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Based on the Snader paper, Fundamentals of Individual Risk Rating and Related Topics, calculate the ex-medical discount. Assume that election of ex-medical coverage eliminates 80% of the medical pure premium.
b. Snader also discusses an adjustment which should be made to the loss conversion factor when ex-medical coverage is rated retrospectively. If the full coverage loss conversion factor is 1.15, what is the indicated ex-medical loss conversion factor?
Solutions to questions from the 1992 Exam:
Question 37. (a)
Step 1: Write the formula for the ex-medical discount.
Step 2: Compute e, the provision for expense other than acquisition and taxes. e = Loss adjustment expense + General expense provision + Profit provision = .05+.09+.08 = .22.
Step 3: Using the formula in step 1, the result of step 2, and the given information, solve for D:
D =  = .234.
Alternatively:
Step 1: Write the formula for the ex-medical discount.
k = .80, EM = $0.50, E = $1.25.
Thus, e and P are needed.
Step 2: Compute e, the provision for expense other than acquisition and taxes. e = Loss adjustment expense + General expense provision + Profit provision = .05+.09+.08 = .22.
Step 3: Write the formula for the full coverage premium, and compute P.
P = =  = 2.083.
Step 4: Using the formula in step 1, and the results from steps 2 and 3, solve for D:
D =  = .234.
(b) Let:
J = c-1, where c is the usual loss conversion factor. Then J' = c'-1, and
Note: c' = 1+J', is the adjusted loss conversion factor for the ex-medical retro plan.
J' =.15*
 = .220.
Thus c' = 1.220.
Alternatively:
J' =  = .220.
Thus c' = 1.220.
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