FACULTY OF COMMERCE

DEPARTMENT OF BANKING AND FINANCE

MAIN EXAMINATION

BACHELOR OF COMMERCE PART 2 SEMESTER 1

COURSE LIFE AND HEALTH INSURANCE

COURSE CODE RIM 204

DATE NOVEMBER 2015

DURATION 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. THE QUESTION PAPER COMPRISES OF FIVE (5) QUESTIONS. YOU ARE

REQUIRED TO ANSWER ANY FOUR (4) QUESTIONS.
2. EACH QUESTION CARRIES 25 MARKS.
3. START THE ANSWER TO EACH QUESTION ON A FRESH PAGE OF THE
ANSWER BOOKLET.
4. WHERE NECESSARY SHOW ALL YOUR WORKINGS.
5. NON PROGRAMMABLE CALCULATORS MAY BE BROUGHT INTO THE
EXAMINATION ROOM FOR USE IN MATHEMATICAL QUESTIONS.
6. WRITE LEGIBLY.

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QUESTION 1

Discuss the factors that motivate people to purchase life insurance. [25 Marks]

QUESTION 2

Critically examine the following forms of life insurance:

2.1 Whole Life Insurance. [7 Marks]

2.2 Term Life Insurance. [6 Marks]

2.3 Group Life Cover. [6 Marks]

2.4 Retirement Policy. [6 Marks]

[TOTAL 25 MARKS]

QUESTION 3

3.1 Outline the 3 primary elements in life insurance pricing. [10 Marks]

3.2 You have been called upon as a consulting actuary to determine the premium
that should be charged to a life policy in a certain country where the mortality
rates are high. The following information is provided:

Mortality Table

Age Number Alive Number Dying

35 1000 10
36 990 20
37 970 30
38 940 40
39 900 50

The cover for every death is $200 000. The interest rate applicable is 12%
annum.

3.2.1 Determine the one year term rate for ages 35-39. [5 Marks]

3.2.2 Determine the net single premium for a five year term policy at age 35.

[5 Marks]

3.2.3 Provide reasons as to why the net single premium for a five year term policy
at age 35 differs from the total one year term rate for ages 35-39. [5 Marks]

[TOTAL 25 MARKS]

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QUESTION 4

4.1 Outline the factors that are taken into consideration when underwriting a
health insurance policy. [13 Marks]

4.2 Write short notes on the following forms of health insurance.

4.2.1 Medical Expense Insurance. [4 marks]

4.2.2 Disability Income Insurance. [4 Marks]

4.2.3 Dread Disease Cover. [4 Marks]

[TOTAL 25 MARKS]

QUESTION 5

5.1 The moral hazard and the adverse selection problems are unavoidable in
health insurance. Explain these key terms. Your answer should also show
how health insurance companies deal with these problems. [15 Mark]

5.2 Shield Medical Aid has 80 000 members in its scheme. During the year 2014
its members were expected to claim as follows:

 2000 claims of $30 each.

 1000 claims of $150 each.
 500 claims of $500 each.

The scheme is able to invest all its premiums at 8% per annum. Assuming
claims are paid at the end of the year while premiums are paid at the
beginning of the year. How much must Shield Medical Aid charge its
members in a one year premium before loading? [3 Marks]

5.3 There are 100 000 members in Reliance Medical Scheme. Each member is
paying $250 in one year medical cover. During the year 2014 the scheme
paid out $26 000 000-00 in claims. Reliance Medical Scheme is able to invest
all its premiums at 8% per annum. Assuming claims are paid at the end of the
year while premiums are paid at the beginning of the year determine if
Reliance Medical Scheme made a profit before loading for the year 2014.

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 [3 Marks]

5.4 You have recently visited a medical practitioner and incurred costs amounting
to $2 000-00. Draw up a table that showing how much you will pay and how
much your health insurance company will pay given the following policy terms.

 A deductible of $250.
 20% coinsurance.
 $50 co-payment. [4 Marks]

[TOTAL 25 MARKS]

END OF EXAMINATION PAPER

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