21. (6 points) You are the actuary for Company XYZ, a Canadian company implementing a
Health Care Expense Account (HCEA). XYZ currently has a modular flexible benefits
plan, with the following employee cost sharing:
Plan Description Module 1 Module 2
Annual Deductible $100 single
$200 family
$0
Medical (including Drugs,
Vision Care)
30% 10%
Dental – Basic
– Major and Ortho
20%
100%
0%
50%
Price Tag – Single
– Family
$300
$700
$600
$1,600
Each employee receives $1500 in credits. Excess credits can be taken as cash or
allocated to the HCEA.
In preparation for the upcoming enrollment, John Doe has estimated his eligible claims
for next year as follows:
•Drugs: $300 for the spouse
•Physiotherapy: $150 for the employee
•Vision care: Eyeglasses of $300 for the spouse
•Dental exam: $90 for each of the employee and the spouse
•Dental bridgework: $900 for the spouse
John Doe’s marginal tax rate is 30%.
(a) (2 points) Describe the advantages and disadvantages to Company XYZ of
offering an HCEA to its employees.
(b) (1 point) Outline the legal requirements for setting up an HCEA.
(c) (3 points) Recommend the best choice for John Doe assuming he retains family
coverage. Show your work.
COURSE 8: Fall 2004 - 18 - STOP
Health and Group Life Segment
Afternoon Session
22. (3 points) You are the product development manager in charge of a direct marketing
initiative for a new special accident product. The basic product benefits will include
proceeds payable upon death or hospital confinement, as well as coverage for emergency
medical treatment. You have test marketed eight variations of the product with the
following response rates:
Test Product
Benefit Level
(High/Low)
Market at
Worksite
(Yes/No)
Include Waiver
of Premium
(Yes/No) Response Rate
1 High Yes Yes 1.2%
2 High Yes No 1.0%
3 High No Yes 0.9%
4 High No No 0.9%
5 Low Yes Yes 1.2%
6 Low Yes No 1.1%
7 Low No Yes 0.9%
8 Low No No 0.7%
You are also provided the following additional information for Test Product 2:
Annual Gross Premium per policy = $30
Solicitation cost per policy = $0.30
Annuity Factor = 2.5
Target loss ratio = 50% of premium
Expenses = 15% of premium
(a) Calculate the impact worksite marketing has on the overall response rate. Show
your work.
(b) Calculate the required response rate to meet a target profit of 15% of premium for
Test Product 2. Show your work.
(c) Outline your response to concerns that the special accident policy is not suited to
a direct marketing approach.
**END OF EXAMINATION**
AFTERNOON SESSION

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