Every year about 100,000 people in NSW are injured at work, of which 80,000 are covered by icare. While most get better quickly and get back to work in a few weeks, many do not. icare is there to support and care for these workers while they recover, which in some cases can take many years.
So how does icare calculate how much money we need to support these injured workers over the coming months and years?
Let’s start by considering the premiums paid by employers to insure their businesses against injury at work. As with all insurance premiums, workers compensation premiums don’t simply sit in icare’s bank account. The majority of the premiums are used to pay weekly benefits and medical expenses for injured workers. Some of these funds cover icare’s operating costs, as a levy to the regulator or invested so that it can be used to make future payments to claimants.
Working out how much money needs to be put aside to support these future payments involves complex calculations, which are performed by an expert (an actuary). The main role for the actuary in these calculations is to estimate the amount yet to be paid on claims that have already been made (see Figure 1, below).
To estimate the size of these future payments, the actuary must consider many different factors, model their complex interactions and make assumptions about how they will turn out decades into the future. These factors include, the following:
- the types of injuries workers have or will experience
- the types of medical care and treatment they will need
- how much the medical care and treatment will cost and how much this will increase over time
- how likely it is for the injured worker to find work in the years to come
- future investment returns on the funds set aside for meeting future payment
- future economic factors such as interest and inflation rates.
The figures for 2016/17 provide an example of the substantial size of claim payments in any year that relate to accidents from earlier years. Of the $1.8 billion in income support, treatment and care for injured workers paid by icare in 2016/17:
- $400 million was for claims that occurred in 2016/17
- $1.4 billion covered injured workers’ claims that occurred prior to 2016/17 (i.e. the future costs from previous years).
Because the future is unknown and hard to predict, it’s impossible to know for certain how much money icare will need to look after injured workers for years to come. A small difference between an estimate and what actually happens in the future – an increase in medical costs, for example – can have a significant impact on whether icare has sufficient funds for the future.
Therefore icare, like all insurers, hold more funds than its estimate of future payments – just to make sure that funds won’t fall short, leaving us unable to support all injured workers. That’s why we target a funding ratio.
This is the first in a series of articles published by icare explaining key financial aspects of workers compensation insurance. The full series comprises:
- How icare supports injured workers over the long-term
- icare targets a funding ratio to help safeguard the interests of injured workers
- What happens to the money I pay in premiums?