Loss Cost Multipliers
What is a loss cost multiplier?
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.
*Please note that there are several other factors, including an experience modification, that may be applied to the base premiums before arriving at the final estimated policy premium.
Assume the NCCI base loss cost for carpentry is 5.62 and the employer has $60,000 in payroll:
Company A would charge 5.62 X 1.250 = 7.025 X 600 (per $100 of payroll) = $4,215 (base premium)
Company B would charge 5.62 X 1.500 = 8.430 X 600 (per $100 of payroll) = $5,058 (base premium)
Note: Some companies will file deviated LCMs for some classes. In these instances, the list will reflect the average LCM rather than the base LCM filed by the company.