Practice Education Course Group Benefits Practice Area Exam June 2011 TABLE OF CONTENTS

Transcription

1 Practice Education Course Group Benefits Practice Area Exam June 2011 THIS EXAM CONSISTS OF FOURTEEN (14) MULTIPLE CHOICE QUESTIONS WORTH 15 POINTS AND FIVE (5) WRITTEN ANSWER QUESTIONS WORTH 25 POINTS FOR A TOTAL OF 40 POINTS. TABLE OF CONTENTS MULTIPLE CHOICE QUESTIONS Question Question 2 (2 points)... 3 Question Question Question Question Question Question Question Question Question Question Question Question WRITTEN ANSWER QUESTIONS Question 15 (5 points) Question 16 (5 points) Question 17 (5 points) Question 18 (5 points) Question 19 (5 points) Question 20 (5 points) Question 21 (5 points)

2 SECTION 1: MULTIPLE CHOICE/GRID QUESTIONS Unless otherwise indicated, all the questions in this section are worth 1 point. Question 1 answer: The following question includes an ASSERTION and a REASON. Please A. If both the ASSERTION and the REASON are TRUE and the REASON is a correct explanation of the ASSERTION B. If both the ASSERTION and the REASON are TRUE and the REASON is a NOT a correct explanation of the ASSERTION C. if the ASSERTION is TRUE and the REASON is FALSE D. if the ASSERTION is FALSE and the REASON is TRUE E. If both the ASSERTION and the REASON are FALSE Self-insurance has a favorable tax treatment in the province of Québec Because By self-insuring the group insurance plan, the 2.00% tax, the 0.55% tax and the 9% tax are saved 2

3 Question 2 (2 points) A group insurance program covering the risk of accidental death or dismemberment has the following stipulations: Definition of accident : An external event, violent and accidental that causes bodily injuries, independently from any other cause. Exclusion: Any loss resulting from a voluntarily self-inflicted injury. For each of the following situations, indicate whether it should be considered an accident or not, based on the principles arising from the most recent case law. Put an X in the appropriate column on each line. Accident Not an accident A man takes crack cocaine at a rave party and dies from an overdose A woman dies from an embolism (sudden death) caused by an infection A woman is murdered A man dies from rabies after being bitten by a raccoon A man dies from AIDS after having contracted HIV during nonprotected sexual intercourse 3

4 Question 3 Among the following situations, which one(s) represent a forbidden discrimination for an Employer-Employee group? I. Refusal to pay short-term disability benefits to a female employee who has a baby, when her absence from work is solely due to pregnancy and delivery. Refusal to grant dental coverage to a homosexual spouse, if the plan provides for coverage of heterosexual spouses. Plan that pays 1 x salary upon the death of a blue-collar employee, 2 x salary upon the death of a white-collar employee and 3 x salary upon the death of a manager. A. I & II B. I & III C. II & III D. I, II & III E. None of A, B, C or D is correct Question 4 Which of the following are TRUE regarding self-insured plans in Canada? I. They provide disability income protection to about one in 10 Canadian employees. IV. They are popular with large companies because of the cost and tax savings. It s often unclear to employees that their benefit plan is self-funded. A House of Commons bill and a Senate bill both propose changes to the federal Bankruptcy and Insolvency Act that would allow the insurance company to step in under certain circumstances. A. All B. All but I C. All but II D. All but III E. All but IV 4

5 Question 5 Which of the following are TRUE? I. You can share the six weeks of compassionate care benefits with other members of your family. You can t receive compassionate care benefits outside Canada to care for or support a family member outside Canada. Compassionate care benefits are Employment Insurance benefits that are subject to a twoweek waiting period. A. I only B. II only C. III only D. I and III only E. II and III only Question 6 Regarding the various supplementary health benefit provincial and territorial programs, which of the following are TRUE? I. Physicians services are covered under the Medical Services Plan in British Columbia IV. Trillium Drug Program (TDP) deductibles for drugs (out of hospital) can be reimbursed or covered by a private plan Employers who operate in Québec and offer health or disability plans must also provide a drug plan that complies with the legislated requirements set out under an Act Rrespecting Prescription Drug Insurance. Nova Scotia Medical Services Insurance (MSI) covers one routine eye examination every two years for those under age 10 and seniors. A. All but I B. All but II C. All but III D. All but IV E. III and IV only 5

