INTERNATIONAL BENEFITS & RISK MANAGEMENT: CANADA REFORMING COMP

A combination of legislative changes and a realization that the system is flawed are fueling efforts to improve the health of Canada's provincial workers compensation system.

Perhaps the largest problem facing Canada's workers comp system is its unfunded liabilities, driven primarily by political decisions to boost benefit levels.

The 12 provincial and territorial governments run Canada's workers compensation program. Most employers must participate and are assessed a payroll tax; the assessment varies depending on the employer's industry.

Six provinces currently have large, unfunded liabilities. For example, at year-end 1996, the cumulative unfunded liability for the Ontario Workers' Compensation Board stood at $10.46 billion Canadian ($7.60 billion); in Quebec it was $2.34 billion Canadian ($1.70 billion); in Nova Scotia it stood at $364.95 million ($265.2 million), and in British Columbia, the unfunded liability was $323.94 million Canadian ($235.4 million).

Compared with earlier in the decade, though, the funding of workers compensation benefit obligations has improved as a result of legislative reforms and cuts in the amount of benefit increases.

Since 1993, for example, nine workers comp systems have reduced or eliminated unfunded liabilities, while only three have worsened.

As of last year, in fact, six territories or provinces have surpluses: Alberta, Manitoba, New Brunswick, Northwest Territories, Saskatchewan and Yukon Territory. Three years earlier, only the two territories and Saskatchewan had surpluses.

The situation started to turn around when people "realized that there was indeed a problem," said Robert Patzelt, group corporate counsel and risk manager for Scotia Investments Ltd. in Bedford, Nova Scotia.

Workers comp boards and employers realized that the burden of covering unfunded liabilities was hurting Canadian companies compared with foreign companies, said Kathy Ortner, consultant-special projects with Royal Insurance Co. of Canada in Toronto.

One effect of the unfunded liabilities is that employers will pay higher assessments to eliminate the shortfall, agreed Jason Mandlowitz, national manager-workers compensation services for Crawford-THG in Etobicoke, Ontario.

High workers comp costs along with high taxes have driven some businesses out of Canada to other countries, such as the United States, which has lower taxes, he said.

The Ontario situation demonstrates the effect the unfunded liability has on businesses. Ontario companies pay $2.85 Canadian ($2.06) per $100 Canadian ($72.28) in payroll to the workers comp board, the second-highest rate in Canada next to Newfoundland's rate of $3.05 Canadian ($2.20).

Twenty-nine percent of the assessment in Ontario goes toward reducing the unfunded liability. If the unfunded liability was eliminated, the assessment in Ontario would drop to levels comparable to other Canadian provinces and closer to the U.S. rate, thereby helping Ontario's businesses compete, explained Linda Jolley, vp of policy and communications with the Ontario Workers Compensation Board in Toronto.

For multinationals, Ontario workers comp costs are higher and more difficult for employers to control than their U.S. workers comp programs, said Linda Stojcevski, manager-health, safety and environmental loss prevention for Speedy Muffler King Inc. in Toronto. Ms. Stojcevski manages the company's workers comp program for both its U.S. and Canadian operations.

In the past few years, Ontario and other provinces have taken steps to reduce workers comp costs.

A 1995 change to Ontario's workers comp law reduced the automatic benefit increases from an amount equal to the consumer price index to three-fourths of of the index minus 1%.

"That made the first major impact into the unfunded liability," Ms. Jolley said.

She said that change along with others helped lower the province's cumulative unfunded liabilities to $10.46 billion Canadian ($7.6 billion) at the end of 1996 from $10.89 billion Canadian ($7.98 billion) at year's end 1995.

Also, partly because of the change, Ontario has run a surplus in accident years 1995 and 1996 and is on track to have a surplus this year, as well.

But the 1995 reform pales in comparison to proposals contained in a bill working its way through the Ontario legislature. Bill 99 is expected to become law and would take effect Jan. 1, 1998.

