A system dynamics analysis of the victorian workcover authority insurer scheme

The Victorian Workcover Authority is charged with responsibility of administering insurance for work related injuries in the state of Victoria, Australia with a cost of work related injuries at over $1B ($1,072,000,000 for 1998/99) per year. The Authority contracts the claims management and premium collection to major insurance companies. The companies are paid according to the size and risk of their portfolio and their performance in injury prevention, early return to work for injured workers and claims cost reduction. The companies are rewarded for improved performance and for maintaining good performance. A system dynamics model was built to provide the insurers with a clear indication of the financial implications of their being able to improve their portfolios performance. The model was also designed to show the impact of gaining and/or losing clients whose overall performance may differ from the average performance of any given portfolio. This model raised a series of questions, which are discussed in the paper, about appropriate strategies for improving the financial performance of individual portfolios. The model was also used to examine the effectiveness of the incentive aimed at improving the portfolio performance. The paper also discusses a series of related issues which involved questions of whether different financial performance by the insurers is related to structural considerations in the survival curves of injury claims or performance of individual insurers in handling claims. The reward calculations used by the Authority builds significant delays into this process. The impact of these delays is discussed in paper.