An ageing workforce and an increasing national retirement age – financial implications for workers’ comp self insurers

Australia’s population is ageing. In recent years, there has been increased awareness and extensive media coverage of this trend — and a growing concern about its implications for the economy. This was highlighted by the increase in national retirement (pension) age announced in the 2009 Federal budget. At the same time there are significant changes occurring in the age and gender of Australia’s workforce.

So what are the financial implications of an ageing workforce, and an increasing national retirement age, on workers’ compensation costs, particularly for self insurers? This article examines the key drivers of workers’ compensation claim costs broken down according to age and gender of worker. Using publicly available projections of the future workforce, these cost drivers are then overlaid to estimate the effect of population and workforce ageing on workers’ compensation costs over time. We then look at some ‘what if ’ scenarios.

July 2010

July 2010

Australia’s population and workforce

Over the past 50 years the Australian population has more than doubled in size from 10 million in 1959 to 22 million people in 2009 - over this time the mix of ages has shifted, with older people making up an increasing share of the population. In particular, over 55s have increased from 17% of the population to 25%. This is the result of increased life expectancy and lower birth rates.

Based on Productivity Commission projections, further growth is expected over the next forty years (recent Treasury forecasts have been increased above this level) with the population projected to grow to 29 million by 2050. Notably the population aged over 55 is projected to grow from around 5 million now (25% of the population) to around 11 million (37% of the population) in 2050.

Not surprisingly the ageing population has implications for the workforce noting that:

While the Australian population is projected to grow by 36% between 2009 and 2050 the workforce is only projected to grow by 25% during the same time. In contrast, the share of the workforce above age 55 is projected to grow from 15% of the workforce in 2009 (1.5 million) to 21% of the workforce in 2050 (2.7 million) - growth of 80%! The number of females participating in the workforce has grown significantly since 1979 - as a consequence the share of the workforce who are male has reduced from two-thirds in 1979 to around 55% currently. This has important implications in projecting future workers’ compensation claim costs as males have historically had a higher claim frequency than women.

Drivers of workers’ compensation costs

At a national level, over the ten years to June 2007, the frequency for serious injury claims (those with one week or more lost time) has fallen by around 30%. It is generally accepted that such reductions are the result of improved injury prevention and occupational health & safety, as well as a general trend in employment toward less risky industries.

Claim sizes have increased at above inflationary levels in recent years, which is consistent with reducing return to work outcomes, and also suggests that some of the reduction in claim frequency is a result of the removal of less severe claims.

The analysis underlying this article relies on the experience of the South Australian scheme. The analysis was deliberately focussed on the relative differences for claims of different age and gender rather than absolute numbers so as to be more broadly applicable. Claim frequencies and average claim sizes were examined for each of these groups to understand trends over time and to assess the contribution of each group to the current cost of workers’ compensation.

July 2010

Claim frequency

Total claim frequency has reduced by 30% for males and 43% for females over the sixteen years as shown in Figures 1 and 2. This equates to reductions over the period of 2.5% to 3.5% per annum. The improving frequency trend is crucial to controlling workers’ compensation costs.

Note that male frequency is 25% to 30% higher than for females and has increased relative to females in recent years as male frequency has stabilised but female frequency has reduced.

One potentially worrying development is that claim frequency for older females has shown only limited im-provement in recent years, with concern arising because this is the group of the workforce growing fastest.

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Figure 1: Claim frequency: Males

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Figure 2: Claim frequency: Females

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July 2010

Average claim size

For all age bands up to age 64 there have been inflationary increases in the average claim size in recent years, with an average increase of slightly above 2% per annum.

Unit cost of workers compensation claims per million hours worked

Based on the analysis above, a baseline ‘unit cost’ of workers’ compensation claims has been constructed by age band, as shown in Figure 3 (‘unit cost’ is the product of the claim frequency and average size). This shows the approximate claims cost per million hours worked for new claims, and compares the differences by age and gender.

