COMPETITION AND COMPENSATION: THE PRIVATISATION OF ACC.

Over the last 10-15 years the privatisation of former government ventures has become one of the defining characteristics of New Zealand's economic and social restructuring. In diverse areas such as telecommunications, heavy industry, financial services, transportation and utilities, state provision has been abandoned in favour of the private market. This process inevitably generated considerable controversy, and is now likely to become even more controversial with the inclusion of the accident compensation scheme as a potential target for market competition.

Established in 1974, the compulsory, 24-hour, no-fault compensation system for victims of accidents and some occupational diseases has become one of the central strands of New Zealand's social security network. ACC now deals with 1.5 million claims per year (out of a total population of 3.7 million) and it collects $1.6 billion in premiums (out of an annual government revenue of $36 billion). Its impact in both human and economic terms is thus substantial, and any move towards privatisation is not something that should be undertaken lightly or quickly, without full consideration of the issues involved.

The Insurance Council and prominent business associations have been very active in promoting privatisation -- spurred on by the identification of various problems in the way the system currently operates. Their lobbying efforts received a major boost in November 1997 when Cabinet agreed in principle to introducing an element of private competition into the accident compensation scheme regardless of the 1996 Coalition Agreement which made a commitment to retain the public monopoly (Department of Labour 1997:1). This dramatic volte-face was soon followed by the announcement in May 1998 that private insurance companies would be allowed to compete with ACC starting in July 1999. The Labour Party then responded by promising to repeal this development if it were returned to power. Private competition in accident compensation has thus become a controversial political issue that is likely to be on the agenda for the next election.

This article analyses the principal arguments in favour of privatisation suggested by the insurance industry and its allies, and critically evaluates the consequences of taking such a step. It concludes that New Zealanders would not be better off with a system run by private insurance companies, and that there would be serious adverse consequences both for accident victims and premium payers, which would outweigh any potential benefits.

The industry's arguments for privatisation can be grouped under three main headings: (i) efficiency and costs, (ii) choice, and (iii) fairness and safety. Each of these will be examined in turn.

EFFICIENCY AND COSTS

Industry contentions about efficiency are quite straightforward. Pressure of competition will force private firms to minimise their costs in order to keep their premiums down; otherwise they will lose business. "Monopolistic" government bureaucracies, by comparison, face no such incentives for efficiency (Insurance Council of New Zealand 1995:7, New Zealand Employers' Federation 1995:47, New Zealand Business Roundtable 1987:7). It is a line that resonates with the popular conventional wisdom that government is inevitably less efficient than the private sector (despite the efforts of Mercury Energy to challenge this belief).

While the claim of superior efficiency seems plausible in theory, it is harder to substantiate in practice, partly because ACC's administrative costs are generally acknowledged to be low by insurance industry standards. This is something that is recognised even by industry representatives themselves (see, for example, Employers' Federation 1995:39, Kerr 1996:5). According to a study by the Ministerial Working Party on the ACC, "there is little doubt that the percentage of premium income which is required for administrative costs would be higher under a multi-insurer environment". The committee estimated that administrative costs of private insurers would be, "in the vicinity of 30 [cts.] in every premium dollar, compared with around 10 [cts.] in the dollar for the continued monopoly" (1991:53).

The issue of efficiency also involves claims management and rehabilitation, and industry spokesmen argue that ACC devotes fewer resources to claims management than private companies would (Kerr 1996:5, Pask 1997:9). In the absence of comparative cost data from the private insurance industry, this contention is hard to verify. In any case, ACC has recently introduced a Work Capacity Assessment Procedure designed to address problems of "passive dependence" on weekly compensation. This initiative only became operational in October 1997, and it deserves a chance to be evaluated before recommending privatisation as the only solution to problems of claims monitoring.

