LCMs – The Hidden Part of the Workers Comp Insurance Process

October 23, 2020 By JL Risk Management Consultants

LCMs – Loss Cost Multipliers – An Important Example

LCMs (Loss Cost Multipliers) have many definitions. The main one that I refer to when asked for a definition is:

LCMs are basically the insurance carrier’s deviation from the advisory loss costs that are published by NCCI or your state’s rating bureau.

Wikimedia Public Use – Mike Gonzalez

I recently received a message from the North Carolina Rating Bureau that referred me to a list of the LCMs. Let us look at what the list looks like for 2020 in North Carolina.

Even though North Carolina is an independent rating bureau, the concept is still the same. Please note this is public information – nothing in the following list is behind a paywall.

The list is much too long to include all carriers in the spreadsheet. Look at the heading and data that is in red. Yes, those are live and effective LCMs.

COMPANY NAME	COMPANY EFFECTIVE DATE	LOSS COST MULTIPLIER	APPLICABLE TO ALL CLASS CODES
ACADIA INSURANCE COMPANY	8/1/19	1.7100	Yes
Accident Fund General Insurance Company	4/1/20	1.9500	Yes
ACCIDENT FUND INSURANCE COMPANY OF AMERICA	4/1/20	1.3800	Yes
Accident Fund National Insurance Company	4/1/20	1.4700	Yes
Accredited Surety & Casualty Company Inc	4/15/20	1.4600	Yes
ACE AMERICAN INSURANCE COMPANY	4/1/20	1.2500	Yes
ACE FIRE UNDERWRITERS INSURANCE COMPANY	4/1/20	1.0630	Yes
ACE PROPERTY AND CASUALTY INSURANCE COMPANY	4/1/20	2.0900	Yes
ACIG Insurance Company	4/1/18	1.2700	Yes
ADVANTAGE WORKERS COMPENSATION INSURANCE COMPANY	5/1/16	1.5810	No*
AIG ASSURANCE COMPANY	4/1/20	1.1870	Yes
AIG PROPERTY CASUALTY COMPANY	4/1/20	1.7010	Yes
AIMCO MUTUAL INSURANCE COMPANY	3/1/06	1.3300	Yes
AIU INSURANCE COMPANY	4/1/20	1.0280	Yes
Alea North America Insurance Company	4/14/05	1.4900	Yes
ALL AMERICA INSURANCE COMPANY	4/1/09	1.6910	Yes
Allianz Global Risks US Insurance Company	3/1/97	1.3310	Yes
ALLIED EASTERN INDEMNITY COMPANY	4/1/20	2.0000	Yes
ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY	4/1/20	2.5270	Yes
ALLMERICA FINANCIAL ALLIANCE INSURANCE COMPANY	4/1/2018	1.8500	Yes
ALLMERICA FINANCIAL BENEFIT INSURANCE COMPANY	4/1/2018	1.0500	No*
AMCO INSURANCE COMPANY	4/1/20	2.0460	Yes
AMERICAN ALTERNATIVE INSURANCE CORPORATION	4/1/10	1.5640	Yes
American Automobile Insurance Company	4/1/20	1.6470	Yes
American Builders Insurance Company	6/1/18	1.6000	Yes
AMERICAN BUSINESS & MERCANTILE INSURANCE MUTUAL, INC.	4/1/18	2.5010	Yes
AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA	4/1/20	1.2750	Yes
AMERICAN COMPENSATION INSURANCE COMPANY	4/1/19	2.1500	Yes
AMERICAN ECONOMY INSURANCE COMPANY	8/1/17	1.6400	Yes
AMERICAN FIRE AND CASUALTY COMPANY	4/1/18	1.6790	Yes
AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY	4/1/09	1.3290	Yes
AMERICAN HOME ASSURANCE COMPANY	4/1/20	1.4630	Yes
American Interstate Insurance Company	9/1/13	1.6000	Yes
American Liberty Insurance Company	4/1/20	1.4500	Yes
AMERICAN MINING INSURANCE COMPANY	4/1/15	1.4200	Yes
American Property Insurance Company	2/28/00	1.3000	Yes
American Safety Casualty Insurance Company	9/1/03	1.4800	Yes
American Select Insurance Company	10/18/20	2.3830	No*
AMERICAN STATES INSURANCE COMPANY	8/1/17	1.7120	Yes
AMERICAN ZURICH INSURANCE COMPANY	4/1/09	1.0950	Yes
AMERISURE INSURANCE COMPANY	4/1/20	1.6500	Yes
AMERISURE MUTUAL INSURANCE COMPANY (a stock company)	4/1/20	2.2000	Yes
AMERISURE PARTNERS INSURANCE COMPANY	4/1/20	1.0500	Yes
Amfed Casualty Insurance Company	4/1/19	1.7500	Yes
AmFed National Insurance Company	5/1/18	1.3200	Yes
AMGUARD INSURANCE COMPANY	4/1/20	1.6600	Yes
AMTRUST INSURANCE COMPANY OF KANSAS, INC.	12/1/15	1.0500	Yes
Ansur America Insurance Company	4/1/20	1.3400	Yes
ARCH INDEMNITY INSURANCE COMPANY	5/15/18	1.1820	Yes
ARCH INSURANCE COMPANY	3/1/04	1.4240	Yes
Arch Property Casualty Insurance Company	4/1/20	1.7800	Yes
ARGONAUT GREAT CENTRAL INSURANCE COMPANY	5/19/10	1.4500	Yes
ARGONAUT INSURANCE COMPANY	5/19/10	1.7400	Yes
ARGONAUT-MIDWEST INSURANCE COMPANY	5/19/10	1.1600	Yes
Arrowood Indemnity Company	4/1/03	1.2600	Yes
ASHMERE INSURANCE COMPANY	2/1/17	1.4000	Yes
Associated Indemnity Corporation	4/1/16	1.9690	Yes
Association Casualty Insurance Company	6/1/07	0.9980	Yes
ASSURANCE COMPANY OF AMERICA	4/1/09	1.5640	Yes
Atlanta International Insurance Company	4/1/17	1.9500	yes
Atlantic Specialty Insurance Company	4/1/19	1.3460	Yes
ATLANTIC STATES INSURANCE COMPANY	9/1/19	1.4500	Yes
Auto-Owners Insurance Company	9/10/19	1.9500	No*

