A. You can if you want, but you don't typically need to. The key is that normalization for most characters is already built into ICU's collation by default. Everything that can be done without affecting performance is already there, and will work with most languages. So the normalization parameter in ICU really only changes whether full normalization is invoked.
The outlying cases are situations where a language uses multiple accents (non-spacing marks) on the same base letter, such as Vietnamese or Arabic. In those cases, full normalization needs to be turned on. If you use the right locale (or language) when creating a collation in ICU, then full normalization will be turned on or off according to what the language typically requires.
A. The only case where you really need to worry about that parameter is for very unusual cases, such as sorting an list containing of names according to English conventions, but where the list contains, for example, some Vietnamese names. One way to check for such a situation is to open a collator for each of the languages you expect to find, and see if any of them have the full normalization flags set.
Word sort is a way of sorting where certain interpunction characters are completely ignored, while other are considered. An example of word sort below ignores hyphens and apostrophes:
This specific behavior can be mimicked using a tailoring that makes these characters completely ignorable. In this case, appropriate rule would be "&\u0000 = '' = '-'".
Please note that we don't think that such solution is correct, since different languages have different word elements. Instead one should use shifted mode for comparison.