My submission to the NSW Workers Compensation Inquiry
Labor is on the right track, but should allow workers to buy top-up insurance.
The following is my submission to the Public Accountability & Works Committee of the NSW Legislative Council, regarding the Workers Compensation Legislation Amendment Bill 2025. This was written on behalf of the Libertarian Party NSW and the Australian Taxpayers’ Alliance.
1. Workers Compensation (WC) insurance from first principles
While the most common starting point for analysing any market is the status quo, it can also be helpful to take a fresh look starting from first principles.
When it comes to the market for workers compensation insurance (henceforth WC insurance), the blank slate approach would be to have a competitive market made up of workers who want WC insurance and insurance companies who provide a range of different insurance products at market prices.1
If a worker suffers a physical or psychological injury covered by their insurance policy, they would be eligible for pre-approved benefits such as income insurance, medical services, and compensation.
The NSW situation differs from this benchmark system in several ways:
SUPPLY = Instead of a competitive market of private providers, the WC insurance market is dominated by state government providers in the form of the Nominal Insurer (for private sector workers) and the Treasury Managed Fund (for public sector workers).
DEMAND = Instead of workers buying their own insurance, the government mandates that employers buy that insurance for their workers.
PRODUCT = Instead of a range of different insurance products catering for different preferences, there is a single level of insurance available, as determined by the state government.
PRICE = Instead of prices determined in a competitive market, the price of WC insurance is set by a state government regulator.
Each of these policy planks is worth reviewing, though the focus of the current review relates primarily to point #3 above in terms of changing the level of WC coverage.
2. Proposed changes in context
The government is not proposing to change the supply side (maintaining the governments near monopoly), nor the demand side (maintaining the requirement for employers to buy insurance for their workers). Since they are maintaining the governments near-monopoly, by necessity they are also retaining the government’s control over pricing. In other words, issues #1, #2 and #4 are unchanged.
The issue under consideration is point #3 from the above list – proposing to change the level of WC insurance coverage being provided. This would be done primarily through:
Tighter definition of covered psychological injuries
Short-term benefits for psychological injuries cut off earlier = after 2.5 years instead of the current 5 years.
Long-term benefits now require higher levels of psychological impairment = 31% Whole Person Impairment (WPI) instead of the current 21%.
Lump sum payments now require higher levels of psychological impairment = 31% WPI instead of the current 15%.
Critics have noted that this amounts to a decrease in WC coverage. This criticism is true in isolation, but it neglects an important piece of context – the level of psychological injury insurance coverage has expanded significantly over recent years, and now exceeds what was envisioned when the scheme was put in place.
This expanded coverage has come about in a number of ways:
Several changes by the State Insurance Regulatory Authority (SIRA) over recent years have made it easier to claim psychological injury in more situations.
Recent court decisions have expanded the interpretation of what constitutes a work-related psychological injury (e.g. Todic v NSW 2019).
The introduction of the “Code of Practice” by SafeWork NSW in 2022 made it easier for people to claim psychological injury in more situations.
After a 2021 parliamentary inquiry into iCare, they changed their internal policies to accept more claims of psychological injury.
Regardless of whether these changes are considered desirable or not, the fact is that they constitute an increase in the effective level of WC insurance coverage being provided. This expanded WC coverage has meant more benefits for workers, but as with everything in life, if you want more of something then it comes at a higher cost.
Seen in this context, the government’s proposed changes are a sensible adjustment. They are effectively defending the long-term status quo, and returning the level of WC coverage back to a level that is sustainable within the current prices. Far from being too radical, there is an argument that the government has been too moderate, and that they should consider more thorough reforms.
3. Back to first principles – the issues not being discussed
The government has proposed minor edits to the existing system to ensure it remains solvent. While that is better than nothing, they should be looking at fundamental reform of the entire market structure.
3.1 Supply
A central feature of any economic question comes down to productivity. Both the government and their critics of all stripes would share the goal of having a more productive insurance industry, so that more insurance coverage can be provided at a lower cost.
There is a perennial wish by planners that they will eventually be able to make government monopolies more efficiency. This is naïve. It is beyond the scope of this submission to outline the history of economic development, but suffice to say the lessons of history show that getting efficiency from government monopolies is like getting blood from a stone. Private markets have many imperfections, but they are by far the most effective driver of sustainable productivity growth.
People genuinely interested in finding supply-side efficiencies need to consider opening the insurance market up to genuine private competition, similar to what currently exists in WA and Tasmania. In particular, private insurance is generally better at keeping costs down, and more capable of dealing with the moral hazard (and potentially adverse selection) that is inherent in the insurance industry.
3.2 Demand
The hypothetical benchmark WC insurance market is further modified by the requirement that employers buy the insurance on behalf of their workers, though the consequence of this policy is widely misunderstood.
Apologists for the status quo imagine that employers pay the insurance costs and then workers get the benefits. That’s not quite right. There is an important distinction between who pays for something, and who ultimately bears the cost of that thing.
It is true that the businesses are the ones who directly pay the insurance premiums, but who ultimately pays is determined by the relative elasticities of capital supply, labour supply, and product demand. Given that most industries face elastic capital supply and elastic product demand but inelastic labour supply, in reality most of the costs of WC insurance will eventually be passed on to workers in the form of lower wages.2
The situation is similar to what exists with compulsory superannuation paid by employers. It is a pleasant fiction to imagine that businesses take on that cost themselves, but the mainstream consensus amongst economists is that higher superannuation payments are associated with lower wages. The employers literally hand over the money, but the real cost is mostly paid by workers.3 The same dynamic is at play with WC insurance premiums.
