The Government is backing away from plans to rejig the Accident Compensation Corporation to allow competition from private insurers because of concerns it will drive up costs for small and medium businesses and the taxpayer.

Former ACC Minister Nick Smith last year confirmed the National Government intended going ahead with plans to open up the Work Account to competition from private insurers, a policy that resulted from its coalition with the Act Party.

Dr Smith went on to produce a cabinet paper in which it was suggested the ACC increase Work Account levies to create a level playing field for private insurers who - unlike the ACC - have to pay tax and turn a profit.

The Herald understands the Government was also considering making the ACC subject to the same prudential capital requirements as other insurers.


Those rules, which the ACC is exempt from, stipulate how much cash and assets insurers must hold in reserve.

The Herald now understands the Government is unlikely to make changes to ACC aimed at providing the level playing field.

"The political bottom line is it wasn't going to be possible to introduce competition on a basis that was level playing field between private sector and public without substantial increases in premiums or levies, particularly for small and medium employers," a well-placed source told the Herald.

If the ACC was to meet prudential capital requirements it would need a substantial injection of cash from the Government - money that would have to be borrowed - placing additional stress on the Crown's already buckling finances.

Costs associated with reforming the ACC were not the only factor likely to result in higher levies or premiums for employers, the Herald understands.

Currently the insurance industry worldwide has to rebuild capital reserves depleted by large losses stemming from the string of catastrophes in recent years.

That was placing upward pressure on premiums for all types of insurance.

The Herald understands that while there were concerns small employers may pay more, private insurers were expected to provide cheaper cover to large employers.


However, large firms can already manage their own workplace accident cover through the ACC's Accredited Employer Programme.

That allows them to take on the management of injury, and administer payment for any compensation granted.

ACC Minister Judith Collins said suggestions her Government was moving away from competition for ACC were "extremely speculative".

She had made it clear she believed there were better options than those outlined by Dr Smith.

"There is now a significant amount of work going on to put the detail around a third option."

That was likely to be made public next month if it was approved by the Cabinet.


Labour's ACC spokesman Andrew Little understood the Government was working on a proposal that would allow medium and small employers to access the Accredited Employer Programme.

Although that may reduce their costs, he was concerned it may affect workers' entitlements should they be injured on the job.

ACC'S work account:

* Pays for workplace injuries.
* Funded by about $1 billion a year in levies paid by employers.
* Dept of Labour says allowing private insurers to compete would create a risk they would target low-risk employers, leaving ACC with the high-risk burden.