New South Wales employers, insurers, and claims managers are now operating under a substantially altered workers compensation framework, with the bulk of the state government's 2026 legislative reforms having taken effect on July 1, 2026. The changes were detailed by the State Insurance Regulatory Authority (SIRA) in its July 30 Recovery at Work Insider bulletin and arrive as the scheme confronts a documented financial deterioration driven primarily by the rising cost of psychological injury claims.
The financial backdrop to the reforms is stark. In a March 2025 ministerial statement to NSW Parliament, Treasurer Daniel Mookhey confirmed that psychological claims account for 12% of total workers compensation claims in NSW but 38% of total cost, and that the average cost of a psychological injury claim rose from $146,000 in 2019-20 to $288,542 in 2024-25. He further noted the state’s main workers compensation scheme holds only 85 cents in assets for every dollar owed to injured workers.
The broader claims environment underlines the pressure. NSW workers compensation claim costs reached $5.3 billion in FY 2023-24, up 20.5% on the prior year – a $900 million increase in 12 months – with icare attributing the shift to growth in claim volumes, longer claim durations, and a significant rise in the average cost of psychological injury claims. Nationally, serious mental health condition claims grew 161% over the decade, from 6,700 in FY 2013-14 to 17,600 in FY 2023-24. Without legislative intervention, the NSW government projected premiums would rise 36% over three years.
Business NSW, the state’s peak employer advocacy body representing nearly 50,000 businesses, welcomed the passage of the reform legislation in February 2026. “These landmark reforms are an important first step in repairing a scheme which has too often failed both business owners and genuinely injured workers. Without reforms, businesses faced a projected 36% increase in premiums over the next three years. One in five members said these increases would close their businesses,” said Business NSW CEO Daniel Hunter.
The most consequential changes restructure how psychological injury claims are assessed and managed. Changes to eligibility, entitlements, and claims processes apply to primary psychological injury claims notified from July 1, 2026, with employers now required to provide information on the relevant event that caused the workplace injury when notifying the insurer. A separate pathway applies to conduct-based claims. Claims caused by relevant conduct – defined as bullying, racial or sexual harassment, or excessive work demands – will go through a different claims process while liability is being determined, and workers will be required to submit a completed claim form. Disputed conduct-based claims will have the conduct itself determined by the Industrial Relations Commission (IRC) before other compensation issues proceed. This pathway has direct market relevance. Safe Work Australia data records harassment and workplace bullying at 33.2% of serious mental stress claims – up from 27.5% in the February 2024 data cut – making it the leading cause of mental stress claims nationally, ahead of work pressure at 24.2%.
The defence for psychological injury claims caused by reasonable management action has also been strengthened. A companion bill passed in February 2026 introduced phased increases to Whole Person Impairment thresholds – rising from 25% on July 1, 2026, to 28% by July 1, 2029 – alongside a new Return to Work Intensive program providing an additional year of medical benefits and income replacement for eligible workers. The return-to-work gap between psychological and physical claims remains the central sustainability problem the reforms are designed to address. According to NSW government reform materials released in May 2025, 50% of workers with a psychological injury return to work within a year, compared with 95% of workers with a physical injury.
The reforms also introduce a structural shift in how claims costs are shared between insurers and policyholders. Most employers will now pay an excess for every claim carrying a weekly entitlement, covering up to the first two weeks of weekly payments the worker receives. This applies to claims made against a policy issued or renewed with icare or a specialised insurer – including Coal Mines Insurance – on or after 4pm on June 30, 2026.
The compliance framework has tightened in parallel. Penalties for not holding a workers compensation policy have increased, a new offence has been created for recklessly failing to provide information relevant to premium calculations, the penalty for not complying with an employer improvement notice has increased to $1,250, and the penalty for failing to provide suitable work where reasonably practicable has doubled. Employers and employer representatives are also now prohibited from attending a worker’s medical treatment or examination unless the worker requests their attendance, with an exception for case conferences.
A further change takes effect on October 1, 2026. Medical and related treatment expenses compensable through the scheme must be “reasonable and necessary,” with treatment required to primarily address the compensable injury, be clinically justified, and represent value for money. The shift carries broader jurisdictional significance. NSW workers compensation is aligning with a test already applied in NSW’s compulsory third-party (CTP) scheme – under the Motor Accident Injuries Act 2017 – and in the National Disability Insurance Scheme (NDIS). Victoria’s WorkCover scheme applies a “reasonable cost of services” test and Queensland a “reasonable in all the circumstances” test, meaning NSW's new standard most closely mirrors the NDIS framework of the three. For insurers and injury managers operating across schemes, the evidentiary discipline already required for CTP and NDIS funding decisions now applies within the workers compensation file.
While compliance and eligibility settings tighten, the premium environment is legislatively constrained. A legislated freeze locks the Nominal Insurer’s insurance premium target collection rate across the 2026-27 and 2027-28 premium years at the rate filed with SIRA for 2025-26. Employer premiums may still vary based on wages and claims experience, but underlying industry rates remain unchanged through to June 30, 2028.
Taken together, the tightened claims eligibility gateway and the frozen premium lever represent a structural position that leaves the scheme’s financial recovery dependent on whether the new eligibility criteria reduce psychological claim volumes as projected. SIRA has directed stakeholders to its Workers Compensation Information Hub as the primary source of ongoing updates.
