This article first appeared in the July 2011 issue of Boardroom magazine.
Although the competitive market the Government is proposing for workplace compensation does not go as far as many would like, there is scope within the broader ACC reform package for employers to fine-tune their insurance arrangements.
These opportunities lie in the Department of Labour discussion document proposals to expand the Accredited Employers Programme (AEP) and to allow for a greater range of risk-sharing options outside the AEP.
Proposed changes to make the AEP, which has only 136 members, more attractive include:
- introducing experience rating (this was introduced for employers under the general ACC scheme on 1 April this year)
- allowing employers to buy as much stop loss cover as they wish and to buy it from either ACC or from an approved private sector provider
- lowering compliance costs by making the auditing requirements less cumbersome and reducing the frequency of audits for firms with good track records, and
- opening the AEP to franchises and co-operatives.
The AEP accreditation criteria exclude small and even most medium-sized firms so the Government is looking at other ways in which they might accept more risk in exchange for lower levies.
Currently all employers must pay weekly compensation for the first week of any work-related injury. One proposal is to allow them to extend this exposure to four, eight or 12 weeks or to a set dollar value. Other ideas are to introduce an all costs excess or a medical only excess (again for a set time or to a set limit). Responsibility for claims management would remain with ACC.
Better deal for employers
Although far from radical, these changes could deliver a better deal for many employers and may be where the real pay dirt is - especially as they would come into effect on 1 April next year, six months before the market is opened to competition, and will mean that the ACC is in a better position to face down any challenge from the private sector.
The ACC will also have inertia working for it as employers who do not actively contract with a private insurer will continue to be covered by ACC and, in the absence of alternative arrangements, will revert to ACC when their private insurance contract expires.
None of which might matter too much – except that the Government is also proposing that the ACC remain a Crown agent. This will give it a significantly lower cost structure than any private competitors, exacerbating the advantages that it would already have as the market incumbent. Unlike private companies or SOEs, Crown agents are not obliged to turn a profit, pay tax or pay dividends.
In opting for this structure, the Government rejected the clear advice of the Treasury and of the David Caygill-led steering group it appointed to conduct a stocktake of ACC.
The steering group recommended that ACC’s role be limited to managing the residual liabilities arising from the past operation of the scheme, saying that were ACC to continue as an alternative provider, “the difficulties involved in ensuring that the Corporation operates on a level playing field with private providers are considerable”.
Treasury was critical not only of the design of the reforms but also of the sequencing, saying: “An expanded AEP retains the ACC’s statutory monopoly with Ministers playing an active role in approving the products and setting levies in regulation. On the other hand, competition requires a deregulated environment with ACC and private insurers designing products and setting prices (while the) Ministers’ role is arm’s-length. If Ministers decide to implement competition in October 2012, we do not see what gains would be achieved from expanding the AEP only six months earlier”.
Too pure a view?
When we asked ACC Minister Nick Smith why National was not taking the approach it did in 1998 and having ACC’s Work Account made into an SOE which would mimic the characteristics of a normal commercial company, he said: “The view that ACC must become an SOE if there is to be choice is too pure a view of the world. Were ACC to become an SOE, it would require a return on capital and dividends, which would flow into higher levies across all of ACC’s accounts”.
But the Government is clearly aware of the problems associated with the Crown agency structure as it has taken steps to provide insurers with the confidence to enter the market. Among these is that:
- ACC separate out its Work Account from its other business and manage this account in a transparent way, with independent oversight and requirements for financial disclosure
- ACC be responsible for its own pricing, rather than have Ministers set premiums in an inevitably political process, and
- ACC and private insurers be required to provide data to a central pool so that they all have the same information on which to base risk assessment and pricing (with due protections for individual privacy).
However there must be a question mark over whether these provisions will be sufficient, particularly given the huge cost pressures the insurance industry is struggling under at the moment as a result of the Christchurch earthquakes, the Queensland floods and disasters in Japan.
We would expect that there will be a strong push by some submitters to have the Government reconsider the competitive model and opt for a variant of the SOE model National used last time it sought to expose the ACC to competition.
Geoff Carter is a principal at Chapman Tripp, specialising in commercial litigation and dispute resolution.