The Loss Sensitive Rating Plan (LSRP) is designed to:
LSRP encourages employers with large assigned risk workers compensation premiums to obtain coverage in the voluntary market by removing the potential financial advantage that the guaranteed-cost residual market coverage may provide for these employers. Therefore, with the establishment of this program, LSRP will help maintain the residual market as the market of last resort, and LSRP will continue to act as a depopulation tool for these large employers.
LSRP also provides large employers with a financial incentive to promote safety and reduce losses by requiring them to accept greater financial responsibility for the losses they incur. To the extent an assigned risk employer controls losses, lower premiums may be achieved.
Original Filing 09/01/94
The Loss Sensitive Rating Plan (LSRP) is a filed plan in Indiana. It was filed as 01-IN-94 "Assigned Risk Mandatory Loss Sensitive Rating Plan (LSRP)" effective 09/01/94. Its purpose is to create a mandatory assigned risk retrospective rating program for employers having residual market standard premium equal to or exceeding $250,000 ($100,000 before 1/01/2012). This rating program is designed to depopulate the residual market, to promote safety and loss-control, and to provide fairness.
Item Filing RM-02-IN-02
"Amended LSRP" effective December 1, 2002 amended the Assigned Risk Mandatory Loss Sensitive Rating Plan (LSRP) that changes the eligibility premium threshold from $200,000 to $100,000. Additionally, this filing changed the renewal premium quotation threshold upon which notification of the possible applicability of LSRP is required to $50,000. Servicing carriers are required to provide this notice on renewal quotes.
Item Filing RM-W-8028
The LSRP rule formerly in the AR green pages is now Basic Manual Rule 4.C. Loss Sensitive Rating Plan effective July 1, 2006. The filing creates a national LSRP rule in Basic Manual, Rule 4-C and applies Indiana state rule exceptions where appropriate (Exhibit 5 of filing). Summary of IN exceptions:
Item Filing RM-W-8040
"Revisions to Basic Manual Rule 4-C Loss Sensitive Rating Plan" effective January 1, 2012 revises the Basic Manual for Workers Compensation and Employers Liability Insurance Rule 4-C—Loss Sensitive Rating Plan (LSRP) to:
There are two standard endorsements related to LSRP:
Note that standard premium "means estimated annual standard premium." It includes the assigned risk surcharge and ARAP, for those states using these programs. Standard premium would be estimated at the time of application and audited after the policy expires. If either the:
equals or exceeds $250,000 ($100,000 before 1/01/2012), then the risk qualifies for LSRP.
Refer to The Basic Manual Indiana Assigned Risk State Rule Exceptions (green pages), Loss Sensitive Rating Plan (LSRP), Rule 4.C.1. and Rule 4.C.2.f.
LSRP "is to provide an assigned risk retrospective rating plan for those employers who have workers compensation & employers liability insurance policy(s) through the Workers Compensation Insurance Plan (WCIP) with a standard premium that equals or exceeds $250,000." ($100,000 before 1/01/2012)
120 Day Cutoff
What happens if after the application, an employer's premium moves above or below the $250,000 ($100,000 before 1/01/2012) threshold?
Provided there is no misrepresentation or omission, here's what happens. Within the first 120 days, an employer may either qualify (premium increased) or no longer qualify (premium decreased) for the LSRP. After the first 120 days, if an employer's premium is under $250,000 but an interim audit reveals premium over $250,000, then the policy will remain as a standard policy and upon renewal, the LSRP will apply.
Refer to the Assigned Risk LSRP Notification Endorsement, Eligibility 4. "After the first 120 days of the coverage term, if it is determined that an employer qualifies for LSRP, the policy shall not be changed until renewal."
Note on PEOs: Professional Employer Organizations (PEO) and temporary arrangement policies may become subject to LSRP at any time. Basic Manual Rule 4-C-11-e: “LSRP is applied to policies covering PEO and temporary arrangements if, at any time during the policy period, the premium for that coverage reaches the minimum threshold required for LSRP eligibility.”
The ICRB interpretation is that this rule excepts the 120 rule. In other words, typically you have to qualify or not within the first 120 days, but PEO’s who exceed the threshold (projected to annual) even after the 120 days, are placed in LSRP. If there are significant changes to a PEO within the first 120 days that would cause us to reasonably assume the annual premium will not reach the threshold, then the policy should not be subject to LSRP. Nevertheless, if subsequent interim audits indicate otherwise, after 120 days, then they are subjected to it for the entire policy term.
The factors used to calculate the LSRP premium are shown in the attached Excel file, below. The factors include:
Minimum Premium Factor
Maximum Premium Factor
Basic Premium Factor
Loss Conversion Factor
LSRP Development Factors
The Basic Manual Indiana Assigned Risk Special Rules (green pages) that define the Loss Sensitive Rating Plan (LSRP) directs the reader to "Refer to the state exception pages (green rate pages) for the LSRP development factors."
Extra Deposit or Line of Credit
An additional deposit of 20% or a line of credit is used as collateral and guarantees that an employer will make additional premium payments, if necessary.
Note: The extra deposit amount does not increase the total estimated premium on the policy. It does increase the amount of deposit (25% deposit at time of application and 20% within 30 days of the effective date). And, if paid in cash instead of a line of credit, increases the total funds paid to the carrier. See next section for more info.
