A REVIEW OF WSIB’S NEER AND CAD-7 EXPERIENCE RATING PROGRAMS: DISCUSSION PAPER

March 2000

A REVIEW OF WSIB’S NEER AND CAD-7 EXPERIENCE RATING PROGRAMS: DISCUSSION PAPER

TABLE OF CONTENTS

INTRODUCTION................................................................................................................... 1BACKGROUND.....................................................................................................................2

1. The Board’s New Prevention Mandate................................................................................22. Effectiveness of Experience Rating Programs.......................................................................2

Labour and Employer Views ..............................................................................33. WSIB’s Experience Rating Programs.................................................................................3

Current & Past Problems....................................................................................44. The Experience Rating Review..........................................................................................75. Guiding Principles..........................................................................................................8

THE KEY DESIGN ISSUES................................................................................................... 9

1. The Review Window.......................................................................................................92. Size of the Financial Incentive........................................................................................113. Costs vs. Frequency Based Model...................................................................................124. Retrospective vs. Prospective Model................................................................................145. Experience Rating and Rate Setting.................................................................................166. Non-Compliance .........................................................................................................177. Fatalities ....................................................................................................................198. Other Design Issues......................................................................................................19

Simplicity.....................................................................................................19Choices.........................................................................................................20

SIEF.............................................................................................................21

A POSSIBLE MODEL FOR THE FUTURE...........................................................................22

A PROSPECTIVE MODEL.................................................................................................22A. General Features........................................................................................22B. Cost Features...........................................................................................23C. Risk/Insurance Features..............................................................................23

A RETROSPECTIVE MODEL.............................................................................................24

IMPLEMENTATION/TRANSITION ISSUES........................................................................ 25

1. Possible Implementation Timeframes...............................................................................252. Systems Impacts..........................................................................................................263. Integration with Other Programs......................................................................................264. Communication Impacts................................................................................................27

SUMMARY OF KEY PROPOSALS .......................................................................................28

Comments

To help you provide input, we have provided a Comment Form in Microsoft Word6/95 for you to download from our Web site. The form will expand to allow you towrite as much as you wish about each of the major aspects of this important review.

Please use this form for your comments. It will help us to do a better job of collatingall responses and ensuring that everyone’s views are considered.

(March 2000)

A REVIEW OFWSIB’S NEER AND CAD-7 EXPERIENCE RATING PROGRAMS:

DISCUSSION PAPER

INTRODUCTION

The Workplace Safety and Insurance Board’s (WSIB or the “Board”) current experience ratingprograms – New Experimental Experience Rating (NEER) and Council Amended Draft 7 (CAD-7) – have been well established since their introduction in 1984. Their primary objective has beento provide appropriate financial incentives to Ontario employers so that they will improve theiraccident and health and safety performance in the workplace. While both programs have beenstrongly supported by various employer groups, it is also recognized and accepted that bothhave some significant common problems, which require attention. One of the key problems isthat over time the financial incentives provided have eroded and are no longer as effective inensuring that this objective is adequately met.

In recent years, experience has pointed to the need to review and change the Board’s currentexperience rating programs to ensure successful realization of their primary objective. While therehave been a number of ad hoc “fixes” to deal with specific structural and financial relatedproblems – such as measures put in place in 1998 to address the financial “off-balance” – therehas not been an extensive review or overhaul of many of the key design features of the programsin more than a decade.

This need is reinforced as a direct result of the government’s 1998 reforms which gave the Boarda new broad mandate for preventing workplace injuries and illnesses. In support of this mandate,it is therefore important that the Board establish more effective and responsive experience ratingprograms that will help to prevent workplace injuries and encourage early and safe return towork.

The purpose of this consultation report is to solicit input from interested stakeholders on thekey experience rating issues and on proposed design changes that will make experience ratingmore effective for medium and large businesses in Ontario. An extensive consultation process isexpected to start in early 2000 with a view to making appropriate changes by 2002. The Boardrecognizes that the specific proposals advanced in the paper will likely evolve during the processof consultation and as the Board continues to conduct further analysis on their potential impacts.

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BACKGROUND

1. The Board’s New Prevention Mandate

Effective January 1, 1998, the Board was provided with a new mandate for preventing workplaceinjuries and illnesses. Specifically, under section 4(1) of the Workplace Safety and Insurance Act,the Board’s health and safety responsibilities include:

• Promoting public awareness of occupational health and safety.• Educating employers, workers and other persons about occupational health and safety.• Fostering a commitment to occupational health and safety among employers, workers and

others.

What this new prevention mandate means is that the Board’s role is to motivate and supportworkplaces to become self-reliant in health and safety. The financial motivating tool is theBoard’s experience rating programs which strive towards encouraging employers to invest timeand money to make workplaces safer. It is important that the Board’s experience rating programsare made as effective as possible in supporting this new mandate.

2. Effectiveness of Experience Rating Programs

The financial incentives available to employers to improve their workplace health and safetyperformance operate on two levels. The first is provided on a collective basis through thepremium rate-setting process: each year, each rate group’s premium rate is adjusted based on thecombined injury cost record of all employers in the group. The second level is provided on anindividual basis through experience rating.

Experience rating rewards or penalizes a firm by adjusting its rate group premium rate based on acomparison between its own accident experience and that of the rate group to which it has beenassigned for collective premium rate setting purposes. The basic idea of such a scheme is toprovide financial incentives to employers in order to encourage accident prevention efforts in theworkplace, without departing significantly from the basic principle of collective liability.

Experience rating is a key motivator to encourage injury prevention. It should not be viewed as asingle decisive tool for this purpose, but rather as an important element in a range of possiblemeasures aimed at improving health and safety in the workplace. For most employers, experiencerating rewards and penalties cannot be large enough to make safety solely a financial decision.However, experience rating must provide rewards (or penalties) which are significant enough sothat employers clearly understand their relationship to improved injury prevention and return towork efforts. At the same time, the rewards/penalties should be fair and balanced. To be

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effective, experience rating should have a positive influence on prevention behaviour and shouldnot result simply in a concentration of efforts on various measures to avoid or reduce claimscosts by illegitimate or unlawful means, including the under-reporting or mis-reporting of claims.

Labour and Employer Views

The labour community has frequently voiced concerns regarding the potential negative effects ofexperience rating. While they support the goal of reducing the frequency and severity of workrelated accidents, they are also concerned about ensuring that injured workers’ access tocompensation benefits is protected. They have frequently expressed the belief that the financialincentives provided through experience rating may result in some employers engaging ininappropriate cost reduction techniques, such as: taking an unduly aggressive stance to appealingclaims, or pressuring workers to return to work which poses risk to their recovery, or theconcealment and non-reporting of workplace injuries.

Since experience rating focuses its attention on costs, it can create a temptation to seek to reducethose costs by any means possible, legitimate or otherwise. However, the Board’s newprevention mandate and the fraud strategy is expected to minimize the potential for negativebehaviour and outcomes. Furthermore, making design changes to the existing programs is alsoexpected to further reduce inappropriate behaviour.

