CEBS - GBA Practice Exam 1 Questions and Answers

CEBS - GBA Practice Exam 1 Questions and Answers 1. Which of the following statements correctly describes minimum require- ments that group benefit plans typically must meet in order to be prospec- tively rated on contract renewal?: The more unpredictable the event that will trigger a claim, the larger the minimum group size and premium requirements 2. Which of the following statements correctly describes the term graduation as it applies to mortality tables?: It is a mathematical process that removes anomalies that should not appear in the mortality data 3. If the plan sponsor pays the premium, which of the following group insured benefits is taxable to the plan member?: Longterm disability (LTD) 4. Which of the following statements correctly describes phases of a group plan marketing?: Plan features of both contributory and noncontributory benefit plans must be communicated to plan members during the enrollment process 5. Which of the following statements correctly describes a characteristic of an insurable risk?: The loss must have financial significance to the insured (The loss must not be catastrophic to the insurer. Option C: The loss must occur by chance. Option D: The loss must be predictable for the insurer.) 6. With respect to marketing a group insurance plan, which of the following statements best describes insurer representatives known as account exec- utives?: They are involved in enrolling group members and installing new plans 7. Which of the following statements correctly describes the statistical con- cept known as the law of large numbers?: Future probabilities of loss are not valid unless a large number of incidents exist to ensure the outcomes are less likely to deviate 8. Which of the following statements correctly describes an insured plan that is insurer-administered?: For self-insured plans with an administrative services only (ASO) arrangement, the insurer bills the plan sponsor monthly for administra- tion fees 9. If the probability that an individual will live one year is 0.95 and the probability of dying in the following year is 0.10, what is the probability that an individual will survive both years?: 0.855 (P (Survive both years) = (0.95) x (1 - 0.1) = 0.95 x 0.90 = 0.855.) 10. Which of the following statements correctly describes the group benefits enrollment process for new employees?: An employee can enroll in the plan any time between his or her date of hire and the end of a waiting period 11. A type of service offered under a third-party administrators (TPAs) claims settlement only arrangement is:: Adjudicating and paying claims 12. Unless otherwise specified in the group insurance contract, a plan mem- ber's status under a group benefits plan terminates the earliest at which:: The plan member retires (Unless otherwise specified in the group insurance contract, the order in which coverage terminates is effective the earliest date the plan member retires, the plan member's service with the plan sponsor is terminated, the plan member ceases active work, and the plan member is no longer a member of an eligible class and premium payments stop.) 13. Which of the following statements correctly describes eligibility require- ments under most group insurance plans?: Unmarried children under a spec- ified age and dependent on the plan member for support are eligible for coverage 14. Which of the following statements correctly describes the negotiated placement method of marketing a group benefits plan?: Once potential insur- ers are identified, each company submits a brief report that highlights its general strategy, philosophy and proposed group benefits plan 15. True North Insurance has established a waiver-ofpremium reserve of $100,000 and will have to pay out an optional life insurance benefit of $200,000. With an interest rate of 6% compounded annually, how many years will it take for the reserve of $100,000 to accumulate to $200,000?: 12 years (Use the relationship between future value and present value to solve for the number of time periods. FVt = PV x (1 + r)^t $200,000 = $100,000 x (1 + 6%)^t $200,000/$100,000 = (1.06)^t 2.00 = (1.06)^t The number of time periods can be approximated using the future value table. With an interest rate of 6%, it will take 12 years to accumulate to a sum of $200,000 (or 2.01220).) 16. Which of the following statements correctly describes a group insurance policy?: It is issued on a group of individuals for protection against financial hazards, such as death, accident and sickness 17. Last year, a small town reported that 20 people under the age of 50 died. If the population of people under the age of 50 in the town is 10,000, what is the probability of a resident under the age of 50 dying?: 0.2% (Probability of a resident under the age of 50 dying is 20/10,000 = 0.002 = 0.2%.) 18. Which of the following statements correctly describes the predictability of an event and the cost of insurance under a group benefits plan?: An out-of-country emergency is an unforeseen event with a potentially high cost (Disability is an unforeseen event with a potentially high cost. Option C: Basic dental services are a predictable event with a low cost. Option D: Paramedical services are an unforeseen event with a low cost.) 19. Which of the following statements best describes individual large amount pooling?: It protects the plan sponsor from claims payments with respect to any one insured individual in excess of the pooling limit or pool ceiling. 