Royal Commission on Workers' Compensation in BC

Feb18 Full Day

Name: Sid Fattedad

Title: Vice President, Finance & Information System Delivery

Affiliation: WCB

Staff Present: TR, GG, OE, GS, SN,

Notetaker: Steven Noble

Date: Wednesday, February 18, 1998

GENERAL COMMENTS

- Topics include: Funding the system

- Classification

- Experience rating assessment

- Other assessment Issues

PRESENTATION

 I share the responsibility in providing strategic directions to the Board and its employees. In discharging this and other duties and assisted by the many talented individuals who work in the division a few of them will be helping me here today during this hearing.

Over this next hour I will draw for you a picture of the basic tools we use in financing the statutory benefits to the workers' compensation system. This brief presentation will fall short of addressing all your concerns – I hope my staff and I will be able to answer yours and Mr. Steeves’ and Mr. Winter’s and Mr. Sayre’s questions during the day. The purpose of my presentation is to outline specific issues and challenges that bear upon the assessment and funding operations of the Board and where the Board has plans and initiatives on the way to address these issues and challenges. I intend to briefly outline those plans. It is a time of significant change at the Board across all the divisions.

In 1996 the strategic plan laid out priorities for all parts of the organization and I believe the plan for the first time makes it clear that each division shares in the overall goals of the Board. And ultimately the Board and its stakeholders must be committed to reducing the number and severity of injuries, and a swift and durable return to work and to excellence in the client service.

The progress to these fronts will lead to less suffering for the workers and their families, to lower premiums for employers, and to increase confidence in the professionalism of the Workers' Compensation Board.

The Finance Division is rising to the challenge and specifically the assessments department is undergoing a period of significant change and transition.

We are coordinating the department’s efforts with those of front line Prevention and Vocational Rehabilitation operations to assist in and achieving injury prevention, and durable return to work and effective service.

The transition involves many facets of structural, procedural and technological changes – all of which comprises the Employer Services Strategy – otherwise known as E.S.S. – Employer Services Strategy has been underway for two years.

The first phase we developed the conceptual design of how the system should look and operate in the future. In phase two we began developing the conceptual models and the detailed plans and now in phase three which we have just begun we will be refining and implementing new systems and procedures that will improve the way that we fund the Workers' Compensation Board system.

Concurrent with this process the Board is engaged in a series of consultations with stakeholders –both labour and employers.

And before substantive changes can take place we are committing to soliciting input and engaging stakeholders in the design, and policy issues affecting the classifications and assessments of employers.

Today’s presentation covers four broad subjects: how the system is funded; the classification structures; rate making, experience rating.

Before proceeding in discussing these four subjects I first wanted to provide you with a quick overview of the Finance Division. The Finance Division of the Board is comprised of four primary areas: Assessments, Operations, Controllers, Actuarial Statistics and Treasury, which deals with the investment of our portfolio.

There are many outcomes of the division’s work that I could discuss and here are just a few: in any given year we classify over 25,000 new employers; we maintain the accounts of 154,000 employers; we set assessment rates for 71 subclasses; we maintain financial records for each of the subclasses for each employer therein; we collect $1billion annually from BC employers; and we invest $7 billion to generate over $600 million in annual income which offsets the amount of money we require in the form of direct assessments. And we audit over 10,000 employers for compliance and collect overdue accounts from some of them.

In 1997 the pro forma operating budgets and the performance results of the assessments and investment functions of the Board were as follows: Our Divisional expenditures were $16.5 million, Total Income $1.63 billion, Accounts Receivable at year end were just over $49 million and during the year we wrote off $10 million in bad debts; the Finance division has 247 staff members.

I will now turn to the main topics of the presentation. In recent years the conversions of various external and internal factors have combined to pose special challenges as well as opportunities to the Board’s assessment function. These factors include a changing profile and mix of industries in BC that has increasingly challenged an antiquated, manual classification process. Our current classification structure and administrative processes were not designed to keep pace with this changing economy. Two; a rate setting process that suffers from delays and poor quality information. As a result individual subclass costs have a two-year lag before costs are reflected in the rates. This disables the Board from timely understanding the current trends in injury rates and industrial activity. Our inadequacies in rate setting impacts, prevention initiatives, and return to work programs because the tools for good analysis are missing.

Moreover, employer rates do not reflect current injury experience.

A third factor – the one size fits all experience rating assessment system is outdated and has significant design flaws; the program is not well understood by the large majority of employers. And moreover, the experience rating assessment system is often criticized by employers and labour groups for its ineffectiveness.

It was designed and implemented though at a time when rate modification was not seen to be a strategic tools to assist in prevention and return to work – mandates of the Board.

And fourthly, employers generally give the Board in our assessment personnel very high marks for good service attitude but they give us a poor rating for being inwardly focused, rule driven, bureaucratic, unresponsive, and we have not met the legitimate demands of knowledgeable and timely customer service.

Success in addressing these four challenges defines the Finance Division’s mission through to the year 2000.

I want to turn now to the first topic that was posed to us and that is the topic of funding the system.

The workers' compensation system is entirely funded by employers. The primary beneficiaries are workers who are injured in the workplace. The system is quite similar to a non-contributory pension fund – wherein employees receive defined benefits and employers bear the full cost of past, present, and future service as well as the responsibility for funding any deficiency or unfunded liability.

Any surplus that may arise from time to time is returned to employers by way of reduced assessment rates over a reasonable period of time.

Similarly deficits are amortized and collected from employers over a period of years. It is worth reporting here that while an obvious benefit of the workers' compensation system is coverage for the injured worker – there is another important benefit that is far less appreciated and that is the benefit of protection from lawsuit. Workers and employers alike enjoy freedom from the expensive and adversarial court system. And many employers, particularly small business employers – operators are not aware of this aspect of the workers' compensation system coverage.

Now turning to the funding of the workers' compensation system – the funding principle behind the workers' compensation system in BC and in other Canadian jurisdictions calls for the collection of sufficient funds each year to cover the total cost of injuries arising in that year. That means that all the money that is required to pay for this year’s injuries including expenses that will be paid in future years must be collected this year.

This important principle is significant for two reasons –first the Board is placed in a trust capacity for the system vis a vis the funds that it has collected and it has not yet paid out. And second – the board must estimate and collect funds to cover future costs for injuries in order that they may be collected in the current year and particularly from the current group of employers.

Section 39 of the Act establishes the operating parameters for financing the Workers' Compensation Board system. In it it prescribes processes by which the Board may assess, collect, and use the funds collected from employers and it provides for equity and fairness as well as relief in special circumstances.

In recent years several funding issues have emerged to cause concern and uncertainty for employers –the first issue is relief of costs –the incidence and scope of historical cost relief being sought by employers has mushroomed in recent years. This stems from employers who seek to benefit from the reduction in experience rating assessments - section 39.1 (e) of the Act exists for good reason –to encourage employment of persons with a pre-existing injury. But an unintended consequence has arisen.

We’ve combined the operation of the experience rating assessment program - cost relief causes the Board to retroactively adjust employer assessments. Consequently the current pool of employers paid for refunds of assessments for past years’ over payments. Sometimes the relief costs as much as twenty years old. Cost relief could be less inequitable if the Board were able to retroactively reassess the old pools of employers – to collect the value of those refunds that are being paid out under Section 39.1(e). However yesterday’s employers – a lot of them are gone and current businesses are the only source of funds.

How to deal with the relief of cost requests is an issue that the Panel of Administrators are grappling with even today. How to deal with the future cost relief in the context of experience rating assessment refunds is an issue we hope to take up with stakeholders in the next several months.

This is another general funding issue, which concerns the financial status of distressed subclasses. The Act in Section 39.1(b)(d) anticipates reserves for depleted subclasses, disasters, or other circumstances that would unfairly burden a group of employers. The Board has some subclasses whose financial status might be deemed to be in extreme distress –for example subclass 721 generally known as shipbuilding and subclass 725 generally known as heavy construction both bear a significant deficit accumulated primarily by employers that no longer exist. These subclasses are currently assessed at $16 and $18 for $100 of payroll, respectively. Their actual cost rates though – that’s the costs that are currently reflective of their experience to day are $11 and $14, respectively but their actuarially required rates for the rates that will ensure that the unfunded liability is recovered in reasonable time are $31 and $47, respectively.

Clearly this financial burden faced by the employers in these subclasses is untenable. At one time BC heavy construction and shipbuilding industries were significantly larger than they are today. Now, however, these subclasses have small and therefore actuarially non-credible payroll sizes. The graphs show the number of workers in heavy construction from 1980 to 1996. You can see how the industry has shrunk – or at least how the industry as it’s registered and classified with us has shrunk. It leaves the very few remaining employers in the subclass with a huge unfunded liability. The commercial reality facing these industries is that are cyclical in nature and tend to have significant payroll spikes up and down and long periods of slow with no growth in between. Mega projects in the past have left significant and unexpected cost tails. That these cost tails have emerged long after the mega project payroll days have subsided. Both subclasses – 725 and 721 - have developed unsustainable deficits – the resultant great increases caused payroll to shrink even more as employers wither exit the industry or avoided classifications within those subclasses. In retrospect the Board’s past assessment practices have not been cognizant of the issues of size, unexpected cost tails and mega project assessment. Dealing with these issues make up a part of the overall Employer Services Strategy project. Indeed a policy submission regarding the treating of surpluses and deficits within subclasses will be brought before the Panel of Administrators following stakeholder consultations’ set of plans in the near future. To date, however, employers have expressed a general unwillingness to allow Section 39 relief for distressed industries based on the principles that they espouse of user pay.

There’s a third general funding issue that I need to address –the Board has a current business practice of allowing payment of assessments and reporting of payroll in arrears –essentially we only find out after the year is over what any one employer has spent in payroll. This practice has several unfortunate consequences for us. For example it seriously jeopardizes the Board’s ability to quickly assign Prevention resources to combat negative injury trends and practice constrains our ability to maintain stability and ensure a subclass financial health. Allow me to expand on these points.

Injury rate information is not timely today and therefore is not essentially available for prevention purposes. The Board calculates injury rates based on the number of short term disability claims accepted in a year divided by the average person years of employment of that year.

Average person years can only be calculated when all the payrolls of all subclasses have been received and processed. Employers are only required to report their report once a year in arrears so most employers report by the February deadline however a material number do not and the Board’s practice has been to wait until May of each year when 99% of payroll reports have been received. So at any given moment in time an accurate estimate of the injury rate can only be determined in May of the following year.

If injury rates are way up in forestry or manufacturing we often don’t know about it until it is too late to take swift, effective action. Moreover if we recognize an upward trend we won’t know until the following year if the trend is as the result of more activity in the industry or unsafe work practices. This I believe compromises the effectiveness of our fieldwork. As well sale payroll information impacts our ability to best manage the Board’s Accounts Receivable.

With the revisions of the Bankruptcy Act in 1997 assessments owing to the Board are no longer ranked as secured debt. As a result the Board is exposed to substantial financial risk because of the policy of assessment in arrears. The practice of allowing most employers to pay quarterly in arrears is long standing and reflects the fact that the Board was a secured creditor under the Bankruptcy Act; that is until it was amended in April 1997.

Until then the Board could always apply statutory liens to satisfy assessments owing. And, therefore, in the event of a bankruptcy the Board was among the first in line to receive payment. Since the change in the Bankruptcy Act, however, we are encountering an increasing incidence of uncollectable debt.

Some recent high profile examples involve the pulp and paper and the shipbuilding subclasses. Both of which are seriously underfunded. Compounding this problem is the fact that small employers enjoy the privilege of paying assessments annually in arrears not just quarterly. Many of these companies have often declared bankruptcy before we are even aware of payment delinquency.

These three issues of funding require an urgent solution. And management is working to establish a linkage with Revenue Canada to include and require receipt of employer payroll information at least monthly.

Plus we are developing business practices that will accommodate a change to our current payroll payment and collections. The availability of payroll information on a current basis is so crucial to the proper understanding and discharge of the Board’s fiduciary duty as to be considered an essential component of Employer Services Strategy.

Now I’d like to turn to the second topic, which is classification. The purpose of classification is to arrange employers into groups with similar industrial undertakings that are large enough to produce statistically credible injury frequencies and costs.

There are two principles involved – first classifications that ensure premiums for employers in a similar industrial undertaking are the same so that none are advantaged or disadvantaged in the course of commercial competition. And secondly classification must ensure that the size of a subclass is big enough to achieve statistical credibility. That way injury frequency and costs are within stable limits thereby producing stable and accurate assessment rates. Periodic adjustments of employer classifications must be made to ensure that the system stays true to these principles.

In the recent pass there has been an explosion of new employers in the province and the Board’s manual classification system combined with a lack of sophisticated analysis failed to keep pace with the evolution of industries. We have not adjusted Board classifications in a systemic and regular way. And the result is that our current classification system is fraught with inequitable and irrational misclassification. The Board’s current classification structure is generally based on industrial classifications described by Section 36 of the Act.

The slide here illustrates the kind of irrational groupings of employers that we have today. You can see that in subclass 659 there are no less than 21 distinct industrial undertakings all grouped together paying the same rate. Many of you would not have guessed that valet parking and aircraft sales had so much in common. This example is one of many that I could turn to in order to make a point.

The classification process is handled by well-trained staff who generally manage to classify employers consistently; the trouble is that the classification system itself is less than adequate.

Employers have increasingly indicated their concern and dissatisfaction over their classification; more specifically individuals as well as groups of employers have expressed concern over their assessment rates. They legitimately question whether they are cost subsidizing other high-risk industries. The most high profile example of this problem was the retail merchants’ case. This was the case where small retail merchants contended correctly that they were funding the large supermarkets and department stores. The solution that was arrived at was to separate the large retail subclass into three related groups; small retail merchants, large food stores, and department stores. This followed a little known but highly consensual process involving all of the stakeholders representing over 15,000 employers and many times that many workers. The only unresolved issue around this case was the distribution of the unfunded liability of the subclass at the time of this break up. This issue is currently still before the courts.

Through the Employer Services Strategy project we hope to try and address problems that I have described. In the future we propose to have more classification categories thereby providing greater distinctions between industries – we will routinely and systematically review and refresh the classification system and new technology will allow us to do this in a semi-automated fashion such that there will be unprecedented consistency in and for the classifications.

We will only set rates for pools of employers that are large enough to be statistically credible and therefore they will enjoy relatively stable rates. We will only accomplish this with the ongoing participation of stakeholders. Over the next year both the workers and employers will be invited to participate in consultation meetings and workshops designed to solicit the expertise in how industries could be restructured within a new classification system. The days of the Board forcing employers into groupings that only make sense to us will come to an end.

The next topic that I’d like to turn to is ratemaking. And the question is what is ratemaking? Simply put - It is a process by which assessment rates are calculated for each subclass. After getting employers appropriately grouped into subclasses we must establish an amount that is to be collected from them. The amount should be equitably – should equitably reflect their injury cost experience their portion of the Board’s administration costs and the portion of any cost relief that’s been distributed from the aggregate. The amount is expressed in an assessment rate per $100 of payroll. On average, BC employers in 1998 will pay the Board $2.12 per $100 of payroll.

Aside from the statistical principle of credible size as a determinant of a subclass there are other rate making principles that are important if a system is to be perceived as fair, equitable, specifically allow me to draw your attention to the three foundational principles; the first costs that comprise an assessment rate should be explainable and understandable to employers, second, the methodology for rate making should be automated, transparent and consistent across all subclasses so that the results can be audited and can withstand public scrutiny, and third rates must be relatively stable in order to remove year to year volatility for employers’ Workers' Compensation Board costs. This principle, however, must be applied with due diligence and particularly with cases where the subclasses are marginally credible or the industry is in decline.

The board’s proposed ratemaking policy is grounded in these principles. The Employer Services Strategy project will provide a formalized, consistent rate making methodology. In the future we propose to use actuarially device called proclaimed reserves. For every injury claim accepted by the Board a statistically accurate estimate will be made of the total future costs of that claim. This means that when we analyze claims costs we will not only look at costs for a claim that have been spent to date we will also have claim by claim calculation of total costs that is the sum of both past and future costs. If we fail to identify these total costs on a claim by claim basis then we can’t tell the difference between injuries that start out having similar costs and we don’t know the total costs of a claim until after we have paid it which is the case today. We have tested the use of Proclaimed Reserves and have found that calculating total costs in this way leads to aggregate compensation costs within a few percentage points as those arrived at using current methods or the historical cost method. The only difference from the old system is that costs are now distributed among subclasses and employers more accurately and are recorded on a current basis. Proclaimed Reserves supplies the Board with a vastly improved ability to set accurate and equitable rates at the subclass level. Moreover, this new tool will provide new insights for effectively managing Prevention resources as well as enhancing our understanding of future of return to work programs in the future.

Only if we understand the true, full cost of injuries can we prevent – can we focus prevention and return to work efforts where they will have the greatest benefit.

The final topic that I want to address is – is the fourth that I referred to earlier Experience Rating. Among the Employer Services Strategy projects this component has the least developed business plan and over the next several months we hope to engage the stakeholders in an open dialogue about experience rating assessment.

We believe that if a new experience-rating plan can be designed correctly and applied appropriately experience-rating assessment will be a very valuable tool. A good plan can significantly contribute to the Board’s objectives of prevention and durable return to work. Currently this is not the case. The problem that exists today is that experience-rating plan is a one class fits all plan. It makes no distinction between multinational forestry giants and corner grocers. The plan is not understood by 48% of employers. It does not effectively motivate behaviour changes in employers with poor injury records. It unduly penalizes small employers for even the smallest of claims but on the other side of the scale it unduly rewards small employers for having no claims. It allows employers’ rates to flip flop from maximum discounts one year to the maximum surcharge the next year. It does not address claims suppression behaviours. The current plan has led to a flood of requests from employers for relief from costs in order that they might reduce past year experience rating charges and the current plan provides employers with $40 million a year more in discounts than in surcharges. This fact is notable especially given that the overall injury rate in BC is unacceptably high. The purpose of experience rating in any given workers' compensation system should be to level the playing field for participants by rewarding those employers whose experience is better than average and penalizing those whose experience is worse than average. This in essence fine tunes the classification ratemaking systems by adjusting individual and employers’ rates based on their individual safety performance. While experience rating is a much debated and arguably ineffective system today it’s ultimate utility as a high impact deterrent to employers with poor workplace safety records and unaccommodating return to work practices cannot and should not be discarded. As long as profits are a major objective for businesses, employers will be motivated to change behaviours that negatively attack their bottom line. As the Board moves forward in stakeholder consultations regarding experience rating we will keep the following five principles in sharp focus:

1. experience rating must assign greater accountability to employers in proportion to their injury and cost experience, hence meaningful financial consequences must result from any new plan.

