The Victorian Workers' Compensation ‘Premium Freeze’: when a freeze is not a freeze

After undergoing rigorous political negotiations, the Workplace Injury Rehabilitation and Compensation Amendment Act 2023, also referred to as the "WorkCover Scheme Modernisation Act", successfully traversed Victoria's parliament, obtaining Royal Assent and coming into force on 31st March 2024.

Amidst the ongoing discourse surrounding this legislative overhaul, particular attention has been drawn to what has been coined as a "premium freeze” for employers.

But what exactly does a “premium freeze” mean for Victorian employers?

Before dissecting this issue, it is crucial to shed light on the intricacies at play, or what some may describe as 'tricks of the trade'.

The limitations of 'Average Rate'

While the use of the Average Scheme Rate ('average rate') may seem straightforward and intuitive, relying solely on this metric to compare workers' compensation schemes, as well as for base premium calculations, oversimplifies the complex dynamics at play.

The average rate calculation method, often involving the summation of all industry rates and dividing by the total number of industries, overlooks critical differences between industries and jurisdictions, including:

  • Workforce Dynamics: Workforces differ significantly across industries, encompassing variations such as workforce size, wages paid, and workplace health and safety outcomes. For instance, while there may be significantly more Aged Care workers than Florists, both industries are treated equally when calculating the average rate.

  • Outliers: Extreme outliers both high and low for individual industries can skew the calculated average either upwards or downwards.

  • Variations in Benefits: Despite similarities, differences exist in the inclusions and exclusions of benefits paid to workers across jurisdictions.

  • Inclusion of Charges: The inclusion of charges varies between jurisdictions, for example the NSW average rate includes GST, while the Victorian average rate does not.

  • Other Determinants of Premium: For many employers, the industry rate is only one of the ingredients in determining the premium paid.

Consequently, relying on a simplistic average as a blanket measure overlooks the intricacies of individual schemes and industries within each jurisdiction, potentially resulting in a generalised assessment that fails to capture their nuanced complexities.

The perilous pursuit of low ‘average rates’

In the realm of workers' compensation schemes, a prevalent narrative revolves around the assertion of scheme affordability in the name of supporting employment, and this narrative frequently centres on the average rate.

However, there are a number of concerns around this focus on average rate, including:

  • Suppression of the average rate can lead to poor insurance rate setting decisions

  • The calculation of average rate is over simplistic and not reflective of actual scheme performance

  • For many employers the average rate has minimal relevance to the premium that they pay

When jurisdictions compete over the average rate it can drive what should be insurance decisions about scheme liquidity and funding into the realm of ‘messaging’.

This circumstance holds the strong potential to detrimentally impact the overall financial stability of a scheme, necessitating significant premium increases as exemplified by the events witnessed in Victoria during 2023/2024.

Nonetheless, fixating solely on the average rate as the primary yardstick for gauging a scheme's efficacy oversimplifies the complex landscape of workers' compensation, as it neglects to account for the myriad other factors at play, thereby painting an incomplete picture of a scheme's true effectiveness.

Key take-aways for Victorian employers

Despite the catchy simplicity of a ‘premium freeze' headline, the reality for employers in Victoria is far more complex and multifaceted.

While awaiting definitive confirmation, we anticipate that the Average Scheme Rate in Victoria will remain at 1.8% for the 2024/2025 period.

However, it is important to note that while the Average Scheme Rate may be ‘frozen’, individual industry rates will continue to be subject to fluctuation, either rising or falling as long as the overall ‘average’ is maintained.

It is also crucial for employers to keep in mind that their premium is determined by multiple factors. These factors are:

  • The Industry Rate

  • The Industry Claims Costs Rate

  • The Employer’s Wages

  • The Employer’s Claims Experience

Despite the so called ‘premium freeze’, all the above factors will continue to influence an employer’s final premium.

Consequently, it is likely that the premiums for most Victorian employers in 2024/2025 will vary from their 2023/2024 premiums, with some seeing decreases while others will face increases.

Employers should focus on fundamentals

Overall, we acknowledge that the Average Scheme Rate remaining steady is immeasurably better than it increasing again, so the decision to freeze the Average Scheme Rate undoubtedly provides a sense of relief to Victorian employers, offering some modicum of stability amidst uncertain times.

However, it is imperative for employers not to be misled by headlines, instead, they must remain steadfast in their commitment to core principles, including the implementation of robust workplace safety measures and effective injury management protocols.

Additionally, businesses must remain vigilant in their financial projections to ensure accurate accruals, as any oversight could lead to unwelcome surprises in the form of unexpectedly higher premium notices.

By adhering to these foundational practices, Victorian employers will be better equipped to navigate the persistent uncertainties inherent in the Victorian workers' compensation schemes.

The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.