The Board’s experience rating programs have enjoyed broad support in the employercommunity. Employer representatives often express the view that experience rating is needed toredistribute the costs of the system more fairly between employers. Other benefits cited haveincluded the following:

• Promotes internal responsibility system – increased responsibility on employer to improvehealth and safety

• Provides incentives for accident prevention and return to work measures – as a result, manyemployers have invested in health and safety processes, communication and training

• Widespread familiarity amongst larger employers• Helps to prevent and reduce overall injuries and costs in the system.

3. WSIB’S Experience Rating Programs

The Board’s two main experience rating programs – NEER and CAD-7 – have been in operationsince 1984. NEER operates on the principle of retrospective rating. It looks at and reviews claimscosts, for a given accident year, for three years following the year of accident. To determine therefunds and surcharges, it compares each firm’s expected claims costs, represented by a portion

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of the initial total premium paid by the firm, with its actual claims cost (referred to as the “NEERcosts”). In addition to a rating factor, which is based on a firm’s size, NEER restricts themaximum cost of each claim to four times the maximum insurable earnings ceiling ($236,800 for1999). As an additional insurance feature, it also imposes a limit on a firm’s total claims costs forwhich it can be held accountable.

CAD-7 was developed jointly by the Board and the Construction Safety Association of Ontarioand is specific to the construction industry. Like NEER, it is also a retrospective plan. However,it takes into account both the accident frequency and the accident cost performance of a firm incalculating a refund or surcharge. For the cost part of the formula, it examines cost awards issuedwithin two prior years (relating to accidents going back 5 years), against a computed “weighted”average of the premiums paid approximating the expected average costs. The magnitude of arefund or surcharge applied to a firm is modified through the use of a rating factor which is alsobased on a firm’s size – the larger the firm the larger the potential refund or surcharge.

Current & Past Problems

Two long standing problems with the Board’s existing experience rating programs – namely theircomplexity (especially for small employers) and the size of the off-balance – have been addressedin large part over the past two years. A simplified plan for small employers – the Merit AdjustedPremium (MAP) plan – was introduced in 1998 (see next section for further details).

The off-balance in the NEER program has been substantially reduced by a series of measurestaken since 1996.The off-balance represents the net difference between refunds and surcharges.Over the past 10 years, total refunds issued have been consistently more than the surcharges.The size of the off-balance has also varied over time. The NEER off-balance has been running at ahigh of over $250 million in each of the past three evaluation years – i.e. 1996-1998. It peaked atabout $300 million in the 1998 evaluation year (which examined costs for 1995-1997 accidents).

The main contributors to the experience rating off-balance include factors relating to the structureor design of the programs (“structural” factors), and differences between expected and actualperformance (“performance” factors). Improvements made to NEER in 1996 were aimed atreducing the structural part of the off-balance. The Board has also made changes to the ratesetting model, beginning with the 1998 accident year, so that it is more responsive to industryspecific trends in injury frequency rates. At a time when injuries have continued to decrease, theeffect of this change has been a reduction in premium rates “up-front”, reducing expected costsand, as a consequence, also reducing the performance part of the off-balance. What this means isthat the change has the effect of rewarding performance that is truly excellent, and not rewardingmediocre performance as was the case in the past. As a result, the off-balance decreasedsignificantly, to about $47 million, at the first review of 1998 accidents in late 1999.

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With respect to CAD-7’s off-balance, it has grown consistently over the years and it continuesto be a persistent problem. The 1999 evaluation produced an off-balance of about $25 million.One of the possible causes for part of the CAD-7 off-balance is that the formula does notdirectly include reserves for the future costs of past claims. This problem has been partiallyaddressed through the experience rating of a smaller proportion of premiums to bring this moreinto line with the costs being measured. However, this has eroded the level of the financialincentive for medium and large construction employers. For CAD-7’s 1999 review, only 35% ofthe premium will be experience rated.

It should also be noted that part of the CAD-7 off-balance has been caused by Board decisions todampen the full effects of surcharges applied to small construction employers, while too manyother small employers have received refunds for what amounts to no better than “average” claimsexperience. This problem will be largely resolved in the future with the extension of the MAPplan to this industry.

A further problem that periodically has given cause for concern is the lengthy delay in the levyingof refunds or surcharges, and the fact that they are payable in a lump-sum at that time. Possibleproblems include the lack of opportunity for employers to recoup WSIB costs after the fact, aswell as the potential for total surcharge receipts to be reduced due to firms ceasing business orgoing bankrupt prior to surcharges being issued. The latter problem may be partially addressedby applying experience rating adjustments on a prospective basis. The merits of a prospectiveexperience rating program will form part of this review.

There are a number of structural and design related problems with the Board’s current experiencerating programs which still need to be addressed. Together, they affect the ability of theseprograms to deliver the full range of potential benefits available from favourably influencinghealth and safety behaviour in the workplace.

A frequently voiced criticism is that the adjustments are too small, especially for medium sizedfirms. For example, a firm paying $150,000 in premiums per year with $10,000 in claims costswill qualify for only $10,000 in refunds under NEER. There are two explanations for this result.First, the rating factor under NEER, expressed as a percentage (minimum of 25% for smallerfirms to maximum of 90% for larger firms), has a dampening effect on the full potential refund.The smaller the firm the less they receive back. At the same time, the rating factor serves toprotect smaller firms from extreme surcharges – i.e. it acts as an insurance feature.

The second major factor driving this outcome is that the new claims cost component in thepremium rates has been coming down on average for the last four years, while the unfundedliability (UFL) component in the rates has increased as a proportion of the total premium rate.Since 1998, the UFL component represents approximately 40% of the average premium rate. Theoverall result is that once the insurance costs and the unfunded liability are removed, only

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approximately 13-45% of the premium is experience rated. This, combined with the rating factorcalculations, has had the effect of significantly reducing the maximum refunds achievable tobetween 4-40%.

Other structural and design related problems include the following:

• NEER reserving methods differ from those used for purposes of rate setting and the financialstatements. Also, the NEER factors have been volatile from time to time. For example, theNEER reserves for shorter duration claims have increased significantly. The differences andunstable nature of the reserves are significant enough to potentially cause structural off-balances in the future. Furthermore, such differences makes it difficult to directly control andmake decisions on the most appropriate acceptable level for performance-based off-balances.

• As noted earlier, there is no direct claim reserving in the CAD-7 calculations. Also, unlikeNEER, which has extensive insurance features, CAD-7 provides very little insuranceprotection.

• Other design differences exist between rate setting and NEER and CAD-7. For example, thereare differences in the time windows used which need to be standardized.

• NEER’s three year review window is too short. This window does not provide sufficienttime to review, make decisions and process SIEF and other cost related adjustments. Theresult is that there are excessive appeals in the system on cost adjustment issues. Thewindow needs to be extended not only to assist in resolving this problem, but also to reflectlonger review milestones relating to loss of earnings (LOE) and return to work activities underthe current Act.

• Under CAD-7, the frequency part of the formula is very punitive, especially for smallerfirms. On average, each lost time injury, regardless of cost, reduces the employer’s potentialrefund (or increases the potential surcharge) by about $8,000. A smaller firm which has onerelatively minor claim may continue to get a surcharge for two consecutive years. This featuremay have had the effect of influencing a number of construction employers to conceal somelost time claims, especially those that are less serious in nature.

