Should employers self-insure for workers compensation?
A new licensing regime in New South Wales that allows large employers to self-insure their workers compensation obligations came into force on 1 July 2017.
The changes are intended to make it easier and quicker to self-insure and to reduce the regulatory burden for cyclical work and health and safety audits, allowing businesses that choose to self-insure to focus more on preventative activities.
The State Insurance Regulatory Authority (SIRA) is the government organisation that regulates workers compensation insurance, compulsory third party insurance and home building compensation. Alongside Insurance and Care NSW (icare), and SafeWork NSW, it replaces WorkCover NSW, whose functions were split across the three entities in 2015.
As part of the change, SIRA is moving away from a three-year licensing system that required large self-insured businesses to undertake an extensive auditing regime every three years, regardless of their workers compensation risk profile. Now, licenses can be issued for up to eight years.
The new self-insurance licencing regime introduces a supervisory model that allows workers compensation risks to be more quickly identified and addressed, seeking to provide better outcomes for workers.
It also recognises high-performing self-insurers who are innovative and add value to the NSW workers compensation system, which can contribute to stronger local economies.
Many large employers that may have previously been discouraged by bureaucratic processes from self-insuring can now look at alternative insurance arrangements with fresh eyes. Here, we look at some options and the potential benefits of self-insuring.
Kiri O’Leary, Marsh’s principal of Workforce Strategies, explains what the changes mean for large New South Wales’ employers.
“Employers that are insured under icare's arrangements have experienced substantial change and volatility from both a premium and claims management perspective starting with the 2015 premium reforms and continuing with the current claims management environment continuing to change throughout 2017,” O’Leary explains.
Since then, employers have been trying to understand how to measure performance around injury and claims management to achieve improved and transparent premium outcomes. “This prompted some businesses to explore alternatives to icare,” she adds.
At the moment icare provides workers compensation insurance for 284,000 NSW employers and 3.4 million employees.
The Loss Prevention and Recovery (LPR) program is one existing alternative for large employers in New South Wales, although under this model they remain icare customers. Self-insurance in contrast can provide a greater level of control for employers who are prepared to own the risk .
Self-insurance involves large employers stepping away from being an icare customer and instead managing their own claims liabilities.
Businesses that do this must meet certain criteria. The establishment and maintenance of robust safety management systems is an important one.
“Self insurance is a discussion more of our large employers are having. While this involves having financial strength and robust safety management and claims handling systems, the ability to manage a consistent program internally is attractive to many businesses,” O’Leary adds.
Marsh is working closely with clients on this issue. Some are reviewing their financial capabilities to identify whether they have the financial strength to self-insure. Marsh is also supporting other clients to develop a management program to support a transition to self-insurance.
Darren Parker, Director of Insurer Performance at SIRA, says it’s important for employers to work through whether self-insurance makes sense.
“All businesses will undertake a financial assessment to ascertain whether self-insurance is feasible for them. But there are a number of other considerations they should also make,” he explains.
The first is whether the organisation has an appetite to take on its workers compensation obligations.
“Businesses should also consult with their union and seek their views on whether self-insurance is a good option for that business,” Parker advises.
Whether claims will be handled internally or externally is another consideration, which involves an assessment of any potential external providers’ capabilities.
“Under a recent policy change, SIRA holds businesses accountable for their workers compensation obligations no matter whether they insource or outsource claims management,” Parker notes.
Businesses must also have the right systems in place to capture accident and injury and claims data, robust reporting systems and buy-in at the executive level.
Parker states that so far approximately 60 businesses have opted to be self-insurers, with a small number choosing to move away from self-insurance over the last 12 months.
“We’re hearing that more businesses are actively considering self-insurance as an option they want to look into,” Parker adds.
Any business that is exploring self-insurance should fully understand their obligations before making any decisions. The licensing regime has been established so that it gives businesses options and the idea is to fully explore these before making any changes to a workers compensation program.
Disclaimer: This article is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as legal advice, for which you should consult your own professional advisers. LCPA No: 17/0114