2. a new plan must not allow short term flips from maximum discounts to maximum surcharge or vice versa.

3. randomness of injuries and employer size as significant and measurable variables that must be factored into the process of experience rating small employers. Since an individual smaller employer experience cannot simulate a predictably about large employers.

4. employers need to be provided with timely and up to date statements of costs and expected future rate changes as a result of their injuries in order that they understand the impact of their injury prevention and return to work efforts on a current basis.

5. a new plan must address claims suppression in a responsive and effective way. That means that abuses of workers and injured workers’ rights to compensation cannot and should not be tolerated.

You have just heard a few, very brief remarks on Employer Services Strategy. In summary I’d like to – I have talked about four topics; first being Funding of the System – among the most pressing issues that we are working to resolve in this area are retroactive refunds, redistribution of subclass balances, and payroll reporting and payments arrears; as for Classification – the new classification structure that we are developing under the Employer Services Strategy program is designed to address the rational groupings that we have, cross-subsidization, and small rate group sizes that have developed under the current scheme; the third topic was Rate Making and in this I discussed that the new rate making system being developed under the Employer Services Strategy project will use Proclaimed Reserves and enable the Board to set rates with some more recent claim experience and will be an important tool to aid in injury prevention and return to work; the fourth topic - Experience Rating – we’re committed to in conjunction with stakeholders to begin the development of experience rating plan that will address the problems of the current one size fits all system and will be better suited to small employers. The new plan will be designed to prevent claims suppression behaviours as well.

I have just a few concluding remarks – the effort to improve our assessment system is not short lived – since May, 1996 we have over 25 formal stakeholder consultation meetings and workshops and there is expected to be a minimum of 35 more consultation meetings through the remainder of this year. We don’t believe we will reach consensus on every issue but we are committed to ensuring both employer and labour communities have every opportunity to be heard. The Board’s assessment processes, policies, and systems are undergoing a strategically aligned transformation that’s designed to do far more than enhance the funding of the system. As we go into the next century the Finance Division will make a real and lasting contribution to the Board’s mission of reducing injury and enhancing appropriate return to work programs. Moreover, we are committed to meeting the service challenge head on. In late 1997 the Panel of Administrators approved the plan for renewal of our outdated computer technology and operating systems. In the future employer accounts will be maintained on the state of the art policyholder system. Clients will be served by a new telephone call centre where knowledgeable and empowered staff will be able to individually handle almost any employer inquiry. We are investing in the knowledge and skills of our workforce through intensive training programs and timesaving technology and as well we are just beginning to develop a risk management section in the division. The staff hired into these new risk management positions will have the talent and experience necessary to analyze complex, industrial dynamics and emerging industry trends.

In the Future – the road ahead is challenging and involves continued meaningful consultation with stakeholders and in particular with small business. It is my sincere desire that the new products proposed by the Finance Division and other divisions of the Board can move BC to the leading edge of the workers' compensation systems.

QUESTIONS

JOHN STEEVES:

Q: A couple of issues from the beginning just in terms of the overall responsibilities of your department or division – First of all, I understand that within your division is information services, as well?

A: Yes, it is.

Q: The information services in broad terms provides information within the Board and communicates that information outside the Board – is that an accurate, broad statement of its purpose?

A: No, actually information services is not the organ to which external communication is made – that is the Corporate Communications Department. Information services predominantly is the equivalent Information Technology Divisions in most organizations so what we do is we create, maintain, operate the computer systems and provide information internally to support staff in doing their work. We also, evolving towards the future, are going to be in the business of providing information electronically through mediums such as the internet and electronic data interchange for people that access those and particularly those employers who access their own accounts and that type of thing.

Q: Right and that information is essentially information derived from assessments and the data related to assessments?

A: No, that information – are you talking about the employers – information related to employers?

Q: Yes.

A: I guess every piece of information that employers, today, have access to that can be put on an electronic form – they would have; such things as claims cost statements, for instance, are provided today on paper. In fact we’ve just put that on electronic forms so that they can access it through electronic means.

Q: I wasn’t talking specifically about information available to employers but information available within the information services is primarily generated from the assessment function within your department?

A: No, the Information Services Division has information of all of the Board’s activities. So it includes compensation and prevention and all those.

Q: So it includes assessments?

A: Yes, yes.

Q: Thank you. And now I wonder if we can just explore a bit of how that information on assessments gets into the Prevention side of the Board. And you it seems to me an important function and that that information is available to Prevention.

A: Yes, up until recently I guess you know the systems at the Board have developed sort of along divisional lines and they weren’t developed in contemplation that one division would want to have information access on another division’s work. What we are doing is we are saying – we are actually cutting across as we develop new systems; we are cutting across lines – divisional lines so that we actually creating common views of an object such as an employer or firm. And that common view is available to everyone in across all divisions. An example of this is a data warehouse project where with the coordination of Prevention and Compensation and Assessments folks we’ve developed something called the Employer Report Card. That report card will include all the things about an employer such as claims, the cost of claims, who the employer is, and also it sometime this year we will also put in the Prevention – the orders type information so that that picture is going to be available to all Board employees in the future.

Q: Just to focus it a bit – if I was working in Prevention and I wanted to know about the assessment record of an employer can I get that readily?

A: yes.

Q: From my own desk or how do I do that?

A: Yes, I think you would be able to dial in to the Prevention folks own lap top computers in the field and get that information.

Q: Yes – were you saying earlier that it was relatively new – that I?

A: Yes, yes, it’s actually not – as I said it is going to be available sometime this year.

Q: So is it available now or is it going to be?

A: It’s going to be.

Q: so I couldn’t do it now.

A: No.

Q: So how would I do it now – again if I am working in Prevention and I want to know what is happening with an employer how would I do it?

A: Well, you’d phone up Assessments and ask for that information.

Q: And, now you indicated that your department does a number of audits of employers and can you give us just a rough idea – sorry you had a number there – was it 10,000?

A: Yes, yes.

Q: You audit 10,000 employers for compliance and collectable overdue payments and can you give us some sense of the results of those audits in terms of monies collected and monies spent doing the audits?

A: Yes, I guess about $5 million of audit or assessments or increase in assessments – the cost of doing that was roughly $2.5 million.

Q: Okay, is that a 1996 figure or?

A: That would be a 1996 figure, yes.

Q: And would previous years be consistent with that?

A: Yes, it is fairly consistent – it is not a &ldots;.

Q: Sort of a 2-5 ratio, very roughly?

A: Yes, that’s right.

Q: Yesterday we heard from the Legal Services Department and one of the things that was raised was administrative fees that are charged by the Board on third party litigation –and that it is currently 29% and it used to be 22% and we were interested to know what that figure was based on and you will be pleased to hear that the answer was deferred to you.

A: Thanks, Ed. Yes, the Board’s administration costs are divided into the cost of compensation in the year and so as a percentage it calculates – calculated out a couple – three years ago and to 29%. Now you may be thinking about this in relation to the $1.2 million of costs but that total cost includes something that is called change in actuarial liability which is something our Chief Actuary does – it doesn’t involve any manpower or any administration costs per se so that piece of it is excluded from the formula so what you are doing is dividing the administration of the Board into the costs of the claims awarded or paid in the year. So that comes to the 29%.

Q: Okay, could we just go through that step by step – you said that it was the cost of compensation in a year.

A: Yes. It is compensation in a year so we – there’s a million dollars in the annual report and if we look into table A of the statistics to the annual report you will find that the amounts

Q: Just slow down just a bit.

A: Yes, Table A of the Annual Report

Q: What page is that?

A: Page 14.

Q: Yes.

A: It says here that the claims costs in the province during the year, 1996, were $592 million – that is really the cost of payments that we made during the year and the cost of awards that were established during the year. That’s the sort of result of administration effort.

Q: So let’s call it 600,000

A: 600 million.

Q: Take me to the next step aiming to the 29%.

A: Then our administration costs totaling $180 million.

Q: So it is a ratio of 180-600?

A: Yes, that’s right.

Q: So, currently assessments are based on payroll in BC, that’s correct?

A: Yes.

Q: And I wanted to suggest to you an alternate model which I think is in place in Washington State and that is assessments are based on an hourly rate.

A: Hourly rate.

 Q: And there is an obvious prevention advantage to that in terms of measuring of work hours and exposure and it’s probably revenue neutral in terms of assessments. Has the Board considered that in BC and if so can you give us your thinking on that?

A: Your question is whether the Board has considered that. We have – in 1992 – we were asked to provide comment to the suggestion of using hours of work as a base.

Q: This is a comment to the Board of Governors?

A: Yes. So I prepared a report to the then Vice President of Financial Services – Mr. Evans. And that was relayed to the Board of Governors, I understand.

Q: All right.

A: So, and I have a copy of that – I don’t have additional copies that I can provide to you if you like.

Q: Perhaps you can discuss that with Mr. Bates and if we could get a copy of that it would be appreciated. Can you summarize the position?

A: Yes, basically we took a look at who was doing it and at that time it was only Washington State. None of the other states were using hours as a base. No province or territory in Canada was using hours. We looked at research – or articles by the National Council of Compensation Insurance which is a actuarial underwriting service firm to many insurers in the United States who publish a digest. And they wrote a couple of articles concerning hours of work versus payroll. Their conclusion was that that payroll was superior as a means to measure exposure and on which to assess.

Q: Did you recall why it was superior in their view?

A: Okay, I’m going from a little bit of memory here and I haven’t report the report again since 1992 – there were a couple of main issues; the first issue was that a lot of the benefits payable were based on wages – loss of earnings – short term disability- etc. were dependent upon the wages earned by the claimant at the time of the injury, therefore, individuals who were injured and off for the same period of time that the benefits payable to them and therefore the costs to the system would be different if their wage rate were different.

Q: Why is that a problem?

A: Well, if you are using the payroll base and the same assessment rate you would be collecting the same amount of money for a different risk exposure.

Q: But claims aren’t a measurement of risk.

A: The cost is.

Q: Yes, what we are talking about is the cost.

A: Yes, but a high wage earner is a higher potential cost risk than a low wage earner. Okay.

Q: Would that be true if the revenue that you got from an hourly based system and a payroll-based system were the same?

A: Yes, the revenue would have to be the same because it would have to cover cost – what you would end up with would be employers – let’s say they are a identical circumstance except for one has high wage earners and one has low wage earners – under a payroll system the high wage employer would be paying more than the low wage employer. Under an hours-worked system they would be paying the same. The cost exposure is higher with the high wage employer.

Q: All right

A: Now the other point was hours of work are difficult to verify; there is no requirement to report them as there is with payroll.

Q: There is a requirement to report payroll why couldn’t we just change that as a requirement to report hours?

A: Well, because there’s other people that require reporting payroll such as Revenue Canada and so on. Hours of work carry no other requirement.

Q: So it would be a new calculation for employers.

A: It would be a new calculation – it’s subject – one of the concerns is fraud.

Q: All right; am I exhausting your memory?

A: You are getting close.

Q: Mr. Fattedad you talked about experience rating assessment and I - your account of experience rating assessment toward the end of your –I guess it is page 17 of your presentation –the BC Federation of labour’s position is that workers find the prospect of safety incentives based on cost as a principle very attractive. However, when we start to look at it very carefully we come up with some of the same conclusions as you do that there are some serious problems with connecting the incentives with the cost and as I am sure that you are aware there was an inclusion – that last year there was debate within the experts about it and for example Professor John Burton says that the relationship between safety and experience rating assessment is not proven. And I just wanted to add one thing to your list of – on page 17 and this from the December, 1995 report of the Board that only 13% of experience rated employers report being influenced – either strongly or moderately by experience rating assessment so that is part of your thinking as well.

A: no answer.

Q: A final matter – a larger one is I wonder if we could talk a bit about injury rates and claims costs –as you may be aware that there are some who are concerned that injury rates are decreasing and claim costs are decreasing and there’s – if you look at it using those terms the injury rates goes down and the claims costs goes up and they intersect about 1993 – you are aware of that kind of concern?

A: Yes I am.

Q: Now with respect to the injury rate which is the one that has been declining and we are talking about the period 1987 to 1996 –now first of all historically sort of in western, industrialized economies the injury rate has been going down isn’t that true?

A: That’s true, yes.

Q: And the – but the problem with using that injury is that it is only for short-term disability, correct?

A: That’s correct.

Q: And which is to say for long term disability is excluded?

A: Well long term disability awards result from generally from short term disability injuries but what happens with those costs is that they – there’s a lag effect in – I refer to that earlier when talked about cost tails and unexpected cost tails as a result of the lag effect of awarding the long term disability and so on. But to your point though to link the injury rate to the total cost of compensation is probably not a useful thing to do but injury rates – just to be clear is the rate that you get as a result of dividing the current number of short term disability claims accepted in a year right by the total person years of work that you estimate. Whereas total costs includes vocational rehabilitation, health care costs and long term disability costs and you know health care costs continue well on into the future so it is not really useful to link the two.

Q: Yes, and on the Long Term Disability point – in fact - from 1987 to 1996 there was a significant increase in Long Term Disability costs from roughly 26 thousand to probably 47-48 – is that right?

A: Long Term Disability Costs?

Q: Yes.

A: Long-Term Disability costs went from&ldots;

Q: 1987-1996?

A: Yes. In 1987 was $228 million and in 1996 was $467 million.

Q: Yes, I’m off a few zeros –so it roughly it was a 60% - something like that?

A: More – it’s doubled. More than doubled.

Q: All right. Now the other thing – I’m looking at these two lines on the graph – the claims costs and the injury rate and the other thing that would be relevant to comparing those two would be the employment rate in BC would it not?

A: Yes, the employment rate you know as it goes up it has a bearing on the injury rate provided that the underlying propensity for injury remains the same; the injury rate will go up with the employment rate.

Q: Yes and you would expect that – whether it is true or not is an empirical question?

A: In the case of BC it has not been true; the employment rate has gone up but the injury rate or the underlying rate which the workers has been injured has been going down. So I mean you think about the two – the growth in employment and the person years worked has consistently gone up in the last decade yet the injury rate has consistently come down. That is actually a good news story for BC.

Q: Quite, quite. But again in order to have the full picture we need to look at the employment rate and, presumably, the unemployment rate? It is a complicated – the point I am ending up is it is much more complicated than looking at injury rates and claim costs.

A: Right, yes. That’s right.

Q: Page 7 of your presentation –you were talking about Section 39.1(e) –that it exists for a good reason – to encourage the employment of persons with pre-existing injuries and I think that’s a – that’s the intent of it. Do you have any numbers about the success of 39.1(e) and encouraging the employment of people with disabilities? Does it work?

A: No, it is probably not something that’s easily determined from any statistics we can measure. The only thing that shows up is that there are large numbers of employers who come forward and say well, we’ve got people with pre-existing and others that we should have relieved their costs and I guess that’s a sort of negative way of looking at how many people that were actually accommodated.

Q: Yes – does the board in those circumstances ask those employers how many people with disabilities they are accommodating and employing?

A: I can’t – I can’t really answer that question simply because we – it is probably something that the Compensation Services people might be better able to answer.

Q: All right. A few little points on experience rating assessment Mr. Fattedad –one is currently there is a 20% cap on assessments for employers - is that correct?

A: It’s sort have been general policy practice on assessment rate setting.

Q: You better explain that – we heard a lot about that on Monday. General policy practice?

A: Well, maybe I can just ask you to take that question a little bit further – what were you leading to?

Q: First of all - it exists –whatever you call it - correct?

A: Yes.

Q: And my suggestion is that it has a distorting effect on the experience rating assessment on the concept of full recovery of costs –that you can’t recover the full recovery of costs with a capping system?

A: Actually it’s not really related so much to experience rating assessment but it’s related very definitely into why certain subclasses have gone into distress and you know if you’d like – I actually anticipated because you asked about this capping thing and I do have something here that I would like to put up on an overhead to show you the effects of that.

Q: You’ve got six inches of paper there –

A: No I don’t.

Q: Just to help you to organize your thoughts – I think where it all ends up is going to be the funding – the funding or unfunding of the system

A: The funding of the system, yes.

Q: Which ultimately ends up being distorted.

A: Right. I spoke about 721 which is shipbuilding, just to give you a view of how 721 degenerated financially – it had payrolls of $60 million back in 1985 and it has spiked up and down through the years and through the early part of 1985 – through 1985 – until the end of the decade this subclass actually had a year end balance – a balance that was in surplus. So that the subclass was fully funded and it had – it was fairly stable. And then what happened was – there was a spike in payroll but it started to dip into an unfunded situation. So and that’s just a financial picture of this thing. To the extent that in 1996 the unfunded or the debt of that subclass is more than 50% of the payroll of the subclass – of the annual payroll of the subclass. Now how does this look in costs and rate terms. This is the cost rate – is this solid line. The cost rate is defined as the rate that you arrive at by dividing the costs of injuries over the payroll. So the cost of injuries and the cost rate is as I said earlier in my presentation in 1996 is $11. And the billed rate – this is the rate that we have been able to bill – these subclasses is that amount here. That dotted line. Now it may not look that way but the dotted line actually has been going up at the rate cap of 20% a year – just by the slope of the curve because the required rate – the rate that we require to collect – from shipbuilding is this number. So that is a very dramatic sort of example and the demonstration of how this subclass went into the tank. Because we could not – with the rate cap – we could not collect the amount that we required to keep it in balance. Now this is probably the most dramatic example&ldots;..

Q: Just before you leave that overhead; the difference between the billed rate and the required rate –whatever the cost that is - goes to the unfunded liability or the funding of the system.

A: That’s right – that’s not collecting what we need to collect for that subclass. So that’s the effect of a 20% cap and heavy construction is may be a little less but has been unhealthy for a long, long, long period of time so heavy construction has been in a deficit since before 12 years ago – continues to be in a deficit except that the payroll of the subclass continues in this downward trend – spikes up once in a while – but it’s a downward trend. Now what you have is this year end balance of a deficit of that subclass is so significant relative to its payroll that it will never dig itself out, particularly given the rate cap that we have. Now this is a – this is a system where – now what we did here in 1995 – or 96 actually – we actually dropped the rate in that subclass with consultation with the industry and with consultation with the other interested groups and the employer community and we dropped the rate because it was just not a sustainable kind of rate for the industry to be paying which was up to $24 per $100. So we dropped it but as you can see here that the rate that we really require ourselves to collect is here. Now in 1995 we broke with tradition and said that the 20% rate cap doesn’t apply to this subclass any more – we raised it to 30% in 1995 and that is how that slope went up&ldots;.

Q: Right. Just on that 30% - that’s the maximum increase as required by experience rating assessment?

A: No. No. that’s a different – that’s a base rate increase.

Q: That is not merit/demerit?

A: No.

Q: Okay.

A: No. That experience rating assessment thing is on top of that.

