Fall 2011 11.d

[STLIrish]

"BTI wants to maintain its 2012 PMPY cost at 2010 levels for each employee gropu by adjusting only Type 2 and Type 3 deductibles while maintaining their current ratio."

I'm not sure what it means by "maintaining their current ratio."

The solution says, "Since BTI wants to maintain cost at 2010 levels for each group, the Employee group will have a deductible added for Type 1"

a few lines below says, "Type 1. For the Employee Group: No changing deductibles."

So how do we maintain the 2012 PMPY cost at 2010 levels if we can't change the type 1 deductible on the employee plan? Are they assuming that since it is indemnity that the plan will pay $120 every year no matter what the trend is?


Back in part (c) under the employee group in 2012 it calculates the PMPY net claims cost to be $224.91 but then says "Since this is the only benefit covered, $204 is the total net cost." Is this a typo? Should the 204 be 224.91?

Thanks for any help.

[MATE Seminars]

I'm not sure what it means by "maintaining their current ratio."

Here it is talking about the relativity between the deductibles for types 2 and 3 (essentially that type 3 deducitble = 2 * type 2 deductible)

The solution says, "Since BTI wants to maintain cost at 2010 levels for each group, the Employee group will have a deductible added for Type 1"

a few lines below says, "Type 1. For the Employee Group: No changing deductibles."

So how do we maintain the 2012 PMPY cost at 2010 levels if we can't change the type 1 deductible on the employee plan?

I believe what they were trying to illustrate here is how you should explain that this part can't really be solved. Since there is no coverage on types 2 and 3 for employees, their cost can only be affected by adjustments to type 1. But the problem stated that we should adjust only type 2 and 3 deductibles, which means we can't solve this problem for employees. So that was their way of explaining that conflict.

Are they assuming that since it is indemnity that the plan will pay $120 every year no matter what the trend is?

No. In fact they did trend this $120 amount in the answer to part (c).

Back in part (c) under the employee group in 2012 it calculates the PMPY net claims cost to be $224.91 but then says "Since this is the only benefit covered, $204 is the total net cost." Is this a typo? Should the 204 be 224.91?

Yes. It appears they just cut and pasted this phrase from earlier in the solution without changing the 204 to 224.91.

[moniccazz]

Can someone help with part c)? So why solution for Type II = ($600*0.185 - $25*15%)*80%?

I did 0.185 * ( $625 - $25 )*80%
The reason I didnt use $600 (BTI exp) because the notes says that manual rates has been adjusted to BTI.

Also, why do they apply 15% on the deductible?

Thanks!

[MATE Seminars]

They used $600 instead of $625 because this group's experience is fully credible. Whenever a group's experience is fully credible, you want to use its experience ($600 in this case) rather than the rate manual ($625).

The 15% factor applied to the deductible reflects that not everyone will pay a deductible. If you leave it out, then you're counting a $25 deductible from every member, even though 85% of them won't utilize type II services and therefore won't need to pay a deductible.

[actuary_pilot]

Why isn't it...

($600- $25).15*80%


In other wise why does the answer:

($600*0.185 - $25*15%)*80%

use the manual rate utilization (.185) on the cost per service amount and the actual experience utilization (.15) on the deductible?

[moniccazz]

$600 x 0.185 = allowed cost per unit (i think using 0.185 because we were not told how many services/1,000 generated the avg unit cost of $600)

I don't think you can do ($600 - $25)*0.15*0.8 because the $600 has already included the 15% as it is the actual cost..... (just my thoughts, of course wait for Mark to clarify)

[actuary_pilot]

But when it says "Percent of population utilizing type 2 benefits is 15% - isn't that the same as saying the utilizaiton is 150 per 1000?

Also it stated that the 600 was a "Unit Cost". So how would it have the 15% built into it?


It seems that the 15% and the .185 (or 18.5%) are both similar utilization numbers. And if we are using experience we should use the 15% and if we are using manual rates we should use the 18.5%. And I was thinking that the same number should be applied to both the deductible and to the total claims cost. That is what I am having trouble understanding.

[MATE Seminars]

If the problem had given us sufficient experience data, then we would definitely want to use only actual experience in our answer, since the experience is fully credible. But they intentionally did not give us experience data for annual utilization per 1,000 so that we would have to use the manual rates there.

But I think from your following comment ...

But when it says "Percent of population utilizing type 2 benefits is 15% - isn't that the same as saying the utilizaiton is 150 per 1000?

... that your real concern is that it appears as though they actually have given us experience data for utilization. However, the answer to your question is "no."

There will be some of those 15% who utilize more than one service during the year. For example, someone may have 5 cavities filled during the year. In this case, that counts five times in determining the "utilization per 1,000," but only counts as one person when determining what % of the population uses type 2 services.

So we can't just convert that 15% statistic to a utilization of 150 per 1,000 and say that we have sufficient data to price based on experience. Instead, we're stuck saying that we don't have sufficient data and that we will need to supplement our experience data by pulling in the manual rate for utilization per 1,000.

[Atropellador]

Originally Posted by MATE Seminars

I believe what they were trying to illustrate here is how you should explain that this part can't really be solved. Since there is no coverage on types 2 and 3 for employees, their cost can only be affected by adjustments to type 1. But the problem stated that we should adjust only type 2 and 3 deductibles, which means we can't solve this problem for employees. So that was their way of explaining that conflict.

Yeah. The model solution concerns me, where it says:

Originally Posted by Model Solution

Since BTI wants to maintain cost at 2010 levels for each group, the Employee group will have to have a deductible added for Type 1.

This is outside the scope of the question. I have to wonder whether I'm expected to produce answers of the form "I could achieve the goals by doing X, but the instructions say not to, so I won't." I could end up wasting time and writing hard-to-read answers that way.

[Atropellador]

One other thing--

The model solution for part (b) used a different set of dental service classifications (4 categories) than those appearing in the data for the problem (Types 1, 2, and 3). The question even capitalized the word "Type"!

My solution would have agonized over whether x-rays and oral exams are Type 1 or Type 2.