There are several other reasons why we would expect ACC's operating costs to be lower -- for example, ACC does not have to provide an extensive budget for marketing, market research or other costs of inter-corporate competition. In addition, ACC can avoid other sorts of outlays that private companies have to accommodate, such as making profits and paying dividends, paying taxes, or spending money to attract investors. ACC can also make use of services provided by Inland Revenue and New Zealand Post for collecting premiums and debts. Although ACC pays a fee for this, it is surely more efficient than having each insurance company run its own separate system. For this reason, the insurance industry would like to retain the services of the Inland Revenue and NZ Post in the event of privatisation, in order "to keep the administration costs of the scheme to a minimum" (Insurance Council of New Zealand 1995:15). This is an interesting change of heart towards "monopolistic government bureaucracies" on the part of the private insurance industry.

Strangely enough, the point about administrative costs is made quite nicely by the Employers' Federation itself:

   Administrative costs could rise significantly under a multi-insurer regime
   -- the collection of levies, for example, might cost more. Private insurers
   would also have marketing costs that a statutory monopoly such as ACC does
   not have. (New Zealand Employers' Federation 1995:15)

Such an admission makes the Federation's support for a "multi-insurer regime" all the more curious.

In the area of accident compensation, however, the vast bulk of the system's costs are not in administration but in the payment of benefits to accident victims. Costs could be lowered by cutting benefits, but this is not really an indication of greater efficiency -- it is simply providing less for less. Anyone can build a small house more cheaply than a large one. If New Zealanders really want a less comprehensive system, with more restricted coverage, lower benefit rates, stricter eligibility requirements, longer waiting periods and greater use of deductibles and co-insurance, then they can have these things without resorting to privatisation. Statutory benefits can be reduced by legislation regardless of whether the system is run by a public agency or private companies, and the political decision would be just as tough in either case. If "efficiency" gains are dependent on cutting benefit costs, then privatisation is unnecessary.

Full Funding Versus Pay-As-You-Go

Ironically, under privatisation overall costs and premiums would not be reduced; they would have to increase substantially due to full funding. Full funding means that the revenue collected in premiums in any one year should cover the total, long-term, costs of the claims occurring in that year. The total costs of a claim can be substantial because people who are permanently disabled in Year 1 will also receive compensation in Years 2, 3, 4, etc. This may be as much as 40 years worth of payments. To cover all these future payments from revenues collected in Year 1 means that employers, workers and motorists must pay a hefty premium.

An analogy can be drawn here with family finances. If your household operated on the basis of full funding you would have to estimate your total expenses over your family's lifetime, including mortgage payments, house maintenance, heating, electricity, school fees, medical bills, car payments, petrol, clothing, groceries, etc. You would then be required to cover all these future expenditures from your current year's salary. If you cannot do this -- and unless you are Bill Gates you probably cannot -- then you will have an "unfunded liability" equivalent to the difference between your current salary and your anticipated total expenditures. This would be a huge amount. Calculated in a comparable fashion, ACC has an unfunded liability of around $8 billion (ACC 1997a:83).

Mercifully, for both your family and ACC, full funding is unnecessary because there will also be income in future years which can be applied to these future expenses as they arise. As long as your current year's income covers your current year's expenses, your accounts will be happily in balance, and you may even have a surplus for savings. Millions of families, corporations, public institutions and government agencies around the world operate quite successfully on this pay-as-you-go (PAYG) basis.

Private insurance companies suffer the disadvantage of not being able to use PAYG. For these companies, full funding of future liabilities is essential because they are contractually obligated to pay compensation benefits to accident victims on a continuing basis. If an insurance company goes bankrupt, these future benefits still have to be paid. Consequently, insurance companies establish a fund, paid for by premiums, that covers the anticipated long-term costs of benefits. Otherwise, insurance company bankruptcies would leave accident victims in the lurch.