Q: Okay;

A: So as you look at this you see that those two subclasses are seriously in trouble. Another subclass that was – that had a very large unfunded liability relatively speaking in the system was sawmills. And it was so big – this is a tremendously big industry - $1.4 billion in payroll in a year – this subclass had an unfunded liability of over $60 million – it was the largest group in terms of unfunded balance in the system that relatively speaking – to its payroll base that that debt is looked as quite discomforting.

Q: Now, just before you move that slide and in relation to all the other ones – same idea as with construction and what was the other one?

A: Shipbuilding.

Q: Shipbuilding. Just looking at those graphs – one is led to the conclusion that there is no relation between the rate and payroll. So that in that particular one the highest years of payroll has the greatest balance –

A: Yes. Again the balance that has been appearing in the subclasses and I said earlier they tie a two year lag – we’ve actually in the past 7-8 years have experienced tremendous unexpected costs tied to the year.

Q: So what we are missing here to explain the balance is the injury rate.

A: Yes.

Q: Including Long Term Disability? Yes?

A: Right. Now so in sawmills as you see here the billed rate is actually at the required rate level and higher than the cost rate so you’ll see that in sawmills that the actual assessments are in fact going down. So I hope I was able to give you an idea of what that rate capping was – that was a question?

Q: Yes, that was helpful.

Q: Just to put on the record the slides in response to – the overlays – in response to my question on capping – through Mr. Bates can we get copies of those?

A: Yes, I have copies here.

Q: I don’t need them this moment.

JIM SAYRE:

Q: On page 2 Mr. Fattedad you were in introducing your presentation this morning you started with some fairly fundamental statements about what the Workers' Compensation Board was all about it and what it’s goals were and ultimately the Board and its stakeholders must be committed to reducing the number and severity of injuries – swift and durable return to work and excellence in client service. I take it from the context of your remarks by clients you were referring primarily to employers as the clients of your division?

A: No, I was referring to all clients including injured workers and employers.

Q: Okay, well I guess I tipped you off a little bit there –I was going to ask you whether you wanted to add another goal to that list that you gave in your introduction. Do you?

A: Excellence in client service?

Q: Yes.

A: Yes. Encompassing all clients that we serve.

Q: By client service – what do you mean by that – particularly in context of injured workers as being – you are the most important of the Board’s clients.

A: Yes, I think we’d view client service to injured workers as probably one of the defining characteristics of a Board that’s either acceptable or not acceptable in the context of service delivery. When I say – when we talk about client service and in particularly to injured workers we are talking about an attitude that’s caring; an attitude that isn’t just well we’re going to throw the book at you – even if you have to throw the book and in terms of the regulations and the rules around things that may or may not be liked. You have to be able to do it in such a way that you don’t come across sounding or looking or feeling like you are uncaring. Client services is – you know good client service is everything that we all should come to expect in every day life – we need some courtesy, some caring – a lot of quick response and an ability to act – that type of thing.

Q: Those are all certainly commendable attributes of a system which of any system deals with other people – whether they are called clients or whatever term may be used – injured workers believe that the core service of the workers' compensation system is to provide compensation for workers who become injured – that compensation will include whatever help can be granted can be given to help the worker return to work and, if necessary be trained in another occupation –that essentially the Board fails if it does not compensate an injured worker for all of the losses that he or she has suffered as a result of a work injury – do you accept that as one of the most important goals– if not the most important goal of the Board?

A: Yes, I think that the important goal of the Board is to deliver upon what’s in the legislation and the Act and provision of benefits and so on.

Q: But that is what the system is all about isn’t it?

A: Yes.

Q: Compensating injured workers –that is why it was created roughly 100 years ago around the world and why it was adopted throughout the western world including, naturally BC.

A: Yes. I’d just like to say though that if we really ask ourselves – would we rather be servicing injured workers or would we really rather be preventing injury from happening in the first place – we’d put the emphasis on preventing it from happening but if we can’t prevent it from happening then we are going to have to be able to deliver the best possible kind of service that we can.

Q: And the goal of the Finance Department that you are responsible for is to make sure that the Board has enough money to be able to carry out that critical purpose of paying claims costs.

A: Yes.

Q: And making sure there is enough money there to pay all legitimate claims – all the legitimate costs of all the legitimate claims.

A: That’s right.

Q: So that the Board never has to say to a worker – yes you have lost X but we going to pay you less than X because we are broke and we can’t afford to compensate you properly - that would be a failure of finance if that happened wouldn’t it?

A: Yes it would be as the kinds of things that you are referring to I don’t think – you know what you’d find that finance people would do and that&ldots;say for instance that the compensation systems in the country where the way to compensate – the way to make up for an unfunded balance is to reduce worker entitlements.

Q: Now that’s unacceptable isn’t it?

A: Yes, it’s absolutely unacceptable and if fact if you look at the – our strategic plan one of the driving things in there for us has been we don’t want ourselves to get into that kind of position where the only way you can fix the problem is to start reducing the benefit levels.

Q: You weren’t here yesterday afternoon I don’t think but the subject came up of the fact that the – among other things – the workers don’t receive compensation for when they are injured is in the case of workers with incomes over $56,000 – the excess income is lost; it’s not covered. And that future of the present legislation is tracked in terms of your department and the fact that you don’t assess any premiums for any of the excess incomes over $56,000 do you?

A: No we don’t.

Q: Is there any reason – what would the revenue effect be if that – the cap were removed –I’ll suggest the answer to save time –I presume the Board would take in more money in respect of those high income earners and then they would get compensated for that portion of their income if they became injured – do you agree with that?

A: Yes, they – the gross payroll that is reported to us by all employers say in the 1996 year was $45.9 billion and the assessable payroll which is the limited or the payroll up to the $54,000 cap was $42.6 billion.

Q: The gross payroll reported was $45.9 billion

A: Yes.

Q: And the assessable payroll?

A: Was $42.6 billion.

Q: So it less.

A: Yes because of the limited – because of the limitation there. Now that limitation obviously differs in varying subclasses and we could go through that analyses but what you are suggesting is we are collecting – by virtue of the legislation – we are collecting less because of the $54,000 cap and that’s the – you asked for the value of that difference. And that’s it.

Q: I think I see what you are saying then is that $ 3.3 billion of payroll is not being assessed now because of that salary cap.

A: Right. So if you want to apply the average rate of about $2 to it you’d be talking about $60 million a year.

Q: Could you give us any help on how much the claims costs have been kept down or how much the claims costs would be increased if there were no cap?

A: The question really is how many people we have claiming from us that bunt up against the maximum $54,000 – I don’t know that answer immediately available to me but we can provide that information. I don’t believe that you’ll find it’s a very large number.

Q: Would it be your opinion or your hunch that the Board might well profit from including – from getting that extra $60 million in assessments and then having to pay out the extra costs – whatever they may be.

A: Would it be my hunch that it – we would

Q: Would it make any sense in other words that these high income people would have injuries and would make claims in proportion to the amount of extra assessments that they would pay?

A: I couldn’t answer; I’d be making a guess at that.

Q: You could give us some figures on that?

A: We could give you some indications of how many claimants would come in with claims against the $54,000 cap. Last time I looked at it it wasn’t that many.

Q: I would ask you to do that as soon as possible.

A: Right.

Q: Another position which is being taken on behalf of injured workers before the Royal Commission is that one of the goals that you set out on is swift and durable return to work and I would add effective vocational rehabilitation absolutely requires the greatest possible cooperation from employers – in the first instance the accident employer but in some cases other employers in the same industry or if the worker has to retrain for an occupation perhaps other employers in totally different – would you agree with that – securing the cooperation of employers in terms of getting workers back to work is a primary goal of the Workers' Compensation Board as a whole and particularly of the Assessment Department?

A: I actually agree with that on two different levels – first is that I think it is necessary as a society to re-accommodate people but secondly I believe if we do that the cost to the system becomes far less. And there’s all kinds of models that can point to that in terms of employers who cooperate even across company lines to reassimilate workers. It actually reduces their overall costs.

Q: So, ultimately employers benefit in the pocket book as well as in more?

A: Yes, we believe that.

Q: Less measurable or tangible ways in assisting workers to get back to work –I assume then that you would agree with me that the financial system that the Board creates has to be designed in a way that doesn’t discourage employers from cooperating in respect of getting their workers back to work.

A: Right.

Q: That brings me back to a feature of the financial system which appears intended to address this issue but which we on the workers’ side feel it’s probably having the opposite effect and that is the experience rating assessment, in general, and an aspect of experience rating assessment is the relief of cost application. Do you have a figure on the total amount of money transferred from the employers to the general Accident Fund as a result of relief of costs applications?

A: Yes, I think it is something like $70 million and – if you look at page 37 of 1996 Annual Report and you look under the third column of figures under enhancement - $76 million –

Q: Is that page 36 or 37?

A: Yes, page 37. It deals with a dry subject – it’s a note to the financial statements

Q: These figures are in thousands of dollars&ldots;..

A: Yes, so it is $76 million.

Q: $76 million.

A: Now, that’s the cost that’s been relieved.

Q: Do you have any estimate of the cost to the Board of the application and decision-making and disclosure and appeal processes that are connected Section 39.1(e)?

A: You have kind of caught me at a disadvantage – I seem to recall it’s fairly extensive and it is very expensive but probably someone like Mr. Pinto could give us a better idea on that, but if I recall if we added up together all of the potential relief exercises that we have in front of us it is in the millions of dollars of costs of effort.

Q: Is it your department that is responsible in the first instance for making those decisions?

A: No, our department actually – we are sort of the tail end of the process. Employer comes in and says we think we need to get relief. The Compensation Division looks at the case and makes that decision and then they pass it over to Assessments to say – well – you know – this employer claims that 18 years ago that their experience rating assessment was over assessed by inclusion of this claim so – then we have to go back and recalculate that employer’s experience rating assessment and if there is a difference – pay that employer the difference.

Q: So it involves opening some very old claims? Is that what is called the historical Section 39.1(e) project?

A: Yes. That’s right.

Q: Are those costs tracked separately? The costs associated with the historical project?

A: When you say the costs are you referring to the administrative costs?

Q: The administrative costs and the resulting shift in costs from these specific classes to the general Accident Fund?

A: Yes, I don’t think they are separately charged to a separately identified pool – they are all charged in that $76 million that you are talking about. As far as the claim cost relief and the interest thereon. The cost of the administration is just borne by administration.

Q: So that would I guess be reflected in the 29% global figure that you have explained to Mr. Steeves – the Board’s cost of administering its operations.

A: Yes. But it would be a very small part of that.

Q: Just to get into a little more detail on how that process works - an employer –and I am not sure you can address the early parts of this process since that is not done by your department but as I understand it the employer asks for relief under 39.1(e) –the claim in many cases has to be retrieved from the archives, I gather, because it may be a very old claim; the employer may simply say in a letter that I have 150 old claims or 1500 old claims – here’s a list of names and claims numbers, would you please review each one of them to see if Section 39.1(e) should apply – because it has never been considered – is that all it takes to start the process?

A: I wonder if Mr. Pinto would mind addressing these kinds of details. [Mr. Pinto arrives]. I guess in a nutshell if I understood your question correctly and – will a list of claims and a general request suffice is generally what happens with old, historical requests. It is part of the requirement of Board policy decision to send me one and but the Board considered this on an ongoing basis on current claims. And the reason for the historical project that there was some reference to is that if the Board did not follow its own policies and it is left open with the situation where employers have now come back to us either on their own or through their representatives and said you didn’t do so do it. And that’s – there’s been a discussion paper circulating in the employer community and I think through the Federation of Labour saying that there is a liability here of efforts – it is nothing else and sort of alluded to the transfer of costs from generation to generation but anyway all those issues are out there – in a nutshell the historic project is where a request can be made in a similar manner to what you described.

Q: And the board isn’t requiring the employer to present what lawyers would call "a prima facia" argument or case in favour of relief of costs in order to have the claim retrieved and considered.

A: No, the very essence of the policy to 71 is an employer should not have to make a case. The Board should be initiating that on its own motion.

Q: And then the next stage in the process, I would gather, is that the Board having reviewed the list of names and claims numbers makes a decision on each one – is that right?

A: Correct.

Q: And that decision, I presume, would give some reasoning behind either the acceptance – the granting of relief or the denial. All those decisions are appealable by the employers to the decision not affecting the worker and so it doesn’t affect the worker’s benefits – so it is appealable to the Appeal Division is that correct?

A: Yes.

Q: In the course of preparing for those appeals then the claim is sent to disclosure and disclosure would automatically provide it or –in any event it gets provided upon request?

A: Yes, as in any appellate proceeding the employer and the worker could request disclosure and disclosure is granted to the employer. If it is an appeal file; it has to be an appeal file and then disclosure can be requested.

Q: The present practice at least that would be disclosure of the entire claim file?

A: With, I think, editing sensitive information if it appears to the discloser – then it would be ultra sensitive – but in general yes, it is the full disclosure.

Q: Just to help us all – would the worker have been notified at any stage up until the time we are talking about that this process is going on?

A: The worker is notified if an appeal is made. At the point that the appeal is filed, yes. I think often adjudicators will copy the worker on the decision as well when they communicate the decision to the employer as well.

Q: I’d like to - if I could turn back to you now Mr. Fattedad –I believe in your paper you said –I’m not sure if I understand it correctly - page 7 – around the middle of the second paragraph referring to the relief of cost applications you say that this stems from an employer’s seeking a benefit reduction in experience rated assessments – is it only experience rating portion of the assessment that is affected by a relief of costs?

A: Yes, that’s in fact experience rating assessment is the primary driver of this whole thing because what most employers are after is the difference in experience rating that they would have had if the claims cost would have been relieved so they never actually are relieved from the base rate – you know say an employer had a 33% demerit so they pay 33% surcharge and if they got three claims or two claims or even one claim relieved that surcharge might have been reduced to 20% so they are after the difference between the 33% and the 20%. Now that’s not to say there’s anything wrong in doing that but the problem is that by doing that we are getting such a large number of really long historical relief cases that what we are doing– is that we are not at the same time that we provide them with the refund we are not actually reassessing that subclass for that year so in the first instance – to take a really extreme example in a subclass which only has one employer and the employer goes back to 1978 and says my experience rating assessment should have been zero instead of 33% demerit. You should pay me back that amount now I should be able to then as a practice to be able to say okay I’ve paid you back that amount but I’m going to readjust your base rate upwards – right – because I’ll have received less money from you so I take the base rate back upwards to pay for that and that’s not being done so that employer will get the refund in 1998 in respect of 1978 when he was the only employer in the classs. Now subsequent to that you know you’ve had 2 or 3 or 4 others coming into the classs and when this refund happens these employers say that came in subsequently and have to pay for the refund. In the end it’s a zero sum game for us – right - because the total assessment we collect is the total assessment we collect. So we just – I used a very crude term on this thing – I mean everyone’s wallowing around in the same bath – right – with this type of refund going on and the only problem that we have with the conceptual point of view we are writing out a bunch of cheques for past refunds but we are not at the same time going back out and collecting the under-collections from those employers in the past.

Q: Now I’m a bit – that is helpful but – I am also a bit more confused – somebody is going to have to pay the money that you’ve just paid to the employer – who pays it?

A: Every employer in the system.

Q: It’s the general Accident Fund that has to bear that cost – that’s what I thought. You were talking about other employers coming into the classs and

A: It’s only one subclass.

Q: There was only one classs to begin with – I see.

A: That’s right.

Q: Before we leave the subject of how the 39.1(e) applications are in fact working is it fair to say that there has been a bit of a cottage industry that has arisen in recent years of people that call themselves employer consultants to represent primarily large employers and make these large applications with many different claimants and pursue appeals and so on – is that consistent with your understanding of what is happening?

A: Yes, it is a term that is used – you know – cottage industry

Q: I don’t know if cottage is the right term.

A: That’s true – there is an emerging to be a bunch of highly skilled and specialized people that are out there being able to hunt down these things.

Q: And that whole process didn’t exist until several years ago - is that right? I mean we didn’t have these large scale 39.1(e) applications.

A: Yes, that’s right.

Q: And if it wasn’t for experience rating assessment there would be no need for any of this stuff would there –I mean that would be the only reason for employers to be applying for relief of costs– is in within connection with the experience rating assessment proportionate to the assessments.

A: That – you know – if you would take – say and say 80% of the fact I’d say yes you are probably right but you know fundamentally employers in a subclass will warrant to get relief so that the subclass rate - the base rate is relieved. So if you understand – the ratings is a large driver because an individual employer benefits but the general base rate impact of relief also drives employers but in a more general way.

Q: I thought that you just told us that the Section 39.1(e) only relieved against the experience rating proportion to the costs – did I misunderstand it?

A: There’s two things that go with 39.1(e); one is the individual employer and can only get relief and benefit from a refund directly against experience rating but in a larger sense if a major group of employers and an industry said – Look we have a bunch of things we should get relieved for – I don’t know what they might be but – let’s say they do – that relief actually – that cost actually comes out of that subclass and goes into the general pool. Right and that would have a base rate impact on the subclass but like I said – you know – you are talking about what is the driver for all this – I would suggest it is the former case. The experience rating assessment.

Q: You also mentioned in your presentation that the Board’s own information is that 40% - I believe is the figure you gave us – is that employers don’t understand experience rating – first of all can you elaborate on that – what 40% are we talking about?

A: I guess we started with all of this back in late 1994 – early 1995 – we decided that we really needed to understand what the employers at large out there think about the assessment system and so on. So we sent a sample survey well over 4000 surveys from which we got more than 2000 returns – it formed what you’d call a statistically reliable picture of what the employers out there think – one of the questions we asked them was – and I am paraphrasing here I am not saying it is the exact question – one of the questions we asked was – Do you understand the experience rating assessment system? The thing that came back and shocked us tremendously was that 48% of the employers out there said that didn’t – they either weren’t aware of it or they didn’t understand it. If you break that down you’d see that a lot of this has to do with small employers – you know small employers – 80% or 85% of the total population – and a large number of them actually don’t deal with us - their experience rating assessment or their assessments are really sort of delegated or are being dealt with by their accountants and other folks so that they don’t even know about experience rating assessment.

Q: It is a fair assumption that those employers in that 48% are not the ones making 39.1(e) applications are they?

A: I wouldn’t say that.

Q: If they don’t know about it they are not going to know how to do it and they are not going to do it.

A: It depends on if this cottage industry has gotten a list of small employers.

Q: If they are soliciting clients impressively enough they might get a hold of them? Was that the same study that Mr. Steeves referred to in one of his questions where he referred to where one of the results was that only 13% of the employers –13% of the employers had reported that experience rating assessment had positively affected their conduct?

