Rate Framework Reform

Transcription

1 Rate Framework Reform Paper 3: The Proposed Preliminary Rate Framework MARCH 2015 WORKPLACE SAFETY AND INSURANCE BOARD

2 MESSAGE FROM THE CHAIR AND PRESIDENT & CEO In recent years, stakeholders, experts and the WSIB have identified a number of fundamental challenges to the WSIB s current classification and premium rate setting approach. Following the recent engagement with stakeholders, Mr. Douglas Stanley released his final Pricing Fairness report, in which he recommends that the WSIB develop an Integrated Rate Framework that would change the way employers are classified and the way premium rates are set. After a careful review of Stanley s recommendations, consideration of stakeholder perspectives and challenges, the WSIB s own analysis and advice from a team of actuarial experts from the firm Morneau Shepell, the WSIB committed to bring forward a proposed preliminary Rate Framework for discussion with stakeholders. The WSIB s objectives are to consider reforms that ensure that everyone pays their fair share for workplace coverage, to ensure that there is a reasonable balance between premium rate stability and responsiveness, and to make it easier for stakeholders to understand and engage in the process. The proposed preliminary Rate Framework described in these technical papers builds upon Stanley s recommendations and proposes a plausible working model a way forward for the WSIB to distribute the costs of the system in a fair and transparent manner. Its key features are: A simplified, transparent and modernized classification system, aligned to an accepted national standard; A fair process that prospectively sets premium rates, reflecting individual employers claims experience relative to their industry; and Considerations for a reasonable transition path to ensure employers can gradually adjust to the new premium rate setting process. Although the WSIB is proposing a plausible working model, there are a number of options and key questions for further consideration. The WSIB understands that it is only with stakeholders varied and unique perspectives that it will be able to make informed decisions on the issues currently faced by the system. The WSIB is thankful for the support and thoughtful engagement of stakeholders in the Rate Framework Reform initiative and looks forward to further opportunities to hear the diverse perspectives as we consider potential reforms to the current approaches for employer classification and premium rate setting. Yours truly, Elizabeth Witmer Chair I. David Marshall President & CEO March 31, 2015 WSIB RATE FRAMEWORK REFORM 2

3 Table of Contents THE PROPOSED PRELIMINARY RATE FRAMEWORK S KEY GOALS 4 EMPLOYER CLASSIFICATION (STEP 1) 6 North American Industry Classification System...7 Multiple Business Activities...14 Temporary Employment Agencies RISK ADJUSTED PREMIUM RATE SETTING (STEP 2 & 3) 23 Premium Rate Setting Policy CLASS LEVEL PREMIUM RATE SETTING (STEP 2) 27 New Claim Costs & Administration Cost: Allocation at the Class Level New Claim Costs: Long Latency Occupational Disease...31 New Claim Costs: Second Injury and Enhancement Fund...32 New Claim Costs: Self-Sufficiency of Classes...35 Past Claim Costs: Experience Rating Off-Balance...37 Class Target Premium Rates EMPLOYER LEVEL PREMIUM RATE ADJUSTMENTS (STEP 3) 42 Actuarial Predictability Step A: Determining an Employer s Actuarial Predictability Risk Banding Step B: Determining an Employer s Total Claims Cost Step C: Determining an Employer s Insurable Earnings Step D: Determining an Employer s Risk Profile Step E: Determining the Class Risk Profile Step F: Determining an Employer s Adjusted Risk Profile Step G: Determining an Employer s Risk Profile Index Step H: Determining an Employer s Target Premium Rate Step I: Determining an Employer s Risk Band Movement Analysis: Risk Band Movement and Stability Employer Costs Above the Premium Rate Thresholds Prospective versus Retrospective Experience Rating New Employers Surcharging Employers...73 CONCLUSION 75 GLOSSARY 76 WSIB RATE FRAMEWORK REFORM 3

4 THE PROPOSED PRELIMINARY RATE FRAMEWORK S KEY GOALS The proposed preliminary Rate Framework is the product of discussion, options analysis and reflection. It considers the Pricing Fairness recommendations and goals against a set of Key Goals developed for the proposed preliminary Rate Framework that are identified on the next page. In reviewing the papers, consideration should be given to the merits, potential variations and implications, and the proposed preliminary Rate Framework s Key Goals for the workers compensation system as a whole. In developing the Key Goals, it was important to link the rate framework reforms with efforts that lead to improved occupational health and safety outcomes. In meeting these Key Goals, the proposed preliminary Rate Framework recognizes these efforts in setting fair premium rates and acts as an early warning for employers with premium rate implications. Revenue Neutrality as a Foundation The adoption of a new classification structure and prospective Risk Adjusted Premium Rate process would not affect the total amount of premium dollars collected by the WSIB, thereby remaining revenue neutral. However, a new system would, in a reasonable and gradual manner, shift the distribution of premiums among individual employers based on their experience, while ensuring that employers are paying their fair share of workplace coverage. WSIB RATE FRAMEWORK REFORM 4

