Changes to the way it classifies employers and set premium rates
Ontario’s Workplace Safety and Insurance Board (WSIB) is proposing a new rate-setting framework to change the way it classifies employers and sets premium rates. It would also eliminate the board’s experience rating programs.
The proposal is still at the preliminary stage and the board has not yet set a date for implementing the changes, other than saying they would not happen before 2018. It has held information sessions with employers and workers and is now giving stakeholders until early October to submit feedback.
"Ontario’s workplaces have changed a lot over the past 30 years, and the way we fund workers’ compensation needs to change to reflect that evolution," says Jean-Serge Bidal, executive director of strategic revenue policy at the WSIB.
The proposed framework includes the following key features:
New classification method: The board is proposing to implement a new classification system that it says will be simpler and easier to understand. Currently, for setting premium rates, the board groups Schedule 1 employers (those not individually liable to pay benefits directly to injured workers) into nine industry classes, 155 rate groups and 840 classification units using a Standard Industrial Classification (SIC) system.
Each rate group pays a different premium rate based on the collective costs of all employers in the group. All employers in a rate group pay the same premium rate.
The board says the current classification model is outdated. "Since the creation of the SIC system, the structure of the Ontario economy has changed dramatically and, as professor Harry Arthurs and Douglas Stanley (who wrote funding/pricing reports for the WSIB) identified, so too has the statistical system aimed at capturing and grouping industries," the board says in a paper.
The current model is also "based on an assumption which has been proven to be wrong in many instances — the assumption that employers undertaking a similar business activity or engaged in the same industry will present a similar ‘risk’ to the system," adds Bidal.
The WSIB recognizes there can be significant differences in workplace injuries between two employers within the same industry and of the same size and operations, based on workplace culture, health and safety and other factors, he says.
"As a result, some employers feel that they are paying for the claims experience of other employers in their rate group, while others are benefitting based on the better claims experience of other employers."
The board is proposing to replace this system with a new model adapted from the North American Industry Classification System (NAICS) that uses "significantly fewer" and larger employer groups. NAICS groups businesses based on type of economic activity and it is updated every five years to reflect changes in the North American economy.
Using NAICS, the WSIB is proposing to group employers into 22 industry classes. It says some employers would remain in a similar grouping at the class level as they are now, while others would be grouped differently.
Within each class, the board would put employers into risk bands based on their individual risk profile compared to others in their class. The number of risk bands per class would vary from 40 to 83.
The new classification scheme would also eliminate the need for employers with more than one business activity to have multiple accounts with the WSIB, with different premium rates. Instead, these employers would be grouped into a single class based on their predominant business activity, determined by the largest percentage of their annual insurable earnings.
An exception would apply for temporary employment agencies since they supply workers in different WSIB classifications. The board is proposing they have a separate premium rate tied to each class for which they supply temporary workers.
Setting premiums: The WSIB says the new framework would more closely tie an employer’s premium rate to its own claims experience. The board would update the employer’s rate each year to reflect its experience within its industry, something other boards in Canada do to varying degrees.
The new framework would use a two-step process to set an average premium rate for each individual class and then adjust it for individual employers based on their own claims experience and insurable earnings relative to the class rate.
The first step would be somewhat similar to the process the board now uses. It would be made up of three parts: collective liabilities for the costs of new injury and illness claims, past claims costs (including unfunded liability costs) and administrative costs.
"The amount of the three components will vary amongst the 22 proposed classes based on various factors such as the apportionment of the unfunded liability or the projected new claim cost for each class," the board says in a discussion paper.
In the second step, the board would look at each employer’s risk profile and actuarial predictability to determine how much its premium rate should be affected by its individual claims experience versus the collective experience of its class.
To determine an employer’s risk profile, the WSIB would consider an employer’s insurable earnings and the number of claims it had over a six-year period.
It would compare the results to the risk profile for the class in which the employer is grouped.
Actuarial predictability measures the degree to which the WSIB can rely on an employer’s past claims cost to predict its future outcomes to accurately and fairly set premium rates.
For example, if an employer’s predictability is calculated at 90 per cent or more on an actuarial predictability scale, the WSIB would base the employer’s rate solely on its individual experience and not on the experience of all employers in the class.
If it scored between 40 and 50 per cent on the scale, the premium rate would be based half on the employer’s individual experience and half on the collective experience of its class.
If the score was no more than 2.5 per cent on the scale, then 2.5 per cent of the employer’s premium rate would be based on its individual experience and 97.5 per cent would be based on the collective experience of its class.
The WSIB would use the risk profile and actuarial predictability, along with an employer’s risk band position, to determine how much an employer should pay based on its own claims experience. In fairness to employers, the board would not require them to start paying new premium rates right away.
"There may be a difference (varying from a very small to a large variance) between what an employer should be paying as their Employer Target Premium Rate and what the employer is paying under the current system," the board says in documents describing the proposals.
Under the preliminary framework, the WSIB says 74 per cent of employers would be see premium rates go down and 26 per cent would see them go up. The WSIB also said the new model would be revenue-neutral, meaning the total amount of premium dollars it collects would not change. However, over time, the distribution of premiums may shift among employers based on claims experience.
Experience rating programs: Since the new rate-setting approach would use an employer’s own claims experience (through the risk bands) to set its premium rate for an upcoming year, the board says it would no longer need its experience rating programs, such as New Experimental Rating Plan (NEER), Construction Industry Plan (CAD 7) and Merit Adjustment Program (MAP).
These programs use a retrospective approach rather than the prospective method the board is proposing. Under the current programs, all employers in the same rate group pay the same initial premium rate, but employers may qualify for surcharges or rebates later once the WSIB compares their expected claims costs to their actual costs.
"While a retrospective program can be more responsive to short-term changes, this also means that there can be significant changes from year to year that result in employers moving from a surcharge position to a refund position, or vice-versa," the board says.
It adds that some employers under NEER or CAD7 have had as much as a 150 to 200 per cent change in their premiums year over year after taking into account experience rating adjustments.
