On March 31, 2015, the WSIB released its long-awaited Rate Framework Reform Proposal (“the Proposal”). Following its release, the WSIB engaged in a consultation process with stakeholders, including employers, employer associations, injured workers and labour groups. On December 1, 2015, the WSIB released its updated Framework following the completion of the consultation process.
The Proposal recommends a number of significant changes to the current experience rating scheme for Schedule 1 employers in Ontario including:
- Adoption of the North American Industry Classification System for classifying employers;
- Reduction in the number of rate groups from 155 to 34;
- Adoption of a surcharge mechanism for employers who consistently exhibit poor claims cost performance; and,
- Replacement of the current experience rating systems (CAD-7, NEER, MAP) with a system known as the Employer Level Premium Rate Adjustment.
This is not the first time the WSIB has turned its mind to one or more aspects of the classification and experience rating system in Ontario. The last substantive classification review occurred in the early 1990s. With the economy changing, and various industry wide closures (e.g. the shutting of tanneries), there were fewer and fewer employers in some of the rate groups. Those that remained could no longer support the group’s liabilities, leading to an increase in the unfunded liability. In response, the WSIB reduced the number of rate groups from approximately 219 to 154, and at the same time started using the Standard Industrial Classification (SIC) codes and subcategories (CU Codes) to classify employers.
More recently, in September 2010, Professor Harry Arthurs was tasked to conduct a comprehensive review of the WSIB’s funding structure and related matters including the Unfunded Liability, premium rate setting, rate groups, occupational diseases and others.
On the heels of Professor Arthurs’ review was the Douglas Stanley Report of February 2014 entitled “A Deliverable Framework for Fairly Allocating WSIB Insurance Costs (WSIB Rate Framework Review)” (“the Report”). Mr. Stanley was engaged to advise the WSIB on how to achieve a new, sustainable, and predictable Rate Framework, which included employer classification, rate-setting and experience rating.
The Report made a number of recommendations including the adoption of a new classification system, the elimination of experience rating programs, the implementation of “charges” or “premiums” towards paying down the Unfunded Liability and the elimination of the Fatal Claims Policy, to name a few.
Goals of the Framework Review
At the commencement of the Rate Framework Reform, the WSIB identified a number of ‘key goals’, or foundational elements that it intended would guide and form the basis of the Framework Review. These ‘key goals’ include:
- Clear and Consistent – “A new streamlined and simpler classification structure that is clear and consistent in its application as a foundation”
- Fairly Allocated Premiums – “An approach that ensures a fair premium for workplace coverage, based on each employer’s risk and claims experience to ensure occupational health and safety is top of mind for employers as it relates to their premiums”
- Balanced Rate Responsiveness – “A reasonable consideration for premium rate stability, while also ensuring responsiveness to risk and claims experience attained through occupational health and safety efforts to reduce workplace injuries and return workers to productive work.”
- Transparent and Understandable – “A Rate Framework that stakeholders can easily understand, and promotes active and informed participation.”
- Collective Liability – “A risk sharing arrangement exists among employers who collectively pay premiums to maintain the insurance fund.”
- Ease of Administration – “Efficient and effective for the employer community and for the WSIB to administer and maintain”
These ‘key goals’ are evident throughout the Framework Review. Their importance to the process was reinforced during the consultations, wherein they were referred to in the rationale applied by WSIB in determining which changes proposed during the consultation process would be adopted or disregarded.
Classification of Employers
One of the key developments arising out of the Stanley Report was a need for equity amongst employers. The Rate Framework review concluded that only 13% of employers are paying the correct premium rate. Specifically, the WSIB concluded that 50% of employers were overpaying premiums, and 31% were in fact underpaying premiums. In other words, approximately one third of all employers in the province were not paying their fair share of the claims costs, and half of all employers were paying too much.
