NSW Treasury holds significant concerns that the country’s largest workers compensation scheme is heading for a financial disaster, secret documents reveal.
- iCare reported a $2 billion loss for the nine months to March 2020 and its funding ratio is below the 100 per cent needed to guarantee claims can be paid out
- Businesses are concerned the state-owned insurer will be forced to raise workers’ compensation insurance premiums to fund the shortfall
- The NSW Opposition is calling for a dramatic overhaul of iCare’s management and board
ABC’s The Business program has obtained a letter from the NSW Treasury to the NSW Treasurer Dominic Perrottet, sent in May, seeking approval to increase its oversight of the workers’ compensation fund iCare due to its “underperformance”.
The letter detailed the insurer’s failings and requests support for the intervention, above what is generally supported by the legislative framework.
“Given concerns that Treasury has about underperformance of [iCare] and non-disclosure of material matters by iCare … going beyond what is required under the legislative framework is appropriate given how important the performance is … to the NSW economy,” the confidential document stated.
iCare loss puts fund in parlous position
Treasury noted that the insurer’s $2 billion loss in the nine months to March 2020 was a key reason for concern.
It stated that, as a result of the loss, the funding ratio “is currently 98 per cent”.
“This is below the board approved target operating range of 110 to 135 per cent,” it said.
In iCare’s own words, this puts the fund in a parlous financial position.
“A funding ratio below 100 per cent indicates that either the organisation is unable to make the payments it needs to or is in danger of not being able to in the future,” the company said.
The document reveals this triggered an extraordinary meeting of iCare’s board.
Concerns about the financial viability of the insurance scheme were first raised in June 2018 by the State Insurance Regulatory Authority.
The ABC’s Four Corners program this week revealed the head of that authority, Carmel Donnelly, now has such “grave concerns” about iCare, she has commissioned EY to interrogate its accounts.
‘Black hole’ that businesses will need to fill
Workers compensation was designed as a safety net, aimed at returning injured employees to work and providing assistance to those so badly hurt they could no longer work.
Australian workers are guaranteed these protections by law, and employers fund it through compulsory premiums.
The deteriorating financial position of the NSW scheme has the state’s peak business lobby worried iCare will have no choice but to hike premiums significantly.
“Given the financial state of the scheme, there is clearly a growing black hole that needs to be filled,” said Stephen Cartwright from NSW Business.
For more than two years, Business NSW has raised issues about iCare’s poor performance.
“Poor claims management practices caused lengthy delays in workers receiving necessary medical and rehabilitation services, contributing to a volatile premium formula,” Mr Cartwright said.
Labor calls for iCare management spill
Shadow finance minister Daniel Mookhey told The Business that workers could not have confidence in the scheme.
“This system is under immense pressure. The resources to get sick and injured workers back to work are disappearing,” he said.
NSW Labor is calling for iCare’s management team and board to go.
iCare was set up by the State Government in 2015 to replace the old WorkCover scheme, which had racked up a $4 billion deficit, and was considered an outmoded and outdated bureaucracy.
Treasurer Dominic Perrottet set up iCare when he was the state’s Finance Minister, and it now answers to him.
It does not answer to banking and insurance regulator APRA, and does not have to abide by the same rules that govern risk, solvency and financial management that other insurers do.
An independent report into the insurer by Janet Dore published in December 2019 found big problems with the way the insurer was handling claims, and noted declining outcomes for workers as well as mounting losses.
“iCare suggests that the deteriorating performance is the result of factors beyond its control,” the report stated.
“While there have been some external factors that affected the deteriorating performance of the NI [nominal insurer], the primary driver for the decline is the implementation and operation of the new claims model implemented by iCare.”
iCare relies on investment returns after premium reductions
iCare significantly cut premiums for businesses, which also significantly cut income for the fund.
The Dore report concluded that, as a result, iCare has relied more heavily on investments to make up the shortfall, which it argued was not a sound funding strategy.
“Reliance on investment returns is inherently risky, especially if depended upon to support the underwriting result,” the report noted.
Since this time, Australia has entered a recession that will likely worsen iCare’s financial position, through a tougher investment environment and the fact that more people are likely to be claiming on the insurer for longer as they struggle to return to work.
The Treasury document from May, obtained by The Business, acknowledged conditions have deteriorated and will continue to do so.
While Treasury said it will continue to monitor iCare, it will not go for “full engagement” because, in part, of an “absence of actuarial expertise within Treasury to adequately and critically analyse information provided by iCare”.
In response to questions about the solvency of iCare, Mr Perrottet told the ABC that the fund has felt the effects of the COVID-19 crisis like all businesses and governments.
“Investment income is a primary factor in the calculation of the net result,” he said.