A: I believe Mr. Steeves referred to the December 1995 assessment. Yes, are we referring to the same thing Mr. Steeves? Now, what I am referring to is the – there is an internal Board survey that was done through Coopers and Lybrand and in – is that the strategic plan that you’ve got there? Oh this is the internal audit report. Yes, it is not the same survey but we are speaking about.

Q: It is part of the same process?

A: Yes.

Q: In the same period of time, right?

A: No answer.

Q: If I were to suggest to you, Mr. Fattedad, that the net effect of 39.1(e) – that whole process which is tied to experience rating assessment - is to shift costs of claims –in some cases claims from past years – from larger, more sophisticated employers to smaller employers would you disagree with that – it is fairly consistent with what you have been saying as I understand it.

A: I feel that has that impact because we are not retroactively going back and reassessing those employers in the year in which it happened.

Q: So when this money is shifted out of one employer – refunded to an employer and ends up going into the general Accident Fund and all employers collectively contribute into that

A: Yes,

Q: Including that group of employers that isn’t sophisticated enough to take advantage of the system or for whatever reason doesn’t do it.

A: Yes; and I’d just like to say that I think that the Act kind of provides for that.

Q: Do you want to elaborate a bit on that remark?

A: In fact the Act doesn’t specifically say that you will relieve and burden current generations but the Act does say that you will relieve costs and you will do all of this and collect the funds. So the Act doesn’t specifically sort of exclude that or preclude that from happening. I think this – the large employers by the way pay a proportionately higher piece of that penalty so I mean they all pay for it and that’s what I am really trying to say. There is no disproportionate sort of loading on to the small employers in terms of the rate that they will pay the following year. The following year everybody’s rate is exactly the same – the base rate.

Q: All of the employers covered by the workers' compensation system end up for paying for the costs that have been shifted under the 39.1(e) is that it?

A: Yes, pro rata to their payroll.

Q: Now at page 5 of the presentation and your introduction you referred to rate modification – experience rating assessment in general –as I understood it you said that it was now seen or you were implying that it was now seen as a strategic tool to assist in the prevention mandate of the Board. Is that right?

A: Yes.

Q: And then on page 18 – having noted that it it is much debated and arguably ineffective system. You said that it’s ultimate utility as a high impact deterrent to employers with poor safety records and unaccommodating return to work practices can’t and shouldn’t be discarded. Do you want to elaborate a little bit on that remark? Why is the Board so committed to experience rating assessment when essentially there is no evidence that it’s working and when it is leading to a lot of undesirable consequences and a lot of negative – a lot of unnecessary administrative costs to the Board which we just talked about in the 39.1(e) process?

A: This is perhaps can be seen as a complex subject but it really isn’t. If you look at an experience rating assessment system that’s a one size fits all and if you are a one person employer – sole worker in a company versus an employer with 5000 people – the experience rating assessment that we apply every year is that one employer with one person in it had a paper cut. That employer could in his subclass experience a 33% demerit from a 33% merit. In fact there’s a fine example of that. There was a doctor who recently phoned me and told that me that he never expected to see me in his office because he had a paper cut and – or one of his assistants had a paper cut - $70 was the cost for his cut and whatever.

Q: Was it a doctor form the Board that caused the cut?

A: Sorry?

Q: Was it a doctor from the Workers' Compensation Board that caused the cut?

A: No I don’t think our papers are that sharp. The impact on that doctor was that the experience rating assessment caused him to pay more than $70 in demerit assessment over two years. So in other words what we do when we experience rate very small employers is in the same – under the same system of experience rating is highly not credible. But you can actually apply experience-rating assessment to a large employer where the numbers are large enough that the experience – that the injury experience is considered to be credible. In other words the number of events of injuries that you observe maybe considered to truly underlie the true injury rate of that employer. Then you’ve got a system where you can say – hey your experience is credible and we can experience rate you but you can’t say that the employer with one person right can go for 20 years without a claim and have one claim that this person is a bad employer – I mean – you know there is no statistical credibility to that kind of thing. So you know if you ask yourself – take 50 people in this room and take send them off to the corner and ask them all to toss a coin – well how many of those are going to be heads? Probably a fairly large number – right – and how many are tails? Probably a fairly large number – so you’ve got a 50-50 chance that you might wind up with a 50% rate. Whereas if you take one person and you ask me to come over to this corner of the room and flip that coin – well guess what I’m going to do? Once – I’m either going to have heads or I’m either going to have tail. Does that mean that’s credible? Right? So when you have an experience rating system that insists that no matter how big you are or how small you are we experience you the same way.

Q: I see two issues arising out of your response –the first is – that I want to come back to before we leave it – is the question of the paper cut resulting in a $70 assessment – I don’t’ understand how a very trivial claim can result in a significant amount of extra money; secondly is this question of the size of the pool – can we get at the first one now – why did the doctor have to pay $70 more for a claim that doesn’t sound like it would cost the Board anything?

A: Well, it works like this – a doctor’s office has let’s say a payroll of – I don’t have a calculator so maybe someone can help me out with this – but has a payroll of say $150,000. And doctors are paying 20 cents on the dollar. Okay, so, this doctor is going to pay probably – what - $300 in assessments. Okay? So it is $150,000&ldots;..

Q: These are examples so I don’t think the figures have to be right.

A: Okay, so it is 20 cents so it is $300 – now this doctor had not had any claims – so at 0 claims compared to the average of the subclass he is at maximum merit. So the maximum merit doctors are at – you know – in this case – in this subclass is 17% - okay – he gets a claim of $70 – that puts him into a maximum demerit. So he goes from 17% discount to 17% surcharge.

Q: Okay, we need to go back a bit now –I had assumed that when you talked about him referring to something like a paper cut –that this was simply a very minor injury that was reported to the Board where there were no medical costs and no other costs involved.

A: There were medical costs that were involved and was charged to the doctor.

Q: So the paper cut resulted in his employee having to seek medical attention and he didn’t give it to her. Well we’ll ignore the fact that she worked in the doctor’s office and he had to pay somebody else to give her the bandage. In any event the Board had to pay some money out under this claim?

A: Yes, and it was charged to the firm. Right, and what happens is going from a 16% merit rating which meant from the $300 base rate this doctor was paying $40-50 less. Okay, now he goes to $50 more. So he’s had a swing from $250 to $350 by the cost of that claim. And that experience rating follows him for 2 years. So next year he’s going to have the same experience rating – so he’ll pay $200 for a $70 small claim.

Q: So he may actually pay more under experience rating than the total cost of the claim itself?

A: Yes. Yes.

Q: Under the present situation is there any option that doctor would have had once the injury occurred?

A: To pay for&ldots;.

Q: To avoid losing his merit – the benefit that he had?

A: No.

Q: I’m thinking now in completing my questions to you I am going to be referring from time to time to a system that I think we all understand quite a bit better than experience rating which is the auto insurance system that we have in the province and the ways in which that seeks to promote road safety by penalizing drivers who have fault claims and not penalizing those who have good records or even giving discounts to those with good records. Now as I understand the Insurance Corporation of British Columbia system if one has a very minor injury – even if you are at fault you can avoid having any impact on your assessments simply by paying the cost directly. Is that not possible under the workers' compensation system?

A: No it’s not. It’s not something that is possible; it is something that we would not encourage.

Q: You would not encourage that or, why not?

A: No, we would not encourage an employer to hide the fact of an injury and because an injury you know could be anything – it could be a strain of the back&ldots;..

Q: But the road example I was trying to pose was not the case of the two drivers sort of exchanging a $50 bill on the shoulder and deciding not to report it – it is a case where the claim goes to Insurance Corporation of British Columbia at some point Insurance Corporation of British Columbia gives you a choice of repaying the cost of the claim if you wish to do that and preserve and then it says as if you never had that at fault accident.

A: Right.

Q: The Board doesn’t do that?

A: No.

Q: Can you see anything undesirable if the Board did do that? Wouldn’t that have benefits as in Insurance Corporation of British Columbia in reducing the cost of administering these claims and not having a trivial claim involved in an excessive effect on somebody’s future assessment – a case you’ve just described with the doctor?

A: I don’t think – now – I’ve never had to face that problem with Insurance Corporation of British Columbia but I don’t think Insurance Corporation of British Columbia would allow you to pay for the cost of injury to the third party like they would allow you to pay for the cost of a fender-bender. But they would not allow you to pay for the cost of the injury to a third party because – A. they couldn’t possibly determine that cost for a long time so therefore why would we do that here. We sure don’t want to have employers get people hurt and then say – well – it didn’t happen and there’s a trail to these things – sometimes injuries can reoccur or you know if you had a back injury and you are just away for a day now does this mean that this injury didn’t happen at work? So I don’t think it is the same kind of thing. Insurance Corporation of British Columbia probably allows you to pay for the cost of the damage to fix a fender bender but I don’t think – I doubt that they would allow you to pay for the cost of a major long-term injury. Why would they?

Q: Yes, well I suppose why would you want to because nobody’s insurance is going to go up by $100,000 or whatever the cost of a personal injury case might be. But we are talking here about small claims – it was your example of the doctor and the paper cut that led me to ask that question.

A: Well, I think the silliness about that is that you wouldn’t even have an experience rating system at all for a small employer. You know because the incident for a one or two person firm cannot be seen to be statistically credible.

Q: You are not really measuring the risk of injury in that doctor’s office as compared to anything relevant to the goals of workers' compensation when you say that because his receptionist had a paper cut or whatever she was. He has to pay more than the doctor next door does.

A: Yes.

Q: That sort of leads to the second area of experience rating that I wanted to explore with you which is in my view even more fundamental which is the whole issue of the fact that it doesn’t appear to be tied in any way to actual fault or merit in terms of the employer’s performance. Obviously in your example the doctor – I presume the Board wasn’t applying experience rating because the doctor was found to buy the wrong kind of paper where the edges were too sharp or anything. In fact, there is no consideration in the application of the experience rating system to – whether or not the employer was in any way to blame for the accident is there?

A: No.

Q: Nor is there any way that an employer can escape from it by showing that they did everything possible to have avoided that accident?

A: There are some circumstances and I think I am going to ask Joe – Mr. Pinto – to elaborate on that if necessary – but there are some circumstances where can and do relieve employers or in fact seek other avenues of redress such as suing Insurance Corporation of British Columbia and others like that for the costs but let me just cite an example of a flaw in this system. There’s a trucking firm – a truck driver was coming down the road one day and it was bad weather out of the fog comes a truck coming across the other side of the median and hits this truck driver. The cost of that injury was $80,000 – health care and short term disability and all that – and the firm itself said – well – you know – this didn’t happen because of any – you know – safety problem on our part or training or anything. Another truck came across the road and hit us. But because he had charged me $80,000 I’m going to go from a merit position to a maximum demerit position and for 2 years I’m going to pay over $200,000. Right – more than I am paying today as a result of that. And in the system today doesn’t allow us to relieve this employer now the problem is this -

Q: Even if it is a different employer that’s at fault for the accident or a different employer’s employee

A: Yes.

Q: It is the employee of the person –the employer of the person who got injured that has to pay the experience rating.

A: That’s right. Now the issue here is this – do we and can we afford to bring in another level of adjudication in here of who should the costs be applied to? Now if you did that the system would just – you know – it would blow up in terms of the kind of effort and if you think those are cottage industries they will become major industries in terms of how to solve that problem. You know – there’s every employer is going to come in and say it is not my fault. You know – another example is a body shop – right – that is open until 7 o’clock and they were working on cars and stuff like that and a robber came in and they used a hammer and hit one of the workers and the cost of that injury was $7000 and this body shop went into a maximum demerit. So those are issues that are from my own personal perspective – you know – we have got to try and solve as we try and redesign the experience rating system. Having said all of that those are the – you know – you always have the edges and all the dramatic examples of the silly things that happen.

Q: It seems to me – I’d like your comments on this – it seems to me Mr. Fattedad - that these aren’t just issues that have to do with experience rating these are concepts that go to the very fundamental premise of experience rating which is that it is supposed to be an incentive to prevent injuries and I have never understood how a system that punishes a person that has a claim regardless of whether they are in any way to blame for the claim or not can be said to be an incentive for anything other than trying to wriggle out from under claim that is made against them because no matter whether they were totally to blame or not to blame at all they are going to suffer the same adverse impact in the pocket book. It is as if you Insurance Corporation of British Columbia said it is going to be too expensive to decide who is at fault for accidents so from now on if you are involved in an accident – even if you are sitting at a stop sign if somebody ploughs into your rear end of your car your rates are going to go up next year. And we are not going to – you know – we don’t want to have all these lawyers running around trying to get people off on liability so we are just going to say well we’ll lower those costs by not bothering to look at that. Isn’t that a relative – isn’t that a relevant comparison – isn’t that why maybe 40% of the employers don’t understand experience rating because it is so fundamentally irrational that there is nothing to understand?

A: Yes, well for most of these employers that we are talking about here – they belong in a small employer size. When we talk about an employer with a billion dollars in payroll or $500 million of payroll their experience becomes much more credible and so if you – even if you take out the ones and twos of no-fault their experience rating should still be credible enough to experience rate them. The experience rating system that we have today is so sensitive to change and so extreme in its impact that – and especially when you apply that kind of sensitivity to small employers you are going to get you know a large, large number of people out there who are saying what are you guys doing? So that’s why we – when we – we’re talking about experience rating which will – will address the two groups fo employers – the large and the medium employers who we can say have credible experience measurements that we can rely on statistically to say that they indicate real trends and then a different kind of system which is far, far less volatile for really small employers and in fact some of them shouldn’t even have experience rating.

Q: If you don’t determine whether an employer is at fault for an injury before it has an impact on their future assessment how could you redesign the system so that it was fairer for small employers?

A: You don’t determine &ldots;

Q: If this doctor has to pay for this paper cut because it is statistically too small as you put it to – the pool is statistically too small for experience rating to be credible the only way that I could think of off hand that you could change that is to treat all doctors as if they were one common pool of employers. Then you don’t have experience rating – then you just have a classification rating system.

A: You actually touch on an interesting concept which isn’t new in workers' compensation - you’ll find in Quebec they do have pools – employer associations – small employers actually being able to go into this larger pool where the association you know has training programs, safety programs and rehabilitation programs – all of those things like a large employer would and all these people – all these small employers belong in that association and are experience rated in total. So they are experience rated in total so they are not experience rated individually but they are experience rated as an association. Now if we should be looking at that type of thing – and I don’t want to mislead anyone here – small employers by the way in different subclasses or industries act very differently in terms of their injury rates. So for instance small employers in construction and small employers in logging have far higher injury rates than the large employers. Okay, and there is more credibility in their numbers simply because the small employers in these two major classes of subclasses tend to be ones that have far greater exposure to risk. So you can’t say all small employers are the same. And so we have to sort of design a system – I guess if you – if you ask me what are you going to try to do – we are going to try to get to a system where it isn’t one size fits all. It just can’t work. One size fits all will leave a majority of all those people out there dissatisfied.

Q: So what it still comes down to is that the Board seemingly very much wants to make retain experience rating as a way of promoting prevention – accident prevention – is that fair enough?

A: Yes.

Q: In spite of the fact that the primary tool for prevention of injuries – remains health and safety regulations and enforcement. In which case and in that area the impact on employers is very directly determined in terms of whether they get anything wrong and whether they comply with the regulations.

A: Right.

Q: But in terms of experience rating the Board seems – you seem very resistant to the idea that if we could tie the impact of experience rating in any way to whether the employer was at fault or not.

A: Yes,

[Alan Winter]: Is it appropriate to interject questions in this format? [No]. Well then I’m going to argue with the witness when we get back. The question I’m going to object to is the statement that the primary tool remains Health and Safety Regulations and enforcement for better safety – Mr. Sayre wasn’t here for the five days of expert evidence so I find that quite an astonishing statement without any evidentiary basis.

Commissioner: It is public so anyone can disagree so&ldots;I’m not going to disallow that. Go ahead.

Q: Thank Mr. Chairman. So what I am coming back to now is is the area that your responsible for – or at least what you are helping us with today which is the experience rating and why it cannot also - if you are going to retain it primarily as a tool for accident prevention why not at least direct it at that goal by attaching it to whether the employer has done something to increase the risk of injury or has failed to do something to decrease the risk?

A: Actually &ldots;.

Q: Let me finish my question&ldots;so we don’t have to ask it twice &ldots;.Why not – why not have a system in which the only claims that are resulting in experience rating are claims where the adjudicator had evaluated the claim determines that the employer did something or did or failed to do something that contributed to the occurrence of that injury or disease and then allow the employer the right to oppose that if they want to –that’s the same kind of dealing with the issue on the merits that we have with claims processing itself and it doesn’t strike me that it is going to involve that much more administrative difficulties or expense than what you have now where you apply experience rating to everything and then employers seek relief of costs from almost everything and then if they think they can possibly make an argument that they come to the Appeal Division and fight the ones where there is a dispute? Why do you think the present dispute is that much better for the Board than what I’ve just suggested?

A: I think I’m following you; we do the math on this – what you are suggesting is massive, across the Board cost relief with the exception of just figuring out in certain circumstances that a claims adjudicator would have to decide whether or not – not just whether the worker is entitled but would also have to decide whether the employer is culpable.

Q: Excuse me – I don’t want to stop you from answering – I wasn’t suggesting massive, across the board cost relief –I was suggesting no cost relief because of no experience rating – cost relief is relief against the experience rating proportion of assessment as I understood what you told us –

A: Right.

Q: What I am suggesting is you only apply that experience rating assessment where there has been a positive decision based on evidence that the employer was at fault in some respect of the occurrence of the injury and then if the employer wants to seek relief from that then there can be an appeal to determine the issue.

A: And the net result would be that you would probably have such a few instances – when I say a few instances I mean so few that statistically it makes it not credible to actually rely on that data for experience rating. You see you’ve got to be able to rely on data and rely on the underlying trend right in order to say your experience tells us this. Now if we sort of render this thing down into just well – we’ll only ever count the ones that we say your are culpable in and of course you know how that will work – they will be disputed, appealed and the decision will probably never come out for years afterwards. You are not going to have enough numbers to count for you to determine whether there is experience here. I just don’t know how you would do that but you know let’s not get into constructing this system here.

Q: I don’t know if we should get into it or not but before we leave the subject what I am –you are referring to it as an experience rating system and I think you are saying that the pool wouldn’t be large enough – that the pool of decisions wouldn’t be large enough to be statistically significant –I am suggesting that you get away from the system altogether and simply assess employers extra - I mean employers pay for the global risk in their industry by reason of the subclass assessment – that is what that process is all about isn’t it? That is why the assessments in heavy construction and in some areas are so much higher for some offices is that because the risk is so much greater. That’s where global risk gets assessed. I am suggesting that the only impact of an individual claim on the individual employer should be when the individual employer is to blame. It seems to me to be a very elementary and logical proposition and I’ve always been at a loss as to why the Board thinks it would be such a drastic revolutionary concept. Wouldn’t that more directly address the purpose of what is now what you say is now the purpose of experience rating – which is persuading employers to pay in the pocket book to prevent injuries?

