FUNDING FAIRNESS: A REPORT ON ONTARIO S WORKPLACE SAFETY AND INSURANCE SYSTEM

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1 FUNDING FAIRNESS: A REPORT ON ONTARIO S WORKPLACE SAFETY AND INSURANCE SYSTEM SUMMARY AND HIGHLIGHTS The Funding Review The Funding Review, chaired by Professor Harry Arthurs, was established in September 2010 to investigate a number of issues related to the financial situation of Ontario s Workplace Safety and Insurance Board (WSIB). These issues were: the WSIB s unfunded liability; premium rate setting; rate groups; employer incentive programs; funding occupational disease claims; and indexation of benefits for partially disabled workers. Professor Arthurs was assisted by four distinguished advisors from various backgrounds Maureen Farrow, Buzz Hargrove, John O Grady and John Tory and by a small staff seconded from the WSIB. In addition, research support for the Review was provided by the Conference Board of Canada and by Morneau Shepell, a firm of consulting actuaries. In late 2010, Professor Arthurs met informally with 39 umbrella organizations representing employer groups, injured workers advocates and unions. In January 2011, he convened a technical consultation at which the WSIB provided extensive financial information to experts nominated by those organizations, as well as a number of nonaligned actuaries. In April and May 2011, the Review held 12 days of public hearings in six Ontario cities. Some 145 representative organizations, individuals and businesses made submissions either at the hearings, by letter, online or in informal interviews with staff members of the Review. A further 23 briefs were received following the hearings. SUMMARY Page 1

2 Finally, in June and November 2011, Professor Arthurs again consulted with the major stakeholder organizations. In March 2012, his final report entitled Funding Fairness was formally presented to the WSIB Board of Directors and to the Ministry of Labour. This summary provides an overview of the report and its main recommendations. However, readers who would like to examine all of the recommendations, and explore the reasoning underlying them, are invited to consult the full text. In addition, they may wish to refer to the Technical Annex, which contains a glossary that explains many terms used in the report, identifies the documentary sources on which it relies and makes available the research studies commissioned by the Review. The report and Technical Annex are available online at A CD Rom containing all the same material is available free of charge from info@wsib.on.ca. The WSIB s unfunded liability The major issue confronting the Funding Review was the WSIB s unfunded liability (UFL). In its 2009 Annual Report, the WSIB noted that its assets amounted to only about 54% of its liabilities, a shortfall of some $11.7 billion. While full funding was not and is not required under its governing statute, and while the WSIB has almost never been fully funded since its inception in 1915, the Auditor General in his 2009 Annual Report expressed concern about its situation and suggested that the WSIB may need to find a new approach to deal with [its unfunded liability]. The Funding Review analyzes the history of the UFL and assigns primary responsibility for the WSIB s funding shortfall to actions by successive governments (often under pressure from stakeholder groups), which forced down premium rates, imposed new obligations on the WSIB without identifying the resources needed to pay for them and failed to use the powers available to them to ensure that appropriate funding levels were maintained. The funding problem was exacerbated by various shortcomings in the WSIB s policies and administration and by investment losses it experienced during the stock market crash of SUMMARY Page 2

3 The Review found that present funding levels, around 50%, exposed the WSIB to the risk of some day not being able to meet its obligations as they become due. It therefore concluded that the WSIB s first concern should be to eliminate the risk of tipping of not being able within a reasonable time frame and by reasonable measures to generate sufficient funds to pay workers benefits. It should then move in stages towards full funding. To achieve these goals, the Review recommends the WSIB should adopt a new funding strategy that: is based on realistic assumptions, including a discount rate based on the best available data and actuarial advice; is designed to move the WSIB as quickly as feasible beyond the tipping point of 60% funding and to achieve 90% to 110% funding within 20 years; calculates premium rates payable by employers on the basis of (a) a variable basic charge that includes provision for new claims costs that are properly priced and fully funded on an annual basis and (b) a fixed UFL component that will change only in exceptional circumstances defined in the strategy; establishes a corridor system that will signal the need to re-price the UFL component in timely fashion and identifies zones of sufficiency that will enable the WSIB to keep in focus, not only its financial situation, but also its responsibility to achieve its statutory objectives; and includes provision for the funding of full indexation for partially disabled workers. [Recommendation 3-1] The report also proposes that statutory increases in benefits should take effect only in the budget year following their adoption; this will enable the WSIB to adjust premium rates to meet the additional cost of new benefits [Recommendation 3-2]. And it recommends that the government review its current policy of using WSIB revenues to pay for certain medical services provided to injured workers by the Ontario Health Insurance Plan (OHIP), for the enforcement of occupational health and safety legislation, and for the delivery of education and accident prevention programs [Recommendations 3-3 and 3-4]. The latter recommendations are intended to ensure that all employers who benefit from these programs not just those insured under the WSIB scheme should pay their fair share of the cost. SUMMARY Page 3