5 Proposed Preliminary Rate Framework s Key Goals Clear and Consistent A new streamlined and simpler classification structure that is clear and consistent in its application as a foundation. Transparent and Understandable A Rate Framework that stakeholders can easily understand, and promotes active and informed participation. 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. 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 Balanced Rate Responsiveness community and for the WSIB to administer A reasonable consideration for premium rate and maintain. 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. WSIB RATE FRAMEWORK REFORM 5

6 EMPLOYER CLASSIFICATION (STEP 1) STEP 1: Employer Classification Risk Adjusted Premium Rate Setting STEP 2: Class Level Premium Rate Setting STEP 3: Employer Level Premium Rate Adjustments Objective: Transparent, consistent, adaptable and responsive classification structure with fewer and larger groups for premium rate setting purposes, based on predominant business activity. Alternatives for Further Discussion: Use of business activity descriptions as a foundation for the classification of employers, and considering the inclusion of risk factors; Appropriate expansion and collapsing of employer groupings to meet actuarial predictability; Period of time (e.g. # of years) to consider earnings and claims history to determine actuarial predictability and predominant business activity; and Level of actuarial predictability for each employer grouping (e.g. class) for premium rate setting purposes. WSIB RATE FRAMEWORK REFORM 6

7 North American Industry Classification System Summary of Current Approach The current classification system, introduced in 1993, utilizes the 1980 Standard Industry Classification (SIC) system as a guide for the development of the WSIB s classification system. It consists of nine classes, 155 rate groups (RG), and 840 classification units (CU). The Workplace Safety and Insurance Act, 1997 (WSIA), Ontario s workers compensation legislation, provides the rules for employers to contribute to the costs of the compensation fund for workplace injuries. The industries that are compulsorily covered in Ontario are described under Schedules 1 and 2 of Ontario Regulation (O. Reg.) 175/98. In addition, the rules governing how an individual employer can apply to be covered under Schedule 1 are described under section 12 and 74 of the WSIA. Further details and interpretation of coverage status are provided in WSIB s Employer Classification Manual and Operational Policy Manual (OPM). Schedule 1 of O. Reg. 175/98 groups industries into nine classes. In order to determine the premiums that each Schedule 1 employer (both compulsorily covered as well as by application) should pay, the WSIB classifies employers into one of 155 RGs. Premiums are calculated and charged at the RG level of the classification structure and each RG has a different premium rate. The premium rate reflects the experience of employers in that RG. Figure 1: Current Classification Structure, Broken Down by Number of Rate Groups and Classification Units CLASSES A B C D E F G H I RATE GROUPS = CLASSIFICATION UNITS = Since the creation of the SIC system, the structure of the Ontario economy has changed dramatically and, as Professor Harry Arthurs and Douglas Stanley identified, so too has the statistical system aimed at capturing and grouping industries. In 1997, the North American statistical agencies introduced the North American Industry Classification System (NAICS) to replace the outdated SIC. One of the goals of the NAICS was to capture emerging industries. The changes in the economy as well as the replacement of the SIC with the NAICS means that, in practice, the WSIB s classification structure is out of step with the current context. WSIB RATE FRAMEWORK REFORM 7

8 Proposed Preliminary Rate Framework The proposed preliminary Rate Framework seeks to replace the WSIB s current employer classification system with a 22 class structure adapted from the 2012 NAICS, the most recent version of the NAICS. The proposed classification structure is based on significantly fewer employer groupings for the purpose of setting premium rates, compared to the current 155 RGs and 840 classification unit structure. It is intended to create a structure that is simple and understandable. KEY GOALS Clear & Consistent Transparent & Understandable Collective Liability Ease of Administration Figure 2: The Proposed Classification Structure 22 Classes Proposed Classification Structure G1 B G2 C G3 G P H H 14 RG 13 RG F Q I I 16 RG T 16 RG 5 RG Current model 800+ CUs 155 RGs J 8 RG E L K A M 4 RG 6 RG 73 RG D D N B E C O F R A S Employer groupings for premium rate setting purposes PROPOSED CLASSIFICATION STRUCTURE A Primary Resource Industries B Utilities C Public Administration D Food, Textile and Related Manufacturing E Resource and Related Manufacturing F Machinery and Other Manufacturing G1 Building Construction G2 Infrastructure Construction G3 Specialty Trades Construction H Wholesale Trade I General Retail J Specialized Retail And Department Stores K Transportation and Warehousing L Information and Culture M Finance N Professional, Scientific and Technical O Administrative, Waste and Remediation P Hospitals Q Health and Social Services R Leisure and Hospitality S Other Services T Education CURRENT SYSTEM PROPOSED PRELIMINARY RATE FRAMEWORK 155 RGs 22 classes & 1,550 risk bands This diagram is intended to show the broad mapping of the current RGs to the proposed preliminary Rate Framework classes. It is not intended to show where each individual employer or business activity would be assigned in the proposed preliminary Rate Framework. Why These 22 Classes? The proposed class structure is adapted from the NAICS to suit Ontario s workers compensation system and Ontario s unique economy. The NAICS is an industry classification system developed by the statistical agencies of Canada, Mexico and the United States. It was created to provide a common framework for the statistical analysis of the three economies. In addition to its primary use as a basis for statistics, it is also used and adapted for the purpose of classifying industries by other workers compensation boards (such as New Brunswick and some US states). WSIB RATE FRAMEWORK REFORM 8