North American Industry Classification System (“NAICS”) and Rate Groups
A key aspect of the Review is the WSIB’s proposal of the adoption of the North American Industry Classification System (“NAICS”). This system should be familiar to most employers, as the majority already have a NAICS number for Canada Revenue purposes.
Under the current system, there are 155 different rate groups, with 800 classification units. The Rate Framework Review proposed, through the adoption of NAICS, a reduction from 155 to 22 classes of employers. Since the initial review, and following the consultation process (which included Risk Disparity Analysis), the WSIB has proposed increasing the number of classes to 34. The Risk Disparity analysis concluded that there was a wide disparity within some of the different proposed classes of employers. In other words, some employers in the proposed classification were bringing a different claims experience relative to the proposed class. Accordingly, to fairly reduce the disparity, the WSIB proposed the expansion of the classes.
In essence, there will now be fewer and larger groups (classes) of employers under the proposed framework compared to the current structure
Predominant Business Activity – One Classification/Premium Rate
The WSIB has proposed that under the new Framework each firm (employer) will now have only one classification/premium rate, regardless of differentiating business activities within a firm. In other words, employers, with the exception of Temporary Employment Agencies (TEA), will no longer have multiple rate groups. It should be noted that at this time, the WSIB has undertaken to consider further exemptions for employers with business activities that are not dependent on the employer’s other activities.
The new proposed single classification will be determined by selecting the rate group that currently has the largest percentage of the employer’s total insurable earnings. Employers will now be classified at the organizational level, rather than the account level. Similarly employers in both compulsory and non-compulsory activities will be classified according to the predominant compulsory activity at the class level.
The classification process for existing employers will involve an initial analysis based on a review of the previous three (3) years of insurable earnings. The WSIB considered a six (6) year window but reduced it to three (3) years as the longer window led some employers to possibly being classified based on a high payroll business activity that might have ceased. For new employers, they will have to demonstrate their predominant class to the WSIB.
It is one of the WSIB’s ‘key goals’ that the reduction to one classification will greatly simplify the classification process. However, for many employers, the new classification may result in significant higher total premiums, should their predominant business activity be based on a rate group with higher premiums than others. Of course, there is the possibility for some employers that their overall premiums will decrease if an activity with a lower premium rate is selected. We would recommend that employers review their business activities and their insurable earnings, so that consideration may be given to the potential impact of a premium increase (or decrease) on the overall business prior to the implementation of the new Framework.
Changes in Classification
The proposal indicates that where an employer begins a new business activity or discontinues a business activity, and this change would result in a class change, the WSIB would consider a potential change in classification, to reflect the immediate change. While the proposal notes that the WSIB would consider this information for potential reclassification for the following premium year, the proposal does not note what will happen if an employer’s insurable earnings change year after year. Will the WSIB consider a rolling average? If so, over how many years? (3 years? 6 years?) Or will the WSIB change an employer’s rate group year after year? The last option certainly does not seem to be in line with the WSIB’s stated intention of premium stability. In any event, there is clearly still some uncertainty surrounding the implementation and mechanics of the new Framework.
Risk Adjusted Premium Rate Setting
Class Level Premium Setting
The WSIB will create an average premium rate for each class, known as a Class Target Premium Rate (“Target Rate”). The Target Rate will be based on the classification’s collective liabilities for new claim costs, along with an apportionment of administrative costs, and past claim costs.
Employer Level Premium Adjustment
The Target Rate will be adjusted at the employer level through an Employer Level Premium Rate Adjustment. Essentially, the Target Rate will be adjusted based on an individual employer’s risk, through their own claims experience and insurable earnings, relative to the Target Rate. The Adjustment will be based on a six (6) year weighted window of claims costs. In essence, the most recent three (3) years of claims experience will account for 66.6% of the rating, with the remaining three (3) years accounting for 33.3%.
While the Rate Framework is intended to be revenue neutral, it does have the potential to impact many employers on a financial level. Or in other words, the Framework will not increase the total premiums collected, but it will shift the distribution of premiums amongst employers. Specifically, the majority of employers (74%) are expected to see a premium rate decrease. However, the remaining employers (26%) are expected to see a premium rate increase, of which, 10% would see an increase greater than 25%.
