ECONOMIC INCENTIVES C reating a new workplace safety climate

1. ECONOMIC INCENTIVESCreating a new workplace safety climate Dr John Wren Adjunct Research Fellow, Auckland University of Technology Principal Research Advisor, ACC SEMINARCreating a Safety Climate in New Zealand – Moving beyond Pike River and the Taskforce Report Victoria University, Wellington, NZ3 September 2013

2. Elements of the Discussion I Issues Evidence Options O E

3. Economic Incentive Theory Neo-Classical Economics • Individuals are rational and self-interested • Economic incentives are powerful drivers for desired behaviour Behavioural Economics • Individuals do not behave neo-classically • Institutional, business, household and individual economic behaviour occurs in a sociological and institutional context • Understanding the context is critical to achieving the end • Modelling assumptions about firm and individual economic behaviour and incentives matters • Neo-classical economic theory is seriously wanting… Altman, M. BehaviouralEconomics, Economic Theory And Public Policy. Prof of Behavioural Economics, School of Economics and Finance, Victoria University Wellington, New Zealand. Dawnay, E. & Shah, H. 2005. Behavioural economics: seven principles for policy-makers. New Economics Foundation, London.

4. OHS policy contested + connected to industrial relations, workers’ compensation policy & competition law Industrial relations, competition and health & safety law all act to regulate business behaviour Superficial congruence between these regulatory regimes Competition law operates in a free market paradigm Health, safety, injury compensation operates from a welfare paradigm Industrial relations law operates from a history of relationships between master / servant and property ownership Different philosophical perspectives for different policy outcomes / agendas, compete and contradict Modelling economic assumptions in a contested workplace regulatory space Haines, F. and Gurney, D. (2003). The Shadows of the Law: Contemporary Approaches to Regulation and the Problem of Regulatory Conflict. Law and Policy. 25(4): 353-80)

5. Privacy at Home vs. Drug & Alcohol Testing at Work Modelling economic behaviour Competing socio-economic trade-offs Competition Regulation & Free Trade OSH POLICY Employer/Contractor Hierarchy of Responsibility Which Causal theory dominates? Duty of Care Health & Safety Supply Chain action is Anti-competitive? A barrier to free trade? OSHTheory & Practice No fault Accident Compensation POLICY BILL of RIGHTS No-Fault vs. Duty of Care vs. Moral Hazard A fair recompense vs. cost burden? Highly competitive, sub-contracted and relatively deregulated labour market, where risk taking is a necessity to secure the next job Occ Health & Env Monitoring vs. economic development and supply of services. Consumer Safety Protection vs. Marketable Commodity? Industrial Relations & Labour Market POLICY Public Health & Environmental LAW Figure 1: OHS Policy, “A Contested Space”. SOURCE: Adapted from Wren, 1997

6. Evidence from Europe Types of Incentives: What are we talking about? • Source: European Agency for Safety and Health at Work. (2010) Economic incentives to improve occupational safety and health: a review from the European perspective. https://osha.europa.eu/en/topics/economic-incentives/index_html • European Agency for Safety and Health at Work. (2012). How to create economic incentives in occupational safety and health: A practical guide”. https://osha.europa.eu/en/topics/economic-incentives/index_html

7. EurosafeInsurance Strategies • Participants receive some form of financial support or reward for their efforts to increase OSH activities and prevent occupational injuries and diseases – can include subsidised training CurrentACCExamples… all variations on Risk Sharing & Risk Reward • Experience rating –levy based on claim history • AEP – eligibility to self-manage claims • WSMP – levy discount • WSD – levy discount • Others activities might include • promotion of Health and Wellness programs or • clear Product Endorsement (example AA – Centre Rear Brake Light)

8. EurosafeTax & Funding Schemes • Designed to promote OSH activities • Provide grant, award or tax concession schemes, separate from the insurance system • Typically “one-off” purchases or highly targeted – e.g. to SMEs Example Tax breaks or Sponsorship offered to employers to invest in safer equipment or work organisation that is safer than the minimum legal requirement.

9. Other Types of Economic Incentives What are we talking about? Performance Pricing Behaviour Incentives Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC. Risk Sharing Options • Service & Partnerships

10. Examples of Economic Incentives Australia, Canada, USA … 2009 Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC.

