4. (10 points) Wonderful Life is considering the purchase of medical reinsurance that is a
combination of quota share and specific excess. The quote they have received is as
follows:
Specific excess
•100% of claims in excess of $50,000
•Covers claims incurred from July 1, 2000 through June 30, 2001
•Reinsurance premium = $20.00 Per Employee Per Month
Quota share reinsurance
•30% of claims incurred up to $50,000
•Ceding allowance: 20% of ceded premium
•Covers premium earned and claims incurred from July 1, 2000 through June
30, 2001
Wonderful Life’s management has set a pre-tax ROE target of 25% while holding riskbased
capital at 30% of premium. Current operating expenses are 15.1% of premium and
pre-tax investment income is 3.0% of premium.
(a) (4 points) Calculate Wonderful Life’s total pre-tax operating gain using the data
in table MM-3 assuming Wonderful Life purchases this reinsurance coverage.
Show your work.
(b) (4 points) Determine if Wonderful Life would have met its pre-tax ROE
objectives:
(i) Without the reinsurance coverage.
(ii) With the reinsurance coverage.
(c) (2 points) Describe the other profit measures you could use in analyzing this
business.
COURSE 8: Fall 2002 -5- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 3 – 8 pertain to the Case Study
5. (7 points) You are the actuary for the Major Medical Division of Wonderful Life. You
have been asked to develop a forecast for the major medical line.
You are given the data in Tables MM-3, MM-6, and MM-7.
(a) Describe the major projection elements governing the design of a financial
forecast.
(b) Identify additional information you would need to develop a forecast and any
concerns about the information you have been provided.
6. (6 points) Wonderful Life is examining various methods of smoothing age-to-age
development factors.
(a) (4 points) Calculate the first lag month’s development factor for Wonderful Life
using the most recent four months of experience from Table MM-4b under the
following averaging approaches:
(i) Without Hi and Lo
(ii) Geometric Mean
(iii) Dollar-Weighted
(iv) Per Member Age-to-Age Ratios
(b) (2 points) Describe other methods that could be used to smooth age-to-age
development factors.
COURSE 8: Fall 2002 -6- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 3 – 8 pertain to the Case Study
7. (9 points) You are the pricing actuary for Wonderful Life. You have been asked to
evaluate the expected cost trend for Group 6. You have been given the following data in
addition to Tables MM-2 and MM-3.
Option 1 Option 2
%EE’s Avg Cost %EE’s Avg Cost
Sub-group 1 80% 5% Higher 90% 5% Lower
Sub-group 2 20% 20% Lower 10% 45% Higher
(a) (2 points) Calculate the expected claim cost per employee per month (PEPM) for
the next renewal period beginning March 1, 2002 based on the current enrollment
mix.
(b) (5 points) At open enrollment, employees in sub- group 2 of each option choose
the other option. Calculate the expected trend for each option and determine the
impact on the overall expected trend.
(c) (2 points) The employer is currently paying 70% of the cost of Option 1 and
Option 2.
(i) Calculate the amount the employer and employee would pay PEPM based
on the current rates and enrollment mix if the employer were to pay an
equal amount under a fixed dollar cost scheme.
(ii) Describe the potential concerns associated with a fixed dollar cost scheme.
COURSE 8: Fall 2002 -7- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 3 – 8 pertain to the Case Study

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