A: Mr. Sayre you know I think everybody attached to the system has some varying views on this subject – yours is obviously respected in this and that is your views – there are views of other people in the system who feel that we do have to have a system of leveling the playing field between employers who had truly high costs to the system regardless of fault – whatever it is that they are doing – they are higher costs than the other group of employers and there’s a feeling that it should be leveled off in terms of a level playing field. So you know if you kind of get yourself in a system where only ever are you – are you assessed for or penalized for supposed fault – it doesn’t it doesn’t satisfy that notion of level playing field. But you know to be frank you know I respect everything that you are saying but you know I have to respect a whole host of other stakeholders and their views around this thing and so you know we’ll just take it under advisement that that’s your position and there are other positions.

Q: I’ll ask you one further question and that is you are in the process of completely revising the experience rating system –you have candidly admitted that it doesn’t work very well now and that there are some serious defects in it - I gather from your answer that you haven’t really look at the alternative of only addressing claims where the employer is found to be at fault? You haven’t looked at the financial feasibility of doing that have you?

A: No we haven’t and that doesn’t mean we won’t – it’s very much an open thing – we are in consultation with all the stakeholders on the redesign.

Q: I’d like to – I will leave that subject now – I think you’d like me to – I know Mr. Winter would like me to; and I want to turn again though – not totally leave experience rating but page 17 of your presentation you said that one of the defects of the present system is that experience rating – is that the present system doesn’t address claims suppression behaviours – could you explain in more detail what you mean by claims suppressing behaviour and how you feel that the kind of system that the Board is examining could accomplish that – could avoid it?

A: I guess – I guess – we don’t have empirical evidence so if you were to ask us – you know – do you have 400 cases that had been reported to you in suppression – we don’t have that – we have anecdotal evidence and some personal evidence that claims suppression takes place – they take place in some cases with small employers and in some cases with very large employers. So the system that we have today – the experience rating that we have today doesn’t provide for any real or executable penalties for against any employers who do participate &ldots;.

Q: In fact it provides a reward if they successfully suppress a claim – they don’t get experience rated on it – isn’t that right?

A: Yes, that’s right.

Q: What I was asking is what do you mean by claims suppression – are you referring simply to telling the employer – telling the worker let’s not report this?

A: Yes, it goes from claims suppression to saying let’s not report this and I’ll pay you to stay at home – in fact – I know this happens because an employer – a fairly large employer – phoned me one day – the controller – this company phones me up and says look, listen we have a couple of guys who’ve been hurt on the floor here and missed a couple of days – maybe we can pay them and you know and not report. You know these people actually think about that and they phone me and ask me if they can do that and I say absolutely not. You are breaking the law if you did. But you know – from a personal perspective I’ve seen this happen – I’ve had people phone and talk to me – I’ve had you know having family members having that done to them so it does happen and what what frustrates us really is the fact that we have no mechanism in place to either randomly go out and check whether these things are going on and if we do find that it is going on there are no provisions for us to levy any kind of penalty on employers. Now part of this experience rating system or the redesign of the experience rating system we fully intend to bring in some activities and potentially fines for that kind of behaviour.

Q: So when you talked about addressing that problem you are talking about doing it terms of punishing employers who are caught suppressing a claim in that way – by way of fining them or whatever –

A: Yes. Yes.

Q: But not redesigning the system in a way where it would make it less advantageous for them to do it or give them less of a motive to do it?

A: No. No.

Q: There has been a proposal made in the past, back in 91 but it suggested that the Board should try to create a system of incentives in the way that the assessment policy operates. It would be aimed at encouraging all employers to employ people with disabilities, specifically injured workers, by giving them a discount on their overall rate by giving a certain percentage of injured workers employment opportunity. Has the Board looked at anything like that kind of proposal?

A: I am not familiar with that proposal. As a part of rate modification review we are looking at not only a system of experience rating that looks at the past history of the firm but also a system of incentive rating that would allow us to enhance, modify either up or down the experience rating or rate modification based on whether a firm was involved with a disability management program, whether the firm was a participant in the Diamond program, etc. We look at the rate modification process that we are developing as encompassing a number of things.

Q: Conceivably could an incentive program be developed that would reward employers who accommodate injured workers?

Q: Speaking conceptually you could do that. Need to look at parameters, costs, does it apply to employers small and large, are any inequities created because someone is able to participate while others are not, etc.?

WINTER:

Q: Couple of main areas I want to deal with - classification, particularly reclassification, experience rating and relief and a variety of other topics.

Reclassification of employers

Q: I want to review the basic existing practice policy in the assessment department when an employer seeks reclassification. When I talk about reclassification I am talking about if an employer comes in complaining that they are not in the proper subclass or want someone else moved from that subclass. I understand that the existing practice policy is that the Board will consider if an employer’s industrial classification properly describes its operation and if it doesn’t it will take steps to remedy that situation. E.g. we had an employer move from supermarket to trucking classification and they didn’t think they were part of trucking but rather a wholesale distributor. The Board was willing to sit down and consider what the employer was and when they put a name on the employer if that was not what the employer was then they would be moved to the correct class. Is that correct?

A: Yes

Q: Another example is when you call a sawmill a pulp mill. If the employer came to you and said that you have us as a pulp mill but we are a sawmill you would rectify that?

A: Yes

Q: What if the employer comes and says that you described me as a pulp mill, which is right but we don’t like who is in our subclass. I understand that that is not something the assessment department currently deals with but rather it is a matter that the Board feels the panel of administrators should deal with. Is that true?

A: Yes if an employer comes to us and says that we are really logging brokers and our office is at the top of the 64th floor of some building. We don’t ever see or touch a log so we are really stockbrokers and we shouldn’t be included in logging. We have people who investigate that and look at the operations and if it is true then it would be possible to reclassify them. More difficult part comes when you are dealing with something like food processing. Now you are talking about a different thing. If we decided to make that change it would be a policy change. Let me give you a bit of history. Up until sometime in 90 or 91, before governance system put in place the assessment department could move an employer around. There were different policy manual or practice guidelines. When governance system was put in they said they didn’t want this to happen anymore. If you changed a word in the classification rate list that has to be approved by governors. They wanted to move things around in some order. As these things kept coming on the governors they appointed a classification committee. I sit on that as chair and other members sit on it as well – assessment and compensation services. We look at issues from various employers and see if the employer has a case. Can we deal with it without changing policy or without it impacting on the rate book? If we can then we can do it but otherwise if it requires changing the policy at all we have to refer it to the Board of Governors. What was more and more prevalent was that more companies were turning up after hearing that there was a classification committee and we had more requests. So much so that there was a decision by the Board of Governors in 1995 that said no more reclassifications until we completely do exercise of reclassification of all employers and we do it right. Unless it was an extreme situation it wasn’t going to be dealt with unless dealt with holistically.

Q: Just to summarize, if an employer can say that they are mis-classified or misnamed then that will be changed. But if the argument is that we are what we are but it is not fair and equitable to have us in this rate group that involves change of policy and assessment can’t do it so it will have to wait until the Board of Governors gets to it. Want to show that there is a problem here and this is without trying to give anyone a bad name. This perhaps should be a power given to administration versus to the governors. Going to deal with BC Sugar that is now Roger’s Sugar with permission from my client. Two clients from Roger’s – Mike Fletcher, and Pete Smith who were present this morning, Mr. Smith is still here, and I will be putting up documents with their names on it.

This issue was first formally raised in April 1993 – BC Sugar at that time said it was inappropriate to be sub classed in 0620 – they were classed in Manufacturer of sugar and that is true. They were classed with other industries that they felt were very different types, with different hazards and different experience. They wanted to be moved out or to have poultry processing class moved out. They also talked about using Section 42 and having a special rate put on where BC Sugar would have their rate lowered or poultry processing would have their rate raised. They also put in evidence to show that over a 6 or 7 year period the amount that they had paid in continually was in excess of the amount that was paid out by the Board in claim costs of over $1 million. The argument was that they were subsidizing a much more hazardous industrial classification and that matter should be rectified. Is that your understanding?

A: That is correct

Q: The first go around in 1993 the assessment department determined that they were properly classified as manufacturer of sugar and the issue was whether they should stay in that subclass. Advised overall classification review versus piece meal approach to individual companies so case was rejected. That was appealed to appeal division and in October 93 the appeal division rejected it saying that it was a matter of policy and only the Board of Governors had the power to create or rearrange the process. In 1995 Roger Sugar came back with a submission focusing on Section 42. First document in May 95 from Mr. Younie said that poultry processing should not be in subclass 0620 and that was initial position that BC Sugar was taking. Then it says that it looks too expensive to move poultry processing into 0671 and it doesn’t look bad for 0637. Just to explain what that means, in 95 base rate for poultry processing was $2.87 so that is the same base rate as sugar. The proposed change would have raised their rate to $5.82. It is a significant increase but it also shows that somebody else shouldn’t be paying their costs and that they had a more dangerous business. It was recommended that it would be okay to move them to 0637, which at that time was paying the exact same rate, $2.87. Next came a letter from Mr. Biggs and who was Mr. Biggs?

A: He was manager of assessment policy.

Q: Mr. Biggs said that after some analysis costs generated by poultry processing industry has led to increasing costs at Roger’s Sugar. Mr. Biggs said that it was expected that a realignment of the subclass would take place shortly. Roger’s Sugar felt that their concern had been acknowledged and felt something was going to happen. Next document in 96 had a note on it wondering if Section 42 could be used. I take it you also saw merit in changing their class?

A: Yes

Q: Next came a memo from Mr. Du Gas. The third paragraph talks about the moving of poultry processing out of 0620 into 0637 so that Roger’s Sugar would remain in 0620 with a number of other industries but it would remove the high cost industry which seemed to be improperly placed. This seems to be a recognition that there is a problem with poultry processing. Alternatives were included on page one, paragraph 5 and included using Section 42 to provide Roger’s with a lower rate or poultry processing with a higher rate. On the second page, last paragraph it said that an alternative might be able to provide some assurance to the company that their concerns will be addressed and any decisions will be retroactive from January 1, 1995. That is basically what the company was looking for, they wanted to know that they were going to be dealt with somehow. There was a memo from Mr. Fattedad again. You seem to be saying that this is what is needed – that we will consider Section 42 and then prepare a paper and support and justify this for 1996 to go to the Senior Executive Committee. Again you are saying let us get this going . In May 96 you said that nothing will happen with this until the reclassification review has occurred. Went to appeal division and got decision of April 97 – denied. Turn to the second to last page, page 27. The appeal commissioner said in paragraph 2 that the documentation from the Board’s assessment department lends substantial support to the grievances expressed by the employer as to whether their classification is equitable. Again yet another admission that this employer has a plausible issue and something should happen. Yet nothing has happened with Roger’s Sugar is that correct?

A: That is correct.

Q: It has been 5 years. When do you anticipate that this review is going to be completed and we are going to start seeing the restructuring of the subclasses?

A: We are looking to have something for 1998 and for implementation in 1999. This is depending on those groups that can go quicker or faster. You are probably looking at an implementation time frame of more than a year as each group goes through the system. I would expect that we would be finished with this process at the end of 98 and then we would talk about who will go first.

Q: Let’s say that 2000 will be a reasonable time in which to say Roger’s Sugar will have something happen?

A: Yes

Q: That has been 7 year period since first presenting their case, which has been described as having merit. Over that 7 years they have had to subsidize that subclass is that right.

A: I would like to go through a short exercise to show the decisions and problems we face. Want to make sure the full picture is being seen.

Q: First I want to go through some of the recommendations that the commission has received.

A: That is fine.

Q: Classification system used in BC must provide the flexibility for the Board to review and correct what experience demonstrates to have been an inappropriate classification for any particular employer. Do you have any problem with this concept?

A: No

Q: These concepts are found in Coalition of BC Businesses’ submission. In order to meet this objective in a timely manner the authority to conduct the appropriate review and to make the adjustments when the equities require must lie within the administration of the Board and not with the Board of Governors. The Board of Governors simply aren’t able to realistically deal with these kinds of matters on a day to day basis. Do you agree with that?

A: Yes

Q: What was recommended is that the authority to review and adjust a classification assignment of any employer on the basis of fairness and equity should lie with the assessment board. Do you agree with that?

A: Yes

SID FATTEDAD:

In the perfect world if all employers were the same and all injury rates equal what you would find is an employer with a 1 person working would have an injury rate of say 5%. If all employers were classified in the right place and had right credibility of experience they would all line up on chart at an average 5% injury rate. When I talk about the variance around this average I am saying that this system is not perfect. Let’s examine how imperfect it is. Class 6 is light industry manufacturing services and trade class of the board. The chart shows average person years of work versus number of claims per year. One dot = one employer so there is a scatter gun effect on the chart. The chart illustrates that even over a 10 year period the experience shows a wide divergence from the mean. Lot of employers will have 0 - injury rate and other employers with a very high injury rate. One employer has over 600 workers in their firm and it is right on the average of injury rate. If we took ourselves down to the 4000 level of person years of work the employers there are varied . One example of an employer with 3500 average person years of employment and average claims of less than 50. It is questionable why they are in this group. Systematically we could move these people out of this category and into another class. This is the first time that we have been able to get at this information because of the data warehouse that we have been building. We can now look at long term direction and get credible data to show us what is going on. ALAN’s point is that in subclass 620, BC Sugar is in a far better assessment rate then poultry processor but when you look at people below BC Sugar there are a lot who have 0 or less than 2 claims over 10 years. They have same legitimate claim that they shouldn’t be here.

Q: You show me where Roger’s Sugar was and where poultry processing was. You are building a new system. You have to build into the system the flexibility to allow rectification of inequities because it is too large a system not to have inequities. The 620 situation has gone on far too long and that can’t happen.

A: ALAN I agree with that and the Board of Governors has been wrestling with that over the last 6 or 7 years. With the new re-classification system these things will happen as a matter of course. Problem is that when anyone came up with a problem there was a new research project for 2 weeks or 2 months. What we have built into the system is automatic levelers that move people from wrong place to right place. That shouldn’t be issue for governance. I think governance was saying that you can’ t make ad hoc decisions or you will open flood gates. I wasn’t trying to point out that you were wrong but if we move out one – the chicken processor - we would then have to move out a bunch of others as well even further down. The information that we had didn’t provide us with this view of the world and the if we had the view that we have now 6 or 7 years ago we would have started to change things.

Q: I do a lot of bargaining and I hear a lot across the table from unions that we may not be here in 10 years so let’s put this down on paper. That is what I am trying to get across here. I understand what you are saying and problems that you have but new system that you have needs timely review. You are still going to have to draw a line and somebody has to make a determination – I think that should be the assessment department. I think that there are going to be a lot of cases where people won’t meet that line but some will and 7 or 9 years is a lot of years to wait, it is unreasonable.

Q: Let’s keep on classification and re-classification. Another concept that I think is important is an employer wants to see that they are being fairly classified vis a vis their competitors. I will give an example of an employer who manufactures computer software, he is involved in the installation and servicing of computers and has an aspect of the business where they do computer programming services. That employer could end up in subclass 0673 – computer software manufacturing - with base rate of $.86 or he could be in 0683 – computer installation and service - with $.47 base rate or he could be in subclass 3303 – computer programming – with a base rate of $.20. That is the kind of thing in existing system that drives employers nuts. It is very difficult to explain to them why they are not in the lower class as is their competitor. Do you agree that that is a problem that needs to be fixed?

A: Yes I agree with that. New classification system allows for multiple classifications a lot easier.

The points that you bring up we intend to address in the revised classification system. Starting point is to create classification unit scopes. This is a definition document of each type of industry. We don’t have that at the present time so right now we have to rely on staff judgement when they read the words in the rate list to determine what that includes and what that doesn’t include. Hopefully that will become a lot clearer to everyone that if you are in that industry everyone in the same group will have these inputs these outputs, etc. From there into the industry units, the industry units will go into rate group based on cost experience. You may have various industries that share the same base rate because cost rate is same. Now there will be an automatic review of those placements and there will also be an automatic review built in where the classification units didn’t capture what is actually happening in industry. Thus, we may have to make a subjective decision initially but that is recaptured and reviewed as we go along on a regular basis. The multiple classification criteria is being looked at, that is the rules surrounding when you get more than one classification what sort of conditions have to exist, etc. To come up with these classification scopes we are holding workshops with industry groups, we have held 7 workshops so far and will hold more. The purpose of these workshops are to identify process of input and output, etc. of various industry descriptors. Had a couple of sessions around business rules surrounding multiple classification, etc. Haven’t finalized because consultation hasn’t been finished.

Q: Understand that but we have waited a long time and will have to wait longer and we are being told that something great will come out. The employer community is unfortunately losing patience and we want to have something to point to at a later date to say that the Royal Commission looked at all this and they have some principles. I am not asking the Royal Commission to do your work because they couldn’t but at least some principles so that when we look at what you’ve built and anybody wants to change it in the future we can say hold it a minute. Unless the role has really changed here are some principles the Royal Commission looked at about how to properly classify and broad principles and have you met them? The ability to be classified vis a vis competitors is a very big one for every employer. You have one that I think that you are aware of and I don’t know why you haven’t fixed it. You have a homemaker service classification and you have 2 – 0626 at base rate of $1.68 is for home maker in health care and 0658 is a base rate of $2.98 and is associated with social services agencies. You tried to fix it by putting everyone in higher group so there was big uproar. It is the same thing as what you have here if a problem is raised and the assessment department recognizes it, takes a step, gets flack and backs off. You are still left with same basic problem. You’ve got competitors facing each other and ones paying a $1.30 less and that’s not fair. The last example is the Southern Rail situation. Southern Railroad used to be part of BC Hydro so it paid their rate. They were privatized but you have a subclass 085103 called Railways Operations of not otherwise established and they have a base rate of $5.57. They came to you and said that they compete with railways and that every other railway has a deposit account or it is an independent subclass so they pay their own rate. Then they put in evidence that in 1988 to 1995 what they paid in and what they got out was over $1 million. If they had been treated the exact same as any other railway they wouldn’t have had to pay out the $1 million. Policy says that you shouldn’t use a classification system if it results in a competitor’s advantage. It was taken to the appeal division and it was said that this was a matter for the governors but again they recognized the concern. Southern Rail was told to wait for the system to change. Problem is that the number of rate groups is too small. BC has 71 subclasses so you have dissimilar industries and hazards put together.

Handout – look at table 3, second to last page, which shows rate classes. It shows BC as having 69, Alberta has 119, Ontario has 219, Quebec has 320 and Saskatchewan has 69. When an employer comes to register with these different jurisdictions they have that many choices with respect to subclass. They have many more industrial classifications. If you look at the 4th column they show you the different industrial classifications. BC has 365 classifications and they must be placed in 69 classes. Is that basically correct?