The WSIB has conducted a Rate Group Analysis which explains how employers within the current classification structure might be classified under the new Framework and identifies potential premium rates. In some cases, the WSIB provided several possibilities for the current rate group structure. Employers interested in their potential classification under the new Framework can find additional information on the WSIB’s Rate Framework website:
Elimination of Experience Rating
As noted above, the Rate Framework will result in the elimination of the current Experience Rating Models, which includes NEER, CAD 7 and MAP. The WSIB identified a number of reasons to revise the system including:
- 59% of employers were excluded from the current model;
- The system of rebates and surcharges led to instability and unpredictability making it difficult for employers to predict their costs year over year; and,
- There was inconsistency in the experience rating windows (NEER = 4 years; CAD 7 = 2 and 5 years), and both conflicted with the 72-month lock-in.
The current Experience Rating program will be replaced by Employer Level Premium Rate Adjustments and the inclusion of Risk Bands. These bands will be based on a range of Premiums. Employers will be grouped within the range based on their risk profile, and will pay a common rate. Employers will then move within the band based on their year over year costs. To ensure stability and predictability, the WSIB has limited how much an employer’s premium can adjust year over year.
The elimination of the current experience rating model could impact many employers, particularly those who under the current model manage their claims based on the current experience rating window (four (4) and five (5) years). Given the new six (6) year weighted window discussed above, employers will have to consider the expanded financial impact that claims will have on their premiums. Accordingly, if employers were not already doing so, they will need to focus more than ever on workplace safety and, where necessary, returning workers to work following a workplace injury, to limit the expanded financial impact of their claims.
While the original Framework proposed the elimination of the Second Injury and Enhancement Fund (SIEF) relief of costs, based on the unanimous view from employer stakeholders who are in favour of maintaining some form of cost relief, the WSIB has indicated that they will be reviewing the details of the SIEF program and policy, along with considering potential alternatives. The WSIB has stated that they will maintain SIEF as an interim measure pending this review.
Rather than develop or establish a new system, (i.e. re-invent the wheel the WSIB could consider programs already in place. Specifically, the WSIB could consider adopting an approach similar to that currently employed by the Alberta Workers’ Compensation Board. For example, WCB-Alberta’s Operational Policy 05-02 provides:
When a compensable accident aggravates a pre-existing condition and the period of disablement is a reasonable consequence of the accident, claim costs resulting from the effects of the aggravation are not relieved (see Policy 03-02, Aggravation of a Pre-Existing Condition).
When there is medical evidence of a pre-existing condition, WCB may relieve claim costs if the pre-existing condition causes an increase to the period or degree of disablement. The pre-existing condition may have been a separate factor or aggravated by the accident. The resulting costs from the prolonged period are relieved from the accident employer’s experience account.
When there is concurrent disablement due to a separate pre-existing condition, cost relief will not be considered unless the separate pre-existing condition has prolonged the disability period for the compensable injury.
Different criteria apply to claims for back injuries with pre-existing conditions (see Application 3 for more information on back injuries).
Ultimately the WSIB removes some or all of the costs of a claim from an employer’s experience record, and transfers the costs to all employers in the industry, and worker benefits are not impacted.
Providing employers with relief of costs can assist employers with the financial burden often associated with accommodating employees in the workplace.
While the potential changes are significant, the WSIB is proposing a gradual and incremental premium rate transition which will seek to balance premium increases and decreases. Based on the information currently available, the new Rate Framework would not take effect until 2019 which should provide employers some time to prepare for these changes.
The implementation of the new Framework will require legislative changes, new policies, and new administrative practice documents. WSIB has indicated that they intend to seek input from stakeholders on the implementation Plan.
We will continue to monitor the process closely and update you on any further developments, including the Transition Plan, once it is released.