Government agencies such as ACC are different in this regard because bankruptcy is not an issue. The future revenue stream is guaranteed by public authority, and ACC revenues in any one year need only cover the benefit costs actually paid out in that year, plus a modest reserve amount to cover unforeseen contingencies. ACC can operate on a PAYG basis, which gives it substantial cost savings over private firms and allows it to charge lower premiums. There is nothing "unfair" or "unnatural" about this; it is an inherent advantage that a public system has over a private one, and it results in real savings for employers and earners. Of course, ACC could operate on a fully funded basis even though it is a public agency, and some steps have already been taken in this direction. But in so doing, ACC is being forced to give up the cost advantages of PAYG -- advantages that are only available to a public agency -- and is being required to impose higher than necessary payroll taxes on businesses and employees over a substantial period of time.

The Employers' Federation, which nevertheless supports privatisation, has estimated that a move from PAYG to full funding would result in a one-off premium increase for employers of 28 per cent on average. This increase would then have to be maintained over a 10-year period. For employees, premiums would rise by 121 per cent, similarly maintained over 10 years (New Zealand Employers' Federation 1995:80).

Premium differentials of this magnitude are an obvious political barrier to privatisation, but the Coalition Government has smoothed the path somewhat by forcing ACC to abandon PAYG in favour of full funding over a 15-year period. This has had an immediate impact on premiums. Based on PAYG, the ACC had recommended an average employer premium of $1.70 per $100 of payroll for the 1998/99 year. The move to full funding pushed this up to $2.35 -- 38 per cent higher than ACC had proposed (ACC 1997b:13). By requiring ACC to maintain the elevated premium levels needed for full funding, government is unnecessarily forcing the public provider to emulate the higher cost structure of the private insurance market.

Despite the efforts of the insurance industry to put a brave face on adverse cost comparisons, the real situation sometimes slips out inadvertently. In what is intended as an argument for privatisation, the Insurance Council maintains that:

   The ACC, in its current form would not survive in the private insurance
   market. Competitive pressures, including the need to establish adequate
   marketing facilities, taken with the need to comply with minimum prudential
   standards [e.g. full funding], would result in substantial cost increases.
   (p.35)

If ACC were a competitive firm in the private market then its costs would have to go up substantially but, unfortunately for the Insurance Council, this argument does not just apply to ACC. Private insurance companies also have to establish marketing facilities and comply with "minimum prudential standards". The obvious implication here is that privatisation requires substantial cost increases over public provision, and that these cost increases can be avoided by keeping ACC as a public agency. This is actually an argument against privatisation.

Changing Demographics 

Finally, one potential problem with PAYG needs to be addressed, and this relates to the changing demographics of the NZ workforce. Declining birth rates may make it harder for future cohorts of workers to support the continuing benefits that are being paid to their more numerous predecessors, thus putting a PAYG system under strain. However, a number of factors make this issue less significant than it may at first seem.

First, this is more of a concern for superannuation than for accident compensation. When the "baby boom" generation reaches retirement age, and then enjoys the fruits of its longevity, then there will be a substantial drain on superannuation funds. But when most of the approximately 28,000 people on long-term weekly compensation reach retirement age they are dropped off the ACC rolls and their earnings-related benefits are terminated.

Second, as the ACC scheme has matured the increase in long-term claims has halted, and has now even started to drop slightly. The recent trends in long-term compensation show both fewer entries and increased exits (ACC 1997c:3,5). If this trend continues it will reduce the financial burden on future workforce cohorts.

Third, over the next 20 years or so, the projections for the workforce-age population (15-64 years) do not actually show much decline. For 1996, Statistics New Zealand calculated that 65.6 per cent of the population was between the ages of 15 and 64. For the year 2021, it has projected that this figure will be 65.1 per cent (1997: Table 2.14)(1) The relative workforce shrinkage may thus not be as much as some people fear.

For these reasons it is uncertain whether demographic changes will have adverse consequences for accident compensation under PAYG, at least for the next 20 years. Many other factors would also need to be included in the calculation, such as increased female participation in the labour force, changes in immigration, changes in unemployment and wage rates, and any future changes to the retirement age. The net effect of these variables on future premium rates is hard to predict. Much clearer is the fact that full funding would impose an immediate and sustained penalty on employers and earners compared to the lower rates possible under PAYG.

