Mr Rob Hinrichs, Workplace Safety and Insurance Board, Ontario, Canada. (Sir William Meredith)

Transcription

1 Mr Rob Hinrichs, Workplace Safety and Insurance Board, Ontario, Canada (Sir William Meredith)

2 (Association of Workers Compensation)(AWCBC)!"#$%&'()!"#$%&'()!"#$%

3 !"#$%! (The Canadian Institute of Actuaries)(CIA) CIA CIA Workers Compensation Marketplace Workers compensation legislation is provincially based in Canada. It effectively started in 1915, when the Ontario legislature brought forward new legislation based on a proposal by Sir William Meredith. Meredith was a lawyer, who became a member of the Ontario legislature, and later, as Chief Justice, was asked by the Ontario government to review the system used to compensate workers for workplace injures. He recommended that the then current tort system be replaced with a comprehensive no-fault insurance scheme. Under the scheme, workers would receive no-fault compensation benefits for work-related injuries in exchange for giving up their right to sue their employers; and employers would collectively fund the system through premiums in exchange for protection from possible litigation by injured workers. Under Meredith s proposal, the Ontario system would be publicly administered, through a trust agency of the government, with an independent board of directors. This effectively precluded development of a private insurance system. It meant economies of scale could be achieved in collecting premiums and adjudicating claims, and overall savings could be realized because coverage was universal and underwriting criteria were reduced to a broadly based classification system. In addition, other initiatives, such as occupational health and safety, compliance and appeals could be strategically focused. Conversely, the system is sometimes criticized for being slow to respond to possible improvements in economies of scale and for over-providing benefits to injured workers. Meredith s ideas spread across Canada and the United States, and soon other provinces and territories in Canada adopted legislation similar to that of Ontario. The government of Canada also adopted similar legislation for its federal employees working across Canada. Despite provincially based social insurance systems, a small private insurance market does exist in Canada. The private market serves industries which are specifically excluded from workers compensation legislation, and employers which are legislatively covered but self-insured and wish to pool excess risks, including their

4 workers compensation risks. The form of insurance is either aligned with group disability insurance coverage, or served through property-casualty and reinsurance markets. Since 1915, each province s legislation has evolved whereby new benefits or provisions have been added or changed. Some changes involve other provincial Acts. For example, many boards provide support such as financial incentives to employers for prevention efforts and funding to health and safety organizations. Some boards work closely with government ministries to improve employer registration and compliance with health and safety standards. Over time, these differences have grown and made provincial comparisons difficult. This creates challenges for national companies operating in several provinces and for workers compensation boards operating in smaller provinces and territories where resources may be scarce. This helps to create opportunities for consultants and actuaries. Actuarial Market This paper explains the roles of actuaries at workers compensation boards in Canada where they work either as employees or are contracted independently to provide specific actuarial services. It does not discuss the roles of actuaries as consultants who serve employers or injured workers. Because of the nature of the risks being assumed ranging from shortterm wage-loss and health care benefits to long-term income benefits, actuaries often have backgrounds in more than one discipline. In the past, the most common background was pensions, and this is still true today for many consulting actuaries. However, it is becoming increasingly more common for actuaries to have backgrounds in other disciplines such as life insurance, group insurance, health insurance and property-casualty insurance. Actuarial Data The data at most worker compensation boards in Canada are voluminous and credible, and have a long history. Smaller boards that do not have sufficiently credible data may supplement their data with studies and analyses from larger boards, or from studies prepared by the Association of Workers Compensation Boards of Canada (AWCBC). The AWCBC consolidates data from all boards and publishes key statistical measures comparing various metrics. Because data requirements have grown from serving the dual needs of processing claim payments accurately and quickly, and collecting employer premiums on time, data often lack common actuarial elements. This can be challenging for actuaries. For example, insured payrolls that are used to determine premiums do not capture information about the employees covered, such as their age or employment status. As a second example, when claims terminate, due to expiry or an injured worker s death, the reason for the termination may not be captured electronically. This can create additional challenges for actuaries preparing claim persistency or mortality studies. Roles of Actuaries at Workers Compensation Boards Actuaries play meaningful roles in several areas at workers compensation boards in Canada. These include valuing benefits liabilities, projecting funding requirements, conducting experience studies leading to changes in assumptions and methods, setting premium rates, and designing and assessing the financial impact of experience rating programs. Actuarial expertise is also provided in costing proposed policy and legislative changes, preparing statistical analyses for management, designing and negotiating special rating programs for specific industries and/or employers, and developing systems and data requirements. Workers compensation boards take different approaches in how they employ actuaries depending upon their needs, the availability of qualified actuaries and the value that actuaries add. Larger boards may have a greater proportion of actuaries to total staff, and these actuaries usually provide a broader range of services. Smaller boards may employ no actuaries and only use actuarial consultants in order to meet minimal requirements. More specifically, actuaries provide services in the following areas. Financial Reporting Valuation of Benefits Liability and Experience Rating Accruals The benefits liability represents the present value of all future payments required on claims incurred (both reported and unreported) as of the valuation date. The experience rating accrual represents the net present value of expected refunds and surcharges incurred under experience rating programs. Because the benefits liability amount is the largest liability on the balance sheet, and changes to it can have a major financial implication to a board s operating income, the work of the actuary comes under considerable scrutiny. As a minimum reporting requirement, Canadian accounting rules require a statement from an actuary expressing an opinion on the appropriateness of the benefits liability to be included in the board s annual financial report. This work is subject to further oversight from external auditors who may employ the services of another actuary for an independent opinion. In Canada, such independent actuarial

