Economic incentives can complement law enforcement as they give financial benefits and thus add weight to the business case for good OSH in a way that is clear to company managers across all Member States.
The European OSH strategy notes that economic incentives can be really effective in promoting occupational safety and health (OSH), especially in small and medium enterprises (SMEs). But the organisations that are able to provide economic OSH incentives, e.g. insurers, need guidance about what to do and how to do it. As the EU strategy states:
"The development of awareness may also be reinforced, particularly in SMEs, by providing direct or indirect economic incentives for prevention measures. Such incentives could include a possible reduction in social contributions or insurance premiums depending on the investment made in improving the working environment and/or reducing accidents, economic aid for the introduction of health and safety management schemes, introduction of health and safety requirements into procedures for the award of public contracts."
(A new Community Strategy on Health and Safety at Work 2007-2012, European Commission, Brussels, 21.01.2007, COM (2007) 62 final.)
What are economic incentives
Economic incentives are financial advantages granted to companies or organisations that improve their working conditions. They include:
- state subsidies, grants and financing
- incentives based on tax systems or tax structuress
- insurance premium variation
:: Examples of economic incentives
State subsidies, grants, financing
Companies that improve working conditions could be given financial payments or favourable access to finance conditions (bank loans). For example, a government might sponsor companies to invest in safe machinery or safer work organisation.
Incentives based on tax systems or tax structures
Taxes can be tailored to encourage businesses to act a certain way. For instance, tax breaks could be offered to employers who invest in equipment that is safer than the minimum legal requirements.
Insurance premium variation
The insurance premium paid by a company could be linked to its safety and health performance. Companies with low accident and disease rates, or good safety rules, could pay lower premiums.
:: Scientific evidence on economic incentives
Research indicates that economic incentives from outside a company can improve occupational health and safety.
It's quite hard to evaluate incentives scientifically, though, so more work is needed to provide hard evidence about their benefits. Experience rating, when insurance premiums are set according to the company’s claims history, has been found particularly effective.
But basing economic incentives on past accident rates can be also risky because the accident rates in individual companies, particularly small ones, can be significantly affected by statistical fluctuations. So this kind of incentive might reward careless but lucky firms, and penalise those hit by purely random events.
One way of getting round this is to assess premiums and rewards according to future risk, favouring companies that bring in measures such as safer machinery or OSH management systems.
Insurance-based incentives seem to be most popular in Europe, but there is also scope for government subsidy schemes (49%).
An expert survey by the European Agency for Safety and Health at Work (EU-OSHA) among Member States found that insurance premium variations were assessed by member countries as most suitable (with 71% approval), followed by OSH promotion (55%), tax reduction (49%) and awards.
Success factors
The following success factors have been identified:
- The incentive scheme should not only reward past results of good OSH management, i.e. past accident rates, but should also specific prevention efforts which aim to reduce future accidents and ill-health.
- The incentive scheme should be open to all sizes of enterprises and pay particular attention to the special needs of SMEs.
- The incentive should be high enough to motivate employers to participate.
- There should be a clear and prompt relation between the desired prevention activity and the reward.
- The incentive system should have clear awarding criteria and should be as easy to use as possible, to keep the administrative burden low for both participating enterprises and incentive-offering organisations.
- If the incentive needs to target a large number of enterprises, insurance or tax-based incentives with precisely defined criteria are most effective (closed system).
- If the desire is to promote innovative solutions for specific areas, subsidy schemes are most effective (open system).
Case studies
The case studies in the survey (see report) show that economic incentives to promote OSH work in many different settings. For instance:
- An incentive scheme introduced in the German butchery sector in 2002 led to a 28% fall in reportable accidents over the following six years compared to a 16% fall in the sector as a whole. In total numbers this means there were about 1000 fewer accidents per year in incentivised companies
- An incentive scheme in the Finnish agricultural sector has slashed the accident rate by 10.2%, preventing over 5000 accidents so far.
- A German health insurance company introduced an incentive scheme which motivated a group of client companies to implement a modern health management system. This led to a 7.6% drop in sick pay and a 6.7% drop in absenteeism.
- Of the Polish companies that introduced an OSH management system, 70% had fewer accidents and reduced insurance premiums, while 50% reported fewer workers in hazardous conditions.
- The Italian Workers Compensation authority subsidises bank credits to stimulate OSH investments in SMEs, which report 13-25% fewer accidents than comparable companies.
- The Dutch subsidy programme for investments in new OSH-friendly machinery and equipment led to better working conditions in 76% of enterprises
- The Dutch Covenant programme reduced sick leave in participating sectors by 28% compared with 11% in other sector
Evaluation and cost-benefit analysis
The case studies in the report were analysed in more detail and the results were published in a scientific paper.
