17. (3 points) You are the chief group underwriter at a major insurance company in the U.S.
A number of your underwriters will be retiring shortly, and you must train junior staff to
fill these positions. Your group line of business products include life insurance, longterm
disability, and long-term care. Outline underwriting considerations for each of these
products.
COURSE 8: Fall 2005 - 18 - GO TO NEXT PAGE
Health and Group Life Segment
18. (6 points) You are a valuation actuary for The World’s Best Insurance Company. You
have been asked to estimate expected claim costs for non-institutional long-term care
(LTC) benefits for a 62-year old male. You have the following information for your
company’s LTC product:
Benefit Amount: $100/day
Benefit Trigger: 2 Activities of Daily Living (ADL) or
Cognitive Impairment (CI)
Benefit Period: 24 months
Elimination Period: 6 months
Lapse rate information:
Duration Lapse Rate
Anti-selective
lapse factor
0 6% 0.8
1 5% 0.7
2 4% 0.6
3 3% 0.5
4 2% 0.4
You are also given the following information specific to a 62-year old male:
Annual Incidence per $1,000: 10.15
Non-Institutional Disability Day Average: 882
Published industry experience tabular data on the distribution of non-institutional claim
durations for males age 62:
Non-institutional Disability Days by Duration from Incurral and ADL/CI Status
Age 62 Male
Percentage of Non-institutional Days Beyond Duration
No CI With CI
Duration in
months 0 ADL 1 ADL 2 ADL 3+ ADL 0 ADL 1 ADL 2 ADL 3+ ADL
0 n/a 40.88 10.85 11.85 31.49 2.34 1.28 1.65
6 n/a 31.90 8.96 9.70 30.67 2.15 1.18 1.52
24 n/a 14.28 4.73 4.78 28.06 1.65 0.91 1.13
30 n/a 10.82 3.78 3.79 27.19 1.51 0.84 1.02
(a) (3 points) Calculate the estimated non-institutional claim cost per month. Show
your work.
(b) (2 points) Discuss how voluntary lapse rates are used in individual LTC valuation
methods, and how they relate to anti-selection.
(c) (1 point) Calculate the morbidity load at duration 4. Show your work.
COURSE 8: Fall 2005 - 19 - GO TO NEXT PAGE
Health and Group Life Segment
19. (6 points) You are the consultant for BigFish Inc., who recently acquired LittleFish Inc.
BigFish Inc. has a flexible benefits plan, while LittleFish Inc. has a traditional plan.
BigFish and LittleFish operate in separate markets. Nemo, the President of BigFish Inc.
has asked you to prepare a report on transitioning LittleFish’s plan to BigFish’s plan.
Current pricing information is shown in the table below:
BigFish Inc. Plan Information:
Price Tags Relative Value
Medical Dental
Plan Option Single Family Single Family Medical Dental
A $100 $250 $105 $280 60% 80%
B $200 $500 $150 $400 100% 100%
C $350 $875 $225 $600 150% 125%
• Credits: $350 for Single Coverage
$900 for Family Coverage
LittleFish Inc. Plan Information:
Medical Dental
Single Family Single Family
Current Costs $225 $550 $140 $420
Expected Participation in Little Fish Flex Plan
Medical Dental
Plan Option Single Family Single Family
A 5% 10% 10% 5%
B 25% 30% 25% 40%
C 10% 20% 5% 15%
• The current medical plan is 20% richer than the BigFish medical
flex plan Option B.
• The current dental plan is 10% less rich than the BigFish dental
flex plan Option B.
• LittleFish pays 100% of the costs.
• The enrollment is 40% Single and 60% Family
(a) (4 points) Calculate the impact to BigFish’s cost of moving LittleFish into
BigFish’s flex plan, without change. Show your work.
(b) (2 points) Discuss why BigFish may want to maintain a separate benefits pricing
structure from LittleFish, and the advantages and disadvantages of doing so.
COURSE 8: Fall 2005 - 20 - GO TO NEXT PAGE
Health and Group Life Segment