9 The first version of the NAICS was released in March Since then, the NAICS has been revised every five years, initially more substantially to improve comparability across the three countries, and subsequently to ensure that new and emerging industries are appropriately captured. The NAICS is structured hierarchically and includes all economic activities. The highest level (twodigit) divides the economy into 20 sectors. These sectors are further subdivided at the three, four and five digit level. A sixth digit is sometimes added to distinguish between definitions that are unique to one or more of the North American countries that participated in developing the system. Because the proposed 22 classes are adapted from the NAICS, an up-to-date classification scheme commonly used by other organizations, the classes would be easier for stakeholders to understand as they are commonly used for other reporting (e.g. tax filings). In creating the proposed 22 classes, the WSIB considered the Key Goals of the proposed preliminary Rate Framework, in particular that a classification system should be simple to understand and not require frequent or extraordinary maintenance. By advancing significantly fewer employer groupings than exist in today s classification system, the proposed structure is designed as a streamlined, simple classification scheme compared to the current classification system. At the same time, grouping employers into classes ensures the principle of collective liability (employers are sharing the risk within their respective class). As discussed later in the premium rate setting section, employers would also be held responsible at the appropriate level for their own claims experience. The WSIB assessed the actuarial predictability of each two-digit NAICS sector and determined that $2 billion in insurable earnings per year for each sector provided a level of predictability that can be relied upon to predict future outcomes and therefore fairly and accurately set premium rates. As a result of this test, some changes to the list of classes at the NAICS based two-digit level would be required in order to create a sound classification structure. Certain classes would need to be expanded or collapsed to ensure actuarial predictability. WSIB RATE FRAMEWORK REFORM 9

10 Figure 3: Example of a Class Expanding and a Class Collapsing in Moving to a NAICS-based System Example of Classes Collapsing Finance & insurance Payroll $0.6B 352 organizations Example of Classes Expanding Building Construction Payroll $2.5B 11,340 organizations Real estate rental & leasing Finance Construction Infrastructure Construction Payroll $2.481B 5,785 organizations Payroll $3.089B 6,154 organizations Payroll $14.7B 52,336 organizations Payroll $2.1B 1,570 organizations Management of companies Specialty Trades Construction Payroll $.008B 17 organizations Payroll $10.1B 39,426 organizations However, the WSIB also noted that in creating these 22 classes that were based on similar business activities, some employers may see a significant change from their existing RG premium rate to their new Class Target Premium Rate. The Class Target Premium Rate is a premium rate based on the valuation of collective liabilities of new claim costs for the employers within a respective class, their allocation of administrative costs, and apportionment of the past claim costs for a particular class. These changes suggest that for certain classes, there is a possibility of risk disparity where employers may demonstrate quite different claims experience relative to the rest of the class. Risk disparity is when claims experience or premium rates vary significantly from the average experience of the class. In large part, this risk disparity would be addressed through Step 3, Risk Adjusted Premium Rate Setting process within each of the classes (employers would gravitate towards the appropriate premium rate based on their individual experience) and a transition plan (see Paper 5: A Path Forward) that would be created to move employers from their current premium rate to a new premium rate. These measures notwithstanding, while the WSIB has created these classes based on business activity and actuarial predictability, the WSIB would continue to review those classes where risk disparity may exist to determine if further modifications of industry classes are advisable. WSIB RATE FRAMEWORK REFORM 10

11 Regulation and Policy Amendments If approved the proposed classification structure changes, the WSIB would require amending Schedule 1 of O. Reg. 175/98, under WSIA, to reflect the proposed 22 classes outlined above. Certain policy changes would also be required to align to any potential regulatory amendments and to the new classification structure. OPM , The Classification Scheme would be the primary policy impacted; a number of other policies would also need to be updated to reflect the new classification structure. Where necessary, the existing references to the nine current classes, 155 RGs and 840 CUs would be replaced with the proposed classes. As part of the transitional issues with moving to a new classification system, the WSIB would work with employers on the appropriate processes for assigning existing employers already registered with the WSIB according to the proposed 22 classes. The classification rules outlined below (and that would be further developed in regulation and policy) would be clearer and more consistent than the current, complex rules in place. The proposed classification system would simplify the classification process for employers, and make its administration more effective and efficient. What Does This Mean For Employers? The proposed new structure recognizes certain industry groupings that are similar to the current structure, such as Manufacturing, Construction, and Transportation and Warehousing. However, it would also group industries into new and separate categories, like Information and Culture and Professional, Scientific and Technical. Further details on these proposed classification conversions are provided on the following page. Classification Accuracy Analysis For modeling purposes, the WSIB reviewed each CU description from the current classification structure and matched the CU to the appropriate five-digit NAICS Code and then aggregated to the proposed 22 class structure. The results showed that the proposed NAICS-based classification would group certain types of industries differently. Owing to the mapping of the CU structure to the NAICS structure, certain business activities would move to a different class. For example, generally speaking most of the business activities under the current Class A (Forest Products) would map to the proposed Class A: Primary Resource Industries. However, certain activities currently in the current Class A (Forest Products), such as manufacturing of corrugated cardboard, are better suited to the proposed Class E: Resource and Related Manufacturing. WSIB RATE FRAMEWORK REFORM 11

