Accident Compensation: The Role of Incentive Consumer Choice and Competition

Abstract

With the exception of the introduction of experience-rated premiums the incorporation of the term "insurance" in the title of the 1992 legislation and the short-lived reforms to the structure of workplace accident compensation in 1998 New Zealand's accident compensation scheme has continued to adhere to the principles laid down in the Woodhouse Report. In particular public monopoly provision comprehensive coverage and mandatory purchase separation from other segments of the market for personal risk (where private insurance companies operate) and cross-subsidies between different categories of insured risk were explicit components of Woodhouse's conception of the scheme. Retention of these aspects of the scheme has been justified by the claim that accident compensation is a component of the social welfare net rather than an insurance scheme and that the social welfare approach is superior from the point of view of those covered by the scheme.This paper reviews three of the economic issues raised by the structure of our accident compensation scheme: the role of incentives the relationship with the broader insurance market and the costs of government monopoly provision. We use our analysis of these issues to consider the veracity of the claim that potential accident victims in New Zealand benefit from our adherence to the principles laid out by the Woodhouse Report. We conclude that the current structure of our scheme creates perverse incentives that substantially reduce its efficiency while also denying those covered by the scheme the potential benefits that would come from consumer choice among competing providers offering a broader range of risk products.