Overview of Loss Costs & Loss Cost Multipliers

Published 08-01-2016 into Pricing Factors of Workers' Comp

Loss Costs & Loss Cost Multipliers


WC is governed by state regulations, so how a policy is priced can vary greatly from state to state.  Each Class Code (industry classification of employee duties) has an associated Loss Cost (LC), also referred to as the Base Rate. 


A Loss Cost is a numerical rating factor representing the actual or expected cost to an insurer of indemnity payment and allocated loss adjustment expenses and is specific to the class of employment (Class Code) within a given state.  A Loss Cost is established by the respective rating bureau of the state and is based on previous experience within the state for the Class Code.  They are typically issued on an annual basis and go into effect on a specific date for policy ratings.


In some states, such as FL and NJ, this LC is the actual policy rate for a given class code.  Another way to say it is that the state sets the WC Rates.  Therefore there will be no rate variance from carrier to carrier (however there can be differences in the Total Cost via underwriting discretion).  This is not to be confused with a monopolistic state, which we are not discussing. 


In other states, such as PA and TX, Carriers file a Loss Cost Multiplier (LCM).  The LCM is a factor that allows the carrier to adjust the standard rate (LC) to account for their own expense provisions.  The LCM is specific to the Carrier’s experience and therefore can vary greatly from Carrier to Carrier.  All this variance creates a very competitive WC market with exploitable opportunities, with the right tools of course.  


Note that in some states a carrier may have ‘sub’ LCM filings for specific Class Codes or have tiered LCM filings (e.g. standard/preferred).  Also note that one ‘Carrier’ may have multiple ‘underwriting companies’ - each with their own LCM filing (e.g. Travelers Casualty, Travelers Indemnity and Travelers Property Casualty are all part of Travelers, but each has its own LCM filing).

Last note...some state's, such as TX, have a 2nd option for rating.  It is called Rate Relativity.  In this scenario the state's rating bureau establishes relativities for the classes, which is the basis for a policy rate.  The carriers file a Deviation which is applied to the Rate Relativity similar to how a LCM is applied to a LC.     


The equation for the policy Rate when LCMs are filed is as follows-


(LC) x (LCM) = Rate


Standard Premium


Standard Premium is the premium generated by applying the payroll associated with a given class code to the code’s Rate.  The equation for Standard Premium is –


Rate x (Payroll/100) = SP


How do we make use of this information in new business production?  Based on the above equations we know there is only 1 relevant pricing variable (LCM) in the equation.  All other factors are fixed, or constant (the LC is set by the state, so it does not vary by carrier; the payroll is the exposure so this also does not vary by carrier).


If you know your market's LCM filings (and you better) you can make a comparison to the incumbent's and at least have something to talk about on your initial call that will be of interest to the prospect.  Keep in mind there are plenty of other variables that play into the total cost of coverage (Exp Mods, scheduled credit/debit, etc), for now we're just working with what we have available. 


The first call is to sell the sizzle, not the steak, right?