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13.3 Premium Basis, Experience Modification, and Classification
Alaska Property & Casualty Insurance State
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1 Standalone Coverage Map
Standalone Coverage Map
2 Introduction: Alaska Property & Casualty Insurance Exam Overview
Alaska Property & Casualty Exam Overview
3 National Portion: Insurance Fundamentals
1.1 Risk, Hazards, Perils, and the Law of Large Numbers 1.2 Insurable Interest, Indemnity, and Other Insurance Principles 1.3 Insurance Contract Law and Elements 1.4 Policy Structure: Declarations, Insuring Agreement, Conditions, Exclusions 1.5 Parties, Agents vs. Brokers, and Authority
4 National Portion: Property Insurance Concepts
2.1 Causes of Loss / Named-Peril vs. Open-Peril 2.2 Valuation: ACV, Replacement Cost, and Functional Value 2.3 Coinsurance and the Coinsurance Formula 2.4 Deductibles, Limits, and Loss Settlement 2.5 Common Property Policy Conditions and Clauses
5 National Portion: Dwelling Policies (DP)
3.1 Dwelling Policy Forms DP-1, DP-2, DP-3 3.2 Dwelling Coverages A-E and Other Coverages 3.3 Dwelling Perils, Conditions, and Endorsements 3.4 Mobile Home and Specialized Dwelling Coverage
6 National Portion: Homeowners Policies - Forms & Section I
Homeowners Forms HO-2 through HO-8 and Eligibility Section I Coverages A-D and Additional Coverages Section I Perils Insured Against and Exclusions Replacement Cost vs. ACV and Loss Settlement in Homeowners
7 National Portion: Homeowners Policies - Section II & Endorsements
Section II Coverages E (Liability) and F (Medical Payments) Homeowners Conditions and Duties After Loss Common Homeowners Endorsements
8 National Portion: Personal Auto Policy - Liability & Injury
6.1 Personal Auto Policy Structure and Eligibility 6.2 Part A Liability and Supplementary Payments 6.3 Part B Medical Payments 6.4 Part C Uninsured/Underinsured Motorists
9 National Portion: Personal Auto Policy - Physical Damage & Duties
7.1 Part D Coverage for Damage to Your Auto 7.2 Exclusions and Part E Duties After an Accident 7.3 Part F General Provisions, Endorsements, and No-Fault Concepts
10 National Portion: Liability Insurance Concepts
8.1 Negligence, Torts, and Legal Liability 8.2 Defenses, Damages, and Vicarious Liability 8.3 Occurrence vs. Claims-Made Triggers 8.4 Bodily Injury, Property Damage, and Personal/Advertising Injury
11 National Portion: Commercial Property Insurance
9.1 Commercial Package Policy Structure and Common Policy Conditions 9.2 Building and Personal Property Coverage Form (BPP) 9.3 Causes of Loss Forms (Basic, Broad, Special) 9.4 Business Income and Extra Expense 9.5 Commercial Property Endorsements and the BOP
12 National Portion: Commercial General Liability - Coverages
10.1 CGL Coverage A: Bodily Injury and Property Damage Liability 10.2 CGL Coverage B: Personal and Advertising Injury, Coverage C: Medical Payments 10.3 Who Is an Insured and Supplementary Payments
13 National Portion: Commercial General Liability - Limits, Triggers & Exclusions
11.1 CGL Limits of Insurance and Aggregates 11.2 Occurrence vs. Claims-Made CGL and Retroactive Dates 11.3 Key CGL Exclusions and Endorsements
14 National Portion: Commercial Auto Insurance
12.1 Business Auto Coverage Form and Covered Auto Symbols 12.2 Commercial Auto Liability and Physical Damage 12.3 Motor Carrier / Trucking and MCS-90 12.4 Garage Coverage Form and Garagekeepers 12.5 Commercial Auto Endorsements
15 National Portion: Workers Compensation
13.1 Workers Compensation Statutory Background and Benefits 13.2 Part One (Workers Comp) and Part Two (Employers Liability) 13.3 Premium Basis, Experience Modification, and Classification 13.4 Other States, USL&H, and Federal Acts 13.5 Workers Comp Exclusions and Endorsements