It should, perhaps, be re-emphasised that this whole debate between PAYG and full funding is central to the issue of privatisation. PAYG allows both employers and employees to enjoy lower rates of payroll tax for accident compensation, but this can only be achieved in a publicly-owned system where state authority can be used to guarantee future revenue flows. Private insurance companies, which can go bankrupt, have no option but to use a more costly fully funded system that imposes a higher penalty on New Zealand businesses, workers, and ultimately the economy as a whole.

CHOICE

Business groups' second line of attack against ACC, unsurprisingly, applies the language of the market to what is essentially a social insurance program. Privatisation is necessary, it is argued, in order to "enhance consumer choice" (Kerr, Roger 1996:6). As the Employers' Federation put it, "the greater the competition between insurance providers, the greater will be the incentives to encourage insurers to supply what customers want" (New Zealand Employers' Federation 1995:50).

But who are the "customers" here? If we look at the Employers' Account, which funds compensation for victims of workplace accidents and disease, then a fundamental problem for the market analogy immediately becomes apparent, viz. those being compensated are not the ones who would be choosing the insurer and paying the premiums. If employers are viewed as the customers, then their main interests lie in preserving the statutory prohibition against lawsuits from their injured employees, i.e. the "no-fault" system. Naturally, employers want to achieve this as cheaply as possible.

Employees, conversely, require adequate levels of benefits to compensate for the loss of their legal fights. This is the "social contract" that underpins the ACC as well as many workers' compensation systems throughout the world. A key feature of such systems is that employers receive the same protection against common law claims regardless of the benefit levels paid to injured workers. Lower levels of benefits simply mean lower premiums. Once the principle of no-fault compensation is accepted, there is thus a clash of interests between employers and workers over benefit levels.

Under privatisation, two alternative scenarios present themselves. First, if the "products" offered by competing insurance companies are genuinely diverse (as industry representatives claim) then employers can be expected to choose companies and packages that have the lowest benefit levels and consequently the lowest premiums. Firms that do not do this will find themselves at a disadvantage vis-a-vis their competitors, and insurance companies that do not offer such products will lose business to their competitors. We would then be faced with a "race to the bottom" with employers and insurers all scrambling to find the cheapest package of benefits consistent with the retention of no-fault protection. This is clearly detrimental to the interests of accident victims, who are the real clients of a compensation system.

In the second scenario, the level of diversity amongst competing insurance companies may be small. If accident compensation is maintained as a compulsory system, with benefits precisely specified in legislation, then private companies may have little scope for differentiation because the same benefits would have to be provided by all companies. Each company would have similar data about the risk levels of various occupations and activities, and each would probably use more-or-less the same actuarial assumptions concerning potential claims costs. In these circumstances, quotations from insurance companies are unlikely to vary much, and "consumers" would end up with a narrow choice between similar options at similar prices. Clearly, this would violate one of the stated goals of privatisation, namely enhanced choice.

If insurance companies have little direct control over benefit levels, then cost competition would inevitably place high priority on claims monitoring to restrict the number of eligible claims. There will be a competition to make access as prohibitive as possible, and a reputation for stringency will not hurt an insurance company's business because workers are not the ones choosing the insurer. On the contrary, it is likely to attract employers looking for a more restrictive system with lower premiums.

Important questions then arise about the recourses available to accident victims who are denied benefits by insurance companies. What sort of appeal mechanisms will be available? Who evaluates appeals? Will the system become clogged with court cases? The Insurance Council (1995:20) has suggested a review process set up by the industry itself, but any mechanism appointed and funded by insurance industry trade associations will hardly be seen as independent in disputes between claimants and member companies. If privatisation does go ahead, then at the very least there should be an independent Compensation Appeals Tribunal appointed by government to provide a relatively speedy and accessible system of dispute resolution compared to the regular courts.