11. Victoria, Australia Performance Pricing Behaviour Incentives Employer and industry based premium calculation. Industry classifications based on WIC Factors affecting premiums include remuneration, claims experience, WIC, capping and minimum capping factor Claims experience only affects medium and large employers Premium calculation based on claims costs reported in the claims reporting period (CRP) Statistical case estimation (SCE) model used for the estimation of future claim costs Recalibration of SCE model and indexation factors can also influence estimates. These factors are outside employers control Employer performance rating and sizing adjustment factors are also used in the premium calculation Capping on premium rate changes only applicable for employers who remain in the same classification for the next policy period Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC. WorkSafe has several employer incentive programs that provide employmentallowances, premium reductions, rebates and brand recognition Optional programs WorkSafe Incentive Scheme for Employers Small business rebate program Compulsory programs Return to work Other programs WorkSafe Victoria Awards Premium reduction methods Risk Sharing Options • Service & Partnerships Buy-out option Can be selected by paying an additional 10% of the employers insurance premium Employers WorkSafe agent manages and pays from day one for an injured worker who is off work Must apply for a whole policy term for an employer Self-insures – organisation that is a body corporate, and has sufficient financial strength and viability to meet their claims liabilities Performance reviewed through the Self-Insurance Performance System • There are six agents that issue and administer claims and policies for WorkSafe • Health care professionals/ providers provide two type of services; primary contact and referred services . They must be registered with Medicare Australia and approved by WorkSafe. These providers are: • Allied health professionals • Independent medical examiners • Independent impairment assessors

12. British Columbia, Canada Performance Pricing Behaviour Incentives Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC. WorkSafeBC’s voluntary Partners in Injury and Disability Prevention Program offers incentives to employers who create and adhere to health and safety management systems aimed at improving workplace safety and helping injured workers return to work in a safe and timely manner Employers who register work with a certified partner to meet the program’s standards. After passing an audit, employers receive a certificate of recognition and become eligible to receive a rebate on WorkSafeBC premiums Certificates available include: Health and safety; awarded to employers that implement and maintain a health and safety management system that exceeds requirements, and Return to Work; obtained by maintaining proactive return-to-work programs Employers must register with a certified partner that offers services unique to their particular industry Legislation gives WSIB explicit approval to use experience rating programs for two reasons: To allow ability to adjust premiums based on an employer’s prevention behaviour To improve equity among employers, by providing rebates or surcharges to employers based on claims experience WSIB experience rating program segments premiums by size of employees, industry classification, and number of claims in the past three-years relative to other firms within a given industry. This means employers in the same industry will likely pay different premiums WSIB distinguishes between small employers and large employers only – WSIB does not recognise medium sized firms Risk Sharing Options • Service & Partnerships WorkSafeBC’scost-sharing training incentive programallows the employer to assess the worker’s suitability for the job without taking any of the financial risk The program is normally three to six monthsin length, in which WorkSafeBC’s contribution decreases and the employer’s increases as the worker becomes fully trained. For example: Month 1: WorkSafeBC pays 100%, employer pays 0% Month 2: WorkSafeBC pays 50%, employer pays 50% Month 3: WorkSafeBC pays 0%, employer pays 100% WorkSafeBC offers optional insurance for individuals not automatically covered under Legislation. Cost of optional insurance depends on amount of cover sought and the rate charged to the workers classification (base rate) and the experience ratings adjustment The Certified Partner program allows organisations, through an agreement with WorkSafeBC, to help guide employers toward earning a certificate of recognition Certified Partners are typically safety associations recognised by WorkSafeBC as having specialist industry knowledge to promote and develop workplace health and safety

