WCIRB Class Talks Proposed Changes Breweries, Wineries and Distilleries Classifications Salvage Material Dealers Classifications July 19, 2018

WCIRB Class Talks Proposed Changes Breweries, Wineries and Distilleries Classifications Salvage Material Dealers Classifications July 19, 2018 Dave Bellusci EVP & Chief Actuary Brian Gray Director, Classification Administration and Education Carrie Kosnik Associate Quality Assurance Director The Webinar Will Begin Shortly

Presenters + Dave Bellusci EVP & Chief Actuary Brian Gray Director, Classification Administration & Education Carrie Kosnik Associate Quality Assurance Director dbellusci@wcirb.com bgray@wcirb.com ckosnik@wcirb.com

ANTITRUST NOTICE As members of the Workers Compensation Insurance Rating Bureau of California (WCIRB) and their agents, you are bound, when involved in presentations, meetings or other activities of the WCIRB, to limit your actions (and discussions other than social ones) to matters relating to the business of the WCIRB. Matters that do not relate directly to WCIRB business should be avoided. Members and their agents should particularly avoid discussions or conduct that could be construed as intended to affect competition (or access to markets). Thus, as members and their agents, you should not discuss or pursue the business interests of individual insurers or others, including, in particular, the plans of individual members involving, or the possibility or desirability of (a) raising, lowering, or stabilizing prices (premiums or commissions); (b) doing business or refusing to do business with particular, or classes of, insurers, reinsurers, agents, brokers, or insureds, or in particular locales; or (c) potential actions that would affect the availability of products or service either generally or in specific markets or locales. Table of Contents 1. Standard Classification System 2. Proposed Changes to Breweries, Wineries and Distilleries Classifications 3. Proposed Changes to Salvage Material Dealers Classifications NOTICE & COPYRIGHT This presentation was developed by the Workers' Compensation Insurance Rating Bureau of California (WCIRB) for informational purposes only. The WCIRB shall not be liable for any damages of any kind, whether direct, indirect, incidental, punitive or consequential, arising from the use, inability to use, or reliance upon information provided in this presentation. 2018 Workers Compensation Insurance Rating Bureau of California. All rights reserved. Questions and Answers No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including, without limitation, photocopying and recording, or by any information storage or retrieval system without the prior written permission of the Workers Compensation Insurance Rating Bureau of California (WCIRB), unless such copying is expressly permitted by federal copyright law. No copyright is claimed in the test of statutes and regulations quoted within this work. Each WCIRB member company (Company) is authorized to reproduce any part of this work solely for the purpose of transacting workers compensation insurance. This reproduction right does not include the right to make any part of this work available on any website or on any form of social media. Workers Compensation Insurance Rating Bureau of California, WCIRB, WCIRB California, WCIRB Connect, WCIRB CompEssentials, X-Mod Direct, escad and the WCIRB California logo (WCIRB Marks) are registered trademarks or service marks of the WCIRB. WCIRB Marks may not be displayed or used in any manner without the WCIRB s prior written permission. Any permitted copying of this work must maintain any and all trademarks and/or service marks on all copies. To seek permission to use any of the WCIRB Marks or any copyrighted material, please contact the Workers Compensation Insurance Rating Bureau of California at customerservice@wcirb.com.

01Standard Classification System

01. Standard Classification System Standard Classification System Summary Approximately 500 Industry Classifications Changes Subject to Insurance Commissioner Approval Mandatory for Insurer Reporting of Data to WCIRB Advisory for Insurer Pricing & Underwriting Objectives - Group businesses with similar operations and exposure to workers compensation losses - Groups are large enough to develop credible advisory pure premium rates Why Clearly Defined Classification System is Important - Many classifications with few large employers - Non-concentrated insurance market - Wide variation in workers compensation costs by industry 5

01. Standard Classification System Sample Average Loss Costs for an Employee Earning $75,000 Annually in Select Classifications $15,000 12,929 $12,000 $9,000 $6,000 5,188 $3,000 $0 2,043 912 34 325 Software Developers Banks Hospitals Restaurants Trucking Logging Source: July 1, 2018 Advisory Pure Premium Rates (approximate loss component). 6

