A new social unemployment insurance scheme for New Zealand?

The Government is currently consulting on a new social unemployment insurance scheme. The proposed scheme would be managed by ACC and would provide New Zealand residents and citizens with 80 percent of their usual income (up to a maximum cap) for up to six months if they lose their job through redundancy or need to stop working due to a health condition or disability.

If the scheme is implemented, the Government would take over a segment of risk presently covered by the private insurance industry in the same way that it did in 1974, when ACC essentially replaced private liability insurance for personal injury. High income earners may still wish to purchase additional private income protection cover, where they want to have cover for more than six months or above the proposed cap. However, the private insurance sector would no doubt need to demonstrate that any “top-up” insurance it offers is good value in order to attract custom, remain marketable and ensure that any products provide meaningful cover, consistent with insurers’ regulatory obligations.

Key features of the scheme

The Future of Work Tripartite Forum (a partnership between the Government, Business New Zealand and the New Zealand Council of Trade Unions) has released a discussion document setting out its case for a new social unemployment insurance scheme. The key features of the scheme include:

  • workers who lose their jobs through no fault of their own (e.g., through redundancy, or as a result of health conditions or disabilities) could receive up to 80 percent of their usual income (up to a cap of NZD130,911) for up to six months while they look for new work or retrain – plus an initial four-week bridging period paid for by their former employer;
  • claimants may only claim up to six months of entitlement every 18 months;
  • to qualify for cover, workers would need to have contributed to the scheme for at least six of the 18 months preceding their claim (with statutory parental leave included in the calculation);
  • insurance payments would be calculated individually, without reference to an individual’s assets or partner’s income, and would reduce dollar for dollar once their income and insurance payments total 100 percent of their pre-loss income;
  • claimants would be expected to show “effort” to search for suitable employment or to prepare for employment by, for example, undertaking training, but would not be required to accept offers of employment that did not offer pre-displacement wages and conditions;
  • the scheme would be funded by way of an initial levy of 2.77 percent of wages and salary, split equally between employers and employees.

Arguments for and against the scheme

The Forum argues that the scheme would be beneficial for New Zealand on the basis that research suggests that, compared with workers in other countries, displaced New Zealand workers experience greater wage losses when they return to work. This suggests, the Forum says, that displacement results in poor use of workers’ skills, lower income and poorer conditions. The scheme is then promoted as offering displaced workers the time and security to find jobs which better match their skills, to upskill or retrain, or address any underlying health issues. It would also give workers confidence to accept jobs in emerging and more risky areas, such as in start-ups, and help communities and industries weather economic shocks and transitions.

The Forum also argues that the scheme would address some of what it views as inequity caused by ACC. Currently, a person who is involved in an accident and is unable to work as a result can receive up to 80 percent of their pre-accident wages under ACC (also up to a cap of NZD130,911), while a person with a health condition or disability which was not caused by an accident receives far more limited support, even though their ability to work may be similarly affected. The scheme would partly address this gap, albeit only for those who were originally working and for a limited time. The scheme’s detractors, however, would point to the potential moral hazard built into the scheme. People may game the system in order to make income protection claims or enjoy a holiday instead of searching for a new job in the knowledge that they have a secure income stream for up to seven months, including the four weeks paid for by their former employer. The increased costs of employing people under the scheme are not insignificant, and some may take issue with the fact that the scheme forces people to purchase insurance cover when they might prefer to carry the risk of redundancy and keep their money, or purchase other cover, such as cover for sickness.

A related issue is how the existence of the scheme may affect employment claims and their resolution. There is likely to be a strong motivation for both employers and employees to resolve issues that would otherwise have led to a dismissal on the basis that allows the affected employees to claim cover. It may result in employees feeling pressured to accept redundancy rather than bring a personal grievance claim that will be uncertain and may result in less compensation in any event.

It is also unclear whether the Forum considered how the scheme may operate if the private market offers “top-up” cover. Some of the difficulties that can arise when the government offers a layer of primary insurance and the private market offers secondary cover were seen following the Canterbury earthquakes, where the involvement of both the Earthquake Commission and private insurers on material damage claims lead to difficulties in duplication of claims management processes, apportionment issues and significant delays in resolving claims. It is not clear how insurance claims involving the scheme and private insurers would be handled.

The future for insurance

The Forum has suggested that the Government is better placed to provide income protection insurance than the private market, arguing that adverse selection means that those who are unlikely to claim under income protection insurance choose not to purchase it, leaving only high-risk individuals in the market. This raises premiums which further discourages people from purchasing cover. The insurance industry will no doubt dispute the suggestion that it is not able to offer efficient and effective income protection cover, however with the Government looking to intrude further into the private market, insurers will need to continue to demonstrate that they can offer better value or more comprehensive cover than government schemes. The scheme, if implemented, may enable private insurers to offer more cost-effective and comprehensive cover as an add-on to the public scheme, so there may be opportunities for innovative insurers that help make up for the loss of their existing private redundancy insurance business.

Read Cover to Cover – Issue 24

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