Monday, January 30, 2012

Why not adopt NZ’s no-fault national insurance



First published at MacroBusiness

I do love New Zealand.  It’s a beautiful country with great people and a relaxed attitude.  One factor that supports a relaxed attitude is New Zealand’s national enduring no-fault accident insurance scheme, which eliminates some the perceived legal risks that can stifle innovation, new business, increase medical costs, and reduce private land utilisation.

I want to take the time to examine this important issue, by looking at the history and performance of the New Zealand scheme, in its various iterations, and compare this to the scope of State and national accident and health insurance provided in Australia.  I will preface the discussion by noting that I am not a legal scholar, but an economist looking at the behavioural incentives provided by the legal framework.

So what is this no-fault insurance scheme I speak of?

As one of my Kiwi friends put it, imagine workers compensation for all accidents for all residents and guests in New Zealand.  Yes, that includes Rugby World Cup players.  In its latest incarnation, the scheme is governed by the Accident Compensation Act 2001, which created the Crown organisation the Accident Compensation Corporation (ACC) (although the legal structure is a little more complex than that).

Funding is provided through various payments, with accounts kept for different types of accidents, such as work injuries, non-work injuries, treatment injury (medical malpractice), and motor vehicle injuries – in all, a comprehensive national accident insurance scheme.

One key feature of the New Zealand scheme is that the legislation, by providing national insurance, removes the ability of accident victims to sue for damages even is such cases as fault could be determined (apart from strictly defined exemplary damages).   The origins of this important provision include concerns over wasted legal effort, and sometimes impossibility, of proving fault in accident claims, and the lack of support of victims of no-fault accidents.

This is quite different from Australian tort law, where damages for negligence can be sought from those at fault, provided they meet a few criteria -
  1. A duty of care must be found to exist.
  2. The duty of care must be breached.
  3. Damage or injury, not too remote, must result from the breach.
The legal profession uses the term the ‘public liability and professional indemnity insurance crisis’ to describe they way insurance markets responded to ever increasing claims for damages with higher prices and less availability in Australia around the turn of the millenium.  This has serious implications for social clubs and sporting organisations, medical professionals, and private landholders who allow third parties to conduct activities on their land (an angle I will revisit later).

The Americans have been eyeing off New Zealand’s national no-fault insurance scheme because it appears so remarkably affordable.  Regarding medical ‘misadventure’ not only are damages paid lower in New Zealand than under America’s tort system for claiming damages, but the administrative costs make up only around 10% of expenditure, compared to 50-60% under the US tort system.  While some criticize a no-fault system as a no accountability system, the reforms to New Zealand’s scheme have included accountability for doctors and disciplinary hearings.

There is even regard for New Zealand’s scheme because it automatically provides accident insurance in the case of terrorist events.

Of course, some have criticised the scheme as inadequate.   One argument often presented, that doesn’t seem to hold water, is that the losses from the elimination of the tort system go further than just removal of incentives to minimise loss. They also remove the information base from which monitoring activities can be designed and upon which education to prevent future loss relies. Both of these are vitally important factors in a system that is heavily dependent on overt monitoring to achieve a socially optimal outcome. (here)

However, having a central agency, if structured well, would greatly enhance the information base about risks and risk education.  A haphazard arrangement of private insurers, and unpredictable court decisions would be a maze to navigate if one wanted to get an appropriate estimation of risk levels.

The critics of such a scheme are those you might expect to benefit from its abolition – the business community who would take over insurance provision, and the legal profession.
While certainly a minority, there is a vocal constituency, comprised largely of individuals from the business community, who seek outright abolition of the no-fault system and a return to the common law tort system. Chief among these critics is the New Zealand Business Roundtable, which considers the accident compensation scheme to be an “unjustifiable intrusion by the state upon individual freedom and decision making” and would like to see it disappear altogether. In 1998, the Roundtable proved successful, if only temporarily, in its goal of dismantling the accident compensation system with the enactment of the Accident Insurance Act. Bolstered by substantial support from the Roundtable, the Act signaled a significant policy shift toward contraction of accident compensation coverage. By suspending the ACC’s statutory monopoly on the administration of benefits and beginning the process of privatizing the ACC, the Act ended most mandatory insurance coverage until the statutory re- institution of the ACC’s monopoly in 2000.
This temporary setback was the product of a clash of political ideals and a shift in political power.
Don’t get me wrong.  New Zealand’s scheme is not perfect, and neither are any other national of State regulations for the provision of accident insurance, whether at work, in motor vehicles, or during domestic and recreation activities.  New Zealand’s scheme has a checkered history of changing scope of coverage, cost blow-outs, and changes of government and direction.

Cost blow-outs were quite dramatic in the early decades of the scheme, with expenditure growing 8 fold in real per capita terms between 1974 and 2000.  What this means in income adjusted terms I am not sure, since even with a set of identical claims and outcomes, the cost of the scheme is always going to at a rate closer to wage growth, than consumer price growth (since income compensation occurs are a proportion of previous incomes, and medical costs are closely linked to labour costs – see here for more explanation on this principle)

Other criticisms come in the form of questioning the moral hazard problem.  Won’t everyone in New Zealand simply stop caring?  Won’t business allow their patron to take extravagant risks?  Will compensating behavior lead the outcomes from the scheme to be far from optimal?

