Workers’ compensation changes in WA that introduce rules on managing psychosocial hazards have highlighted pricing risks from increasing mental health claims in the sector, Macquarie Equity Research says.

The state laws, which take effect next month, follow Safe Work Australia’s updated regulations on psychological risks in workplaces that have led to changes around the country.

“Across other states, we are not seeing repricing reflecting the new coverage, but we are seeing employees already set claims precedents in court,” Macquarie says in a research report.

Mental health claims are four times more costly than physical ones, recovery times are longer and the return-to-work rate more than two times worse. The life insurance market has experienced similar issues relating to individual disability income claims.

“Although this challenge is longer-dated than most investment horizons, we believe it is already evident that growth into long-tail commercial lines should be viewed with scepticism at this point in the premium rate and economic cycle,” Macquarie says.

The insurance industry forecasts workers’ compensation claims for mental health will double between 2022 and 2030, after an increase of about 50% in the previous five years, according to the report.

WA represents about 70% of the workers’ compensation gross written premium for “risk states”, where there is underwriting by listed insurers. Other privately underwritten jurisdictions are Tasmania, the ACT and the NT. Governments have various arrangements in other states.

The report notes that in the life sector, by 2019 mental illness was the biggest cause of claims for total and permanent disability and the third-biggest for income protection, reflecting changes including around diagnosis.

Macquarie says Ebix data shows repricing for Australian workers’ compensation risks was up 2.4% in the March quarter. “Although pricing for this product can be seasonal, there has been a clear slowdown in the upward repricing trend over the past year, which suggests to us these mental health trends are not yet being priced in,” it says.

Workers’ compensation market shares for listed companies IAG, Suncorp and QBE have been relatively flat over the past five years, with the insurers representing about 69% of the “risk states” market in fiscal 2023. Workers’ compensation accounted for about 6% of Suncorp’s Australian GWP and about 5% of IAG’s Australian GWP, Macquarie says.