• To be experience rated under CAD-7, a firm must have one full year of experience. The resultis that a substantial number of construction employers are not experience rated, many ofwhich have poor claims experience. Under NEER, a firm which opens an account afterFebruary 1 is not experience rated for the year. Also, if a firm was open prior to February 1but closes the account any time prior to December 30, it will not be subject to experiencerating for that year.

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• The experience rating calculations need to reflect the reality that the majority of lost timeclaims have very low total costs associated with them - - e.g. approximately 90% of claimshave costs of less than $5,000.

The Board has found evidence of some inappropriate activities on the part of employers over theyears (such as concealment of claims) which have been addressed on a case-by-case basis. Futurechanges made to the Board’s experience rating programs should not induce negative activities, butrather should encourage appropriate and positive disability management practices. The keydesign issues which need to be considered as part of this review are addressed in more detail laterin this paper.

4. The Experience Rating Review

In early 1997, the WSIB’s Board of Directors (BOD) commissioned an independent actuarialreview of the WSIB’s experience rating programs -- NEER and CAD-7. A number of keyproblems outlined above with the Board’s experience rating programs were underscored by theresults of this initial review. The review found that:

• the programs are complex and difficult to understand – mostly by small and medium-sizeemployers.

• small employers were inappropriately subject to the same experience rating criteria andprogram parameters as larger employers.

• rewards and penalties are provided in arrears, with a considerable time lag.

• the off-balance was not subject to effective controls and has adversely impacted WSIBfinances.

Based on the results of this independent review, it was requested that the Administration workwith the actuarial consultant to develop a plan for making appropriate changes to the WSIB’sexperience rating programs tailored to different size employers – i.e. small, medium and large. Thekey objective at that time was to strive towards developing experience rating programs which aresimpler, fairer and provide more effective financial incentives for improving accident preventionand facilitating return to work.

The complexity problems, associated mainly with small businesses, have been largely addressedwithin the first phase of the Board’s review. Specifically, the Board developed a new simplifiedfinancial incentives program tailored to small businesses, called the Merit Adjusted Premium(MAP) plan. Small businesses – those with average annual premiums between $1,000 and

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$25,000 – were taken out of NEER and placed into MAP in 1998. Firms with annual premiumsbelow $1,000 were removed from experience rating entirely. Recently, the Board decided toextend this plan to small businesses in the construction industry, effective year 2000. The MAPplan applies a percentage adjustment to the employer’s basic premium rate to arrive at anindividualized (prospective) rate, based on their own past workplace injury performance.

The Administration continued to work directly with the actuarial consultant to developappropriate changes for medium and large businesses. During the first half of 1998, the Board’sAdministration also engaged in a number of working meeting discussions with broad industrygroup representatives on the key issues surrounding future changes for medium and largebusinesses. At that point, it was not clear, nor was there a consensus, as to whether appropriatechanges for addressing the key issues should (or could) be based on a modification of the currentNEER and CAD-7 programs, or whether a new program was required.

Due to this lack of consensus and to conflicting priorities within the Board’s business planningprocess, the review was deferred until 1999. The Board is now in a position to move forwardwith the review and plans to engage in an extensive formal consultation process on this issue.

5. Guiding Principles

Changing the current experience rating programs will be a complex process which will have far-reaching implications and financial consequences for large and medium-size businesses in Ontario.It will, therefore, be helpful for the consultation process to have a set of guiding principlesagainst which the proposed changes can be discussed and evaluated. The principles will also helpto ensure that the changes being considered are consistent with and supportive of the Board’snew prevention mandate and vision, which aims to eventually eliminate all workplace injuries anddiseases. The following key principles will guide the Board’s experience rating review.

• To maximize the financial incentives available for injury prevention and return to work,consistent with sound insurance principles. The purpose would be to encourage employers toput in place measures that will reduce and eventually eliminate all work related injuries, andwhen injuries do occur, to facilitate and encourage the adoption of appropriate disabilitymanagement practices.

• To ensure that the experience rating premiums are balanced and fair. The premiums charged toemployers should be based on a balance between collective insurance and individual liability.At the same time, workplace health and safety performance should be a source of competitiveadvantage (or disadvantage) between employers.

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• The changes to the experience rating programs must be made on a financially sound basis. Toensure this is achieved, it is necessary to co-ordinate the experience rating model with thepremium rate setting model and the liability calculations in the Board’s financial statements.

• To support effective program administration through timely delivery of financial rewards andefficient collection of financial penalties.

• To improve understandability and effective communication tailored to different client groups.This does not mean that it is an overriding principle of the Board to simplify the existingexperience rating programs for medium and large businesses, since it would likely require toomuch of a trade-off against some of the other key principles. However, achieving someadditional simplicity would certainly be a welcome by-product of the review process,provided it is consistent with the other main objectives.

THE KEY DESIGN ISSUES

The key experience rating design issues are discussed below. It should be noted that in order toaddress all of the issues, it is not simply a question of whether the issues could (or should) beresolved by making appropriate changes to the existing programs or whether the existingprograms should be replaced with a new program. The answer to this question will directlydepend on the most appropriate solution or design feature that will address each issue, andwhether each can be easily accommodated within the existing programs. Furthermore, since thesolutions and their implications are in many cases interactive they must be examined holisticallyin order to be able to determine the most appropriate overall approach.

It should be kept in mind that the purpose of making appropriate design changes is to enhanceprevention of workplace injuries and to foster early and safe return to work.

1. The Review Window

NEER’s three-year window has been in place since the inception of the program in 1984. Thetotal period over which claims costs remain open and subject to review and revision for a givenaccident year actually extends up to three years and nine months. For example, an accidentoccurring in January 1996 will have the third and final NEER review done at the end of 1999,based on its cost status up to September 30, 1999.

The Board has experienced a number of problems over the years with this three-year window.First, under Bill 162’s FEL/NEL model, effective January 1, 1990, not all claims reached the firstFEL review (“R1”) before they ceased to be subject to NEER. As a result, NEER’s future cost

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projections for these types of claims did not benefit from the availability of R1 reviewinformation, with potentially adverse consequences for the accuracy of these projections. Thiscontinues to be a problem under the current Loss of Earnings (LOE) model since the Act providesfor LOE reviews up to 72 months post-accident.

More importantly, the Board has found that some employers cease active rehabilitation andreturn to work efforts once a claim falls outside of the NEER window. The Board has also foundthat some employers who take their workers back early in the process cease to retain them oncethe window has elapsed. The fact is that, once the NEER window ends, the employer has nofurther financial incentive to continue remedial efforts.

Another problem experienced by the three year design window is that in many cases the windowmay not provide sufficient time for the full and proper adjudication of second injury andenhancement fund (SIEF) relief. The outcome has been that a significant number of claims thatultimately are awarded SIEF relief miss at least one out of the three NEER evaluations, or fallentirely outside of the three-year window. As a result, the cost relief does not get factored intoany of the NEER calculations. Two possible reasons as to why this occurs are either that theSIEF entitlement review in a claim gets initiated very late in the NEER review process (either bythe client or the Board), or that the actual decision is made too close to the September 30 cut-offdate. The result is that many claims miss the window entirely and end up going through theappeals process. The employer community has been extremely critical of WSIB’s decision andprocess delays on this issue. It is also important to note that this problem has worsened over theyears since there have been a growing number of requests for SIEF relief.

