Economic incentives in the prevention and compensation of work injury and illness

In Australia and North America, among workers' compensation regulators and many other professionals in the workers' compensation system, there has been a largely uncritical acceptance, if not celebratory endorsement, of experience-rated workers' compensation insurance premiums as a means by which the workers' compensation pricing system can bring about safer workplaces. First, this paper examines the historical origins of experience rating in the USA during the second and third decades of the 20th century, and finds, from the accounts of actuaries and underwriters who were involved in devising these arrangements, that the major impetus came from insurance underwriters wanting a theoretical basis for premium variation as a means of attracting the business of large employers. Second, the paper examines the dynamics of workers' compensation system processes, including the operation of the pricing mechanism, and suggests that the claims made for experience rating as a driver for workplace safety are largely illusory. There is a conflation in studies of experience rating between workers' compensation claims data and injury and illness data and, for a variety of reasons, experience rating has no utility in the area of occupational disease. Furthermore, the nature of experience-rating pricing methodology means that it can apply only to a relatively small number of larger employers. Third, with reference to a number of approaches adopted in different European jurisdictions, the paper explores ways in which economic incentives can be structured to facilitate safer workplaces without the deleterious effects associated with experience rating.