Retro-Paid Loss Premiums

WorkCover NSW has introduced a Retro-Paid Loss premium model for large employers (sometimes called a “burning cost” model) with South Australia, and other states, reportedly looking to follow suit. The retro-paid loss methodology provides large employees with an alternative to traditional Scheme insurance or self insurance.

The key features of the NSW premium model are:

Premiums are tied to actual claims experience over a five year period.

A loading is added to the incurred claims to cover scheme costs. Don’t be fooled by a lower deposit premium. The deposit premium is a percentage of the tariff

premium, which may give the impression of a lower total premium. However, adjustment premiums in later years are more likely under a Retro-Paid Loss, increasing the final premium paid.

Total premiums will be more volatile because they are based on a single year’s claims rather than an average of the last three years. A single “bad” year will mean a higher premium, similarly a “good” year will mean a lower premium.

March 2011

March 2011

It is our experience from costing this arrangement for a number of employers, that the benefit, or otherwise, of a Retro-Paid Loss premium will vary significantly from employer to employer. It is important to look at a number of years of your historical experience to get a complete picture of how your retro premium might look. In NSW, it will take at least five years of a Retro-Paid Loss before a “true” premium comparison is possible.

This article demonstrates the more technical aspects of how a Retro-Paid Loss model works in practice. In a follow up article, we will investigate how premiums under a Retro-Paid model compare to the premium under the Scheme and to the cost of self-insurance.

How it works

Unlike regular experience-based premiums, the premium payable under the Retro-Paid Loss model is not related to the size of the employer (unless minimum or maximum premiums are payable) nor to their relativity to their own industry’s experience. Under this methodology an employer’s premium is equal to their claims cost for the period plus a loading for development of claim costs plus expenses. Large claims are capped at the discretion of the employer – the choice impacting the claim cost loading. Maximum and minimum premium rates provide some security for the employer against higher than expected frequency of claims, cost of claims or multiple large claims in a single year.

One of the key requirements is that an employer has no undue volatility in claims history and is able to demonstrate a satisfactory history of OH&S and workers’ compensation compliance. Organisations are also required to commit to a Retro-Paid Loss premium arrangement for a minimum of three policy years. The details of the NSW retro-paid loss methodology are available at: http://www.workcover.nsw.gov.au/formspublications/publications/Documents/retro_paid_loss_premium_model_participation_guidelines_2716.pdf

The timing of premium payments is summarised in the following diagram:

March 2011

An Example

The following is an example of how a Retro-Paid Loss policy works in practice under the NSW scheme (ignoring the impact of Dust Disease and other levies). Note that in the following example:

The Policy Year and wages are for the period 1 July 2011 to 30 June 2012.

The Reported Claims Cost is determined in much the same way as for the existing experience

premium calculation. Large claims are capped at an agreed level ($350,000 or $500,000 in NSW)

and journey and recess claims are excluded.

The Adjusted Premium is calculated as the Reported Claims Cost times the Adjustment Factor

(specified by WorkCover NSW).

The Adjustment Premium Paid is equal to the Adjusted Premium less the total premium paid up to the

adjustment date.

Retro-Paid Loss Premium Commences

Deposit Premium Paid

Year 1

1st adjustment premium/refundDeposit premium for second policy year paid

Year 2

2nd adjustment premium/refund1st adjustment premium/refund for second policy year paidDeposit premium for third policy year paid

Year 3

3rd adjustment premium/refund2nd adjustment premium/refund for second policy year paid1st adjustment premium/refund for third policy yearDeposit premium for fourth policy year

Year 5

Final adjustment premium/refund4th adjustment premium/refund for second policy year3rd adjustment premium/refund for third policy year2nd adjustment premium/refund for fourth policy yearDeposit premium for the 6th policy year paid

March 2011

Under this example the employer pays an initial deposit premium at the commencement of the insurance premium of $500,000. At the first adjustment date (15 months after the policy inception) an adjustment premium of $49,000 is paid.

Additional adjustment premiums are paid at each adjustment date until a total premium of $1,610,000 has been paid over the five year period.

The premium under the Retro-Paid Loss premium model of $1.6 million; more than three times the initial deposit premium and compares to claims cost for the policy year of $920,000.

