Underwriting Considerations Pertaining to Workers' Compensation Insurance: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 6, pp. 6.33-6.41.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-62-1. The following questions pertain to workers' compensation insurance and employers' liability insurance.

(a) List three types of benefits made available under workers' compensation insurance.

(b) What does employers' liability insurance cover?

(c) Does a standard workers' compensation / employers' liability insurance policy cover all perils not specifically excluded or only those perils that are specifically listed?

Solution S5-62-1.

(a) The following four types of benefits made available under workers' compensation insurance are mentioned by Myhr and Markham, p. 6.33:

1. Death benefits;
2. Disability income;
3. Medical expense;
4. Rehabilitation expense.

Any three of the above answers would suffice.

(b) Employers' liability insurance covers "employers for their legal liability to an employee for bodily injury arising out of and in the course of employment that is not covered under the workers' compensation law" (Myhr and Markham, p. 6.34).

(c) A standard workers' compensation / employers' liability insurance policy covers all perils not specifically excluded.

Problem S5-62-2.

(a) Describe two types of on-premises hazards considered by underwriters of workers' compensation insurance.

(b) According to Myhr and Markham, p. 6.36, what are the three elements of an off-premises hazard?

Solution S5-62-2.

(a) The following two types of on-premises hazards are described by Myhr and Markham, p. 6.35:

1. Housekeeping: This hazard concerns "the physical layout of the workplace, its cleanliness, and its operating efficiency. Housekeeping includes not only tidiness but also machinery arrangement, aisle placement and adequacy, stair cleanliness, and freight-elevator opening and stair marking" (Myhr and Markham, p. 6.35).

2. Maintenance: This hazard concerns the condition of the plant and machinery, and whether these are kept in good working order.

(b) The following three elements of off-premises hazards are discussed by Myhr and Markham, p. 6.36:

1. The duration of travel;
2. The mode of transportation;
3. The hazards at remote job sites.

Problem S5-62-3.

(a) What are professional employer organizations (PEOs)?

(b) What important question does the existence of PEOs raise with regard to workers' compensation insurance?

(c) How do most workers' compensation laws and standard workers' compensation insurance policies address the treatment of uninsured subcontractors of a contractor?

Solution S5-62-3. These questions are based on the discussion in Myhr and Markham, pp. 6.37-6.38:

(a) PEOs are vendors who lease employees to firms.

(b) The question the existence of PEOs raises is that of "who employs these workers, the leasing company or the firm that hires them" (Myhr and Markham, p. 6.37). This is an important question to address when payrolls are segregated to develop experience modifications and collect statistical data.

(c) "Most workers' compensation laws hold a contractor responsible for workers' compensation benefits to employees of its uninsured subcontractors. The standard workers' compensation policy automatically insures this loss exposure" (Myhr and Markham, p. 6.38).

Problem S5-62-4. The following questions pertain to the Occupational Safety and Health Act of 1970:

(a) What entity enforces this act?

(b) Under this act, when may safety inspectors enter working premises to inspect the premises, equipment, and environment?

(c) Once an employer receives written notice of a violation of the act, how long does the employer have to notify the Department of Labor that the action taken under the act will be contested?

(d) How does the act define a recordable case?

(e) What information could OSHA safety logs and inspections provide to workers' compensation insurance underwriters?

Solution S5-62-4. These questions are based on the discussion in Myhr and Markham, p. 6.39.

(a) The Department of Labor enforces the Occupational Safety and Health Act of 1970.

(b) Under the act, safety inspectors may enter working premises to perform inspections "at any reasonable time" (Myhr and Markham, p. 6.39).

(c) Once an employer receives written notice of a violation of the act, the employer has 15 days to notify the Department of Labor that the action taken under the act will be contested.

(d) The act defines a recordable case as "one involving an occupational death; occupational illness; or occupational injury involving loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment (other than first aid)" (Myhr and Markham, p. 6.39).

(e) OSHA safety logs and inspections can provide workers' compensation insurance underwriters with information regarding "types of losses, loss frequency, and loss duration in terms of lost workdays." It "can also be used to verify other loss information submitted with the insurance application" (Myhr and Markham, p. 6.39).

Problem S5-62-5.

(a) Define maritime loss exposures in the context of workers' compensation insurance.

(b) Name the two principal U. S. federal laws that address on-the-job injuries for maritime occupations.

(c) What potential "gray areas" of coverage can arise because benefits pertaining to many marine occupations are addressed by federal laws, whereas most workers' compensation benefits are addressed by state laws?

(d) Give three examples of ways in which a workers' compensation residual market can be structured.

Solution S5-62-5.

(a) Maritime loss exposures are loss exposures "related to occupations involving work on vessels while at sea or in close proximity to bodies of water, such as on docks, on piers, or in terminals" (Myhr and Markham, p. 6.39).

(b) The two principal U. S. federal laws that address on-the-job injuries for maritime occupations are the United States Longshore and Harbor Workers' (USL&HW) Compensation Act and the Merchant Marine Act (Jones Act) (Myhr and Markham, p. 6.40).

(c) If an individual who does not regularly work on a vessel on water boards such a vessel and is injured in the course of doing work there, it is sometimes not clear whether federal laws or state laws apply. The injured party will often seek benefits under federal laws, because these benefits are typically greater.

(d) The following examples of ways in which a workers' compensation residual market can be structured are provided by Myhr and Markham, p. 6.41:

1. Monopolistic state funds;
2. Competitive state funds;
3. Joint underwriting associations (JUAs);
4. Assigned risk plans;
5. Reinsurance pools.

Any three of the above answers suffice. Other valid answers may be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.