Your carriers what???
LCM, or Loss Cost Multiplier.
Should you know your carrier’s LCM? How does this affect your company, or your client? First let’s see what an LCM is.
Below is a good description of an LCM and how it applies. This was taken from the 2012 Report from the Maryland Insurance Administration to the Joint Committee on Workers’ Compensation Benefit and Insurance Oversight Committee. (feel free to skim through the jargon until you get to the “what exactly does this mean?”)
In Maryland, workers’ compensation insurance is a blend of prior approval and competitive rating. In this line, all insurers, with the exception of IWIF, are required to subscribe to a group known as NCCI. NCCI is a licensed rating and advisory organization which files pure premium loss costs with the Md. Insurance Administration or MIA. Pure premium loss costs reflect actual claim information submitted by insurers to the NCCI. Claim information includes lost wages and medical costs. NCCI then aggregates this claim information for use in its pure premium loss cost filings. Pure premium loss costs do not, however, include any other costs associated with writing workers’ compensation insurance, such as profit, commissions, taxes and the expenses associated with providing the benefits to the injured worker (known as loss adjustment expenses). No insurer may use NCCI’s pure premium loss costs until those costs have been approved by the MIA. The rates usually are effective beginning January 1 of each year.
Once the MIA has approved the NCCI’s pure premium loss costs, insurers submit independent rate filings. These filings adopt the NCCI pure premium loss costs and then include the insurer’s expense multiplier. The expense multiplier consists of the following elements from an insurer’s expense and profit information: (1) commission; (2) general expense; (3) taxes, licenses and fees; and (4) profit. In addition, since the NCCI does not include loss adjustment expense in its pure premium loss cost filings, companies modify their expense multiplier to include a component for loss adjustment expense. The insurer’s rates are derived by multiplying NCCI’s pure premium loss costs by the insurer’s calculated expense multiplier. These rate filings are made under competitive rating, which means that insurers may begin to charge premiums based on the specific expense multiplier as soon as it has been filed with the MIA.
So what exactly does that mean? Well, if you don’t live and breath insurance, rates are estabished in states at a level to cover claims according to statisistical data for the particular state. Carriers then take this loss cost and add a surcharge to it to cover things like profit, expsenses, agent commissions, etc. The higher the loss cost multiplier, the higher the base rate you’ll see on your workers’ compensation policy. The lower LCM you see a carrier files, the lower the rate is going to be for your work comp insurance.
Let’s see an example.
You’re a Virginia based business and your carrier is Erie Insurance. Carriers files different rates for different “carrier companies” or tiers. Take a look at this breakdown of different Erie companies in Virginia. Depending on which company your policy is written with, your rates with essentially the same carrier can vary widely!
Now why on earth would a carrier do this? Well, not all companies are created equal! Let’s say you’re a drywall contractor with $10,000,000 in payroll. You’ve had an excellent claims history over the last 15 years in business and really deserve to be paying insurance with the lowest rates available in addition to a very low experience rating. Then compare that company with another drywall company which uses uninsured subcontractors, casual labor, and a terrible 5 year loss history. Let’s take it a step further to say this same company is too small to even qualify for an experience rating. In this case, if a carrier were to insure this business they might want to put the highest or higher rated tier until they had more experience with the risk.
So do you as a business owner need to worry about your carrier’s LCM? Not really. If you’re shopping the marketplace for the best carrier based on price, the rates you see on the quote or proposal are probably the easiest way to gauge the pricing, but it certainly won’t hurt to know where you stand. If you are shopping your agent, you could always ask- why aren’t I this tier or that tier with my carrier? If you have a good relationship with your broker, and don’t shop, it certainly might be in your best interests to ask about your carrier’s LCM.
As an agent or broker, you should absolutely be paying attention to LCM’s. Not only will it help you do the very best job for your client, but it could save you tremendous time and resources on the marketing side of your business.