12 Strictly from a conversion perspective (without factoring experience or risk), the WSIB reviewed the distribution of insurable earnings (2013) for Schedule 1 employers to the proposed new classes and found that: CURRENT CLASS Class A Class B Class C Class D Class E Class F Class G Class H Class I FINDINGS Almost 90% of insurable earnings in the Class A, Forest Products, would more appropriately fit into the proposed Resource and Related Manufacturing class; 9.7% would move into the proposed Primary Resource Industries class. 90.0% of Class B, Mining and Related Industries, would move to the proposed Primary Resource Industries class; the remainder would move to Specialty Trades Construction (2.5%), and to Resource and Related Manufacturing (4.6%). 60.8% of Class C, Other Primary Resources, would shift to the proposed Primary Resource Industries class; 29.4% would move to the proposed Administrative, Waste and Remediation class. Class D, Manufacturing, would be primarily split between three proposed classes: Food, Textile and Related Manufacturing (13.9%), Resource and Related Manufacturing (21.8%), and Machinery and Other Manufacturing (56.8%). Class E, Transportation and Storage, would primarily map to the proposed Transportation and Warehousing class (82.0%), but some 11.3% would move to the proposed Administrative, Waste and Remediation class. Class F, Retail and Wholesale Trades, would map to the proposed four classes: Wholesale Trade (30.1%), General Retail (39.9%), and Specialized Retail and Department Stores (14.5%); while 8.4% would move to Other Services. Construction, would be primarily split between three proposed classes: Building Construction (16.0%), Infrastructure Construction (10.0%) and Specialty Trades Construction (64.4%). Class H, Government and Related Industries, would be primarily split between five proposed classes: Utilities (8.6%), Public Administration (18.5%), Health and Social Services (27.7%), Hospitals (34.9%) and Education (5.9%). Class I, Other Services would move to a number of new classes, primarily the new Professional, Scientific and Technical Class (27.2%), Leisure and Hospitality (25.4%), followed by Administrative, Waste and Remediation (19.3%), Finance (8.4%), and Information and Culture (7.2%) and Other Services (6.9%). e.g., Paper bags & consumer products, particle board, shingles moving to manufacturing e.g., Barn cleaning, lawn maintenance moving out of Primary Resources e.g., Asbestos abatement & window cleaning moving out of construction When reviewing the conversion at a RG level using the percentage of insurable earnings reported for 2013 and mapping it to the proposed classes, a number of observations can be made. In most cases, 80-90% or more of the insurable earnings from the RG maps to one of the proposed preliminary Rate Framework classes. For example: RG 570 Courier Services 97.50% of insurable earnings would map to the proposed Class K, Transportation and Warehousing. WSIB RATE FRAMEWORK REFORM 12

13 Therefore, looking at the WSIB s current system using the NAICS, the composition of the current RGs (the business activities captured under each CU within a RG) is generally orderly in terms of mapping to the one broad industry grouping from among the proposed 22 classes. This is because even though the NAICS replaced the SIC which the WSIB s current classification structure is based upon there is some degree of continuity between the two classification systems. In addition, the proposed preliminary Rate Framework s 22 classes are quite broad, and therefore each class captures a number of business activities. In a small number of cases, the insurable earnings from a given RG is split fairly evenly between two classes (sometimes three). For example: RG 30 Logging 66.9% of insurable earnings would fall under the proposed Class A, Primary Resource Industries, while 24.4% of insurable earnings would fall under the proposed Class E, Resource and Related Manufacturing. Frequently, the classes would move into a similar broad industry type (e.g., the three proposed manufacturing classes, the three proposed construction classes, the two proposed retail classes and one wholesale trade class). For example: RG 711 Road Building and Excavating 43% of insurable earnings would fall under the proposed Class G2, Infrastructure Construction, while 44% would fall under Class G3, Specialty Trades Construction. In a few, exceptional cases, the insurable earnings from the RG maps to more than two main classes, and these classes do not belong to a similar industry type. For example: RG 962 Advertising and Entertainment 43.7% of insurable earnings would move to Class L, Information and Culture, 32.4% of insurable earnings to Class N, Professional, Scientific and Technical, and 14.8% of insurable earnings to Class R, Leisure and Hospitality. In all RGs including the examples above, there may be some remaining insurable earnings that fall under a number of different classes. This is the result of the proposed elimination of multiple classifications for employers with more than one business activity. This matter is discussed in the next section of this paper. QUESTIONS FOR CONSIDERATION 1. Is the proposed structure adapted from NAICS an appropriate grouping of employers? 2. Do the proposed 22 classes appropriately reflect the industry categories in Ontario s economy today? WSIB RATE FRAMEWORK REFORM 13