5 advice will likely become a mandatory audit requirement for the 2006 year end. Because the business is long-term, the development and use of experience studies and the understanding of the effects of net business growth are critical areas where actuaries provide expertise and insight. This is especially true when actuaries are developing assumptions and methods for valuation, funding, premium rate and experience rating purposes. The timing and communication of changes to assumptions and methods is critical for a board s strategic planning, business planning, budgeting, and forecasting of operating results. Funding, Classification and Pricing For funding purposes, the actuary takes an economic view of the workers compensation system, as a whole, for future years. The view may include such things as possible changes in legislation, changes in the economy (for example, inflation), changes in accounting or actuarial practices, and changes in assumptions or investment returns. This work helps the board form views of its present and projected surplus (or deficiency), expected revenues and costs to be generated within the classification structure, and the upcoming year s premium rate assumptions. The classification system is the underwriting basis for all employers in the province or territory. Historical claims and premium experience are grouped for employers based on similar business activities and risks. Although there may be shifts in employer classifications from one year to the next, no further renewal underwriting is done. Generally, the classification basis remains intact over time until a major review is considered necessary. When a major review is undertaken, the work of actuaries is critical to understanding and communicating the financial impacts of any changes that are being considered. Such changes may include revisions to credibility measures, updated assumptions and methods for setting premium rates, and design and insurance feature changes for experience rating programs. Premium rates are based on the classification system and are recalibrated annually. The rates include components for new claims costs, expected expenses, and credit for (or recovery of) experience gains (losses) arising from prior years pricing experience. Also included in the premium rates of some boards is a component to amortize deficits or surpluses which are not otherwise being recovered through other components of the premium rate. Because profit generation is not a motivation of Canadian workers compensation boards (but having sufficient surplus funds is), some degree of premium rate stability can be achieved. This means that at many boards a funding mechanism exists through the premium rate setting process to defer and distribute (or recover) annual operating gains (or losses). Experience Rating At many boards, the claims and premium experience of individual employers is captured and used to modify its classification-based premium rates through a mechanism called experience rating. Experience rating programs vary by province and are generally not underwritten specifically for individual employers. Rather, they are developed and applied universally to all employers in the province or territory that fall within a given class or size category. At many boards, actuaries provide financial analyses to the design and recalibration of insurance pooling mechanisms for its experience rating programs. Frequently, an individual employer s experience rating performance is closely tied to its efforts to prevent workplace injuries and to return its injured workers to work. At some boards, traditional experience rating programs are expanded or tailored to provide specific industries or employers with financial incentives based on other criteria such as attaining specific management objectives related to health and safety or return to work. Other Areas At some boards, actuaries play roles as senior managers. The roles may include such things as providing expertise for strategic and business planning purposes, especially on possible long-term financial implications of changes in benefits, revenue policies or legislation, and asset liability management. Analyses may include funding implications, and be based on sets of assumptions using best-estimate, plausible-adverse or mitigation scenarios. Actuaries sometimes participate in corporate risk and technology/data systems committees. They may also contribute at meetings with employer and worker stakeholder groups to explain assumptions and processes underlying such things as funding projections, and changes to premium rates and experience rating programs. The Canadian Institute of Actuaries (CIA) has a workers compensation committee. The committee reviews actuarial practices and standards (especially when accounting and auditing practices are changing), promotes continuing education among members of the CIA, and liaises with the Association of Workers Compensation Boards of Canada (AWCBC) on actuarial issues, and with other CIA committees on workers compensation issues.