Speech by Gary Johns, Senior Fellow, Institute of Public Affairs, (Associate Commissioner, Productivity Commission , National Workers Compensation & Inquiry), Melbourne 18 March 2005.
I have to admit that the government’s response to the Productivity
Commission’s 2004 Report on workers’ compensation was less than
enthusiastic. The government judged that small business was wary of the supposed
adverse impact of big business leaving state premium pools. Consequently, the
government did not support the key elements of the Commission’s proposed
national framework models. Instead, it stuck to the script of ‘national
consistency in workers’ compensation and arrangements’. It has
proceeded to work towards a new tripartite body, the Australian Safety and
Compensation Council, whose role is to ‘develop policy advice on
workers’ compensation and programs for the Workplace Relations
Ministers’ Council’. The government hopes to introduce legislation
for the Council by the middle of this year.
The 2004 Inquiry arose because Cabinet was reluctant to support the
Minister’s desire to allow eligible companies to join the Commonwealth
scheme. In this regard, the Report has served its purpose because Optus has
subsequently made a successful application and Toll has the Minister’s
approval to proceed with an application. The Victorian WorkCover Authority
failure to stop the process in the courts makes it more likely that others will
follow.
The Commissioners were conscious of the government’s interest in the
impact of its report on small business, but there was nothing that the
Commission heard in evidence to suggest any impact of the schemes on small
business. The Report was not designed to find a ‘magic solution’ to
the costs and regulation faced by any employer. It did find that multi-state
employers could be relieved of some of the burdens of compliance with multiple
schemes by signing up to one. Whether they would do so was, in the view of the
commissioners, a matter for their commercial judgment.
Of greater interest to the trade union movement is the Commission’s
views on the benefits to injured workers and the processes for dispute
resolution. Broadly, the Commission recommended that national uniformity in
OH&S regulation should be established as a matter of priority. In essence,
all jurisdictions agree with the fundamental principle of ‘duty of
care’. There are no compelling arguments against a single national regime,
and there are significant benefits from a national approach, particularly for
multi-state employers and for the increasingly mobile workforce.
For workers’ compensation, each scheme reflects community norms,
evolving workplace arrangements and the legal and medical practices of that
particular jurisdiction. It is not apparent that there is any single perfect or
best scheme. Best practice can be reflected in a number of different ways.
Innovation and learning should be encouraged, with the consequent reforms
benefiting workers and employers. However, this leads to compliance and cost
issues for multi-state employers that should, and can, be addressed. The
solution is the progressive expansion of a scheme offering alternative national
coverage, which would operate alongside those of the individual jurisdictions.
In addition, all jurisdictions should collectively pursue improvements to
workers’ compensation by establishing a formal review mechanism similar to
that already in place for OH&S. This should lead to an increasing level of
national consistency (and perhaps for some scheme elements, national uniformity)
over time.
Existing national coordinating mechanisms have proven ineffective in
resolving the compliance complexities and costs for multi-state employers. Over
the last five years, Heads of Workers’ Compensation Authorities primary
output has been the provision of comparative information about the schemes. The
Workplace Relations Ministers’ Council, whilst also generating comparative
performance monitoring information, has been primarily concerned with industrial
relations matters.
National Framework Proposals
Recent announcements by the Prime Minister and the Minister for Workplace
Relations about a national industrial relations system may ensure that the
Productivity Commission recommendations make a return. That being so, here is
what the Commission recommended.
There are four models of national frameworks for workers’ compensation
arrangements. The first three are to be introduced consecutively and the fourth
to be implemented independently.
a. The Australian Government offers to license employers who qualify under
the current competition test to self-insure under the Comcare scheme.
b. The Australian Government establishes, for all corporate employers, an
alternative national scheme of workers’ compensation self-insurance
to operate in parallel to existing State or Territory schemes.
c. The Australian Government considers, later, an alternative
national premium-paying insurance scheme for all corporate employers
who wish to join, to operate in parallel to existing schemes. It would be
privately underwritten.
d. The Australian Government, States and Territories establish a national
workers’ compensation body that would develop nationally consistent
scheme elements for adoption by individual jurisdictions.