A: Yes

Q: Preceding page shows that BC has 143,000 employers and 69 rate groups. Alberta has 72,000 employers and 119 rate groups, Ontario has 219 rate groups and 179,000 employers and Saskatchewan with the same rate group as BC has 33,000 employers. The number of subclasses has to expand to provide that flexibility. What are your thoughts on that?

A: There is probably no prescription for the right proportionate number of rate groups relative to employers. Rate groups should be credible groups in terms of cost, payroll size so that in the long term what you want to have is stability. It is not good for any industry to have rates that wildly fluctuate year after year. Found that this report falls short on good analysis of the variance around the mean in terms of rate groups. The fact that you have 120 rate groups is not necessarily good of its own because the variance around the centre mean could be so high that it is not really, it tells you that industries are not going to be well treated. Having said that 69 and particularly knowing that under subclass 659 where we had 21 different types of things going on in the same subclass probably tells you that we need more classification units. In BC today we have 365 classification units and the model that we are moving to has something like 1000 classification units and about 100 subclasses.

Q: I didn’t want a number but agreement that there needs to be an increase in rate groups. My understanding is the first administrative inventory and the ESS review recommended that. Both said that we have to raise the rate groups. Again I think that we are in agreement.

A: Yes

Q: Statement from ESS phase 1 project was that "the current state classification system lacks structure and is not responding well to changing circumstances&ldots;" so everybody objectively agrees that there is something wrong but we have to sit and wait."

A: Yes

Q: I want to talk about retroactive changes to benefit levels. Employer community is advocating that retroactive implementation of benefit changes should not occur but if it has to occur then it should be very much limited and should come from general revenue as opposed to the employer community. HANDOUT – excerpt of the Board’s briefing paper dated April 1997 – Funding the BC Compensation System. Have you seen it before?

A: I have seen this.

Q: Wanted to deal with page 12 on who should pay for retroactive changes to benefit levels. On page 13 it sets up the review of previous Royal Commissions and a previous report on this point. They start with Mr. Justice Sloan’s 1952 Royal Commission report and what he does is point out the concern of retroactive changes altogether. What he seems to be saying is that what you try to do now is fund based on the current and future costs to try and bring it in today. If you go back and try to make changes retroactively you are asking today’s employers to pay for yesterday’s problems. I think that you used that exact same example, by the way when you were talking about cost relief. I am always interested to hear people talk about that problem from cost relief but nobody wants to talk about it from retroactive benefits. Mr. Justice Tysoe then looked at the issue and he said that I know that my report is going to have all sorts of cost implications and it is unfair to put that all on employers. It should be 50/50 to consolidate revenue. That is what the 1976 report – which was an actuarial report looking at the actuarial aspects of the WCB – said. They said was that the general taxpayer through the consolidated revenue fund should contribute at least 50% of the cost of retroactive benefit improvements since 1965 with employers paying balance. You would agree that hasn’t happened, employers pay whole shot?

A: Yes that is right.

Q: In fact it sets out some of the shots on the next page some of the shots that we have had to pay. The retroactive benefits from 1974, payments were all paid by employers and then you have the 2 aspects of the widows’ pension being paid by employers. Is that correct?

A: Yes

Q: If you look at the last bullet on widows’ pension. The last line says - after talking about the amount of $401 million charged to the Board unfunded liability – this may mean a delay in achieving the goal of restoring the fund to fully funded status providing prudent reserves set out in the WCB’s 96 strategic plan. These insertions into the WCB system has real consequences on whole system doesn’t it?

A: Yes

Q: There was another retroactive decision that came out of an appeal division decision. That was the question of whether the Board had power to recover over payments, retroactive adjudication. It was an issue of an adjudicator making a decision saying that you are entitled to compensation, then your employer appeals and you go to the Review Board and they say no you are not. The practice had been that the Board would take that back if they could. That went to the appeal division and the appeal division said that it was decisional errors, i.e. it was within the jurisdiction of the adjudicator to make the decision he or she did. The Review Board thought that was wrong but it is a decisional error so they don’t get back the money. It went a step further because the governors resolved that we are going back to 1980 and correct. The situation was that there were people who improperly received money due to decisional errors from the Board and the Board took the money back. Then the governors, through the appeal division, said that we will get it back again anyway. So the Board had to give back money that should have never been given the first time but that should never have been taken away. Are you familiar with that scenario?

A: No I am not.

Q: Bud you were around for that scenario, are you familiar with that scenario. The reason I am asking is about how much was that?

A: $5 million

Q: Let’s just assume that it was about $5 million and that employers had to pay for it too. So we see some of the comments in here about the previous Royal Commission, outside reports, what is your thoughts about retroactive benefits being charged to employers only through the WCB system?

A: If you are asking me from a personal perspective then this is just a personal thought here. I think it is very difficult for businesses to properly plan their business and their outlays and their costs if these things come from nowhere and they find out they have to pay for it. From that perspective it is not good for business but if you are talking about something like reinstatement of widows’ pensions I was always under impression that that was a process everybody had agreed to.

Q: When you say everyone do you mean that the employer community agreed with that? My understanding is that the employer community had no choice. The government made a decision that WCB was going to pay it.

A: We never heard anything different from employers so it went through. As you know ALAN this wasn’t a decision imposed on the system by WCB.

Q: I understand that and that is why I think we are raising the concern. It was a legislative decision that first put this decision into the Act. It was a legislative decision that made that discriminatory – if that is what it was – under the charter. It was a legislative decision to change it but it ended up being one segment of population that had to pay for it – employer community. You hold the senior position in finance position and that is the position I want to hear from. I want to raise it from the same perspective that you raised it this morning on cost relief. What happens when you take that widows’ pension – we’ve got about $400 million being paid by employers? Today’s employers are paying for widows that were cut off back before 1983. You would agree that a lot of employers today weren’t around in 1983.

A: That is true.

Q: But a lot of the employers are paying for it.

A: That is correct.

Q: You would agree that a lot of the employers who were around in 1983 are not around anymore. What are your thoughts on that?

A: It is not very fair. You know that our children are going to be picking up the tab for our pensions in the future.

Q: I know you volunteered the problem about 39(1E) and you left the impression that it is just not fair to have this intergenerational problem that a current employer should pay for relief.

A: Right

Q: I know that current employers haven’t bitched at all about paying at all. What they are complaining about is that you are taking away our right to bring the 39(1E) on historical. They are fighting with you about taking away what they are willing to pay. But the Board raises back that we don’t want to put it on interjurisdictional. When the employers come and we say that there is a problem here with interjurisdictional on the retroactive entitlement side then all of a sudden it becomes well yeah, but&ldots; That is what I am trying to go at. It just doesn’t seem fair and again, the position that the employer community is taking with the Royal Commission is, that should be dealt with in the statute. That is not fair that current employers have to pay that significant amount with respect to things that happened in the past. Nobody is saying that the widows shouldn’t get it back but it is just the wrong entity, the employers are saying, that is paying for it.

A: Let me clarify this. The cost of the retroactively reinstated pensions was something like $400 million to the assessful rate group. The way we decided to recover that cost from the employers was to extend it over a period of 10 years or even more. As an administration we made a decision that we would not penalize employers immediately or right up front so we extended it. The impact of that is $36 million on 1998. In other words had we not had that pension reinstatement the 98 assessment would be $36 million less. That compares to rate relief of $76 million. For something as high profile and significant as the widows’ pension the impact of cost relief is even higher than that.

Q: I am not quite sure I understand because there is a long term effect. It is $500 million that is being paid there and I understand that cost relief is $76 million all together.

A: No it has been going on at $70 million for 3 or 4 years.

Q: The $70 million is already in the system it is just being moved around and employers don’t seem to mind that it is being moved around. They still have to pay it is not an additional $70 million that employers have to throw into the system, which is what the widows’ pension is – it is above and beyond. I don’t know what $70 million does to the base rate of every single group.

A: It has some impact on various groups.

Q: It has to have an impact but whether it is cents or what I don’t know. But the money is already in the system, which is something completely different then the widows’ pension money.

A: The money isn’t all in the system. The 39 (1E) refunds is real money going out of the system. In fact, the leakage is what I really object to, the leakage of this money to the system because most is going to employers and rest to consultants.

Q: That is a different issue.

A: It is not no cash but real money that is going out of the system.

Q: I was going to ask questions about Experience Rating Assessment and relief based on your discussion with Mr. Sayer. When we get to historical relief I will ask Mr. Pinto to come join us again. I want to summarize my understanding of the premises that you were trying to get across. Tell me if I am right or wrong. I had the impression that you were saying experience rating in one form or another has value within the Worker’s Compensation system. Is that correct?

A: That is correct.

Q: I understand that all Canadian jurisdictions have experience rating.

A: That is correct.

Q: The other thing that I took from you is that one size experience rating systems does not fit all employers.

A: That’s right.

Q: For larger employers they are a statistically credible group and the existing experience rating is workable. There are problem areas that have to be dealt with but it is a workable concept with larger employers.

A: Yes

Q: For smaller employers the current system just doesn’t work well for them and for very small employers – one, two or three employees – it doesn’t work at all?

A: Yes

Q: I want to talk to you about what I perceive to be beneficial objectives of experience rating with respect to the Worker’s Compensation System. It is an incentive to promote safety awareness, and for taking steps for preventative action. Do you agree with that? Do agree with that - a properly structured experience rating system?

A: A properly structured one yes

Q: It also makes an employer think about cooperative steps of return to work programs, for example. It is working together with the system, the worker, the doctor and the employer to bring people back to the work force sooner, which reduces claims costs and could have impact on experience rating.

A: Yes and an impact on the base rate.

Q: Experience rating also has an objective of equity. For example, you have 2 large employers in the same industry and same subclass – pulp mills. They have 150 employers each. One is striving for excellence in safety – safety programs, safety attitude, it has a culture of safety, it has an enviable safety record and when someone does get injured it has a wonderful management program with rehabilitation and return to work. On the other hand the other one is not a bad employer but just ambivalent. Production is a focus and the culture between the workers and the management is not excellence in safety. So not through fault but they have a higher claims record. My understanding of experience rating is that it is suppose to add an element of equity between those 2 employers in that there is an incentive of recognition for the excellence and there is a cost benefit. That may have not been the drive but it is there and it is a recognition that is appreciated. What do you think about the equity side? Do you agree with that?

A: I think that that is the right result.

Q: Some discussion this morning was that relief of cost, particularly Section 39(1E) is being driven by experience rating. Now would you agree? My understanding is that 39(1E) – the relief for a pre-existing disability, disease or condition predated universal Experience Rating Assessment. Is that correct?

A: That is correct.

Q: So that was in the statute a long time ago. So whatever the reason the government had put into the statute the need for a reserve for a relief of cost.

A: When you said it predated universal Experience Rating Assessment, Experience Rating Assessment has been around for some time in different forms for various industries so the drive behind that is still there.

Q: You made 2 statements that I thought were inconsistent about the effect on the base rate with experience rating assessment. You used the example of a single employer in a subclass. First off, in my experience there aren’t many of those. There are deposit accounts and there is Alcan and I am not aware of many other single employers in subclasses. You raised the example of that single employer going out and getting historical relief. So the adjustments were made and the money was reimbursed. Then you raised a comment about what doesn’t happen is that you don’t’ go back and adjust the base rate. I take it that the employer gets the double benefit because if the base rate was adjusted it would have been a higher base rate. What I didn’t understand is how that could possibly could happen. My understanding is that the costs that got relief are taken out of that subclass and moved to the reserve and everybody shares on that. So the base rate would have to go down. Is that right.

A: That is right. If there was nothing coming back to this subclass from the relief being afforded other subclasses. In other words you have a relief of cost coming out of this one employer subclass, say of $100,000. Supposing there was more than $100,000 coming back into this subclass as a result of the spreading around of other employer’s relief. For instance this subclass may draw $200,000 or may attract $200,000 of cost relief transfers. As a result that difference isn’t readjusted or reallocated for rate setting purposes. That is what I was referring to. It is not always just an outgoing thing. Every subclass has an incoming. To the extent that an incoming and an outcoming does not balance we are not readjusting the base rate.

Q: I understand that but I understood that when you do an adjustment in modern times for historical, if it was going to be equitable there had to be a historical base adjustment too. I got the impression that the employer who is getting relief is also getting a benefit that their base didn’t go up. That is what I didn’t understand, the base would not have gone up historically.

A: Not as a result of that relief but it may go up as a result of other relief.

Q: I understand that because who knows what other relief is in the system. That is independent of the relief being sought by that one employer.

A: ALAN you know that it would be impossible for us to deal with that because of the number of claims, the number of reliefs that have been done for everyone of those to come through and we go and recalculate, it is impossible. So we don’t do it.

Q: I wasn’t suggesting that you want to do that. I was just picking up on the point I thought you had said that the base rate goes up for that particular employer way back when and they don’t get it adjusted and that is not what I understood.

Q: I want to deal with the historical Section 39(1E). These are the ones that date back to who knows when – it could be 10 years or 15 years – but they are being brought in to current time. What I understand to be the initiating problem is not that employers have decided in the 1990s to bring claims on earlier files for relief of cost. It is that the policy changed – it was Decision 27(1) – back in 1978. The policy changed and clearly said that there was a mandatory obligation for the claims adjudicator to consider and deal with Section 39(1E). That was my understanding and it didn’t happen.

A: Two things – one is that the policy did say that and actually went beyond that. There was slight distinction in the words but it required the adjudicator to convey a decision to the employer. The department took that to mean you convey the decision when you actually make an application and so it never issued decisions when it didn’t make an application. For the most part there used to be checklists on files. People would look through the files, think about it and say no in most cases but they never issued a decision. So in 90 or thereabouts I think it became an issue when the Board started to get a lot of retroactive requests about whether it should go back and deal with the ones where the employer actually hadn’t been given a decision. After a lot of internal debate and some debate externally it was agreed that the way the policy read there was an obligation to provide a decision. So the Board has been accepting retroactive requests orally.

Q: What happened from the employer viewpoint is that there were knowledgeable people who were coming into their community and raising these issues with not knowledgeable people – i.e. employers themselves. They were saying that you had a right to seek relief and employers being told that they have a right are starting to exercise that right. It took a few years. I compare it to a situation in our current legislation. Workers have the right unilaterally, without making an application, to get their benefits adjusted twice a year on CPI. Is that correct?

A: Yes

Q: Let’s say hypothetically that the Board stopped doing it and people didn’t notice until about 5 years later. You would agree that it would be the same situation where you would have to deal with it. It would be an administrative problem but you would have to deal with it and you would have to adjust every worker. Now I am not saying that that has happened.

A: I think that there has been a general sense that if you have committed a clear error in law, if you have failed to do what the law says you should have done then it must be corrected.

Q: Here it is not a clear error of law but it was a policy matter that was not being followed. The other aspect and the reason I am doing this is because whenever I hear 39(1E) historical I always get the impression that employers are being painted as that we are doing something wrong. I get the impression that we’re causing all sorts of problems and we are going to put an end to it. Everybody is advocating let’s put an end to it. The other aspect where this comes out is, you hear the stories and I know that they are true, in goes an application for 155 and it lists 150 claim numbers. That is a lot of work for an adjudicator. Do you know the background on why they had to do that? I’ll tell you what the background is and you tell me if that is accurate to your knowledge. What happened was the same people – and I was involved in the discussions with the Board – said look we are doing this. What we would like to do is the work, give us the files. These are the files that we are going to want so give them to us and we will do them at the Board. We will review the file, we will see what is on the file and then we will make the application. We will do only the ones where there is evidence on the file but we need the file. When the Board said – and it is not a matter of right or wrong – they said no. They said that there is no appealable decision here so we are not going to give you the file but ask and we will give you a decision letter and then you will have an appeal decision. We said that the problem that you are going to end up with there is that you are going to have to make the initial decision. We are going to get the files anyway and we are going to appeal it so can’t we work out a process. The answer was no so the only avenue left that I saw was to file for every claim – for example, back injuries – and we are going to file every Macmillan Bloedel back injury because it is the only way we are going to be able to get the information. Is that your understanding?

A: Slight revision to that history. When these requests were submitted in bulk they ended up building up and folks within the Board met with some representatives of the employer representatives that were dealing with these. Initially they did agree to the suggestion that was made that we’ll come in and we’ll scan the files, we’ll pull out the files that we think there is some reason to consider 39(1E) or that there is some possibility of success. A special project started up in 1995 and that went on until about mid-1996. Why the Board stopped allowing that was privacy concerns that had been raised with the privacy commissioner about employers having access to the file. As you know there was a whole change on the employer’s right to access the file. The employer no longer has a right to access the file until an appeal is filed. So that is when the Board said from now on we are not going to be able to give you the file we can only give you a file once a decision is made. Then there was a brief period where the Board sort of gave a very cursory decision on the historical cases to basically do the same thing. Some of these claims were 20 or 30 years old. The appeal division in late 1996 96, early 97 said that is not really a decision in a true sense so really the Board has to make an individual decision. Where we are at today then is an individual decision on the merits has to be made. If the employer doesn’t agree with it then they have to file the appeal and then we will go from there.

Q: I wanted to show that this wasn’t an attempt to drive the Board crazy. It was circumstances and the only way of getting to the files was by going through this process. I take it that this should be capped for want of a better term. I.e. we shouldn’t be extending the historical period beyond a certain period of time. To be specific when did the Board first become aware that we have this historical 39(1E) problem we didn’t give letters in the old days. When was it clear that this is something that we better not do again?

A: I would say it came during the early part of the governance era.

Q: 1991 – 92?

A: Yes

Q: Does that mean that every case now gets a Section 39 (1E) letter?

A: That is the expectation.

Q: You would agree if it didn’t it is the same problem?

A: This is on future claims.

Q: Claims that have been in the system in the last 4 years, everyone of them should have a 39 (1E) letter.

A: That is the expectation.

Q: If not then it is the exact same problem that is continuing on – that an employer can come back at a later date and say I forgot one.

A: Correct

Q: I assume that this is a Board responsibility to make sure that this problem doesn’t continue.

A: That is correct. Or change the policy.

Q: Yes but they haven’t yet?