6 Question 7 Generic drug price reforms have recently occurred in Ontario and Québec. Which of the following statements about the reforms are TRUE? I. Reforms in Ontario will directly impact dispensing fees charged under private plans. Generic drug prices for the Ontario Drug Benefit program and private plans decreased. Professional allowances will be completely eliminated in both Ontario and Quebec by April 1, A. I only B. II only C. III only D. I and II E. II and III Question 8 Which of the following are TRUE in relation to flexible benefit programs? I. Modular plans have modules designed with different levels of coverage to appeal to specific employee groups. IV. Core + options plans provide employees with core coverage that can be supplemented. Core coverage is generally mandatory. Cafeteria-style plans use a menu-driven approach that features some level of mandatory coverage. The level of choice to be provided in any flex plan is a key consideration. Limited choice means less risk of anti-selection. A. All B. All but I C. All but II D. All but III E. All but IV 6

7 Question 9 TRUE? Which of the following statements related to funding arrangements are I. A fully-pooled arrangement is a special case of prospective rating where the credibility of the group is zero. IV. Under both prospective rating and refund accounting arrangements, a determination of prior period experience is required. Retrospective premium arrangements are used when the policyholder believes that claims will be less than anticipated by the insurer. Refund accounting of excess claims may exist in a split-funded arrangement. A. All B. All but I C. All but II D. All but III E. All but IV Question 10 Under International Accounting Standards No. 19 (IAS 19), which of the following benefits are required to be recognized in an entity s financial statements? I. Termination benefits. IV. Post-retirement Health Spending Account. Employment anniversary gifts. Deferred bonus programs. A. All but I B. All but II C. All but III D. All but IV E. All 7

8 Question 11 Which of the following are TRUE in comparing CICA 3461 to IAS 19? I. Differences include early measurement date and attribution period. Recognition of prior service cost is always faster under IAS 19. More disclosures are required under IAS 19. IV. A. All Treatment of gains and losses may differ with respect to the continuation of medical and dental coverage for employees on LTD. B. All but I C. All but II D. All but III E. All but IV Question 12 In order to select an appropriate actuarial table for a calculation, which of the following elements must be considered? I. The purpose for which the table was developed. IV. The type of experience (characteristics of the persons whose experience was observed) used to build the table. The period during which the experience used for building the table was observed. Experience studies subsequent to the publishing of the table that present results compared to the particular table under consideration. A. All but I B. All but II C. All but III D. All but IV E. None of A, B, C or D is correct 8

9 Question 13 Which of the following IFRS requirements are currently met under Canadian GAAP? I. A provision for possible future claims shall not be recognized as a liability if those claims arise under insurance contracts that are not in existence. IV. A liability adequacy test must be performed. A liability shall not be removed from an insurer s statement until the obligation has been discharged, cancelled or expired. Reinsurance assets shall not be offset against related insurance liabilities. A. All B. All but I C. All but II D. All but III E. All but IV Question 14 Which of the following are TRUE regarding economic capital? I. Economic capital is an internal calculation of capital required, based on the company s view of risk, with calculations based on economic principles. IV. The primary driver for calculating economic capital is capital allocation, although it is also used to measure risk-adjusted performance and for making strategic and tactical decisions. Value at risk (VaR) and tail value at risk (TVaR) or conditional tail expectation (CTE) are measures of risk tolerance. Unlike the liability runoff approach, the one-year mark-to-market approach cannot be implemented using a stochastic simulation approach. A. All but I B. All but II C. All but III D. All but IV E. All 9

