Funding and pricing policy

Effective Date: June 09, 2023

Overview

The Workplace Safety and Insurance Act, 1997 (“WSIA”) and Regulations require the Workplace Safety and Insurance Board (“WSIB”) to maintain the Insurance Fund (the “Fund”) so that the amount of the Fund is sufficient to allow the WSIB to meet its obligations under the WSIA.

The WSIA also authorizes the WSIB to establish a special reserve fund to meet losses arising from a disaster or other circumstances, which would, in the opinion of the WSIB, unfairly burden employers in any class.

The WSIB’s Funding and Pricing Policy reflects the WSIB’s risk appetite statement for Insurance Funding Risk in the WSIB’s Corporate Risk Management Policy.

The administration and management of the Fund, including the asset mix policy, are set out in the Insurance Fund Statement of Investment Policies and Procedures (“SIPP”). The SIPP is reviewed by the WSIB Board of Directors (“BOD”) at least annually and confirmed or amended as required. In accordance with the SIPP, the WSIB conducts a detailed review of the asset mix policy at least every four years in the context of the WSIB’s risk appetite, benefit liabilities, premium rate levels, and capital market assumptions (i.e. an asset liability study), to ensure that the asset mix policy and other provisions of the SIPP remain relevant.

This policy, in conjunction with the rate setting model’s operational policies, SIPP, and Corporate Risk Management Policy, provides guidance to the WSIB in making Funding Decisions and Pricing Decisions.

Purpose

The purpose of this Funding and Pricing Policy (the “Policy”) is to provide direction to the WSIB in making Funding Decisions and Pricing Decisions in order to provide for the costs of the workers’ compensation system through employer premiums and investment earnings of the Fund.

Application and scope

The Policy provides guiding principles to support the achievement of the regulated funding requirement, the setting of premium rates, and Funding Decisions to maintain the Sufficiency Ratio within a Target Funding Range.

It applies to the BOD, the Chief Actuary and WSIB Management with respect to recommending or making Funding Decisions and Pricing Decisions.

While the Policy contemplates required funding actions in various scenarios, should extraordinary circumstances arise that represent a significant departure or omission from those contemplated in this Policy, the BOD has the ultimate authority to make Funding Decisions and Pricing Decisions that may deviate from this Policy, based on such extraordinary circumstances. In making such a decision, the BOD shall take into consideration the Chief Actuary’s recommendation, and the recommendation of WSIB management, tailored to such extraordinary circumstances.

Policy statement

The WSIB shall make decisions governed under this Policy with the overall objectives of equity and fairness, in support of the following priorities listed in descending order of importance:

  1. Maintaining sufficient funding, i.e. a Sufficiency Ratio of at least 100 per cent, and taking action to achieve high level of confidence in returning the Sufficiency Ratio to the mid-point of the Target Funding Range should it fall below the Target Funding Range;
  2. Mitigating the risk of the Sufficiency Ratio reaching 125 per cent; and
  3. Maintaining premium rate stability, in combination with any target funding contributions.

The WSIB aims to establish and maintain the Sufficiency Ratio within the Target Funding Range of 110 per cent to 120 per cent. Further, the WSIB takes a proactive, tiered approach to managing the risks that the Sufficiency Ratio will move outside the Target Funding Range and fall below 100 per cent or reach 125 per cent.

Proactive approach: Should the Sufficiency Ratio be at high risk of falling below or exceeding the Target Funding Range over the next five years, the WSIB will take necessary action, intended to maintain the Sufficiency Ratio within the Target Funding Range, over a period of up to five years.

Tiered approach: The level of prudency and conservatism in making Funding Decisions and Pricing Decisions will depend on the level of the Sufficiency Ratio. At lower Sufficiency Ratios, risk appetite is lower and increasing action will be taken to mitigate the risk of underfunding and have high confidence of returning the Sufficiency Ratio to the mid-point of the Target Funding Range. At higher Sufficiency Ratios, risk appetite is higher and increasing action will be taken to mitigate the risk of overfunding, including potential surplus distributions to return value to employers.

Stochastic asset-liability analysis will be used to assess the risk of the Sufficiency Ratio moving outside of the Target Funding Range, the risks of falling below 100 per cent or reaching 125 per cent, and the potential impacts on premium stability.

The Target Funding Range shall be reviewed and reassessed every five years or more frequently as needed to ensure it continues to be appropriate. The Target Funding Range is, for example, influenced by risk appetite and the prioritization of the above risks and premium stability, the level of investment risk resulting from the investment asset allocation, and the Sufficiency Ratio at a given point in time.

