NSW Workers Compensation is a statutory class of insurance overseen by the WCA and underwritten by the Nominal Insurer. Agents are contracted by the WCA to supply claims management and policy services, and are remunerated based on market shares and achieving performance benchmarks set by the WCA. Currently the system generates over $2 billion in premiums at an average premium rate of 1.55% of wages paid. Approximately 140,000 claims are lodged each year, although more than 50% of these are not serious.
There are approximately 280,000 workers compensation policyholders in NSW, of which 98% are small to medium enterprises (SME) with an annual premium of less than $30,000. The SME market is attractive to general insurers as it both profitable and relatively simple to deal with. It also exhibits many of the characteristics of the ideal insurance portfolio, in that it is a mix of many different risks, it is widely geographically distributed and a single loss is unlikely to be of high value.
It is widely assumed that SMEs fail at a rate of approximately 30% per annum. The study of data relating to the registration of new and the failure of existing business (for all reasons) over an 8 year period by German researchers, concluded that small firms failure rate is in the order of 39.2% and would tend to confirm this assumption. SMEs generally buy insurance as “business packs” into which all general insurance products are bundled, workers compensation is an add-on. There is a constant churn of SMEs which must be accommodated or market shares will be lost.
Those agents which deal with the larger employers face less of a threat of loss of market share through natural attrition but face stronger competition from other agents (there are less than 30,000 employers who pay more than $10,000 in premiums). These clients tend to buy insurance as individual products and can have several insurers.
SMEs generate fewer claims per policy compared with larger employers with only 11.2% of policy holders reporting a claim (98.7% of policy holders whose premiums are greater than $200,000 have a claim).
Larger employers premiums are claims rated and claims costs are factored into their premiums. Those employers who pay more than $100,000 in premiums are very demanding and require high quality services, they are expensive to maintain and take an active role in the management of claims. They expect much of their agent.
SMEs are passive consumers in relation to claims services and are unlikely to understand the system. They are not financially penalised by their claims experience.
The “product” is an insurance policy which pays benefits to injured workers in accordance with the Workers Compensation legislation. All employers must have a policy. The scope of cover is fixed in the legislation; this does not however prohibit adding-value, something agents have so far shied away from.
Business retention (repeat business) is the most important form of promotion. Personal selling by intermediaries is the most common new-business promotional strategy. There is some direct marketing although this is limited to the more casual inquiry. Other promotional activities include trade show exhibitions and advertising in industry related media.
Most workers compensation is arranged through an intermediary. These are typically insurance brokers, small business advisors or accountants. A small proportion of the market arranges workers compensation directly with an agent. Distribution of business insurance products by Insurance Companies (including workers compensation) has been a mix of intermediaries (mainly insurance brokers) and direct through branch and agencies structures.
The WCA does not permit its agents to pay commissions to brokers (commissions for general insurance products are factored into premiums), so other less transparent methods of remuneration have been necessary. These have been in the form of risk management payments where an agent pays a proportion of its WCA derived income to its brokers for services they undertake on its behalf.