This shows that:

The unit cost for younger claims is low - the result of lower claim incidence generally, shorter recovery times and lower average wages, and thus lower income replacement benefits. For younger ages, the unit cost of male weekly claims is considerably higher than that of female weekly claims - mostly due to a higher claim frequency for males.

By age 35 this differential in weeklies cost reduces, with a similar differential between males and females through to age 64. It is hypothesised that most of this difference (from 35 to 64) will arise from males having higher rates of pay than females on average and working in industries with higher injury rates.

The unit cost of weeklies claims for 60-64 year olds is around 20-25% below the unit cost for claims for 35- 59 year olds. This is due to short terms to retirement (at which point benefits generally end).

For the 65+ age band, the unit cost of weeklies claims is low, a result of the retirement age restrictions on income replacement benefits.

For non-weeklies claims, the unit cost increases with age, due to an increasing average size.

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Figure 3: Unit Cost per million hours worked

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July 2010

Focusing only on the above baseline unit cost differentials, and all else being equal, an increase in the proportion of work performed by older workers (i.e. the 60-64 and 65+ age bands) would only lead to increases in the overall unit cost if it was at the expense of a reducing share of younger workers (i.e. the 15-19, 20-24 and 25-34 age bands) where the unit cost is lower.

What does it all mean for workers’ compensation costs?

Combining the workforce projection by age and gender and the assumptions on claim frequencies and average sizes, a projection of the future cost of workers compensation claims can be undertaken.

Base scenario: Claim frequency improvements continue

Future claim frequencies have initially been assumed to continue improving at 1.5% per annum, which is offset by an assumed above inflationary increase in average claim sizes of 1.5% per annum. This approach is broadly consistent with the observed experience over the past 16 years (in South Australia). The net result is an unchanged workers’ compensation ‘unit cost’ per hour worked.

The result of this projection is, essentially, that the changing mix towards an older workforce does not cause a shift to workers who are relatively more expensive for workers’ compensation claims. Assuming average wages are unchanged by hours worked then this suggests a slight reduction in the cost of workers’ compensation claims.

So is this what we should expect to see? Probably not for two reasons:

1. The first reason is that the 2009 Federal budget announced an increase in the national pension age, so that from 1 July 2023, people will have to be 67 to qualify for an age pension (the change is implemented progressively after 2017).

2. With an increasing pension age, those claimants who would have remained on income replacement benefits until ‘retirement’ are now likely to remain on benefits for an extra two years. It is also likely that the associated medical and treatment related expenditure will also rise.

Scenario 1: Increased retirement age

To test the impact of these changes, the total workers’ compensation cost is re-projected assuming increased average sizes to allow for those claimants remaining on benefits until retirement and improving claim frequencies (as per base scenario).

Under this projection we now start to see increases in workers’ compensation claim costs.

While the full effect of these changes will not be felt until 2024 when the retirement age changes are fully in force, the liability impacts start accruing well before the additional payments begin. By 2024 the modelling projects annual claim costs at around 10% higher than the base scenario due to higher average payment amounts, as well as from the already projected change in workforce profile.

July 2010

While the full impact takes around 15 years to manifest, there is also an immediate effect on the current accident year, due to those claimants young enough to reach retirement age after 2017. While this additional cost is only around 2% for 2010, in most jurisdictions this is not being accounted for, as current state based workers’ compensation legislation prescribes its own retirement age at 65 years. While a 2% change in workers’ compensation costs is not overly significant for a single accident year, the effects of delaying the legislative change will compound over time. Along with the increasing real cost for each year until 2024, there will be a one-off impact on the outstanding claims liability, which ultimately needs to be factored in.

Scenario 2: Increased retirement age with limited claim frequency improvement

As an additional test of the sensitivity of future workers’ compensation claim costs, a scenario was constructed where the rate of improvement in claim frequencies was reduced over time - in particular for older ages (the rationale being that if significantly more people have to work to older ages, the claims experience could deteriorate). In this scenario there is a significant increase in claim costs over the 40-year projection period, compared with the increased retirement age alone scenario. The clear message is that if claim costs continue to increase at above inflationary rates, then ongoing claim frequency improvements are critical to mitigating overall cost increases.