14 Pricing Fairness Recommendation #3.1 The WSIB should adopt the NAICS system of classification for the purpose of all data collection. I am recommending that North American Industry Classification System (NAICS) replace Standard Industrial Code (SIC) as the basis to classify employers. Summary of Current Approach Multiple Business Activities If an employer s business activity is covered under Schedule 1 (or if an employer enters Schedule 1 by application), the WSIB classifies the employer s operation by assigning it a CU. The corresponding RG for the CU determines the premium rate for the operation. In some cases, an employer s operations may involve two or more business activities that the WSIB s classification structure includes in separate CUs if they are able to segregate their payroll. Recognizing that small employers may more often have greater difficulties in segregating their payroll, there is a policy exception to this rule for small employers with aggregated payroll 1. Small employers are instead classified in the RG for the predominant business activity 2. Large employers who choose not to segregate their earnings would be attributed to the RG corresponding to the highest premium rate. In the current structure, the WSIB recognizes certain special operations 3 that are classified differently than other operations if they form part of a business activity. Where an employer carries out a special operation and does not segregate their payroll, then the premium rate for the employer s entire payroll is the higher of the business activity premium rate, or the special operation premium rate. An employer s business activities must be properly assigned to the right CU and RG so that the employer is contributing appropriate premiums for the risk they bring to the system. 1 Small employer is defined as an employer whose annual insurable earnings are less than five times the maximum insurable earnings ceiling for the premium year. 2 The predominant business activity is defined as the business activity which corresponds to the largest percentage of the annual insurable earnings. 3 Special Operations include the following: 1. High rise forming. 2. Structural steel erection and steel reinforcing. 3. Demolition. 4. Construction of a bridge that has a span between abutments of at least 6.1 metres and a height, at some point, of at least 3.1 metres to the top of the bridge floor. 5. Construction, excluding repairs relating to ordinary wear and tear, performed by employers who are not in the construction industry. 6. Logging performed by employers who are not in the logging industry. 7. Millwright and rigging work performed by employers who are not engaged in a millwright and rigging industry. 8. Any of the following operated as part of a retail operation: garages for servicing and repairing motor vehicles, restaurants or home improvements and renovations. WSIB RATE FRAMEWORK REFORM 14

15 O. Reg. 175/98, under WSIA and WSIB Policy also recognizes certain key concepts for the purpose of calculating an employer s premiums: Ancillary Operations The term ancillary operation is defined as one that supports, or is incidental to, the employer s business activity 4. In today s structure, an ancillary operation is assigned the same classification as the employer s business activity. Contracting Out WSIB policy specifies that when an employer contracts out with another arm s length employer to carry out the business activity that defines the original employer s classification, the WSIB classifies the original employer s remaining operations as if nothing had been contracted out. Proposed Preliminary Rate Framework The proposed preliminary Rate Framework s classification structure would group employers with multiple business activities in a single class according to their predominant class 5. The WSIB is suggesting to define the predominant class as the class that represents the largest percentage of the employer s annual insurable earnings. This approach is not completely new to the system; it resembles in some ways the approach outlined in OPM , Aggregated Payroll for small employers that are unable to segregate their payroll. KEY GOALS Clear & Consistent Fairly Allocated Premiums Transparent & Understandable An employer may engage in more than one business activity. However, for premium rate setting purposes, classification would focus on what the employer is primarily in the business of, at the class level. In the current system, multiple classifications using several RGs are sometimes necessary for employers with multiple business activities in order to better approximate the right fit for the employer s premiums. This makes for a more burdensome classification structure and process. 4 For an operation to be considered ancillary, it must be supportive of or incidental to a business activity, and fall under any of the following: 1. Design, including drafting and engineering, research and development related to goods produced or services provided, or intended to be produced or provided, by the employer. 2. The operation of a plant to produce power or heat for the employer s use. 3. The operation of maintenance or repair shops for the purpose of servicing or repairing the employer s vehicles or equipment. 4. Inventory control. 5. The manufacture of packaging or packing materials to be used in the packaging of goods produced by the employer. 6. Printing or lithography directly onto, or for use on, goods produced or sold by the employer. 7. The warehousing or distribution of goods produced or sold by the employer. 8. The transportation of an employer s personnel or of goods produced or sold by the employer. 9. Wholesaling of goods produced by the employer. 10. The maintaining of security at the employer s premises. 11. Administration related to the employer s operations. 12. Warranty repairs carried out on goods produced or sold by the employer. 13. Marketing, promotion or communication related to goods sold or produced or services provided, or intended to be sold, produced or provided, by the employer. 14. Training of personnel relating to the employer s business activities. 15. The operation of any of the following carried out for the employer s personnel: cafeterias, commissaries, parking lots or health, recreational or day-care facilities. 5 The WSIB proposes to treat temporary employment agencies (TEAs) differently from other employers by allowing them to have multiple classifications/premium rates. See the TEA section of this paper (p. 21) for additional information. WSIB RATE FRAMEWORK REFORM 15