High-Risk Accounts

Another issue affecting choice is the question of whether or not private insurers will participate fully in all of the major Accounts currently maintained by ACC, namely, the Employers, Earners, Non-Earners and Motor Vehicle Accounts. In general, the Insurance Council (1995) "considers that insurers should be able to choose which accounts they wish to participate in," while acknowledging that this may result in few participants in unpopular or unprofitable accounts.

Industry associations have suggested that a "pool insurer" be established to handle the less desirable accounts (Insurance Council of New Zealand 1995:15,20; New Zealand Employers' Federation 1995:68). This pool insurer would be owned and operated in combination by all the private insurance companies involved in accident compensation. Thus, in some accounts, consumers would be faced either with few participating insurance companies or with a private monopoly in the form of the pool insurer. In either case, choice would be limited, and the suggested benefits of competition would be less likely to emerge.

For high-risk employers or individuals, the premiums, restrictions and deductibles of such pool insurance are likely to be punitive and, as the Galvin Committee noted, "this function will be unprofitable and the Government will have to subsidise it" (Ministerial Working Party on the Accident Compensation Corporation and Incapacity 1991:71). The Galvin Report also suggested a more draconian alternative, which has been adopted by the Employers' Federation -- if high-risk firms cannot afford insurance cover they should simply be allowed to go out of business (New Zealand Employers' Federation 1995:68).

The insurance industry would thus like government to pick up the bill for poor risks, leaving the more lucrative individual and employer accounts to private insurers (Insurance Council of New Zealand 1995:20). This is one manifestation of a more general phenomenon in business-government relations, namely the simultaneous desire of business for the privatisation of profits and the socialisation of costs (see, for example, O'Connor 1973). In accident compensation this would result in "cream-skimming" by private insurers, with less profitable accounts dumped onto the taxpayers or left without insurance altogether. Choices, in this case, will be enhanced only for insurance companies.

FAIRNESS AND SAFETY

The issue of fairness is intimately related to the question of funding. The insurance industry and allied business associations argue that PAYG forces current employers to pay the ongoing costs of accidents that may have occurred many years ago -- even before some contemporary firms started operating. Firms may find that a large proportion of their premiums is being levied to cover accident costs for which they could in no way be blamed. Conversely, firms that have now gone out of business may have "escaped" without paying the full costs of their accident claims. As the Employers' Federation correctly notes, "under a pay-as-you-go scheme, past employer behaviour is, effectively, subsidised by present and future employers" (New Zealand Employers' Federation 1995:56).(2)

This funding issue also has implications for workplace safety. Premium levels in any given industry are determined by the accident costs in that industry, and firms thus have an incentive to improve workplace safety in order to lower their premiums. However, if most of the costs in that industry are determined by past accidents over which contemporary employers have no control, then this incentive is diminished.

These arguments against PAYG and inter-generational cross-subsidies are essential for the insurance industry because without full funding there can be no privatisation. As noted earlier, full funding will result in cost increases and higher levies than under PAYG, and private insurers must therefore find some compelling arguments to justify this move to premium payers. The issues of fairness and safety certainly have potential in this regard, but unfortunately, the arguments contain several weaknesses.

First, full funding may be a necessary condition for privatisation, but it is not a sufficient one. If problems of cross-subsidisation are the real issue, then PAYG can be changed to a fully funded system within the existing ACC structure. In fact, this change has already been announced by the government. Privatisation is therefore superfluous to the goal of ending cross-subsidies between different "generations" of businesses.

Second, cross-subsidisation is something that cuts both ways. Past employers are being subsidised by current ones; but current employers are, in turn, subsidised by future ones, and so on. It is a continuing inter-generational transfer that is common in many of the world's social insurance programs that operate on the principle of PAYG -- for example, the US Old Age Security and Disability Insurance program, or the Canadian Pension Plan.