Policy YearWagesInitial Deposit Premium

1/07/11 - 30/06/12$25,000,000

$500,000

Claims cost at 15 monthsAdjustment FactorAdjusted Premium

Adjustment Premium

180,000305%

549,000

49,000

Adjustment Premium - Year 1

Claims cost at 24 monthsAdjustment FactorAdjusted Premium

Adjustment Premium

367,500210%

771,750

222,750

Adjustment Premium - Year 2

Claims cost at 36 monthsAdjustment FactorAdjusted Premium

Adjustment Premium

740,000180%

1,332,000

560,250

Adjustment Premium - Year 3

Claims cost at 48 monthsAdjustment FactorAdjusted Premium

Adjustment Premium

845,000175%

1,478,750

146,750

Adjustment Premium - Year 4

Claims cost at 60 monthsAdjustment FactorPremium

Final Adjustment

Total Premium Paid

920,000175%

1,610,000

131,2501,610,000

Final Adjustment Premium - Year 5

March 2011

Advantages of Retro-Paid Loss

Premiums more closely reflect the actual claims costs (plus a share of expenses) during the policy year.

Good claims experience impacts actual premiums immediately rather than taking three years to work through the premium formula. Conversely, a “bad year” only affects that year’s premium rather than three year’s worth of premiums.

There is an opportunity for employers to pay lower premiums through more direct rewarding of their good claims experience. Savings do depend on actual claims experience and vary from employer to employer. Each employer should consider their own circumstances before deciding to enter the Retro-Paid Loss premium model.

There is less cross-subsidisation of premiums between large and small employers (although Adjustment Factors may still contain a level of cross-subsidy).

Disadvantages

Premiums can be volatile from year to year. The example above shows that adjustment premiums can vary significantly from one year to the next depending on the actual claims experience during the year.

The final premium paid is unknown until the end of the run-off period which makes the actual cost more uncertain. Traditional insurance premiums are known with certainty sooner (albeit not until the experience adjustment premium is paid at the end of the one year policy period).

The retro-paid loss premium model spreads the premium over the five year retro period. This may give a (misleading) impression that premiums have reduced in the initial few years. A “true” premium comparison will not be meaningful until the end of the first five year retro period when a deposit premium and five years of adjustment premiums will be paid in the same year (see earlier diagram).

There are additional costs to be incurred, such as bank guarantees.

Final Word

You should consider your own experience prior to deciding whether a retro-paid loss premium is right for your organisation. Premiums can vary considerably from year to year. It is important to look at a number of years experience to get a complete understanding of the final premium payable. In the above example the premium payable in year 1 was only $500,000 but this grew to $1.6 million over the five year term of the retro-paid loss policy (all relating to 2011/12 only!).

In our next newsletter we will show the Retro-paid loss premium for a variety of portfolios to show what type of experience is rewarded by this option and what type is not.

March 2011

Outlook for Scheme Premiums

At the recent National Council of Self Insurers Conference we gave a presentation titled “Self Insurers: Are you doing the right thing?”. The presentation provides a high level comparison of the claims experience for self insurers v insured employers.

View the presentation: http://www.finity.com.au/our_publications.php?category=25&subcategory=68

The presentation also included an outlook for Scheme premiums as they are a key component in the decision whether or not to self insure. An update on our outlook based on i) the funding ratio of each Scheme ii) recent premium changes, and iii) recent Scheme changes is set out in the following table.

Recent and possible future trends

The following table summarises recent Scheme performance together with our thoughts on possible future trends in premium rates.

State Funding Position Premium Rate Frequency

NSW 2009/10 funding ratio remains below 90% for the second year in a row

Continued premium rate decreases since Nov 2005

Claim frequency reduced in 2009/10

Victoria Funding ratio back above 100% at June 2010 after deficit post GFC

Premium rates stable in 2009/10, decreased for 2010/11 (1.39% of wages to 1.34%)

Lowest injury rate on record - 10.6 claims per 1000 workers

Queensland $1.3 billion deficit past 2 years. Funding ratio has fallen in recent years from 183% in 2006/07 to 114% in 2009/10

Premium rates increased in 2010/11 - first increase in 13 years (1.15% of wages to 1.30%)

Reported statutory claim frequency in 2009/10 is the lowest level since 2005/06. Common Law claim frequency increasing

SA Long term deficit, though funding position improved to 66% as at December 2010

Rates decreased in 2010/11 for the first time in 7 years (3.0% of wages to 2.75%)

Claim frequency reduced slightly in 2009/10

WA-

Gazetted 2010/11 rates decreased by 14% to 1.497% of wages

Claim frequency reduced significantly in 2008/09

Tasmania-

Suggested rates increased by 2% in 2009/10

Claim frequency declined by 6% in 2009/10

Comcare Funding ratio reduced in 2009/10. Small surplus

Continued premium rate decreases since 2005/06

Scheme incidence rates reduced by 36% in period 2005/06 to 2009/10

March 2011

The table continued...