16 The following examples illustrate how the current employer classification would be converted to the proposed classification structure. Figure 4: Illustrative Example of an Employer who is Classified According to the New NAICS Classification Structure The diagrams below represent multi-rated WSIB employers, each with three business activities under the current WSIB classification scheme. Technical Consulting Services Employer Business Activity 1 Business Activity 2 Business Activity 3 CURRENT MODEL PROPOSED MODEL Other Instruments Oil, Power & Water Distribution Technical & Business Services RG 529 RG 835 RG 958 1% of IE 11% of IE 88% of IE CLASS O Administrative, Waste and Remediation In this example, each business activity falls under three different classes in the proposed classification structure. Because the percentage of insurable earnings under RG 958 makes up the largest component of total insurable earnings (IE) (88%), it would determine the employer s predominant class. This employer s predominant class is Class O: Administrative, Waste and Remediation. Window Manufacturing Employer Business Activity 1 Business Activity 2 Business Activity 3 CURRENT MODEL Primary Glass & Glass Container Operations RG 502 Resins, Paint, Ink, and Adhesives RG 512 Technical & Business Services RG % of IE 41% of IE 11% of IE In this example, the percentage of insurable earnings under RG 502 (48%) and RG 512 (41%) both fall under the same class in the proposed classification structure. This employer s predominant class is Class E: Resource and Related Manufacturing. PROPOSED MODEL CLASS E Resource and Related Manufacturing WSIB RATE FRAMEWORK REFORM 16

17 Definition of Business Activity The term business activity is currently defined in O. Reg. 175/98, as an operation that relates to the production of a product or the provision of a service and includes the work done by domestic workers. As noted, an employer engages in at least one business activity, but may sometimes engage in more than one business activity. The concept of business activity would remain central to the classification of employers in the proposed preliminary Rate Framework. However, the WSIB is proposing to review the definition of business activity to further clarify for employers the rules governing the classification of employers. To achieve this, the WSIB is proposing to address the concepts of ancillary operation and contracting out as part of defining what is (and is not) considered a business activity for classification purposes. Similarly to the current system, an ancillary operation would be considered part of an employer s business activity or activities not a business activity in its own right, unless it produces a product or provides a service that is not for the employer s own use. When determining what constitutes an employer s business activity or activities, the WSIB may consider any operation carried out by the employer s own workers (or deemed workers) as well as those contracted out by the employer to another person to perform. However, in calculating what premiums an employer would pay, only those earnings for the workers (or deemed workers) they employ would be used. As a result of classifying an employer with multiple business activities in a single class, the special operations rules (which are in place to work with the current multiple classification scheme) would be out of step with the proposed preliminary Rate Framework. In addition, the special operation rule is a way to identify certain business activities and single them out as potentially riskier. In the proposed preliminary Rate Framework, this would be addressed by the proposed Risk Adjusted Premium Rate Setting process, which is detailed later in this paper starting on p. 23. Compulsorily Covered and Non-Compulsorily Covered Business Activities Where an employer engages in both compulsorily covered and non-compulsorily covered business activities, the employer would be classified according to their predominant compulsorily covered business activity at the class level. As is the case in the current system, an employer would not be required to have coverage for the non-compulsorily covered part of their operations, provided the employer can reasonably demonstrate that there is a true separation between the business activities. If the employer elects to have coverage for the non-compulsorily covered business activity, and that business activity is their predominant business activity at the class level, then the employer would be classified according to that activity. Change to Business Activities For new employers, once a new Rate Framework is implemented, 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 changes WSIB RATE FRAMEWORK REFORM 17

18 made by the employer. Where an employer does not begin or discontinues a business activity (i.e., only their insurable earnings have changed), the WSIB would consider this information for potential reclassification for the following premium year. Regulation and Policy Changes The classification of employers according to their predominant class requires changes to O. Reg. 175/98, as well as to the related policies, to amend the provisions that address the process by which an employer s premiums may be calculated when an employer engages in multiple business activities. The key changes to be considered are as follows: O. Reg. 175/98, Section 8 (special operations) and Section 9 (employer with more than one business activity) and the associated policy rules would be replaced with the concept of calculating premiums according to the employer s predominant class. As a result of the proposed incorporation of ancillary operation and contracting out concepts into the definition of business activity, the WSIB would review Section 6 (ancillary operation) and Section 10 (contracting out). Depending on the exact changes to Section 6, it may also be necessary to amend Section 11 (associated employer), since it refers to the concept of ancillary. OPM , Segregated Payrolls and OPM , Aggregated Payroll policies would be rescinded as separate segregated and aggregated payroll rules would no longer be needed. The method of determining the employer s predominant class would be developed in policy where appropriate. OPM , Single Classification would be incorporated as required into the proposed Classification Scheme policy. WSIB RATE FRAMEWORK REFORM 18