Third, cross-subsidisation is not something unusual within the insurance industry itself, and in one sense, the very principle of insurance is based on the cross-subsidisation of risk. The costs to insurance companies of people who get sick, have accidents or die young are subsidised by revenue from healthy people who live long and prosper. Unfairness can also result from insurance companies' use of demographic groups to set premiums. For example, not all young male drivers are maniacs, but even careful ones must pay higher insurance premiums, at least initially, because they are subsidising their less cautious confreres. The insurance industry accepts this because it is administratively too expensive to disaggregate such group classifications and rate everyone on a purely individual basis.

Fourth, the insurance industry is suffering from a case of mixed principles by simultaneously defending the concept of no-fault compensation while attacking PAYG funding as unfair. If you argue that current employers should not have to pay the costs of past accidents because they were not responsible for them, then you are implicitly arguing for a fault-based system in which costs are allocated to those who created them. This view is part of a broad ethic of liberal individualism.

No-fault compensation, on the other hand, dispenses with individual culpability. Firms face premium increases if there is a serious workplace accident, even if they were totally blameless. Similarly, firms are protected against civil lawsuits from injured workers even when management is manifestly negligent, although in such cases they may still be subject to prosecution by the Occupational Safety and Health Service. A departure from this no-fault system could result in huge common law damages against employers and the people who insure them, which is why the insurance industry is keen on retaining it. But the industry cannot simply switch back and forth between principles of individual responsibility and no-fault compensation when it is expedient to do so.

Fifth, there is the large question of who will pay the costs of existing claims if the system is privatised. With new claims necessarily being fully funded, businesses and individuals will already have to pay higher premiums than under PAYG. On top of this, there will still be the continuing compensation costs of people injured under the pre-existing PAYG system. These unfunded liabilities will not magically disappear and will still have to be paid for by someone.

The insurance industry and its allies have proposed that this problem be dealt with in one of two ways. Despite concerns about making NZ businesses less competitive, the Insurance Council proposes an extra surcharge on premiums for businesses and individuals for the next 5-10 years (p.23). Not only does this further undermine the industry's contention that costs and premiums would be lower under privatisation, but it also violates the insurance industry's ostensible concern with fairness because current employers would still be paying for the costs of past accidents.

The Employers' Federation has an alternative suggestion. In its view, "requiring present and future employers to pay for the cost of accidents they had no control over and were not responsible for would be totally unacceptable" (Pask 1997:6). Instead, "the Federation considers that there is a strong case for the Government, via taxpayers, picking up the unfunded liabilities across all accounts" (p.5). Quite why taxpayers are any more responsible than employers for the costs of past accidents is not explained. The ACC Employers' Account, covering workplace accidents, constituted 63 per cent of unfunded liabilities in 1996/97 -- equivalent to $5.24 billion (ACC 1997a:83).(3) This unfunded liability exists because past employers enjoyed cheap premiums thanks to PAYG. Is it fair that current taxpayers now be forced to pick up the bill for past business subsidies?

A sixth point relating to fairness is that a privatised system would have adverse consequences for victims of occupational diseases. Currently, ACC compensates some such victims, but it would be very difficult for a private system to do so. Occupational diseases often have long latency periods and ambiguous etiologies which can make it difficult to identify a single employer or a single cause as being responsible. For instance, cancer may be diagnosed many years after the first exposure to an occupational carcinogen, thus making it complicated to trace the links, and if the victim worked for several similar employers over a number of years, which insurance company should pay the claim? If occupational diseases are covered at all in a privatised system, victims will likely face a contentious process characterised by protracted disputes. Any future extension of compensation to cover disabilities from non-occupational diseases will be all but impossible. The unfairness of a system that arbitrarily discriminates between victims of accidents and victims of disease will be permanently entrenched.

Experience Rating

Finally, the issue of safety must be addressed. A PAYG system, it is argued, discourages safety improvements because a large portion of the employer's premium is determined by the past accident rate throughout the industry rather than by the safety record of individual firms. If employers were rated according to their own accident record, based on fully-funded costs, then this ought to provide a greater incentive for workplace safety.