Possible implications for self insurers

1. The impact of an ageing population and an increasing national retirement age will depend on:

(i) the industry of the self insurer (ii) the age and gender mix of its workforce (and any changes to these) (iii) whether or not long-term trends of improving claim frequency can be maintained into the future

2. Any tendency to a ‘pension mentality’ (staying off work until retirement) either towards or among older claimants will need to be challenged.

3. Successful innovation in rehabilitation and return to work will be needed to ensure further improvements in claim outcomes over time.

4. Management of above inflationary claim cost growth is a key to maintaining overall costs. Tight controls on areas such as medical and treatment related expenditure will clearly be necessary over the longer term.

5. Proactive management of claim frequencies via OH&S initiatives will continue to be a key component in controlling workers’ compensation costs, particularly in environments where older people are working in industries that have not traditionally made large use of older workers.

July 2010

Conclusions

The effects of an ageing population on workers’ compensation costs will become clearer over time, but there are issues that need to be considered in the short term. One thing already clear is that liability impacts will emerge well before any additional payments are made.

Self insurers need to remain focused on the evolving landscape and be aware of those variables that are not directly controllable. As with any long tail portfolio, being slow to recognise change – and even worse taking too long to respond appropriately – can have significant financial implications.

This article is adapted from the paper ‘An ageing workforce and workers compensation – what are the implications, in particular with an increasing national retirement age?‘– McInerney, first presented at the 12th Accident Compensation Seminar 2009, Institute of Actuaries of Australia. Here

Is the self insurance option for you?

Recently Finity gave a presentation to the 2010 National Self Insurance Summit on assessing whether workers’ compensation self insurance was the right option for your organisation. The presentation set out the pros and cons of the various workers’ compensation options and then outlined how to carry out a financial assessment. Check out the presentation here.

Market Updates

General

Comparative performance monitoring

The eleventh edition of the Comparative Performance Monitoring Report released in December 2009 found that the average funding ratio for centrally funded schemes dropped from 131% in 2006/07 to 121% in 2007/08; the decrease was primarily attributed to poor investment returns. The average funding ratio for privately underwritten schemes also fell; from 126% in 2006/07 to 120% in 2007/08.

In 2007/08, Australian workers’ compensation schemes paid $6.3 billion in total scheme expenditure of which 54% was paid directly to injured workers, 23% was paid in medical and other service costs with 19% for operational expenses.

Durable return to work rates have fallen in recent years from around 80% of workers returning to work following a work related injury or disease to 75% in 2007/08.

The standardised average premium rate fell by almost 30% from 2.25% of payroll in 2003/04 to 1.59% of payroll in 2007/08 with most jurisdictions recording falling rates.

July 2010

National Disability Care and Support Scheme

The Federal Government has proposed a National Disability Care and Support Scheme which would cover the cost of lifetime care for disabled Australians. This could have a significant financial impact for some self insurers as some very large claims (or parts of claims) may be met from the Scheme hence reducing claim costs. Conversely, self insurers may be asked to help fund the Scheme.

The Scheme will provide cover for:

“severe or profound disability” life as long as the onset of the disability occurred before age 65 (i.e. not disability due to ageing)

new incidence plus the existing condition.

Benefits will include long term essential care, equipment, aids, transport and home modifications, but not income support, medical, aged care or housing.

The Government has asked the Productivity Commission to conduct an inquiry into the Scheme with initial submissions due mid-August 2010. The staged implementation of the Scheme is planned to commence in 2012.

New South Wales

Reducing deficit

WorkCover NSW’s deficit has fallen by $266 million in the six months to 31 December 2009 mainly due to improved investment performance. However the scheme retains a deficit of $1.2 billion and a funding ratio of 91%.

This improved financial result has led the NSW Government to announce a cut in the average workers’ compensation premium rate of up to 2.5% for better performing industries (effective 30 June 2010). As a result the target average premium collection rate has reduced to 1.66% of wages.

