achieving a target premium growth rate; 5. To reduce lapse rates, in particular, to retain the more profitable business; 6. To write a given premium volume; 7. Achieving an overall operating ratio across the whole portfolio; and 8. To obtain a broader spread of business (for example, by geographical area, policyholder type or industry mix). Phifer (1996) observed that reinsurance premiums that insurance companies pay for risk sharing with reinsurance companies do influence the pricing of insurers. As for the market factor, two variables are identified in the literature: (1) competition (Booth et al., 1999); and (2) volume of business in the market (Young 1997). 2.5 Risk control strategies of insurance companies in Singapore Health and motor insurance companies in Singapore adopt various strategies to control their risks whereby there are insights for reforming the construction WCI. 2.5.1 Health insurance Risks in health insurance are controlled by a co-payment scheme in Singapore. The co-payment is the portion of a covered expense (medical expenditures) that must be paid by the insured. The co-payment encourages the insured to be responsible in the
Literature review-i 28 use of healthcare benefits. Policyholders are encouraged to use healthcare services only when necessary. Example of a co-payment system in an insurance company in Singapore is described in Table 2.4. Policyholders are required to co-pay in a varying quantum depending on the use of medical services. Table 2.4: Health insurance co-payment scheme Medical service type Co-payment limit Primary care doctor S$5 Accident and emergency visit S$10 24-hour clinics S$10 Specialist S$15 Specialised investigation (e.g. CT scan) 10% of the bill Hospitalisation 10% of total hospital bill 2.5.2 Motor insurance (Source: NTUC income, 2006) Risks in motor insurance are controlled via two strategies in Singapore, viz: Excess; and Discounting system. The 'excess'is an amount of money that the policyholder is required to assume for any damage. i.e., if a policyholder s motor insurance excess is S$500, he/she will have to assume the first S$500 of any damage and will not be entitled to claim for an accident that results in damage valued at below this amount. The excess helps to keep insurers administration costs lower by reducing the number of small claims handled. A well-structured discounting scheme is in practice in motor insurance in Singapore to control insurers risks. Vehicle owners are entitled to three kinds of discounts as described below. No Claim Discount (NCD): If a vehicle owner is under a comprehensive motor policy for a continuous 12- month period and there is no claim made on the policy, the insured will be entitled
Literature review-i 29 to a No Claim Discount (NCD) on renewal of the policy. The percentage of the NCD increases with the number of claims-free years. The insured will lose the NCD entitlement if he/she makes a claim. Loyalty rebate: A rebate of 5% is entitled to a given insured if he/she has been insured with the same insurance company for 3 consecutive years. Incentive for clean driving records: If a vehicle owner has not been fined during previous years, the traffic police will issue a commendation letter with zero demerit points. Insurers incentivise vehicle owners for clean driving records. Nonetheless, the application of risk control techniques in the context of the construction WCI is not established in Singapore due to the unique nature of the construction WCI from the rest of the insurance classes. Hence, the construction WCI is still in a need of a well-structured risk control scheme in Singapore. The concept of NCD may be adapted for a potential risk control system in the WCI. 2.6 Summary Providing adequate WCIs is mandatory for contractors in most countries for employing workers. It is enforced to safeguard the interests of occupational injury victims and to eliminate contractors financial burden of compensating that stem from the Workers Compensation Act. The construction industry has been benefiting significantly from the WCI because the construction industry has a poor safety performance globally. In the interest of the insurers, adequate premiums for construction projects need to be quoted to reasonably cover all the future risks. This entails extensive studies of potential accident risks in construction projects as well as insurers internal strengths and market conditions, as illustrated in Figure 2.1.
Literature review-i 30 Project factors Wage roll Project duration Project hazard level Safety management system on site Contractor factors Claims history Placement of multiple policies Expectation of potential business Cooperation by the contractor Contractor s size Multi-criteria decision making Insurer factors Corporate objectives Investment return rate Amount of outstanding claims Profit/loss experience Overhead cost Reinsurance cost Optimal premium-rate Market factors Level of competition Volume of business in the market Figure 2.1: Premium-rating variables for construction WCI Nevertheless, construction projects are large in size, complex, exposed to external environment, inherited by longer durations and lesser productivity as well as involving many sub-contractors in one project. Therefore, the assessment of project hazards and safety for premium-rating becomes complex. Effective hazard and safety assessment methodologies need to be incorporated into the premium-rating model for deriving realistic premiums. The next chapter explores project hazards and safety assessment methodologies for construction projects in detail.