19 What Does This Mean For Employers? Under the proposed classification structure, the WSIB would continue to classify employers according to business activities (when registering, an employer must provide the WSIB with a description of their business activities). As in today s structure, the employer would be required to report any changes to their business activities or to their insurable earnings. Employers that engage in a single business activity and therefore currently report all of their insurable earnings under a single CU, would not be impacted by the predominant class rules. Their new classification would be mapped to a single class, based on the proposed 22 class structure. Employers that currently report earnings under multiple CUs according to different business activities would continue to identify all of their earnings to the WSIB. In most cases, the business activities would fall under the same class (e.g., logging and reforestation services are two distinct business activities under the current classification system, falling under separate CUs and RGs for rate setting purposes. Under the proposed preliminary Rate Framework, both would fall under the same class: Primary Resource Industries). In fewer cases (approximately 5%), an employer s business activities would fall under two or more classes (e.g. an employer engaging in cabinet making, a manufacturing activity, and also performing installation, a construction activity, of cabinetry). As noted above, the WSIB would classify these types of employers according to the predominant class. An employer may also engage in multiple business activities within a class (e.g., the manufacturer and installer of cabinetry performs a third business activity plumbing Will Eliminating Multi-Rating Create a Competitive Advantage for Some Firms? There are many factors at play that are beyond the WSIB s influence when considering an employer s ability to compete for business. As is the case in the current system, it is a fundamental principle that some employers should pay more or less than their peers, based on their injury history. Just like with the current system, the proposed preliminary Rate Framework would follow insurance-based principles by adjusting an employer s premiums based on their individual cost experience. The potential problems associated with a competitive advantage or disadvantage exist in the current system. Currently, an employer has a strong incentive to review their assigned classification to ensure that they are paying the lowest premiums possible, so as not to be at a competitive disadvantage compared to other employers in their sector or industry. Creating a simplified classification scheme with fewer employer groupings means that most employers that are in similar business activities, at an industry level with the same level of insurable earnings, would more likely find themselves in the same class. It is important in the proposed model that an employer s premiums are reflective of their health and safety experience and claim costs, rather than simply the RG they fall under (before any experience rating program adjustments). Under the current scheme, a significant number of employers pay the RG rate they are not eligible for premium rate adjustments. This means that in practice, their premiums are governed entirely by the experience of employers in their RG. If a very small employer has a good accident record, it should have a bearing on the premiums they pay, provided it can be reasonably calculated. The proposed preliminary Rate Framework would address this issue by making all employers part of the Risk Adjusted Premium Rate Setting process, subject to the level of historical experience that the employer brings into the system. Regardless of which class they may fall into under the proposed preliminary Rate Framework, employers would gravitate towards the appropriate premium rate that reflects their claim costs. WSIB RATE FRAMEWORK REFORM 19

20 [i.e., construction]). This activity would be classified in the same construction class Specialty Trades Construction as the installation of cabinetry. To determine the predominant class in this scenario, the insurable earnings that fall under the same class are added together and compared to the insurable earnings falling under other classes. In this example, the employer s insurable earnings for the manufacturing business activity (cabinet-making) would be compared to the two construction business activities (cabinet installation and plumbing). The WSIB would then determine whether the employer should be classified in Machinery and Related Manufacturing, or in Specialty Trades Construction. To transition existing employers with one or more WSIB accounts to the new classification scheme, the WSIB would determine which class an employer would belong to within a rolling three years of insurable earnings information. For example, to determine the classification for the 2014 premium year using the proposed preliminary Rate Framework, the WSIB would review the information from the three prior years, 2010 to For new employers registering for the first time after a new classification structure is implemented, they would inform the WSIB of their business activities, as is the case today. In addition they would need to identify and if required, demonstrate their predominant class to the WSIB. QUESTIONS FOR CONSIDERATION 1. The WSIB is proposing to classify employers according to their predominant class, where the predominant class would generally be defined based on the class representing the largest share of an employer s annual insurable earnings. Should the WSIB consider factors other than just insurable earnings? For example, should the WSIB also consider the risk involved in the business activity when determining the appropriate classification? Or a mix of both insurable earnings and risk? 2. Is a three year window for determining an existing employer s predominant class appropriate? Is a longer window (e.g., four years) more appropriate or is a single year enough? Pricing Fairness Recommendation #4.1 The WSIB should cease the practice of having multiple rates for single employers, which provides a significant amount of complexity in the system and can lead to adverse implications related to the fairness of the current system. I recommend that the WSIB use an employer s predominant business activity, with no distinction for size of employer or their ability to segregate their earnings, for both classification and rate setting purposes. WSIB RATE FRAMEWORK REFORM 20

