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Commercial Lines Rating Series: Part 2 – Loss Costs & Loss Cost Multipliers

January 21, 2013

Insurance loss costsWhat is a Loss Cost?

What is a Loss Cost Multiplier?

 

Effective October 1, 1994, the Washington Surveying and Rating Bureau (WSRB) began publishing Advisory Prospective Loss Costs in lieu of Advisory Rates.

 

A loss cost is the portion of the rate component covering only losses and the costs associated with settling losses. Each company must determine their own expense provisions and include provisions for underwriting profit and contingencies.

A loss cost plus company provisions constitutes a rate.

 

Loss Cost

The largest component of a loss cost is the provision for losses and loss adjustment expenses. This includes the payment made by the insurer to an insured under the terms of the insurance contract and provides for future loss adjustment expenses such as:

  • fees for expert witnesses
  • salary and overhead for outside legal counsel

 

Loss Cost Multiplier (LCM)

Each company must determine their own expense provisions, and include provisions for underwriting profit and contingencies by filing a loss cost multiplier with the Washington Office of the Insurance Commissioner.

In addition to profit and contingencies, a company-filed loss cost multiplier includes these expenses:

  • Commission paid to agents and brokers
  • Sales expenses
  • General company expenses for rent, payroll, and employee benefits
  • Taxes, licenses, and fees

 

Loss cost X company-filed loss cost multiplier (LCM) = Rate

Read more articles from our Commercial Lines Rating Series or learn more about other Policy Rating issues.

Article by: Terry Krueger, Subscriber Administrator

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