01. Standard Classification System Standard Classification System Role of the WCIRB Ensure Integrity of Classification Data - Physical inspections of employers operations - Review classifications reported on policy and unit statistical report submissions - Physical test audits of employer records - Review of reported payroll and loss data Propose Classification Advisory Pure Premium Rates Propose Revisions to Standard Classification System 7

01. Standard Classification System Standard Classification System Advisory Pure Premium Rates Subject to Insurance Commissioner Approval Expressed per $100 of Payroll Reflect Anticipated Loss and Loss Adjustment Expense Advisory Only Insurers May or May Not Use in Their Own Rate Filings to CDI Classification s Advisory Pure Premium Rate Based on Approved Change in Average Benchmark and Classification s Relativity to Statewide Average Loss to Payroll Ratio WCIRB Classification Relativity Computation - Based on payroll and losses of businesses assigned to classification - Losses limited to avoid distortion due to large claims - Classification relativity changes limited to be no more than 25% annually 8

01. Standard Classification System Standard Classification System Classification Changes Subject to Insurance Commissioner Approval Changes to Standard Classification System Address - New and evolving industries in California - Lack of homogeneity of businesses within a classification - Declining industries - Ambiguity in classification definitions 9

02Proposed Changes to Breweries, Wineries and Distilleries Classifications

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Proposed Changes to Brewery, Winery and Distillery Classifications Basis of Study Concerns Lack of consistent classification direction for the following: - Facility tours and product tastings - Product sales to retail customers - Preparing and serving alcoholic beverages or hot food Multiple Enterprises rule does not ensure consistent classification determinations for these ancillary operations - Retail stores, tasting rooms and restaurant or tavern operations are often not physically separated from the manufacturing operations - If these operations are not physically separated from the governing manufacturing operations, then the operations may be assignable to the highest rated classification - The classification assignment may change when the rate relativities between potentially applicable classifications fluctuate from year-to-year 11

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Brewery, Winery and Distillery Classifications Findings Facility Tours Tours of the manufacturing facilities normally prevail at these locations and do not constitute multiple enterprises Product Tastings Tasting rooms at wineries are used to promote the retail sale of wine for off-site consumption - Historically assigned to Classification 8060 Product tastings at distilleries are commonly performed in connection with facility tours - Historically assigned to manufacturing classification Taprooms at breweries are used to sell beer for on-site consumption - Historically assigned to Classification 9079(1) 12

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Brewery, Winery and Distillery Classifications Findings Product Sales Some retail stores operating under an off-sale license issued by the California ABC provide product tastings that promote the retail sale of alcoholic beverages for off-site consumption - Historically assigned to Classification 8060 Food and Beverage Preparation and Service On-site restaurants, taverns or food preparation departments are operated for the preparation and serving of hot food or the preparation, pouring and serving of alcoholic beverages - Historically assigned to Classification 9079(1) 13

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Brewery, Winery and Distillery Classifications Recommendations Facility Tours Tours of the manufacturing facilities should be included in the applicable manufacturing classification Including the provision of product tasting samples to customers in connection with facility tours Tasting Rooms Tasting rooms at wineries should be assigned to Classification 8060, Stores wine, beer or spirits Tasting rooms/taverns at distilleries should be assigned to Classification 9079(1), Restaurants or Taverns Tasting rooms/taprooms at breweries should be assigned to Classification 9079(1), Restaurants or Taverns Product Sales The operation of retail stores should be separately classified to the appropriate Stores classification - Includes product tastings in connection with retail store sales Food and Beverage Preparation and Service The operation of restaurants or taverns and the preparation and serving of hot food should be separately classified as 9079(1), Restaurants or Taverns 14

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Brewpub Restaurants Findings & Recommendations Findings Brewpubs are restaurants with on-site beer brewing operations On-site beer brewing operations are secondary to integral restaurant operations Beer brewing operations often not physically separated from the restaurant operations The majority of payroll consistently developed in the more labor-intensive restaurant operations Application of Multiple Enterprises rule has resulted in inconsistent classification assignments for employers performing the same combination of operations NCCI specifically excludes brewery operations performed at brewpubs from assignment to Classification 2121 and assigns these operations to a restaurant classification Recommendation Amend Classification 9079(1), Restaurants or Taverns, to clarify that it also applies to on-site beer making operations performed by restaurants where the beer brewed is primarily sold to the general public for consumption on the premises 15

