A general contractor's workers compensation policy has a $2,500 experience modification rate and the standard premium is $18,000. What is the actual premium the contractor will pay?
Correct Answer
A) $45,000
Experience modification rates are expressed as decimals (2.5 in this case). The calculation is $18,000 × 2.5 = $45,000. A rate above 1.0 indicates higher than average claims experience.
Why This Is the Correct Answer
The experience modification rate of $2,500 must be converted to a decimal by dividing by 1,000, which equals 2.5. This decimal modifier is then multiplied by the standard premium to calculate the actual premium. The calculation is $18,000 × 2.5 = $45,000. An experience modification rate above 1.0 indicates the contractor has higher than average claims experience, resulting in a premium increase.
Why the Other Options Are Wrong
Option B: $20,500
This answer incorrectly treats the $2,500 as a flat dollar amount to be added to the standard premium ($18,000 + $2,500 = $20,500), rather than converting it to the proper decimal modifier of 2.5.
Option C: $15,500
This answer incorrectly subtracts $2,500 from the standard premium ($18,000 - $2,500 = $15,500), treating the experience modification rate as a deduction rather than a multiplier.
Option D: $7,200
This answer appears to divide the standard premium by 2.5 ($18,000 ÷ 2.5 = $7,200), which is the opposite of the correct calculation and would incorrectly reduce the premium despite the poor claims experience.
Memory Technique
Remember 'EMR = Expensive More Risk' - when the Experience Modification Rate is above 1.0, you pay MORE because you're a higher risk due to more claims.
Reference Hint
Florida Building Code - Administrative Chapter, Section on Insurance Requirements and Workers' Compensation calculations
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