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Appendix III - Data Source, Assumptions and Methodology

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A. Minister of Finance Assumptions

In accordance with section 66.2 of Act the Minister of Finance shall, on or before September 30 of a year, provide to the chief actuary and the Commission the most current forecast values of the economic variables that are relevant to the determination of a premium rate for the following year.

The data and assumptions provided to the Chief Actuary and the Commission on 30 September 2008 can be summarized as follows :

**Minister of Finance Assumptions**
Description	2007 Actual value	2008 Projected	2008 Rate of change	2009 Projected	2009 Rate of change
Labour force	17,946,900	18,270,900	+1.8%	18,442,000	+0.9%
Employment	16,865,000	17,148,300	+1.7%	17,244,100	+0.6%
Self-employed	2,614,800	2,622,800	+0.3%	2,665,800	+1.6%
Unemployed	1,081,800	1,122,600	+3.8%	1,197,900	+6.7%
Average Weekly Earnings	$770.82	$790.49	+2.6%	$809.98	+2.5%

**Minister of Finance Assumptions (continuity)**
Description	2007 Actual rate	2008 Projected rate	2009 Projected rate
Unemployment rate	6.0%	6.1%	6.5%

B. Other Assumptions

However, a number of assumptions are not provided by the Minister of Finance and are the basis of estimation. These variables have to be established from historical data and are forecasted by the chief actuary. A detailed description of those assumptions is shown below.

1. Ratio of regular beneficiaries to unemployed (b/u)

Despite its limitations as an indicator of coverage, an estimate of the b/u ratio is necessary to produce benefit projections for any given unemployment rate. The number of beneficiaries is estimated using the average number of benefit weeks for a year.

This ratio has varied considerably since 1976. However, it has remained relatively stable over the last few years. Its stability supports the view that variations over the next few years are unlikely.

For the last three years, 2005 to 2007, the three year moving average of the b/u ratio has been 46.79% and we anticipate that it would remain at this level for 2008 and 2009.

2. Maximum Insurable Earnings (MIE)

2.1. Annual Maximum

Section 4 of the Act (see Appendix V) states that the maximum will remain at $39,000 until the calculated value, which is based on the average weekly earnings, reaches that threshold after which it will be indexed at the pace of the average weekly earnings.

In 2007, and for the first time since 1996, the annual maximum insurable earnings exceeded the threshold of $39,000 established by the Act. In accordance with the indexation formula of section 4 of the Act, which is based on the average weekly earnings, the annual maximum insurable earnings for 2009 shall therefore be set at $42,300. For more details please consult Appendix I.

**Annual maximum employment insurance insurable earnings**
Description	Actual 2007	Actual 2008	Actual 2009
Annual maximum employment insurance insurable earnings	$40,000	$41,100	$42,300

2.2 Proportion of insurable earnings below and above the annual MIE

Whether it is for the calculation of premium revenues or for the cost of benefits, it is important to remember that only insurable earnings up to the MIE are covered by the Employment Insurance Program.

In projecting benefits and the corresponding break-even premium rate it is therefore necessary to find what proportion of earnings will be insured by the Employment Insurance Program.

Over the period from 1996 to 2007 there has been a strong correlation between this proportion and the employment insurance MIE as well as the average weekly earnings.

This strong correlation allows us to formulate the following assumptions :

**Proportion of insurable earnings below and above the annual MIE**
Description	Actual 2006	Projected 2007	Projected 2008	Projected 2009
Proportion of insurable earnings below and above the annual MIE	42.00% / 58.00%	41.52% / 58.48%	40.92% / 59.08%	40.39% / 59.61%

3. Average weekly earnings

For 2007 and before, we have used the annual average of the average weekly earnings from the time series 281-0026, as published by Statistics Canada under the authority of the Statistics Act, and which represents the average weekly earnings for Canada, unadjusted for seasonal variation, for all industries and including overtime. This series is the same series that is used to calculate the value of the annual maximum insurable earnings (see Appendix I).

For 2008 and 2009, we have used the assumptions provided by the Minister of Finance in accordance with Section A of the current Appendix.

