Loss Cost Multipliers (LCM)
Jump to navigation
Jump to search
A Loss Cost Multipliers (LCM) is an adjustment multiplier to the loss cost (LC) that takes into consideration business expenses and profit.
- Example(s):
- If insurance company A has an LCM of 1.25 and insurance company B has an LCM of 1.500 then company B will charge 20 percent more for the same class code.
- …
- See: NCCI, U.S. Premium Calculation System.
References
2020
- https://insurance.mo.gov/consumers/wc/losscostmultipliers.php
- QUOTE: ... Although the National Council on Compensation Insurance is responsible for developing base loss costs for each job classification, the NCCI loss costs only reflect one component of your workers' compensation rate — the pure cost of workers' compensation claims by class code. The pure cost of claims includes the cost of actual medical care provided, lost wages, prescriptions, etc. Loss costs do not include expenses common to all businesses such as salaries, rent and utilities.
It is up to each insurance company to develop its own loss cost multipliers (LCM), which is the second component of your rate. This component is based on the company’s own operating expenses, taxes and profit provision. Although insurers may start off with the same base loss cost published by NCCI, their individual LCMs will vary greatly. This means the rate you pay will be different from insurance company to insurance company.
The formula below is used to calculate an individual insurance company’s base rate for a particular class code:
- Rate = Advisory Loss Cost (published by NCCI) * Loss Cost Multiplier
- For example: If one insurance company (A) has an LCM of 1.250 and another insurance company (B) has an LCM of 1.500, the second insurance company will charge 20 percent more for the same class code.
- QUOTE: ... Although the National Council on Compensation Insurance is responsible for developing base loss costs for each job classification, the NCCI loss costs only reflect one component of your workers' compensation rate — the pure cost of workers' compensation claims by class code. The pure cost of claims includes the cost of actual medical care provided, lost wages, prescriptions, etc. Loss costs do not include expenses common to all businesses such as salaries, rent and utilities.
2020
- https://investopedia.com/terms/l/loss-cost.asp
- QUOTE: Loss cost, also known as pure premium or pure cost, is the amount of money an insurer must pay to cover claims, including the costs to administer and investigate such claims. Loss cost, along with other items, is factored in when calculating premiums.
- Key Takeaways
- Loss cost is the total amount of money an insurer must pay to cover claims, including costs to administer and investigate such claims.
- When determining what insurance premium to charge a policyholder, insurance companies factor in the loss cost.
- Insurance companies make a profit when collected premiums are greater than loss costs.
- In calculating the loss cost, insurance underwriters use statistical models and historical data from their business and the entire industry.
- The loss cost multiplier is an adjustment to the loss cost that takes into consideration business expenses and profit.
- The loss cost multiplied by the loss cost multiplier equals the desirable premium to charge for coverage.