4 Premium rate setting Noting that the WSIB has in recent years failed to charge premium rates sufficient to meet the estimated cost of new claims a major cause of the growth of the UFL the report recommends a number of measures designed to enhance the professionalism and protect the integrity of the rate setting process: The WSIB s Board of Directors (the Board) should adopt and publish a formal funding policy outlining the key elements of its funding strategy and the principles that are to govern premium rate setting. It should also adopt and publish an annual supplement to its funding policy, with special emphasis on factors affecting rate setting for the coming year. The Board should issue standing instructions to the Chief Actuary to submit an annual recommendation for the average premium rate in accordance with its funding policy and the annual supplement. The Actuary s recommendation should be accompanied by a signed statement that it is in accordance with the funding policy and annual supplement. The Board may (a) accept the recommendation of the Chief Actuary; (b) seek review of the Chief Actuary s opinion by the WSIB s Actuarial Advisory Committee; or (c) reject the rate recommended by the Chief Actuary. If it decides to adopt an average premium rate different from that recommended by the Chief Actuary, the Board must publish a statement setting out the reasons for its action. [Recommendation 4-4] To reinforce this recommendation, the report makes clear that: The average premium rate should be set by the Board in accordance with its funding policy and with the procedure described in the previous recommendation. The Minister of Labour should not interfere in any fashion with rate setting by the Board except in the exceptional circumstances and in accordance with the procedures set out below. The Minister may reject the premium rate set by the Board within a specified period of time if, in his or her opinion, (a) the province is facing a serious economic crisis and (b) the increase in premium rates proposed by the Board would have a significant adverse effect on the province s economy. SUMMARY Page 4

5 If the Minister elects to reject the average premium rate proposed by the Board, he or she must forthwith issue a public statement (a) explaining his or her reasons for doing so, (b) setting an average premium rate, and (c) instructing the Board what steps to take in the event that the rate set by the Minister provides insufficient revenue to enable the WSIB to meet its current and future statutory obligations and to implement its funding policy. The steps to be taken may include increasing the WSIB s unfunded liability, selling its investments or imposing a special premium rate surcharge in future years. [Recommendation 4-5] The report also proposes a series of measures designed to protect the rate-setting process from direct or indirect pressure by stakeholders: The technical capacity, professional status and autonomy of the WSIB s Chief Actuary should be enhanced. [Recommendation 4-1] Each year, stakeholders should be provided with a full and timely briefing on the technical considerations that led the Chief Actuary to recommend the average premium rate. [Recommendation 4-2] The WSIB should set premium rates on the basis of the actual cost of providing insurance coverage to employers, not on the basis of whether its rates are affordable. Present statutory language that allows particular groups of employers to complain that their premium rates are undue or unfair has seldom been referred to or used, is too vague to be workable in any practical sense, and should therefore be repealed. [Recommendation 4-3] The WSIB should make and announce its final decision regarding premium rates as early each year as possible, and in any event no later than July. [Recommendation 4-6] Rate groups The Workplace Insurance and Safety Act (WSIA) assigns all insured employers to one of nine generic industry classes such as construction or manufacturing. However, because employers in different types of business within each class expose their workers to different risks and generate different benefit costs, the nine industry classes are broken down into 154 rate groups. Each rate group is charged a premium rate that is supposed to reflect the cost of the claims it generates for the system, as well as its SUMMARY Page 5