4. Premium reduction wage-loss program

Under subsection 69(1) of the Act, the Commission must prescribe a system for reducing employer premiums when employees are covered by qualified wage-loss replacement (WLR) plans which reduce EI benefits otherwise payable; Subsection 69(3) provides the Commission with the authority to make regulations for the operation of a premium reduction system, including the method for determining the rates of premium reduction and the use of actuarial calculations and estimates. These calculations will be dealt with in a separate report entitled "Report on Rates of Employment Insurance Premium Reduction for Registered Wage-Loss Replacement Plans".

The following assumptions are consistent with the assumptions to be used in the separate report concerning the Employment Insurance premium reductions of registered wage-loss replacement plans :

**Premium reduction wage-loss program**
Description	Actual 2007	Projected 2008	Projected 2009
EI premium reductions granted to registered WLR plans	$705 M	$782 M	$806 M

5. Pilot projects and transitional measures

On May 11, 2004 the Government of Canada announced a new measure with the creation of a pilot project offering EI claimants in high unemployment regions the possibility of receiving up to five more weeks of EI benefits (maximum 45 weeks). Pilot Project No. 6 began on June 6, 2004 and was scheduled to end on June 4, 2007 but was extended through the creation of Pilot Project No. 10. Pilot Project No. 10 became effective June 11, 2006 and will end June 6, 2009.

On February 23, 2006 the Government of Canada announced the creation of three new employment insurance Pilot Projects (No. 7, 8 and 9) in regions of high unemployment, with the objective of evaluating their impact on the labour market.

In October 2006, the Employment Insurance Regulations were modified to allow for the extension of the transitional measures for the two Employment Insurance Economic Regions most affected by the 2000 review of the Employment Insurance Economic Regions namely Lower-St-Lawrence-North-Shore (Quebec) and Madawaska-Charlotte (New Brunswick).

In September 2008, the Minister announced the continuation of EI Pilot Projects and Transitional Measures. Pilot Project No. 7 has been replaced by Pilot Project No. 11 and is scheduled to end on October 23, 2010. Pilot Projects No. 8 and No. 9 have been replaced by Pilot Projects No. 12 and No. 13 respectively and are scheduled to end on December 4, 2010. Transitional measures are extended to April 10, 2010.

The estimated total costs per calendar year of these pilot projects, as well as the extension of the transitional measures presented in the following table, are based on experience data. They were provided by Legislative and Quantitative Policy Analysis, Employment Insurance Policy, Skills and Employment Branch, Human Resources and Social Development Canada.

**Pilot projects and transitional measures**
Initiative	Timeframe
Pilot Project No. 6 – Five Weeks	June 6 2004 to June 4 2006
Pilot Project No. 10 – five weeks	June 11 2006 to June 6 2009
Pilot Project No. 7 and 11 – Best 14 weeks	October 30 2005 to October 23 2010
Pilot Project No. 8 and 12- Revenue Threshold	December 11 2005 to December 4 2010
Pilot Project No. 9 and 13 – Entrance requirement	December 11 2005 to December 4 2010
Transitional measures economic regions	October 8 2006 to April 10 2010

**Estimated total costs of Pilot projects and transitional measures**
Initiative	2007	2008	2009
Pilot Projects Number 6 through 13	$449 M	$460 M	$506 M
Transitional Measures	$25 M	$25 M	$25 M

In Table 1, we have added $57 million ($506 million less $449 million) for the expected additional cost of pilot projects in 2009, compared to 2007, as the actual cost of $449 million in 2007 is already included in the 2007 regular benefits as the base year for projection purposes.

6. Employment Benefits and Support Measures (EBSM)

The amount for 2007 corresponds to the actual amount of expenditure. The anticipated amounts for 2008 and 2009 correspond to the authorized spending limit for EBSM for 2008-2009 and 2009-2010.

**Employment Benefits and Support Measures (EBSM)**
Employment Benefits and Support Measures (EBSM)	Actual 2007	Projected 2008	Projected 2009
amounts	$2,094 M⁶	$2,126 M	$2,136 M

7. Administrations costs

The amount for 2007 corresponds to the actual amount of administration costs. The anticipated amounts for 2008 and 2009 are based on figures provided for 2008-2009 and 2009-2010 by the Chief Financial Officer of HRSDC.

**Administration costs**
Description	Actual 2007	Projected 2008	Projected 2009
Administration costs	$1,676 M ⁶	$1,718 M	$1,652 M

8. Expenditure Review Committee (ERC)

On December 16, 2003, the Government of Canada launched an extensive exercise to review government spending and to shift expenditures from low-priority areas to high-priority areas. A new Cabinet Committee on Expenditure Review (ERC) was created to undertake a rigorous review of all government programs and expenditures.