In some cases it was possible to come up with a detailed cost-benefit analysis of a particular scheme.
German butchery sector scheme
In the German butchery sector scheme participating companies had their premiums reduced if they promoted safety, e.g. through buying safety knifes or driver safety training.
This has led to about 1000 fewer reportable accidents (i.e. those resulting in more than 3 days absence from work) per year since its introduction in 2002.
For the first six years (2002-2007) the scheme cost € 8.32 million for the 255,000 workers in the sector. However, the benefit due to reduced accident rates was calculated at € 40.02 million. This means € 4.81 was saved for every € 1 invested in the incentive scheme.
Dutch covenant programme
About € 303 million was invested in the Dutch covenant programme, of which 55% was paid by the participating industry sectors and the rest by the Ministry of Social Affairs. The co-financing-system has stimulated sectors to spend more funds on improvement of working conditions. The value of the extra fall in sick leave, calculated by value added per year worked, amount to € 2.7 billion.
However, not all of this € 2.7 billion should be attributed to the covenant programme, as sick-leave can be influenced by many factors, e.g. levels of motivation, or the of unemployment rate in a certain sector. Experts think it is reasonable to link one-third of the drop in sick leave to the covenant programme. This would still produce a € 900 million benefit, or a saving of € 3 for every € 1 spent.
Policy overview
Most European countries have a 'Bismarckian' social security system in which the accident insurance institutions are organised in a state-run monopoly. Other Member States have a competitive market in a 'Beveridgean' system, and some countries have mixtures of both these systems.
This means that there is a fairly limited range of accident insurance and social insurance systems on the continent, which should make it easier to implement and transfer economic incentive models.
Subsidy systems, tax incentives and non-financial incentives should be theoretically possible in all EU countries.
Experience-rating approaches can be found in both competitive and monopolistic markets. However, there are differences when it comes to the funding of future-oriented prevention efforts, such as training or OSH investments.
This should be no problem for monopolistic approaches, because the insurance company can be sure it will benefit from the positive effect that investments will have on the claims rate. In a competitive market, however, the insurance company runs the risk that companies could switch insurers at short notice so that investments in prevention efforts benefit its competitors. A possible solution for competitive markets could be the introduction of long-term contracts lasting several years or the creation of a common prevention fund which is financed equally by all insurers.
Nearly all larger EU Member States presently offer some kind of economic incentives.
- Germany, France, Italy and Poland all offer various incentives through their public insurance system. These include not only insurance premium variations, but subsidy programmes for specific investments in OSH.
- In Spain insurance incentives are planned in the national OSH strategy and a variety of OSH subsidy programmes are offered on a national as well as regional level.
- Of the smaller Member States Belgium, Finland and the Netherlands are the most active, showing that economic incentives are also possible in private accident insurance systems.
The overview shows that economic incentives can be offered in all Member States, regardless of their social security system traditions or whether the accident insurance system is private or public.
The factors influencing the transferability of incentive schemes are discussed in more detail in the following scientific publication.
Impact of EU-OSHA project on Economic Incentives
The project was inspired by the European OSH Strategy 2007-2012, which aimed to reduce occupational accidents by 25%. The project is advised by an expert group of organisations that were nominated by the EU Member States. It includes a number of specific projects carried out by the EU-OSHA Topic Centre (a consortium of European research institutes).
The long-term project started in 2008 and will run until 2013.
In its first phase (2008-2010) several products were delivered:
- a comprehensive report titled Economic incentives to improve occupational safety and health: A review from the European perspective,
- a fact sheet (summarising the report)
- two articles in the Scandinavian Journal for Work, Environment & Health (SJWEH)
- a series of expert group workshops which documented in our events section
- a collection of case studies to find in our good practice data base
The Agency economic incentives expert group not only gives advice and input to Agency activities related to economic incentives, but helps promote the products among stakeholders. The project and its results have been presented at conferences and workshops in numerous European countries, such as Bulgaria, Cyprus, Czech Republic, Germany, Italy, Sweden, Slovenia and the UK.
Some practical consequences have already been observed. For example, following the discussions of the expert group the Italian Workers’ Compensation Authority INAIL decided to launch a new € 60 million incentive scheme focussed on SMEs. According to Agency cost-benefit calculations a return of at least € 3 can be expected for every € 1 spent on such a scheme, which could lead to a benefit of € 180 million at society level.
Thus the project has already stimulated a mutual learning process between EU Member States in order to exchange good practice on how to design an incentive scheme. This can contribute significantly to achieve the European target of a 25% accident reduction and therefore lead to substantial economic benefits for European economies as well.
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