The Board believes that a longer review window is required for NEER not only to address theabove problems, but also to bring it more in line with the current premium rate setting model.Therefore, the Board proposes that the window be extended to five years. The Board believesthat extending the review window by two years would add significant value. It should be notedthat the same five-year time window should be used as a basis for setting individual prospectiverates, if it is decided that a prospective model is the most effective way of achievingimprovements in health and safety for a specific group of employers. This issue is discussedlater in this paper.

The Board has found the CAD-7 window to be less of a problem. However, the review windowwould be more effective if it reviewed 5 “accident years” independently of each other, rather thanthe current design which evaluates two “award years” for claims going back five accident yearswithin each.

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Size of the Financial Incentive

The design of any program should not only be financially and actuarially sound, but must alsoseek to provide a financial incentive that is sufficiently adequate in size to influence the desiredchange in health and safety behaviour. However, with the gradual erosion over time of theincentives available under NEER, it is difficult to induce an improvement in health and safety orto achieve a satisfactory sustainable level.

Prior to 1987, NEER experience rated the entire premium, including the unfunded liabilityportion of the rate. This was regarded as inequitable by some, since the unfunded liabilitycomponent of the rate related to events of the past and not the present. As a result, following1987, only the net premium rate (net of unfunded liability) was subject to experience rating. Sincethen, the unfunded liability component of the overall premium rate has grown considerablyrelative to the new claims cost component, thereby gradually eroding the experience rating base.

The relative increase in the unfunded liability component in the premium rate combined with theinsurance features of the program (for example, the per claim and firm cost limits), means thattoday less than one-half of the premium rate is subject to experience rating for the largest firms.For smaller firms, this proportion is as low as one-tenth of the premium rate. As a consequence,the maximum refund achievable, even with a perfect claims record, generally ranges from as littleas 4% (for those with annual premiums up to $50,000) to about 40% for the very largeemployers (those with annual premiums above $1 million).

To illustrate this problem more clearly, it is useful to look at its effects on different sizedemployers. For example, a firm which pays the Board $100K in annual premiums may receive amaximum rebate of about 5% (i.e. $5K). Those who pay annual premiums of $250K and $500K,may receive maximum rebates of about 15% ($37K) and 20% ($100K), respectively. It is alsoimportant to note that the size of the potential maximum rebate rises very slowly for firms whofall between $50K and $250K in annual premiums.

Many employers have argued that NEER’s current design does not provide a large enoughincentive to reward adequately those employers that consistently maintain an outstanding safetyrecord. A number of employer group representatives on the experience rating working committeealso expressed concerns on this issue and suggested that the Board increase the maximum refundto 85%. The Board feels that moving to such a high level may be too extreme a step since itmeans that a qualifying firm would be paying very little towards retiring the unfunded liability.Furthermore, it would require significantly higher (punitive) surcharges to pay for the higherrebates.

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The level of the financial incentive has also shrunk significantly under the CAD-7 program forsimilar reasons. As mentioned earlier in the paper, the total amount of the premium experiencerated in 1999 is approximately 35%. The problem could be addressed in part using a differentcosting model which takes into account reserved costs.

The Board accepts that there is scope for providing a higher level of financial incentives andrecognizes that doing so will likely improve prevention and return to work efforts in theworkplace. However, in making any changes to the current formula, the Board must have regardfor and balance individual equity considerations against the principle of collective liability as itspecifically relates to retiring the unfunded liability in accordance with the new funding policy.Furthermore, the Board must balance any increase in the level of refunds against the potential forsignificantly higher surcharges for many other employers and the prospects for collecting thesesurcharges.

Taking into consideration all of the above, the Board proposes that the refunds be increased to anabsolute maximum of 50% of the total premium for those employers with $500K or more inannual premiums. It is also proposed that the maximum refund for the smallest NEER employersbe set at 10% to make it consistent with the maximum discount under the MAP program.Finally, it is proposed that the amount of the maximum refund be changed so that it rises at afaster pace for medium sized employers (e.g. aiming to have a maximum as close as possible to20% for those at $50K in annual premiums and 40% for those at $250K).

With respect to the maximum surcharge for an individual employer, it is proposed that itcontinue to be limited to two times the maximum refund for that employer.

One further modification in calculating the degree of weight attached to an individual employer’sown claims experience could assist in increasing the potential size of financial incentives availableto multi-rated employers. Currently, NEER cumulates an employer’s premiums across allaccounts in calculating the employer’s rating factor. However, this calculation is done separatelyfor each rate group in which the employer is registered. A logical extension would be to cumulateacross all rate groups (as is done now, for example, with CAD-7). The model proposed later inthis paper, and reflected in Appendix B and C, incorporates this feature.

2. Costs vs. Frequency Based Model

The objectives of experience rating include the provision of financial incentives which encourageboth prevention activity (i.e. efforts to reduce the number and severity of workplace injuries) andearly and safe return to work.

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The respective design features of NEER and CAD-7 differ significantly. The NEER program isbased solely on costs while CAD-7 measures both cost and the frequency of lost-time injuries.The key issue to be considered is which design is more effective in influencing health and safetybehaviour: a cost or frequency based plan? In theory at least, both types of programs mayultimately produce an improvement in injury prevention.

However, a cost based program is more suitable for larger employers, since it has the potentialfor a more comprehensive assessment of an employer’s prevention and disability managementefforts. It not only provides an indirect incentive to improve prevention, and therefore reduceinjury frequency rates, but also provides a direct incentive to reduce claim severity and anopportunity to mitigate the overall costs associated with injuries by getting injured workers backto work sooner.

On the other hand, a frequency-only type model is more appropriate for very small employers.Insurance considerations limit the extent to which they can be held responsible for the costs ofclaims beyond a relatively low level. As a practical matter, smaller employers are less able to putin place effective return to work measures which serve to contain costs once an injury hasoccurred. Also, the calculations associated with a frequency-only plan are relatively simple andeasy to understand, as is the case with the Board’s MAP plan.

The NEER program currently treats smaller claims equally in “weight” with larger cost claims interms of the degree of direct responsibility assigned to the employer for purposes of calculatingthe overall refund/surcharge. This lack of differentiation between smaller and larger claims can beargued to place some limits on NEER’s effectiveness in meeting its main objectives.

There are a number of jurisdictions that have established different claim cost levels todifferentiate between more direct responsibility versus insured responsibility. For example, underthe Quebec Personalized Rate Plan, for those claims whose costs are less than 50% of theirmaximum insurable earnings (MIE), 100% of the costs are included in the employer’spersonalized rate calculation. For those claims whose costs are between 50 and 100% of theMIE, 50% of the costs are included, while for those with costs between 100 and 150% of theirMIE, only 25% are included. The details of this experience rating model, and a few others foundin other Canadian jurisdictions, are described in Appendix A.