Service Canada has indicated that ERC savings for the Employment Insurance program, between 2007 and 2009, are expected to remain relatively stable. Since our projection model uses 2007 as the base year and because of the fact that we are only concerned with relative changes in regards to that base year, we have concluded that it was unnecessary to adjust 2009 results in regards to ERC savings.

9. Premium refunds

Under the Act employees who have paid contributions beyond the yearly maximum insurable earnings or have not earned $2,000 are entitled to a refund. The year 2006 is the first year for which experience data is available regarding the impact of the Quebec Parental Insurance Plan (QPIP) on premium refunds. Indeed, contributors working outside of Quebec but residing in Quebec obtain a premium refund on their T1s that corresponds to the premium reduction for the provincial plan. In 2006 the actual amount of refunds as a percentage of gross revenues increased substantially to 1.21%, mainly due to QPIP.

The use of T1s to breakdown the insurable earnings implicitly takes into account the amount of premiums that is expected to be refunded due to QPIP. The expected premium refund is then adjusted down, based on an analysis of premium revenue using both T1s and T4s to split the insurable earnings. This adjustment was not done for the 2006 to 2008 premium rates due to the absence of experience data on premium refunds with QPIP in place.

The adjusted value of 0.80% is used as the 2009 assumption for refund ratio.

10. Benefit repayments

Benefit repayments are expected to be relatively constant at 1.75% of total regular and fishing benefits. The assumption used is the actual ratio for 2007.

11. Bad debts and penalties

Bad debts and penalties have historically been estimated as a percentage of projected net benefits.

The assumptions used are the actual ratios for 2007 and are respectively 0.56% and 0.40% for bad debts and penalties.

12. Proportion of claims at maximum

This assumption also has to be made in order to be able to project benefits :

**Proportion of claims at maximum**
Description	Actual 2007	Projected 2008	Projected 2009
Proportion of claims at maximum	42.87%	43.53%	44.17%

C. Methodology and Integration of Assumptions

On the expenditure side, the base year must be updated with the 2007 data, the last complete calendar year. Our model is based on the actual amounts paid for each benefit type, as well as other items, mainly administration.

We then estimate the costs for the year 2008 and adjust it with the year-to-date data. Annual projection factors are determined so as to ensure consistency with year-to-date changes for employment, unemployment and wage growth. Administration costs are based on figures provided by the Chief Financial Officer of HRSDC.

The 2007 insurable earnings are still estimates as the Canada Revenue Agency (CRA) will only release their final value in January 2009.

Finally, these projections are carried out to 2009 based on the projected annual rates of change for each factor as described below :

1. Benefits

1.1. Regular benefits

Regular benefits in the amount of $8,485 million have been paid in 2007. For 2008 and 2009, four main assumptions are needed: the rates of increase of the average weekly benefits, the labour force, the unemployment rate and the ratio of beneficiaries to unemployed. It is therefore estimated that amounts of $8,784 million and $9,602 million (including pilot projects and transitional measures) should be paid in regular benefits respectively in 2008 and 2009.

1.2. Employment Benefits and Support Measures (EBSM - Part II of the Act)

For 2007, an amount of $2,094 million was paid in EBSM ⁷. As previously mentioned, for 2008 and 2009, we have used the authorized spending limits for EBSMs.

1.3. Special benefits

Special benefits are basically comprised of sickness, maternity, parental and compassionate benefits.

For 2007, an amount of $3,659 million was paid in special benefits including $2,732 million in maternity and parental benefits, $918 million in sickness benefits and $9 million in compassionate care benefits.

For 2008 and 2009, two main assumptions were necessary: the rates of increase in the average weekly benefits and insured population. It is therefore estimated that for 2008 an amount of $3,847 million of special benefits should be paid, including $2,877 million in maternity/parental benefits, $960 million in sickness benefits and $9 million in compassionate care benefits. For 2009, it is estimated that an amount of $3,955 million of special benefits should be paid, including $2,958 million in maternity/parental benefits, $987 million in sickness benefits and $10 million in compassionate care benefits.

1.4. Fishing Benefits

For 2007, an amount of $269 million was paid in fishing benefits. For 2008 and 2009, only one assumption was necessary: the rate of increase in average weekly benefits. It is therefore estimated that for 2008 and 2009 amounts of $271 million and $277 million should respectively be paid in fishing benefits.

