COURSE 8: Fall 2002 -1- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Fall 2002
Society of Actuaries
**BEGINNING OF EXAMINATION 8**
HEALTH, GROUP LIFE & MANAGED CARE
MORNING SESSION
1. (5 points) You are the COO of ABC Insurance Company. You are considering
outsourcing the claim and benefit administration function.
(a) Describe common claims and benefit administration problems and their effects.
(b) Describe measures of claim quality and methods to increase quality.
(c) Describe methods commonly used to control claims costs and claims
administrative expense.
(d) Review circumstances under which you might outsource claims administration.
Course 8G
COURSE 8: Fall 2002 -2- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
2. (5 points) A company has successfully implemented a flexible benefits program for its
salaried employees with the following benefits:
Basic Coverage
Non-hospital and drug: $300 deductible, 75% coinsurance
Hospital: Semi-private room, $150 maximum per day
Out-of-country: $50,000 maximum per year
$500,000 lifetime maximum
Vision: No coverage
Enhanced Coverage
Non-hospital and drug: $100 deductible, 90% coinsurance
Hospital: Semi-private room, $250 maximum per day
Out-of-country: $80,000 maximum per year
$1,000,000 lifetime maximum
Vision: $200 maximum per year
Employee Palpatine incurred the following medical expenses over a one-year period:
Apr. 5 formulary drug prescription of $125
Jun. 10 formulary drug prescription of $180
Jul. 18 hospital stay, semi-private room at $180
Jul. 19 hospital stay, semi-private room at $180
Jul. 20 hospital stay, semi-private room at $180
Sept. 22 formulary drug prescription of $60
Dec. 5 new glasses at $280
(a) Identify and address the concerns the union might have with the company’s
proposal to offer this program to union members. Include design alternatives that
could be substituted.
(b) Explain the general principles regarding selection that should be considered when
implementing a flexible benefits program.
(c) Calculate the out-of-pocket expenses Palpatine would have paid under the Basic
and the Enhanced options.
COURSE 8: Fall 2002 -3- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 3 – 8 pertain to the Case Study
3. (5 points) Wonderful Life's small group block of business is experiencing deteriorating
profits. The Chief Actuary believes part of this deterioration is due to the wearing off of
underwriting. You have been asked to design a durational study for Wonderful Life’s
closed block of small group business using the data found in Table MM-7.
(a) (1 point) Describe the information that would be required to compile this study.
(b) (1 point) Describe the potential limitations of the data used in a durational study
and the factors you should consider in adjusting the data.
(c) (3 points) Calculate the annual durational factors for Wonderful Life’s closed
block of small group experience using the data in table MM-7 and other relevant
information on the small group block discussed in the case study. Show your
work.
COURSE 8: Fall 2002 -4- GO ON TO NEXT PAGE
Health, Group Life & Managed Care
Morning Session
Questions 3 – 8 pertain to the Case Study
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