Quebec’s approach is similar to that of the National Council on Compensation Insurance (NCCI)in the U.S. Specifically, NCCI’s prospective plan distinguishes between “primary costs”, whichare costs less than a certain per claim amount, and costs in excess of that amount. Primary costsare given greater direct weight than excess costs in the experience rating calculation. The effect ofthis and Quebec’s experience rating program is that it provides a greater direct incentive toprevent injuries. It is interesting to note that NEER’s first version in the mid 80’s included a two-tiered cost feature.

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The Board believes that placing different degrees of responsibility on the employer based ondifferent levels of claim costs would make a cost-based plan a more direct and effective means ofinfluencing and improving health and safety in the workplace. Accordingly, the Board proposesthat a two-tier cost-based plan be adopted. Specifically, the Board proposes that more directresponsibility be placed on employers for the first $50,000 of fully reserved costs on any claim.

Above this level, employers would be responsible for the costs to a diminished extent. Forextremely high costs, a high degree of pooled insurance will likely be necessary. Currently, underNEER, the costs above the per claim limit (set at 4 times the ceiling) are removed entirely fromthe employer’s responsibility. It is proposed that the upper limit for 100% pooled insurancecould be raised to cover costs exceeding $500K, for example. Moving the limit to a higher leveldecreases the amount of pooled insurance costs in exchange for potentially higher financialincentives.

3. Retrospective vs. Prospective Model

As mentioned previously in the paper, both the NEER and CAD-7 programs are retrospectiveexperience rating plans. All employers in a particular rate group pay the same initial premiumrate, regardless of their previous accident experience. This rate is, in effect, modified after-the-factfor each individual employer by issuing refunds or surcharges based on that year’s accidentexperience. Since a retrospective plan typically looks at each year separately, it may be moreresponsive to significant short-term changes. On the other hand, treating each year separatelylimits the degree of weight that can be attached to a firm’s own experience. This has the effect ofrestricting the size of potential financial incentives, especially for medium sized employers.

Prospective rating simply reviews each firm’s performance over a previous period of time andestablishes an appropriate firm-specific premium rate for the upcoming year. Firms with goodpast records are assumed to be more likely to have a continuation of this experience, andconsequently pay a lower premium rate than those in the reverse situation. Prospective plansusually provide more stability since they typically use an “averaging” approach in examining afirm’s past performance for purposes of establishing an individualized rate for the future. Aprospective plan is also more effective in rewarding or penalizing firms with consistent long-termperformance.

Retrospective plans are more suitable for larger employers since they are generally more sensitiveto a recent change in an employer’s accident performance, and large employers are usually moreable to absorb the financial impact of such fluctuations. On the other hand, smaller firms requiremore stability since they are less able to move immediately from a rebate position to a surcharge.Therefore, a prospective plan may be more suited to smaller firms since it tends to providegreater stability and more insurance features.

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Specific design features could be incorporated under both types of programs that would makethem more balanced. For example, a prospective plan could be made less stable, and thereforemore responsive, by placing more “weight” on the most recent past year’s performance.Similarly, an averaging feature could be incorporated into a retrospective plan tailored specificallyto smaller firms (e.g. 3-year averaging for firms between $25K-100K in annual premiums, 2 yearsfor those between $100K-$250K, and none for those above $250K).

The Board believes that an experience rating program should try to balance both equity andfinancial incentive objectives that will reward/penalize short- and long-term performance, whileproviding appropriate incentives for short-term change. At the same time, it is necessary tobalance the principle of sensitivity against the need for a higher level of insurance and stability formid sized firms, since their experience is more likely to fluctuate from year to year.

The Board feels that there is a sufficient argument for the idea that medium-sized firms should beplaced in a prospective plan since they require the kind of stability that a prospective plan canprovide. The Board is not necessarily suggesting that all medium sized firms be immediatelymoved out of the retrospective plan. Since those firms are currently in a retrospective plan, itmay be more appropriate to operate both types of plan simultaneously, at least for a period oftime. If this approach was taken, it would provide an opportunity to determine the necessity forand suitability of operating both on a long-term basis for medium size firms, having regard to thecomplexity and possible instability associated with such an arrangement.

The Board believes that beyond a certain size, combining both types of plans is not onlyequitable, but also the most effective means to improving health and safety. A retrospective planallows for some “fine-tuning” of the prospective premium should the firm’s actual performancechange. This provides for additional financial opportunity for large employers to make health andsafety improvements. In fact, some jurisdictions (such as Quebec and Alberta) have implementedboth types of plans for larger employers and found it to be very effective.

A key issue for discussion during the consultation process will be to determine whether (and atwhat level) a size limit should be established below which firms be subject only to prospectiverating. The Board has some concerns that implementation of a dual prospective and retrospectivescheme for these mid-size firms, in combination with an increase in the aggressiveness of theadjustment formula, may produce significant instability in year-to-year premium adjustments.The Board intends to conduct further sensitivity testing to determine how serious a concern thismay be. The ultimate proposed design of the program will depend on the results of these tests,on the consultation feedback received, and on their compatibility with the overall objectives ofthe review.

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4. Experience Rating and Rate Setting

The Board made a number of modifications to NEER’s cost parameters, effective with the 1996accident year, in an attempt to address the inadequacy of NEER’s (future cost) reserves. Whilethe improvements went a long way towards eliminating the structural/methodology componentsof the off-balance there still exists scope for improving the accuracy of the current reserve model.The much larger “performance” component of the off-balance, arising out of differences betweenactual costs and those anticipated in the rate setting model, was addressed with a change in rate-setting methodology introduced in the 1998 premium rates.

NEER’s current reserve model divides claims into 14 classification categories. The reservecategory that a claim falls into directly depends on the type of benefits being paid, the durationof those benefits and whether a claim is active or inactive. Separate reserve tables currently existfor each of the nine industry classes. The reserve model does not take into account characteristicsof the claimant, such as age.

It should be pointed out that the existing model generates a reserve for relatively minor “losttime” claims – such as, lost time for physiotherapy and medical appointments. While the reserveplaced on these type of lost time claims are very small, the perception among many employer’sis that the related costs are significant since they also include a reserved cost. This issue isdiscussed further in the next section of the paper.

The Board’s current reserving approach attempts to balance two objectives – efficiency andaccuracy. Administrative practicalities limit the extent to which detailed information on eachspecific claim can be factored into the calculation of reserves. This may result in accuracy beingsacrificed to some degree, increasing the potential for overstating or understating the reserve in aparticular claim.

It is the Board’s view that a more accurate approach would be to assign a reserve on each claim,which is tailored to the age of the claimant, as is done with the Board’s valuation model for thefinancial statements. Making the reserves more sensitive to the most recent updatedcompensation rate for loss of earnings benefits paid in each claim also improves their accuracy.This suggested approach would bring the NEER program more “in sync” with the assumptionsused for future cost projections under the rate setting model. Moving towards standardizing theexperience rating reserve model to improve its accuracy is not only a desirable goal, but is alsofinancially prudent.

The “fine-tuning” of the experience rating reserves moves a step closer to eliminating thepotential for future structural off-balances. However, to be absolutely certain, there needs to be amonitoring process put in place not only to maintain the reserves, but also to identify any otherstructural problems, which may arise.

