Why are workers’ compensation premiums increasing?

Workers’ compensation claims are proving to be increasingly more expensive. But why is this happening, and how is it affecting businesses?

According to Lockton’s premium strategy and analytics national manager, Craig Simpson, there are three main drivers pushing these costs up:

1. Escalating numbers of mental injury claims. Claims for mental health are growing each year, and they are generally more complex and often take longer to resolve than a physical injury.
2. Increases in the cost of medical services. While inflation is in the news now, medical services, in particular, have escalated in costs over the past few years, putting strain on the schemes.
3. Decreases in return-to-work rates. Often the largest cost of a claim is wages compensation, and with declines in the rate at which injured workers are returning to some form of work, the cost of paying compensation is increasing.

Mr Simpson noted that businesses in NSW and Victoria are most at risk of being hit with rising premiums.

“In a normal year, the increases that iCare announced in NSW would be causing significant concern for employers, but they have been totally overshadowed by the phenomenal and unprecedented rate increases in Victoria,” said Mr Simpson.

“Continuing the theme of increasing premiums, the remaining two managed fund jurisdictions (Qld and SA) have not improved the financial outlook for employers either. Both jurisdictions have announced increases in their average industry rates. With premium increases across the country, there is no welcome news for employers in any of the managed fund jurisdictions.”

The fallout from these price hikes can be severe for organisations, especially during times of economic uncertainty and inflated cost of living. This has caused businesses to worry about the future.

“These increases are causing significant issues for businesses, who are constrained in their ability to manage or grow their business by the increasing costs they are facing. In some sectors (particularly health and community services), we see that it is putting pressure on their ability to remain viable,” Mr Simpson explained.

“Whilst all businesses are impacted, large businesses, whose premiums are weighted towards their claims experience, are particularly exposed to increases far above the ‘average increases’ announced by the various regulators, resulting in the budgets and accruals for businesses being significantly insufficient.”

Amid this chaos, what can businesses do to stay afloat? Mr Simpson said an evaluation of policy and strategy may be necessary.

“For employers, it is important that they focus on the things they can control, including making sure that wages and classification and premium strategy are correct,” he said.

“This includes determining whether alternative risk transfer solutions like Loss Prevention and Recovery (LPR), Large Employer Alternative Pricing (LEAP), Retro-paid loss (RPL), or self-insurance are preferable. Importantly, employers must ensure that they are making every effort in injury prevention and subsequent injury and claim management with a focus on return to work.”

Mr Simpson continued: “Employers who do these things well are not immune from the increases in the underlying cost of workers’ compensation, but they are inoculated against the extreme impacts that, unfortunately, many employers will see.”

Mr Simpson listed some additional precautions employers can take to mitigate any issues:

• Engaging with a specialist workers’ compensation insurance adviser and conducting a claim review offers the opportunity to ensure that short-term and long-term strategic goals are in place. Return to work and sustainability continue to be the main drivers and need to remain the focus to best support injured workers and the containment of costs.
• Conduct a self-insurance financial feasibility study to determine what workers’ compensation scheme options are available and which one is the most financially viable. Self-insurance for the right organisations can help chief financial officers control their own destiny in the face of uncertainty. When insuring people for workers’ compensation, this option can be financially more lucrative and give greater control over claims management.
• Analyse employee data to understand where there are gaps in the workforce, such as absences from injuries and mental illness. This can help organisations to develop suitable injury management policies and procedures to decrease workers’ compensation claims.
• Consider premium funding. This can help alleviate some of the financial strain that increased premiums can place on a business. With premium funding, organisations can more easily afford a complete insurance and risk management program which may avoid under-insurance and therefore help to protect the business.