A: No

Q: The question came up about our employees giving notice. Now the few that I have seen are actually a letter that goes out to the employer. It says your employer – sometimes they identify the consultant – has filed seeking relief of cost under 39 (1E). The reason they mainly send the letter I think is to advise them that there will be no effect on entitlement of benefits. It says that in the letter that I’ve seen and that the file will be given to the employer

A: I just want to correct one thing I said in response to Mr. Sayer earlier. The historical practice even before this became an issue in 91 was that this was not an issue that the worker was really concerned about. It didn’t affect the worker’s benefits and for that reason, in fact, it is only appealable to the appeal division. So as a matter of course the adjudicators did not provide a copy of their decision letter to the employer. I just did a scan over lunch time with some of the adjudicators and that is generally the practice. A copy of the decision is not generally provided and procedures don’t require that. Adjudicators being very used to copying both parties on letters do that. My point and answer is that it is not a matter of course at the adjudication level that the worker will get a copy of it. At the appeal division, when an appeal is filed and an employer requests a copy of the worker’s file the appeal division notifies the worker at that stage.

Q: It sounds like the claims adjudicator would copy the worker. What I see is an actual letter from the adjudicator to the worker explaining what is going on.

A: That is not a standard practice in any event.

Q: You were asked by Mr. Sayer if they get full file disclosure and I expected a simple yes but you mentioned something about super sensitive material. Does someone actually go through these files on 39(1E) and edit them determining what they think is relevant and not relevant before they give it to employers?

A: The general answer would be that they get full file disclosure but a couple of areas, first of all in sensitive claims, as you know that section is responsible for disclosing those claims. They may limit certain aspects of disclosure because they don’t think that they are relevant to the issue. They have been asked to be very sensitive to the disclosure. In the move to e-file now there is ability to flag sensitive material as it is received and placed on a file if it is considered relevant. You are probably familiar with the protocols around relevancy and sensitivity and all that. That was the qualifier that I was providing.

Q: I will save any more questions on that area for Occupational Disease. I am coming back to a couple of other areas that were raised on Experience Rating Assessment this morning. Mr. Sayer raised a couple of points and, in fact I objected to one and was advised that it sounded like a proposition. I am going to put the propositions to you. First off Mr. Sayer said that there is essentially no evidence that Experience Rating Assessment works. Do you agree with that?

A: No I don’t believe that but on the other hand the amount of research that is available on this subject doesn’t fill a library.

Q: He also said that the primary tool remains for the objective of safety and prevention is the health and safety regulations and enforcement. Do you agree with that?

A: Primary tool?

Q: The primary tool to have safety in the work force is health and safety regulations and the enforcement.

A: Yes that is the front end.

Q: Do you believe that that should be the primary tool?

A: It is a tool. I think that there is a whole plethora of tool to be used to ensure that you have safety in the work place. Having good regulations is a back bone to the thing but you can’ t just do it with regulations I don’t think.

Q: Do you know Mr. Terry Thomason?

A: No

Q: He was one of the experts that testified before the commission during the first phase report dealing with occupational health and safety. There were five experts and Mr. Thomason was the one that came to review for the commission the empirical evidence that he could find. It was focused primarily on experience rating systems, not ours necessarily but experience rating systems and the impact that had on safety – reduction of the injury rate I think it was mainly but there were different ways of weighing that. His opinion, if I remember correctly because I wasn’t prepared to come and talk about that today, was that the empirical evidence does show a positive relationship between experience rating and an employer’s commitment to reduction of injury rate and enhancement of safety. What he also said was that when you look at that as compared to the empirical evidence – and there isn’t much – between joint occupational health and safety committees and safety experience rating was more positive and said the same thing with respect to enforcement. I think he said the same thing you did that they are all tools and don’t give up one. Clearly he said don’t give up experience rating and I take it you agree with that premise?

A: I do.

Q: When you put the primary tool in enforcement of regulations you have disincentive in my view. When you come into an environment and you penalize in order to get compliance that doesn’t mean that you are always taking human nature and got them to agree and will they accept? My personal view is that incentives are sometimes easier – the carrot is better than the stick - to get human nature to move in the direction that you want. What is your view on incentive system like Experience Rating Assessment versus disincentive like penalties?

A: An incentive system, an Experience Rating Assessment system could be more impactful because the dollars that can be brought to bare are so much larger. For big companies a 10% experience rating difference could be in the 100s of thousands of dollars. Whereas a penalty written on an infraction is not going to make them sit up and pay attention. So we think that the hammer of Experience Rating Assessment is much bigger than the penalty system unless you are talking about a penalty or an infraction that was put in for $100,000 or something like that.

Q: Suppression – your view is that there is probably suppression. You have heard anecdotal stories and you have personal knowledge of family members I believe. I took your evidence to say that when you revisit the experience rating one of the factors that you want to keep in mind is how do you deal with potential suppression. Were you trying to say in your view that there was wide spread suppression by employers as a result of Experience Rating Assessment?

A: I wasn’t trying to say that it was wide spread because I don’t know that but I have heard anecdotal evidence and I have seen that it is happening.

Q: Let’s flip it. Have you heard anecdotal evidence about potential fraud situations by workers?

A: Yes

Q: So they are there too. Do you have any idea if they are that big or that big?

A: No

Q: Is it reasonable to put them in the same range? You probably have a small minority of both?

A: I don’t think that I could make a comparison.

Q: You would agree that there is probably both in the system – suppression by employers and some misrepresentation, fraudulent action by workers?

A: Yes and even workers who are owners of the companies.

Q: You don’t throw out the whole system because you have a potential minority of abuse?

A: No

Q: Employer community is advocating that we should put in a system to deal with this for everybody – employers, workers and people within the Board. They are suggesting some kind of fraud line that people can go to, without fear of recrimination, to voice their concerns towards an employer, a worker or the Board. What do you think about that concept?

A: The concept of fraud line has been talked about various different groups. I think that there has to be a way for people to tell us that something is going on. Even our sister insurance company across town has fraud lines. I don’t understand why we don’t have those and I think that it should be clear that employers and workers need to be part of that.

Q: Excess earnings – you would agree that every jurisdiction in Canada has excess earnings . Document that I handed out and it set out on the first page what the maximum for assessable earnings and compensable earnings for payment are and we are second highest.

A: BC is second highest next to Ontario.

Q: Ontario is 56,100 and BC is 55,800.

A: Right

Q: What is the premise, why does everybody have an excess earnings for both assessment and compensation?

A: Fundamental basis of system was not to compensate the worker for the full loss of income because of the 75% rules. This is regardless of whether there is income tax today or not. The 75% compensation rule really speaks to the fact that it wasn’t contemplated that an injured worker would get the full recovery of all the costs.

Q: My understanding of a basic insurance principle is that there is a basic cost benefit analysis. The higher you go up and the more you want to protect the more it costs. It seems like most policies, be it LTD, STD or WCB put in maximums that you can get. Is that a principle that you are familiar with in insurance?

A: Yes

Q: Last point is capping. You talked about the problems of getting into capping. On the 2 subclasses you gave us - heavy construction and ship building. My understanding is that the duration rate is going up. The injury rate may be going down but the duration rate is going up. Is that generally correct?

A: Relative to 1990 – 1994 yes but since then it has been coming down.

Q: Claims costs have also gone up.

A: Yes

Q: One of the problems in the subclasses is that there may be fewer accidents but they wait longer and it costs more. That is a joint multi-faceted problem isn’t it?

A: Yes

Q: It may be employer return to work kind of issues, safety kind of issues, worker motivation issues in returning to work or the Board and how they manage the file. There may be a whole number of factors as to why the subclasses are in distress.

A: Yes

Q: The issue of capping itself – the employer community is advocating that the governors have, in the legislation, the discretion to have a cap with the ability to look at unique and exceptional situations not to use that cap. Do you agree with that philosophy?

Yes

Q: Last question is that there is an issue as to whether our system is required to be fully funded, whatever that means. You raised already one point that in my mind leaves it almost impossible to be fully funded and that is the widow’s pension. How can you have a fully funded system when these other costs come back into the system and have to be dealt with? If it was going to be fully funded then it would have to be done immediately, you would have to recruit that full amount?

A: Yes

Q: The other difficulty on fully funded is that it is still an estimate. Actuarially you are trying to figure out today what values are going to be in the future and that is just going to be an impossibility to be exact.

A: That is right.

STEEVES:

Q: BC Sugar case. As I understand the problem from the Board’s point of view is 620 the subclass that has sugar and poultry?

A: Yes

Q: You explained on the overlays the wide variation compared to the 5%. It seems to me that from the Board’s point of view the problem or concept is how do you classify – according to cost or industry? Does that make sense to you? If it was classified by industry, that is all poultry processors it would be an actuarial principle, you wouldn’t remove the unsafe ones? You would keep them all there as an actuarial principle.

A: Classification should classify all employers who are, relatively speaking, in the same industries and competing against each other. For classification purposes they should be in the same place. Subsequent to that once they are in the same place you now measure their performance against each other and you can then apply Section 42. Section 42 basically says that if you find one employer that is way worse than the other employers then you are obligated to levy an additional assessment on that employer.

Q: My point is that you wouldn’t remove a business from a subclass for cost reasons.

A: I don’t think that is right thing for us to do.

Q: The 7 year delay seems long and offensive and certainly on the worker side delays at the Board are notorious. The question though is why was there a delay? The matter started in 1993 and then the correspondence Mr. Winter showed you started around 1995/96. By 1993 that was coming to the end of the previous governance structure was it not?

A: No it was almost during the middle of that.

Q: Well certainly by 95/96 the previous governance structure had disbanded and a new one was in place. One of the reasons for delay would have been the disruption in the governance structure.

A: No I don’t think so. This BC Sugar case was going on immediately following the 621 the break up of the retail subclass. Once that happened the decision was put into some question because one of the groups decided to appeal the allocation of the unfunded balance of 621. In other words we had to deal with the $60 million unfunded liability of retail by allocating them to the groups that we were breaking out. When you break out groups of employers from a subclass you have to deal with how much of the balance that they take away with them in assets and liabilities.

Q: My point is that the resolution of that lies with the governance structure and that structure changed.

A: The governance structure changed in 1995 and the delay occurred in 96.

Q: Let me address the issue of retroactivity and the suggestion was put to you about taxpayers paying for issues such as retroactivity as a matter of fairness. I think that fairness may be relevant but I think that we need to go to the first principles of what this system is about. You are familiar with the Meredith principles from 1913?

A: Yes

Q: One of those principles is the principle of collective liability and that means that employers share the liability of Worker’s Compensation across the system and subject to the subclasses and so on, correct?

A: Right

Q: Doesn’t collective liability also mean collective liability over time and intergenerational as well?

A: Section 39 (9) of the Act specifically relates and refers to any liabilities arising out of legislative change and it specifically refers to the way that you can actually fund that change.

Q: My point is that if I am an employer today under the principle of collective liability then my risk is protected now and it would be protected in the future. Future employers are going to pay for my risk, correct?

A: No if you have employees who are injured today then you will have paid for the cost of that injury today.

Q: If there were retroactive decision 5 years from now I would escape that.

A: You would if you were no longer around. That is the case with widow’s pension. A large number of the employers from whom the widow’s pension came about are no longer here.

Q: The other Meredith principle is that the system should be paid for by employers, correct?

A: Yes

Q: So it would be contrary to that principle for taxpayers to have to pay.

A: There was that other memo that we saw earlier about the decision or the opinion about 50/50 sharing.

John is asking you about the very first commission, I guess, the Meredith commission.

Q: Yes right so for taxpayers to pay for part or all of the decision by the Board or the Appeal division would be contrary to the Meredith principle that employers pay.

A: Yes

Q: We have heard from a number of economists who take the view that it is workers who, at the end of the day, pay for compensation. Have you heard that view?

A: Yes

Q: There are also some, mostly employers, who see Worker’s Compensation as an insurance plan. Are you familiar with that debate between insurance and the social welfare system?

A: Yes

Q: Assuming that it is an insurance plan isn’t it contrary to the principles of insurance that someone outside the plan should have to pay for the risk of plan?

A: Yes

Q: Taking taxpayers payment – if taxpayers were to pay part of compensation system then shouldn’t taxpayers be paid back at some point if the compensation system became flush?

A: I don’t think so because they never paid into it.

Q: They don’t pay into it now.

A: That is right so why should they get any back?

Q: Then why should they pay for it now?

A: If the taxpayers representatives make the decision to cause the cost to be borne by the Worker’s Compensation system that is something that ought to be an accountability between the taxpayers and their representatives.

Q: If the taxpayer representatives say that taxpayers should pay for some of the cost of the system then it is equally logical that when system is rich that the taxpayers should benefit from it.

A: If the taxpayers had been part of the payers of the system.

Q: Yes if they paid into the system then they should be entitle to be paid out of it.

A: I think, by the way, that there has been instances in the past where the government made a decision and imposed a cost on Board and actually paid for it or contributed to it.

Q I think that there are examples either way and what I am suggesting is that there is a more principled approach to that.

A: Yes

COMMISSION:

Q: You mentioned that with respect to claim suppression that there were no claim penalties provided for where claim suppression was discovered. Perhaps I am not understanding what you mean by claim suppression but it looks to me like Section 13(2) provides an offense under the Act to suppress a claim.

A: The penalty amounts are fairly insubstantial. It has not come to my attention that we have ever levied a penalty of that type.

Q: I understand that no one can remember anyone being prosecuted. Does the Board have statistics on how much claim suppression activity has been brought to its attention through auditing or complaints?

A: No I think I said earlier that I don’t have any quantitative information around that so it is just what you hear.

Q: Any rationale or policy as to why persons who have been found to have suppressed claims – employers - have not been prosecuted?

A: I don’t know of a policy to avoid that. In the four years I have been here I have not had that come to my attention. Jerry Massing will be back tomorrow afternoon to talk about these kinds of things and he may be better able to comment.

Q: I am confused about the impact of Experience Rating Assessment on net inflow of funding into the system. It would seem to be logical that if you capped the plus or minus experience rating amounts that there will be some employers who will – because of the cap - have very bad safety records and they will be paying much less than they ought to be paying. How is that shortfall made up or is it made up?

A: The shortfall is made up by virtue of the fact that it is rolled over in the subsequent year into the balance of the subclasses and then reallocated out on the basis of a base rate change.

Q: That would be a base rate applicable to all subclasses or just the subclass where that occurred?

A: We know from examination of the previous year that there will be a shortfall in the assessments because just as you say there are more merits than demerits. Consequently when establishing the rates for following years we load the assessment rate with an estimate of the shortfall for that year. We know that we won’t collect it but we’ve put the loading in so that our net assessment rate ends up as what we really want to collect. This is before capping and everything. So that it is paid for – if paid for is the right phrase - by the subclass where it occurred. It is not spread across.

Q: The final question I had is that there are discussions ongoing now about the revision of the Experience Rating Assessment system. The Board appears to believe that it is an effective tool in prevention. Can anyone outline to me the nature of the proposed changes including whether the plus or minus experience rating capping would be increased?

A: None of it is set in any kind of concrete as it is still in the preparation phases of design.

Q: I realize a definitive statement hasn’t been made but what I was just wondering what some of the options are.

A: I think that rather than look at it as what is going to change it would be fairer to say that the old plan will be discarded in its entirety and a brand new plan will be brought in – one for medium-large employers and one for small employers. The one for medium-large employers will likely end up being retrospective. That is adjusting past year as opposed to perspective, which is the case with our current experience rating plan. The limits that we are looking at right now are a maximum merit reduction of 50% and a maximum demerit of 200%. The way we would calculate the experience rating would be quite a bit different. Right now we look at a cost payroll ratio for the individual firm compared to the group. In the future we will look to their cost as opposed to their expected cost. To do that we will use fully reserved claim costs rather than truncated costs. Right now the maximum period of time that we will look at costs over is 30 months and again with fully reserved claims costs it will be the total cost of that claim regardless of whether the claim takes 10 months, 30 months, 5 years or 10 years. It is a completely different type of plan. We also want to look more at the trending of a firm and increment up their rating either on the good or bad side. As Mr. Fattedad pointed out right now a firm can swing from maximum merit to maximum demerit in one year because we only use a moving 2 year average. That is undesirable of course and we want to say that we will take you part way and a little bit more as we develop the trend. It really is for the reason of changing the purpose of the plan and where our priorities lie. That is in establishing a favorable long term trend for an individual firm rather than just saying that you were good for this 2 years so you get money or you were bad for 2 years so you will pay money in. We want to move more towards the long term and not being as sensitive to the immediate claims cost as we have been in the past.

Q: Is there a discussion paper that has been developed for the purposes of your consulting?

A: There have been quite a few and we have copies of our phase 2 Employer Services Strategy

It might be worth noting that this like many of the ESS initiatives are policy initiatives and we work in concert with the policy bureau to get the process up to the panel and also to go out for consultation. As of yet on experience rating we haven’t, in concert with the policy bureau finished a position paper that we are going to take out to consultation.

Q: We were given the policy bureau’s priority list and the Experience Rating Assessment changes are scheduled in there with respect to deadlines?

A: Broadly they have listed employer service strategy as a high priority and there is a number of policy issues that flow from there.

Q: Consultation processes – you mentioned 25 consultations with the community last year and 35 this year. Is that process carried out by any one division of the Board or is it carried on by a number of different divisions. Who coordinates the process?

A: The consultation that we are referring to are only the ones that are related to the employer service strategy. There are all kinds of other consultation that has gone on and other policy initiatives. The numbers that we refer to have been coordinated by the assessment department on employer service strategy issues.

We are, however, working with our policy bureau that has overall responsibility for consultation matters before going to panel.

Q: What is current status of Diamond Program and where does it fit in to the ESS strategy?

A: Mr. McGinn is better able to explain that. We see integrating the experience rating and the employer services plan along with Ralph and his people on the Diamond Project.

The Diamond Project, with respect to the prevention programs, is going to be rolled out in the first quarter of this year to within one industry sector and to some of the larger firms in the wood product sector. We are looking at working with the construction sector to determine how it can work there. It is still in its formative stages and there is nothing in terms of monetary incentive or disincentive other than the existing system that would apply to the Diamond Program.

Q: Right now there is no interface with Experience Rating Assessment and the Diamond system but that is what you are looking at?

A: Yes

Q: Issue of full funding – reading section 39(1C) does that simply mandate the Board to be fully funded?

A: That says we have to establish the full cost of the system but we don’t have to have all the money for it.

Q: Is there any provision in the Act that actually mandates full funding?

A: I don’t think so but just through the way that it provides for us to collect the necessary funds from employers it suggests that we should be fully funded.

Q: I contrasted that with subsection 9 that seems to allow for what is often called the current cost approach. Section 39(9) seemed to provide authority to the Board under special circumstance to go on a pay as you go basis.

A: Sub 9 is the one that says if you have legislative change you can choose to fund it as you go.

Q: Has that ever been used by Board?

A: No we have not used it.

Q: Is it Board policy that its operation should be fully funded?

A: Yes it is

Q: Does that come from governor’s policy?

A: That comes from the first time, from a governance perspective, come from around that premise after completing strategic plan that called for full funding by a certain date.