As you can see, each company has its own LCM. Please do not think of this as a list of which company charges the least. Many more variables go into your Workers Comp policy such as discounts, Schedule Credits, etc.

The companies that have the No* in the last column will have LCMs for different Classification Codes. Check here for more information on specific filing searches.

©J&L Risk Management Inc Copyright Notice

Loss Cost Multipliers – The Real Numbers That Carriers Charge

April 16, 2015 By JL Risk Management Consultants

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.

Woman Working Loss Cost Multipliers On Computer

Wikimedia Commons – Oregon Department of Transportation

**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.

©J&L Risk Management Inc Copyright Notice

Rate Reductions – One Of Most Misleading Statements In WC

April 10, 2015 By JL Risk Management Consultants

Rate Reductions

Rate reductions news published by a state rating bureau or NCCI is always a very positive statement in an industry led by negativity.

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The rate reduction news is then re-published over and over again by various Workers Comp outlets. There is still one piece of the puzzle that is lacking in the positive news.

Rate reductions are basically where a rating bureau analyzes actuarial data and subsequently publishes lower advisory or recommended rates for some or all of a state’s classification codes.

The buzz now is that California’s WCIRB (rating bureau) has recommended a 10.2% rate reduction which may seem contrary to the veiled WC crisis the state has been experiencing for the last seven years.

What does the reduction in advisory rates mean? – actually not much or even nothing. I have written in this blog many times concerning (and there are many confusing terms) deviated rates or Loss Cost Multipliers that are filed by each carrier. There are some that are over 300% of the actual advisory rates.

Hand Illustrating Rate Reductions Increase

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In very simplified terms, an insurance carrier can negate an advisory rate by filing a rate increase that matches the rate decrease. If I am ABC WC Insurance Company and I do not wish to decrease my insurance rates, I will change my deviated rate to match the decrease.

This situation does not happen that often. However, this situation has happened even more severely as a major carrier increased their deviated rate extensively last year in CA. Insurance carriers do have a team of actuaries that produce their own numbers that may not agree with the actuaries at the rating bureaus.

The insurance carriers are going to apply their own rates to remain profitable.

I will provide an example with numbers next week. I try to keep most articles to 300 words or less and this one is getting a little long to read.

©J&L Risk Management Inc Copyright Notice

WCRI – How Economy Drives Financial Performance of WC – Live

March 13, 2014 By JL Risk Management Consultants

Economy Drives Work Comp Success – WCRI

A great presentation on how the Economy Drives the financial performance of WC.

.Dr. Harry Shuford from NCCI – One of the best presentations so far at this conference. This was great data analyses. He should have been given longer than 30 minutes of time. An hour would have sufficed for his presentation.

Picture of Man Economy Drives On Bar Graph

Income statement approach

Workers Comp’s average profitability 5% over time. It is very cyclical.

109% combined ratio – underwriting loss of 9% per year

If insurers charged the NCCI recommended rates, they would cover costs. – I did not understand that concept as most of the carriers use LCM (Loss Cost Multipliers) of more than 100% which would generate a profit.

Cost drivers

Heavy drop in manufacturing and private sector injuries (frequency)
Business cycle – flow of inexperience workers (AIG study)
Business cycle – duration increases in recession, decreases in better economic times.
Better medical treatment
The key is labor market function

Hard markets are always preceded by a heavy recession. Underwriting cycles match economic performance of investments.

