Premium on popularity

By Richard Braddell

WELLINGTON - Who could baulk at a system that saved the country $200 million a year in insurance costs and halved workplace deaths and the number of workdays lost through injuries?

Labour, the Alliance and now the Greens, for starters. For the three parties are now committed to winding back the privatisation of workplace accident insurance put in place by the previous government.

To be fair, the claims of huge improvements in workplace safety have been calculated by a less than disinterested Insurance Council, based on incomplete data from the regulator, and are undoubtedly grossly exaggerated.

But they have been a good emotive rallying point for business lobbyists who are increasingly concerned that the Government's dogmatic adherence to its election policy of removing private insurers from workplace accident insurance is yet another sign of a business-unfriendly Government.

While business may be quietly happy to endorse the new Government's commitment to an "enterprise New Zealand" and a retreat from the "flat earther" belief in the level playing field, the reinstatement of ACC's workplace insurance monopoly and repeal of the Employment Contracts Act are decidedly unwelcome.

Add to that the lift in the top income tax rate to 39 per cent and the complications that brings in managing fringe benefits tax, and the new Government's score, according to business, is looking decidedly negative.

Manufacturers' Federation chief executive Simon Carlaw says such signals are not going down well, and combined with uncertainties about the current economic rebound, they are giving manufacturers cause to hold back on investment in new capacity, despite full order books and good growth in elaborately transformed manufactured exports.

"To be fair, I think it can be reasonably conceded that the party policy was clear and unequivocal; the Government is doing what it said it would do. But for the slightly longer-term there is unease at a series of steps, all clearly signalled, which are clearly going to add costs to the bottom line," says Mr Carlaw.

Labour accepts that the reinstatement of ACC's monopoly is highly unpopular with business. But while ACC Minister Michael Cullen says its election mandate is clear, he also sticks to the view that the new ACC monopoly will rectify the faults of ACC in the past. It will be better than the private sector because rigorous monitoring by actuaries, for instance, will ensure it meets its objectives while sidestepping the temptation to conceal liabilities that have dogged the scheme in the past.

But in proceeding with its policy, the Government is shrugging off the vast majority of more than a 1000 submissions presented to the parliamentary select committee on the bill that will end the private market on July 1.

To summarise the pro-privatisation argument: private insurers are more flexible, more proactive in rehabilitating injuries and because they are more efficient in pricing in poor accident records, they give employers a strong incentive to improve workplace safety.

So much so, according to the figures extracted by the Insurance Council from raw data provided by the Department of Labour regulator, that workplace fatalities have halved, accidents have reduced in number by 40 per cent, time off work claims are down by 40 per cent, disputes are an eighth of those under ACC and premiums are down 30 per cent.

Of course, the figures are too good to be true. Drawn from only five months of the new market, the numbers ignore significant reporting lags, sometimes of many months. And in annualising the regulator's data, errors are multiplied which enhance the private sector's attractiveness vis-a-vis the last year ACC was in the market.

One could expect figures on fatalities to be reliable. But again, they do not square with alternative numbers supplied by Occupational Safety and Health which suggest workplace fatalities may actually have been higher in the first few months of the privatised market.



Nevertheless, there is room to think an improvement has been made, not just in premiums but in outcomes under the private market, particularly given concerns that ACC's own record for accurately collecting and reporting accident data may not be so good.

Good reasons are evident, howver, for thinking that ACC can meet for a while at least its promise of offering premiums below the $1.20 average set by the private sector.

The first is ACC's greatly improved performance in the two or three years before privatisation.

ACC's better record is due to similar factors that are claimed to lie behind the private sector's success. These include scrapping the stand-down period before serious rehabilitation efforts begin. Treatment delays under that policy are regarded as instrumental in turning what too often should have been short-term injuries into long-term or permanent disabilities that are now being paid for by the taxpayer.

The introduction of experience rated premiums, a factor claimed as instrumental in better private sector performance, undoubtedly helped. So did ACC's workplace safety initiatives, the benefits of which, it is claimed, are now being reaped by the private sector.

But the question still remains. Why is the Government racing ahead when a year's data from the private market would provide a more reliable guide to its merits and perhaps pointers to how ACC's monopoly might better work if it must be reinstated?

Labour's policy, formulated in a dialogue with the Council of Trade Unions, seems to be founded in principles that ACC involves a social contract and that private insurers should not profit from worker injuries. Furthermore, under the current arrangement, while employers have freedom to contract with whom they like, employees have no say, either in insurer, rehabilitation or level of cover.

To suggest that the private sector has had an unblemished record in its first nine months is to take a rose-tinted view.

Employers, who are saving as much as half on their premiums have made no secret that they are pleased. But the close link between accident experience and premium costs has almost certainly resulted in accidents being under-reported.

Union submissions on this point have been bolstered by the Medical Association. It says doctors have been pressured by employers who have wanted to pay all the treatment costs to avoid an insurance claim that would result in a higher premium next year.

Chairwoman Pippa MacKay said: "Virtually all GPs I have spoken to have had instances where employers have wished to pay the bill for a workplace accident in its entirety.

While doctors might find that cash up front is more convenient than the rigmarole of a claim, it also raises questions about the well-being of injured workers.

An injury might turn out to have long-term consequences that would not be covered.

In other cases, employers are said to have encouraged workers to report injuries as due to non-work causes, which unfairly shifts the cost to ACC.

One employer is said to have offered bonuses that would reduce as accidents were reported.

Indeed, it is to counter risk transfers and under-reporting that the legislation will water down the experience ratings basis for setting premiums.

Labour's election policy was to return to industry ratings - the much-criticised approach that lumps good employers in with bad, regardless of their accident record. As submissions to the select committee suggested, the approach is also flawed because it takes no account of the variations in intrinsic risk between different businesses in the same umbrella industry.

Dr Cullen is now talking about pricing on the basis of "observed risk," although quite how that will work is not clear.

The Government looks more likely to yield on another factor regarded as making ACC and the private sector work better - fully funded as against a return to pay-as-you-go.

The latter system is largely responsible for ACC's huge tail of unfunded liabilities that is belatedly being paid for through a premium surcharge on all employers, while a fully-funded approach has the advantage that long-term claims can be matched by long-term investment income.

If the Government has been moved by employer entreaties, it is not showing it. As Dr Cullen summed up: "It's almost as though some people are going through a grieving process before the select committee."

But while the principle of state monopoly is set in stone, Dr Cullen has left the door ajar for those who want input into the detail of the scheme.

Already, the Greens and Federated Farmers can claim success for provisions in the first bill that will improve the position of the self-employed and farmers by enabling them to insure to a guaranteed level of income rather than that in the previous year.

These provisions should properly have been in the second bill due for introduction in June.

But with much other detail still to be decided, the argument is far from over.