Q: Section 42 came up as a possible method to reclassify employers that are in the wrong subclass as opposed to moving them out. It does seem, on straight reading, to provide the Board with the authority to provide differential rates for employers even though they happen to be in the same subclass.

A: Correct

Q: Is that a section that is used and what are guidelines or criteria involving the use of that section?

A: Section 42 speaks to 2 different things. One is that it can be applied to a single employer and the 2nd is that the Board may adopt experience rating system that may apply to a broad base of employers. To my knowledge we have not applied Section 42 to a single employer. I think that is explained by the fact that if we did it to one how many others should we do it to to make if fair and equitable? Fact that we haven’t been able to do it in the past is because the effort to identify those employers to execute Section 42 across all groups and subclasses was just too much for us to undertake.

Q: Isn’t that what the Board would be doing in essence when revisiting the entire classification scheme?

A: Once you reclassify employers into the right groups and credible groups then we need to be able to look across the performance of all those employers and note any particular employers that are way beyond normal and then consider applying 42. The issue is that in the past we haven’t been able to do that.

Q: There was some discussion of assessments, rather than being on the basis of assessed payroll would be on hours worked. At the beginning of Section 39 it seems to authorize assessments on the basis of something other than payroll. It mentions being rated on the payroll or by assessment rated on a unit of production. Would assessing employers based on the hours worked by their employees be one example of assessment on a unit of production or does that refer to something else?

A: Not sure if that was always there. We don’t assess fisheries on payroll but rather on the product. That is a case where we use a different measure.

In fishing we use the value of the fish landed but we do it in such a way to approximate payroll. So we use fish slips that were issued or a percentage of the catch. We are trying to work it down to a payroll figure. To the best of my knowledge we have always used payroll and the only exception I can think of is Alberta where they used a unit of logs, a volume of logs and made an assessment based on per unit amount. Believe that has been abandoned.

Q: By far measure the most predominant assessment method is on a percentage of payroll?

A: Correct

One thing that helps in using payroll is that the employers know there is a reference of cross checking through Revenue Canada so if there is an effort to avoid us then we could find out through other means. Basing it just on ours we would just have to believe employers.

Q: There has been a lot of discussion around Experience Rating Assessment and the various goals and objectives that experience rating is trying to accomplish. Broadly speaking 2 have been identified today, one being to create a sense of equity between employers recognizing that it runs contrary to the general principle of collective liability and two it promotes safety and return to work. How does Board see those 2 principles in terms of Experience Rating Assessment with respect to prioritizing? How do those two objectives measure up?

A: Our priorities are for prevention and for return to work. Fairness ought to be there and if there is fairness in the system then employers will be more likely to be favourably investing in the exercise of increasing awareness, training for safety and returning to work. Fairness is the underlying thing that employers have to be able to see and then they will see a return on their investment. For us our main focus is preventing injuries and getting workers back to work.

Q: I noted your comments about there not being a lot of linkage between injury rates on the one hand and claim costs on the other since claim costs encompass a number of processes in adjudicating a claim. Experience Rating Assessment, as it is currently designed focuses on claim costs as opposed to injury rates. Do have any thoughts on the effectiveness of a system if it is designed to address safety but uses data that has little to do with safety?

A: You are right in the extreme example where you have one company with only one injury that costs a million dollars and then another company that has 100 smaller injuries with 500,000 dollar cost. Which one is worse? From a design perspective Experience Rating Assessment is a financial, numbers driven thing. We need to marry the experience rating system along with the prevention division’s Diamond program so the Diamond program ought to have, other than a monetary measurement in design so they look at the underlying conditions and behaviours of employers. I just don’t know that we can administer a financially driven system to take into account the things that only the front line prevention officers can observe. We need an experience rating system that is a leading indicator to help the prevention people to target into employers and looking behind the dollars and looking at this phenomenon of one versus fifty in terms of claims.

Q: What about incorporating a presumably collectable and fairly discreet piece of data like injury rate or claims frequency? Is it realistic to retain common sense premise that if you have a lot of little accidents you are eventually going to have one big one or that one of the small ones will end up costing far more than expected? If that is a reasonably sound proposition is there any merit in including claims frequency data into the Experience Rating Assessment design?

A: That is a good observation and a good piece of information that we will take away with us. We haven’t decided to include or exclude anything. We are genuinely open to good input and suggestions.

Q: Section 39 (1E) – relief of costs – how many files are left to deal with?

A: I think it was 4000 requests in the pipeline and a 40,000 potential if we address them all.

Q: Any estimates on how long it will take to do those?

A: The panel is looking at some policy options. One of the options is equity and that might mean going back and doing them all. There are concerns that if we don’t do them all then we are not looking after everyone’s interests. We have had some dialogue with the employer community and we have had their feedback. The estimate if we did just the 4,000 is probably 2 to 3 years at the current pace but that depends on how much manpower we apply to it so it could take 6 months. Similarly with the 39,000 if the panel did decide to do them all we are estimating that it will take about $10 million to do them all. Whether that is spent over 10 years or one year depends on how many resources we apply to it.

Q: So there is an end in sight?

A: Yes

Q: Issue of administration costs is one that came up today in the form of a 29% figure that is applied in the system from time to time. Is that a high number in terms of administration costs as a percentage? What does that say about value for money in terms of services provided?

A: If you were pricing a product you would normally full cost it. The 29% is a full costing. The entire overhead is fully loaded into that cost. Whenever we are pricing products we use the full cost philosophy. You could use other pricing philosophies and if you do it long enough you could go broke. Full cost is a prudent way of doing business. With respect to value for money – spending 29 cents for every dollar you pay out or adjudicate is a matter of comparison to what? I understand that in this case we were talking about the legal surcharge or the administration overhead charge that is levied for legal activities. I am not sure how this would compare to law firms.

Q: I would be interested in how it would compare to other insurance companies or other compensation boards.

A: I could get that for you but would be surprised if it is much different. Our administration cost a percent of total revenues or total costs compared to the other boards is not very different. Unless the Boards use a different type of pricing then it should be the same. If you like I will undertake to get that from my other counterparts at the other boards.

Q: I think that could be useful. My last question has to do with assessments. You figure out how much money to collect every year to keep the system going the way it is supposed to be going. I gather from a lot of what you said any changes would hopefully improve the system by increasing the ability to look forward. It would provide the foreseeability of what claims are going to be costing down the road so that you can collect that money sooner instead of with the lag that currently exists. It is foreseeability that you want to improve with respect to claims costs. What kind of information do you think that the Board should be collecting or are you looking to collect and how would you get it enhance that ability?

A: The information, by and large, that that we need we have but we never were able to derive the proclaimed reserve out of it. Going forward into the future in this ESS in the rate making system with the guidance and direction of the chief actuary we are going to derive those numbers out of clam information coming in today. I don’t think the we are missing data. Payroll information is important to us and we get that 2 months after the year ends. We would probably do better with having information much more current.

Q: That would give you a better idea of how many people are out there that might potentially get hurt.

A: That is right. That is what we are faced with today. In the summer the hospital groups said that their injury rate is going up way over what it should be and there was no way for us to tell. Just because the count goes up doesn’t mean the rate goes up.

Q: I gather the Board does have a process to estimate reserves for existing claims?

A: Yes

Q: Is that reserve setting process accurate or is it being underestimated?

A: There may be periods of rapid rise in cost or in periods where there is a significant increase in health care costs or that there has been a preponderance to giving out much more 100% pensions. In those periods the system derives reserves by using 5 year smoothing so we will understate our liabilities. For instance, in 1992-93 we understated our liability because we used this 5-year smoothing. We don’t use this year’s experience and say that is it. In periods of rapid decreasing cost we will overstate. In the end we always catch up. The problem was that in 92/93 we had rising cost so in those years we would have undervalued.

Q: Looking at the Act there is a number of provisions that provide for the transfer of funds within the system to achieve employer equity. There is Experience Rating Assessment, there is transfer of cost between classes and I just want to make sure that I have a complete understanding of what those sections are. Section 42 provides for Experience Rating Assessment and that is a transfer of cost or at least a portion of that cost from a particular subclass to a particular employer within that subclass. Then there is 39(1E), which is the Experience Rating Assessment assessed to an employer that shouldn’t have been and that gets transferred to a class or the general fund.

A: Well it is both. There is the Experience Rating Assessment change or refund and then there is the cost itself. Let’s say this injury had $100,000 cost in the subclass or rate group and it is relieved of that then this rate group gets $100,000 taken away from it. That gets spread to the general fund.

Q: Then there is Section 10(8) – the transfer of claims from one class to another class and then there is Section 5(5), which is not really a transfer but it’s non-work related. It is not really a cost transfer it just carves out the non-work related component and doesn’t incorporate that in pension award.

A: That is what is known as proportional entitlement and we are only paying for the part that is work related so there is no transfer.

Q: You just don’t pay that cost?

A: That is correct.

Q: Are those essentially the 4 methods that transfer money around within the system?

WINTER: 39(1D) is another reserve that isn’t applied much anymore. Usually when you talk about relief and transfers you put both together, D and E.

Q: That is the disaster fund.

WINTER: Yes that is right. It would be the same thing. It would transfer out of the subclass into the reserve if you had a disaster.

A: I think 37(2) in the case of rearrangement of the classes or the withdrawal of an industry from a class the Board may make the adjustments and the disposition of the funds, reserves and accounts of a class as it considers just and expedient. That is a place where if you had an unfunded liability in a subclass retail when you broke it up you could transfer the balance.

WINTER: There is also a policy in the green manual dealing with transfer of costs for occupational diseases when it is multiple exposures. It is not in the act but it is in the policy manual.

Q: I have a question on the use of benchmarks to ensure that you were giving value for money. I have a question on the $10 million in bad debts that were written off. If you could talk about that and also, how does that stack up against other jurisdictions?

A: Bad debts are essentially the amounts that we set up, as receivables by way of employers that we consider cannot be collected through. That is charged off annually as an expense and it is not charged off as an administration cost but it is charged off against income in the subclass. In terms of the $10 million value as a benchmark we did not fair well on that issue because we are the only jurisdiction in Canada that allows employers to pay in arrears so our exposure is greater. Up until this month the Board did not run an accounting system that had an account receivable system. The collection officer comes to the desk in the morning and he/she will see that this number of accounts are out and need to be collected. We didn’t have that before.

Q: Reclassification issue is one we have heard a lot about. I do recall the Southern Railway submission specifically because of the length of time it took and their diligent and responsible approach to it. It was also the response from the Board on the occasions when there was correspondence. It was that we don’t want to open up another class, we are redoing the classification, come back later and then finally it essentially said hit the road. I can see where the frustration builds up because these are not adequate responses in a system that you want to be service oriented and client oriented. Why can’t you answer this? With all the information the system has about classifications, the experience rating of these various companies and classifications in industry surely there must be an approach that you can carve out that will deal with some of these reclassifications. You can tell me perhaps how many you have a year. Surely there has been so much thinking into how the classification system should look that you would have some sense of what the criteria should be. You could start at the far end and start dealing with the companies that are at the far end and really hurting with respect to their competitors.

A: I think that is right. We try to respond to these issues and we try to respond positively to those employers. It is difficult though because every time you try to do the right thing you think about this business of the floodgates opening. Every time that you do something that you want to change you have to schedule it through to the policy bureau and have a whole thing done so that you can meet the needs of the panel. It is not to say that is the wrong process but that is not the right process to apply to 150,000 employers probably half of whom feel that they are in the wrong place.

Q: On an annual basis how many requests for reclassification do you get?

A: We have classification committee meetings once a month and every month we have a request of some kind or another.

Q: So you have a couple every month?

A: We have 12 to 15 that we would deal with in a year.

Q: In a year?

A: Those are the ones that come to the classification committee and there are probably 100s coming from employers on a monthly basis to our front line workers who are saying sorry we can’t do anything about this.

Q: I understand that but from there you have been able to sift through that and come up with 12 to 15 annually. It is very difficult for me to believe that there isn’t a process that you can come up with, with all the talent in the Board, to actually provide for a process to deal with these in anticipation of a system. Even if you come up with a system it will take another many years to implement.

A: We actually do act on some of these requests. We do reclassify employers where we can, where we are given the ability to do so within our abilities. It is where something involves a change in the book or it is a policy matter that we have to refer it on. It is probably a difficult thing to understand but the governors of the panel have an extreme sensitivity to us acting in a way that could be seen as first come first serve. That very much is a matter of justice and that is very much behind why we can’t do anything until we do the big bang.

Q: Well we look at this list of over 100 projects all slated to come to fruition in 1998 and that is hard to believe given that so many of them have been hanging around for the last dozen years or so. We are very hopeful but it seems that you are setting your expectations high.

Q: This $73 million that is currently being redistributed back to employers as a result of 39(1E) is that new money? Is it just recycling?

A: It is just recycling.

Q: Is it in Experience Rating Assessment?

A: No this is $73 million of costs that have been paid.

Q: Is this money, which if you didn’t have to pay it out now would be on the bottom line?

A: No

Q: Where does the money come from?

A: Just the Experience Rating Assessment portion of it. Let me explain this. There was this $100,000 claim that was paid out and as a result of that $100,000 claim an employer now gets relief and gets a refund of $5,000 against the Experience Rating Assessment payment. The $5,000 is new money. The $100,000 is being washed around the system. It is being taken out of this subclass and being put into the general pool to be washed around. The new money that there is leakage on is the $5,000 and the old money that is being washed around is the $100,000.

Q: So how much money is the new money?

A: Off the $73 million it is a fraction of that. It is not $10 million.

Q: This is money - and even the money that is just sloshing around – that is being reassigned out to employers, an awful lot of whom were not on the WCB records when the mistake was made.

A: That would be safe to say, particularly with small employers who only last 4 years on average.

Q: The 29% is that an arbitrary figure that the WCB just set?

A: It is not arbitrary there is a calculation that is made. They take the administration costs at the Board spends and divide it into the output – the value of the claims that are paid or awarded in a year. In other words they relate the total input into the system to the total output and that is 29%.

Q: But $190 million, which is what it was in 96, would be like 12% or so of your total revenue that year. Why would you measure it against the value of the benefits rather than the income or the expenditures that you incur in total over the years?

A: The income really isn’t generated primarily from the input. Say $600 million of the income is generated from the work of 3 people in the investment side. I don’t think that you can relate it to the revenue base.

Q: How long have you had Eckler as the actuary?

A: You heard earlier that there was a report produced in 19-something or other by Eckler/Tipping? Well they were two members of the firm Eckler. The firm was appointed to the Board as actuaries sometime thereafter so I guess it has been about 20 years that the firm has been the Board’s external consulting actuaries. I have been around 15 years and they were around a few years before that.

Q: Does that go out for RP on occasion or are they just automatically the actuary?

A: It has not been put out to tender since I have been here. It has been considered several times and the internal audit and the audit committee of the panel have requested it. We will be, within 2 years, going out to tender with it. The reason it has not been is that it is rather like an external audit. There is an awful lot of familiarity required and a large learning curve from the outside. It is even different from an auditing firm in that the actuarial science or art is a bit different from auditing. If you look in the pension area you will find that major corporations have retained the same external-consulting actuaries. The external firm is vetting anything actuarial in the ESS so we wouldn’t want to change that.

Q: How much are the actuarial fees on a year that they file for you?

A: They review our financial statements, actual evaluation and assessment rates every year. The fees in for the year-end liability audit are $40,000 and for the assessment rate, auditing and report writing it is about $30,000. They are also involved in significant other consulting to senior management but not specifically on liability evaluations. Other advice on financial aspects, for example, 4 or 5 years we changed our discount rate and they provided a lot of advice in that area before doing it.

Q: They are the ones that certify that you have got, today, the correct, acceptable assessment of what your unfunded liability is or your funded liability position is.

A: Yes their certificate is in here. Strictly speaking they certify the value of the liabilities. They do not certify the value of the assets. The surplus is the different between those two numbers.

Q: That doesn’t seem to cost a lot of money for what they do.

A: That is one of the advantages of staying with the firm. If we changed I think that the fee would be double if not three times what we pay now.

Q: That is the total expenditures to the actuary over the course of the year?

A: The total would be up to $100,000 adding in the miscellaneous.

Q: Do have the 1997 numbers in for return?

A: In terms of investment returns yes. 1996 was 16.6 and 1997 was 14.4 roughly.

Q: What does the Board assume is their rate of return when you are actuarially calculating?

A: 3% plus inflation. So the target rate in this year, for example, would be 4.5 to 4.7%.

Q: That is what you assume is the rate of return for actuarial purposes?

A: Yes 3% real. It is a very conservative rate. In fact, we use the lowest actuarial discount rate in the country.

Q: You operate under the financial administrations act as far as the guidelines are concerned on what your investment policy can or cannot be?

A: Yes

Q: Is that a pretty restrictive process? Does that tie the hands of the investment committee who is managing the Board’s funds?

A: No it just sets guidelines.

Q: Are you required to do any of your investing through the government, through the Treasury Board?

A: No we place funds into, for instance, they have index polls and we place them in there as if they were any other money manager. We don’t hand over money to them. So the Treasury Board, per se, doesn’t get any of our money.

Q: There are two issues that have come up, one amendments to the bankruptcy act taking away your priority as a creditor. There are currently amendments to the Canada Pension Act, which could have cost impact on 100% pensions to disabled workers. What is the mechanism by which you as an organization can bring your concerns to the federal government with respect to those kinds of legislative initiatives? Is that done through the Ministry, inter-governmental affairs?

A: With regards to the bankruptcy issue representations through the federal government will be done through the Association of Canadian Worker’s Compensation Boards – the AWCBC. They have appeared on numerous occasions over the years before the federal minister involved and the cabinet committees obviously without a whole lot of success. It was a concentrated issue on the part of Canadian Boards. That issue as you may recall went through various court actions involving the Supreme Court of Canada. In response to your question there were representations made by each individual board to the respective ministers involved in each province and territory by the AWCBC. Then a committee struck as things got closer to the end of the process and that committee – lawyers representing the Canadian boards joined with the president of the AWCBC and vigourously made presentations to the federal government.

Q: Similar to the Canada Pension plan changes?

A: I am not aware of similar initiatives in regard to the pension issue but there may be.

SAYER: Mr. Pinto, you gave us an estimate in response to Judge Gill’s question about the cost of completing a reassessment under 39(1E). I think the cost you gave us was $10 million for all 40,000 potential claims. That works out to about $250 per claim if my math is right. I gather that doesn’t take into account the appeals.

A: In coming up with that cost we did bring in cost of appeals, disclosure and the assessment department’s cost.

SAYER: You were counting the costs of the appeal’s divisions time and all sorts of costs factors?

A: Yes it was a pretty high level kind of estimate. I think the feedback we had from the employer community is that it was perhaps overstated but it is a working estimate anyway.