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Douglas: Benefits of Opening ACC to Competition

The Benefits of Opening ACC to Competition

Speech by Hon Sir Roger Douglas, ACT New Zealand
Tuesday, October 27 2009

The Injury Prevention, Rehabilitation and compensation Amendment Bill does not reform ACC. This Bill keeps ACC in its current form, continues to fund ACC through compulsory levies, and does not apply ongoing commercial pressure to its operation.

All it does is manage the payout system a little differently – it stops those who harm themselves on purpose from getting payouts, it stops criminals who injure themselves while breaking into someone’s house from getting payouts. In reality, there is nothing of substance in this Bill – it’s the same kind of management of ACC that Labour undertook, except, as opposed to expanding entitlements, it is reducing them.

Nothing in this Bill deals with the fact that, from its inception, ACC was a flawed pyramid scheme. In the beginning, it operated on a pay-as-you-go basis. That meant that for many years, it seemed cheap, as the full cost was not apparent – all of those with long term injuries were not yet making claims. Unfortunately, those years of low cost also saw the entitlements expand – so that by the time the system had absorbed all those with long term injuries, and covered the expanded entitlements, it suddenly seemed to cost an awful lot.

These problems are set to get worse. We have an aging society. An aging society implies not only more payouts, but also a lower proportion of people paying levies to cover the Non-Work Account. Because it is a Ponzi scheme, it will require ever-expanding numbers of people working to pay the levies.

To their credit, Labour realised this was a problem. They realised that operating ACC on a pay-as-you-go basis was not viable when you have an aging society. That is why Labour announced that the scheme would be fully funded by 2014.

Unfortunately, they also undertook a massive expansion of the entitlements under the scheme, meaning that despite their promises to have the scheme fully funded, the unfunded liability has in fact expanded - its unfunded liability now stands at $13 billion – up $5 billion in just the past year.

If any private insurance company had the books that ACC has, they would be declared bankrupt. The only reason that ACC is still solvent is that it has the capacity to increase levies. In essence, it is solvent because it can force people to cover its costs.

The only viable way to ensure that ACC delivers results for reasonable prices is if it is open to competition. If people can get cheaper rates elsewhere, they should be allowed to leave. If that means risky workplaces start paying higher premiums, so be it – it will encourage them to improve workplace safety.

The benefits of competition become apparent when you listen to the nonsense peddled by Labour in their opposition to it. The first thing Labour will tell you is that costs will increase, because we now have to pay for the profit margin of private companies. Well, the facts speak otherwise. The last time competition was introduced, premiums declined by around 30 percent. The argument that profit margins lead to higher prices is absurd – by that logic, the Labour party would nationalise everything.

The second thing Labour says is that premiums were only lower because they offered cheap rates as loss-leaders. Well, that’s very interesting. A private insurance company has to have their books signed off by an actuary, and that actuary has to say that the income in one year will cover the full cost of all accidents arising in that year. Labour, on the other hand, oversaw a scheme that was meant to be moving towards full-funding, and yet their unfunded liability moved in the other direction and actually expanded. So, who shall we trust – the expert actuary or the Labour party?

The system needs to be fully funded. But should it be open to competition?

Well, look at it this way. Every single monopoly – be it in forestry, shipping, or coal mining, has always delivered more for less when it has been opened to competition. There is no reason to think ACC will be different.

In fact, it is even more important to open ACC to competition. Currently, ACC sets a flat rate levy based on the risk in an industry. Those employers which have safe environments subsidise those who have unsafe environments. There is little commercial incentive to create safer workplaces.

By keeping ACC as a monopoly, and not properly allowing risk pricing to emerge, we are in fact increasing the number of workplace accidents. In the private market we have insurance excesses, we have no claims bonuses, we have risk-based premiums. The private market is all about mitigating risk. ACC, on the other hand, is about forcing the good employers to subsidise the bad ones.

That is why, last time it was opened to competition, costs not only decreased, but so did the number of accidents.

Those that oppose competition in ACC are not just wasting taxpayers’ money – they are also ensuring that more people suffer accidents in the workplace.


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