20. Nevaeh works full¬time as a business manager on her family's dairy farm. She has an allergy to grain that is triggered by direct contact. If she becomes sick and is unable to work, she loses her only source of income and her lifestyle will change significantly. Which of the following risk management approaches would BEST address Nevaeh's need to protect her income?: - Transfer the risk of becoming sick (Assuming Nevaeh wants to stay in farming, avoidance is not an option. Nevaeh can do everything she can to take measures to reduce her exposure, but if becoming sick jeopardizes her only source of income, Option C, purchasing insurance, is the best option.) 21. Under the coordination-¬of-¬benefits (COB) provision, which of the fol- lowing plans is the first payer in respect of a claim for a covered dependent child under a single-custody arrangement?: Plan of the parent with custody of the child 22. In terms of designing a group benefits plan, which of the following state- ments correctly describes a benefit/needsoriented philosophy?: An example of a needs-oriented benefit is health care 23. Which of the following statements correctly describes static tables and tables with projection?: In "mortality tables with projection," it is assumed that the mortality rate at a particular age will improve in the future by a certain percentage per year (Static tables include mortality rates that are not adjusted for expected future mortality improvements. Option B: Instead of replacing tables, actuaries typically make adjustments for unexpected improvements in mortality. Option C: Setbacks method uses the same mortality rate but assumes that it applies to a lower age.) 24. Which of the following statements correctly describes participation ratios in a benefits plan?: A noncontributory life insurance plan with liberal eligibility requirements should have a reasonably high participation ratio (The level of benefits under a mandatory, noncontributory life insurance plan does not affect participation ratios. Option C: An optional life insurance plan should have a lower participation ratio if eligibility requirements are tight. Option D: The level of plan member contributions under a voluntary, contributory plan has an impact on participation ratios.) 25. Vivienne's health care plan pays a maximum of $5,000 if she is hospital- ized. She was recently hospitalized and her actual expenses were $4,000. Vivienne's insurer will pay the actual amount of expenses and not the $5,000 maximum stipulated in the plan. This is an example of:: A contract of indemnity (A valued contract specifies in advance the amount payable when a loss occurs regardless of the actual loss amount. Option B: Face value is the amount of insurance payable under the policy. Option D: Liability risk is the risk of economic loss resulting from an individual being held accountable for harming others or their property.) 26. Which of the following statements correctly describes processing health care claims under a group benefits plan?: The plan member must submit a completed claim form and written proof of the expense within a specified time period to recover eligible expenses 27. Which of the following statements correctly describes marketing a group benefits plan?: If a plan sponsor decides to cancel a plan, it typically must notify the insurer within 30 to 60 days before the effective date of cancellation 28. How is the funding arrangement for a nonunionized singleemployer plan determined?: By the amount the employer is willing and/or able to contribute from revenue 29. Which of the following statements correctly describes an income replace- ment benefit provided under a group benefits plan?: Sick leave plans typically provide full pay for absences from work due to sickness or injury for a short period (A long-term disability (LTD) plan is the most common method of providing extended income replacement benefits to plan members who are disabled and unable to work due to prolonged illness or injury. Option C: Salary continuance plans typically provide benefits for the full period of short-term disability up to the end of the elimination period under an LTD plan. Option D: An LTD plan typically replaces 55¬-75% of a disabled plan member's gross earnings, subject to a maximum monthly amount.) 30. Which of the following statements correctly describes the financial ac- counting of a self-insured group benefits plan using a billed-in-advance administrative services only (ASO) arrangement with an insurer?: Year-end plan surpluses may be carried forward as a positive cash balance to the next contract period for payment of claims 31. Eagle Assurance is expecting to pay total death benefits of $150,000 at the end of four years. Assuming the interest rate is 6% per year compounded semiannually, what reserve level must be held today to meet this future obligation?: $118,412: Use the present value formula or present value table to determine the reserve level. r = 6%/2 = 3% and t = 4 x 2 = 8 PV = $150,000/(1 + 0.03)^8 PV = $118,412 OR PV = CF8 = PVIF(3%,8) PV = $150,000 = 0.78941 [from the present value interest factor (PVIF) table] = $118,412. 32. What effective annual rate (EAR) is equivalent to a nominal rate of 18%