CAA CAA Life & Health Insurance Principles 2 — Questions and Answers
Question 1: What is a 'deferred annuity' in the context of US retirement products?
- An annuity that begins paying income immediately upon purchase
- An annuity where the income payments are postponed to a future date, allowing accumulated funds to grow tax-deferred in the interim (Correct answer)
- A life insurance policy with a term of less than one year
- A government-issued bond maturing in ten years
Correct answer: An annuity where the income payments are postponed to a future date, allowing accumulated funds to grow tax-deferred in the interim
A deferred annuity accumulates value tax-deferred during a savings phase and then converts to income payments at a future annuitization date chosen by the contract holder.
Question 2: What is the 'policy reserve' in a traditional whole life insurance policy?
- The insurer's capital set aside for catastrophic events
- The liability the insurer must hold to meet future policy obligations, funded by past premiums in excess of current costs (Correct answer)
- The policyholder's premium payment held in escrow
- The reinsurer's share of expected claims
Correct answer: The liability the insurer must hold to meet future policy obligations, funded by past premiums in excess of current costs
The policy reserve is an actuarial liability representing the present value of future benefits minus the present value of future net premiums, funded by premium overpayments in early policy years.
Question 3: Under the US Affordable Care Act (ACA), what does the 'medical loss ratio' (MLR) requirement mandate for health insurers?
- That at least 80–85% of premium revenue must be spent on medical claims and quality improvement activities (Correct answer)
- That premiums cannot exceed 80% of the average wage in each state
- That insurers must invest at least 80% of assets in government bonds
- That all health plans must cover at least 80% of essential health benefits
Correct answer: That at least 80–85% of premium revenue must be spent on medical claims and quality improvement activities
The ACA MLR requirement mandates that individual and small-group insurers spend at least 80% (large groups: 85%) of premiums on medical care and quality improvement, limiting administrative costs and profits.
Question 4: What is 'credibility theory' used for in group health insurance ratemaking?
- Verifying the creditworthiness of employer group policyholders
- Blending a group's own experience with industry-wide data to produce a more reliable rate estimate (Correct answer)
- Calculating the credit available to policyholders for unused benefits
- Assessing an insurer's credit rating for capital market purposes
Correct answer: Blending a group's own experience with industry-wide data to produce a more reliable rate estimate
Credibility theory provides a weighted blend of a group's own experience and a broader manual rate, with the weight on own experience increasing as the group's data becomes more statistically reliable.
Question 5: What does the term 'incurred but not reported' (IBNR) mean in health insurance reserving?
- Claims that have been denied by the insurer but appealed by the policyholder
- An estimated liability for claims that have already occurred but have not yet been submitted to the insurer (Correct answer)
- Premium income that has been earned but not yet collected
- Reinsurance recoveries not yet invoiced to the reinsurer
Correct answer: An estimated liability for claims that have already occurred but have not yet been submitted to the insurer
IBNR reserves represent the actuary's estimate of the liability for medical services already rendered but for which claims have not yet been filed or recorded by the insurer.
Question 6: Which factor does an actuary primarily use to adjust health insurance premiums for an aging workforce in an employer group?
- Geographic location of the employer's headquarters
- Age-sex adjustment factors that reflect higher expected medical costs for older employees (Correct answer)
- The employer's Standard & Poor's credit rating
- The number of years the group has been insured with the same carrier
Correct answer: Age-sex adjustment factors that reflect higher expected medical costs for older employees
Age-sex adjustment factors are applied to premium calculations to account for the higher medical utilization and costs associated with older and female members in the group.
CAA CAA Life & Health Insurance Principles 2
What is a 'deferred annuity' in the context of US retirement products?