21 Summary of Current Approach Temporary Employment Agencies Temporary employment agencies (TEAs) employ workers that are supplied to client employers for short-term, long-term or open-ended work assignments. Section 72 of the WSIA indicates that TEAs are deemed the employer of their workers. As a result, TEAs pay premiums for their workers and their experience rating record is impacted if their workers are injured while supplied to client employers. KEY GOALS Fairly Allocated Premiums TEAs are often classified differently from their client employers because their classification is based on their business activity, not the business activity of their client employers. As a result, the premium rates TEAs pay for their workers are lower, in some cases, than the premium rates client employers pay for their workers. This could create an incentive for client employers with relatively higher premium rates to use TEA workers, rather than hire their own workers, to reduce their premium costs (premium cost avoidance). Additionally, the costs of a TEA worker s injuries are attributed to TEAs for experience rating purposes. It is conceivable that the client employers may use TEA workers to perform dangerous and/or unsafe work to avoid the experience rating consequences of injuries (claims cost avoidance). These issues call into question the fairness of how TEAs are classified and experience rated by the WSIB. The WSIB would consider how to address these issues under the proposed preliminary Rate Framework. Proposed Preliminary Rate Framework Premium Cost Avoidance The proposed preliminary Rate Framework recommends that TEAs and their client employers would need to be classified in the same class in order to mitigate the premium cost avoidance issue. If this occurs, their premium rates would be similar in many cases. TEAs are expected to pass along their premium costs to client employers as part of their fee. If TEAs and client employers have similar premium rates, there would be minimal financial incentive for client employers to use TEA workers to avoid premium costs. To allow TEAs and client employers to be classified in the same class: the WSIB would seek to amend Schedule 1 of O. Reg. 175/98 to indicate that supply of labour to a class (regardless of what activities are performed) is considered a business activity of that class; and TEAs would be allowed to have a separate premium rate linked to each class they supply. The proposed preliminary Rate Framework suggests grouping employers with multiple business activities in a single class according to their predominant class. However, this approach would be WSIB RATE FRAMEWORK REFORM 21

22 problematic if applied to TEAs because it would prevent TEAs that supply workers to multiple classes from being classified under the same class as all their client employers. As a result, TEAs must be treated differently from other employers to mitigate the premium cost avoidance issue. The proposed approach would mitigate, rather than eliminate, the premium cost avoidance issue. This is because employers in the same class would, in some cases, pay different premium rates based on their individual claims experience and predictability. Claims Cost Avoidance In July 2014 the government introduced before the legislature the Stronger Workplaces for a Stronger Economy Act, 2014 (Bill 18). At the time, Schedule 5 of the proposed legislation would have amended the WSIA to address the claims costs avoidance issue. Specifically, it would have attributed the costs of TEA worker injuries to client employers, rather than TEAs, for experience rating purposes. As the bill evolved, Schedule 5 was amended to remove the proposed changes to the WSIA. In its place, the authority to make regulations to address the claims cost avoidance issue was added. Essentially, the amended legislation would allow the government to make regulations to achieve the same outcome as was initially proposed. In November 2014, Bill 18 received Royal Assent. The WSIB is interested in engaging with the government and stakeholders to discuss Bill 18 and the claims cost avoidance issue. QUESTIONS FOR CONSIDERATION 1. Should TEAs be treated differently from other employers under a new Rate Framework to address the premium cost avoidance issue (e.g., be allowed to have multiple premium rates)? 2. How should the claims cost avoidance issue be addressed under a new Rate Framework? Pricing Fairness Recommendation The WSIB needs to examine the responsibilities of temporary employment agencies and client employers with respect to employer classification and experience rating, and consider amendments to the current policies and practices to ensure that appropriate premiums are assessed and that costs are attributed to the appropriate employer. WSIB RATE FRAMEWORK REFORM 22

23 RISK ADJUSTED PREMIUM RATE SETTING (STEP 2 & 3) STEP 1: Employer Classification Risk Adjusted Premium Rate Setting STEP 2: Class Level Premium Rate Setting STEP 3: Employer Level Premium Rate Adjustments As employers familiarize themselves with the proposed preliminary Rate Framework, it is important to understand that it may not be easy for them to compare what they may recognize as their premium rate, that is the premium rate associated with the Rate Group in the current system, with the proposed approach. The proposed preliminary Rate Framework uses a methodology that is seeking to set employer centric premium rates that considers an employer s claims experience in setting a premium rate for the upcoming year, and gradually moves employers towards a premium rate that is truly reflective of their own experience. Simply explained, the proposed preliminary Rate Framework would see individual employers more fairly assessed based on their own claims experience, moving away from the current system where, regardless of their own experience, all employers pay the same premium rate within their rate group. In order to ensure that the proposed preliminary Rate Framework could improve workplace health and safety and create outcomes that are reasonable and fair to all employers, the WSIB developed a working model that utilized enough data to determine the premium rate impacts to employers. In the coming sections, the WSIB presents information on a working model that is based on 13 years of claims and insurable earnings experience. Using the proposed preliminary Rate Framework methodology, the WSIB generated 2014 employer premium rates so that employers would be able to relate to the premium rates that were created at the class level. WSIB RATE FRAMEWORK REFORM 23