Our blog series, The Basics of Commercial Lines Ratings, offers a refresher course on the fundamentals. In Part 1, we looked at the components needed for developing a commercial property rate. In Part 2, we explore loss costs and loss cost multipliers.
The words used to define loss cost (LC) can differ between sources, but all the definitions have the same meaning. The International Risk Management Institute (IRMI) considers loss cost “pure premium.” Overhead costs and profit loading are not included, only “actual or expected cost to an insurer of indemnity payments and allocated loss adjustments expenses.” (You can read IRMI’s full definition of loss costs here.)
To use a loss cost correctly, it's important to understand what it includes, and what it excludes
WSRB defines loss costs as the portion of a company’s rate component covering only losses, along with the costs associated with settling those losses.
The largest component of a loss cost is the provision for losses and loss adjustment expenses. This includes the payment the insurer makes to the insured under the terms of the insurance contract. This payment provides for future loss adjustment expenses such as:
- Fees for expert witnesses.
- Salary and overhead for outside legal counsel.
Loss Cost Multiplier
The loss cost multiplier (LCM) is a company’s expense provisions. Each company must determine its own expense provisions, including those for underwriting profit and contingencies. Then, the company needs to file these provisions with the Washington Office of the Insurance Commissioner.
In addition to profit and contingencies, a company-filed loss cost multiplier includes expenses such as:
- Commission paid to agents and brokers.
- Sales and marketing expenses.
- General company expenses for rent, payroll and employee benefits.
- Taxes, licenses and fees.
Multiply the loss cost by the company’s loss cost multiplier to determine that company’s rate.
LC x LCM = Rate
WSRB does not provide rates. Rather, we provide our subscribing companies with Advisory Prospective Loss Costs. You can find specific loss costs for commercial properties by logging into the Subscriber portion of our site and selecting the Loss Cost tab. Along with the loss cost, you’ll also get a commercial property report for your risk file.
Loss costs and loss cost multipliers are straightforward. Part 3 in our series deals with something that’s not so straightforward: coinsurance.