The answers to the questions are all simply no.  Studies have shown that risk of medical misadventure in New Zealand sits very close to the average of its peers (half way between the UK and Australia by the way).  In terms of serious injuries to workers, New Zealand outperforms all Australian States bar Victoria in terms of population adjusted workers compensation cases.

In fact, the ACC has a role to prevent injury, and has adopted an approach of being a provider and safety information and regulatory advice.

New Zealand’s system, while it appears quite radical, is inherently similar to Australia’s public health care and welfare system from the point of view of an injured person, in terms of health care, rehabilitation, and lifetime income support (although income support in Australia is at subsistence welfare levels rather than a portion of previous income as in the New Zealand scheme).

In the realm of motor vehicle and workplace accidents, Australia has similar national or State insurance/compensations schemes in place (or compulsory private insurance), and it wouldn’t be such a great leap to expand our insurance systems to include all injuries.  In fact, only about 25% of the serious injuries are not covered by statutory insurance requirements.
Data has shown that 61% of catastrophic injuries in Australia come under the motor vehicle scheme, 13% are part of workers’ compensation, 11% are due to medical negligence, and 15% fall under public liability. (here)
Some States in Australia have also reformed tort law to cap damages claims, and make scope for damages more narrow.  This has gone some way to reducing civil matters that can clog our court systems to the advantage of the legal profession.

After all this rambling Rumple, will you now tell us why you are so interested in this scheme?

Yes, thanks for interrupting me.

In everyday life I see liability insurance as a great hindrance to social and economic activities.  Local sporting competitions are often burdened by the costs of insurance, which are often directly attributable to legal costs under the tort system, and expectations of damages claims.  Adventure sport and tourism, New Zealand’s great exports, would have a much more difficult time if they could not pool their liability insurance across all the diverse activities occurring in New Zealand.

Even if our current system does restrict liability, the uncertainty and difficulty in interpreting legal accountability, is itself a hindrance to emerging social and economic activities.

The NSW parliament has shown some interest in no-fault State accident insurance after the decision of the High Court to reinstate the award of $3.75million in damages to Guy Swain, a man rendered quadriplegic after diving into a wave and hitting a sandbank at Bondi Beach in 1997 (here).  Waves of ‘insurance crises’ have led to continual tort reform, but in 2005, Bob Carr announced that the government was working on a no-fault scheme of insurance.  

It is these types of legal and damages costs that Councils, community groups and landowners fear.
Doctors face hefty costs to start up their own practice, and often the risks involved from medical malpractice suits leads to over mediation, and excessive treatment.  Since medical costs in the public system are already paid for by the public at large, wouldn’t any measure to reduce costs be beneficial?  In the US, these so-called ‘defensive’ medical treatments are estimated to cost around $45billion per year.

Lastly, the liability of property owners for injuries from activities on their land does stifle economic activity.  For example, would you allow an adventure sport race on your farm if you knew that there was a slight chance of being held liable for injuries to participants?  Or would you allow campers on your land? What about paragliders launching and landing?  I know from speaking with the paragliding community that liability concerns have made many landholders reluctant to continue to allow launching from sites on their property, and these same concerns extend to local Councils.

Removing the fear of legal action in the case of injury (whether real or perceived), by making all accident insurance compulsory and national, will help lubricate the economy by enabling those very small businesses and community groups to conduct activities they would otherwise fear to undertake.

Australia, and many other countries, are incrementally heading towards the basic principles of New Zealand’s national scheme, as the economic benefits from the elimination of the right to damages apart from in exemplary cases, provides society wide benefits.

I don’t see a sudden change in this direction, but with ongoing parliamentary interest, and recurring insurance crises, we may yet reach a point where the net effect of our complementary insurance scheme is much the same as New Zealand’s scheme, simply by default.

Any input from people who have been injured in New Zealand, or worked in this area of law would be greatly appreciated.

Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter@rumplestatskin

4 comments:

  1. I love the NZ system, especially compared to a US counterfactual (against which damn near anything looks good). But there are a few big problems.

    1) They don't charge premiums that are sufficiently risk-adjusted. Employers don't get as strong a benefit from improving safety as they might; this is partially on purpose (I think) to avoid hiding accidents. But still a problem.

    2) You can make a non-crazy case that offloading of liability for building safety helped cause some of the building collapses in February; had building owners been liable for buildings falling onto people, or at least risked civil suit for damages, we might have had more old buildings made safe or torn down. Again, the problem is on risk-adjustment. But the public insurer has slack(ish) incentives to get those right.

    3) You do hear horror stories about how claimants are treated, but I've no sense of whether that's better or worse than they'd fare with private insurers.

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  4. I doubt America would ever adopt a system that prevents people from suing each other or companies, unless they framed it as protecting corporate interests in which case you'd have Congress all over that - anything to protect corporations from people! As a personal injury lawyer in Boston MA I have mixed feelings - obviously my job is dependent on these suits but I wonder which system works better for the people? Thanks for the article!

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