02. Proposed Changes to Breweries, Wineries and Distilleries Classifications Brewery, Winery and Distillery Classifications Impact of Proposed Changes Changes primarily clarify current classification procedures and provide for consistency Will not result in complete reclassification of employers operations In limited instances, a component of an employers operation will be reclassified Should avoid year-to-year reclassifications based on changes in classifications relative advisory pure premium rates 16

03Proposed Changes to Salvage Material Dealers Classifications

03. Proposed Changes to Salvage Material Dealers Classifications Proposed Changes to Salvage Material Dealers Classifications Basis of Study Concerns: Currently, eight phraseologies for four classification codes - Defining characteristics overlap - Applicable classifications can easily change based on changes in rate relativities and scrap material market values, with no significant change in operations Objective: Perform a comprehensive review of the Salvage Material Dealers Industry Group - Simplify administration - Consolidate classifications - Update descriptions 18

03. Proposed Changes to Salvage Material Dealers Classifications Proposed Changes to Salvage Material Dealers Classifications Salvage Material Dealers Industry Group 8847, Beverage Container Collection or Redemption 8264(2), Bottle Dealers secondhand 8265(1), Iron or Steel Scrap Dealers 8265(2), Junk Dealers N.O.C. 8500, Metal Scrap Dealers nonferrous 8264(1), Paper Stock Dealers secondhand 8264(3), Rubber Stock Dealers secondhand 8264(4), Wiping Cloth or Rag Dealers including all laundry operations 19

03. Proposed Changes to Salvage Material Dealers Classifications Salvage Material Dealers Classifications Basis of Study Recycling Industry and Refuse Management Industry are converging - Zero Waste philosophy at transfer stations and landfills to recover recyclable materials Expanded scope of study to include classifications: - 9403(1),Garbage or Refuse Collecting - 9424, Garbage or Refuse Landfill, Transfer Station and Material Recovery Facility Operations all employees 20

03. Proposed Changes to Salvage Material Dealers Classifications Metal Scrap Dealers 8500 & 8265(1) Findings - Significant overlap in the operations of employers that recycle ferrous and nonferrous scrap metal - Operationally similar and have similar loss to payroll ratios Recommendations - Eliminate Classification 8265(1) and assign its constituents to Classification 8500, Metal Scrap Dealers ferrous or nonferrous - Amend Classification 8500 to apply to the purchase, sorting, consolidation and sale of both ferrous and nonferrous scrap metals, provided metal sales equal or exceed 25% of gross receipts 21

03. Proposed Changes to Salvage Material Dealers Classifications Impact of Proposed Changes Advisory Pure Premium Rates per $100 of Payroll $15 $12 $9 $6 13.15 12.85 $3 7.70 8.43 8.09 $0 8500 - Jan 2015 8265 - Jan 2015 8500 - Jul 2018 8265 - Jul 2018 8500 Jan 2019* (8500 & 8265(1) Combined) Source: Approved advisory pure premium rates and 2019 Classification Relativity worksheets. Note: * Imputed based on 2019 Classification Relativity and assuming an 0% overall average pure premium rate change for January 1, 2019. 22

03. Proposed Changes to Salvage Material Dealers Classifications Mobile Shredding and Document Destruction Operations 8264(1) Findings - These operations are distinct and significant subset of operations within Classification 8264(1) and are dissimilar from the rest of 8264 - The loss to payroll for this subset of 8264(1) is significantly lower than the rest of 8264 - These operations are comparable to the curbside collection of refuse and recyclables assigned to Classification 9403(1), Garbage or Refuse Collecting, and they have similar loss to payroll ratios Recommendation - Establish Classification 9403(3), Document Destruction including mobile paper shredding 23

03. Proposed Changes to Salvage Material Dealers Classifications Impact of Proposed Changes Advisory Pure Premium Rates per $100 of Payroll $15 $12 $9 $6 $3 11.30 12.46 6.88 9.70 7.85 $0 9403 - Jan 2015 8264 - Jan 2015 9403 - Jul 2018 8264 - Jul 2018 9403 Jan 2019* (8264(1) & 9403 Combined) Source: Approved advisory pure premium rates and 2019 Classification Relativity worksheets. Note: * Imputed based on 2019 Classification Relativity and assuming an 0% overall average pure premium rate change for January 1, 2019. 24