The Commission has no evidence of support by the States and Territories for a
single uniform national workers’ compensation scheme. Many of the
stakeholders at the individual jurisdiction level – unions and employers
alike – have suggested that concessions won in hard fought negotiations would
not be willingly surrendered for the sake of national uniformity.
Importantly, the Commission does not support national uniformity of
workers’ compensation for its own sake. In arriving at this view, the
Commission recognizes that the vast majority of employers (who are predominantly
small to medium enterprises) and their employees operate only within a single
jurisdiction. To them, national uniformity has little relevance.
A National Scheme To Operate In Conjunction With
Existing Schemes
Step 1: Actively encourage self-insurance applications
under Comcare (model A)
Currently, the Australian Government’s Safety Rehabilitation and
Compensation Act 1988, which establishes the Comcare scheme, enables private
employers to apply for a licence to self-insure. The Minister has discretionary
power to declare as ‘eligible’, employers who are ‘carrying on
a business in competition with a Commonwealth authority or with another
corporation that was previously a Commonwealth authority’. This test could
potentially apply to the banking, telecommunications, air transport, defence,
broadcasting and postal sectors. The granting of a licence is then subject to
approval by the Safety Rehabilitation and Compensation Commission (SRCC) under
certain prudential and other criteria.
Four public policy principles that guide the Minister in exercising
discretion are the impacts of the grant of a licence on: employees; the
employer; the integrity of the Comcare scheme; and the operations of State and
Territory schemes.
Employees would become eligible for benefits as provided under Comcare.
Employers will self-select, but will need to comply with the rigorous prudential
and other requirements.
Of direct concern to the Australian Government is the risk to itself
associated with granting a self-insurance licence to a company which is
subsequently declared bankrupt or is otherwise unable to meet its workers’
compensation liabilities. Based on advice sought by the Commission, the
Australian Government Actuary proposed specific prudential requirements that
would reduce the residual risk to the Government.
The Commission proposes that the cost of any residual risk be internalised to
self-insurers by a post-event levy, as has been recommended for insurance by the
HIH Royal Commission.
The Commission has also proposed that the existing regulatory framework
provided by the SRC Act be modified and developed progressively to support the
expansion of national insurance under this and the subsequent steps, with the
SRCC being developed as a stand-alone regulator.
Actuarial advice to the Commission is that the impact on the State and
Territory schemes is unlikely to be significant. Many of the employers eligible
for self-insurance under the proposed national scheme are likely to be
self-insured under existing State and Territory arrangements and are thus
already outside the premium pools in those jurisdictions. However, the national
scheme would extend to some employers who currently pay into some premium pools
for various reasons, such as not meeting minimum employee criteria for
self-insurance of particular jurisdictions. Queensland’s threshold of 2000
local employees is a case in point.
Some participants expressed strong concern that small businesses, in
particular, could be disadvantaged by the loss of premiums from their risk pools
by large firms self-insuring. The concerns related to the effects that the loss
of premiums could have on the viability of some risk pools and on the ability to
provide cross-subsidies from within a scheme. There could be some changes in
premiums for those remaining if risk pools were to be reformulated, but, of
itself, this would be unlikely to systematically increase (or decrease)
premiums.
In privately underwritten schemes, the nature and extent of any existing
cross-subsidies is likely to be limited by commercial considerations and
competition between licensed insurers. Accordingly, the loss of premiums from
large employers would have little, if any, effect on the premiums of those
remaining. For publicly underwritten schemes, and notwithstanding policies to
minimize the extent of cross-subsidies, actuarial advice was that any increase
in average premiums on remaining employers would be very small, even if those
employers who were to exit were providing quite large cross-subsidies.
Without further legislation, private employers self-insured under the Comcare
scheme would continue to operate under State and Territory arrangements. The
Australian Government Solicitor has advised that the Australian Government,
drawing on its constitutional heads of power, could enact legislation that
enabled all employers self-insured under the Comcare scheme to elect to be
covered by Australian Government legislation.
Step 2: Establish an alternative national
self-insurance scheme (model B)
The Australian Government could also commence, at the same time, the drafting
of legislation to establish an alternative national self-insurance scheme
(administered by the SRCC) for all employers who so wish and who meet certain
prudential and other requirements. The Australian Government Solicitor has
advised the Commission that this could be covered under the Commonwealth’s
corporations’ power under the Constitution.
