The Big Falsehoods Of Workers Compensation Experience Rating Systems
The Big Falsehoods of Workers Compensation experience rating system involve advisory rate accuracy. I recently received an email from a regional insurance company reporting that a certain state had an 8% reduction in the advisory rates also known as loss costs. This is one of the inadvertent falsehoods in Workers Comp.
A certain state reducing their advisory rates has very little to do with the final premium any employers will pay in that state. Insurance carriers can immediately change their loss cost multiplier (LCM) to offset any rate reductions. For instance, I know of one carrier in California where the LCM is 211% of the loss cost or advisory rate. This is an approved LCM that is on file at this time.
Some carriers change their LCM’s frequently. Almost all state’s Workers Compensation Departments just rubber-stamp the increases or decreases.
Carriers can actually file an LCM for each classification code in a certain state. Most carriers file only one LCM per state for all class codes. If a carrier does not wish to incur the aforementioned 8% rate reduction across the board, they can easily file a new LCM with an 8% increase.
Rate decreases are not necessarily a worthless or negative development. Most carriers do not immediately file an LCM change in response to a loss cost decrease by the state. However, they can file an increased LCM if they wish.
The takeaway is the policy and the rates that are charged to your company are the true and final rate decrease or increase. The final audited premium is the most important number for your company. Anything else is just background noise that pertains to the workers compensation experience rating system.
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