[As noted in our first newsletter a reduction in the average premium rate does not impact the experience component of an employer’s premium which, for a very large organisation, can be up to 90% of the total workers’ compensation premium.]

New Claim Estimation Manual

WorkCover NSW introduced an updated workers’ compensation claims estimation manual in December 2009. The manual outlines requirements on how claims are to be estimated and applies to all open, re-opened and new claims estimates from 31 December 2009. The updated manual takes into account changes in legislation over several years and is designed to improve consistency in claim estimation.

July 2010

Victoria

Accident Compensation Legislation Passed

Victorian Parliament recently passed the Accident Compensation Amendment Act 2009 which includes significant reforms to Victoria’s workers’ compensation legislation. Two of the more significant changes from an actuarial perspective are:

Introducing a superannuation component - equal to 9% of weekly benefits - for long-term injured workers (more than 52 weeks)

Increasing weekly benefits from 75% to 80% of pre injury earnings for workers with weekly payment entitlements after 13 weeks.

Reduced average premium rate

The Victorian Government has reduced the average workers’ compensation premium rate for 2010/11 by 3.5% from 1.39% of wages to 1.34%.

This reduction in premium rates followed an improved financial performance in the first half of 2009/10 with a surplus of approximately $700 million announced. The funding ratio has consequently increased to 109%.

Lower claim numbers

The half yearly results also showed a reduction in workers’ compensation claims from 10.8 claims per thousand workers in 2008/09 to 10.3 claims per thousand workers in the six months to 31 December 2009.

New self insurer guidelines for actuarial reports

There have been several changes to WorkSafe’s guidelines for the annual actuarial assessments of self insurance liabilities (effective 1 July 2010) including:

the inclusion of a prospective component when calculating the bank guarantee required to secure the outstanding claim liabilities. The prospective component is equal to the expected liability of new claims expected to arise in the next 12 months less expected claim payments during the next 12 months (excluding tail claims). The prospective component is subject to a minimum of zero (i.e. the security will not be reduced where the claims expected to be paid exceed the cost of new claims) a requirement that “the actuary will make reasonable efforts to periodically test that the allowance made for claims handling expenses remains appropriate”. WorkSafe has provided the Scheme’s claims handling expense allowance of between 11% and 12% of net claim payments over recent years for guidance where specific claims handling expense information is not available.

July 2010

Queensland

Ongoing issues for the Scheme

The workers’ compensation Scheme in Queensland has recorded deficits of $1.3 billion over the last two years (2007/08 and 2008/09) due to lower than breakeven premiums, poor investment returns and increasing claim costs. The increase in claim costs relates to an increase in statutory payments and a significant rise in common law claims as well as increases in hospital, medical and rehab expenses.

As a result the average premium rate for 2010/11 has been increased by 13% from 1.15% of wages to 1.30%.

Scheme changes

In addition to premium rate increases, following ongoing publicity regarding potential future scheme deficits and common law claims out of control, a number of changes have been introduced effective 1 July 2010, including:

for common law claims, an increase in the onus of proof required of the injured worker to show that an employer was at fault

capping pain and suffering at $300,000 and economic loss payments at three times Queensland’s ordinary time earnings

employers will pay a higher premium excess.

South Australia

Improved funding position

The SA Scheme has announced an improvement in their funding position with the Scheme deficit reducing from $1.1 billion at 30 June 2009 to $0.9 billion at 31 December 2009. The funding position has increased from 57% to 63% as a result of the improved performance.

The trend to improved financial performance following the recent reforms, has led the Scheme to announce a reduction in the average premium rate from 3.0% of wages in 2009/10 to 2.75% of wages in 2010/11. This is the first reduction in average premium rate since 2002.

Bonus Penalty Removal

The bonus-penalty scheme will be removed from 2010/11, with all employers to pay 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. WorkCover has said it will be consulting with employers over coming months about a replacement for the scheme.