In terms of scheme design, the Australian Government could offer the current
Comcare arrangements, or redesign particular elements of the scheme, such as the
current long-tail benefit structure and the dispute resolution procedures.
Actuarial advice, as noted earlier, is that this step is also likely to have
little impact on existing schemes, as the relevant employers are predominantly
self-insurers. The initiative may pick up the smaller premium paying State or
Territory offices of some firms.
Again, as with step 1, employers opting into this scheme could be
covered by Australian Government OH&S legislation.
Step 3: Establish an alternative national
premium-paying insurance scheme (model C)
Following consideration of the success achieved under steps 1 and 2, and the
outcome of cooperative institutional reform (model D), the Australian
Government could extend its alternative national scheme to be available to all
corporate employers, involving both self-insurance and premium-paying insurance.
As with the previous step, it would require the exercise of the
Commonwealth’s constitutional powers and the passage of new legislation.
In the Commission’s view, private underwriting of this expanded scheme
would be desirable. Although research into the relative merits of public and
private underwriting suggests that sound management can be more important than
the form of underwriting, the characteristics of private underwriting are
nevertheless attractive. These include: the capital risk being accepted by the
capital markets; competition in the marketplace, with incentives for efficiency
and innovation; and greater transparency of any governmental influence over
premiums.
Employers covered by the national insurance scheme would also be eligible for
coverage by Australian Government legislation.
The opening up of an alternative national insurance scheme to all corporate
employers could have potentially significant impacts on existing State and
Territory schemes, if there was widespread uptake. Those public schemes with
large unfunded liabilities may need to impose appropriate ‘exit’
arrangements. Some of the smaller schemes may ultimately become unviable on a
stand-alone basis if a significant number of employers switch to the national
scheme.
Nevertheless, the operation of a number of private underwriters in small
jurisdictions such as Tasmania, the Northern Territory, and the Australian
Capital Territory attests to the capacity of insurers to operate with small
premium pools for any one class of insurance. Further, if introduced in the
staged form recommended, then it is unlikely that the changes would occur at a
pace that precluded the steady rationalization of existing arrangements.
National Cooperative Institutional Reform (Model D)
Independent of and in parallel to the Australian Government’s own
initiatives as set out above, the Commission is proposing that the States and
Territories join with the Australian Government to strengthen and upgrade the
national institutional infrastructure relating to workers’ compensation.
This model centres on formalising cooperation between the jurisdictions. I
presume this is what the Minister has in mind with establishment of the
Australian Safety and Compensation Council.
Self-Insurance
One area where trade unions have expressed some disquiet
is self-insurance. The inquiry was asked to identify and report on a regulatory
framework that would allow suitably qualified employers to obtain national
self-insurance coverage that is recognized by all schemes.
To self-insure, employers must meet certain requirements. Although
jurisdictions vary, their self-insurance requirements cover the following four
broad areas:
of employees in that jurisdiction.
A number of participants (particularly employers and self-insurance
associations) have expressed concerns about particular aspects of these
legislative requirements, as well as the extent of inconsistency across
jurisdictions. Many supported the incorporation of self-insurance into a
national framework.
Prudential Requirements
As self-insurance provides for the risk of workplace fatality, injury and
illness to be paid for by employers on a pay-as-you-go basis, there are
legitimate concerns about their ability to meet all claims costs in all
circumstances in the future.
A number of participants raised concerns that the prudential requirements
were insufficient to reduce the risk that self-insurers would bring to a scheme.
The most probable risk is that the company self-insuring collapses and the bank
guarantee is not sufficient to cover all the claims liability.
Instruments To Deal With Residual Risks
If the bank guarantee and reinsurance policy were insufficient to cover the
claims liability of a collapsed self-insurer, then, in the absence of other
prudential arrangements, injured workers would bear the burden of not having
their claims met. To avoid this, all the State and Territory schemes explicitly
guarantee to pay claims arising from a collapsed self-insurer. Although the
Australian Government does not explicitly provide such a guarantee, it is very
likely that there would be pressure for it to take responsibility if such an
event occurred.