6 share of the WSIB s administrative costs and the cost of financing the UFL and various other items. The Funding Review concluded that the present system of rate groups is not based on sound principles, fails to reinforce government and WSIB initiatives regarding accident prevention and return to work, is too costly to administer, and offers employers opportunities for rate-shopping. The Review therefore recommends that: The existing system of rate groups and industry classes should be replaced by a new system of sectoral groups that would be used both to set premium rates and to organize accident prevention, safety education and return-to-work / labour market re-entry programs. As far as possible, sectoral groups should cluster firms in a given sector that are already committed to working together in their common interest The WSIB should investigate the possibility of creating a separate small business sectoral group, or alternatively of establishing a standard rate for small businesses within each sector. Whichever system the WSIB uses, it should develop a clear set of principles governing the creation of rate groups and the assignment of employers to them. [Recommendations 5-1 and 5-2] These recommendations are bolstered by a series of technical suggestions whose implementation would enable the WSIB to keep overall coverage and rate group or sectoral boundaries up to date in a rapidly changing economy. [Recommendation 5-3] The report also acknowledges that, in implementing the proposed reform of its rate group system, the WSIB must coordinate its efforts with those of the new Chief Prevention Officer who will have primary responsibility for preventing workplace accidents and illnesses under the aegis of the Ministry of Labour. It also acknowledges that reforms will have to be implemented gradually to avoid sudden increases in premium rates resulting from the realignment of employers into the new sectoral groups. [Recommendation 5-4] SUMMARY Page 6

7 Whether or not the WSIB implements the sectoral group proposal, it will still have to decide how the costs of the insurance system are to be distributed among insured employers. The report makes a series of recommendations in this regard: Each sectoral (or rate) group should pay the full current and future cost of the new claims its members generate. [Recommendation 5-5] The annual cost of paying down the UFL should be distributed as follows: 5% should be paid by all insured employers in the form of a fixed collective responsibility charge; 47.5% should be allocated among the nine industry classes on the basis of their responsibility for the growth of the UFL over the past 20 years; and 47.5% should be allocated among industry classes on the basis of their current new claims costs. [Recommendation 5-6] Unless the government decides no longer to require the WSIB to reimburse it for OHIP-insured medical services provided to injured workers, to fund the enforcement of health and safety legislation and related activities, and to meet other legislated obligations, these costs should be distributed among employers on the same basis as at present. The WSIB should also charge employers for their pro rata share of administrative costs, as at present. [Recommendations 5-7 and 5-8] Finally, the WSIB currently imposes surcharges on the premium rates paid by employers with poor claims records and provides rebates to those with good records. The Funding Review notes that this system of surcharges and rebates has produced a considerable net loss of revenue each year another contributing cause of the UFL and strongly recommends that it operate on a revenue-neutral basis in the future. [Recommendation 5-9] Employer incentive programs The experience rating system of surcharges and rebates described above is one of several programs run by the WSIB to encourage employers to reduce workplace risks encountered by workers and to facilitate their return to work. Only modest evidence supports the proposition that these programs are having their intended effect. However, evidence of comparable quality suggests that some employers try to preserve their clean claims records and their favourable premium rate by persuading, paying or coercing injured workers not to seek compensation, while others engage in abusive SUMMARY Page 7

8 practices that discourage workers from returning to work or deprive them of other rights under the WSIA. In general, the Review concludes that experience rating likely produces both negative and positive results. The report presents a series of proposals designed to prevent the former and improve the latter: The WSIB should continue to maintain experience rating programs under section 83 if, and only if, three conditions are met: it declares the purpose of such programs to be solely to encourage employers to reduce injuries and occupational diseases and to encourage workers return to work, and it concludes that the programs are in fact accomplishing their purpose; it adopts a firm policy to protect the integrity of its programs and commits the necessary resources to proactively detect, prevent and, if necessary, punish any abuses committed by employers to gain the benefit of reduced premium rates; and it establishes a credible monitoring process to ensure that the first two conditions are met. [Recommendation 6-1] In support of this approach, the report recommends that: Employers should be required to take positive steps to ensure that workers know of and are able to exercise their rights under the WSIA. The WSIB should take proactive steps to ensure that all participants in its proceedings act fairly and honestly. The WSIB should devote additional resources, and be given additional powers, to detect and punish acts or omissions that interfere with the right of workers to claim compensation or to return to work under the WSIA. The WSIA should be amended to more effectively deter and punish illegal conduct. If the WSIB does not commit to protecting workers against claims suppression and other abuses in the context of experience rating programs within 12 months from the receipt of this report, or if it fails to initiate all necessary changes within its competence within 30 months, it should discontinue those programs. [Recommendation 6-2] SUMMARY Page 8

