16. (4 points) You are the reserving actuary for Wonderful Life. One of your actuarial
students has observed that the reserve for one claimant has a different reserve/benefit
ratio compared to the other claimants. In addition to Table GLD-8b you have been given
the following information about the claimant:
Date of Birth 03/01/44
Gender Male
COLA 0%
Date of Disability 03/01/03
Valuation Interest Rate 5%
Elimination Period 3 months
Benefit Period to age 65
Benefit Percentage 66.67% of salary
Social Security Benefit $1,300 monthly (Frozen)
Salary $72,000 annually
Assume all benefits are paid at the end of the time period for which there are termination
rates.
(a) (3 points) Calculate the disabled life reserve as of 12/31/04 for this claimant.
Show your work.
(b) (1 point) Discuss factors which would make the reserve/benefit ratio for this
claimant different.
COURSE 8: Fall 2004 - 13 - GO TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
Questions 15 – 17 pertain to the Case Study
17. (4 points) You are the pricing actuary for Wonderful Life’s LTC product.
(a) Describe factors used to price a LTC product.
(b) List data sources available to assist with reviewing the current pricing.
(c) Compare the LTC product line to Wonderful Life’s other products with respect to
the following:
i. Sales force
ii. Rating practices
iii. Underwriting practices
iv. Reserving practices
COURSE 8: Fall 2004 - 14 - GO TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
18. (4 points) You are the pricing actuary for an insurer that sells a substantial amount of
Medicare Supplement business. Highlights of the recent Medicare legislation are as
follows:
•Medicare will begin offering a voluntary prescription drug benefit (Part D).
New Medicare Supplement policies with prescription drug coverage may
no longer be sold.
Existing policies with prescription drug coverage for persons that enroll in
Part D must:
(a) Renew the policy with a lower premium that excludes prescription
drugs; or
(b)Enroll in a different policy (guaranteed issue).
Existing policies with prescription drug coverage may be renewed if the
person does not enroll in Part D.
•New standardized plans “K” and “L” will be created and include higher costsharing
than existing products.
•The Part B deductible is increasing to $110.
As a result of the legislation, you expect increased competition from HMO’s.
(a) (3 points) Discuss the pricing considerations for your company’s Medicare
Supplement policies and how your assumptions are impacted by the new
legislation.
(c) (1 point) List the data sources that might be used to assess the pricing changes.
COURSE 8: Fall 2004 - 15 - GO TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
19. (8 points) You are the new consulting actuary for Slide Rule Inc., a company with a
flexible benefits plan. Prior to adopting a flexible benefits plan in 2003, Slide Rule Inc.
provided all employees dental coverage with Option 2 benefits. The flex plan was
originally priced with the help of an Elbonian consultant, who was not an actuary. Actual
claims have been higher than expected, partly due to adverse selection.
At the kick-off meeting with the Slide Rule Inc. management team, you learned the
following about the team members’ pricing objectives:
•Benefits Administrator wants realistic prices, equal credits, and no losers.
•CFO wants realistic prices, no losers, and no company cost increase over 2003
actual.
•Vice President of Human Resources wants equal credits, no losers, and no
company cost increase over 2003 actual.
You have also been given the following dental plan design and pricing information:
Option Design
Relative
Value
2003
Expected
Incurred
Claims
2003
and 2004
Price Tags
2003
and 2004
Flex Credits
Actual
Enrollment
2003
Actual
Incurred
Claims
1 50% S: $250
F: $750
S: $150
F: $150
$300 S: 50
F: 100
$35,000
2 80% S: $400
F: $1,200
S: $250
F: $250
$300 S: 50
F: 50
$80,000
3 100% S: $500
F: $1,500
S: $300
F: $300
$300 S: 100
F: 150
$550,000
Dental inflation is expected to be 5% per year, and the expected and actual claim figures
include expenses and taxes. Plan design and enrollment are not expected to change.
(a) (1 point) Compare the current pricing design against the various pricing
objectives.
(b) (1 point) Determine the 2003 expected and actual employer cost. Show your
work.
(c) (4 points) Determine three different pricing approaches for 2005 that might
address the objectives of each of the three team members. In your analysis,
include 2005 price tags and credits and indicate the advantages and disadvantages
of each approach.
(d) (2 points) Describe the design and pricing mechanisms that could be added to a
flex plan to minimize adverse selection.
COURSE 8: Fall 2004 - 16 - GO TO NEXT PAGE
Health and Group Life Segment
Afternoon Session
20. (5 points) Company XYZ has 500 full-time employees, and 100 part-time employees.
XYZ has adopted the following severance policy for its employees as of 1/1/2004:
Years of Service Severance benefit (multiple
of base monthly salary)
Distribution by full-time
Employee count
< 2 years 0 25%
2 but < 6 years 1 40%
6 but < 10 3 25%
10 or more 6 10%
Severance is paid regardless of cause of employee termination. Benefits paid in 2004
were $375,000.
The benefit obligation as of 12/31/04 is based on:
Long-term discount rate 5%
Benefit Obligation $4,000,000
2004 Benefits Earned $500,000
Average remaining years of service 8 years
(a) Discuss when FAS 112 does and does not apply and the accrual rules for FAS 112
accounting.
(b) Determine whether FAS 112 applies to XYZ and justify your response.
(c) Compare the income and balance sheet items if Company XYZ is to (i) recognize
the full liability, or (ii) defer recognition of the liability. Show your work.
COURSE 8: Fall 2004 - 17 - GO TO NEXT PAGE
Health and Group Life Segment
Afternoon Session

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