BarTalk December 2002
Volume 14, Number 6

CBABC intervention results in rate holding

by Sid Fattedad

The WCB assessment rate for 2003 for law firms is $0.15. The board initially published a preliminary rate of $0.18 but as a result of a query from the Canadian Bar Association, BC Branch, and further review of the rate group’s performance, the board has decided to hold the proposed increase in abeyance for reasons that are outlined below.

By way of background, on January 1, 1994 the Workers’ Compensation Act was amended to extend WCB coverage to virtually all employers in BC. At that time the CBABC and Law Society made presentations to the WCB proposing to be initially placed in a group that included accountants and financial institutions with an assessment rate of $0.25 per $100 dollars of assessable payroll. Since 1994 lawyers have paid the following rates:

The process of setting rates for insurance pools is fairly straightforward. Fully reserved costs for claims by year are established on a weighted average basis and divided by the assessable payroll of the rate group. For actuarial purposes, a rate group is deemed to be “credible” for rate making if there are 2,000 wage loss claims over five years with a minimum of 250 claims in each of the most recent two years, or if the rate group has $400 million of assessable payroll in each of the preceding three years.

With the introduction of a new classification system on January 1, 2000 law firms were put into a rate group of their own. The rate group was deemed to be credible because assessable payroll totals over $500 million per year. However, law firms as a group have very few claims – in the past five years only about 200 wage loss claims have been filed. Because of this, the costs related to claims are minimal especially when expressed as a payroll percentage. The majority of claims from law firms (75 per cent) are small, with costs of less than $1,000. However, on an infrequent basis, some claims have proven to be very large. In 2002, one such claim had a cost of over $600,000 when a full loss of earnings pension was awarded to a claimant. In 2001 $1.1 million in costs were awarded for several claims. Such incidences of large claims have a tendency to impact the calculated assessment rate dramatically. To illustrate the point, assume that payrolls are $500 million and applying a base rate of $0.15 per $100, the WCB collects only $750,000 per year from the legal profession, not sufficient to pay for the cost of those large claims.

Because the rate group for law firms has minimal numbers of claims but a large payroll base, there is inevitably volatility in the cost rate. We have run models to predict the claims experience and the financial performance of the rate group over time. Our analysis, based only on the group’s eight-and-a-half years’ experience has led us to the conclusion that it may be possible to hold the rate for law firms steady for long periods of time without running serious long term financial risks. In other words, actual cost rates might fluctuate dramatically from year to year, but over time, they should average out to a sustainable flat rate. Currently, that rate appears to be $0.15.

There is a caveat, however, and it has to do with the propensity factor of high cost claims. By this, we mean that should the ratio of high cost claims to low cost claims rise on a trended basis, signaling a fundamental change from the random nature of those claims today, rates for this rate group will likely be reviewed and be susceptible to annual change.

Sid Fattedad is the Chief Financial Officer of the Workers’ Compensation Board of British Columbia.

This article was published in the December 2002 issue of BarTalk and is subject to the copyright by the British Columbia Branch of the Canadian Bar Association, 2005, all rights reserved.