Institute says return of ACC could be costly for economy

By RICHARD BRADDELL

WELLINGTON - The return of workplace accident insurance to an ACC monopoly may have "serious economic consequences," according to the Institute of Economic Research.

In a report commissioned by the Insurance Council, the institute calculated that the reconstituted state monopoly would accumulate a deficit of $171 million in the years to 2003, before it earned its first surplus of $10 million in 2004.

While the report has been dismissed by Accident Insurance Minister Michael Cullen as badly flawed, the institute emphasised that its forecasts were based on "generous" favourable assumptions about the economy and investment income, and after allowing for claims to be 10 per cent lower than they were before privatisation.

At that time, New Zealand's accident injury rates were among the OECD's highest.

Furthermore, the institute said it had used an average premium for the "new ACC" of $1.20 per $100 of wages, which was the same as in the privatised market now, and up from the $1.08 which the ACC is claiming would be sustainable.

Included in the estimates were $6.7 million annually over three years to cover the writeoff of @Work Insurance's setup costs.

"Even with these optimistic assumptions, the financial outcome of the re-nationalised scheme will not be running enough surplus for building up reserves to deal with costs of future accidents," the institute report said.

"As a result, ACC will accumulate an unfunded liability .... [which] translates directly into a deterioration in the Government's fiscal position."

In challenging hopes that a new ACC would be "a caring yet hard-nosed state monopoly that would not exhibit the performance problems of the state monopoly of the past," the institute said the numerous financial crises and restructurings of ACC over the past 25 years suggests otherwise.

While the institute had found that ACC would go into the red on a $1.20 premium rate, it said that level was quite sustainable within the private sector, owing to differences in accounting treatments between ACC and private insurers.

While private insurers were projected to run at a deficit this year, they would run a substantial cashflow surplus in following years because they had accounted for the cost of future claims in their current year accounts.

The result would be additional hidden funding available to generate investment income which would have to provide a return of only 1.7 per cent after tax and inflation, to cover the apparent shortfall.

Accordingly, the argument that private insurers had been discounting to gain market share was also rejected in the report.

Ironically, given the insurance industry's pursuit of economies of scale through headlong consolidation last year, the institute argues that the fragmentation of the market into seven providers had also resulted in lower operating costs than those possible in a single monopoly.

Using information gathered from the insurance companies, it found projected year 2000 costs for the private sector of $56.3 million, compared with $87 million for ACC in 1999.

"The fact that the ACC's operating costs were larger than the seven companies combined suggests that there are possible diseconomies of scale," the institute said.

The available information also suggests that claims under the privatised scheme would be down by $100 million in the current year.