Most people think that Racing NSW runs racing in that state, but scrutiny of its annual accounts shows that it is actually an insurance company which does a bit of racing administration on the side.

Given that its been said that insurance is just glorified bookmaking, Racing NSW is setting its odds way too high. If it put up a stand at Randwick the punters would go home winning every week.

With a net equity deficiency already of $3.7 million, Racing NSW is technically insolvent, although it claims to be a going concern by virtue of its first claim on TAB revenues.

However only a miracle such as winning its court battle over race fields is going to cover up the damage to the Racing NSW balance sheet from the runaway train wreck which is its workers compensation insurance business.

While premium income has crept up from $7.9 million in 2005 to $8.7 million in 2009, outstanding claims have ballooned from $28 million to $54 million in the same period. Clearly an $800,000 increase in premium income cannot possibly pay for a $26 million increase in claims. The Racing NSW annual report shows the trend.

Remarkably the $16 million increase in outstanding claims in 2009 produced a much smaller impact on the reported results. One can only imagine the discussions with Racing NSW's auditors which produced this outcome.

Racing NSW is the only state racing body in Australia still providing workers compensation insurance. In all other states, the main Workcover authority handles this requirement.

And in all other states the racing industry benefits because while it can be a highly dangerous industry for participants, most employers are regarded as small businesses, which means that their premiums are subsidised by large employers. There is of course also a wide range of small businesses which mean that higher risk employers have their workers compensation liabilities pooled with low risk small businesses.

One could argue that Racing NSW should not be in the insurance business in any event. It doesn't have the balance sheet for it to start with. Most insurers have shareholders funds and accumulated reserves to cover their claims liabilities. Racing NSW has neither. Most insurers, faced with a blowout in claims would jack up their premiums. Racing NSW refuses to do so.

All insurers should have experienced legal, actuarial, investment and claims staff who specialise in the insurance industry. Racing NSW has had a revolving door insurance administration with 3 managers in the past 4 years, all of which have been expected to combine legal and insurance administration expertise in the same person.

It would be different if the Racing NSW insurance experience was profitable, but the figures show it is not. In fact the process of saving a few hundred thousand dollars by bringing insurance administration in house has arguably contributed to a claims blowout of monumental proportions and expenses well into the tens of millions.

Shown the Racing NSW annual accounts and the jump last year in claims duration from 5.2 to 12.3 years, an experienced stockmarket insurance analyst commented :

"If you grow quickly and your book is not yet mature - you might expect duration to go from 5 to 6 years, but for the duration to go from 5 to 12 years, it would mean:

1) they stuffed up the previous year calculation
2) they are growing at an astronomical rate (but the premiums tell you different)
3) they have changed the policy design - ie they do not have any experience of how this may pan out.

The analyst also said:

"Workers compensation is a very difficult class of business to get right - and when you think all is ok for 10 years, something like asbestos comes along and blows you out of the water."

Well it may not be asbestos, but Racing NSW has adopted some unique ways of limiting claims which are a prospective minefield for future liabilities. All it takes is for a smart lawyer to challenge some of its rulings and hundreds of claims may have to be allowed or increased.

For instance, it has adopted the narrow view that trainers and track riders are only insured when they are working with racehorses. A horse which has not yet raced is in their opinion not a racehorse and therefore any accident involving it is not covered.

Faced with trainers looking to get workers compensation cover for a combined training and breeding operation, Racing NSW has said it will only insure the training part. However it is illegal under the NSW Workcover Act for a single employer to have two workers compensation policies.

Individual trainers who have been unfortunate enough to have one of their employees make a claim have been slugged with Claims Experience Premiums of tens of thousands of dollars even though under the NSW Workcover Act, employers with a wages bill of less than $300,000 should not have to pay CEP's.

On the income side, there appear to be many reasons why trainers in particular might object to paying the premiums charged, leading to them clawing back overcharges in previous years.

The Workcover Act stipulates that premiums should be calculated based on a percentage of wages paid. This ruling is reflected in Racing NSW's own Rule Of Racing, which state in Local Rule 111 (Insurance Fund):

"(5) Trainers must pay to cover their liability as employers under the Workplace Injury
Management and Workers Compensation Act, 1998 as follows:
(a) a premium calculated at the rate determined from time to time by the Board
upon the wages paid to their employees plus the value of their keep when
kept by the employers, with a minimum as determined from time to time by
the Board, whether the trainer has any person employed or not.
(b) a contribution as prescribed from time to time by the Board in respect of
any unpaid stablehand registered to the trainer, who rides work on a
racecourse.
(c) if holding a licence or permit from another Principal Club or the New
Zealand Racing Conference, while visiting New South Wales, a premium as
prescribed from time to time by the Board.

However Racing NSW imposes premiums based on a deposit premium and an "activity fee" based on the number of horses starting in races and barrier trials.

In doing so, it appears to be acting in breach of its own Rules as well as the Workcover Act. Any trainer who has a lot of starters but few staff is entitled to object to the premiums he has been charged.

Under this rule interstate trainers racing in New South Wales have been forced to take out additional policies, even though their home state policy should cover traveling staff.

Another aspect of its Rules of Racing is that Racing NSW appears to be engaging in "third line forcing" by requiring trainers to take out workers compensation insurance with its own fund, even though trainers may not be able to cover all their activities due to exclusions.

It is illegal under the Trade Practices Act to force clients to do business with a specific supplier. Rule 111 says:

"(4) Subject to the provisions of the Workplace Injury Management and Workers
Compensation Act, 1998 as amended, all Racing Clubs and trainers must, except with the
approval of the Board, effect workers compensation insurance with the NSW TRB Insurance
Fund at the rates determined by the Board from time to time."

The impact of continuing losses from its Workcover business threatens the financial viability of Racing NSW. At the end of the 2009 financial year, it had $29 million on deposit with the ANZ Bank which covered its liability for an equivalent ANZ guarantee, which Racing NSW must have in order to cover its Workcover liabilities.

There was another $24 million on deposit which is all that was left from the $32 million it had collected from bookmakers from the race fields levy. In other words, if at the end of June last year Racing NSW had to give back $32 million to the bookmakers, it could not have done so.

The ANZ guarantee has now risen to $36 million and apparently Racing NSW has now collected $60 million from the bookmakers. Given that its workers compensation losses seem to be accelerating, so also would be the working capital deficiency.

The ANZ Bank has a first mortgage over all of Racing NSW's assets. At present it gets much comfort from the $60 million in race fields fees sitting on deposit. A loss by Racing NSW in the Betfair or Sportsbet cases means that these fees would have to be refunded, which I'm sure will cause the ANZ Bank to consider its position.

And nowhere has Racing NSW accounted for the substantial legal expenses it is incurring in the Betfair and Sportsbet cases. These are already in the millions and will be doubled if it loses.

As I said at the start of this article, Racing NSW would be a very bad bookmaker if that was its business. Its looking more and more like a very drunk punter putting everything he has on a longshot in the last race.

Any wonder they hate bookmakers so much!

A submission to Workcover NSW by the Australian Trainers Association outlining their concerns about the Racing NSW Workcover Scheme can be read here.