The Loss Cost Multipliers Have An Indirect Effect
I recently posted on Loss Cost Multipliers that affect your premium audit. I have received so many inquiries to my last post on the subject that I thought I would cover the subject again. This is an emailed question I received last week. The answer is definitely yes. Loss Cost Multipliers (LCM’s) affect your premiums as much as your E-Mod (X-Mod in CA).
Advisory rates are posted by the NCCI, WCIRB, or the state’s rating bureau. Loss Cost Multipliers are each carrier basically asking the state’s permission to deviate from the Advisory Rate. There are two solid facts about LCM’s:
- They are usually a % increase over the advisory rates in most cases
- A state will rarely reject the LCM’s requested by the carrier
The best way to cover LCM‘s is by showing an example. Let’s say the advisory rate for a trucking classification code 7219 is 12.50. This means for every $100 in payroll for trucking in that state, the advisory rate published by the state for a certain time period is 12.50.
The insurance carrier says that to afford their overhead and to make a modest profit, they need to increase all classification codes by 1.35. In our example above, the 12.50 per $100 in payroll now becomes (12.50 * 1.35) per $100 of payroll is now $16.88.
This is an area that employers are usually not privy to as you will only see the $16.88 rate. The rates can deviate heavily amongst carriers in a certain state. I know of one large carrier that is deviating their rates by 2.11 or 211% in a certain state.
In my example the trucking company would pay 12.50 * 2.11 = 26.38 per $100 of payroll for their truck drivers. So, in that case, the trucking company would end up paying out over 1/4 of their payroll in Workers Comp insurance for their truck drivers. Ouch!
At the premium audit, the auditor will, of course, not use the advisory rates. He or she will use the rate after the LCM has been applied to the advisory rate. There are many more steps to getting to the premium, but the LCM is just as important to your company as the Mod. It is another multiplier in the formula.
If you are in the state risk pool due to a high E-Mod (X-Mod), the state will usually provide the rate with the LCM already calculated into the rate. I will cover that next time.
The main takeaway is there are as many different rates as there are carriers in a state. They do not just take a rate and use it. Next time you look at your company’s renewal quote, you will know each rate has been deviated from the recommended rate by the state.
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