What are cost components?
Total cost rate
This is the dollar amount per $100 of assessable payroll WorkSafeBC must collect to cover the anticipated cost of new claims that are incurred by the rate group in a given rate year, and the future cost of administering those claims.
The total cost rate comprises of the following components:
Average benefit cost rate
The average benefit cost rate is used to calculate the base rate. It includes the multi-year average of short term disability, long term disability, survivor benefits, health care, and rehabilitation costs charged directly to the rate group. This figure is calculated by dividing the total accumulated costs (paid and anticipated future costs) by the total accumulated payroll, over the number of years required for credibility.
Claim administration
This is the amount charged to the rate group to cover all future costs of administering new claims occurring in the given rate year. These costs include any goods or processes provided or performed for the primary purpose of assessing the claimant’s entitlement to an award or the amount of the award, overall management or re-opening of a claim, as well as the function of making payments under the claim.
Accident fund adjustment
This adjustment accommodates for changes between board-wide actual historical claims cost experience and what is anticipated to be paid on those historical claims given current conditions. This includes such changes as the allocation of Section 39 costs and cost reductions arising from recent legislative changes which are spread across all industries.
Penalty and experience rating imbalance adjustment
This figure represents the adjustment to the rate to cover anticipated premium losses or gains that result from experience rating adjustments as well as assessment and prevention penalties.
Other administration costs
This is the amount charged to a rate group to cover its share of the cost of administering the workers’ compensation system, other than the cost of administering claims. For details, please refer to the 2008 Annual Report.
Amortization adjustment
This adjustment provides for funding of deficits (a rate increase) or for a return of surpluses (a rate decrease), plus contributions to provide for any necessary reserves. This is generally amortized over five years. The amortizations can vary for each classification unit. A rate group’s amortization adjustment figure represents the average amortization of all the classification units in its rate group.
Actuarial rate
The actuarial rate for a rate group is the average of the actuarial rates for all its component classification units. This includes the amount required to cover the projected costs of new claims, administration and miscellaneous costs (the total cost rate), and an amortization element to recognize the surplus or deficit position of a classification unit (the amortization adjustment).
Funding policy adjustment
This adjustment accommodates for the WorkSafeBC policy of limiting base rate changes from year to year (the normal maximum change is +/- 20 percent). The 2010 base rates have been limited to a maximum 8 percent increase in recognition of the recent extreme economic downturn producing severe financial stress on many employers in B.C. It also accommodates for any recent emerging claim cost trends which significantly deviate from the normal long term actuarial assumptions used for rate setting.
Industry-funded initiatives
These initiatives are typically funded by adding a levy to the classification unit (CU) base rate of employers that participate in industry sponsored safety programs. CUs with an industry-funded initiative generally have higher base rates than that of their rate group.
Prevention adjustment
Classification units of federally regulated industries are exempt from prevention inspection activities. As such, they may have a reduction applied to their base rate.
Here are the main reasons why a base rate for a classification unit (CU) may vary from other CUs in the same rate group.
- The CU may participate in an industry-funded initiative and is contributing to its funding by paying an additional levy.
- The CU may participate in an industry specific incentive program and is contributing to its funding over a five year amortization period.
- The CU may represent a federally regulated industry that is exempt from having to contribute to WorkSafeBC prevention efforts.
- The CU may have moved between rate groups in the past. To avoid inappropriate cross-subsidization of industries, WorkSafeBC keeps balances for each rate group. When CUs move between rate groups, they take their portion of their previous rate group’s balance with them.
- Actuarial rates are calculated based on long term trends using actuarial data and actuarial assumptions. On occasion, short term trends may provide compelling reason to vary a CU’s rate from the actuarial rate.
- WorkSafeBC recognizes that significant change in rates can have a major financial impact on employers. Rate changes (either up or down) are generally limited to 20 percent from one year to the next. For the 2010 rates, however, base rates have been limited to a maximum 8 percent increase while the usual 20 percent limit on rate decrease remains. Since the actuarial rate can vary for each CU within a rate group, application of the capping may result in different base rates for different CUs. That is, the actuarial rate may have changed substantially (either up or down) in some cases, but the base rate change is generally limited by the capping procedures.