By Michael Mitchell
This February, the Ontario Workplace Safety and Insurance Board (WSIB) released Pricing Fairness: A Deliverable Framework for Fairly Allocating WSIB Insurance Costs. Once this proposed framework takes effect, employers in Ontario—including design/construction firms—will face a significantly altered landscape for workplace insurance, including the premiums they will pay. Employers will need to assess their current approach to absence management strategies as premiums paid become even more sensitive to claim costs.
Annually, the construction sector contributes close to $1 billion in premiums to the WSIB, and represents approximately 25 per cent of the total system premium. Any upcoming changes must be fully understood and the key message to the WSIB is full disclosure of impacts with appropriate transparency and fair transitional application. More importantly, the changes could have implications for design/construction professionals outside Ontario. This is because while the new framework in some ways follows trends established in other provinces, it will nevertheless likely merit the notice of regulators and employers across the country.
For the Ontario WSIB, the road to regaining financial viability has been long and winding. In 2009, when it had the lowest funded ratio (assets/liabilities) among all provincial workforce insurance plans, Ontario’s auditor general stressed the financial sustainability of the WSIB was at risk; the next year, the WSIB was close to the ‘tipping point” of sustainability.
Driven by the plan’s ballooning unfunded liability, Ontario businesses have historically paid much higher insurance costs to cover the previous management of the system. This current re-focus, while a few years in the making, will likely lead to a more competitive business environment, and other jurisdictions may have to respond given the greater competitive advantage for Ontario employers. By implementing a more structured insurance fairness approach in Ontario, the framework may well influence other provinces to assess and consider change.
Written by WSIB advisor Douglas Stanley, the Pricing Fairness report includes several important recommendations with the goal of developing a simpler, more equitable workers compensation insurance framework that shares the system’s “fairly across all participants, and responds to the changing nature of work in Ontario.” Following an earlier funding review, the new report also addresses the need to ensure the sustainability of the WSIB, and proposes reforms to the classification scheme, premium rate setting model, and experience rating models used to determine rates. Of course, much remains to be done before the report’s recommendations may be adopted—stakeholders to be consulted, and the working-through of real scenarios to assess the financial impact and the claims management implications. Regardless, the fact remains the proposed funding framework is different from the current model.
For the Ontario construction industry, the changes will be far-reaching. For some, rates will go up; for others, they will go down. As the report states, “whatever those outcomes are, they are a reflection of the real costs those employers/sectors are generating.” For example, architects and engineers whose businesses fall within the current WSIB Class I industry description may see premium rate declines as the premium rate contribution towards the unfunded liability have historically been too high. These declines, depending on the three conceptual methods considered in the report, range from 2.1 to 9 per cent.
The following are the recommendations in the report are the most significant to design/construction employers.
A new classification system
There are 155 distinct rate groups under the current WSIB funding framework, but the new framework would cut those by more than 80 per cent, to between 20 and 25 groups. This means the groups would be aligned with broad industrial or class sectors, rather than more specifically defined risks, and premiums, for distinct business activities. As a result, some employers will be paying higher premium rates, while others will be paying less.
The end of multiple rate groups for employers
The report proposes all employers be assessed according to their predominant business activity—a streamlined approach that does not make a distinction for the employer’s size or the employer’s ability to segregate earnings. The approach would apply both for classification and for rate-setting purposes. So, some employers would not be able to take advantage of a lower-risk rate group in their organizations, and will no longer pay lower premiums for specific portions of their businesses.
A new experience-rating model
Pricing Fairness does away with the old models for risk-adjusted premium rate setting like New Experimental Experience Rating (NEER), CAD-7 (the construction experience rating program), and Merit Adjusted Premium (MAP), and proposes instead a model that would group employers by risk and accident costs into low-, average-, and high-risk bands. The class premium rate would then be the average premium rate for the employer, based on the employer’s class rate. What employers would actually pay would move up or down from the average rate based on their own accident experience. How this will play out remains to be seen as many in the construction sector strongly support the retrospective program (CAD-7).
However, the current Manitoba model can provide some clues. There, a firm’s current rate is adjusted based on last year’s experience rating, which is based on the company’s most recent claim cost performance. So, each year’s rate is not adjusted up or down from an industry base rate, but from the company’s rate in the previous year, meaning there is a compounding effect on the firm’s experience, for good or bad. WSIB expects the proposed Ontario model will resemble that of Manitoba.
But, Ontario employers are being given time to provide feedback and prepare. Throughout this year and into 2015, the changes proposed in Pricing Fairness will be modelled and tested in a further consultation period, with transitional implementation notionally scheduled for 2016. The report also asked WSIB to consider phasing in the premium rates produced by the new framework, so the percentage increase (or decrease) would be limited to set percentage for each year in the transition period.
While the direct impact of these changes might not be felt for two years, it is critical for organizations to start acting right away. They need to be diligent in keeping track of the proposed changes through the testing and modelling stages so they have good insight into the risk and costs their workers’ compensation programs face, and can maintain the flexibility to respond appropriately when the changes come into force. More directly, the WSIB is working to develop specific class and rate-group impacts, so it makes sense for employers to engage the board in discussions about what those impacts are likely to be and how best to respond to them. Outside Ontario, the developments at the WSIB will be watched closely by workers compensation boards and employers alike.
In other words, now is the time to pay attention to coming changes to workers’ compensation insurance in Ontario—not only for those in the province, but also beyond.
Michael Mitchell is a senior associate within the 360 Absence Solutions practice of Aon Hewitt in Toronto. Michael Mitchell is a senior associate within the 360 Absence Solutions practice of Aon Hewitt in Toronto. He can be contacted by e-mail at email@example.com.