Four points are worth noting in reply. First, ACC has had a system of experience rating for employers since 1993. Each employer's claims record in the last five years is matched against the industry average, and if the employer has a better-than-average record then there is a discount on the premium; and if the record is worse then there is an extra penalty. Despite concerns about PAYG, employers have strongly supported experience rating (New Zealand Employers' Federation 1995:49).

Second, although experience rating sounds like a plausible method of improving workplace safety through financial incentives, the actual empirical evidence is inconclusive. Following an in-depth study, the New Zealand Minister of Labour concluded that, "evidence justifying experience rating on the grounds that it sends the right `signals' to employers and thereby leads to safer employment practices is at best equivocal" (Birch 1991:23). Evidence from the United States and Canada similarly fails to demonstrate a clear empirical link between experience ratings and workplace safety (Lanoie 1992:67, Chelius and Smith 1983:128-137, Ehrenberg 1988:91-95). Chelius and Smith conducted one of the principal empirical studies on this subject and concluded that, "experience-rating, or the lack of it, in workers' compensation has no observable effect on employer behavior" (p.136).

A third problem is that experience ratings are particularly deficient when applied to economies such as New Zealand's where there are many small firms. As the Royal Commission on Social Policy noted concerning small firms, "it is not possible to distinguish between statistically random fluctuations in the number of accidents and those fluctuations caused by accident prevention efforts, or their lack" (Royal Commission on Social Policy 1988:606-607). With a private insurance system based extensively on experience ratings, premiums for small firms could rise dramatically if there is a single costly accident, even if the firm was genuinely safety-conscious and not at fault. Such a system could end up being less fair to small firms than the current scheme.

Finally, one thing that experience rating does clearly achieve is a more contentious and judicialised claims-adjudication process. If employers are to be penalised for the compensation costs of their accidents then they have an incentive to challenge claims from injured workers and to appeal "unfavourable" decisions. While this may help to discourage some dubious claims, more generally it is likely to make the process more confrontational, time consuming and stressful for people who are already suffering as a result of their injuries.

CONCLUSION

The arguments presented here challenge the three main rationales for privatising ACC. On grounds of i) efficiency and costs, ii) choice, and iii) fairness and safety, the claims of the insurance industry and other business groups suffer from several weaknesses. Other than conventional assertions about the inevitable superiority of the private sector over the public sector, the insurance industry's case for greater efficiency and lower costs cannot overcome two obstacles. The first is that ACC's administrative costs are recognised to be lower than in a multi-insurer environment largely because of the extra expenses associated with competition. Second, the move from pay-as-you-go (PAYG) to full funding, which is a prerequisite for privatisation, will impose substantial cost increases on the system and will be reflected in higher than necessary premiums for employers and individuals. Full funding is essential for private insurance companies, but is redundant for a government agency such as ACC where the legitimate use of public authority ensures that commitments to accident victims will be honoured. ACC can operate on a financially sound basis with lower costs and lower premiums than the private sector, thanks to PAYG. Industry scaremongering about "unfunded liabilities" is simply an inappropriate application of a private insurance concept to the public sector where it is irrelevant.

Despite unsupported claims of superior case management, the only real way a privatised system could be less costly than ACC is if benefits to victims were cut and eligibility was restricted. Alternatively, ACC could be forced to raise its costs artificially (through a government mandated move to full funding), which would make cost comparisons more favourable to the private sector. The latter is already happening; the former can probably be anticipated if privatisation goes ahead.

Arguments about choice are similarly deficient. The choices of workers will not be enhanced if their employers shop around for the insurance package with the lowest benefits and lowest premiums. Alternatively, if current benefit levels are maintained in legislation, then insurance companies may have little scope for offering much variation in premiums. For employers and individual premium payers, there is also a danger that private insurers will have the discretion to eschew less profitable risks while "skimming the cream" of accounts that are more lucrative. Enhanced choices for insurance companies may leave some firms and individuals without coverage. Ultimately, taxpayers may be forced to shoulder the costs for whatever the insurance industry decides it does not want.