Guiding Principles

The WSIB considers the following guiding principles when making Funding Decisions and Pricing Decisions:

Collective liability

Schedule 1 employers must collectively pay the premiums required each year to maintain the Fund such that the amount in the Fund is sufficient for the WSIB to meet its obligations under the WSIA.

Fair and reasonable allocation of aggregate costs

The WSIB’s objective is to maintain sufficient funding, i.e. a Sufficiency Ratio of at least 100 percent, while ensuring that aggregate premiums are allocated among employers, and different generations of employers, based on expected costs incurred, taking into account the allocation of any Unfunded Liability or Surplus available for distribution. The WSIB will make annual employer premium rate decisions that reflect a measured approach towards the premium rate that best reflects employers’ expected costs incurred.

External benchmarking

The WSIB will consider its administrative and claims processing expenses in comparison with other jurisdictions.

Financial security

The WSIB will act in a financially prudent manner in support of the financial sustainability of the workers’ compensation system.

Legislative framework

The WSIB will adhere to the WSIA requirement to maintain the Fund such that the amount of the Fund is sufficient for the WSIB to meet its obligations under the WSIA, i.e. a Sufficiency Ratio of at least 100 per cent, while allowing risk appetite to shift as the Sufficiency Ratio rises such that mitigating the risk that the Sufficiency Ratio reaches 125 per cent increases in importance when making Funding Decisions. The WSIA and its regulations prescribe the amount and timing of surplus distributions should the Sufficiency Ratio reach 125 per cent.

Stability of premiums

The premium rate in combination with any target funding contribution required from employers will be as stable as possible, taking account of the intention to maintain the Sufficiency Ratio within the Target Funding Range and to align with the WSIB’s risk appetite statement for Insurance Funding Risk. The premium rate, excluding any target funding contributions, will continue to reflect the need to fund the benefits provided to injured workers and the costs of running the workers’ compensation system for the injury year. Premium rate setting is a Pricing Decision, whereas determining target funding contributions is a Funding Decision.

Strategic asset allocation

The strategic asset allocation is the asset mix policy stated in the SIPP approved by the BOD to achieve a reasonable funding balance between a) affordable and stable premiums and b) investment revenues with an acceptable level of investment risk in accordance with the risk appetite statement for Insurance Funding Risk.

Transparent and understandable

Ease of understanding will be a component of Funding Decisions and Pricing Decisions, including methodology and process. This will facilitate clear, transparent communication of Funding Decisions and Pricing Decisions.

In order to ensure that the system is sufficiently funded, the WSIB may exercise its discretion in balancing the guiding principles appropriately.

Definitions

For the purpose of this Policy:

Funding Decisions: refers to decisions that are intended to maintain or return the Sufficiency Ratio within the Target Funding Range, including, but not limited to, surplus distributions (a return of surplus funds to eligible Schedule 1 employers), target funding contributions (a surcharge, in addition to the premium rate, intended to support the return of the Sufficiency Ratio to, or maintain it within, the Target Funding Range) or no action.

Insurance Fund (the “Fund”): assets maintained by the WSIB under the WSIA for the purpose of:

  1. Paying for current benefits and to provide for future benefits under the insurance plan to workers employed by Schedule 1 employers and to the survivors of deceased workers;
  2. Paying the expenses of the Board and the cost of administering the WSIA; and
  3. Paying such other costs as are required under any Act to be paid by the WSIB or out of the Fund.

New Claims Costs: defined as the current and discounted future costs of expected new claims incurred during the upcoming year.

Non-Controlling Interests: represent the WSIB employees’ pension plan and other investors’ proportionate interest of the net assets and comprehensive income of subsidiaries of which the WSIB directly or indirectly owns less than 100 per cent.

Pricing Decisions: refers to decisions that impact the premiums charged to Schedule 1 employers to maintain the Fund, which funds the benefits provided to injured workers and the costs of running the workers’ compensation system.

Sufficiency Ratio: represents the measure of the WSIB’s ability to meet its obligations under the WSIA to make payments under the insurance plan for current benefits as they become due and to provide for future benefits, calculated as the amount of the WSIB’s Total Assets less the amount of Non-Controlling Interests divided by the amount of Total Liabilities.

Sufficiency Statement: is a statement prepared quarterly by the WSIB, which presents the Sufficiency Ratio and relevant disclosures. The Sufficiency Statement is reviewed quarterly and audited annually by WSIB’s external auditors.

Surplus: is the amount by which the Total Assets less Non-Controlling Interests is greater than the amount of Total Liabilities.

Target Funding Range: a Sufficiency Ratio range of 110 per cent to 120 per cent, which is established to maintain confidence that the Sufficiency Ratio will not fall below 100 per cent or reach 125 per cent.

