WorkSafe Victoria recently unveiled the workers’ compensation premium updates (opens a new window) for the 2024-25 financial year, laying the groundwork for the calculation of workers' compensation premiums for employers in Victoria.
Last year saw substantial increases in Industry Rates, with an average increase of 42%, leaving employers understandably apprehensive about potential further premium hikes this year.
In this article, we dissect the recent Victorian workers' compensation premium updates, going beyond the surface-level headlines, such as the much-publicised ‘rate freeze’ (opens a new window), to uncover the nuanced implications for employers in Victoria.
Average Premium Rate
In March 2024, as part of an agreement to secure bipartisan support for new Victorian workers’ compensation legislation, it was decided that the Average Premium Rate would be ‘frozen’ at 1.8% for the 2024-25 financial year, a decision that has been confirmed in the recent premium updates.
What this means for employers
The Average Premium Rate serves as a general benchmark only, but actual employer premiums are subject to fluctuation based on three key variables:
the employer’s Industry Classification;
the employer’s size; and
the employer’s workers' compensation claims history relative to that of the industry, or industries, in which they operate.
While the Average Premium Rate freeze may suggest general premium stability across the scheme, the truth for many Victorian employers is that their premiums are likely to fluctuate from last year, as the Average Premium Rate is just one component in the complex calculation of workers' compensation premiums.
In our previous analysis (opens a new window), we explored the limitations of using Average Premium Rate as a means of measuring scheme performance.
Industry Rate
The Industry Rate serves as the foundation for workers’ compensation premium calculation in Victoria.
Every employer in Victoria is allocated to an Industry Classification, or multiple Industry Classifications, depending on the industry, or industries, in which they operate.
An Industry Rate is then assigned to each Industry Classification based on the claims experience of the industry, with updates published annually in the Government Gazette.
An analysis of the updated Industry Rates within the 2024-25 premium updates confirms that among the 520 Industry Classifications:
227 have had a decrease in the Industry Rate;
252 have had an increase in the Industry Rate; and
41 have maintained the same Industry Rate.
What this means for employers
Considering that the majority of Industry Classifications are experiencing either increases or decreases in their Industry Rates, it stands to reason that the premium outcomes for most employers will differ from last year, with some benefiting from better outcomes while others may face less favourable circumstances.
However, there's still more to calculating workers compensation premium in Victoria, as we will discuss in the following section.
Industry Claims Cost Rate (ICCR)
While the Average Premium Rate and Industry Rates usually dominate the narrative, ICCR is another pivotal factor in determining an employer's final workers' compensation premium.
The ICCR plays a crucial role in premium calculation by assessing an individual employer's claims performance against the industry benchmark.
Each Industry Classification is assigned an ICCR, reflecting the ratio of the industry's total workers' compensation claims costs to wages, with updates to the ICCR published annually in the Government Gazette.
Industries with lower claims costs relative to total wages will have lower ICCRs, while those with higher claims costs relative to total wages will have higher ICCRs.
A lower ICCR makes it more challenging for an employer within that industry to outdo the benchmark, whereas a higher ICCR may facilitate an employer's ability to do better than the industry benchmark.
An analysis of the changes to ICCR contained within the 2024-25 premium updates reveals an almost 10% reduction in ICCRs overall.
What this means for employers
Although ICCRs have decreased by around 10% across the board, it is impossible to generalise on premium outcomes for specific Industry Classifications due to the multitude of factors at play in the premium calculation formula.
The evaluation of ICCR changes on an employer’s premium must be done on a case-by-case basis.
However, in an interesting side note, despite the Average Premium Rate freeze, the overall reduction in ICCRs will lead to a net increase in total premium revenue for the Victorian scheme.
Changes to the method of claims cost calculations
As if deciphering the implications of the premium updates on employer’s workers’ compensation premium was not already confusing enough, WorkSafe Victoria has further complicated matters by introducing changes to what was already a convoluted method of determining impacting claims costs and made it even more complex.
What this means for employers
In theory, these changes to the method of determining impacting claims costs should benefit employers by removing some impacting claims costs from the premium calculation formula, however:
the changes also make it significantly more complex for employers to understand how claims impact premiums; and
whether the changes result in premium savings depends on whether an employer’s reduction in impacting claims costs is relatively better or worse than that of their industry peers.
Capping
Bringing welcome relief, this year sees a return to the historic level of 30% for the capping of the effective rate, following last year's significant increase to 70%.
What this means for employers
While this adjustment is positive for employers, it provides little solace to those who may have already borne the brunt of premium increases both in the previous year and possibly again this year.
Closing remarks
Despite the narrative surrounding the Average Premium Rate 'freeze', the intricate interplay of multiple factors in premium calculation will ensure that most Victorian employers will experience a different premium outcome this year compared to last year.
As outlined in the above analysis, whether an employer experiences a reduction or an increase in premium will depend on the interplay of the numerous premium calculation factors.
As always, employers should remain focused on proven strategies to drive long-term positive premium outcomes and avoid being swayed by politically motivated messaging.
Such proven strategies include the implementation of robust Workplace Health and Safety (WHS) practices and effective claims management processes.
Additionally, with the renewal period now upon all Victorian employers, ensuring the accuracy of financial projections for precise accruals is paramount, as any oversight could result in unwelcome surprises in the form of unexpectedly higher premium notices.
It is through these foundational practices that Victorian employers can navigate the ongoing complexities of the workers' compensation scheme and secure favourable premium outcomes over the longer term.
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.