Exit fees

Exit fees continue to be a contentious issue in South Australia with the state government rejecting the SA Parliament’s Statutory Review Committee’s recommendation that WorkCover should stop charging exit fees designed to discourage employers from self insuring.

July 2010

Active income maintenance claims up

A report by Finity Consulting released with WorkCover SA’s annual report shows that active income maintenance claim numbers have increased by 3% during 2008/09 driven by the early reporting bonus and provisional liability legislative changes - changes which are intended to improve return to work outcomes over time given the earlier intervention. There were 19,720 claims incurred with 5,440 of those claims receiving income maintenance payments.

Western Australia

Reduced average premium rate

The recommended premium rate for 2010/11 has been reduced by 14% to 1.497% of wages.

Proposed legislative changes

A review of Workers Compensation and Injury Management Act 1981 went to Cabinet in February. The main aim of the proposed changes is to simplify the legislation which is thought to be overly complex.

Workers’ compensation payments on the rise

WorkCover WA reported $616 million in workers’ compensation payments during 2008/09, up from $582 million the previous year. WorkCover’s annual report noted that there were 42,223 compensation claims lodged in 2007/08 (the most recent data released) and 18,368 lost time claims. The average lost-time claims cost was $23,651.

Tasmania

Legislation introduced July 2010

The long-awaited Clayton reforms to the workers’ compensation legislation in Tasmania became effective on 1 July 2010, the main changes being:

The weekly benefit step-down provision is more generous with benefits reduced to 90% of weekly earnings at 26 weeks instead of to 85% of weekly earnings after 13 weeks. The maximum payment periods are also being extended for more seriously impaired claimants

The maximum payment period for medical costs will be linked to the payment of weekly benefits (one year after cessation of weekly benefits)

The threshold for accesssing common law is being reduced from a whole person impairment (WPI) of 30% to a WPI of 20%.

The maximum lump sum benefit and the death benefit are increasing

The package is expected to increase claim costs by around 15%.

July 2010

Workers’ compensation costs on the rise

Tasmania WorkCover reported $115 million in workers’ compensation claim payments in 2008/09, an increase of $9 million (8.6%) on 2007/08. Weekly benefits represented 34% of all claims paid, while medical and related payments accounted for $36 million (32%). Other lump-sum payments comprised 28% of total payments.

In total, 9,709 claims were lodged in 2008/09, 261 fewer than the previous year. The Tasmanian return to work rate and durable return to work rate were reported at 91% and 80% respectively. Both rates were 8% higher than the Australian average, which indicates that Tasmanian workers are, on average, returning to work earlier than the rest of the country.

ACT and Northern Territory

ACT Industrial Relations Minister Katy Gallagher tabled the Workers’ Compensation Amendment Bill 2009. The Bill is estimated to save ACT employers more than $4 million by improving compliance and reducing administrative barriers.

Comcare

Moratorium continues

The moratorium on self insurers joining the Comcare workers compensation scheme is expected to continue until the end of 2011 when National OH&S laws are planned to be harmonised (refer our previous newsletter for more details).

Latest stats

The latest Compendium of OHS and Workers’ Compensation Statistics for Comcare report has found:

the scheme’s incidence of accepted claims has reduced by 41% since 2004/05 the frequency of claims involving at least one day off fell 36% over the same period

the number of full-time equivalent employees covered by the SRC Act jumped 45% from 30 June 2005 the number of licensed Comcare self insurers increased from 8 in 2005 to 29

the durable return to work rate of 88% was the highest of any jurisdiction in Australia and significantly above the national average of 72%

Comcare’s average premium rate of 1.36% of payroll in 2008/09 was 23% lower than in 2004/05

the scheme recorded a positive funding ratio of 110% in the 12 months to 30 June 2009.

licensed self-insurers accounted for 44% of total full-time equivalent employees covered by the SRC Act.

July 2010

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 and Queensland WorkCover Schemes 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. In addition to our actuaries, Rod McInnes provides claims management and strategic advice to assist Schemes, insurers and self insurers. Rod McInnes was previously General Manager Insurance at NSW WorkCover.

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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