The available Australian and international evidence suggests that the
probability of the Australian Government being exposed to the claims liability
of a self-insurer under the Comcare scheme is relatively low. The most likely
exposure would first require a self-insurer to collapse and then for the bank
guarantee to be insufficient. Although such a combination of events is unlikely,
it is important to recognize that it is still possible.
The Australian Government Actuary noted several reasons why a bank guarantee
may be insufficient, including that the self-insurer experiences an increased
number of claims and that there are claims which are unforeseen. There is some
evidence of bank guarantee insufficiency, as this occurred in the cases of both
of the Australian self-insurers that collapsed.
Given that there are residual risks, the Commission considered it prudent for
the Australian Government to consider additional risk management instruments. It
is recognized that such instruments involve a transfer of risk from the
Australian Government to the remaining self-insurers, at their cost, and that
the efficacy and efficiency of the transfers are important considerations. The
Commission considered three instruments – scheme reinsurance, a security fund,
and a post-event levy.
As time is short, suffice to say that the first two were not considered
useful instruments, but the post-event levy was.
Post-Event Levy
The cost of financing any liabilities arising from the failure of a
self-insurer and their guarantees/reinsurance can be recouped by way of a levy
on the remaining self-insurers. There is increased certainty as to the amount of
funds required and the administration cost can be relatively low.
While it would add a cost to the remaining self-insurers, it internalizes the
cost of self-insurance failure to self-insurers as a category. If the prudential
arrangements operate as intended, the costs are likely to be small and imposed
infrequently. The internalization of the costs would act to ensure individual
and mutual support for prudential regulation among self-insurers.
The post-event levy does not require the ongoing administration of a pool of funds or the continual purchase of insurance scheme reinsurance. The administrative costs that would be incurred, however, would arise from the scheme administrator being empowered to accept and pursue recovery of the self-insured’s scheme liability. The funding could be dealt with in a variety of ways, such as by a Government loan or guarantee of loans (as occurred for Ansett employee entitlements).
In the Commission’s view, a post-event levy is the most suitable
approach.
Claims Management Requirements
The jurisdictions require self-insurers to have appropriate procedures for
managing workers’ compensation claims. Most jurisdictions allow for
self-insurers to engage third parties to manage the claims. However, in
Queensland, only local governments are allowed to contract out their claims
management processes.
Self-insurers are required to demonstrate that they employ suitable staff and
engage service providers approved by the scheme. This is to ensure that
employees of self-insuring employers have their claims managed in a professional
manner in accordance with scheme benefit structures. The differing requirements
generate compliance problems and costs for multi-state employers.
Most jurisdictions require self-insurers to have claims managers located in
that jurisdiction. A number of self-insurers noted that this prevents them from
operating a national claims management centre, which would reduce claims
management costs.
Multi-state self-insurers are required to have detailed knowledge of up to
eight different claims management processes and benefit structures, with the
associated information technology costs.
The employer may also need a different claims manager in each jurisdiction
(and perform its own claims management in Queensland). Telstra notes that
‘there is a shortfall of national claims managers who are accredited in
each State/Territory jurisdiction. As a result, a national company would be
required to have different claims managers in various States’.
Some Union participants raised concerns about the claims management practices
of self-insured employers. In part, this is seen as being a consequence of the
strong incentive self-insured employers face to minimize the occurrence of
workplace injury, fatality, and illness and the subsequent cost of any
accidents. Whilst the Commission has received other anecdotal evidence of
self-insured employers inappropriately managing claims, there is no evidence of
systematic failure. Robust administration of claims management practices,
however, remains important.
Performance Requirements
Regulations apply to all employers, irrespective of whether or not they
self-insure. However, most jurisdictions place an added requirement on
self-insurers to demonstrate, through an audit, that they have appropriate
OH&S management systems to prevent work-related injury and illness. These
systems and audit processes differ between the schemes. They constitute an added
cost for multi-state employers.
Expressing concerns about their appropriateness, CSR argued that the
additional OH&S requirements are inefficient because they do not target
employers with the greatest risk of work-related fatality, injury, and illness
(which is somewhat independent of whether they are self-insuring or paying
premiums).
The National Council of Self Insurers argued that OH&S management systems
should be determined on the risks of an organization, rather than general
OH&S management systems applied to all employers.