Because of the nature of retrospective rating, an LSRP policy undergoes the 1st adjustment or evaluation after the first year (12 months) of coverage, so additional premium might be billed around 18 months after the policy effective date or 6 months after the policy expires. Because a typical line of credit is also effective for 12 months, and because billing for more premium would occur after the line of credit would have expired, our rules require an automatic renewal clause (also known as "evergreen"). According to a KeyBank source, most renewable lines of credit can roll for additional one year periods and are common. Also, virtually all lines of credit are irrevocable because banks follow the UCP 500 standard that requires all credit to be irrevocable. Therefore, our rules appear reasonable when they ask for irrevocable and renewal lines of credit. The Basic Manual Rule C-6-c(2)(d).
The Indiana exception to the Basic Manual rule provides a common sense solution that in issuing a line of credit, the bank may address its letter to the "ICRB and its successors or assigns" or "ICRB servicing carrier" since at the time of the application, we do not yet know which servicing carrier will be writing the account.
Here's a sample letter of credit.
LSRP Deposit not part of Total Estimated Annual Premium
The extra LSRP deposit does not increase the total estimated annual premium. The rule merely provides that the carrier can collect an additional 20% of the total as collateral (or reserve, if you will) that is set aside and may be used should there be problems in collecting future premium payments. In Indiana, the normal 25% of the total is collected upfront, plus 20% LSRP deposit or line of credit to be paid within 30 days of the policy effective date. The insured will be billed for the 75% balance of premium in eight monthly payments. So, even though the total collected funds would be greater than the total estimated annual premium (if insured paid cash instead of provide a line of credit for the 20% LSRP deposit), the deposit rule does not serve to increase the actual premium.
One may ask, so what? There are several reasons why this is important:
1. What is shown as total estimated premium must match the approved premium algorithm for Indiana.
2. Total estimated annual premium must be accurately shown to a premium finance company, separate from the 20% LSRP deposit.
3. The LSRP deposit rule allows a line of credit in lieu of cash, so in some instances, the extra amount may not actually be collected, so it would be misleading to show the extra LSRP deposit amount as part of total estimated annual premium.
First, if an employer finds coverage in the regular market within 120 days of the LSRP policy effective date, then the LSRP rules do not apply (LSRP Rule 4.C.4.a., Table 2) and no adjustments are required. Normal policy cancellation rules apply.
Second, if an employer finds coverage in the regular market and cancels an assigned risk policy, then premium must be returned pro-rata (no short rate calculation regardless of what LSRP rules might say) per Indiana statute IC 27-7-2-35.
The current timeframe required in the 2002 Servicing Carrier Standards 7.c.(1)(d), updated 1/1/07 and 2009 Assigned Carrier Performance Standards 7.A.6.a., say "Statements and return premium checks must be mailed within fifteen (15) days of recording on company records."
If the policy is canceled by the employer or insurer after the first 120 days, a determination shall be made as to whether this program shall apply. The Assigned Risk Loss Sensitive Rating Plan "shall apply only to those policies where the payroll extended to an annual basis and multiplied by the manual rates and experience modification, equals or exceeds the premium eligibility level in any of the states where this program has been approved." Similarly, the maximum premium factor is based on the standard premium projected to annual.
The Basic Manual Indiana Assigned Risk State Rule Exceptions (green pages), Loss Sensitive Rating Plan (LSRP), Rule 4.C.2.f.
Assigned Risk Mandatory LSRP Endorsement WC 00 04 18 C. This endorsement has since been replaced by endorsements WC 00 04 18 D & E.
LSRP Rule 4.C.12.b.(2) provides that "When a return premium is generated by final audit. The assigned carrier will return the premium, but hold the LSRP contingency deposit until the fourth or final valuation. Any remaining contingency deposit premium must be returned to the employer within 10 days after the assigned carrier calculates the fourth or final valuation."
Policy premium (whether standard premium or the LSRP contingency deposit premium of 20%) may or may not be returned, based on the insured's losses. Remember, because of the nature of retrospective rating, an LSRP policy undergoes the 1st adjustment or evaluation after the first year of coverage, so premium might be due or returned around 18 to 21 months after the policy effective date (or 6 to 9 months after the policy expires, if cancelled midterm and the carrier makes an early calculation).
So, the earliest refund would be 6-9 months after the policy expires, when the 1st adjustment is made, processed, and recorded.
Also, remember that a total of 4 adjustments are made at 18, 30, 42, and 54 months after policy effective date. At those times, the insured may owe additional premium or the carrier may owe the insured a refund.
The states that have an LSRP are listed in the Assigned Risk Supplement, Section 5 - Appendix. As of 9/26/07, 16 states use an LSRP. They are: Alabama, Connecticut, DC, Georgia, Idaho, Illinois, Indiana, Kansas, Mississippi, Nevada, New Hampshire, North Carolina, Oregon, South Carolina, South Dakota, and Vermont . Effective 1/1/05 Indiana exposure must be issued on a stand-alone policy. The multi-state employer rules do not apply to Indiana policies.
Avoidance of LSRP Rules
The Basic Manual Indiana Assigned Risk Special Rules (green pages), Rule 4.C.6. states:
Some employers may take actions for the purpose of avoiding the application of the LSRP. Other employers may take actions for otherwise legitimate business reasons that nonetheless result in the improper application of LSRP. Regardless of intent, any action that results in the miscalculation or misapplication of the LSRP determined in accordance with these LSRP rules is prohibited.
To calculate an example LSRP deposit premium, minimum and maximum premiums, or 1st adjustment premium, open the attached Excel spreadsheet and enter your numbers.
For an overview on risk sharing programs also known as loss sensitive programs, dividend programs, retros, and large deductibles, read the Advisen Ltd paper titled "Challenges in Collateralizing Large Deductible Programs" from July 2012.