I get this question a lot, “What are workers’ compensation insurance loss costs and how do they affect my business?”

The first response from my slack jaw is really, you want to know about this stuff? Of course, the smart C.F.O.’s, Executive Directors, and owners of small businesses realize that it’s little details like this that they can gain a competitive advantage against their competition. It’s not that they are “interested” in loss costs, it’s that insurance, and specifically, workers compensation insurance specifically eat of a significant piece of their expense budget. If they can rein in this line item on their expense sheet (P&L) they can have an outsized impact their overall cost structure, giving them flexibility in their pricing, and higher profits. Assuming you hadn’t crawled out from under a rock, you know that the cost each business pays for both NY workers’ compensation insurance and NY general liability insurance differs for each and every company and is uniquely based upon your results.

What loss costs are essential without all the insurance speak is the baseline premium variable that ultimately is used to calculate your companies insurance premium. Think of it this way: Think of the insurance company like a bank, and loss costs as the prime rate, got it! Everything is calculated off that baseline number, (Prime Rate). The insurance carriers have over 600 prime rates that are broken down by job classification and again based upon geographic location. The 600 “Prime Rates” or “Loss Costs” are based on “Workers Compensation Classifications” which typically is a four-digit code that tells the insurance carrier the folks that work for you are carpenters and not lawyers. The risk of a work-related injury to a carpenter is much higher than it is for an attorney, usually. Thus this is how an insurance carrier arrives at its base rate or “prime rate”; through loss costs associated with the job classification, by geographic region (county).

Here is the quick skinny on some of the other variables that are used in the gross calculation of your workers’ compensation insurance premium.

Variable	What Purpose Does It Serve	Industry or Company Specific
Loss Costs	Base insurance rate for each job description, by State, by County	Industry
Experience Modification Factor	A complex calculation that determines your specific insurance companies’ loss experience as it relates to workers’ compensation insurance. Anything over a 1, you get surcharged, anything below a 1 you get a credit. ( Note: an experience modification factor of 1.0 is like getting a C on your report card.	Your Company
Territorial Charge	In some states like NY there is an additional surcharge for certain classes like construction in Ne York City.	Industry/ Your Company Both

WHERE THEY GET THE LOSS COSTS :

For those that want more bless you! The history of Workers’ compensation rate regulation is essentially one of controlled pricing. All insurers submitted their premium and loss data to a designated rating organization such as NCCI. The organization used pooled data submitted by all insurers to develop rates for each of about 600 different work classifications. These rates were then submitted to the state insurance department for approval. Obviously, in some cases the recommended rates were approved while in other cases rates significantly lower than the recommended rates were approved. The key is all insurers in the state had to use the approved rates by the insurance department for all workers’ compensation insurance loss cost policies written in that state.

However, things are starting to change in the exciting world of workers’ compensation insurance loss cost. There have been some concerns over the past few years that the administered pricing system deprives businesses of the benefits of a truly competitive market. As a result, most states have altered their rate regulations to allow insurers to charge rates that differ from those developed by the recognized rating authority in the state. This approach to rate regulation is typically referred to as an open or competitive rating. 39 states (and D.C) have adopted a competitive rating, generally using one of the following three methods.

Insurer’s file deviations from advisory published rates
Insurer’s file loss cost multipliers for use with advisory published loss costs
Insurers file their own proposed rates

The difference between loss costs and rates is that loss costs contemplate only expected losses and loss adjustment expenses.

In states that have allowed insurers to file deviations from published rates, the rating bureau develops and files final rates with the regulators. Each insurer then advises the regulatory authorities of the percentage by which it will deviate from these rates.

In states that have implemented competitive rating by adopting loss costs, the rating bureau develops and files with regulators loss costs that reflect only expected losses and loss adjustment expenses, not final rates. Each insurer then files with the regulatory authorities a loss cost multiplier that reflects that insurer’s estimate of expenses and desired underwriting profit. To arrive at final rates in a loss cost system, the insurer’s loss cost multiplier is multiplied by the loss costs filed by the rating bureau.

In states that require insurers to file their own proposed rates, each insurer files its own proposed final rates with regulators. In developing their proposed final rates, insurers in these states typically use pooled loss cost data made available to member insurers by the rating organization.

The table below shows the process used in each of the states that have adopted competitive rating, and which rating bureau develops rates on behalf of all insurers in administered pricing states.

If you have any questions about New Jersey, Connecticut, or NY workers’ compensation loss cost insurance, or if you would like to request a free quote, contact Metropolitan Risk Advisory today.

Workers Compensation Rate Regulation	Premium Calculation Basis
Competitive Rating States	Lost Costs/Rates
Alabama	Loss Costs
Alaska	Loss Costs
Arkansas	Loss Costs
California	Loss Costs
Colorado	Loss Costs
Connecticut	Loss Costs
Delaware	Loss Costs
DC	Loss Costs
Georgia	Loss Costs
Hawaii	Loss Costs
Illinois	Advisory Rates and Loss Costs(Footnote 1)
Indiana	Advisory Rates and Loss Costs(Footnote 2)
Kansas	Loss Costs
Kentucky	Loss Costs
Lousiana	Loss Costs
Maine	Loss Costs
Maryland	Loss Costs
Michigan	Loss Costs
Minnesota	Loss Costs
Mississippi	Loss Costs
Missouri	Loss Costs
Montana	Loss Costs
Nebraska	Loss Costs
Nevada	Loss Costs
New Hampshire	Loss Costs
New Mexico	Loss Costs
New York	Loss Costs
North Carolina	Loss Costs
Oklahoma	Loss Costs
Oregon	Loss Costs
Pennsylvania	Loss Costs
Rhode Island	Loss Costs
South Carolina	Loss Costs
South Dakota	Loss Costs
Tennessee	Loss Costs
Texas	Loss Costs
Utah	Loss Costs
Vermont	Loss Costs
Virginia	Loss Costs
West Virginia	Loss Costs

Administered Pricing Scales	Rating Bureau
Arizona	NCCI
Florida	NCCI
Idaho	NCCI
Iowa	NCCI
Massachusetts	The Workers Comp. Rating & Inspection Bureau of Massachusetts
New Jersey	Comp. Rating & Inspection Bureau of NJ
Wisconsin	Wisconsin Compensation Rating Bureau

**North Dakota, Ohio, Washington, and Wyoming are monopolistic fund states

Footnotes
1. Illinois issues both advisory rates and loss costs. Insurers can use either in developing final rates.
2. Indiana issues both advisory rates and loss costs. Insurers in the voluntary market can use either in developing final rates. Advisory rates must be utilized for assigned risk policies.
3. Legislation effective February 1, 2008.