For multi-state employers, the problem of additional OH&S requirements is
exacerbated with the additional expense of multiple audits and the differences
between audit requirements. This makes it difficult and costly for multi-state
employers to develop uniform OH&S management systems.
For example, Woolworths has different OH&S management systems in each
state because of the difficultly of developing a single OH&S management
process that meets the different requirements. Woolworths estimates they could
save approximately $400 000 per annum if they could have a single national
OH&S management system.
The Commission does not support OH&S requirements for self-insurers that
are additional to those applying to other employers.
The Minimum Employee Requirement
In order to self-insure in some jurisdictions, employers are required to have
a minimum number of employees in that jurisdiction. Where such a requirement is
not specified, the number of employees of a self-insurance applicant may be
taken into account when assessing eligibility for a licence.
Justifications for a minimum employee requirement include: that it helps
gauge the financial strength of the employer; that a minimum number of employees
is required for self-insurance to be cost effective; and that the quality of
claims management will not be assured in firms with small numbers of
employees.
A central concern with the requirement is that, if it is set too high, it can
restrict otherwise eligible employers from obtaining the benefits of
self-insurance. Employers who can obtain a self-insurance licence in one
jurisdiction may not be able to obtain a licence in another jurisdiction because
they do not meet the minimum employee requirement in that particular
jurisdiction.
The justifications for a minimum employee requirement are not strong given
that there is no direct link between the number of employees and the financial
strength of an employer.
Whilst a minimum number of employees may act as a guide for the scheme to
assess the appropriateness of self-insurance for an organisation, on balance,
the Commission concludes that setting a minimum number of employees as a
requirement to self-insure is a poor proxy for the more fundamental requirements
of effective prudential standards and claims management processes.
If prudential regulations focus on the ability of the employer to meet all
future claims and manage them effectively, then the individual employer, not the
regulator, should decide whether it is cost effective to self-insure.
Other Requirements
There is a range of other self-insurance licensing requirements that,
although they may not be individually significant, can have a collective
impact.
Self-insurers are required to pay an application fee and ongoing levies for
each licence. These fees and charges include the recovery of self-insurance
administration costs and contributions to OH&S functions. For employers
self-insuring in more than one state, there may be unnecessary replication in
the payment of some components of these fees. There is also concern from
self-insurers that the fees and levies are not based on the administration cost
they bring to the scheme. As an example, the contribution fees Pacific National
pays to the New South Wales and Comcare schemes are ‘very different’
despite there being almost the same number of employees covered by each
licence.
Self-insurers are required to supply data to the regulator on an ongoing
basis. Whilst the collection of data is appropriate, self-insurers feel that the
schemes do not adequately use the data that is collected.
The collection of data imposes costs on multi-state self-insurers because
each scheme requires a different data set and software to supply the data, thus
preventing self-insurers from operating an integrated computer system to satisfy
the various scheme requirements. BHP stated that each State system costs
$50 000 to purchase and is required to be tailored to each scheme’s
definitions, which themselves vary.
Conclusion
The Commission had sought to provide a solution to the inconsistencies and costs faced by multi-state employers and their workforce. It noted that there is no one perfect scheme. It was impressed at the ability of each scheme to learn from its interstate colleagues. Note, I do not use the term competitors. In as much as companies who operate within the state have no choice, the state schemes do not compete. Those who operate across states do not have a choice either, but under a nationally available scheme they could be relieved of the burdens of multiple compliance.
The argument that this will lead to yet another scheme is hollow. A
multi-state employer will face one set of rules, as will a single state
employer. A worker who moves from firm to firm may face different rules, and in
this regard, it is essential to move to the same OH&S regimes.
I have observed this ‘dance of the national scheme’ for some time
now. My bet is that when sufficient multi-state employers sign up to Comcare,
pressure will come to bear on the government to think about the scheme
attributes for the new constituents. Eventually the scheme will change to suit
more multi-state employers and employees and a truly national scheme for
self-insurers will emerge. I have my doubts as to whether a premium based
national scheme will emerge, but almost certainly, workers’ compensation
for self-insurers will become a creature of federal politics. I look forward to
watching the action.
