The Real Deal – Loss Cost Multipliers Definition
The Loss Cost Multipliers definition (LCM‘s) is one of those “under the radar” concepts in Workers Comp. I had decided to comment on LCM’s as they are very important to your Workers Comp budget. The LCM allows the insurance carriers to charge whatever their actuarial and underwriting departments think is appropriate for each classification code.
received a question on LCM’s as an employer was confused as to why their insurance carrier was charging above what was published in their state’s online rating bureau.
LCM’s are basically the insurance carrier’s deviation from the advisory loss costs that are published by NCCI or your state’s rating bureau.
The advisory loss costs are what each state has set for a Classification Code. Advisory loss costs do have a function. They are the basis for the Loss Cost Multipliers.
Almost all carriers will deviate from the advisory rate by adding in a factor above the advisory loss costs. There are in rare instances certain carriers that will file for a LCM under the advisory loss costs.
The LCM’s are basically your company’s real insurance rate basis. The basic formula would be (certain classification code for a certain year)
Carrier’s Rate = Advisory Loss Cost (published by rating bureau) * LCM
One of the most confusing areas is certain carriers may have multiple named carriers that look similar, but have very different LCM’s they have filed for all or certain class codes. I wanted to try to make this the least confusing possible.
The main takeaway is the carrier’s filed deviations (LCM’s) from the advisory rates are the basis for what you pay in Workers Comp premiums. Some LCM’s are up to 211% of the advisory rate.
The bottom line is exploring the insurance market each year for quotes is usually a good risk management technique as a Workers Comp carrier can change their rates dramatically from year to year by filing a different LCM.
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