Total Assets: consists of the amount of all assets, including the amount of Non-Controlling interests, reported on the WSIB’s Sufficiency Statement.

Total Liabilities: consists of the amount of all liabilities reported on the WSIB’s Sufficiency Statement.

Unfunded Liability: is the amount by which the Total Assets less Non-Controlling Interests is less than the amount of Total Liabilities. If the amount of Total Assets less the amount of Non-Controlling Interests equals or exceeds the amount of Total Liabilities, the Unfunded Liability shall equal zero dollars.

Requirements

Required actions

1.1 Funding Decisions

Should the Sufficiency Ratio be at high risk of falling below or exceeding the Target Funding Range over the next five years, the WSIB will take necessary funding action, intended to maintain the Sufficiency Ratio to within the Target Funding Range, over a period of up to five years.

The actions may include a Surplus distribution to eligible Schedule 1 employers or a target funding contribution from all Schedule 1 employers, after consideration of internal and external circumstances, including, but not limited to:

  • level of the Sufficiency Ratio, which uses a smoothed value of assets;
  • level of the Sufficiency Ratio if using the fair value of assets;
  • projections of the Sufficiency Ratio based on a range of investment return scenarios;
  • known or anticipated legislative or regulatory changes;
  • economic environment and stakeholder considerations;
  • risks relating to the WSIB’s long-term financial security; and
  • other considerations, as appropriate.

The level of prudency and conservatism in making Funding Decisions will depend on the level of the Sufficiency Ratio. Below the mid-point (i.e. 115 per cent) of the Target Funding Range, factors are more likely to weigh in favour of target funding contributions in order to have high confidence of returning the Sufficiency Ratio to the mid-point of the Target Funding Range. Above the mid-point of the Target Funding Range, factors are more likely to weigh in favour of the use of surplus distributions.

The WSIB reserves the right to consider other actions according to the financial position measured by the Sufficiency Ratio, and consideration of other relevant internal and external circumstances as appropriate.

1.1.1. Surplus Distributions and Target Funding Contributions

Volatility of investment returns, actual claim costs, legislative changes, along with a number of other factors will cause regular fluctuations in the Sufficiency Ratio. Surplus distributions are a necessary mechanism to manage the level of Surplus funding, while target funding contributions mitigate the impact of downward fluctuations in the Sufficiency Ratio. Surplus distributions and target funding contributions are both implications of a defined Target Funding Range and elements of the legislative framework.

Surplus distributions shall not be made when the Sufficiency Ratio is below the mid-point of the Target Funding Range.

1.1.2. Elements of the Legislative Framework

Should the Sufficiency Ratio be equal to or above 115 per cent and below 125 per cent, any Surplus distributions shall be distributed within 90 days of the WSIB determining that it will issue a Surplus distribution to eligible Schedule 1 employers, with the amount of the distribution within the discretion of the WSIB. The WSIB shall use the quarterly or annual Sufficiency Statements in making this assessment.

Should the Sufficiency Ratio be equal to or above 125 per cent, any Surplus distributions shall be distributed to eligible Schedule 1 employers within 30 days of the WSIB determining the Sufficiency Ratio is equal to or above 125 per cent, to return to a Sufficiency Ratio of 115.1 per cent. The WSIB shall use the annual audited Sufficiency Statement in making this assessment.

1.2. Pricing Decisions

Premium rates will be set in accordance with the provisions of the WSIA and this Policy. Premium rate setting projections will be based on prudent assumptions. While a Funding Decision may require a Surplus distribution or a target funding contribution, Pricing Decisions will be made independently with the objective of reflecting an accurate and fair estimate of the true cost of benefits coverage to employers for the immediate following year.

Further, premium rate setting recommendations will take into account the following factors:

  1. New Claims Costs;
  2. Administrative costs expected to arise during the year, including legislative obligations and current and future claims adjudication costs in respect of claims arising during the year;
  3. Benefit changes*; and
  4. Any other factor(s) deemed relevant to the maintenance of financial prudence.

*Changes in benefits will be fully priced in premium rates approved by the BOD subsequent to the change.

The level of prudency and conservatism in making Pricing Decisions will depend on the level of the Sufficiency Ratio. Below the mid-point (i.e. 115 per cent) of the Target Funding Range, factors are more likely to weigh in favour of higher pricing margins in order to have high confidence of returning the Sufficiency Ratio to the mid-point of the Target Funding Range. Above the mid-point of the Target Funding Range, factors are more likely to weigh in favour of the use of lower pricing margins.

