External economic incentives for prevention
Daniela Treutlein, TNO, the Netherlands
- 1 Introduction
- 2 Policy-related governmental economic incentives
- 3 Insurance-related economic incentives
- 4 Key aspects and success factors of economic incentives
- 5 References
- 6 Links for further reading
Economic incentives in occupational safety and health (OSH) describe processes that reward organisations for safe and healthy workplaces. From a European perspective, incentives are seen as an effective tool complementary to OSH regulation aimed at encouraging businesses at the management level to provide good OSH. Tax or insurance premium reductions are common examples. A range of economic incentive schemes can be classified along two lines: First, according to the source issuing the incentive, i.e., public governmental authorities or workers’ compensation insurers, and second, according to the mode of operation, i.e., result-based or effort-based incentives. Below, the most commonly applied external financial incentive schemes are explained in further detail.
Public authorities primarily use two complementary policy devices to promote OSH at the workplace. First, they may use the enforcement of OSH regulations and experience rating of workers’ compensation insurance premiums (see section 3, on the other hand). Other financial incentive schemes which may be employed by governments include taxes (or tax reductions), matching funds and the linkage of financial revenues to audits or intervention programmes.
Enforcement strategies for OSH regulation
Although OSH regulations do not fall under a strict definition of “economic incentives”, they are designed to influence the behaviour of the involved parties and, thus, they provide the framework for economic incentive schemes The role of legislation in occupational safety and health management. The scientific literature usually distinguishes between three types of regulatory strategies: direct intervention (prescription of guidelines and standards), policing or deterrent systems (inspections and fines) and educational programmes. However, the overall effectiveness of OSH regulation continues to be controversial due to data and measurement problems. Authors frequently point to the administrative burden and regulatory errors (when fines and sanctions are too small to influence companies) resulting from direct policy interventions The economic dimension of occupational safety and health management. Also, OSH policy interventions may fail to take into account the variations in firms with respect to size or level of technology. Regarding punitive systems, there is evidence that specific deterrence, i.e., the actual punishment of a firm imposed primarily as a direct consequence of an inspection, has a positive influence on the frequency and severity of injuries. General deterrence, i.e., the mere threat or probability of an inspection, has less influence on the frequency and severity of injuries.
Governments also can try to stimulate companies to engage in OSH preventative measures by utilizing taxes. Taxes can be used either to punish poorly performing firms or as a positive incentive. A heavy tax on white phosphorus matches by the Russian government in 1892 is an example of the former. The use of tax reductions as a reward is more common, however. A Swedish commission recently proposed the reduction of taxes for organisations that provide physical and cultural activities at the workplace. In the Netherlands, the Farbo regulation of 1998 offered tax reductions for good OSH performance, but in 2005, it was modified to provide subsidies. Further, tax breaks could be offered to companies that perform well as an incentive to improve workplace safety and health. However, tax breaks are not easy to enact and are costly due to the additional administrative burden they create. Furthermore, they are applicable only to companies that pay corporate taxes and that make a taxable profit. Also, companies only realise their profits at the end of a fiscal year. Public and non-profit sector organisations will not benefit from this type of economic incentive.
A matching fund is an incentive scheme that offers public grants in proportion to the amount of money the company spends on workplace safety and health, i.e., for every euro spent by the organisation, the government grants one euro. The Austrian FGÖ (Fonds Gesundes Österreich) is an example. It supports and funds projects in the fields of health promotion and primary prevention. For a minimum project budget of 10,000 euros, one-third to two-thirds can be funded by the FGÖ. Companies of all sizes can take part by simply filling in a project template.
Linking economic incentives to audits or intervention programmes
This incentive system links audits or intervention programmes to financial grants in an effort to stimulate good OSH behaviour by firms. For instance, in Canada, firms can sign up for annual OSH audits and economic incentives of up to two million US dollars are handed out to organisations with outstanding results.
Insurance-related economic incentive schemes usually are designed to change the behaviour of employers and employees mainly with respect to two moral hazard problems. The first is the so-called risk-bearing moral hazard, meaning that workers will pay less attention to their health and safety if they know that they are covered by workers’ compensation insurance. The second is the claims-reporting moral hazard, meaning that workers’ compensation benefits may increase the probability that workers will report claims that they would not report if there were no or lower compensation benefits.Workers compensations and its role in prevention In an effort to solve these two moral hazard problems and to make employers aware of their true production costs (including the costs of work-related accidents and illnesses), insurance premiums are frequently linked to OSH performance indicators (accident or disease rates) International comparison of occupational accident insurance system. One generally can distinguish between result-based incentives and effort-based incentives that reward good OSH behaviour. The most commonly applied form of insurance-related result-based incentive designed to stimulate good OSH behaviour by enterprises is experience rating of workers’ compensation insurance. Below, a variety of forms and examples of experience-rating schemas are explained in more detail.
Experience rating of workers’ compensation insurance
Workers’ compensation insurers primarily apply different forms of experience rating in an effort to solve the claims-reporting moral hazard. Experience rating is a method of determining the price of premiums for different groups or individuals based on claims history rather than accident experience. As a result, the employer is stimulated to engage in claims prevention as well as accident and illness prevention. In short, an individual's or group’s historic data is used as a proxy for future risk, and insurers adjust and set insurance premiums and plans accordingly. There are a number of variations of experience-rating in practice, including bonus-malus systems or premium assessment rates, designed to stimulate good OSH behaviour   .