03. Proposed Changes to Salvage Material Dealers Classifications Wiping Cloth or Rag Dealers 8264(4) Findings - Very few employers are assigned to Classification 8264(4) and their experience has low statistical credibility - Are comparable to the operations assignable to Classification 8032, Stores clothing, shoes, linens or fabric products wholesale Recommendations - Eliminate Classification 8264(4) and assign its constituents to Classification 8032 - Amend Classification 8032 to include the purchase, sorting, cutting, laundering, bundling and resale of wiping cloth or rag material 25

03. Proposed Changes to Salvage Material Dealers Classifications Impact of Proposed Changes Advisory Pure Premium Rates per $100 of Payroll $15 $12 $9 $6 10.36 12.46 9.70 6.28 $3 6.36 $0 8032 - Jan 2015 8264 - Jan 2015 8032 - Jul 2018 8264 - Jul 2018 8032 Jan 2019* (8264(4) & 8032 Combined) Source: Approved advisory pure premium rates and 2019 Classification Relativity worksheets. Note: * Imputed based on 2019 Classification Relativity and assuming an 0% overall average pure premium rate change for January 1, 2019. 26

03. Proposed Changes to Salvage Material Dealers Classifications Recycled Material Dealers and Resource Recovery Findings - The loss to payroll ratio for Classification 8265(2) Junk Dealers, is significantly lower than that of Classifications 8265(1) and 8500. Employers assigned to 8265(2) primarily handle a variety of miscellaneous materials. - There are very few employers assigned to Classification 8264(2) Bottle Dealers secondhand, and 8264(3), Rubber Stock Dealers secondhand, and their experience has low statistical credibility. - Salvaged and recycled material dealers that handle a variety of materials operate similarly to transfer stations and material recovery facilities assigned to Classification 9424, Garbage or Refuse Landfill, Transfer Station and Material Recovery Facility Operations all employees. - The operations of recycling and waste disposal industries are converging. - The procedure for classifying the collection or redemption of CRV beverage containers at Processing Facilities is unclear. 27

03. Proposed Changes to Salvage Material Dealers Classifications Recycled Material Dealers and Resource Recovery ( continued) Recommendations - The Salvage Material Dealers Industry Group should be renamed to the Recycling and Refuse Management Industry Group - Eliminate Classification 8265(2) and assign its constituents to the newly established 9424(2), Recycled Material Dealers N.O.C. - Eliminate Classifications 8264(1), 8264(2) and 8264(3) and assign their constituents, other than mobile paper shredding, to the newly established Classification 9424(2) 28

03. Proposed Changes to Salvage Material Dealers Classifications Impact of Proposed Changes Advisory Pure Premium Rates per $100 of Payroll $15 $12 $9 12.46 12.85 $6 10.51 $3 9.70 8.43 7.28 7.09 $0 8264 - Jan 2015 8265 - Jan 2015 9424 - Jan 2015 8264 - Jul 2018 8265 - Jul 2018 9424 - Jul 2018 9424 Jan 2019* (8264(1-3), 8265(2) & 9424 Combined) Source: Approved advisory pure premium rates and 2019 Classification Relativity worksheets. * Imputed based on 2019 Classification Relativity and assuming an 0% overall average pure premium rate change for January 1, 2019. 29

03. Proposed Changes to Salvage Material Dealers Classifications Recycled Material Dealers and Resource Recovery Clarifying Changes - Amend Classification 8847 to define Processing Facilities and direct that the collection or redemption of CRV beverage containers at certified Processing Facilities is assignable to Classification 8500 - Amend Classification 9424(1) to apply to the disposal of medical waste, as well as green waste recycling when conducted at a garbage or refuse landfill, transfer station or material recovery facility location - Amend 9424(1) to direct that California Certified Recycling Centers at a garbage or refuse landfill, transfer station or material recovery facility location that are operated by the same employer be separately classified 30

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