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With respect to performance based off-balances, the Board accepts in principle that they arejustified provided that they directly represent “real” changes in the performance of the system.At the same time, the Board must have regard for its overall financial requirements on a year-to-year basis. Therefore, it may be necessary to control or place some reasonable limits from year-to-year on the size of performance-based off-balances.

It is also important to verify, on an annual basis, the performance-based off-balances as part ofthe monitoring process. Finally, it is necessary to ensure that all off-balances are accounted forand funded through each of the separate industry classes to reflect the requirements under theBoard’s new funding policy.

As mentioned earlier in the paper, the CAD-7 program does not directly include any type of(future) cost reserves. A minimum requirement for any successor program is that it mustincorporate some type of reserving model.

5. Non-Compliance

It has been argued in the past that experience rating may induce some employers not to reportcertain claims in an effort to avoid possible premium surcharges. In an evaluation of the NEERprogram conducted several years ago, some evidence to support this argument was found andthere have been further indications since then in the course of the Board’s regular administrationof the system. The Board has generally taken the position that experience rating is an importantelement in pursuit of its prevention mandate. However, this does not preclude the need tocontinue to monitor operation of the program to ensure that it is meeting its objectives in anappropriate fashion and that employers continue to meet their statutory obligations in thereporting of workplace injuries.

While there is no substitute for direct monitoring of compliance, it is probable that attention tothe design of experience rating programs can be of some assistance in helping to ensure that undueincentives for non-compliance are not created.

One of the problems with a frequency based plan, as evidenced by CAD7, is that it may inducesome firms not to report small claims. A similar problem may exist with NEER, since, the Boardhas found that a number of employers have reported some of their small lost time claims as ahealth care claim, so that it would not trigger a NEER reserve. Others have paid workers directlyand attempted to conceal lost time claims in order to avoid all NEER costs. Confusion over whatconstitutes a reportable claim, and where the boundaries lie between first aid, medical aid andlost-time claims may also have played a role in some cases. The Board has worked over the lastyear to clarify these distinctions to avoid any possible doubt.

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There appears to be a perception that excessive cost reserves are applied to small lost timeclaims. The fact is that 80% of all claims registered with the Board are less than $1,000 in costs.Placing reserves on such a significant number of very low cost claims may be inducing somenegative behaviour. A possible solution for addressing this problem would be to remove futurecost reserves on all claims with total costs of less than $1,000. It is interesting to note that theBoard addressed a potentially similar problem arising under MAP. Under MAP, only thoseclaims exceeding $500 in benefit costs are counted against the employer’s experience ratingrecord.

A significant disadvantage of retrospective rating is that refunds and surcharges are issued inarrears. This adds to the difficulty of being able to collect large surcharges. Also, it may inducesome employers to try to shed a bad record or avoid surcharges by corporate reorganization orclosing and opening up as a new legal entity. The introduction of prospective rating will improvethe prospects of collecting surcharges since they are assigned up-front on the premium rates.However, firms could still seek to avoid prospective rate surcharges by closing operations andstarting-up under a new company. Appropriate and effective administrative measures arerequired to minimize this type of outcome – e.g. doing name crosschecks of all individuals whoopen a new account.

One potential loophole under the Board’s experience rating programs, which may be inducingnegative behaviour, is the fact that a firm is not experience rated for a partial year. While mostfirms close for legitimate reasons and may never re-open, on both workplace safety and equitygrounds it can be argued that a firm should be experience rated for a partial year and be issued asurcharge or rebate. Therefore, the Board proposes that experience rating calculations take placefor firms who close part way through the year. Implementation of this measure may be largelydependent on the introduction of prospective rating; where retrospective rating only is applied, asignificant collections problem exists in recouping surcharges.

Other measures that the Board is proposing which are felt to be appropriate include:

• New firms which open during the first half of the year should be experience rated under aretrospective plan for the remainder of the year.

• Any new firm which has been in operation less than a full year but has paid at least $25,000in premiums and whose record produces a surcharge should be experience rated under aprospective plan. While a longer period may be required in order to establish that a firm hastruly earned a rebate for good performance, the same is not necessarily true in surchargesituations. This is consistent with the approach taken under MAP.

It is important to point out that in order to minimize non-compliance and potentially eliminate it,it is crucial that there be an effective administrative operation, which provides for an appropriate

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mix of monitoring, enforcement, and education measures. This can be achieved through theBoard’s Employer Audit and Special Investigation Branches, combined with the new servicedelivery model which has put in place the account managers and customer servicerepresentatives.

6. Fatalities

The number of allowed occupational fatalities has been on average about 165 annually over thelast five years, which includes fatalities arising from traumatic injuries and those due tooccupational diseases. This figure represents, on average, about three fatalities per working week.The "traumatic" fatalities are the only types included in the experience rating calculations. Theyrepresent almost half of the allowed fatalities (i.e. about 80 per year).

The Board has found that, for a significant number of cases, the seriousness of a traumaticfatality is not always reflected in the actual costs. For example, in 1998 one-third of all traumaticrelated fatalities generated total costs of less than $100K, while the average cost of a fatality wassignificantly higher at $270K. The effects of these costs on the experience rating calculations areinsignificant when compared to the loss of human life, especially for the loss of young workers.

The Board feels that it is important to reflect the seriousness of fatalities in the experience ratingcalculations. It is proposed that an appropriate minimum cost feature should be factored into theexperience rating calculations, irrespective of the actual costs generated by a fatal claim. TheBoard proposes that the minimum cost requirement be set at $200K, representing an appropriateblend of the significance of these types of claims and actual costs generated. It is also proposedthat the claims cost limit under NEER be suspended for fatal claims. These proposed designchanges are consistent with the Board’s approach taken under MAP where an additional 25%surcharge is applied for a fatal claim.

7. Other Design Issues

Simplicity

The issue of “simplicity” has been largely addressed by the placement of all small firms into theMAP plan. Further simplification of the existing programs for medium-size and large employersis technically achievable, but likely only at the expense of equity and with less effectiveincentives. This exchange would probably be unacceptable to larger employers since most havethe necessary resources at their disposal or are willing to invest the time to understand morecomplex programs, provided that the programs are equitable and provide a satisfactory level offinancial incentives. The observations made and feedback received so far suggest that programsimplicity is not a key issue amongst large employers.

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At the same time, the Board recognizes that the issue of further simplicity and programunderstandability is likely more important to medium-sized firms. Placing these firms into asimpler prospective plan may help in this regard. However, a more effective means of achievingprogram understandability is to have a proactive communication and education program, whichspecifically tailors the information to different client groups and takes into account differentneeds.

In order to influence health and safety behaviour in an effective way, experience rating programsmust be understandable, at least to the extent that those covered by them are aware of the causeand effect linkages contained within the plan. On the other hand, achievement of this objectivedoes not necessarily require an intimate knowledge of all of the detailed technical workings of theplan. While the Board has endeavoured to simplify where possible, the issues of equity, ensuringthe adequacy of financial incentives and financial soundness have remained the paramountconsiderations guiding the main design proposals.