Concerns about fairness that relate to cross-subsidisation in funding ignore the fact that current employers both give and receive "inter-generational" subsidies, and that a purely individual allocation of costs does not take place even within the private insurance industry. Privatisation does not really change the subsidy situation much because the costs of existing claims still have to be paid by someone -- either through a surcharge on current premiums or by transferring costs to taxpayers. Whatever was unfair will still be unfair, either for current premium payers or for taxpayers. For victims of occupational diseases, a privatised system is likely to be less fair than at present because private insurers have difficulty with claims that have long latency periods and complex etiologies. Such victims may find themselves in the double bind of having no compensation and no legal recourse.

Finally, arguments about workplace safety suffer from inconclusive evidence linking experience rating and improvements in accident rates. Furthermore, experience rating tends to make the whole claims adjudication process more confrontational, and it can be unfair to small employers who may be disproportionately penalised by a chance accident.

In sum, privatisation would result in a system characterised by higher costs and/or lower benefits, where workers are vulnerable to choices made by their employers, and employers are vulnerable to choices made by insurance companies. Cross-subsidies would not be eliminated; there is little evidence that safety would be improved; and the resulting system could be a lot less fair to certain segments of society such as non-earners, general taxpayers, small businesses and victims of occupational diseases. Whatever the alleged benefits of privatisation in other sectors of the New Zealand economy, in accident compensation the consequences would be overwhelmingly negative.

(1) This projection is based on the assumption of medium fertility, medium mortality, and a long-term annual net migration of zero.

(2) It should, however, be noted that the current ACC scheme does already permit certain larger employers a limited form of self-insurance based on their own accident experience.

(3) A proportion of the accrued liabilities in the Employers' Account is due to non-workplace accidents that occurred prior to 1992 when a separate Earners' Account was created.

REFERENCES

ACC (1997a) Annual Report.

ACC (1997b) Ministerial Briefing Paper, 9 December.

ACC (1997c) Quarterly Report, 31 December.

Birch, Hon. W.F. (1991) Accident Compensation: A Fairer Scheme, Ministry of Labour, Wellington.

Chelius, James R. and Robert S. Smith (1983) "Experience-Rating and Injury Prevention" in John D. Worrall (ed.) Safety and the Work Force: Incentives and Disincentives in Workers' Compensation, ILR Press, Ithaca, N.Y., pp.128-37.

Department of Labour (1997) Briefing to the Incoming Minister for ARCI, Attachment Two, "Coalition Agreement", 8 December.

Ehrenberg, Ronald G. (1988) "Workers' Compensation, Wages and the Risk of Injury" in John F. Burton, Jr. (ed.) New Perspectives in Workers' Compensation, ILR Press, Ithaca, N.Y., pp.91-95.

Insurance Council of New Zealand (1995) A Proposal for the Alternative Delivery of Accident Compensation Benefits and Services, Wellington.

Kerr, Roger (1996) New Zealand's ACC Scheme: Time for a Decent Burial, New Zealand Business Roundtable, Wellington.

Lanoie, Paul (1992) "Government Intervention in Occupational Safety: Lessons from the American and Canadian Experience" Canadian Public Policy, 18(1):67, March.

Ministerial Working Party on the Accident Compensation Corporation and Incapacity (1991) Report, April.

New Zealand Business Roundtable (1987) Review of Accident Compensation, Submission to the Law Commission, July.

New Zealand Employers' Federation (1995) A New Prescription for Accident Compensation, Wellington.

O'Connor, James (1973) The Fiscal Crisis of the State, St. Martin's Press, New York.

Pask, John (1997) ACC: Problems and Solutions, New Zealand Employers' Federation, Wellington.

Royal Commission on Social Policy (1988) April Report, Vol. 1, Royal Commission on Social Policy, Wellington.

Statistics New Zealand (1997) Key Statistics, November.

Andrew Stritch

Bishop's University Quebec