13. Washington, USA Performance Pricing Behaviour Incentives Washington has a sophisticated analytical approach to experience rating L&I’s classification and rating system is based on principles of workers' compensation insurance used by private insurance companies The premium rate per hour worked is determined using the following inputs: Firms Experience Factor: This measures the extent to which a firm’s future claim costs per unit of exposure are estimated to exceed or fall short of the benchmark claim cost per unit of exposure for the classification Base Class Rates: These rates are the benchmark premium rates for each risk classification. These rates reflect the estimated cost of providing insurance for work in that risk classification Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC. L&I operates a claim free discount which rewards small employers who have gone at least three years without a claim in which wage-replacement benefits or a permanent disability benefits were paid The scheme can save employers up to 40% on the workers' compensation premiums Claims in which only medical benefits are provided do not count against the claim-free discount if no accident fund costs were paid on any claim The program encourages employers to put in place effective injury prevention programs L&I also operates a Retrospective Rating financial incentive program to help qualifying employers reduce their industrial insurance costs Risk Sharing Options • Service & Partnerships L&I allows employers to self-insurer and provide any and all appropriate benefits to the injured worker. The Self-insured employer: Is responsible for the payment of benefits during the time that a claim is open Remains liable for benefits during a lengthy reopening period provided in industrial insurance law Continues to be liable for worker benefits whether the self-insurance certification is continued or surrendered L&I's role with self-insured employers is to: Oversee the provision of workers compensation benefits to their injured workers based on its rules and regulations Review their financial strength to make sure that all workers' compensation obligations can be met L&I offers courses to employers as an added service. They include the following: Workers' Comp 101: Teaches employers how injuries impact premiums, and outlines elements of an effective Claims Plan Rates and Claims Management 101: This workshop is an overview of basic claim management principles L&I also have a Workers’ Compensation Advisory Committee which advise and serve as a sounding board for the Director of L&I on matters pertaining to the state’s workers’ compensation system This committee includes representatives from businesses, insurers, and employee groups

14. NZ EvidenceEffectiveness of economic incentives? • Accredited Employer Programme provides very strong incentives by putting employers at the centre of injury management and exposing them to the costs of injuries. • Accredited employers have better injury management outcomes in terms of lower average claim size and lower claims rates than standard (non-accredited) employers. • Accredited employers’ overall costs per average entitlement claim are around 15% lower than standard employers. • Standard employers’ claim rates are 14% higher than accredited employers during the period (of the review 2000-2009) after adjustment for the different industry characteristics of the employer groups. Claim rates for standard employers are improving, while for the AEP’s the claim rates have remained relatively unchanged. Source: Melville, Jessup, Weaver (June 2010) for Martin Jenkins review of ACC Accounts

15. NZ Evidence: An Actuarial Risk?WSMPCompared Between Eligible & Non-Eligible Participants WSMP Paid Claims Ratio Compared to Eligible Participants and Non-Eligible Participants (Eligibility based on total payroll Levy paid)

16. NZ Evidence: An Actuarial Risk?WSMP Compared Between Discount Levels & Eligible Non-Participants WSMP Paid Claims Ratio Compared between Discount Levels and Eligible Non-Participants

17. NZ EvidenceEffectiveness of economic incentives? • New Zealand research on effectiveness is essentially non-existent • It is virtually impossible to establish in robust research terms the effectiveness of the various economic initiatives currently in place (statistically, New Zealand is far too small to demonstrate efficacy). • The available evidence suggests participants in AEP are safer than non-AEP, however this could be because of large number of reasons not related to the economic incentive of being in AEP. • Little evidence to suggest that participants in WSMP and WSD are significantly safer than eligible non-participants. • Economic incentives could pose an “Actuarial Risk” if they don’t work or are set wrong. Conclusions

18. Evidence for effectiveness?EuroSafe Conclusions Internationally research based results for effectiveness are mixed • OVERALL … strong policy argument for the benefits of economic incentives arising from sources outside a company to improve OHS. • Incentives for OHS couldbecost-effective. • The use and possible effectiveness of economic incentives needs to be considered in the context of the fundamental legal design of the social insurance systems and worker’s compensation, including enforcement. • Targeted economic incentives have significantly more impact than general incentives. • Tax reductions can be effective in helping an organisation invest more in workplace injury prevention. Internationally, such incentives are rare.

19. Evidence for effectiveness?EuroSafe Conclusions • Linking economic incentives to audits/intervention programmes is another promising way of improving OHS. • Matching funds – where governments provide a grant proportional to the amount of money spent by an organisation on workplace health are a potential method to improve OHS. This type of economic incentive has high administrative costs for both the organisation involved and the government. • Funding schemes for OHS, on the other hand, are found in nearly every EU country. Funds (subsidies, grants) are provided for a wide range of practices, from the purchase of certain materials and tools to the implementation of OHS management systems.