Choices

There are a number of possible design choices and variations which could be explored that havethe effect of tailoring, to a certain extent, the more traditional experience rating approach to thespecific needs of the larger employers. For example, through the use of a “claims cost deductible”employers could be permitted to select a level of self-insurance by directly assuming the initialcosts of a claim up to an agreed limit (e.g. for the first $10,000 in claims costs), in return for adiscount on their premium rate. This choice feature does not remove an employer’s legalresponsibility to report all related injuries to the Board. Other possible choices and variationscould include:

• Providing choices on the types of costs to be excluded (or included) in the calculations inexchange for lower (or higher) premium rates and/or financial incentives.

• Having different cost limits available which vary the degree of self-insurance.

• Variations on overall size of rebates/surcharges available.

Incorporating any type of choice features will add a significant amount of complexity to both thecontent and the administration of the program. As a result, the Board feels that choice featuresshould be explored only after successful implementation of all other more fundamental designfeatures discussed above.

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Second Injury and Enhancement Fund (SIEF)

The SIEF program provides employers with the opportunity to avoid having the full cost ofinjuries relating to pre-existing medical conditions reflected in their accident record, and thereforeexcluded from the experience rating calculations. There are two main arguments that support theneed for such a program. First, the existence of relief is seen as an equity issue betweenemployers in that an employer should not have to face the arbitrary cost consequences when apre-existing condition is a significant cause of an injury or prolongs the recovery period. Second,the existence of the relief is seen as possibly removing a potential barrier to the re-employment ofpartially disabled workers.

However, the Board is experiencing a number of problems with the current SIEF program. First,the significant overall costs transferred to SIEF have eroded the financial impact of experiencerating – SIEF currently represents about 25%. What this means is that the SIEF costs arecollectively insured costs and are therefore not subject to experience rating. Second, the rates ofutilization of SIEF vary greatly between different sized employers. All firms are required tofinance the SIEF program, but larger employers, who can afford consultants, have benefittedsignificantly more from the cost relief provided than have smaller firms. Larger firms and theirrepresentatives are not only more successful in obtaining SIEF relief, but are also more successfulin influencing the level of SIEF granted in any particular claim.

The Board also has administrative concerns with the growth and size of the fund. The SIEFpolicy requires a substantial dedication of administrative resources due to the need to makedecisions on entitlement, handle related enquiries, deal with appeals, provide claims access, reviseaccident cost and NEER statements, and so on. The Board has experienced a growth in activity inall these areas, with a consequent increase in the administrative resources that must be devoted tothese tasks.

Past attempts at modifying and limiting the scope of the Board’s existing SIEF policy have metwith significant resistance. Employers who are aware of the policy and utilize it have an interestin keeping it the way it is. Many employer consultants also have a financial interest in thecontinuation of the existing policy. Labour groups, while generally distrustful of all experiencerating programs, have in the past opposed the adoption of any changes out of concerns that theymay serve to limit employment opportunities for individuals with pre-existing conditions, ormay result in some employers engaging in more aggressive cost-saving measures, includingincreased resort to the appeals process to challenge claims.

The Board believes that an effective review of SIEF requires an exhaustive single-issue focus.Therefore, this issue will not be addressed as part of the present experience rating review. While

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the current SIEF policy will continue to remain in effect, the Board plans to undertake anextensive review of this issue immediately after the implementation of the experience ratingdesign changes proposed in this report.

A POSSIBLE ER MODEL FOR THE FUTURE

As mentioned earlier, a holistic approach must be taken in order to effectively address all of thedesign issues discussed above. The effect of making the necessary design changes will be tosubstantially modify NEER to the point that it would essentially become a new program.

A PROSPECTIVE MODEL

Based on the guiding principles for this review and proposed features for the key design issues, itis proposed that the following be considered as a new prospective experience rating model for thefuture.

A. General Features

• Only two components of the rate are to be experience rated: new claims cost (less SIEF andoccupational disease costs) and overhead.

• The New Claims Cost (NCC) rate component for the rate group rate will be divided in twoparts, against which a firm will be experience rated: NCC rate component for all claimscosting up to $50,000; and NCC rate component for all claims costs of more than $50,000.

• The most recent five-year past experience will be used as the basis for establishing eachfirm’s NCC rate to make it consistent with the period used under the current rate settingmodel. For example, if prospective rating was in effect in year 2000, a firm’s 1994-1998experience would have been used for setting a firm’s NCC rate. If a firm has been active forless than 5 years (say only three years), then this lesser period is used provided each yeargenerates at least $25,000 in premiums.

• The maximum achievable premium rate reduction by large firms is 50% of the total rate grouprate. The maximum adjusted premium rate will be limited to two times the total rate grouprate.

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B. Cost Features

• A firm’s past 5-year accident claims costs will also be divided into two tiers for purposes ofcalculating an NCC rate under each: Tier 1 – all claims costs up to a maximum of $50,000 perclaim; and Tier 2 – costs in excess of $50,000 for any claim.

• Tier 1 costs will be “weighted”, with the most recent past year having a relatively highersignificance in the calculations. The oldest (past) year will be the least significant. The sameweights will be applied to a firm’s past payroll for purposes of calculating the NCC rate forTier 1 Costs. The proposed weighting reflects the fact that the more recent the year inquestion the better the indicator it provides of the firm’s likely experience in the followingyear.

• For the firm’s Tier 2 costs, it is less sensitive to a firm’s own past experience since thesmaller firms in particular require a higher level of insurance and stability for the more costlyclaims.

• The cost value of each past claim is based on the amount of benefits paid to the date of theevaluation plus a future reserve.

• Cost reserve model to include the following features:• A reserve is placed on a claim if it exceeds $1000 in benefit costs and is considered

“active”.• A claim is considered active for an LOE reserve if LOE benefits were paid any time

during the six months prior to the evaluation date.• LOE reserves will be sensitive to the age of the claimant and the most recent benefit

rate paid.• A claim is considered active for a health care or rehabilitation reserve if related benefits

were paid any time during the twelve months prior to the valuation date.• Separate reserve tables to be established for each industry sector.

C. Risk/Insurance Features

• The “participation factor” (currently referred to as the rating factor under NEER/CAD-7)represents the degree of risk that can be taken by the firm for each tier of costs.

• The maximum participation factor achievable is one. The larger the firm the higher theparticipation factor and, therefore, the closer the NCC rate will reflect a firm’s ownexperience.

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• A participation factor is calculated for each tier, which is based on the (payroll/premium) sizeof the firm. Most firms will have the maximum participation factor under Tier 1. The formulafor calculating Tier 2’s participation factor makes it less aggressive for smaller firms’ thanTier 1, since they are less able to take on the risk for more costly claims and therefore requiregreater insurance protection.

• The calculations for the new experience rating models (reflecting the design changes proposedin this paper) would be applied to the overall performance of an organization, (i.e. coveringthe entire operations of each particular legal entity). For example, what this means for amulti-rated firm in the prospective plan is that the “participation factor” calculated for eachtier will be based on the total premium and payroll for the organization, derived bycumulating these figures across all rate groups in which the organization is registered. Oncethe participation factor is calculated for each tier, the same set of factors are applied to theorganization’s separate premium rates.

