15. (6 points) You are the group actuary for MNO Life. MNO management wants to
increase production of the Group LTC business to achieve higher expected profit margins
compared to MNO’s other product lines (group LTD and group medical). MNO plans to
offer institutional care benefits as part of their GLTC product line.
(a) Outline pricing considerations for developing morbidity assumptions and
underwriting methods in order to minimize anti-selection for the GLTC product
line.
(b) Identify the sources and limitations of data available from which to estimate claim
costs for institutional care benefits.
(c) Identify any concerns or needed modifications when using the 1985 NNHS, as
interpreted by the SOA's LTC Experience Committee, as a reserving basis for
institutional care benefits.
COURSE 8: November 2001 -13- GO ON TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
16. (6 points) You are the product development manager in charge of direct
marketing initiatives focused on association groups. You have developed the following
assumptions for an upcoming direct marketing campaign:
•Product Package – Life, AD & D, and LTD with Declaration of
Health Underwriting
•Annual Gross Premium per package = $50
•Solicitation cost per 1000 solicitations = $200
•Maximum Policy duration = 5 years
•Annuity Factor (interest and lapse) = 2.70
•Target Loss Ratio = 30% of premium
•Expenses = 20% of premium
(a) Calculate the required response rate to meet a target profit of 10% of
premium. Show your work.
(b) Determine the maximum solicitation cost as a ratio to first year premium to
generate a 10% profit margin. Assume no lapses occur in the first year. Show
your work.
(c) The profit center manager is not satisfied with the projected response rates
and persistency. Outline possible action steps to improve response rates and
persistency.
COURSE 8: November 2001 -14- GO ON TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
17. (4 points) You have just been hired as the group disability pricing actuary for
Acquisition Life Insurance Company (ALIC). A year ago, ALIC purchased actively sold
blocks of long-term disability and short-term disability products. ALIC continued to sell
both the LTD and the STD products without modification to the original plans.
Experience over the past year has not been favorable.
Plan Descriptions:
Long-Term Disability
•70% of salary with no maximum
•30 Day elimination period
•to age 65 benefits
•Cost-of-living adjustments
Short-Term Disability
•100% of weekly salary with no maximum
•0/7 Day elimination period plan
•52 week benefit period
Recommend design changes to the current plans for each product that would improve
experience.
COURSE 8: November 2001 -15- GO ON TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
18. (4 points) You are the underwriter for the medical stop loss line of business and
have been supplied the following information in order to prepare a quote for the DEF
Corporation:
Proposed Effective Date January 1, 2002
Lines of coverage Medical and Dental
Specific stop loss deductible per person $25,000
Aggregate deductible 120% of Expected Claims
Paid claims from July 2000 – June 2001 $1,250,000
Average Employee Count from July 2000 – June 2001 300
Average Age of Employees 42
(a) Identify additional information you would need in order to provide a specific and
aggregate stop loss quote.
(b) Explain steps required to develop the annual aggregate deductible.
COURSE 8: November 2001 -16- STOP
Health and Group Life Segment
Afternoon Session
19. (7 points) You are the consulting actuary for RST Enterprises, which currently provides
medical and dental coverage to its employees. Employees currently pay 20% of the
premium for these benefits with after tax dollars. Each RST employee is provided $500
per year which may be allocated to a health care expense account or taken in cash.
Unused account balances are forfeited at the end of the year.
Significantly rising costs and a slowing economy have led RST to question the current
benefits program. RST is also concerned about employee complaints regarding the loss
of unused account balances for the health care expense account benefit.
(a) Identify the range of flexible benefits program structures, and the degree to which
each structure may help to contain benefit costs for RST.
(b) Explain the different roll-over approaches that may be used for health care
expense accounts.
(c) The table below provides expenses for Employee X provided under his current
health expense account for items not covered by the RST medical plans.
Calculate the differences in reimbursement and forfeitures under each of the
allowable roll-over approaches for each year had they been in effect at that time.
Year 1 Year 2
Credit Allocation $500 Credit Allocation $500
Physical Therapy $225 Vision Care $200
Vision Care $300 Massage Therapy $100
Massage Therapy $150
(d) Determine the amount Employee X should allocate to his health care expense
account if RST decides to change its policy regarding the rollover of unused
health care expense account balances in the coming year.
**END OF EXAMINATION**

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