10 SECTION 2: ESSAY QUESTIONS You must answer each mandatory question (three questions in total: 15, 16, and 17), plus one question among the following: 18 and 19 plus one question among the following: 20 and 21 for a total of five questions. 10

11 Question 15 (5 points) You are given the following information about the short-term disability plans offered by three different employers: Company Benefit Formula Tax Status Monthly Premium Rate ABC 75% of gross salary Taxable $1.20/$10.00 of weekly indemnity DEF 60% of gross salary Non-taxable* $1.05/$10.00 of weekly indemnity GHI 60% of the first $45,000 of gross salary + 40% of the portion of gross salary that exceeds $45, Non-taxable* $1.10/$10.00 of weekly indemnity *Non-taxable plans have an all sources limitation whereby the insurer will reduce the benefit to make sure that benefits from all sources do not exceed 85% of net pre-disability income. By net pre-disability income, we mean Salary Income Tax CPP contribution EI contribution. You are also given the following income tax table: Salary Marginal Tax Rate (Federal + provincial combined) First $15,000 0% Next $10,000 20% Next $10,000 30% Next $10,000 35% Next $10,000 40% Next $10,000 45% Excess over $65,000 50% Joseph Blow has been offered a job by each of these three companies, for the same $90,000 annual salary. Whatever employer he chooses, Joseph will have to pay the following social programs: CPP $2,217.60; and Employment Insurance $ a) (3 points) Calculate the amount of weekly benefits (dollars per week) payable by each of these plans for an employee who earns $90,000/year assuming that there are 52 weeks in a year. b) (1 point) For each plan, calculate the monthly premium for an employee who earns $90,000. c) (1 point) Which plans offer the highest after-tax benefit per dollar of premium? Show all your calculations.

12 Question 16 (5 points) You are the group benefits consultant for Company ABC. ABC has a new vice-president (VP) of human resources (HR) who transferred from the US parent company. The VP of HR would like you to outline the social programs in Canada and how each impacts the employee benefits programs offered by ABC to its employees in Canada. ABC has employees in BC, Ontario and Québec. Provide a summary of your response. 12

13 Question 17 (5 points) In the course of preparing your DCAT report, you have been asked to consider an economic scenario. This includes: No growth in GDP and an increase in unemployment for five years; An immediate drop of 2% in interest rates, and then interest rates stay flat for five years; and An immediate drop in equity, real estate and other equity investments of 20%, with no recovery for five years. Discuss how you would expect this to impact the following elements in DCAT scenarios with respect to group business: a) Mortality; b) Morbidity incidence; c) Morbidity termination; d) Assets; e) New business; f) Renewals; g) Reinsurance, and h) Expenses. Include any potential ripple effects, and potential management action. 13

14 OPTIONAL QUESTIONS LIST 1 You must answer only one of the following questions (that is, you must answer either Question 18 or Question 19). Question 18 (5 points) You have recently joined Youppi Life an established Canadian insurer based in Toronto with a large block of group health policies spread throughout every province and territory. On your first day of work as Youppi Life s new group actuary, you ve been handed the following report for calendar year 2011: Group Head Office Funding Method Québec Certificates Single Couple Family Individual Drug Claims over $4,000 Total Drug Claims Paid Location A PQ Insured Nil $9,101 B PQ Insured $6,702 $15,990 C ON Insured Nil $63,774 D NB ASO $4,006; $62,700 $152,502 E PQ ASO $10,000; $151,980 $898, Summarize the provincially-mediated drug pooling arrangement in Québec and the 2011 changes to the program. 2. Calculate the difference between Youppi Life s total annual fee and the amount that they received from the Québec Drug Insurance Pooling Corporation. 3. Briefly discuss the advantages and disadvantages to insurers and policyholders of a risk pool such as the one in Québec. 14