The details of this proposed model, with relevant examples, are outlined in Appendix B.

A RETROSPECTIVE MODEL

The retrospective model would incorporate the proposed changes discussed earlier and alsomirror and be consistent with most of the prospective design features outlined above. It wouldcontinue to evaluate each accident year independently, as is the case today, by comparing anemployer’s actual costs to their expected costs, which are derived from their rate group rate. Themajor difference is that it would take into account the refund or surcharge produced by theprospective rate. This last step simply corrects the employer’s projected prospective rate basedon what actually took place.

The new retrospective features are expected to enhance and improve upon the current NEERformula. The Board also feels that some fundamental changes are needed for CAD-7 (such as areserving model) in order to address the related problems discussed earlier in the paper. However,it would be difficult to make appropriate changes to the program while, at the same time, tryingto retain its current basic features. Therefore, the Board believes that a better alternative would beto replace CAD-7 with the new enhanced retrospective model. The details of the retrospectivemodel are provided in Appendix C.

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IMPLEMENTATION/TRANSITION ISSUES

Development of detailed implementation plans would be premature in advance of the publicconsultation process yet to be undergone. The outcome of this process, in terms of the proposedcontent of the new experience rating programs, will significantly affect the implementationtimetable. The remaining sections of this paper are intended to provide some general informationon what appears to be feasible at present, along with some potential implications.

1. Possible Implementation Timeframes

One of the key transition issues relates to the implementation of an extended evaluation timewindow for the retrospective model. One possible approach is to apply an extended reviewwindow on prior accident years, which have been evaluated at least once under the existingNEER formula. For example, instead of ending the review on 1998 accidents after threereviews are completed in year 2001, the window for 1998 accidents could be extended for afurther two years, up to the 2003 issue year. However, this approach would require advancenotification in early 2001 (or probably earlier) and the implementation of any newcalculation formula being applied not just to the 2001 accidents being evaluated for the firsttime in 2002, but also to 1998, 1999 and 2000 accidents which had been previouslyevaluated under the old NEER formula.

The Board believes that a fairer and more effective approach would be to begin implementingthe extended review window, and all the other new design changes, to an accident year notpreviously evaluated under NEER. Under this implementation approach, there would be atransition period where the old NEER model would continue for prior accident years untileach year has completed the three-year evaluation window. However, since this approachlikely requires complex systems support to run (simultaneously) two significantly differentretrospective models, it will be necessary to fully assess whether it is feasible.With respect to the question of which future accident year will be the first to receive anextended window and a newly designed retrospective experience rating formula, the timing isdependent on a number of factors, including the outcome of the consultation process and thesystems implications. Tentatively, the Board is targeting 2001 accidents being evaluated forthe first time in 2002. It is simply not possible to implement any of the design changesearlier since it would require commencing the system design work in the early part of year2000. It should also be noted that if it turns out to be difficult or too complex to implementall of the design changes at one time, an alternative could be to phase-in the changes – say,implement the extended window and new reserve model for 2001 accidents evaluated in2002, and all other design changes the following year.

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The timing of the introduction of prospective experience rating is dependent on many of thesame factors. Presently, the Board is proposing to implement prospective experience ratingbeginning with 2002 premium rates, provided there are no systems impediments orconstraints. If it turns out not to be feasible to implement a new prospective model at thesame time the design changes are being implemented for the retrospective plan, then analternative could be to implement the prospective model beginning with the 2003 premiumrates. The details of the proposed implementation and transition approach are outlined inAppendix D.

A key issue to be considered by stakeholders is whether it is appropriate for all medium andlarge employers to be under both a prospective and a retrospective program. The Boardbelieves that it may turn out to be difficult for smaller employers to manage both in the longterm, and that a more effective longer-term approach may be to have only a prospective planfor employers up to a certain size. In the shorter-term, during a transition phase, it ispossible that both types of plan could cover such employers, allowing for an opportunity toevaluate the desirability or necessity for both plans to continue.

2. Systems Impacts

Regardless of the specific details, a fundamental overhaul of WSIB’s current experiencerating plans will obviously have major systems impacts. The main direct impacts relate tothe significant systems work required to build the new prospective model and to make theproposed design changes to the retrospective plans. The system resources required fordeveloping and making the necessary system changes is estimated to cost approximately $5million. This figure could change significantly as the proposals evolve over time. While thiscost is expected to be covered within the Board’s long-term IT strategy, the impacts of thisproject on the IT strategy’s existing scheduled plans will need to be assessed.

Other direct impacts expected relate to the additional administrative workload added to theBoard’s prevention area, at least in the short term. They will be administering at least two(mostly new) experience rating programs for all medium and large employers. This may haveresource implications on the area. Finally, the Board’s staff will need to be educated/trainedon the new program changes.

3. Integration with Other Programs

With the implementation of the new design features, both the Safe Communities IncentivePlan (SCIP) and the Safety Group models will eventually need to be adapted to the newexperience rating formulas. The timing of making the changes to these models will directly

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depend on the transition approach adopted for implementing the design changes to theretrospective plans and the new prospective model. Specific transition measures may berequired for the changeover which are tailored to these programs.

It will also be necessary to develop specific rules and criteria for moving firms between thevarious experience rating programs.

4. Communications Impacts

Making extensive changes to the current retrospective plans and adopting a new prospectivemodel will eventually require extensive education and communication initiatives. This isexpected to be in the form of newsletters/bulletins, information sessions, workshops, anddeveloping various guides/brochures, which are tailored to different client needs. While themain clients will be the individual employers directly impacted by the changes, the initiativeswill also need to target employer and labour groups, the safe workplace associations and theconsulting community. It is also important to point out that new simplified employer coststatements will need to be designed.

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SUMMARY OF KEY PROPOSALS

1. That the cost review window be extended to five years for all employers.

2. That the size of the maximum financial incentive be increased to 10% of the totalpremium for the smallest firms, and increased to 50% for the largest firms (i.e.those above $500K in annual premiums). The amount of the maximum rebate is torise at a faster pace for medium sized-firms (i.e. those with annual premiumsfalling between $50K and $250K).

3. That, for each employer, the maximum surcharge continue to be limited to twotimes the maximum refund.

4. That a two-tier cost-based plan be used which places more direct responsibility onemployers for the first $50,000 in costs for any claim.

5. That a prospective plan be introduced and applied to all employers, and thatconsideration be given to eventual withdrawal of the retrospective plan for mediumsized employers.

6. That the current reserving model be replaced with a new model which takes intoaccount the age of the claimant, is sensitive to the most recent compensation rates,and balances against WSIB's financial requirements.

7. That a process be put in place to monitor the performance of the plans and anypotential future off-balances.

8. That the following compliance related measures be put in place:

• remove reserves on claims with costs of less than $1000• experience rate all firms which close part way through the year• experience rate new firms under the retrospective plan, if the firm opened

during the first half of the year• experience rate new firms under a prospective plan, once they’ve paid at least

$25,000 in annual premium, where their record generates a surcharge toensure that a clear message is sent to all new firms regarding the importancethe Board places on prevention.

9. That a minimum cost requirement be set at $200K on all fatalities, and that theper-claim cost limit be suspended for these claims.