State Return to Work Scheme changes Possible future premium trends

NSW RTW rate of 85% in line with national average

Some change to death benefits - minimal impact

Pressure to increase premiums to improve funding ratio?

Victoria RTW rate of 85% in line with national average

Legislative changes introduced in 2010 - increased weekly benefits, lump sum and death benefits

Recent benefit changes potentially limits scope for major rate reductions in the near future

Queensland RTW stable, and slightly higher than national average

Reforms aimed at controlling common law costs became effective 1 July 2010

Reforms implemented - premium rates to remain stable?

SA RTW rate declined slightly in 2009/10 and sits below the national average

Final phase of legislative reforms complete by 30 June 2010. Redemptions phased out

Pressure to maintain rates given long term funding deficit?

WA WorkCover WA to survey RTW outcomes in 10/11

Drafting of amendments underway - minimal impact expected

Reductions in rates to reflect improving frequency/wage trends

Tasmania Better than average RTW rates

Legislative changes effective 1 July 2010 - expected to increase claim costs by around 15%

Premium rates could increase depending on to what extent insurers factor in legislative changes

Comcare RTW rates significantly above national average

Some future changes flagged - minimal impact expected

Remain stable, as long as surplus maintained

March 2011

State Update

Comcare

Moratorium continues

The moratorium on private sector companies joining the Comcare scheme as self insurers is expected to

remain until 2012, when uniform work, health and safety laws will be in effect.

Legislative changes

Following a review of the Comcare scheme in 2009/10, and subject to the passage of legislation,

Comcare intend to implement the following changes:

introduction of statutory time limits for claims determinations

reinstatement of coverage during off-site recess breaks

continued payment of medical and related costs where weekly benefits have been suspended for

refusal to participate in the rehabilitation process.

NSW

Recent developments in the NSW Workers compensation scheme include:

Removal of apprentice wages from the calculation of premiums

Increase in the lump sum death benefit to $449,850 on 1 April 2010, and broadening of the

circumstances in which the benefit is payable

Increase to the lump sum asbestos death benefit paid to dependants from $245,700 to $311,050

(via three annual increases)

Automatic coverage for employers who pay annual wages of $7,500 or less.

March 2011

Victoria

Legislative Reform

In response to the Hanks Review, a package of legislative changes was introduced in 2010, including:

provision of superannuation for eligible injured workers

increased weekly benefit payments

increased lump sum benefits for spinal impairment

increased death benefits

enhanced return to work obligations for employers

clarification on the eligibility requirements for stress claims.

Common Law and Legal Costs

WorkSafe implemented a range of strategies designed to control their legal costs, and have begun

a process aimed at curbing continued above inflation growth in plaintiff legal costs also. Measures

include a focus on encouraging earlier settlements, and amendments to legislation to enable a more

predictable model for plaintiff lawyer remuneration.

Queensland

Scheme financials

Queensland WorkCover reported a 2009/10 loss of $259 million, which follows a loss of $567 million

in 2008/09. The scheme’s funding ratio for 2009/10 was 114%, down from 127% in 2008/09.

Premium rates

Premium rates in Queensland increased from $1.15 to $1.30 per $100 wages for 2010/11, the

first rate increase in 13 years. Queensland still maintains the lowest average premium rate of any

Australian state scheme.

Common Law and Legislative Reform

Common law lodgements have increased significantly in recent years, and this continued with an 18%

increase in 2009/10. Just over a third of these lodgements related to strain or sprain injuries, while

psychiatric and psychological claims represent 5% of common law lodgements (which compares to only

3.7% for statutory claims). The majority of common law lodgements (77%) were from claimants with a

Work Related Impairment (WRI) less than 20%.

