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2007-01-10 CC
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2007-01-10 CC
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<br />the rate increase. A string of storm, fire and other losses pushed loss rates up in the '05 <br />underwriting year and the early projection is that '06 will be similar or worse. <br /> <br />The other major factor impacting this year's property rates is an increase in LMCIT's <br />reinsurance premiums. Because of the high reinsurance limits we need to purchase in order to <br />cover possible catastrophic losses (e.g. the tornado that moves through several cities), <br />reinsurance costs are a large cost component in our property program, representing about 35% of <br />property premium costs. Our reinsurance costs have gone up this year in part due to our loss <br />history and also as a result of coverage changes we've implemented. <br /> <br />Workcomp <br /> <br />Although we were able to keep overall work comp rates flat for 2007, rising medical costs <br />continue to be a major concern. Medical costs for work comp injuries are projected to continue <br />increasing at a rate of about 9% a year. Medical costs now make up over half of work comp loss <br />costs - about as much as indemnity benefits, Special Compensation Fund assessments, and <br />defense costs combined. <br /> <br />Our work comp indemnity costs have been generally stable and less than projections. While this <br />is good and helps offset the increase in medical costs, we also need to keep an eye on injury <br />frequency. Hopefully cities can continue reducing the numbers of employee injuries; that's <br />really the best tool we have to control future premium costs. <br /> <br />Investment income remains a very important element in the LMCIT work comp program, though <br />not quite as significant as it was a few years ago. Investment income now produces about a <br />quarter of the program's total revenue; a few years ago, it was over a third. Nevertheless, <br />investment income is still very important. Premiums alone would not quite cover projected <br />losses, let alone administrative and reinsurance costs. <br /> <br />How was the dividend amount determined? <br /> <br />Most LMCIT members are very familiar with LMCIT's approach to rate-setting. Briefly, the <br />premium rates incorporate a safety margin. Premiums plus investment income are designed to <br />produce enough revenue to cover losses and expenses even if losses turn out to be greater than <br />projections. Iflosses turn out to be at projections, that margin isn't needed to pay for losses and <br />is available either to be returned to members as a dividend or used to strengthen LMCIT's fund <br />balance. If losses turn out to be lower than projections, that additional savings also becomes <br />available to be returned to members. <br /> <br />It can take several years until claims are finally settled and we know for sure what the actual loss <br />costs were for any given underwriting year. For this reason, we have to work with estimates, <br />which are continually revised and updated. The program's results and the amount of dividend <br />we can return in anyone year therefore don't just depend on what happened during that year; the <br />year's financial results are also affected by changes in our estimates of what prior year losses <br />will ultimately cost. <br /> <br />4 <br />
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