How ‘capping’ affects WorkCover insurance premiums

WorkSafe Victoria’s premium calculation formula is incredibly complex. But basically, employers’ premiums are primarily determined by your rateable remuneration, workplace industry classification and claims history. One of the less-understood, but in many ways significant, parts of the formula is ‘capping’.

What is capping?

After combining all the ingredients of the premium calculation, every employer ends up with a unique ‘premium rate’. Multiplying your final premium rate by your rateable remuneration determines the premium you pay. WorkSafe does, however, offer some protection against sudden increases in your premium caused by claims costs or fluctuating industry rates: increases in your premium rate are capped at 30% per year.

Capping does not apply to all elements of your premium calculation. If you double your wages, the rateable remuneration will double. As it’s the rateable remuneration that is multiplied by your premium rate, your premium would very likely double in line with the increased labour costs. But still, if you have a complex, expensive claim with hundreds of thousands of dollars in costs, your premium may not in turn skyrocket by hundreds of thousands of dollars – not immediately at least. The 30% capping of your premium rate may offer some relief in the short term.

Does capping protect my business?

Don’t let capping make you complacent. Yes, it can reduce the impact a claim has on next year’s premium. But there is no limit to how many times your premium can increase by 30%. It’s ironic that there is a threshold on how low an employer’s premium can go (that is, when you have no injuries), because there is no upper limit for how high premiums can go over time.

Remember, too, that a WorkCover claim will affect your premium for up to three years. A single injury could drive a compounding 30% increase through three consecutive premium calculations. And that’s just one claim. Imagine if additional claims came in during those three years. Things would start looking pretty grave for the employer.

For example, consider a company that hasn’t had a significant WorkCover claim in the last five years. They pay a $100,000 premium per year. Then a worker sustains a severe injury and lodges a claim. To keep it simple, we’ll assume that the rateable remuneration and industry rate remain the same over the years that follow. Let’s look at what could happen, and how capping influences the company’s premium:

• $100,000 starting premium before the claim
• year 1: $100,000 + 30% = $130,000
• year 2: $130,000 + 30% = $169,000
• year 3: $169,000 + 30% = $219,700

You can see that the premium more than doubles in three years. It’s a 120% increase.

Now let’s have a look at how much this company forks out on top of the $100,000 premium they paid previously. In year 1, the employer pays an extra $30,000. They spend an additional $69,000 and $119,700 in years 2 and 3, respectively. All up, this one claim ends up costing the employer a total of $218,700 on top of their previous premium. And it’s possible that the actual costs of the claim were half that amount.

Moving forward

I’ve found that capping has the effect of delaying the moment when an employer realises they have a pressing problem.

So don’t assume that capping will save you. Make sure you understand why your premium changes from one year to the next. And consider what you’re willing to invest to prevent your premium from doubling.

About Mark Stipic Consulting

Mark Stipic Consulting are trusted advisors to decision-makers at employers, helping them achieve the goals of reduced injuries, claims and premiums. Mark Stipic is #TheWorkCoverGuy and author of WorkCover that Works, the only book of its kind written specifically to help employers reduce their injuries, claims and WorkCover premiums.

When you’re ready, here are two ways Mark Stipic Consulting can help you and your business take control of your WorkCover situation:

1. Get a copy of Mark’s book WorkCover that Works. It will show you how to reduce your injuries, claims and WorkCover premiums.
2. Request a free, no obligation 30-minute strategy call. We will help you address your most pressing challenges and connect you with potential solutions if appropriate.