Bottom line – Workers Comp overall has performed much better than most of the financial industries.

I agree with the above statement as the usual market growth rate is approximately 4% over time. Workers comp performs at 1% better level than other financial and insurance markets.

©J&L Risk Management Inc Copyright Notice

WC Premium Increases Secret – Insurers Ignore Rating Bureaus

December 19, 2013 By JL Risk Management Consultants

WC Premium Increases Source Not Rating Bureaus

The secret to WC premium increases has to do with investment risk.

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The questions that I am asked the most in my line of work are twofold:

Do you know of a good stock to invest in – a hot stock tip as I am a Chartered Financial Consultant? I usually say none as the markets are artificially inflated right now – Greenspan’s irrational exuberance comment still applies today – one of my favorites.
The second one is – are my Workers Comp premiums going to increase – usually asked right after a premium audit.

The second one is harder to assess than the first even though they are interrelated to a large degree. The secret is that insurers base their premiums (hard vs. soft market) on what investment earnings they can obtain by investing a portion of your company’s hard-earned premium dollars.

The carriers can file rate deviations also known as Loss Cost Multipliers (LCM’s) at any point in time with the rate bureaus. That is not true for assigned carriers that handle the assigned risk pool claims. There are carriers presently that will deviate from the recommended rates up to 220%. The carriers cannot deviate from reality – investment earnings.

Banks are the most conservative investors closely followed by insurance carriers. Even though the market is rocketing along, there are not that many small company conservative stocks that are doing well over the long term (10+ year horizon).

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The Dow Jones index does not represent the full market or the proper portion of the market. The Dow has changed the companies in the index to have more appealing and profitable companies – the flavor of the week, so to speak.

If you use Yahoo Finance (freebies) and search for Russell 2000 and Russell 3000, you will see how the REAL market is doing overall. This will give you an indication of how your WC premium will shape up over the next few years.

I question any Risk Manager’s decision that does use these or similar indices in their decisions. The two indexes are basically a peek into the real world results for upcoming premium changes. As we all know, insurance premiums, including WC, are based on a lagging system of 2 – 3 years.

If you ever look at a 10K (found on the free Edgar System) of an insurance carrier, you may be shocked at how much funds they have in investments. What are the carriers that had invested in risky investments doing today? They are no longer in business.

You now know the secret. I will send you the bill next week – kidding.

©J&L Risk Management Inc Copyright Notice

Loss Cost Multipliers Affect Premium Audits Indirectly

October 18, 2012 By JL Risk Management Consultants

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).

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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.

Graphic of Sack of money Loss Cost Multipliers In Premium Audit

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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.

Who Is The WCIRB And What Do They Regulate?

October 10, 2012 By JL Risk Management Consultants

Who Is The WCIRB ?

What do they regulate and who is the WCIRB ? I received this question on the WCIRB last night from a California employer that had grown large enough to receive an X-Mod. Congratulations on your company’s growth in a tough economy. Sometimes, it is best to get back to the basics when analyzing Workers Compensation.

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The WCIRB is the acronym for the Workers Compensation Insurance Rating Bureau of California. The organization is very similar to NCCI. They are the data gatherer for info that feeds into each California employer’s Experience Modification Factor (XMod).

Some companies are too small to be rated in California. The minimum pure premium for an X-Mod is presently $25,225. The pure premium figure is not the premiums your company has paid.

The bureau holds conferences/workshops usually four or more times a year. I have found them to be very educational. The staff has always treated me very professionally and would help me as much as possible in any given situation.

One very important fact is the WCIRB only sets advisory rates. They are not directly responsible for how much you are charged in Workers Comp premiums. Your insurance carrier will usually deviate from their recommended rates by filing a Loss Cost Multiplier.

This is from the WCIRB’s About Us web page.

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The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) is a California unincorporated, private, nonprofit association comprised of all companies licensed to transact workers’ compensation insurance in California, and has over 400 member companies. No state money is used to fund its operations. The operations of the WCIRB are funded primarily by membership fees and assessments.

To accurately measure the cost of providing workers’ compensation benefits, the rating agency performs a number of functions, including collection of premium and loss data on every workers’ compensation insurance policy, examination of policy documents, inspections of insured businesses, and test audits of insurer payroll audits and claims classification.

The WCIRB employs approximately 200 people and maintains two offices. The home office is located in San Francisco, and a small Southern California field office is located in Cerritos.

Loss Cost Multipliers Definition – Real Deal On Insurance Premiums

August 7, 2012 By JL Risk Management Consultants

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.

Picture of Hand Shaking With Houses At Background Loss Cost Multiplier Definition

I received a question on LCM’s as an employer was confused as to why their insurance carrier was charging significantly 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.

Picture Hand Presenting Real Deal Financial Concept

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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.