March 2011

As a consequence of the recent common law experience, in 2009/10 the overall cost of common

law claims increased by 40%. This experience prompted the Queensland Government to announce a

number of reforms to the Queensland workers’ compensation scheme effective 1 July 2010, including:

harmonisation of the workers compensation common law arrangements with the Civil Liability Act

2003, including the strengthening of liability provisions and capping of certain damages (i.e. pain

and suffering capped at $300,000, economic loss payments at three times Queensland’s ordinary

time earnings and use of the ISV scale to determine general damages)

increased onus of proof on workers to demonstrate employer fault

allowing for costs against plaintiffs whose cases are dismissed

increasing the employer excess from 65% to 100% of the Queensland ordinary time earnings or one

week’s compensation.

South Australia

Scheme financials

SA WorkCover achieved a profit of $77 million in 2009/10 – the first full year profit in the past 10

years. The scheme’s unfunded liability fell to $982 million, and scheme funding at 30 June 2010

was 61.5%, up from 56.7% in 2009. The average levy rate for 2010/11 decreased to 2.75% of

remuneration.

Bonus Penalty Removal

During 2010, WorkCover commenced consultation with employers on a new employer payment

system for the scheme. Options being considered include a system which reflects the employer’s size

and experience. Also being considered is a ‘retro-paid loss’ model for employers paying more than

$500,000 in levy.

The bonus-penalty scheme was removed from 1 July 2010, with all employers now paying the

published industry rate. Previously employers with low claim expenses could get premium discounts of

up to 30%, whilst poor performers paid penalties of up to 50% of the base premium.

March 2011

Redemptions

One of the intentions of the legislative reforms has been to limit redemptions. A report by Finity

Consulting, published in September 2010, showed redemption activity increased in the 6 months to

June 2010 as claims were finalised prior to the phasing out of redemptions. Future new redemptions

are expected to be negligible.

Other Developments In Brief

In June 2010, cabinet approved the new Workers Rehabilitation and Compensation Regulations

2010. The new Act commenced on 1 November 2010. The main change is the consolidation of

most of the existing regulations into a single simplified document.

An independent review of the SA WorkCover scheme and Workers Compensation and Rehabilitation Act

1986 by Bill Cossey and Chris Latham opened for submissions on 24 January 2011. This review is to look

at the impacts of the 2008 legislative changes on (i)injured workers, (ii)levy rates, or (iii)the scheme fund.

A recent Workers Compensation Tribunal finding (delivered January 2011) in the case of Davey

v SA WorkCover found that SA WorkCover failed to provide the injured worker an opportunity to

make submissions before discontinuing weekly benefit payments. The finding raises the potential for

workers who had weekly payments discontinued in similar circumstances to revisit their claim.

The SA Government rejected a recommendation by the SA Parliament’s Statutory Authorities Review

Committee that WorkCover stop charging scheme exit fees for employers leaving the scheme to

pursue self insurance.

Western Australia

Legislative Review

The 2009 Legislative Review of the Workers’ Compensation and Injury Management Act 1981 was

completed in December 2009, and the majority of the recommendations were approved by Cabinet in

March 2010. The aim of the review was to create a more flexible, responsive and modern legislation.

The review did not involve an examination of entitlements or other fundamental aspects of scheme

design. The approved recommendations include:

Redrafting and change to the structure of the statute

Amendments to address legislative anomalies and inefficiencies

Increased entitlement to weekly payments from one to two years

Removal of all age based limitations on entitlements

Access to common law for injured workers employed by uninsured employers

Changes to dispute resolution arrangements.

Drafting of legislative amendments is currently being undertaken.

March 2011

Recommended Premium Rates

In 2009/10, WA’s economic recovery lead to continued wage growth and a fall in workers’

compensation claims. As a result, the 2010/11 recommended average premium rate reduced by

13.9% to 1.497% - the lowest in scheme history. The average recommended rate has reduced by 52%

since 1999/00, with the amendments in 1999 and more recently, high wage growth, being the main

drivers of these reductions.

TasmaniaNo major developments since our previous newsletter

Australian Capital Territory

Proposed Legislation Changes

On 5 October 2010, the Workers Compensation Amendment Bill 2010, amending the workers

compensation legislation in the ACT, was released for public consultation. Submissions were due on 30

November 2010, and are currently being considered by Government. A similar Bill amending the CTP

legislation was tabled in Assembly in February 2011.

The Bills propose amendments that are intended to improve the performance of the scheme and health

outcomes for injured people while reducing the cost of insurance premiums for Territory residents and

businesses.

The main features of the Workers Compensation Bill are:

Lump sum entitlements to be based on the concept of Whole Person Impairment (WPI) determined

using the American Medical Association’s Guides (5th Edition) and NSW WorkCover Guides (3rd

Edition).

