Chapter 22 — Key Takeaways

A one-page reference card. If you remember nothing else from this chapter, remember this.

The core ideas

  • Workers' comp is statutory, no-limit, audit-driven. The benefit is set by state law, not by your policy; the core coverage (Part One) has no dollar limit; and the price is settled after the term by a premium audit, not at binding.
  • The class is the price. Classify by the work employees do (NCCI or independent-bureau class codes), find the governing class (usually the largest non-standard-exception payroll), and split out standard exceptions (clerical, drivers). Misclassification is the most expensive routine error in WC.
  • The X-mod is the company's risk as a number. The experience modification factor multiplies manual premium up (debit, >1.00) or down (credit, <1.00) from the company's own multi-year losses — weighting frequency over severity. It is portable, it follows the insured, and contractors use it to gate who can bid.
  • Frequency is the disease; severity is often the symptom. Watch the frequency trend, not the comforting absence of a single big claim.

The rule of thumb

Modified premium = (Payroll ÷ 100 × rate per \$100), summed across classes, × X-mod, then schedule credits/debits and expense + profit loads. The X-mod of 1.00 is the class average; 0.85 is a 15% credit; 1.25 is a 25% debit. (All figures illustrative.)

The two coverages on a WC policy

  • Part One — Workers' Compensation: the statutory, no-fault, no-dollar-limit benefit (medical, indemnity, disability, death). The umbrella does not sit over this.
  • Part Two — Employers' Liability: a liability coverage with limits (e.g., illustrative \$1M/\$1M/\$1M) that responds to injury suits outside the no-fault bargain — third-party-over, dual-capacity, consequential claims. The umbrella attaches over Part Two.

Structure and the map of the market

  • Monopolistic state funds (e.g., Ohio, Washington): private carriers cannot write the statutory coverage; carve out that payroll and add a stop-gap employers'-liability endorsement (the funds give Part One, generally not Part Two).
  • Loss-sensitive programs for large insureds: large-deductible (you become a credit underwriter — take collateral), retrospective rating (final premium tracks actual losses within a min/max), and self-insurance with excess WC over a high retention.

The underwriter's real lever

Return-to-work + frequency control. Indemnity (lost wages while a worker is off) is the largest controllable claim cost. Bringing injured workers back to light duty fast shortens the indemnity tail, keeps medical-only claims from becoming lost-time claims, and over three years bends the X-mod toward (and below) 1.00. You cannot cap the medical benefit — so you select, condition, credit, and verify the employer who manages the claim.

What you could defend to your manager

"I priced Harbor Steel's WC at a debit X-mod because its own losses earned it, I confirmed the welding/fabrication governing class and flagged the erection question for inspection, and I attached a return-to-work credit as the one lever that bends both the indemnity tail and the mod. I did not grant a safety credit the loss data doesn't support, and I treated the catastrophic single-claim tail as a reinsurance problem (Ch. 27), not a working-layer one."

The Underwriting File

  • Harbor Steel WC (≈\$11M payroll; several back injuries + a serious laceration near-miss): governing class = structural-steel/metal fabrication; expect a debit X-mod (>1.00); attach a return-to- work credit; verify at inspection whether the shop erects steel at job sites (a far more hazardous class). Disposition: WC priced — debit X-mod + RTW credit; safety-culture and audit questions remain open; catastrophic tail ceded to reinsurance.