Loss Cost Multipliers Examples
Last week, an article was published on this blog in reference to Loss Cost Multipliers. The article received a large amount of traffic. A few questions were emailed to me on how Loss Cost Multipliers generate what a carrier actually charges for Workers Comp premiums.
The following is just one example of a large number of Loss Cost Multipliers in a state. This is an actual LCM filing. Any carrier-identifying information was masked. For readability, the numbers are inserted down the page instead of across.
Insurance Carrier – ABC Insurance Company
Rating Effective Date – 4/1/15
Loss Cost Multipliers – 1.4040
*Applicable To All Classes – Yes
Date Of Filing – 12/1/2014
*This means that for all Advisory Rates, ABC Insurance Company is adding a markup of 1.4040.
Some insurance carriers have many Loss Cost Multipliers depending on each Classification Code. The above is an example of a carrier that is using the formula:
Advisory Rate Published By Rating Bureau * 1.4040 = True Insurance Company Rate**
For example, the Rating Bureau publishes the advisory rate for Classification Code 8810(Clerical) as .80. The rate that ABC Insurance Company would charge = .80 *1.4040 = 1.12.
**The rate is per $100 or payroll.
Referring back to the article that I mentioned earlier if the rating bureau decided to lower the advisory rate from .80 to.75, ABC Insurance Company and their actuaries/underwriters may say that they cannot afford to do business in the state with that much of a reduction.
ABC Insurance Company may then file an LCM to account for the reduction. So the formula would be .75 *1.493 = 1.12. In other words, ABC Insurance Company, by adjusting their LCM really never reduced their rate even though the state reduced their overall rates. By raising their deviated rate (LCM) to 1.493, ABC Insurance Company is still charging the same rate or 1.12.
Carriers may never do this- however when a state rating bureau releases new advisory rates, this may mean little to the employers’ final premiums paid in the state.
A 20% reduction in advisory rates may mean very little unless the carriers go along with the reduction.
For the “number-crunchers”, yes this was a very oversimplified example, but the Loss Cost Multiplier numbers still hold true.
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