The creation of a Permanent Impairment Assessment Panel and the introduction of a streamlined

process for medical assessment (including peer review) to arrive at a single, independent assessment

of a worker’s WPI.

Impairment benefits

The introduction of WPI thresholds for access to permanent impairment lump sums

Changes to the lump sum impairment benefit amount, such that the benefit payable is linked

to the works WPI

March 2011

Common law benefits

The introduction of a WPI threshold for access to common law

Future economic loss awards will need to be justified. Discount rate to be prescribed as 5%.

Commutations

Workers are no longer entitled to commute permanent impairment benefits, but may continue

to commute other statutory benefits (i.e. weekly, medical and other costs). We understand that

further guidance on commutations will be provided at a later date.

Introduction of a compulsory dispute resolution process, which requires parties to participate in a

settlement conference and exchange mandatory final offers of settlement prior to proceeding to

hearing.

Restriction on the advertising of legal services and amendments to allow the Minister to determine

the maximum expenses and fees that may be charged by or paid to legal service providers.

Increase in the lump sum death benefit from $150,000 to $450,000 (CPI indexed).

Increase in the maximum compensation for funeral expenses from $4,000 to $9,000 (CPI indexed).

Northern Territory

The 2009 actuarial review of the Northern Territory Workers’ Compensation Scheme completed by

Marsh showed the premium rate charged by insurers in 2008/09 was 2.2% of wages. The report also

noted a downward trend in claim frequency for insured employers, but an increase in average claim

sizes in recent years.

The reported funding ratio for the scheme as a whole (i.e. including insured and self-insured

employers) was 100.9%.

March 2011

About Finity

Finity is the largest independent general insurance actuarial and consulting firm in Australia, with around 80 staff in Sydney in Melbourne. We provide analysis to advise and assist organisations with their strategy and financial management related to risk management and insurance issues.

We are Appointed Actuaries to more than 30 general insurance companies within Australia.

Finity has been awarded ‘Service Provider of the Year to the Insurance Industry’ by the Australian and New Zealand Institute of Insurance and Finance for the past 4 years.

Workers’ compensation

Within Finity, we have a dedicated Workers Compensation Team which specialises in workers’ compensation insurance consulting. We have provided strategic and analytical advice and support to most workers compensation schemes in Australia and New Zealand. We currently provide strategic advice, as actuarial advisors, to the South Australian, Queensland and Tasmanian WorkCover Schemes plus the ACT Chief Minister’s Department as well as having experience as peer review actuary to the NSW WorkCover Scheme in recent years.

The Workers Compensation Team includes a number of experienced self insurance specialists from both Sydney and Melbourne. Our self insurance specialists include Mark Hurst, Estelle Pearson, David Minty, Andrew Cohen, Adam Payne, Gillian Harrex and David McNab. All are Fellows of the Institute of Actuaries of Australia.

Self insurance

The features of our self insurance (and specialised insurer) experience includes:

actuaries to a number of large employers self insured with state workers’ compensation schemes

actuaries to three NSW Specialised Insurers. We assisted with the licensing process for two of these insurers

actuaries to three large employers self insured with the Comcare Scheme. We assisted with the licensing process for two of these employers

we have performed numerous self insurance feasibility studies for employers, in relation to both State Schemes and/or Comcare

we are actuaries to a number of council pools that self insure their public liability and professional indemnity risk.

advising several energy companies with regard to their self insurance programs including estimating the annual cost of self insurance for inclusion in their submission to the Australian Energy Regulator (AER).

We keep up to date with scheme requirements, and other factors, affecting self insurers through our ongoing research and development. We have written a number of papers for seminars which are available on our website:

“The Comcare Self-insurance Option” - presented to the Institute of Actuaries of Australia Accident Compensation and National Self-insurance Seminars in 2007. This paper looked at the issues facing national employers considering the Comcare self-insurance option.

“Assessing the Financial Viability of Moving to Self Insurance” – presented to the Australian Self Insurance Summit in 2008. This paper documented the process an organisation would go through to estimate whether self insurance is financially viable.

Contacts

Sydney:Mark Hurst (02) 8252 3358

Melbourne:David McNab (03) 8080 0903

We are grateful to everyone who has responded with comments about the previous issue - as ever, we appreciate your feedback. Any suggestions for topics that you would like to see addressed in greater depth in future newsletters are welcome. mark.hurst@finity.com.au

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