Rate Framework (Archived): Class Level Premium Rate Setting

Objective

A Class Target Premium Rate that reflects the collective experience of all employers within each class, setting the stage for a significant range of potential premium rates.

Alternatives for Further Discussion

• Threshold for claim costs limit at an employer level, above which the costs are allocated to the class;
• Whether each class ought to be self-sufficient or supported by other classes in Schedule 1;
• Period of time (e.g. # of years) to consider claims experience for premium rate setting purposes;
• The allocation of claim costs at the class versus the employer level (long latency occupational disease (LLOD), secondary injury enhancement fund (SIEF), inactive employers); and
• Proposed approach to allocate the UFL at the class level.

In Step 2 & 3, employers will be provided with more details on how each Class Target Premium Rate would be calculated and how this premium rate would be adjusted for individual employers under the proposed preliminary Rate Framework.

The Risk Adjusted Premium Rate Setting is a two-step process:

• Step 2: Class Level Premium Rate Setting would create an average premium rate for each individual class (Class Target Premium Rate) based on the valuation of collective liabilities of new claim costs for the employers within their respective classes, their allocation of administrative costs and the apportionment of the past claim costs for a particular class; and
• Step 3: Employer Level Premium Rate Adjustments would adjust the Class Target Premium Rate for individual employers based on their risk, represented by their own claims cost experience and insurable earnings relative to their Class Target Premium Rate.

Key goals

• Fairly allocated premiums
• Transparent & understandable
• Ease of Administration

Premium Rate Setting Policy

To establish and describe the rules for the Risk Adjusted Premium Rate Setting process, the WSIB would develop a new Premium Rate Setting Policy accompanied by administrative practice documents, as required. Together with the WSIB's Funding Policy, a Premium Rate Setting Policy would provide the WSIB with a framework for adherence to a set of governing principles on the setting of premium rates.

Key goals

• Fairly allocated premiums
• Transparent & understandable
• Collective liability

New Claim Costs and Administration Cost

The proposed preliminary Rate Framework would continue to use the current methodology for estimating the new claim costs amount required at the Schedule 1 level and incorporate a per claim limit.

However, some changes would be needed at the class level, as a result of the proposed 22 class structure.

The preliminary Rate Framework recommends continuing the current allocation of the administration components of the premium rate (whereby, each class is allocated their share of these costs in equal proportion to their new claim costs and insurable earnings).

Key goals

• Transparent & understandable
• Collective liability

New Claim Costs: Long Latency Occupational Disease (LLOD)

The proposed preliminary Rate Framework is based on continuing with the current assignment of LLOD claims as a collective cost that is pooled at the class level. As these costs are excluded from being considered under the current three experience rating programs, likewise, they would continue to be excluded from being considered under the Risk Adjusted Premium Rate Setting process.

New Claim Costs: Secondary Injury Experience Fund (SIEF)

Key goals

• Fairly allocated premiums
• Balanced rate responsiveness
• Collective liability
• Ease of administration

The proposed preliminary Rate Framework seeks to discontinue the SIEF program as part of a prospective premium rate setting approach.

The SIEF is a policy tool meant to ensure that employers do not bear the full cost of an occupational injury (in situations where one of their workers already suffers from some existing disability that prolonged or enhanced the injury), and therefore removing a potential obstacle to the employment of workers suffering from such impairments. The SIEF program is connected to the Experience Rating Programs, as it reduces the actual claims costs that are used as a basis for the calculation of refunds and surcharges. 

Key goals

• Fairly allocated premiums
• Transparent & understandable
• Collective liability

New Claim Costs: Self-Sufficiency of Classes

The proposed preliminary Rate Framework recommends that each class stand on its own with no pooling of costs (such as new claim costs, bad debts and gains and losses, etc.) from other classes or from Schedule 1, subject to the transition plan based on the classes new claim costs for the most recent completed year.

Key goals

• Fairly allocated premiums
• Transparent & understandable
• Collective liability

Past Claim Costs: Experience Rating Off-Balance

Under the proposed preliminary Rate Framework the current Experience Rating Programs would be replaced with a prospective premium rate setting approach.

Eliminating the Experience Rating Programs would address the issue of any future off-balance. The WSIB is assessing the current off-balance issue. 

Class Target Premium Rates

Considering the proposed changes for Class level Premium Rate Setting and based upon the proposed 22 NAICS-based class structure, the WSIB has created a working model of the proposed preliminary Rate Framework that identifies what the WSIB has estimated or targeted the premium rate to be as the “Class Target Premium Rate”. For illustrative purposes, the calculations reflect the proposed preliminary Rate Framework as though it had been implemented in 2014.

The Class Target Premium Rates were calculated using the following assumptions:

• New claim costs were estimated based on the full cost of new claims for injuries expected to occur during 2014, using the experience of the most recent six years of insurable earnings and claim costs (2007- 2012) ; and
• Overhead expenses were allocated to the classes in proportion to their new claim costs and insurable earnings; and

• Past claim costs were apportioned using the proposed UFL apportionment methodology. (see

  Paper 4: The Unfunded Liability
  for more information).

For illustrative purposes, based on these assumptions, the chart below outlines what the WSIB is projecting for the 2014 premium rates under the proposed preliminary Rate Framework.
 

Note that the above Class Target Premium Rates do not take into consideration the premium rate limitations that are described under Step 3 (Employer Level Premium Rate Adjustments) or as part of a proposed transition plan of the proposed preliminary Rate Framework.
 

Employers should note that the above premium rates are based on the expected claim costs and insurable earnings experience for 2014, in order to project the Class Target Premium Rate under the proposed preliminary Rate Framework methodology. If the proposed model is implemented, and if the class cost experience shifts, these Class Target Premium Rates would be updated to reflect changes in costs.

Additionally, the Class Target Premium Rates have been calculated, without taking into consideration the premium rate changes that employers may face as a result of moving from the current classification scheme to the proposed preliminary Rate Framework. As will be outlined in the following section, risk disparity and under Step 3, Employer Level Premium Rate Adjustments, there may be differences between what employers are paying for "net" premiums today (including experience rating surcharges and refunds), to what they may be expected to pay under the proposed model.
 

In order to understand how the above 2014 Class Target Premium Rates compare to the premiums employers are paying in today's classification scheme, the following chart outlines the various premium rates under the current nine classes.
 

In some classes there are large differences between the lowest and highest premium rate. This may result in additional risk disparity or premium rate changes if the WSIB moves from estimating premium rates at the rate group level and charges employers' premium rates at the class level. For example, an employer who is currently paying a RG premium rate under the current classification scheme may be required to pay a premium rate at the class level under the proposed preliminary Rate Framework that may be either much higher or much lower.

While the proposed preliminary Rate Framework does propose more emphasis on employer risk and claims experience, changing from the current model to the proposed model would require a structured approach for employers to reach their "Employer Target" Premium Rate, by including premium rate limitations on upward and downward movement. As would be expected, the effect of these premium rate limitations would be collectively shared by all employers in order to ensure year over year premium rate stability. More details on how this would work are outlined under Step 3: Employer Level Premium Rate Adjustments and in Paper 5: A Path Forward.
 

The WSIB would like to hear from you! Please email us your questions or comments about the proposed preliminary Rate Framework to consultation_secretariat@wsib.on.ca.

For more information, see Paper 3: The Proposed Preliminary Rate Framework (PDF)