Loss Cost Decrease Does Not Directly Result in Premium Decrease
Loss Cost Decrease Question From Newsletter Reader
A newsletter reader recently asked this question after reading that their state recommended a Workers Comp Loss Cost decrease recently.
If our state has a Loss Cost decrease does that mean we will pay less premium? My answer to their email inquiry was “not necessarily.”
Wikimedia Public Use – JLW87
I have written on this subject a few times over the last 12 years. Loss Cost increase and decrease questions seem to one of the unexpected more popular questions since 2000.
Many states have been very active in publishing Lost Cost information over the last two weeks. Our HQ state (North Carolina) just recommended a 3.9% decrease.
California's WCIRB (Rating Bureau) refers to these rates as advisory pure premium rates. The WCIRB has a great definition of advisory pure premium rates that can apply to Loss Costs:
California advisory pure premium rates reflect a projection of losses and loss adjustment expenses per $100 of payroll for each of the approximately 500 standard classifications used in California. The data used to calculate the pure premium rates proposed by the WCIRB are derived, in part, from aggregate financial data collected from insurers who have workers' compensation underwriting and claims experience in California.
Loss Cost Multiplier Definition
Insurance carriers very often publish and re-publish Loss Cost Multipliers. Loss Cost Multipliers are sometimes published per insurance company as in this Kansas exampleor per each or certain classification codes
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.
Loss Cost Decrease A Good Sign
If you would like to see what a decrease looks like check out this lengthy letter from the North Carolina Rate Bureau to The Insurance Commissioner look like – here you go.
Pages 11 – 15 show the actual rate charts. This is an example. Most states follow the same type of process to have the Lost Costs approved by the Insurance Commissioner.
If a state recommends a Loss Cost reduction, does this mean that the companies in that state are safer? Yes, but not necessarily.
Huge Loss Cost and LCM Difference
One of the big differences between Loss Costs and LCMs is Insurance Commissioners have rejected, raised, or lowered the Loss Cost recommendations by NCCI or their own state's rating bureau.
I have yet to see an Insurance Commissioner reject a carrier's LCM filings. The rejections could have occurred, but I have yet to see one.
And the final answer is – Loss Cost decreases show a good trend for a state. The carriers adjust their rates almost at will. Please pull up your Workers Comp Dec Pages and review them before policy renewal and at the premium audit.
You do read your Dec Pages – yes? If not, please read or have someone in your company read them that oversees your funds.
This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.
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