9 Finally, with a view to ensuring that experience rating programs actually do achieve positive results, the report recommends: The WSIB should initiate a time-limited, carefully monitored experiment in experience rating, involving one industry class, with the aim of reducing accidents, improving the return to work of injured workers and avoiding claims suppression by employers. If, upon conclusion of the experiment and on the basis of empirical evidence and objective analysis, the experience rating system is found not to be effective in achieving its objectives, it should be discontinued. If the experiment succeeds, the approach should be extended to other industry classes following extensive consultation with stakeholders and within a broad framework of principles laid down by the WSIB. [Recommendation 6-3] Funding occupational disease claims Workers who contract certain diseases in the course of their employment are entitled to WSIA benefits. However, the existence of a causal link between working conditions and the disease may be difficult to prove; it often takes many years for the symptoms of certain diseases to become manifest; and because many occupational diseases end in total disability and/or death, claims attributable to diseases tend to be very expensive. For all these reasons, occupational disease claims represent a significant future liability for the WSIB, but the extent of that liability is difficult to estimate. The Funding Review proposes measures to improve the capacity of the WSIB to forecast its potential exposure. The WSIB should re-establish a medical / scientific panel to enable it to identify occupational diseases that should be eligible for compensation under the WSIA, suggest the conditions and/or presumptions that should govern eligibility for compensation, and provide advice that will enable the WSIB to forecast likely future costs attributable to those diseases. The WSIB should closely monitor long-term trends in occupational disease costs and the emergence of new occupational diseases, and make prudent financial provision for future benefit costs. However, it should not establish a special segregated fund to cover the future cost of occupational disease claims. [Recommendation 7-1] SUMMARY Page 9

10 The Review rejects a suggestion that the costs of occupational diseases should be met through the general welfare system or the Ontario Health Insurance Plan [Recommendation 7-2]. Instead, it concludes: The cost of benefits attributable to occupational diseases should normally be charged to the industry class or sectoral group where the claim originated. When a decision is taken to compensate workers who have contracted a new occupational disease a disease not previously recognized or connected with particular workplace conditions the cost of compensation for workers who have already contracted the disease as of that date should be divided between the industry class or sectoral group and all Schedule 1 employers. The cost of benefits for workers who contract the disease after that date should be borne by the industry class or sectoral group alone. The WSIB s present set-aside of $600 million for the future cost of occupational diseases, where exposure has already occurred but claims have not yet been filed, is reasonable. [Recommendation 7-3] Indexation of benefits for partially disabled workers Between 1987 and 1995, the benefits of all injured workers were fully indexed to prevent their value being eroded due to inflation. However, amendments to the WSIA adopted in 1995 and 1998 reduced the extent of indexation available to partially disabled (but not fully disabled) workers. The Review concludes that it is unfair to treat fully and partially disabled workers differently and recommends: The benefits of fully and partially disabled workers should be indexed on the same basis. The WSIA should therefore be amended to restore full indexation of the benefits of partially disabled workers on a going-forward basis. [Recommendation 8-1] The benefit base of workers who received benefits prior to 2006 should be adjusted to partially compensate them for the effects of inflation on their benefits over the years. [Recommendation 8-2] Matters not within the mandate of the Funding Review A number of stakeholder groups took the position that the Funding Review ought to look into important issues that were not within its mandate. While the Review could not consider these issues on the merits or make recommendations relating to them, it did SUMMARY Page 10

11 agree to take note of the views advanced by stakeholders. The report therefore records a range of stakeholder submissions on: the WSIB s reputation and governance, coverage of the insurance scheme, proposed changes in the basic design of the WSIB scheme (including privatization), benefits provided to injured workers, the WSIB s investments, the extent to which different sectors (such as small business) require differential treatment, advocacy in WSIB proceedings and in policy debates, and the impact of the WSIB system on Ontario s social and economic development. Conclusion The report concludes with some brief reflections on the WSIB s need to improve its capacity to collect and analyze important data, conduct systemic research, and engage with stakeholders. SUMMARY Page 11