16 National Portion: Other Commercial Lines - BOP, Crime & Marine
14.1 Businessowners Policy (BOP) in Depth 14.2 Crime and Fidelity Coverage 14.3 Inland Marine and Nationwide Marine Definition 14.4 Ocean Marine Coverages (Hull, Cargo, Freight, P&I)
17 National Portion: Other Commercial Lines - Specialty & Professional
15.1 Farm and Agricultural Coverage 15.2 Commercial Umbrella and Excess Liability 15.3 Professional Liability and Errors & Omissions 15.4 Directors & Officers and Employment Practices Liability
18 National Portion: Other Commercial Lines - Surety, Flood & Specialty
16.1 Surety and Fidelity Bonds 16.2 National Flood Insurance Program (NFIP) 16.3 Cyber, Aviation, and Other Specialty Lines
19 National Portion: Insurance Regulation & Market Conduct
17.1 State Regulation, Licensing, and the McCarran-Ferguson Act 17.2 Rates, Forms, Solvency, and Guaranty Associations 17.3 Producer Authority, Fiduciary Duty, and Company Operations
20 National Portion: Ethics & Unfair Trade Practices
18.1 Unfair Trade Practices and Unfair Claims Settlement 18.2 Producer Ethics, Errors & Omissions Exposure, and Fiduciary Conduct 18.3 Privacy, Fraud, and Consumer Protection
21 Chapter 1: Alaska P&C Insurance Regulation & Licensing
1.1 Alaska Division of Insurance 1.2 Alaska P&C Producer Licensing Requirements 1.3 Alaska Producer Duties and Responsibilities
22 Chapter 2: Alaska Property Insurance
2.1 Alaska Homeowners Insurance 2.2 Alaska Property Insurance Policy Provisions
23 Chapter 3: Alaska Auto & Casualty Insurance
3.1 Alaska Auto Insurance Requirements 3.2 Alaska Commercial Liability Insurance
24 Chapter 4: Alaska Ethics & Professional Conduct
4.1 Alaska Ethical Standards for Insurance Producers 4.2 Alaska Privacy Laws and Regulatory Compliance
13.3 Premium Basis, Experience Modification, and Classification
Key Takeaways Explain This Topic AI
Workers comp premium = (Payroll ÷ 100) × Rate × Experience Mod; the exposure base is payroll, rated per $100.
NCCI class codes price each operation by hazard; a governing classification applies, with standard exceptions for clerical, sales, and drivers.
Policies start with estimated/deposit premium and are trued up by a post-term premium audit; a minimum premium always applies.
The experience mod compares actual to expected losses: <1.00 is a credit, >1.00 is a debit, 1.00 is average.
Claim frequency hurts the mod more than a single severe loss, rewarding safety and loss-control programs.
Last updated: June 2026
Premium Basis: Payroll and Classification
Workers compensation premium is built on payroll , not on coverage limits, because the system has no policy limit. The basic formula is:
Premium = (Payroll ÷ 100) × Rate × Experience Modifier
Payroll is divided by 100 because rates are expressed per $100 of payroll . Each type of work carries a classification code (set by NCCI or an independent state bureau) reflecting its hazard: clerical office work has a low rate, while roofing or logging carries a high rate. Assigning the correct class code is critical — misclassification distorts the premium and can trigger audit penalties.
The Premium Audit
Because actual payroll is unknown when the policy is issued, the carrier charges an estimated (deposit) premium at inception based on projected payroll. After the policy expires, the insurer conducts a premium audit to determine actual payroll and class assignments, then issues an additional charge or a return premium.
Key audit rules tested on the exam:
Overtime pay is generally counted at the straight-time portion only — the premium portion (the extra half) is excluded.