The Chief Actuary’s recommendation on premium rate requirements to the BOD will anticipate full funding of expected New Claims Costs.

The WSIB reserves the right to adjust premium rates and consider other actions according to the financial position measured by the Sufficiency Ratio and other strategic interests.

Valuation of assets and liabilities

2.1. Valuing WSIB Assets

The WSIB will report assets on the sufficiency basis, consistent with applicable Government of Ontario’s Regulations in accordance with accepted actuarial practices for going concern valuations, which may differ from that required under International Financial Reporting Standards (“IFRS”), subject to adjustments to gains and losses from investments amortized over a five-year period to moderate the effect of market volatility described below.

2.2. Valuing WSIB Liabilities

The WSIB will value liabilities using actuarial methods and assumptions that are consistent with accepted actuarial practice for going concern valuations, which may differ from those required under IFRS. The WSIB will value liabilities of the Fund using a discount rate that is determined with reference to the long-term expected return on investments and consideration of other relevant factors. Other assumptions with respect to liabilities will be made using the Chief Actuary’s best estimate in accordance with actuarial standards.

2.3. Treatment of Gains and Losses on Investments

The WSIB will reflect gains and losses on investments as follows:

  • On the basis of stability of premiums as a guiding principle to funding, investment assets are valued at fair value adjusted for unamortized gains or losses relative to the long-term expected rate of return on those assets, less the interests in those assets held by third parties, as represented by the balance of Non-Controlling Interests.
  • Any differences between the net long-term return objective and actual returns will be amortized into the Sufficiency Ratio, over a period of five years, on a straight-line basis. This will moderate the impact on annual premium rate setting of short-term market fluctuations that are expected to normalize over time.

Roles and responsibilities

3.1. General: The WSIB retains the sole authority and responsibility for Funding Decisions and Pricing Decisions.

3.2 Board of directors:

  • The BOD is responsible for the approval and final determination of the following, after consideration, as applicable, of the Chief Actuary’s recommendation, the Audit and Finance Committee’s recommendation, the Investment Committee’s recommendation, and recommendation of WSIB Management:
    • Funding Decisions as applicable for the upcoming fiscal year, including the WSIB’s plan (as applicable) to maintain the Sufficiency Ratio within the Target Funding Range over a period of up to five years, in accordance with the requirements above;
    • Premium rates for the upcoming fiscal year (or years);
    • Investment policy, including the recommended strategic asset allocation;
    • The desired level of confidence that the Sufficiency Ratio will not fall below 100 per cent; and
    • All other Funding Decisions and Pricing Decisions.
  • The BOD will consider the following factors when making Funding Decisions and Pricing Decisions:
    • Funding recommendations from the Audit and Finance Committee with supporting information and analysis provided by WSIB Management with consultation of the Chief Actuary;
    • Pricing recommendation from the Audit and Finance Committee with supporting information and analysis provided by the Chief Actuary;
    • Investment policy recommendations from the Investment Committee with information and analysis supporting such recommendations;
    • Desired level of confidence that the Sufficiency Ratio will not fall below 100 per cent as recommended by the Audit and Finance Committee;
    • The guiding principles set out in this Policy, and any analysis required to appropriately balance the guiding principles;
    • The relevant Sufficiency Ratio requirements as prescribed by the WSIA; and
    • All other relevant information submitted to the BOD.
  • In addition, the BOD will be informed of the methods and assumptions used by the Chief Actuary for the valuation of Total Liabilities.
  • The BOD is responsible for approving this Policy following recommendation from the Audit and Finance Committee.

3.3. Chief actuary:

  • The Chief Actuary will develop premium rate recommendations in consultation with management, for approval by the BOD, in accordance with this Policy and the rate setting model’s operational policies, taking into consideration the WSIB’s investment objective and expected returns. In developing these recommendations, the Chief Actuary will be expected to take account of the WSIB’s financial position, test adverse scenarios, analyze impact of premium pricing components including discount rates, new claims costs, legislated benefits and administrative expenses, and take account of other considerations as may be judged relevant.
  • The Chief Actuary is also responsible for all other pricing recommendations.

3.4. WSIB management:

  • WSIB management is responsible for:
    • The determination that the Sufficiency Ratio is at high risk of falling below or exceeding the Target Funding Range, including analysis in support of this determination;
    • Funding recommendations, including the WSIB’s plan (as applicable) to maintain the Sufficiency Ratio within the Target Funding Range, including supporting information and analysis with consultation of the Chief Actuary; and
    • This Policy, including strategic and operational analysis for all decision-making and actions associated with this Policy, and obtaining external independent advice, as appropriate.

Related documents

This Policy takes into account the following legislation and documents, as applicable: