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Old 08-14-2019, 02:33 PM
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Default LCMs for dummies

The phrase 'loss cost multiplier' doesn't actually appear in exam 5 or exam 8 provided pdfs. I obviously get how the general formula works in terms of accounting for expenses as all variable (required in my state), but what else goes into their calculation? Surely some form of modification based on loss experience is used? (Questions are intentionally vague...I know how some things are done but more interested in things I haven't actually thought of).
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Old 08-14-2019, 03:20 PM
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Originally Posted by ALivelySedative View Post
Surely some form of modification based on loss experience is used?
Wouldn't that affect the loss costs themselves, not the LCM?
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Old 08-14-2019, 03:23 PM
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Variation between uw companies (tiers) can be done through lcm
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Old 08-14-2019, 03:39 PM
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Wouldn't that affect the loss costs themselves, not the LCM?
Yes! Essentially why I have a question in the first place: Does one not account for company loss costs vs published industry loss costs? Are LCMs really derived solely from expenses? Are expenses tracked down to individual class codes? In general I think not (ime), so how are different multipliers devised for different class codes under the same line of business? This may be a simple case of bigger companies have more data than what I'm used to seeing, but I just don't know.
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Old 08-14-2019, 03:44 PM
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Variation between uw companies (tiers) can be done through lcm
This makes sense to me. I would expect expenses to be tracked separately for said companies and the basic formulas to apply. I'm more looking for other business considerations, if there are any.

As an example, being in a coastal state, we can calculate a reinsurance expense that differs by territory and apply different LCMs to different territories. Some filings I see though have massive lists of different LCMs for different class codes, which is not immediately intuitive. I'm guessing it's a data collection thing (wrt expenses) or I'm flat out not recognizing something.
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Old 08-14-2019, 04:57 PM
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Check out the appendix to W&m. Specifically D-17.
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Old 08-14-2019, 04:59 PM
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Originally Posted by ALivelySedative View Post
Yes! Essentially why I have a question in the first place: Does one not account for company loss costs vs published industry loss costs? Are LCMs really derived solely from expenses? Are expenses tracked down to individual class codes? In general I think not (ime), so how are different multipliers devised for different class codes under the same line of business? This may be a simple case of bigger companies have more data than what I'm used to seeing, but I just don't know.
You could use a Rate Departure Factor to reflect different experience. It gets multiplied in and results in a different LCM.
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Old 08-14-2019, 05:11 PM
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Quote:
Originally Posted by ALivelySedative View Post
The phrase 'loss cost multiplier' doesn't actually appear in exam 5 or exam 8 provided pdfs. I obviously get how the general formula works in terms of accounting for expenses as all variable (required in my state), but what else goes into their calculation? Surely some form of modification based on loss experience is used? (Questions are intentionally vague...I know how some things are done but more interested in things I haven't actually thought of).
LCMs are in Bahenman text in exam 8.

Either way traditionally they don't include adjustments for loss experience. However, many companies include a deviation on top of them sometimes embedded in the LCM or as a different factor that incorporate it. I have seen it both ways.

So yes in many cases it does include loss experience.
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Old 08-14-2019, 05:14 PM
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The point being that the your loss cost, let's assume NCCI or ISO is too low. So you need make an adjustment. The Loss Cost Multiplier can include that deviation factor, or you can have it separated out.

You are adjusting the loss cost. I have also seen ALAE, company/ISO used as part of an adjustment too.
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Old 08-14-2019, 06:28 PM
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Originally Posted by ALivelySedative View Post
This makes sense to me. I would expect expenses to be tracked separately for said companies and the basic formulas to apply. I'm more looking for other business considerations, if there are any.

As an example, being in a coastal state, we can calculate a reinsurance expense that differs by territory and apply different LCMs to different territories. Some filings I see though have massive lists of different LCMs for different class codes, which is not immediately intuitive. I'm guessing it's a data collection thing (wrt expenses) or I'm flat out not recognizing something.
These posts are what I was getting at, though I'd have to chew on whether I'd consider this adjusting the loss cost or adjusting the rate. Semantics, perhaps.

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Originally Posted by act_123 View Post
LCMs are in Bahenman text in exam 8.

Either way traditionally they don't include adjustments for loss experience. However, many companies include a deviation on top of them sometimes embedded in the LCM or as a different factor that incorporate it. I have seen it both ways.

So yes in many cases it does include loss experience.

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You could use a Rate Departure Factor to reflect different experience. It gets multiplied in and results in a different LCM.
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