20. Evidence for effectiveness?EuroSafe Conclusions • Insurance-related economic incentives are an effective way to motivate organisations to invest in OHS. • However they should be regarded as a single strategy within a group of initiatives, including tax incentives and funding schemes. • Evidence suggests that economic incentives alter employees’ behaviour or incident rates in organisations. • “Moderate” evidence for the effectiveness of experience rating and reduction in the number of insurance claims. • Another insurance related approach is to reward specific prevention efforts according to a pre-determined model. • Methods for setting premiums cannot be regarded as true economic incentives, which should aim to motivate enterprises to comply with (or exceed) legal minimum requirements.

21. Eurosafe 7 success factors 1 The incentive scheme should reward specific prevention efforts which aim to reduce future injuries & ill-health and not only reward past results of good OHS management, i.e. past injury rates. 2 The incentive scheme should be open to all sizes of enterprises and pay particular attention to the special needs of SMEs. 3 The incentive should be high enough to motivate employers to participate. 4 There should be a clear and prompt relationship between the desired prevention activity of the enterprise and the reward. European Agency for Safety and Health at Work. (2012). How to create economic incentives in occupational safety and health: A practical guide”. https://osha.europa.eu/en/topics/economic-incentives/index_html

22. Eurosafe 7 success factors 5 The incentive system should • have clear awarding criteria • be designed to be as easy to use as possible • have a low administrative burden for both participating enterprises and incentive-offering organisations. 6Insurance or tax-based incentives with precisely defined criteria are most effective, if targeting a large number of enterprises. (closed system). 7Subsidy schemes are most effective, if the desire is to promote innovative solutions for specific areas. European Agency for Safety and Health at Work. (2012). How to create economic incentives in occupational safety and health: A practical guide”. https://osha.europa.eu/en/topics/economic-incentives/index_html

23. Points for discussion What is the “Value Add” proposition for economic incentives in the new regulatory environment? • A lever for raising awareness and complying with legislation(particularly for SMEs). • Reward organisations which develop and maintain safe and healthy working environments. • Motivate organisations to invest in OSH, because regulatory enforcement alone is often not sufficient to persuade them of the importance of OSH. • Complement regulatory dictates as they stimulate organisations at the financial level and thus add weight to the business case for good OSH in a way that is clear to company managers. Eurosafe, 2010. Factsheet 95 Summary of the report on Economic incentives to improve occupational safety and health: a review from the European perspective.

24. Points for discussion What is the Value Add ? • A balance of “hard paternalism” (regulatory enforcement) and “soft paternalism”(economic incentive). • A move towards “Best Practice” beyond the “Regulatory Minimum” But isn’t regulation supposed to promote adoption of best practice? • Signalling the true cost of injury treatment and rehabilitation through Performance Pricing or Risk Sharing. But isn’t this what industry levies do? • Reduced costs to Compensation Scheme. • Productivity – better equipment and reduced presenteeism and absenteeism. A role for health and wellness programmes? Is this a case for subsidies, tax benefits etc? • Reduced injury severity rates.

25. Points for discussion In reality where is the economic moral hazard or behavioural risk that economic incentives will fix? • Which economic incentive will dominate in a highly contested workplace regulatory setting?Competition law, labour law, product & environmental law, free trade, free choice. • An “actuarial risk” to the Scheme if incentives are set wrong, or don’t work. • Rewarding what should already be done by law. A moral repugnance? • Subsidising productivity improvements that should be done in their own economic interest (under neo-classical theory). • No-fault Scheme. • Return of the Forensic Lottery (in itself this is an economic incentive). • Continual enforcement failure.

26. Summary: Designing Economic Incentives in the New Regulatory Setting • Requires understanding the whole social and institutional regulatory context • Modelling economic behavioural assumptions in a highly conflicted and contradictory regulatory space • Choosing the target outcomes sought • Designing for the outcomes • Economics incentives are only one part – and not necessarily the most important part – of the whole setting • Remember the Eurosafe Seven Success Factors