Payroll for owners, executive officers, and partners may be subject to minimum and maximum payroll limitations.
Refusing to allow the audit can void the policy or let the carrier estimate payroll at a punitive level.
Experience Rating and the Mod
Larger employers qualify for experience rating , which compares their actual loss history to the expected losses for their class. The result is an experience modification factor (the mod or EMR) applied to the manual premium:
A mod of 1.00 is average — losses match expectations.
A mod above 1.00 (a debit ) means worse-than-expected losses, raising premium.
A mod below 1.00 (a credit ) means better-than-expected losses, lowering premium.
Frequency of claims affects the mod more than severity , because experience-rating formulas weight the number of losses heavily and cap the impact of any single large loss. Trap: many small claims hurt the mod more than one catastrophic claim.
Worked Mod Example and Rating Plans
Suppose a contractor's manual premium (before the mod) is $80,000 and the firm earned an experience mod of 1.25 from a string of small frequent claims. The modified premium is $80,000 × 1.25 = $100,000 — a $20,000 debit penalty. Had the firm controlled frequency and achieved a 0.85 mod, the premium would be $68,000, a $12,000 credit.
Other rating plans the exam references:
Retrospective rating — final premium adjusts after the period based on the insured's own actual losses, between a minimum and maximum.
Premium discount — a volume discount for large policies.
Schedule rating — credits/debits for specific risk characteristics (safety programs, housekeeping).
Assigned Risk and the State Fund
An employer unable to buy coverage in the voluntary market because of poor experience or a hazardous class is not left uninsured. Coverage is provided through a residual market mechanism :
An assigned-risk pool (administered by NCCI in many states) distributes hard-to-place employers among carriers.
Some states operate a competitive state fund that competes with private insurers, while a few run a monopolistic state fund where employers must buy comp from the state (private comp is not sold). In monopolistic-fund states, employers buy a separate stop-gap endorsement on the CGL for employers-liability coverage, because the state fund provides comp only.
Knowing the monopolistic-fund states and the stop-gap concept is a recurring exam item.
Auditable Exposures and Premium Determination
Workers comp is an auditable line: the carrier issues a deposit premium on estimated payroll, then trues it up after the term. The exam expects you to know what counts as payroll and what is excluded. Included: wages, salaries, commissions, bonuses, holiday/vacation pay, and the straight-time portion of overtime. Excluded or limited: the premium (extra) portion of overtime, severance, certain reimbursed expenses, and tips; owners/officers are subject to payroll min/max caps set by the state bureau.
Class codes (NCCI four-digit codes) drive the manual rate, and an employer with multiple operations may carry several codes, each rated on its share of payroll. The governing classification is the highest-payroll non-standard code. Worked example: a firm with $1,000,000 of clerical payroll (low rate) and $500,000 of roofing payroll (high rate) is rated separately by code; misassigning roofing payroll to the clerical code understates premium and triggers an audit charge plus possible penalties. Trap: clerical and outside-sales payroll cannot absorb hazardous fieldwork — each operation keeps its own code.
Dividend Plans, Deductibles, and Self-Insurance
Beyond manual, experience, and retrospective rating, employers manage comp cost through several mechanisms the exam references. Participating (dividend) plans return a portion of premium as a dividend when the insurer's loss experience for the group is favorable — dividends are never guaranteed.
Large-deductible plans let a sizeable employer retain the first dollars of each claim (e.g., $250,000 per claim) in exchange for sharply lower premium, shifting routine losses back to the insured. Qualified self-insurance lets a financially strong employer pay its own claims directly, posting security/bond with the state and often buying excess (specific and aggregate) workers comp above a retention.
Worked example: a large retailer with stable, predictable losses adopts a $500,000 large-deductible plan, paying small claims itself and buying coverage above the deductible; its premium drops, but it now carries the cash-flow and reserving burden of frequent small claims. Trap: dividends are contingent on results and cannot be promised at sale — guaranteeing a dividend is an unfair trade practice.