Rate Framework (Archived): Analysis of UFL Apportionment

To determine how the UFL should be apportioned under the proposed preliminary Rate Framework, the WSIB conducted analysis on different apportionment methods, taking into consideration that the WSIB's updated Sufficiency Ratio projection is set at nearly 100% by 2022.

Background

In his Pricing Fairness report, one of Douglas Stanley's recommendations of apportioning the UFL was that the WSIB should apply a fixed charge to all employers that recognizes collective responsibility for the UFL.

As well, as part of the Pricing Fairness Consultation, Stanley released three alternative approaches of apportioning the UFL by class for discussion purposes. All three approaches attempt to reflect past responsibility for the UFL at the class level and differ from the NCC method.

The WSIB reviewed these approaches and is suggesting that the third approach, in principle, merits further consideration as a viable approach of apportioning class responsibility for the UFL. Going forward, this approach will be referred to as the Past Responsibility (PR) method.

The WSIB has incorporated both of these concepts and developed an alternative method of apportioning the UFL that includes a:

• Fixed charge that is applied equally to all employers that recognizes collective responsibility for the UFL; and
• Variable charge (based on the PR method), that is applied to each class that recognizes its past responsibility for the UFL and apportioned to employers based on their share of the class NCC.

This alternative method is described in more detail below and will be compared to the NCC method.

Fixed Charge

It is reasonable for all employers to be collectively responsible for the portion of the UFL that is unrelated to the claims experience of particular classes. For example, items such as gains/losses related to investment returns, the employee benefit plan and accounting changes, do not relate to benefit payment expenses. Since these types of costs cannot be specifically allocated to a particular class, it makes sense to have all employers collectively share in this fixed charge.

This collective portion of the UFL may fluctuate each year based on the various factors that are unrelated to the experience of particular classes. If the WSIB adjusted the fixed charge on an annual basis, employers may potentially experience premium rate volatility. To mitigate this, it could be suggested that the fixed charge remain unchanged until the UFL is eliminated.

For the purpose of this analysis, a fixed charge of $0.05 is being proposed. This amount is consistent with the recommendations of both Douglas Stanley and Professor Harry Arthurs. Stanley recommended a “modest” fixed charge and Arthurs recommended a fixed charge of $0.03 which would collect 5% of annual UFL revenue. Using current insurable earnings and UFL revenue figures, a $0.05 fixed charge would collect about 5% of annual UFL revenue.

Class Variable Charge/PR Method

Prior to 1999, responsibility for the UFL was determined for each class, however, from 1999 to present, this practice did not continue.

To reflect each class's responsibility for the UFL, the PR method approximated their responsibility for the UFL, as if the practice continued.

To do this, the PR method used the 1998 closing balance for each class's UFL as its starting point (adjusted for investment returns through to 2012).

It then adjusted each class's UFL based on their notional gains/losses between 1999 and 2012 (adjusted for inflation).The notional gains/losses were determined by comparing gains from premiums paid (net of experience rating adjustments) against losses from claim costs.

The PR method of allocating responsibility for the UFL was then used to develop class variable charges.

To demonstrate the outcome of the PR method, as part of the Pricing Fairness Consultation, Stanley compared the PR method with the method of apportioning the UFL charge used in 2013.

As noted earlier, the 2013 UFL allocation method involved subtracting the NCC and overhead expense components from the premium rates of RGs.

Method 2

Under Method 2, the fixed charge would collect about 5% of the annual UFL revenue. The remaining UFL revenue (95%) would be collected through the class variable charge.

To minimize premium rate volatility for certain classes, the total class UFL charges were increased/decreased by a maximum of 50% from the current state UFL charges. This 50% UFL limitation will be referred to as Method 2.

Comparison of All Methods

The following chart compares the current state UFL charges with UFL charges under the NCC method and Method 2.

In many cases the NCC method and Method 2 are directionally consistent under the nine classes (i.e., classes that experience a UFL charge increase or decrease under the NCC method also experience an increase or decrease under Method 2).
 

However, under the proposed 22 classes, the number of classes that are directionally consistent (in increases or decreases) between the NCC and Method 2 is somewhat reduced.