California Loss Cost Multipliers Do Not Reflect Any Reform Measures
The California Loss Cost Multipliers has said no to reforms. Loss Cost Multipliers (LCM’s) are one of the concepts in Workers Comp that I have been covering for many years. LCM’s are the carriers’ own assessments of risk in the marketplace. LCM’s allow deviations from the Advisory Rates published by each state’s rating bureau or the NCCI.
California’s rating bureau – the WCIRB left their advisory rates unchanged as they were unsure of the short or long term effects on Workers Comp. The carrier’s however, did not agree that the reforms are going to work in the short term and possibly even in the long term or at least the risk of them not working is high.
The insurance carrier’s actuaries and underwriters are basically implying there is too much risk in the general CA marketplace to not increase rates. In my humble opinion, insurance carriers and their actuaries do not like there being so many unknown variables when trying to provide employers in CA with quotes for coverage.
Insurance carriers are going to always err on the side of extreme caution. If you introduce so many concepts that are not concrete then carriers are going to increase rates and wait for the fallout. As a person that cranks through so many insurance statistics, I would have to agree with their stance. I do not agree with insurance carriers often.
If you look at a simple formula that I made up, you will see what I am concluding for the rise in rates.
A = B * C * D
This is a simple formula to calculate. Let us say that B = 9, C = 10, D = 11. A = 990 without question. Adding in another, but unknown variable E to the mix would make the answer 990 * E. If E could easily be estimated, there is some type of security in calculating A.
You may not be able to calculate A directly. A is now just dependent on one variable – E. This equation to me was SB 899, the old California Reform Law. You do not know exactly what A will be but you can come close knowing what E could possibly be in the equation.
This is where insurance carriers were after SB 899 A = 990 * E.
Along comes SB 863 and the formula now changes as there are so many unknown variables. For example
A = B * C * D * E * F * G
You now know that A = 990 * E * F * G. If E, F, and G are not necessarily known, the risk for any underwriter or actuary is going to jump off the charts. How do insurance companies reduce the risk – by raising rates substantially, thereby lowering the risk of loss due to so many unknown variables.
This is an oversimplified version of events. One can see, though, how the rates could have been sharply increased at least of the short term. As underwriters and actuaries feel more comfortable with E, F, and G, the rate corrections will follow.
For our readers in other states, there have been many pseudo-reforms over the last few years. CA is not alone in this problem.
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