Bill 99 would overhaul the province's workers comp system. Under the current system, the priorities of the workers comp board were compensation first, followed by rehabilitation. Return-to-work and health and safety programs lagged far behind, Mr. Mandlowitz said.

But under Bill 99, the order will be reversed, and health and safety would assume the highest priority, followed by return-to-work, rehabilitation and then compensation, he said.

Bill 99 "will reduce the unfunded liability significantly," said Ms. Jolley of the Ontario board.

Another significant change the law would make is decreasing benefit levels. An injured worker is paid 90% of pre-tax income, but under Bill 99, that would drop to 85%. "That will take some strain off the system," said James Melchin, manager of health and safety for Schneider Corp. in Kitchener, Ontario.

The bill also would reduce future benefits by setting increases at half of the consumer price index less 1% and applying this formula to more categories of workers than under the 1995 law. The board estimates this change would shave $8.4 billion Canadian ($6.07 billion) from the projected unfunded liability of $18.4 billion Canadian ($13.29 billion) in 2014, Ms. Jolley said.

Overall the board projects Bill 99 will leave Ontario with an unfunded liability of $4.3 billion ($3.11 billion) in 2014. This is expected to be eliminated by the reduction in claims that would result from an increased emphasis on improving health and safety in the workplace and shorter periods of disability due to return-to-work programs, Ms. Jolley said.

Under Bill 99, changes to the system designed to help lower claims would include: new worker claim reporting requirements; involving the employer in determining the worker's fitness to return to work-currently the province's workers comp board makes that decision exclusively; mandating that the worker and employer communicate during the worker's absence; requiring the worker provide the employer with functional abilities information; requiring health care providers cooperate with the employer; and eliminating compensation for stress except for cases of traumatic events.

Two provinces have been especially successful in recent years in changing their unfunded liabilities into a surplus. Alberta, which had a debt of $276 million Canadian ($208.5 million) in 1993, ended 1996 with a $295.3 million Canadian ($214.6 million) surplus. Manitoba turned a $54.1 million Canadian ($40.9 million) unfunded liability in 1993 to a $38.5 million Canadian ($27.8 million) surplus in 1996.

Wally Fox-Decent, chairman and chief executive officer of the Workers Compensation Board of Manitoba, said that eliminating the province's debt by the year 2000 was his top priority when he took over in 1992.

"Unless we achieved the black side of the ledger, we were not on a stable financial basis," he said.

A number of factors contributed to the system's turnaround and reaching a surplus four years ahead of schedule, he explained.

First, the Manitoba system devoted more attention to getting injured workers back to work. Between 1991 and 1995, the average time a worker was receiving benefits dropped by 2.2 days, to 33.2 in 1995 from 35.4 in 1991. This drop created $24 million in savings per year, he said.

Next, a change in provincial law in 1992 cut benefits to workers to 90% of net wages from 75% of gross wages. Despite this drop, Manitoba still maintains one of the most generous benefit levels in Canada, Mr. Fox-Decent said.

Third, while claim costs had declined, Manitoba comp premiums remained the same. "We charged employers a bit more than they needed to pay for current costs" to reduce the program's debt, Mr. Fox-Decent said.

To reward employers, this year the board provided refunds of 11.1% of 1997 premiums, and more refunds are anticipated next year as well, he said.

A more aggressive investment approach, along with the rising stock market, brought in extra income, part of which the board earmarked to lower the debt.

Despite the progress to date, changing the Canadian workers comp system won't occur overnight, people involved with it said.

Many Canadians view the system as part of the social safety net and not an insurance system, said Ms. Ortner of Royal Insurance. "Somehow the system is not working that efficiently," she said. "But that may be a cost of having a slightly different look at society" in Canada compared with the United States, she said.

Mr. Patzelt of Scotia Investments agreed that change will be slow. "It took us a long time to create this problem, and it will take us a long time to get rid of it, but we're moving in the right direction," he said.