NSW state-owned icare has warned of another testing year after its main workers’ compensation scheme swung to a $876 million net loss amid falling bond yields and rising medical costs.

The Nominal Insurer result for the year to June 30 compares with a net profit of $88.9 million in the previous 12 months.

Chairman Michael Carapiet says there have been challenges since icare’s inception in 2015 as the Government took action to move from a fragmented and adversarial workers’ compensation system to one that delivers fairer outcomes.

“We recognise that implementing some of these challenges have caused disruption and we have had operational challenges achieving the right scale,” he writes in the annual report released last week.

“The year ahead will test us again, but we approach it with a sense of optimism and clarity, driven by our vision and purpose.”

Gross written premium rose about 11% compared to a year earlier to $2.586 billion while net claims expenses/scheme costs increased to $4.064 billion from $2.24 billion.

The scheme reported an underwriting loss of $2.391 billion, while it received net investment revenue of $1.647 billion.

icare says it has had limited ability to control or influence some factors significantly affecting the financial performance of schemes in the past year.

“Some of these factors are likely to continue to put pressure on results into the next financial year, requiring ongoing monitoring and proactive financial risk management,” the report says.

A fall in bond yields resulted in an increase in claims liabilities, partially offset by reducing inflation assumptions.

“In aggregate economic assumptions, bond yields and inflation have adversely impacted icare’s schemes by about $2.2 billion,” it says.

icare operations also include a self-insurance scheme, the Home Building Compensation Fund, Lifetime Care and Dust Diseases Care.

Insurance liability strengthening due to rising costs affected the Nominal Insurer’s results by $700 million and future medical inflation remains uncertain, the report says.

Since 2015 average medical costs per claim have increased by about 40% in part due to the NSW workers' compensation system in many cases paying Australian Medical Association rates plus 50% which no other Australian jurisdiction does, it says.

“While icare can influence, and has some limited control over medical costs, we need to work with the State Insurance Regulatory Authority (SIRA) to address the issue including their fee scales,” it says.

icare says results have also been affected by scheme reforms which saw significant releases in reserves that favourably impacted results prior to icare’s formation, followed by reserves strengthening.