15 Question 19 (5 points) With respect to the valuation of group life benefits: a) List the group benefits that would be reported as life insurance on an insurer s financial statements. b) Discuss the valuation approach and considerations for each of the following: a. Waiver of premium; and b. Paid-up life. c) Outline the issues with using the CIA LTD experience for the valuation of waiver of premium benefits. 15

16 OPTIONAL QUESTIONS LIST 2 You must answer only one of the following questions (that is, you must answer either Question 20 or Question 21). Question 20 (5 points) You are given the following financial information about Red Berry, a privately-held Canadian handheld device company. CICA 3461 CICA 3461 Comments Obligation 31/12/ /12/2010 Retirees 2,500,000 Actives fully eligible 800,000 Actives not fully eligible 2,700,000 Total Obligation 6,000,000 Funded Status Obligation 6,000,000 Asset 0 Surplus (Deficit) -6,000,000 TBD Unamortized losses (gains) 720,000 TBD Unamortized past service costs 200,000 TBD 50,000 annual amortization Unamortized transition obligation Accrued benefit asset (liability) 800,000 TBD 400,000 annual amortization -4,280,000 TBD Discount rate 5.50% 5.10% Duration 15 EARSL Service cost 200,000 Expected benefits paid 300,000 Actual benefits paid 320,000 16

17 Red Berry has decided to transition to IFRS accounting standards starting in In an upcoming presentation on IFRS, you are required to determine the following items. Assume no differences in determining the obligation between the standards. a) Determine the CICA 3461 expense for b) Determine the CICA 3461 financial position as at December 31, 2010 (items identified as TBD above). c) Determine the January 1, 2010 IFRS Transition Impact to retained earnings, if the Fresh Start approach is used. Then determine the cumulative impact to retained earnings at January 1, d) Identify potential sources of difference between IFRS and CICA which could result in the obligation being different under each standard. e) Red Berry is considering a plan change in 2010 which will impact both current and future retirees. Please comment on the accounting impact under both standards. 17

18 Question 21 (5 points) You work for a Canadian group insurer. Key data on your business for the 2010 year are presented below. Your company writes only fully insured group medical and dental insurance. Data on premium revenue for 2010 are provided in the following table: New Renewal Total Medical Dental Total Your business has not been growing in recent years and new business has just replaced terminating business. The following table presents the pricing basis (as a percentage of premium) for your business. Risk/profit Commissions Premium Tax Expenses Medical 4% 10% 2.5% 7.5% Dental 3% 10% 2.5% 6.0% Expected expenses are 8.5% for medical and 7.0% for dental; expected commissions and premium taxes are the same as the pricing basis. Your company usually reduces rates by 5% for new business. The incurred loss ratio for 2010 was 80%. Actual loads were identical to pricing so no experience gains exist with respect to loadings. Liabilities and assets backing liabilities are immaterial for your business. Your company holds capital at 225% of MCCSR. Due to other lines of business, the statistical fluctuation factor for your company is Capital requirements for risks other than morbidity risk are immaterial. No assumption changes were introduced in No unusual events that might be classified as management actions occurred during Your company expected to earn 2.5% on capital and surplus in During the course of 2010, you wrote down the $1 million Bank of Ireland bond you held in capital and suffered a loss of $500,000. Your company pays taxes at 30%. Normally, your employer reports earnings using the traditional income statement. Your boss has recently read the group source of earnings educational note and has asked you to explore the application of source of earnings analysis to your business. a) Explain how source of earnings analysis for group business differs from the analysis for individual business. 18

19 b) For your group medical business only, calculate the following values for the source of earnings analysis for 2010, showing all your work. Pre-tax expected profit on inforce (renewal) business (EP); Pre-tax impact of new business (NB); Pre-tax experience variances on inforce (renewal) business (Variances); Pre-tax earnings on capital and surplus (ECS); Management actions and assumption changes (MAAC); Taxes (Taxes); and Net income after tax (NI). For the purposes of this analysis, your boss wants you to include all expected profit and earnings variances associated with new business in the impact of new business. 19