A bonus-malus system rewards companies that have performed well with lower premiums and punishes poorly-performing ones with higher premiums. Usually a bonus-malus ladder with a number of assembly levels (15-20) is employed. Each level provides a discount or an extra amount to the premium. Following a year without claims, the insured party climbs one level on the ladder. Car insurance premiums are a common example. With respect to workers’ compensation insurance, the German butchery sector has introduced a bonus system for small and medium-sized companies in an effort to reward prevention efforts. Companies can chose to implement special OSH measures included in a yearly published catalogue. The German “Berufsgenossenschaft” provides bonus points for those implementing the measures. Companies scoring 10 points or more receive discounts on their insurance premiums. The maximum reduction is 5 % for 100 or more bonus points. This type of bonus system is transparent and easy to apply, as every enterprise can immediately perceive the linkage of certain OSH measures with bonus points and premium reductions .
Premium assessment rates
Premium assessment rates require a two-step procedure . First, a base rate is calculated comparing the company to the industrial classifications of groups sharing the same risks for occupational injury or illness. Second, the base premium rate can be adjusted per company within a group based on its individual past safety record (experience-rating). This two-step method is more flexible than ordinary experience rating, in which all enterprises within a rate category pay the same premium regardless of the injury records of individual firms.
Partial insurance is another feature of workers’ compensation which might reduce the moral hazard effect on employees. In general, partial insurance refers to any type of insurance that omits certain risks or only covers costs in specific circumstances. The common meaning of partial insurance is incomplete insurance coverage, i.e., leaving out certain areas of coverage while other areas are covered. With respect to workers’ compensation, partial insurance implies waiting periods and wage replacement rates for employees and offers newer, deductible insurance contracts for employers.
Key aspects and success factors of economic incentives
Despite the absence of large-scale empirical evidence, the use of insurance-related economic incentives such as experience-rating of workers’ compensation premiums or partial insurance in addition to OSH regulation seem to be an effective way to motivate enterprises to undertake preventive OSH measures. In addition to incentives relating to workers’ compensation, incentives such as reductions in employers’ liability insurance premiums, which represent a considerable expense for firms, also could be a strong motivator for managers to invest in occupational safety and health measures.
When it comes to the design of economic incentives for workers’ compensation insurance, three key aspects must be considered :
- Because many parties are involved in the workers’ compensation system, the system itself has to be reliable. If not, the whole process is at risk of being derailed;
- Economic incentives must be developed in such a manner that technical and social feasibility is guaranteed (the design of tariffs can be particularly sensitive);
- The credibility of workers’ compensation insurance will be weakened if the economic incentive system is subject to many changes in a short period.
In conclusion, the following seven factors are necessary for economic incentives to be efficient and successful :
- In addition to past good OSH performance, specific prevention efforts should be rewarded by the economic incentive scheme in an effort to reduce future accidents and ill-health;
- The economic incentive scheme should be open to companies of all sizes and should account for the special needs of SMEs;
- The value of the financial incentive should provide a true motivation for employers;
- The relationship between the desired prevention activity and the reward should be directly visible and clear to an enterprise;
- The economic incentive system’s award criteria should be clear and as easy as possible to apply in an effort to keep the administrative burden as low as possible;
- If the economic incentive targets a large number of enterprises, insurance or tax-based incentives with precisely defined criteria are the most effective (a closed system);
- If the economic incentive is aimed at promoting innovative solutions for specific areas, subsidy schemes are the most effective (an open system).
- Tompa, E., Trevithick, S., McLeod, C., 'A systematic review of the prevention incentives of insurance and regulatory mechanisms for occupational health and safety', Scandinavian Journal of Work, Environment and Health, Vol 33 No 2, 2007, pp. 81 - 95
- Thomason, T., 'Economic incentives and workplace safety', in F. Sullivan (ed), ‘Preventing and managing disability injury at work’, Taylor and Francis Incorporated, 2003, pp. 183-202.
- Durbin, D., Butler, R.J. 'Prevention of disability from work-related sources: the roles of risk management, government intervention, and insurance', in T. Thomason, J. F. Burton, D.E. Hyatt (eds) ‘Systematic Occupational Health and Safety Management, Pergamon, 2000, pp. 227-246. /]
- BGAG Institut Arbeit und Gesundheit der Deutschen Gesetzlichen Unfallversicherung. Qualitaet in der Prevention, Anreizsysteme, Abschlussbericht, December 2006.
- Mustard, C. 'Cooperation between insurance and prevention’, Safety Science Monitor, Vol 9, No 1, 2005, pp. 1-11.
- Munich Re Group 'Economic incentives. A reflection on workers’ compensation systems’, Discussion paper prepared by the Centre of Competence for workers’ compensation, No 2, November 2005, pp. 1-11.
- ’Summary of the report on Economic incentives to improve occupational safety and health: a review from the European perspective’, EU-OSHA (European Agency for Safety and Health at Work, 2010). Available at: /
Links for further reading
Economic incentives to improve occupational safety and health: a review from the European perspective’, Report by EU-OSHA (European Agency for Safety and Health at Work, 2010 
Economic incentives’, EU-OSHA (European Agency for Safety and Health at Work, 2010). 
How to create economic incentives in occupational safety and health: A practical guide’, Report by EU-OSHA (European Agency for Safety and Health at Work, 2011). Available at: 
Innovative solutions to safety and health risks in the construction, healthcare and HORECA sectors’, Report by EU-OSHA (European Agency for Safety and Health at Work, 2011.