Chapter 22 Self-Check Quiz

Twenty questions. Answer before opening the key at the bottom. The multiple-choice questions test recall and recognition; the short-answer questions test whether you can use the ideas. All figures are illustrative.

Multiple choice

  1. The core workers' compensation benefit (Part One) has no dollar limit because: a. Insurers choose not to print one b. The benefits are defined by state statute, which imposes no per-occurrence cap c. Reinsurance covers any amount d. The employer's liability limit applies instead

  2. "The grand bargain" of workers' compensation means: a. Employers pay nothing if the worker was at fault b. The worker gives up the right to sue in tort in exchange for prompt, no-fault benefits c. The insurer guarantees the employer a profit d. The state pays all claims

  3. In workers' compensation, the exposure base is: a. Square footage b. Annual revenue c. Payroll (remuneration per \$100) d. Number of vehicles

  4. The governing class of a business is: a. The class with the highest loss cost regardless of payroll b. The basic classification that best describes the business as a whole (usually the largest non-standard-exception payroll) c. Whatever class the broker selects d. The clerical office class

  5. An NCCI class code primarily groups employers by: a. The state they operate in b. Their annual revenue c. The type of work their employees do d. Their credit rating

  6. An X-mod of 1.25 means: a. A 25% discount on manual premium (a credit) b. A 25% surcharge on manual premium (a debit), reflecting worse-than-class experience c. The mod has not yet been calculated d. The employer is 25% larger than average

  7. The experience rating plan weights the primary portion of each claim more heavily than the excess portion in order to: a. Punish large claims most b. Respond to frequency (a pattern of injuries) rather than the lottery of a single severe claim c. Reduce the insurer's reinsurance cost d. Comply with the umbrella policy

  8. Three small claims will generally move an employer's X-mod: a. Less than one large claim of the same total dollars b. The same as one large claim of the same total dollars c. More than one large claim of the same total dollars d. Not at all

  9. A workers' compensation premium charged at binding is: a. The final, fixed price b. A deposit (estimated) premium, to be trued up by a premium audit after the term c. Always lower than the audited premium d. Set entirely by the reinsurer

  10. The premium audit does which of the following? a. Counts actual payroll for the term and verifies the classifications b. Recalculates the X-mod from scratch c. Sets next year's reinsurance d. Determines whether to renew the policy

  11. Part Two — Employers' Liability of a WC policy: a. Has no dollar limits, like Part One b. Is a liability coverage with dollar limits, responding to injury claims outside the no-fault statutory bargain (e.g., third-party-over actions) c. Pays the statutory medical benefit d. Only applies in monopolistic states

  12. A \$10M umbrella sitting over a WC policy increases the limit of: a. Part One (the statutory benefit) b. Part Two (employer's liability), not the unlimited statutory benefit c. Both equally d. Neither

  13. A monopolistic state fund is: a. A state fund that competes alongside private insurers b. A state-run insurer that is the only lawful source of WC coverage in that state c. A federal reinsurance program d. A private insurer with the largest market share

  14. The largest controllable cost driver on a typical WC claim, and the one a return-to-work program most directly attacks, is: a. The medical treatment b. The indemnity (lost-wage) payments that accrue while the worker is off work c. The premium audit fee d. The reinsurance cost

  15. "A clean severity record but a rising frequency trend" should be read as: a. A good risk getting lucky on big losses b. A red flag — a safety-culture problem that the X-mod is built to catch and that often precedes a catastrophic claim c. Irrelevant, since no large claim has occurred d. A reason to grant a credit mod

Short answer

  1. Explain why workers' compensation is the most state-specific line an underwriter writes, and give two concrete examples of how the same injury can cost differently in two states. (§22.1)

  2. A fabrication shop has \$8,000,000 of governing-class payroll at a manual rate of \$4.50 per \$100 and a 1.20 X-mod. Compute the manual premium for that class and the modified premium (before other classes, schedule rating, and loads). (§22.2–§22.4)

  3. In your own words, explain what the X-mod can tell an underwriter and what it cannot, and why reading the loss runs claim by claim is still necessary. (§22.3)

  4. Distinguish Part One (workers' compensation) from Part Two (employers' liability), and give one example of a situation that triggers Part Two rather than Part One. (§22.5)

  5. Harbor Steel's WC loss history includes several back injuries and a serious laceration near-miss. Predict the direction of its X-mod, name the one loss-control lever you would attach, and explain how that lever affects both the indemnity cost and the mod over time. (§22.3, §22.7, The Underwriting File)

Answer key (try all twenty first) **Multiple choice:** 1. **b** · 2. **b** · 3. **c** · 4. **b** · 5. **c** · 6. **b** · 7. **b** · 8. **c** · 9. **b** · 10. **a** · 11. **b** · 12. **b** · 13. **b** · 14. **b** · 15. **b** **Short answer:** 16. WC benefits, weekly-wage maximums, medical fee schedules, presumed occupational diseases, choice-of- physician rules, and even whether private insurers may write the coverage at all (monopolistic states) are all set state by state, because McCarran-Ferguson leaves insurance regulation to the states. Examples (any two): the same lost-wage injury replaces a different percentage of wages or hits a different weekly maximum in two states; the same surgery is reimbursed at a different fee-schedule amount; a condition presumed occupational (and thus compensable) in one state must be proven in another. 17. Manual premium = (\$8,000,000 / 100) × \$4.50 = 80,000 × \$4.50 = **\$360,000**. Modified premium = \$360,000 × 1.20 = **\$432,000** (before other classes, schedule rating, expense, and profit loads). 18. The X-mod tells you the *what* — that this employer ran better or worse than its class over a multi-year period, weighted toward frequency — but never the *why*: it cannot show the cause of each loss, whether a new safety regime has taken hold, or whether the risk is deteriorating right now (the mod is backward- looking and lagging). Reading the loss runs claim by claim reveals the causes, whether the claims are still occurring, and whether corrective actions took — the judgment the formula can't supply. 19. Part One (workers' compensation) is the no-fault, no-dollar-limit statutory benefit that pays whatever the state WC law requires for a covered work injury. Part Two (employers' liability) is a liability coverage *with* dollar limits that responds when an injury-related claim falls outside the exclusive no-fault bargain. Example (any one): a third-party-over action (an injured worker sues a general contractor, who then sues the employer for contribution); a dual-capacity claim; certain consequential family claims. 20. Direction: a **debit X-mod (above 1.00)**, because a string of repeated small-to-moderate claims is exactly the frequency pattern the experience rating plan weights heavily. Lever: a **return-to-work program** (made a condition/schedule credit). It brings injured workers back to light duty quickly, which shortens the indemnity (lost-wage) tail on each claim and keeps medical-only claims from becoming lost- time claims — lowering claim costs the way the mod is most sensitive to and, over three years, working the mod back toward 1.00.