This is not a hard and fast rule. Employers with monopoly power will be able to pass some of the costs on to their consumers in the form of higher prices, and the stickiness in the labour market may cause some employers to fire people instead of supressing wages… but in the long run, the most likely outcome is relatively lower wages.
Seen in this light, the mandate for employers to pay for WC insurance is mostly about appearances – to hide the reality that it is the workers who pay the costs of WC insurance.
To enhance transparency, and ensure that people are able to make the best decision for their circumstances, workers should be given the option of either accepting the WC insurance provided by their employer, or else negotiating to receive that money directly in the form of higher pay and then buy their own WC insurance.4 If nothing else, the value of WC insurance should be made explicit as part of a workers full salary package, in a method similar to how superannuation payments are reported.
3.3 Product = level of insurance
The government is proposing to adjust the fixed level of insurance that is available, but the better approach would be to have multiple different levels of insurance available at a range of different prices, and let the workers decide their preferred level of coverage.
The current debate is focused on finding the one true level of WC insurance for everybody. This is a needlessly myopic approach to insurance. People do not all share the same preferences, and industries do not all face the same risk profiles, so there is no single correct level of insurance for everybody.
A fully deregulated WC insurance market would have no mandatory minimum. Some workers may choose to accept higher pay instead of having WC insurance, and then take on the risk themselves. Others may choose to take the higher pay and buy their own WC insurance, while still others may choose to negotiate a salary package that includes WC insurance at some level.
If full deregulation is deemed too radical, then the government could mandate a minimum standard level of insurance, but allow some people to pay for extra insurance. There is nothing inherently preventing insurance providers (whether state-owned or private) from offering a range of different insurance products. Workers and employers would then have the option to stick with the mandatory minimum, or else salary sacrifice to get a higher level of insurance coverage.
This would be a win-win reform over the current proposals. The government would achieve their goal of bringing the mandatory level of WC insurance back to historical levels, and therefore ensuring the system remains sustainable. Meanwhile, those people who prefer higher levels of insurance would be able to make an informed decision about whether that extra insurance is worth the extra cost.
The only real objection to this proposal is the insulting claim that workers can’t be trusted to make their own decisions, or the non-credible claim that the cost of WC insurance mostly falls on employers (see the discussion in section 3.2 above).
3.4 Price of insurance
The final topic of price setting is inextricably linked to the first topic regarding how WC insurance is provided. If the government insists on maintaining their near-monopoly position in the WC insurance market and mandating a single level of coverage, then the government would continue being the price setter.
On the other hand, if the government stood back and allowed a competitive private insurance market, then the price of insurance would be discovered according to the usual process of market dynamics. Insurers would compete to provide the highest value at the lowest cost, which creates an incentive for them to find productivity gains and to carefully assess and manage risks.
A possible hybrid model would be for the government to maintain their monopoly position on providing the mandated minimum level of insurance at regulated prices, and then allowing a private insurance market to provide “top-up” insurance at market prices.
The market prices from a hybrid model would provide an insight into the real underlying risks and costs that would come from different levels of insurance, and if nothing else would provide better quality information to policy makers as they reassess the ideal coverage and price of the mandatory minimum insurance. If this system had existed before the expansion of psychological injury insurance over recent years, then the government would have had advanced warning about the cost pressures that they were about to face, and they could have taken earlier action to prevent or mitigate those rising costs.
4. Conclusion
The government’s proposed changes are an appropriate reaction to the recent changes in the WC insurance market. A range of legislative, regulatory and legal changes in recent years have effectively increased the level of WC coverage, which is driving unsustainable cost increases, and it is perfectly reasonable for the government to make some offsetting changes to bring coverage back to historic level.
That said, there are opportunities to go further. Recommendations of this submission are:
Introduce the government’s changes to the mandatory minimum level of WC insurance, but then allow employers/workers the option of paying more for top-up insurance. If the value of the extra insurance genuinely is worth more than the cost for some people, they should be able to buy that insurance.
Allow genuine private competition in the WC insurance market. Ideally in a fully competitive insurance marketplace, but failing comprehensive reform then at least allow private competition in providing top-up insurance.
Recognise that, although employers directly pay for WC insurance premiums, the real cost of insurance is often felt by workers in the form of lower wages. This should be made more transparent by including the value of WC insurance in salary packages, similar to how compulsory superannuation are reported.
In reality, before the introduction of workers compensation legislation, these types of services were provided by membership-based Friendly Societies.
As a general rule, if capital supply was the most inelastic then the cost would fall mostly on the employer; if labour supply was the most inelastic then the cost would fall mostly on the worker; and if product demand was the most inelastic then the cost would fall mostly on the consumer. In reality, capital supply is elastic, labour supply is highly inelastic (roughly 0.1 to 0.3), and product demand elasticity varies from business to business but is normally higher than the labour supply elasticity.
Other examples of this effect are GST, PAYG(W) income tax, and payroll tax. In each instance it is the business that directly pays these taxes, but most of the impact is passed on to consumers as higher prices and/or to workers in the form of lower take-home pay.
Even if there was a choice, it seems likely that most people would continue to arrange their WC insurance via their employer. Not only would this be more convenient, but there would be opportunities for responsible employers to achieve lower premiums through careful risk management. The primary virtue from allowing choice would be to improve transparency.