1.5. Work Sharing Program

For 2007, an amount of $13 million was paid through the work sharing program. We estimate that benefits of $14 million will be paid in 2008 and 2009.

2. Benefit repayments

Benefit repayments totalled $153 million in 2007. Benefit repayments are expected to be relatively stable as a percentage of the total amount of regular and fishing benefits.

3. Administration costs

As previously mentioned, the actual costs of administration for 2007 as well as the projected costs for 2008 and 2009 have been provided by the Chief Financial Officer of HRSDC.

4. Bad debts and penalties

It is assumed that bad debts and penalties for 2009 will respectively stand at 0.56% and 0.40% of the projected net benefits.

5. Insurable Earnings (IE)

The calendar year 2006 is the last one for which total IE are available. This data is provided by the Canada Revenue Agency (CRA). This amount has to be adjusted however because some 2006's T4s will only be processed after December 31, 2007. The 2006 IE are therefore adjusted by considering the analysis of historical accrued premiums.

The 2007 IE are still estimates as CRA will only release their final value in January 2009 (except for accrued revenues which should be added).

For the following years, two assumptions are needed: the growth rate of the insured population and of the IE. The growth rate of the insured population is a function of the growth rate of employment, excluding self-employed. The growth rate of IE, in turn, is a function of the growth rate of the annual maximum insurable earnings ($42,300 in 2009 compared to $41,100 in 2008 and $40,000 in 2007) for the portion of IE above the maximum annual insurable earnings and of the growth rate of average weekly earnings for the portion of IE below the maximum annual insurable earnings.

Growth of IE can be expressed as follows:

**Growth of Insurable Earnings**
Total Insurable Earnings for Canada	Actual 2006	Projected 2007	Projected 2008	Projected 2009
Before adjustment for late T4 processing	$408,353 M	-	-	-
After adjustment for late T4 processing	$410,622 M	$432,125 M	$452,295 M	$466,364 M
Rate of change	-	5.2%	4.7%	3.1%

6. Provincial Plan (PP)

In order to determine the EI premium rate for provinces where there is a PP and the EI break-even for provinces where there is no PP, it is necessary to breakdown the insurable earnings in two distinct portions. These insurable earnings must be determined on the basis of the province of residence since eligibility for a PP is based on residency.

In addition, in order to determine the rate for the type of EI benefits insured by a PP, it is necessary to take into account the variable administrative cost which is the amount of direct operating costs incurred to provide the type of EI benefits covered by a PP.

These two issues are the subject of Appendix II.

7. Calculation of break-even rate

Below is a description of the formulas used for Table 1 in the main report:

CEI^WOPB = Costs of employment insurance including the cost of the reduction for registered wage-loss salary plans. EI variable administration costs linked to the delivery of EI benefits which are of the PB type (see Appendix II) are excluded.

CEI^PB = Costs of employment insurance benefits of the PB type including the EI variable administration costs linked to the delivery of EI benefits which are of the PB type.

EIIE^WPP = EI insurable earnings for provinces with a Provincial Plan (PP).

EIIE^WOPP = Employment insurance insurable earnings for provinces without a PP.

EIIE^T = Total employment insurance insurable earnings for Canada.

= EIIE^WPP + EIIE^WOPP

PRMRF^% = Ratio of premium refunds as a percentage of total revenues.

BE^WPP = Reduced EI premium rate for provinces with a PP, rounded off to the nearest one hundredth of one percent.

= (CEI^WOPB / (1-PRMRF^%) - CEI^PB
______________________
2.4 x EIIE^T

RED^PB = EI premium rate reduction for EI benefits of the PB type, rounded off to the nearest one hundredth of one percent.

=          CEI^PB
   _______________
   2.4 x EIIE^WOPP

BE^WOPP = EI break-even rate for provinces without a PB
= BE^WPP + RED^PB

⁶ The actual amounts for calendar year 2007 are taken from the final expenditures for 2006-2007 and 2007-2008, which appear in the Public Accounts of Canada, as these expenditures are reported only on a fiscal year basis.

⁷ The actual amounts for calendar year 2007 are taken from the final expenditures for 2006-2007 and 2007-2008, which appear in the Public Accounts of Canada, as these expenditures are reported only on a fiscal-year basis.