This PPT is presents a summary of evidence for the use of economic incentives to promote work place health and safety. It was given at seminar at Victoria University of Wellington NZ

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

2. Elements of the Discussion
EI O
Issues Evidence Options

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. Behavioural Economics, 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.
I

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)
I

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

6.  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
E
Evidence from Europe
Types of Incentives: What are we talking about?

7. Eurosafe
Insurance 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
Current ACC Examples … 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)
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8.  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.
E
Eurosafe
Tax & Funding Schemes

9. Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC.
Other Types of Economic Incentives
What are we talking about?
Performance Pricing
Risk Sharing Options
Behaviour Incentives
Service & Partnerships
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10. Examples of Economic Incentives Australia,
Canada, USA … 2009
Australia Canada USA
New South Wales
Victoria
Queensland
Western Australia
South Australia
Tasmania
Northern Territory
Comcare
Ontario
British
Columbia
Alberta
North Dakota
Minnesota
Washington
New York
Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA.
PPT prepared for ACC.
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11. 11
Victoria, Australia
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
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
WorkSafe has several employer incentive programs that provide employment
allowances, 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
Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC.
Performance Pricing
Risk Sharing Options
Behaviour Incentives
Service & Partnerships
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12. British Columbia, Canada
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
WorkSafeBC’s cost-sharing training incentive program allows 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 months in 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
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
Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC.
Performance Pricing
Risk Sharing Options
Behaviour Incentives
Service & Partnerships
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13. 13
Washington, USA
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
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
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
Source: Deloitte (October, 2009). Global Jurisdiction Summary, Australia, Canada, USA. PPT prepared for ACC.
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Performance Pricing
Risk Sharing Options
Behaviour Incentives
Service & Partnerships

14.  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.
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Source: Melville, Jessup, Weaver (June 2010) for Martin Jenkins review of ACC Accounts
NZ Evidence
Effectiveness of economic incentives?

15. NZ Evidence: An Actuarial Risk?
WSMP Compared Between Eligible & Non-Eligible Participants
E
WSMP Paid Claims Ratio Compared to Eligible Participants and Non-Eligible Participants (Eligibility based on total payroll Levy paid)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2004 2005 2006 2007 2008 2009 2010 2011 2012
PaidClaims/Levies
Year Ending 31 March
Paid Claims Ratio
Industry: (All)
WSMP
Target Non-WSMP
Non-Target Non-WSMP

16. 0%
10%
20%
30%
40%
50%
60%
70%
80%
2004 2005 2006 2007 2008 2009 2010 2011 2012
PaidClaims/Levies
Year Ending 31 March
Paid Claims Ratio
Industry: (All)
Primary
Secondary
Tertiary
Target Non-WSMP
NZ Evidence: An Actuarial Risk?
WSMP Compared Between Discount Levels & Eligible Non-Participants
E
WSMP Paid Claims Ratio Compared between Discount Levels and Eligible Non-Participants

17.  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.
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NZ Evidence
Effectiveness of economic incentives?
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 could be cost-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.
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19.  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.
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Evidence for effectiveness?
EuroSafe Conclusions

20.  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.
E
Evidence for effectiveness?
EuroSafe Conclusions

21. OEurosafe
7 success factors
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
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.

22. O
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
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.
6 Insurance or tax-based incentives with precisely defined criteria are
most effective, if targeting a large number of enterprises. (closed system).
7 Subsidy schemes are most effective, if the desire is to promote innovative
solutions for specific areas.

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.
O
Eurosafe, 2010. Factsheet 95 Summary of the report on Economic incentives to improve occupational safety and health: a review from the European
perspective.

24. 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.
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Points for discussion

25. 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.
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Points for discussion

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